Running Accounts and the Law of Limitation in India: A Scholarly Analysis

Running Accounts and the Law of Limitation in India: A Scholarly Analysis

Introduction

In the realm of commercial transactions, "running accounts" are a ubiquitous feature, facilitating ongoing business relationships where debits and credits are continuously recorded. However, the fluid nature of such accounts often gives rise to complexities when determining the period of limitation for recovery of dues. The Limitation Act, 1963 (hereinafter "the Act"), provides the statutory framework for barring legal remedies after a specified period, thereby ensuring diligence in pursuing claims and providing repose to defendants. This article undertakes a scholarly analysis of the legal principles governing running accounts vis-à-vis the law of limitation in India, drawing extensively upon judicial pronouncements and statutory provisions.

Defining 'Running Account' and 'Mutual, Open and Current Account'

The term "running account" is not explicitly defined in the Limitation Act, 1963. However, judicial interpretations have provided clarity. A running account is generally understood as an open, unsettled account that exhibits reciprocal demands between parties, as distinguished from a stated and liquidated account where the amount is crystallized.[1] Black's Law Dictionary defines a "running account" as "an open unsettled account... mutual accounts and reciprocal demands between the parties, which accounts and demands remain open and unsettled."[2] It signifies an ongoing course of dealing where transactions are recorded, and the balance may shift between the parties.[3]

Crucially, for specific provisions of the Limitation Act to apply, particularly Article 1, the account must qualify as a "mutual, open and current account." The Supreme Court, in Kesari Chand Jaisukh Lal v. Shillong Banking Corporation Ltd., cited with approval in Idea Cellular Limited v. Mahanagar Telephone Nigam Limited, adopted the definition from Hirada Basappa v. G. Muddappa: "To be mutual there must be transactions on each side creating independent obligations on the other and not merely transactions which create obligations on the one side, those on the other being merely complete or partial discharges of such obligations."[4] This implies reciprocity of dealings where each party has a claim against the other arising from distinct transactions.[5]

Rankin C.J. in Tea Financing Syndicate, Ld. v. Chandra Kamal Bezboruah, a decision consistently approved by Indian courts including the Supreme Court in Hindustan Forest Company v. Lal Chand And Others[6] and cited in Shambhu Bhat v. Karnataka Vyavasaya Varthaka Sangha Ltd.,[7] elaborated on these terms. An account is "open" when no balance is struck, or if struck, is not accepted or acknowledged. It is "current" when it has been ongoing as a continuous account. It is "mutual" when there are transactions on each side creating independent obligations, not merely payments discharging an obligation.[8] Thus, where one party merely sells goods and the other makes payments, it does not automatically constitute a mutual account; the buyer's payments are typically partial discharges, not independent demands against the seller.[9]

The Limitation Act, 1963: Core Provisions for Running Accounts

Several articles under the Schedule to the Limitation Act, 1963, are pertinent to claims arising from running accounts.

Article 1: Mutual, Open and Current Accounts

Article 1 prescribes a limitation period of three years for "the balance due on a mutual, open and current account, where there have been reciprocal demands between the parties." The period begins to run from "the close of the year in which the last item admitted or proved is entered in the account; such year to be computed as in the account." This provision is critical because it allows earlier items in the account, which might otherwise be time-barred, to be included if the last admitted or proved item falls within the limitation period computed from the close of the relevant accounting year.[10] The computation of "such year" refers to the accounting year maintained by the parties.[11]

Article 14: Price of Goods Sold and Delivered

If an account does not meet the criteria of a "mutual, open and current account" under Article 1, other articles may apply. For instance, Article 14 provides a three-year limitation period for "the price of goods sold and delivered where no fixed period of credit is agreed upon," commencing from "the date of the delivery of the goods." In cases where a running account is maintained for goods supplied, but mutuality is absent, Article 14 might govern, potentially barring claims for earlier deliveries if each delivery is treated as a separate transaction.[12] However, if successive bills show a balance carried forward and payments are appropriated towards the total outstanding amount, it may still be considered a running account, though not necessarily a "mutual" one for Article 1 purposes.[13]

Other Relevant Articles

Article 26, which pertains to suits "for money payable for money lent," prescribes a three-year limitation period from when the loan is made. This was noted in Era Constructions (India) Limited.[1] Article 115 of the erstwhile Jammu and Kashmir Limitation Act (similar to provisions for breach of contract in the Indian Limitation Act) was considered in Hindustan Forest Company, where an advance payment by the buyer was held to make the sellers debtors, thus precluding the application of an article meant for sellers suing for price.[6]

Judicial Interpretation of 'Running Account' and Limitation Principles

The Essence of Mutuality: Reciprocal Demands

The cornerstone of Article 1 is "mutuality." As established in Tea Financing Syndicate and reiterated in numerous subsequent cases like Aghore Nath Ray v. Bisnu Chandra Das*, there must be independent obligations on both sides.[8, 9] For example, if A sells goods to B, and B consigns goods to A for sale, creating independent obligations, it would be a mutual account.[8] However, if B merely makes payments against goods purchased from A, these payments are generally considered discharges of B's debt, not independent claims by B against A.[9] In Mrs. Rosy George v. State Bank Of India And Others Respodents., the adjustment of rent (owed by the bank to the borrower) against a loan (owed by the borrower to the bank) was held to create mutual obligations, bringing the account under Article 1.[14] Conversely, in SURAT SINGH v. M/S KASHMIRI LAL PARVINDER KUMAR, the court scrutinized whether the account was genuinely mutual or merely a one-sided lending transaction.[15]

Commencement of Limitation Period

For accounts falling under Article 1, limitation runs from the close of the year of the last admitted or proved entry.[10] If Article 1 is inapplicable, and Article 14 applies (e.g., for goods sold), limitation for each item typically runs from its date of delivery.[12, 16] In Era Constructions (India) Limited, the arbitrator noted that the last payment made by the petitioner started the limitation period, and the claim was within three years of that payment.[1] However, the specific article applied by the arbitrator (whether Article 1 or another, influenced by Section 19) is crucial. The Supreme Court in Oil & Natural Gas Commission v. M.C Clelland Engineers S.A observed that in cases of running bills and periodic payments, the determination of when an amount becomes due and whether transactions are complete are matters for adjudication, emphasizing the need for detailed pleadings on limitation.[17]

Acknowledged Accounts and "Accounts Stated"

When parties agree upon the balance of their accounts after mutual adjustments, it may become an "account stated." This is distinct from an open running account.[1, 2] The Supreme Court in Hiralal And Others . v. Badkulal And Others . held that an unconditional acknowledgment of debt in the plaintiffs' ledger, signed by the defendants, was sufficient to establish a cause of action and implied a promise to pay.[18] Such an "account stated" can give rise to a fresh cause of action.[19] The Calcutta High Court in Sefatullah Bepari v. Sadhu Molla Opposite Party. found that an adjustment of accounts, even if unsigned by the defendant but arising from partnership relations and carried forward, gave rise to a new cause of action.[20]

The Role of Acknowledgment (Section 18) and Part-Payment (Section 19)

Sections 18 and 19 of the Limitation Act, 1963, play a significant role in extending the period of limitation. Section 18 provides that if an acknowledgment of liability in respect of any property or right has been 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. An acknowledgment need not specify the exact nature of the right or aver that the time for payment has come.[21]

Section 19 states 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), 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.

In the context of running accounts, a written acknowledgment of the outstanding balance by the debtor can give a fresh start to limitation under Section 18.[18, 21] Similarly, a part-payment made towards the debt, duly acknowledged in writing, can extend limitation under Section 19.[13] These provisions can be crucial where an account might not strictly qualify under Article 1, or even if it does, to confirm the starting point for limitation. The Delhi High Court in F.C.C Projects Pvt. Ltd. v. Ashish Bhardwaj . considered the effect of a payment alleged to be in full and final settlement versus a part-payment for the purpose of Section 19.[13]

Distinguishing Running Accounts from Unsettled Claims and Simple Debts

It is important to distinguish a running account from a mere accumulation of unliquidated claims or simple one-sided debts. The Supreme Court in Union Of India v. Raman Iron Foundry . dealt with a contractual clause allowing recovery of "sums due." The Court held that a "claim for damages" which is unadjudicated does not constitute a "sum due and payable."[22] While a running account involves ongoing transactions, the balance may not be a "sum due" in a finalized sense until the account is stated or settled. The characteristic of a running account, especially a mutual one, is the expectation of ongoing dealings and shifting balances, not just a one-off debt or an unliquidated claim for damages.[4] Payments made towards revenue arrears/outstanding principal in a running account may not automatically be considered an acknowledgment for a distinct claim for interest, as highlighted in Power Company Of Karnataka Limited Through Its Managing Director And Another v. Udupi Power Corporation Ltd. Through The Managing Director And Others.[23]

Continuing Guarantees and Live Accounts

The concept of a "live account" is relevant when a running account is secured by a continuing guarantee. In Syndicate Bank v. Channaveerappa Beleri And Others, the Supreme Court, discussing the limitation for enforcing a continuing guarantee, held that so long as the account is a "live account" (i.e., not settled and no refusal by the guarantor to carry out the obligation), the period of limitation against the guarantor might not commence.[24] Limitation would run from the date of breach of the contract of guarantee. This underscores that the nature of the principal debtor's account (whether it's active and running) can influence the guarantor's liability period.

Modern Context: Insolvency Proceedings

The principles of limitation for debts arising from running accounts are also pertinent in the context of the Insolvency and Bankruptcy Code, 2016 (IBC). The Supreme Court in B.K. Educational Services Private Limited v. Parag Gupta And Associates affirmed that the Limitation Act, 1963, applies to applications filed under Sections 7 and 9 of the IBC.[25] Consequently, a default must have occurred within three years prior to filing the application (subject to Section 5 of the Act). Section 60(6) of the IBC provides for the exclusion of the moratorium period when computing limitation for suits or applications by or against the corporate debtor. This highlights the enduring importance of determining when a debt from a running account becomes "due and payable" for limitation purposes, even in insolvency scenarios.

Procedural Considerations

The plea of limitation is a mixed question of fact and law. As emphasized in Oil & Natural Gas Commission v. M.C Clelland Engineers S.A, a bald statement that a claim is barred by limitation without detailed pleadings may be insufficient.[17] Parties must clearly articulate the basis for their claims or defences regarding limitation. While not directly on running accounts, the Supreme Court in State Bank Of India And Others v. S.N Goyal . stressed the importance of framing substantial questions of law in second appeals,[26] a principle that generally underscores the need for precision in legal arguments, including those related to limitation. The case of M/S Madras Rubber Factory Ltd. v. Union Of India And Others also touched upon a "running account" for customs duty payments, but the core issue was the timeliness of refund applications under the Customs Act, 1962, highlighting that limitation operates distinctly under different statutes based on their specific provisions.[27]

Conclusion

The interplay between running accounts and the law of limitation in India is intricate, hinging on the precise nature of the account and the specific provisions of the Limitation Act, 1963. The distinction between a simple running account and a "mutual, open and current account" under Article 1 is paramount, as it dictates the commencement point for the limitation period. The existence of reciprocal demands creating independent obligations is the litmus test for mutuality. In the absence of mutuality, other articles like Article 14 may apply, often leading to a different computation of the limitation period for each transaction.

Furthermore, the doctrines of acknowledgment under Section 18 and part-payment under Section 19 of the Act can significantly alter the limitation landscape by providing a fresh period of limitation. Judicial precedents, from the foundational principles laid down in Tea Financing Syndicate to contemporary applications in insolvency law, consistently emphasize a careful factual analysis of the course of dealings between parties. Ultimately, a thorough understanding of these legal principles is essential for both creditors seeking to recover dues and debtors seeking to raise the defence of limitation, ensuring that claims are pursued diligently and within the temporal boundaries set by law.

References

  1. Era Constructions (India) Limited v. D.K Sharma, Prop. Keshav Security Services (Regd.) . (Delhi High Court, 2007).
  2. Black's Law Dictionary, 6th Edition, as cited in Era Constructions (India) Limited v. D.K Sharma (Delhi High Court, 2007) and Power Company Of Karnataka Limited Through Its Managing Director And Another v. Udupi Power Corporation Ltd. Through The Managing Director And Others (Appellate Tribunal For Electricity, 2020).
  3. Idea Cellular Limited Petitioner v. Mahanagar Telephone Nigam Limited (Telecom Disputes Settlement And Appellate Tribunal, 2010).
  4. Kesari Chand Jaisukh Lal v. Shillong Banking Corporation Ltd., cited in Idea Cellular Limited Petitioner v. Mahanagar Telephone Nigam Limited (Telecom Disputes Settlement And Appellate Tribunal, 2010).
  5. Hirada Basappa v. G. Muddappa, 6 Mad HC 142, cited in Idea Cellular Limited Petitioner v. Mahanagar Telephone Nigam Limited (Telecom Disputes Settlement And Appellate Tribunal, 2010).
  6. Hindustan Forest Company v. Lal Chand And Others . (1959 AIR SC 1349, Supreme Court Of India, 1959).
  7. Shambhu Bhat v. Karnataka Vyavasaya Varthaka Sangha Ltd. (Kerala High Court, 1987).
  8. Tea Financing Syndicate, Ld. v. Chandra Kamal Bezboruah (1929 SCC ONLINE CAL 324, Calcutta High Court, 1929).
  9. Aghore Nath Ray v. Bisnu Chandra Das* (Calcutta High Court, 1949).
  10. Article 1, Schedule, Limitation Act, 1963. See also Era Constructions (India) Limited v. D.K Sharma (Delhi High Court, 2007); Idea Cellular Limited Petitioner v. Mahanagar Telephone Nigam Limited (Telecom Disputes Settlement And Appellate Tribunal, 2010).
  11. Ashok Parshad v. Mahalaxmi Sugar Mills Co. Ltd. (Delhi High Court, 2013).
  12. Ashok Parshad v. Mahalaxmi Sugar Mills Co. Ltd. (Delhi High Court, 2013); F.C.C Projects Pvt. Ltd. v. Ashish Bhardwaj . (2007 SCC ONLINE DEL 1342, Delhi High Court, 2007), citing Attadi Venketi v. Baratam Ramulu and Sons, AIR 1984 Orissa 226.
  13. F.C.C Projects Pvt. Ltd. v. Ashish Bhardwaj . (2007 SCC ONLINE DEL 1342, Delhi High Court, 2007) / F.C.C Projects Pvt. Ltd.… v. Ashish Bhardwaj…. (Delhi High Court, 2007).
  14. Mrs. Rosy George v. State Bank Of India And Others Respodents. (Kerala High Court, 1992).
  15. SURAT SINGH v. M/S KASHMIRI LAL PARVINDER KUMAR (Punjab & Haryana High Court, 2015).
  16. Narayana Pillai v. Narayanan Vanajakshi, AIR 1957 Kerala 93, cited in F.C.C Projects Pvt. Ltd. v. Ashish Bhardwaj . (2007 SCC ONLINE DEL 1342, Delhi High Court, 2007).
  17. Oil & Natural Gas Commission v. M.C Clelland Engineers S.A . (1999 SCC 4 327, Supreme Court Of India, 1999).
  18. Hiralal And Others . v. Badkulal And Others . (1953 AIR 225, Supreme Court Of India, 1953).
  19. Maniram v. Seth Rupchand, cited in Hiralal And Others . v. Badkulal And Others . (1953 AIR 225, Supreme Court Of India, 1953).
  20. Sefatullah Bepari v. Sadhu Molla Opposite Party. (1927 SCC ONLINE CAL 10, Calcutta High Court, 1927).
  21. State Trading Corporation Of India Ltd. v. Jay Shree Chemicals And Fertilisers (Calcutta High Court, 1979); Section 18, Limitation Act, 1963.
  22. Union Of India v. Raman Iron Foundry . (1974 SCC 2 231, Supreme Court Of India, 1974).
  23. Power Company Of Karnataka Limited Through Its Managing Director And Another v. Udupi Power Corporation Ltd. Through The Managing Director And Others (Appellate Tribunal For Electricity, 2020).
  24. Syndicate Bank v. Channaveerappa Beleri And Others (2006 SCC 11 506, Supreme Court Of India, 2006).
  25. B.K. Educational Services Private Limited v. Parag Gupta And Associates (Supreme Court Of India, 2018).
  26. State Bank Of India And Others v. S.N Goyal . (2008 SCC 8 92, Supreme Court Of India, 2008).
  27. M/S Madras Rubber Factory Ltd. v. Union Of India And Others (1976 SCC 2 255, Supreme Court Of India, 1975).