Navigating the Labyrinth: Limitation in Running Accounts under Indian Law
Introduction
The law of limitation prescribes the time within which legal proceedings must be initiated. In commercial transactions, parties often engage in a series of dealings over time, leading to what is commonly referred to as a "running account." A running account is characterized by its ongoing and unsettled nature, where debits and credits are made, and the balance fluctuates. Determining the precise point at which the period of limitation commences for dues arising from such accounts presents considerable complexity. The Limitation Act, 1963 (hereinafter "the Act"), particularly through Articles such as 1 and 14 of its Schedule, along with substantive provisions like Sections 18 and 19, provides the framework for this determination. This article endeavors to critically analyze the principles governing the computation of limitation periods for running accounts under Indian law, drawing upon statutory provisions and authoritative judicial pronouncements.
Understanding "Running Account" in Legal Parlance
Definition and Characteristics
A "running account" is generally understood as an open, unsettled account, distinct from a stated or liquidated account where the amount due is crystallized. The Delhi High Court in Era Constructions (India) Limited v. D.K Sharma, Prop. Keshav Security Services (Regd.) (Delhi High Court, 2007), quoting Black's Law Dictionary (6th Edition), defined a running account as: “An open unsettled account, as distinguished from a stated and liquidated account. Running accounts mean mutual accounts and reciprocal demands between the parties, which accounts and demands remain open and unsettled.” This definition was also adopted by the Telecom Disputes Settlement And Appellate Tribunal (TDSAT) in Idea Cellular Limited Petitioner v. Mahanagar Telephone Nigam Limited (TDSAT, 2010). The Appellate Tribunal For Electricity in Power Company Of Karnataka Limited Through Its Managing Director And Another v. Udupi Power Corporation Ltd. Through The Managing Director And Others (APTEL, 2020) reiterated this definition, emphasizing that running accounts involve mutual accounts and reciprocal demands that remain open and unsettled.
Types of Running Accounts for Limitation Purposes
For the purpose of applying the Limitation Act, 1963, running accounts can broadly be categorized into:
- Mutual, Open, and Current Accounts, specifically addressed by Article 1 of the Schedule to the Act.
- Running (Non-Mutual) Accounts, the limitation for which requires a more nuanced analysis involving other Articles and provisions of the Act.
Limitation for Mutual, Open, and Current Accounts (Article 1)
Statutory Provision
Article 1 of the Schedule to the Limitation Act, 1963, provides for: "For the balance due on a mutual, open and current account, where there have been reciprocal demands between the parties." The period of limitation prescribed is three years, and the time from which this period begins to run is "The close of the year in which the last item admitted or proved is entered in the account; such year is to be computed as in the account." This starting point was noted in Idea Cellular Limited (TDSAT, 2010) and Era Constructions (India) Limited (Delhi High Court, 2007).
The Concept of "Mutuality"
The cornerstone of Article 1 is "mutuality." For an account to be mutual, there must be reciprocal demands or two sets of independent transactions between the parties, where each party can be a debtor and a creditor in turn. The Kerala High Court in Mrs. Rosy George v. State Bank Of India And Others Respodents. (Kerala High Court, 1992) explained that mutuality involves transactions with mutual credit on either side or an express or implied agreement for set-off. In that case, rent due to the mortgagor being adjusted against a loan taken by the mortgagor was held to create mutual obligations, attracting Article 1. The Punjab & Haryana High Court in SURAT SINGH v. M/S KASHMIRI LAL PARVINDER KUMAR (Punjab & Haryana High Court, 2015) emphasized that for an account to be mutual, open, and current, there must be reciprocal obligations and not a mere one-way traffic, such as a simple lender-borrower relationship where one party is always a creditor and the other a debtor. The Calcutta High Court in Tea Financing Syndicate, Ld. v. Chandra Kamal Bezboruah (1929 SCC ONLINE CAL 324), while dealing with the precursor to Article 1, also underscored the necessity of reciprocal demands. If an account lacks this element of mutuality, Article 1 will not apply, even if the account is "running" or "open."
"Open and Current"
The terms "open" and "current" signify that the account has not been settled or closed and that dealings are ongoing. An "open" account is one that is still subsisting, where transactions are yet to be finalized or adjusted, as opposed to an account stated where parties have agreed upon the balance due (Idea Cellular Limited, TDSAT, 2010).
Commencement of Limitation under Article 1
As stipulated, the limitation period of three years commences from the close of the accounting year in which the last item admitted or proved is entered into the account. The "last item" can be a transaction (supply of goods, rendering of service) or a payment that is admitted or proved to have been made and entered in the account. The computation of the year is based on how it is maintained in the account itself (e.g., financial year).
Limitation for Running (Non-Mutual) Accounts
Absence of a Specific Dedicated Article
The Limitation Act, 1963, does not contain a single, specific article that comprehensively addresses "running non-mutual accounts" in the explicit manner Article 1 does for mutual accounts. Consequently, the determination of the limitation period for such accounts often involves an interpretation of other articles, primarily Article 14, and the application of Sections 18 and 19 of the Act.
Applicability of Article 14 v. Suit for Account Balance
Article 14 of the Schedule to the Act states: "For the price of goods sold and delivered where no fixed period of credit is agreed upon." The limitation period is three years from "The date of the delivery of the goods."
A critical question arises whether, in a running non-mutual account involving the supply of goods, Article 14 applies to each delivery independently, or whether the account can be treated as a whole. The Delhi High Court in Bharath Skins Corporation v. Taneja Skins Company Pvt. Ltd. (Delhi High Court, 2011) observed that in the case of a running and non-mutual account between a buyer and seller, where goods are delivered and payments are made intermittently, the seller's action is not for the price of individual goods sold and delivered but "for the balance due at the foot of an account." This suggests that Article 14, which focuses on individual deliveries, may not be the appropriate provision when the claim is for an overall balance in a continuous dealing. The court in Bharath Skins Corporation explicitly stated that Article 14 would have no application in suits for recovery of money due on a running and non-mutual current account between buyer and seller.
The Delhi High Court in Ashok Parshad v. Mahalaxmi Sugar Mills Co. Ltd. (2013 SCC ONLINE DEL 3629) elaborated on this. While acknowledging that Article 14 provides the starting point of limitation for each item of account as the date of delivery, it also noted, in the context of a running account (though not mutual), that "the cause of action for all the items delivered is single down to the date of last delivery" and that limitation "would keep on being extended when the last payment is made." This implies that while individual deliveries might trigger their own limitation periods under a strict Art. 14 interpretation, the nature of a running account and subsequent payments can alter this, effectively treating the claim as one for the overall balance.
Commencement of Limitation
If a running (non-mutual) account is viewed merely as a series of discrete transactions (e.g., individual sales), Article 14 would suggest limitation runs from the date of each respective delivery. However, if the essence of the claim is for the balance due on an ongoing account, the "default" in paying that balance, or the last transaction/payment, becomes more pertinent. In such scenarios, the provisions concerning acknowledgment (Section 18) and part-payment (Section 19) are of paramount importance in extending the limitation period for the recovery of the outstanding balance.
The Role of Acknowledgments and Part-Payments
Sections 18 and 19 of the Limitation Act, 1963, play a pivotal role in extending the period of limitation for debts, including those arising from running accounts.
Section 18: Effect of Acknowledgment in Writing
Section 18 provides that if an acknowledgment of liability in respect of any property or right is made in writing signed by the party against whom such property or right is claimed (or by any person through whom he derives his title or liability) before the expiration of the prescribed period for a suit or application, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed. The Supreme Court in Food Corporation Of India v. Assam State Cooperative Marketing & Consumer Federation Ltd. And Others (2004 SCC 12 360) held that letters acknowledging receipt of an excess amount constituted a valid acknowledgment under Section 18, thereby resetting the limitation period. The acknowledgment need not be an explicit promise to pay but must demonstrate an admission of a subsisting jural relationship of creditor and debtor. Similarly, the Calcutta High Court in State Trading Corporation Of India Ltd. v. Jay Shree Chemicals And Fertilisers (Calcutta High Court, 1979) affirmed that admission of an existing unadjusted account operates as an acknowledgment of liability.
Section 19: Effect of Payment on Account of Debt or of Interest
Section 19 stipulates that where payment on account of a debt or 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. The proviso requires that an acknowledgment of the payment appears in the handwriting of, or in a writing signed by, the person making the payment. The Bombay High Court in Chetan Navnitlal Shah v. Fizza Navnitlal Shah (Bombay High Court, 2017) found that a part repayment in a running account afforded a fresh starting point of limitation. More recently, the National Company Law Appellate Tribunal in ARIHANT METALS v. GURUDEV OVERSEAS LIMITED (NCLAT, 2024), in an IBC context, considered the date of the last payment received in a running account as crucial for determining the date of default and, consequently, limitation.
Distinction: Payment towards Principal v. Interest
A crucial caveat, highlighted by judicial decisions, is that a payment made towards the principal sum due does not automatically extend the limitation period for claiming interest on that sum, unless the payment is specifically appropriated towards interest or the payment itself is made in circumstances implying an acknowledgment of liability for interest. The Delhi High Court in Food Corporation Of India v. Amar Flour Mills (1993 RLR 655) held that where all payments were towards liquidation of the principal amount, a claim for interest on transactions that had occurred much earlier was barred by time, as the payment of principal did not revive the claim for interest. This was echoed in Power Company Of Karnataka Limited (APTEL, 2020), where it was submitted that payment towards principal cannot be considered an acknowledgment for interest claims to extend limitation for interest recovery under Article 25.
Special Considerations
Accounts Stated (Article 26)
Article 26 of the Act deals with suits "For money payable to the plaintiff for money found to be due from the defendant to the plaintiff on accounts stated between them." The limitation is three years from "When the accounts are stated in writing signed by the defendant or his agent duly authorized in this behalf," unless a specific time for payment is fixed. An account stated is distinct from a running account, as the former implies a settlement and agreement on the balance due, thereby crystallizing the liability (Idea Cellular Limited, TDSAT, 2010; Chetan Navnitlal Shah, Bombay High Court, 2017).
Continuing Guarantees and "Live Accounts"
The Supreme Court in Syndicate Bank v. Channaveerappa Beleri And Others (2006 SCC 11 506) dealt with continuing guarantees payable on demand. It held that limitation commences only upon a valid demand by the creditor and refusal by the guarantor. The Court referred to the concept of a "live account" in the context of guarantees, meaning an account that is not settled and where there is no refusal by the guarantor to carry out the obligation. While this case pertains to guarantees, the principle of identifying a specific "trigger" for the commencement of limitation in ongoing financial relationships (like a "live account") can be analogously relevant when assessing the nature of running accounts, especially non-mutual ones where a clear "default" on the overall balance might be the trigger.
General Principle: Limitation Bars Remedy, Not Right
It is a well-established principle, reiterated by the Supreme Court in State Of Kerala And Others v. V.R Kalliyanikutty And Another (1999 SCC 3 657), that the Limitation Act, 1963, generally bars the remedy but does not extinguish the right itself (except in cases like adverse possession under Section 27). This means that while a creditor may be precluded from enforcing a time-barred debt through a court of law, the debt itself is not wiped out. This underlying principle informs the interpretation of limitation provisions, ensuring that while stale claims are discouraged, provisions for extension (like Sections 18 and 19) are given their due effect when conditions are met. The Court in Kalliyanikutty also held that special recovery statutes do not, by themselves, override the Limitation Act to allow recovery of time-barred debts unless explicitly provided.
The case of Hindustan Forest Company v. Lal Chand And Others (1959 AIR SC 1349) illustrates how the specific contractual terms and actions of parties can influence the debtor-creditor relationship and, consequently, the applicable limitation provisions. There, an advance payment by the buyer was held to make the sellers debtors, altering the usual dynamic and impacting the applicability of the relevant limitation article (Article 115 of the J&K Limitation Act).
The Supreme Court in A. K. Gupta And Sons Ltd. v. Damodar Valley Corporation (1967 AIR SC 0 96) addressed the issue of amending pleadings. It held that an amendment that does not introduce a new cause of action but merely clarifies or adds a relief stemming from the existing cause of action could be allowed, even if that specific relief, if claimed in a new suit, would be time-barred. This procedural aspect can be relevant in suits involving complex running accounts where the full extent of the claim might evolve.
Conclusion
The determination of the limitation period for claims arising from running accounts in India is a multifaceted exercise, contingent upon the precise nature of the account and the conduct of the parties. For "mutual, open, and current accounts," Article 1 of the Limitation Act, 1963, provides a clear framework, with limitation commencing from the close of the accounting year of the last admitted or proved entry. The key is establishing "mutuality" through reciprocal demands.
For running accounts that are not mutual, the position is more complex. While Article 14 might seem applicable to individual supplies in a seller-buyer context, judicial pronouncements suggest that a suit for the balance due on such a running account is often treated as a claim for an overall sum. In these scenarios, Sections 18 (acknowledgment) and 19 (part-payment) of the Act become instrumental in extending the limitation period, effectively allowing the account to be treated as a continuum where recent acknowledgments or payments can revive or keep alive the claim for the outstanding balance. However, parties must be cautious regarding claims for interest, as payments towards principal do not automatically extend limitation for interest dues.
Ultimately, meticulous record-keeping, clear documentation of transactions, acknowledgments, and payments are crucial for both creditors and debtors in navigating the complexities of limitation in running accounts. The law seeks to strike a balance between preventing the litigation of stale claims and ensuring that legitimate dues arising from ongoing commercial relationships can be recovered within the prescribed legal timelines.