How to compute the period of limitation for personal-guarantee?

The law of limitation means the time-limit for different suits within which an aggrieved person can approach the court to obtain a decree against the principal debtor and surety. The different time limit or period of limitation is prescribed for different types of suits, appeals, or applications in the ‘Schedule’ to the Limitation Act, 1963. The suit filed, appeal preferred and the application made after the expiry of the time limit is struck by the law of limitation and the same will not be admitted by the court as evidence for breach of contract.

A guarantor is liable to pay if the principal debtor defaults. The creditor has to enforce the guarantee within the limitation period stipulated under the limitation act. As per article 55 of limitation act 1963, the time-limit of 36 months would be reckoned from the date the guarantee contract is breached. The breach of contract occurs if the payment is not made or refused ‘on-demand’.  Further, article 113 (the residuary articles) of the limitation act provides that the time begins to run only when the right to sue accrues. For example, when a demand is made to the guarantor requiring payment within a stipulated period, (say within 15 days from the date of the notice), the breach occurs or right to sue accrues, if the payment is not made or is refused within 15 days of the notice date. Then again, the different implications for the words ‘on-demand’ which would depend purely on the terms of the contract, as there are some decided cases reveal a divergence of opinion for the words ‘on-demand’ in relation to certain time guarantees. Therefore, in the cases of guarantees, a claim may be time-barred against the principal debtor, but still enforceable against the guarantor on breach of contract.

Supreme Court judgment:

In the case of Deepak Bhandari (Appellant) versus Himachal Pradesh State Industrial Development Corporation Limited (Respondent) [Civil appeal no.1019/2014 in Supreme Court], the court seized that, the right to sue under a contract of indemnity or guarantee would principally arise when the indemnifier or the guarantor fails to pay the money claimed from it and not from the time when the ‘Recall Notice’ is served. The Supreme Court held that when the Respondent takes steps for recovery of the amount, the limitation period for recovery of the balance amount would start only after adjusting the proceeds from the sale of assets of the Borrower as only then would the Respondent be in a position to determine the Appellant’s final liability as to the guarantor. Accordingly, the suit filed by the Respondents for recovery of money from the Appellant being the guarantor was held to be within the period of limitation.

Cases where the fresh period of limitation shall be computed:

Acknowledgment of Debt in writing: According to Section 2 (j) of the Limitation Act, 1963, the life of a loan document (DPN) is three years. In case the bank is unable to obtain a revival letter for DPN before the expiry of 3 years,  Section 18 of the Limitation Act provides that the period of limitation is extended in the event of an acknowledgment of liability made by the debtor before the expiration of the period of limitation to initiate the recovery process. An acknowledgment of the debt by the principal borrower also abandons the earlier demand made against the guarantor. Thus, the limitation period for the related guarantee contract also extended from the date of the acknowledgment.

Promise after expiry period: Under Section 25(3) of the Contract Act, a promise is made by the debtor to pay in whole or in part, a time-barred debt offers a fresh period of limitation for the debt contract. U/S 128, the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract.

Acknowledgment or payment by another person:  Section 19 of the limitation act provides that where payment on account of a debtor of interest on a legacy is made before the expiration of the prescribed period by the person liable to pay the debt or legacy or by his agent duly authorized in this behalf, a fresh period of limitation shall be computed from the time when the payment was made. Provided that, (save in the case of payment of interest made before the 1st day of January 1928), an acknowledgment of the payment appears in the handwriting of, or in a writing signed by, the person making the payment.

To know more click below

(i) Time limit for enforcement of bank guarantees (ii) Major types of bank guarantees   (iii) Circumstances that may discharge Guarantor from all liabilities

Disclaimer:

This article should not be construed as professional advice under any circumstance. It is clarified to the readers that the contents provided in this write-up are intended for general information only and cannot be relied upon for real-time professional facts. Readers are advised to refer to relevant provisions of law and also to take the qualified professionals’ advice before applying or accepting any of the points mentioned above. The author or the website accepts no responsibility whatsoever caused by the use of any information provided in this article and shall not be liable for any losses, claims, or damages that may arise because of the contents of this post.