Holding

For a continuing guarantee payable on demand, the limitation period begins when a valid demand is made and the guarantor breaches by not complying, so the suit filed within three years of that demand is timely.

Summary

Syndicate Bank extended various credit facilities to Gadag Forge Fits (India) Pvt Ltd. The company’s directors executed personal continuing guarantees payable on demand. When the company’s accounts became dormant in mid‑1986, the Bank sent a demand letter on 12 Oct 1987 and a formal notice on 17 Dec 1987, to which the guarantors replied denying liability. The Bank sued the guarantors on 16 Mar 1990. The trial court and High Court held the suit barred, reasoning that limitation began when the accounts became dormant. The Supreme Court held that for a guarantee payable on demand, the limitation period starts only when a valid demand is made and the guarantor fails to comply; thus the limitation began after the 15‑day period following the 12 Oct 1987 demand, making the suit timely. The appeal was allowed, setting aside the lower courts’ judgments.

Issues considered

When does the limitation period commence for a continuing guarantee that is payable on demand?
Does the cessation of operation of a borrower’s account constitute a demand or refusal that triggers the limitation period?
Which provision of the Limitation Act, 1963 (Article 55 or Article 113) governs a suit against guarantors in such circumstances?
Can a suit be maintained solely against guarantors without joining the principal debtor?

Legislation cited

Indian Contract Act, 1872s. 126, s. 128, s. 129, s. 130
Limitation Act, 1908s. Article 115
Limitation Act, 1963s. Article 113, s. Article 19, s. Article 21, s. Article 55

Subjects

continuing guaranteeon‑demand guaranteelimitation periodcontract of guaranteejoint and several liabilitybank guaranteeArticle 55Article 113Supreme Court of Indiabanking law

Judgment

SYNDICATE BANK A
v.
CHANNAVEERAPPA BELERI AND ORS.

APRIL 10, 2006

[ARUN KUMAR AND R.V. RA YEEND RAN, JJ.) B

The Contract Act, 1872:

Section 129-Continuing guarantee-Payable on demand-
Enforcement of-limitation-Held, the limitation begins to run when the C
demand is made and the guarantor commits breach by nqt complying with
the demand-Limitation Act, 1963-Articles 55 and 13.

The appellant Bank had extended credit facilities by way of overdraft,
goods loan, and demand loan supply Bills to a company known as Gadag Forge.
Fits (India) Pvt. Ltd., 'company' for short). Respondent 1 was its Managing D
Director and Respondents 2 to 7 were its Directors. The credit facilities were
renewed and enhanced from time to time. Respondents 1to7 executed different
guarantee bonds in favour of the Bank, personally agreeing and undertakings
to pay and satisfy the Bank on demand all sums which may be due on account
of the credit facilities granted to the company subject to the limits mentioned E
therein. On account of the company allegedly incurring losses and stopping
its activities, operations in the accounts of the company with the Bank stopped
in the middle of 1986. In view of the failure on the part of the company (principal
debtor) in paying the amounts due, the Bank sent a letter dated 12.10.1987 to
the company and its 7 Directors (Respondents 1 to 7) informing that the
following amounts were outstanding in the accounts of the company as on F
30.9.1987 and calling upon the company as principal debtor and respondents
1 to 7 as guarantors to pay the said amounts within 15 days. The company
and its Directors (Respondents 1 to 7) sent a reply dated 31.10.1987 stating
that the company was passing though a financial crisis inter alia alleging
that the Bank had failed to assist the company by making further advances G
by way of working capital, on account of which the company sustained heavy
loss and the company was reserving liberty to file a suit for damages for an
amount which would be more than the amount claimed by the Bank A formal
notice through counsel was sent by the Bank on 17.12.1987 demanding

999 H
1000 SUPREME COURT REPORTS [2006] 3 S.C.R.

A payment which elicited a reply dated 30.12.1987 denying the demand. The
Bank initiated proceedings for winding up against the company on account of
its inability to pay its dues, on I I.I 0.1988 and the High Court ordered winding
up of the company on 17.3.1989. Therefore, the suit was filed by the Bank on
16.3.1990 only against the Guarantors (Respondents I to 7).

B The Bank contended that the respondents were jointly and severally
liable to pay the amounts due by the company. It was alleged that the cause of
action for the suit against the guarantors (respondent I to 7) arose on
17.12.1987 when the demand was made and on 30.12.1987 when they denied
the liability by notice. The statements of account showing the particulars of
C amount due as on 31.12.1989 were annexed to the plaint The appellant-Bank
further contended that the guarantees executed by the respondents were
continuing guarantees; that the guarantors had agreed to pay the amount/s
on demand by the Bank; that such a demand was made by the Bank on the
guarantors on 12.10.1987 and 17.12.1987, and that the guarantors' refusal
to pay the amount demanded is contained in their reply-letters dated
D 31.10.1987 and 30.12.1987; and that, therefore, the suit filed on 16.3.1990,
within three years from 31.10.1987 was within time.

Respondents resisted the suit inter alia on the grounds that (a) The
suit was not maintainable only against the Guarantors and was liable to be
rejected for non-joinder of the principal debtor, (b) the Bank ran not proceed
E against the guarantors without first exhausting of remedies against the
principal debtor, (c) the guarantee bonds were executed in the years 1983,
1984 and 1985. As the suit was not filed within three years from the respective
dates of the guarantee bonds, in the absence of renewals or acknowledgement
by them, the suit was barred by limitation. The respondents also contended
that when the operations ceased and the accounts became dormant, the very
F cessation of operation of accounts should be treated as a refusal to pay by the
principal debtor, as also by the guarantors and, therefore, the limitation would
begin to run, not when there is a refusal to meet the demand, but when the
accounts became dormant.

G The trial court by an exhaustive judgment answered all the issues,
except the issue regarding limitation in favour of the Bank. It held that the
Bank had established the correctness of the amounts claimed and the rate of
interest. It, however, held that the suit was barred by time and consequently,
dismissed the suit. The trial court was of the view that the accounts of the
company with the Bank became dormant and inoperative from 1986 and,
H therefore, they ceased to be 'live accounts'. lt held that a 'live account' was
SYNDICATE BANK v.CHANNAVEERAPPABELERI 1001

one which was currently being operated at the relevant time by the borrower/ A
customer. The trial court further held that in view of such cessation of
operation of the accounts, it should be deemed that the company and
consequently the guarantors had refused to discharge their obligations; that
once there was such refusal by stopping operation of the accounts, the
limitation would start to run immediately; that time which begins to run, B
cannot be stopped; and that the mere fact that the demand was made by the
bank much later, that is in the year 1987, will not postpone the commencement
of running of the period of limitation. The appeal filed by the Bank was also
dismissed by the High Court. Hence the appeal.

Allowing the appeal, the court
c
HELD 1.1. In a case where the guarantee is payable on demand, the
limitation begins to run when the demand is made and the guarantor commits
breach by not complying with the demand. (1013-G-H; 1014-A]

Wright v. New Zealand Farmers Co-operative Association ofCanterbury
Ltd., (1939) AC 439 and Bradford Old Bank v. Sutcliffe, (1918) 2 KB 833, D
relied upon.

Pagels: Law of Banking, referred to.

1.2. The terms of guarantee, thus, make it clear that the liability to pay
would arise on the guarantors only when a demand is made. The time begins E
to run only when the right to sue accrues. In this case, the contract was
broken and the right to sue accrued only when a demand for payment was
made by the Bank and it was refused by the guarantors. When a demand is
made requiring payment within a stipulated period, the breach occurs or right
to sue accrues, if payment is not made or is refused within the stipulated days.
If while making the demand for payment;no period is stipulated within which F
the payment should be made, the breach occurs or right to sue accrues, when
the demand is served on the guarantor. Where guarantor becomes liable in
pursuance of a demand validly made in time, the creditor can sue the guarantor
within three years, even if the claim against the principal debtor gets
subsequent time-barred. (1014-F, G, H; 1015-A, CJ
G
Margaret Lolita Samuel v. Inda Commerical Bank Ltd., AIR (1979) SC
102, relied upon.

1.3. When the demand is made by the creditor on the guarantor, under
a guarantee which requires a demand, as a condition precedent for the liability
of the guarantor, such demand should be for payment of a sum which is legally· H
1002 SUPREME COURT REPORTS [2006] 3 S.C.R.

A due and recoverable from the principal debtor. If the debt had already become
time-barred against the principal debtor, the question of creditor demanding
payment thereafter, for the first time, against the guarantor would not arise.
When the demand is made against the guarantor, if the claim is a live claim
(that is, a claim which is not barred) against the principal debtor, limitation
in respect of the guarantor will run from the date of such demand and refusal/
B non compliance. Where guarantor becomes liable in pursuance ofa demand
validly made in time, the creditor can sue the guarantor within three years,
even if the claim against the principal debtor gets subsequently time-barred.
[1015-A, B, CJ

1.4. The time began to run not when the operations ceased in the accounts
c in mid-1986, but on the expiry of 15 days from 12.10.1987 when the demand
was made by the Bank and there was refusal to pay by the guarantors. The
suit filed within three year therefrom is, therefore, in time. [1016-A, B[

2.1. By no logical process ceasing of operation of accounts by the
borrower for some reason, would amount to a demand by the Bank on the
D guarantor to pay the amount due in the account or refusal by the principal
debtor and guarantor to pay the amount due in the accounts.
(1015-G, H; 1016-AJ

3.1. 'Live account' means an account that is not settled. The use of the
term 'settled' gives an indication that a 'live account' refers to an account
E where the balance has not been struck by an "account stated'' or "account
settled" [1016-CJ

Bis/11111 Chand v. Girdhari Lal and Anr.. AIR (1934) PC 147, referred
to.

F 4.1. In the case of refusal of a guarantor to pay the amount, the matter
would be governed by Article 115 of the Schedule to the Limitation Act, 1908,
which corresponds to Article 55 of the Limitation Act, 1963. Having regard
to the fact that the period of limitation is 3 years both under Article 55 and
Article 113, and having regard to the binding decision in Samuel (supra), it
G is not proposed to examine the controversy as to whether the appropriate
Article is 55of113. Suffice it to note that even if the Article applicable is
Article 113, the Bank's suit is in time. [1016-H; 1017-A-D[

Iron and Hardwure (India} Ltd. v. Firm Sham/al and Bros .. AIR (1954)
Born. 423 ..

H
_.
!

SYNDICATE BANK v. CHANNAVEERAPPABELERI (RA VEENDRAN,J.] 1003

Tricomdas Cooverji Bhoja v. Gopinath Jin Thakur, Air (1916) PC 183, A
referred to.

Margaret lalita Samuel v. Jndo Commercial Bank Ltd., AIR (1979) SC
102, relied upon.

CIVIL APPEL LA TE JURISDICTION : Civil Appeal No. 6894 of 1997. B
From the Judgment and Decree dated 6.3.1997 of the High Court of
Kamataka at Bangalore in R.F.A. No. 107of1993.

Adarsh B. Dial, Sumati Anand and Navneet Mishra for the Appellant.

-- Bhimrao Naik, S.V. Deshpande, Anuradha Rustogi and C.G. Solshe for
the Respondents.
c

The Judgment of the Court was delivered by

RA VEENDRAN, J. This appeal by special leave, is by the plaintiff Bank D
against the judgment dated 6.3 .1997 of the High Court of Kamataka dismissing
R.F .A. No. 107 of 1993 filed by it against the judgment and decree dated
29.10.1992 of the Civil Judge, Gadag in O.S. No. 29of1990, dismissing its suit
on the ground of limitation.

2. The appellant Bank filed Original Suit No. 29 of 1990 against E
Respondents I to 7 herein for recovery of Rs. 19,77,478/60 (the liability of
Respondents 2 & 3 being restricted to Rs. 15,75,960 and liability of Respondents
6 & 7 being restricted to 17,56,070.60) together with interest @18.5% per
annum compounded quarterly from the date of suit till the date of realization.
The plaint averments in brief are as under.
F
(2.1) The Bank had extended credit facilities by way of overdraft, goods
loan, and demand loan against supply Bills to a company known as Gadag
Forge Fits (India) Pvt. Ltd., ('company' for short). Respondent 1 was its
Managing Director and Respondents 2 to 7 were its Directors. The credit
facilities were renewed and enhanced from time to time. Respondents 1 to 7 G .
executed the following guarantee bonds in favour of the Bank, personally
agreeing and undertaking to pay and. satisfy the Bank on demand all sums
which may be due on account of the credit facilities granted to the company
subject to .the limits mentioned therein :

(i) Guarantee Bond dated 17.9.1983/20.8.1983/29.8.1983 executed by H
1004 SUPREME COURT REPORTS [2006] 3 S.C.R.

A Respondents !, 2 and 3, the limit ofliability being Rs. I0.50 lakhs
(a single deed executed by Respondents 1, 2 and 3 on different
dates).

(ii) Guarantee bond dated 4.4.1984 executed by respondents 4 & 5,
the limit of liability being Rs. 10.50 lakhs.
B (ill) Guarantee bond dated !0.9.1985 executed by Respondents I, 4,
5, 6 & 7, the limit ofliability being Rs.11.70 lakhs.

Thus the limit of total liability undertaken exclusive of interest was Rs.22.20
lakhs in the case of Respondents I, 4 & 5, Rs. I 0.50 lakhs in the case of
C Respondents 2 & 3 and Rs.11.70 lakhs in the case of Respondents 6 & 7.
Their liability was joint and several with the company.

(2.2) On account of the company allegedly incurring losses and stopping
its activities, operations in the accounts of the company with the Bank
stopped in the middle of 1986. In view of the failure on the part of the
D company (principal debtor) in paying the amounts due, the Bank sent a letter
dated 12.10.1987 to the company and its 7 Directors (Respondents I to 7)
informing that the following amounts were outstanding in the accounts of the
company as on 30.9.1987 and calling upon the company as principal debtor
and respondents I to 7 as guarantors to pay the said amounts aggregating
to Rs.13,48,264.79 with interest@ 18.5% per annum from l.10.87 within 15
E days:-
SYNDICATE BANK v. CHANNAVEERAPPA BELERI [RA VEENDRAN, J.) 1005

Account Date of Lim it/Amount Balance as on A
No. Advance Advanced 30.9.1987

Over Draft
27/85 10.9.85 2,50,000/- 3,32, 116.04
1/86 7.1.86 2,50,000/- 3,39,719.54
14/86 1,50,000/- 1,99,105.35
B
29.4.86

Goods Loan
49/84 23.7.84 1,61,000/- 1,91,654.00
48/85 12.10.85 27,450/- 35,894.85

Demand Loan
c
against Supply
Bills
229/85 2.12.85 5,0001- 318.60
232185 6.12.85 5,0001- 6,936.65
233/85 6.12.85 2,500/- 3,469.40 D
234/85 11.12.85 16,900/- 23,356.15
235/85 20.12.85 1,5001- 2,071.85
237/85 26.12.85 6, 100/- 8,366.90
2186 1.1.86 2,900/- 3,966.95
3/86 1.1.86 5,100/- 3,425.75
E
5/86 13.1.86 32,970/- 44,819.30
8/86 3.2.86 3,7001- 444.05
10/86 10.2.86 31,600/- 26,274.85
12/86 13.2.86 13,700/- 18,424.20
• 14/86 11.3.86 8,800/- 11,685.45
15/86 20.3.86 10,230/- 13,518.25 F
16/86 21.3.86 36,0001- 47,534.00
18/86 25.3.86 20,300/- 26,750.10
20/86 26.4.86 6,400/- 8,412.60
TOTAL 13,48,264. 79
(2.3) The company and its Directors (Respondents 1 to 7) sent a reply G
dated 31.10.1987 through counsel stating that the company was passing
though a. financial crisis and the Bank had failed to assist the company by
making further advances by way of working capital. They further alleged that
in view of the failure to adv:ince further funds, the company sustained heavy
r
loss and the company was reserving liberty to file a suit for damages for an H
1006 SUPREME COURT REPORTS [2006] 3 S.C.R.

A amount which would be more than the amount claimed by the Bank. They also
alleged that the bank ought to have given a moratorium on interest to
--
rehabilitate the company. They also stated that without prejudice to their
rights and contentions, they were willing to discuss the matter with the Bank,
to arrive at an amicable solution. A formal notice through counsel was sent
B by the Bank on 17.12.1987 demanding payment which elicited a reply dated
30.12.1987 denying the demand.

(2.4.) The Bank initiated proceedings for winding up against the company
on account of its inability to pay its dues, on I I. I 0.1988 and the High Court
ordered winding up of the company on 17.3.1989. Therefore. the suit was filed
C by the Bank on 16.3.1990 only against the Guarantors (Respondents 1 to 7)
for recovery of Rs.19,77,478.60 (that is, the amount demanded in the notice
dated 12.10.1987 with interest up to date of suit). The Bank restricted the claim
to Rs. I 0.50 lakhs with interest at 18.5% P.A. from 17.12.87 to the date of suit
against Respondents 2 and 3 and to Rs.11.70 lakhs with interest at 18.5% P.A.
from 17.12.1987 to date of suit against respondents 6 and 7. The Bank contended
D that the respondents were jointly and severally liable to pay the amounts due
by the company, as aforesaid. It was alleged that the cause of action for the
suit against the guarantors (respondents I to 7) arose on 17 .12.1987 when the
demand was made and on 30.12.1987 when they denied the liability by notice.
The statements of account showing the particulars of amount due as on
E 3 1.12.1989 were annexed to the plaint.

3. Respondents 4 and 7 remained ex parte. Respondents I, 5 and 6
filed a common written statement which was adopted by 2nd respondent.

F
Respondent !'lo. 3 filed a separate written statement. They resisted the suit
inier alia on the following grounds :-

(a) The suit was not maintainable only against the Guarantors and
-
was liable to be rejected for non-joinder of the principal debtor.
(b) The Bank cannot proceed against the guarantors without first
exhausting of remedies against the principal debtor.
G (c) The guarantee bonds were executed in the years 1983, 1984 and
1985. As the suit was not filed within three years from the
respective dates of the guarantee bonds. in the absence of
renewals or acknowledgement by them, the suit was barred by
imitation.

H 4. The trial court framed as many as 16 issues. We are concerned with ,
SYNDICATE BANK v. CHANNA VEERAPPA BELERI [RAVEENDRAN, J.] J007

the issue no.4, that is, : 'Is the suit not in time?'. The Bank examined its A
manager and respondents I, 2 and 3 gave evidence on behalf of the defence.
Ex. P-1 to P-35 and Ex. D-1 to 05 were marked. The trial court by an exhaustive
judgment answered all the issues, except the issue regarding limitation in
favour of the Bank. It held that the Bank had established the correctness of
the amounts claimed and the rate of interest. It, however, held that the suit B
was barred by time and consequently, dismissed the suit. The appeal filed by
the Bank was also dismissed by the High Court. The said dismissal is challenged
in this appeal by special leave. The only question that was argued and that
arises for consideration in this appeal is whether the decision of the courts
·below that the suit was barred by limitation is correct in law.

5. To appreciate the rival contentions, it is necessary to refer to the
c
relevant statutory provisions, the terms of the guarantee and the decision of
this Court relied on by both parties.

(5.1) Section 126, 128, 129 and 130 of Contract Act, 1872 are extracted
below: D
"Section I 26. 'Contract of guarantee, ' 'surety, ' 'principal-debtor'
and 'creditor '.-A 'contract of guarantee' is a contract to perform the
promise, or discharge the liability, of a third person in case of his
default. The person who gives the guarantee is called the 'surety'; the
person in respect of whose default the guarantee is given is called the E
'principal-debtor,' and the person to whom the guarantee is given is
called the 'creditor.' A guarantee may be either oral or written."

"Section 128. Surety's liability.-The liability of the surety is co-
extensive with that of the principal-debtor, unless it is otherwise
provided by the contract." F
"Section 129. 'Continuing guarantee'.-A guarantee which extends
to a series of transactions is called a 'continuing guarantee."

"Section 130. Revocation of continuing guarantee.-A continuing
guarantee may at any time be revoked by the surety, as to future G
transactions, by notice to the creditor."

(5.2) The relevant Articles in the Schedule to the Limitation Act, 1963
are extracted below :

H
'
>

1008 SUPREME COURT REPORTS [2006] 3 S.C.R.

A Article Description of Suit Period of Time from which
No. limitation period begins to run

55 For compensation for the Three years When the contract is
breach of any contract. broken or (where there
express of imp Iied not herein are successive breaches)
specially provided for. when the breach in
B
respect of which the suit
is instituted occurs or
(where the breach is
continuing) when it
ceases.
c 113 Any suit for which no period Three years When the right to sue
of limitation is provided accrues.
elsewhere in this Schedule.
19 For money payable for Three years When the loan is made.
money lent.
D 21 For money lent under an Three years When the loan is made.
agreement that it shall be
payable on demand.

(5.3) The guarantee bonds have been executed in the standard Form of the
E Bank. The relevant portions from the Guarantee bond dated 10.8.1985 (the
Bonds are similarly worded) are extracted below :

"In consideration of SYNDICATE BANK, here-in/after called the
"Syndicate'' .......... making, or continuing to make advances or otherwise
giving credit or financial accommodation or affording banking facilities
F for as long as the Syndicate may think fit to M/s. Godrej Forge Fits
(I) Pvt. Ltd. Hirakoppa village, Gadag taluk here-after called the
"Borrower" ......... , the undersigned (I) C. M. Beleri, (2) I. M. Beleri, (3)
K. M. Chhadda, (4) Mrs. Shailaja Beleri and (5) T. Parthasarathy
(hereinafter referred to as the "Guarantor") hereby agrees to pay and
G satisfy to the Syndicate on demand all and every sum and sums of
money which are now or shall at any time be owing to the Syndicate
in any of its offices on any account whatsoever, .......... "

"PROVIDED ALWAYS that the total liability ultimately enforceable
against the Guarantor under this guarantee shall not exceed the sum
H of Rs. 11, 70,000/- together with interest thereon at the rate stipulated
SYNDICATE BANK v. CHANNAVEERAPPA BELERl [RA YEEND RAN, J.] l 009

by the bank fl-om date of demand by the Syndicate upon the Guarantor A
for payment. "

"NOTWITHSTANDING the Borrower's Account or Accounts with
the Syndicate may be brought to credit or the credit given to the
Borrower fully exhausted or exceeded or howsoever the said financial
accommodation varied or changed from time to time; notwithstanding B
any payments from time to time or any settlement of Account, this
guarantee shall be a continuing guarantee for payment of the ultimate
balance to become due to the Syndicate by the Borrower not exceeding
' Rs.I 1,70,000/- as aforesaid."

-- "NOTWITHSTANDING the discontinuance of this Guarantee as to
one or more of the Guarantors or the death of any one of them, the
Guarantee is to remain a continuing Gu~rantee, as to the other or
c

others or the representatives and estates of the deceased and where
there is more than one Guarantor, their liability under these presents
being con~trued as joint and several."
D
"ANY ACCOUNT SETTLED or stated by or between the Syndicate
and the Borrower or admitted by him or on his behalf may be adduced
by the Syndicate and shall in that case be accepted by the guarantors
and each of them and their respective representatives as conclusive
~
, evidence that the balance or amount thereby appearing is due from
E
to the Syndicate."

[Emphasis supplied]

(5.4) Margaret Lalita Samuel v. Jndo Commercial Bank Ltd., AIR (1979) SC
102 relied on both sides dealt with the question of limitation with reference F
to a continuing guarantee. In that case the guarantor sought to avoid liability
by contending that every item of an overdraft account was an independent
loan and the limitation would start from the date of each loan, and that with
reference to such dates, the suit was barred by limitation. While negativing
the said contention, this Court observed :
G
"In our view it is unnecessary for the purposes of the present case,
to go into the question of the nature of an overdraft account. The
present suit is in substance and truth one to enforce the guarantee
bond executed by the defendant. In order to ascertain the nature of
the liability of the defendant, it is necessary to refer to the precise
H
1010 SUPREME COURT REPORTS [2006] 3 S.C.R.

A terms of the guarantee bond rather than embark into an enquiry as to
the nature of an overdraft account.

After referring to the terms of the guarantee bond, this Court held :

"The guarantee is seen to be a continuing guarantee and the
B undertaking by the defendant is to pay any amount that may be due
by the company at the foot of the general balance of its account or
any other account whatever. In the case of such a continuing
guarantee, so long as the account is a live account in the sense that
it is not settled and there is no reji1sal on the part of the guarantor

-
to carry out the obligation, we do not see how the period of limitation
c could be said to have commenced running. Limitation would only run
from the date of breach under Art. 115 of the schedule to the Limitation
Act, 1908. When the Bombay High Court considered the matter in the
first instance and held that the suit was not barred by limitation. J.C.
Shah, J. speaking for the Court said :
D On the plain words of the letters of guarantee it is clear that the
defendant undertook to pay any amount which may be due by the
Company at the foot of the general balance of its account or any other
account whatever .... We are not concerned in this case with the period
of limitation for the amount repayable by the Company to the bank.
E We are concerned with the period of limitation for enforcing the
liability of the defendant under the surety bond ..... We hold that the
suit to enforce the liability is governed by Art. 115 and the cause of
action arises when the contract of continuing guarantee is broken,
and in the present case we are of the view that so long as the account
remained live account, and there was no refusal on the part of defendant
F to carry out her obligation, the period of limitation did not commence
to run.

(Emphasis supplied)

After expressing agreement with the above view expressed by Shah, J., this
G Court also agreed with the view expressed by the Privy Council in Wright v.
New Zealand Farmers Co-operative Association of Canterbury ltd., (1939)
AC 439, and the Court of Appeal in Bradford Old Bank ltd. v. Sutcliffe, (1918)
2 KB 833 that limitation against a guarantor under a continuing guarantee
(which specified that the liability of the guarantor is to pay on demand) would
H not run from the date of each advance, but only run from the tim e when the
1
SYNDICATE BANK v. CHANNA VEERAPPA BELERI [RAVEENDRAN, J.) j 0 j j

balance (payment of which is guaranteed) was constituted and a demand was A
made for payment thereof. This Court also referred to a passage from Paget's
Law of Banking, with approval, though not extracted. The said passage from
Paget reads thus :

"In Bradford Old Bank Ltdv. Sutcliffe, (1918) 2 KB 833, it was pointed
out that the contract of the surety was a collateral, not a direct, one B
and that in such case demand was necessary to complete a cause of
action and set the statute running. Moreover, bank guarantees
invariably specify that the liability of the surety is to pay on demand,
and in this connection the words are not devoid of meaning or effect,
even with reference to this statute; as is the case with a promissory C
note payable on demand, but make the demand a condition precedent
to suing the surety, so that the statute does not begin to run till such
demand has been made and not complied with."

(Emphasis supplied)

(5.5) Bradford (supra), in turn, relied on Hartland v. Jukes, (1863) I H&C 667,
D
wherein in the context of a continuing guarantee, it was contended that the
period of limitation would begin to run as soon as the principal debtor
b.ecomes indebted to the Bank. The contention was negatived by stating :

"It was contended before us that the statute began to run from the E
3 lst of December, 1855, by reason of the debt of Pound 179:1:11 then
due to the bank; but no balance was then struck, and certainly no
claim was made by the bank upon the defendant's testator (the
Guarantor) in respect of that debt; and we think the mere existence of
the debt, unaccompanied by any claim from the bank, would not have
the effect of making the statute run from that date." F
6. The trial court held that the accounts of the company with the Bank
became dormant and inoperative from 1986 and, therefore, they ceased to be
'live accounts'. It held that a 'live account' was one which was currently
being operated at the relevant time by the borrower/customer. The trial court
further held that in view of such cessation of operation of the accounts, it G
should be deemed that the company and consequently the guarantors had
refused to discharge their obligations; that once there was such refusal by
stopping operation of the accounts, the limitation would start to run
immediately; that time which begins to run, cannot be stopped; and that the
mere fact that the demand was made by the bank much later, that is in the H
1012 SUPREME COURT REPORTS [2006] 3 S.C.R.

A year 1987, will not postpone the commencement of running of the period of
limitation. The trial court refused to accept the contention that the limitation
will start to run only when a notice was issued by the creditor Bank, demanding
payment of the amount from the guarantors and a refusal thereof by the
guarantors. The trial court was of the view that if Bank's contention was to
be accepted, then it would mean that the Bank, by postponing issue of a
B notice making a demand, can postpone the commencement of the running of
limitation. The trial court purported to test the validity of the Bank's contention,
by reference to a hypothetical situation, where the Bank, by not making a
demand for, say 20 or 30 years, or postponing the demand indefinitely, could
postpone the commencement of limitation indefinitely, and held that such a
C situation was impermissible. It, therefore, held that the period of limitation - ......
commenced to run from the middle of 1986 when the operation of the accounts
was stopped, and the suit filed in 1990 beyond 3 years from the stoppage of
operation ofaccounts was barred by time.

7. The High Court affirmed the said finding. It held that the words ·on
D demand' had a specific connotation in legal parlance; and that when an
amount is payable on demand, it means 'always payable' and a 'demand' is
not a condition precedent for the amount to be paid. The High Court held that
when the guarantee stated that the guarantors were liable to pay on demand
by the Bank, it meant that the amount was payable from the moment of
execution of the guarantee and, consequently, no actual demand is necessary
E
to make the amount due under the guarantees. It was held that the money
became payable under the guarantee bond as soon as the guarantee was
executed. The High Court also held that when the accounts became dormant
in the middle of 1986 by non-operation and non-payment, it should be deemed
that there was a refusal to pay the amount under the guarantees and, therefore,
F the suit filed on 16.3.1990 was barred by limitation, being beyond 3 years. The
High Court held that the decision in Samuel (supra) will not apply to the
Bank's suit, as this Court had stated that the limitation will not run only if
the account was a 'live account' and there was no refusal on the part of the
guarantor to carry out the obligations. It held that the-word 'live' meant that
G account should be operating and when an account became dormant and
inoperative, it was not a live account. The High Court also distinguished the
decision in Samuel on facts.

8. The appellant-Bank contended that the guarantees executed by the
-
respondents were continuing guarantees; that the guarantors had agreed to
H pay the amount/s on demand by the Bank; that such a demand was made by
1
I

SYNDICATE BANK v. CHANNAVEERAPPA BELERI [RA VEENDRAN, J.] j 013
...-·
the Bank on the guarantors on 12.10.1987 and 17.12.1987; and that the A
guarantors' refusal to pay the amount demanded is contained in their reply-
letters dated 31.10.1987 and 30.12.1987; and that, therefore, the suit filed on
16.3.1990, within three years from 31.10.1987 was in time. Reliance is placed
on Article 55 of the Limitation Act, 1963 and the decision of the Supreme
Court in Samuel (supra).
B
9. A guarantor's liability depends upon the terms of his contract. A
'continuing guarantee' is different from an ordinary guarantee. There is also
a difference between a guarantee which stipulates that the guarantor is liable
to pay only on a demand by the creditor, and a guarantee which does not
contain such a condition. Further, depending on the terms of guarantee, the C
liability of a guarantor may be limited to a particular sum, instead of the
liability being to the same extent as that of the principal debtor. The liability
to pay may arise, on the principal debtor and guarantor, at the same time or
at different points of time. A claim may be even time-barred against the
principal debtor, but still enforceable against the guarantor. The parties may
agree that the liability of a guarantor shall arise at a later point of time than D
that of the principal debtor. We have referred to these aspects only to
underline the fact that the extent of liability under a guarantee as also the
question as to when the liability of a guarantor will arise, would depend
purely on the terms of the contract.

10. Samuel (supra), no doubt, dealt with a continuing guarantee. But the E
continuing guarantee considered by it, did not provide that the guarantor
shall make payment on demand by the Bank. The continuing guarantee
considered by it merely recited that the surety guaranteed to the Bank, the
repayment of all money which shall at any time be due to the Bank from the
borrower on the general balance of their accounts with the Bank, and that the p.
guarantee shall be a continuing guarantee to an extent of Rs. I 0 lakhs.
Interpreting the said continuing guarantee, this Court held that so long as the
account is a live account in the sense that it is not settled and there is no
refusal on the part of the guarantor to carry out the obligation, the period of
limitation could not be said to have commenced running.
G
11. But in the case on hand, the guarantee deeds specifically state that
the guarantors agree to pay and satisfy the bank on demand and interest will
be payable by the guarantors only from the date of demand. In a case where
the guarantee is payable on demand, as held in the case of Bradford (supra)
and Hartland (supra), the limitation begins to run when the demand is made H
1014 SUPREME COURT REPORTS [2006) 3 S.C.R.

A and the guarantor commits breach by not complying with the demand.
12. We will e~amine the meaning of the words 'on demand'. As noticed
above, the High Court was of the view that the words 'on demand' in law
have a special meaning and when an agreement states that an amount is
payable on demand, it implies that it is always payable, that is payable
B forthwith and a demand is not a condition precedent for the amount to
become payable. The meaning attached to the expression 'on demand' as
'always payable' or 'payable forthwith without demand' is not one ofuniversal
application. The said meaning applies only in certain circumstances. The said
meaning is normally applied to promissory notes or bills of exchange payable
C on demand. We may refer to Articles 21 and 22 in this beha~f. Article 21
provides that for money lent under an agreement that it shall be payable on
demand, the period oflimitation (3 years) begins to run when the loan is made.
--
On the other hand, the very same words 'payable on demand' have a different
meaning in Article 22 which provides that for money deposited under an
agreement that it shall be payable on demand, the period of limitation (3 years)
D will begin to run when the demand is made. Thus, the words 'payable on
demand' have been given different meaning when applied with reference to
'money lent' and 'money deposited'. In the context of Article 21, the meaning
and effect of those words is 'always payable' or payable from the moment
when the loan is made, whereas in the context of Article 22, the meaning is
'payable when actually a demand for payment is made'.
E
13. What then is the meaning of the said words used in the guarantee
bonds in question? The guarantee bond states that the guarantors agree to
pay and satisfy the Bank 'on demand'. It specifically provides that the liability
to pay interest would arise upon the guarantor only from the date of demand
F by the Bank for payment. It also provides that the guarantee s.hall be a
continuing guarantee for payment of the ultimate balance to become due to
the Bank by the borrower. The terms of guarantee, thus, make it clear that the
liability to pay would arise on the guarantors only when a demand is made.
Article 55 provides that the time will begin to run when the contract is
'broken'. Even if Article I 13 is to be applied, the time begins to run only when
G the right to sue accrues. In this case, the contract was broken and the right
to sue accrued only when a demand for payment was made py the Bank and
it was refused by the guarantors. When a demand is made requiring payment
within a stipulated period, say 15 days, the breach occurs or right to sue
accrues, if payment is not made or is refused within 15 days. If while making
H the demand for payment, no period is stipulated within which the payment
SYNDICATE BANK v. CHANNAVEERAPPABELERI [RA VEENDRAN, J.]} 015

should be made, the breach occurs or right to sue accrues, when the demand A
is served on the guarantor.

14. We have to, however, enter a caveat here. When the demahd is made
by the creditor on the guarantor, under a guarantee which requires· ii''demand,
as a condition precedent for the liability of the guarantor, such demand
should be for payment of a sum which is legally due and recoverable from B
the principal debtor. If the debt had already become time-barred against the
principal debtor, the question of creditor demanding payment thereafter, for
the first time, against the guarantor would not arise. When the demand is
made against the. guarantor, if the claim is a live claim (that is, a claim which
is not barred) against the principal debtor, limitation in respect of the guarantor C
will run from the date of such demand and refusal/non compliance. Where
guarantor becomes liable in pursuance of a demand validly made in time, the
creditor can sue the guarantor within three years, even if the claim against
the principal debtor gets subsequently time-barred. To clarify the above, the
following illustration may be useful :
D
Let us say that a creditor makes some advances to a borrower between
10.4.1991 and 1.6. 1991 and the repayment thereofis guaranteed by the
guarantor undertaking to pay on demand by the creditor, under a
continuing guarantee dated 1.4.1991. Let us further say a demand is
made by the creditor against the guarantor for payment on 1.3.1993.
Though the limitation against the principal debtor may expire on E
1.6.1994, as the demand was made on 1.3.1993 when the claim was
'live' against the principal debtor, the limitation as against the guarantor
would be 3 years from I .3. 1993. On the other hand, if the creditor does
not make a demand at all against the guarantor till I .6. I994 when the
claims against the principal debtor get time-barred, any demand against F
the guarantor made thereafter say on 15.9. I 994 would not be valid or
enforceable.

Be that as it may.

I 5. The respondents have tried to contend that when the operations G
ceased and the accounts became dormant, the very cessation of o~eration of
accounts should be treated as a refusal to pay by the principal debtor, as also
by the guarantors and, therefore the limitation would begin to run, not when
there is a refusal to meet the demand, but when the accounts became dormant.
By no logical process, we can hold that ceasing of operation of accounts by
. the borrower for some reason, would amount to a demand by the Bank on the H
t

1016 SUPREME COURT REPORTS [2006] 3 S.C.R.

A guarantor to pay the amount due in the account or refusal by the principal
debtor and guarantor to pay the amount due in the accounts.

16. In view of the above, we hold that the time began to run not when
the operations ceased in the accounts in mid-1986, but on the expiry of 15
days from 12.10.1987 when the demand was made by the Bank and there was
B refusal to pay by the guarantors. The suit filed within three years therefrom
is, therefore, in time. -
17. In the view we have taken, it is not necessary to consider the
meaning of the words 'live account' used and referred to in Samuel (supra).
Suffice it to say that the interpretation by the courts below placed on the
c words 'live account', that they refer to an account which is operational and
not dormant, may not be sound. This Court itself had indicated that 'live
account' means an account that is not settled. The use of the term 'settled'
gives an indication that a 'live account' refers to an account where the
balance has not been struck by an "account stated" or "account settled". We
D may in this behalf, refer to the following observations in Bishun Chand v.
Girdhari Lal & Anr., AIR (1934) PC 147:

"The essence of an account stated is not the character of the items
on one side or the other but the fact that there are cross items of
account and that the parties mutually agree the several amounts of
E each and, by treating the items so agreed on the one side as discharging
the items on the other side pro tanto, go on to agree that the balance
only is payable. Such a transaction is in truth bilateral, and creates a
new debt and a new cause of action."

'There can be account stated although the balance of indebtedness
-
F is not throughout in favour of one side. It is irrelevant whether the
debt in favour of the final creditor is created at the outset by one large
payment or consists of several sums of principal and several sums of
interest. Nor is it material whether the only payments made on the
other side were simply payments in reduction of such indebtedness
or were payments made in respect of other dealings. In any event
G
items must be ascertained and agreed on each side before the balance
can be struck and settled."

18. Some arguments were addressed about the Article of limitation that
would apply in respect of a suit against the guarantors. Samuel (supra) held
H that in the case of refusal of a guarantor to pay the amount, the matter would
-
SYNDICATE BANK v. CHANNA VEERAPPA BELERI [RA VEENDRAN, J.] 1017

. be governed by Article 115 of the Schedule to the Limitation Act, 1908, which A
corresponds to Article 55 of the Limitation Act, 1963. One of the submissions
made before us was that the term 'compensation for breach of contract' in
Article 55 indicates to a claim for unliquidated damages and not to a claim
for payment of sum certain (as to what is the difference between a claim for
unliquidated damages and a claim for a sum certain or a sum presently due, B
reference can advantageously be made to the classic statement of Law by
Chagla, CJ., in Iron and Hardware (India) Ltd. v. Firm Sham/al & Bros., AIR
(1954) Born. 423. If Article 55 does not apply, then a claim against a Guarantor
in such a situation may fall under the residuary Article 113 of the-Limitation
Act, 1963 corresponding to Article 120 of the old Act. The controversy about
the appropriate Article applicable, when the claim is found to be not exactly C
for 'compensation' but ascertained sum due has been referred to as long back
as 1916 in Tricomdas Cooverji Bhoja v. Gopinath Jin Thakur, AIR (1916) PC
183. Under the old Limitation Act (Act of 1908), the periods prescribed were
different under Article 115 and 116. The periods prescribed were also different
under Article 115 and 120. But under the 1963 Act, the period of limitation
is the same (three years) both under Article 55 and 113. Having regard to the D
fact that the period of !imitation is 3 years both under Article 55 and Article
113, and having regard to the binding decision in Samue/(supra}, we do not
propose to examine the controversy as to whether the appropriate Article is
55 or 113. Suffice it to note that even ifthe Article applicable is Article 113,
the Bank's suit is in time. E
19. In view of our finding that the suit is not barred by time, we allow
this appeal and, consequently set aside the judgment and decree of the High

-- Court and that of the trial court. Consequently, the suit is decreed, as prayed
for, with costs.

B.K. Appeal allowed.
F