Order
1. The question for decision in this appeal is: When the period of limitation for recovery of the balance due after sale of mortgaged property starts.
2. Briefly stated, the facts are as follows: the appellants had given a loan to a partnership firm of M/s Engineering Works. As security for that loan, a mortgage deed was executed. Certain other documents were also executed with which we are not concerned in this appeal.
3. Clause 7 of the mortgage deed is important. It reads as follows:
“Without prejudice to the above rights and powers conferred on the Corporation by these presents and by Sections 29 and 30 of the State Financial Corporations Act, 1951 and as amended in 1956 and 1972 and the special remedies available to the Corporation under the said Act, it is hereby further agreed and declared that if the partners of the industrial concern fail to pay the said principal sum with interest and other monies due from them under these presents to the Corporation in the manner agreed, the Corporation shall be entitled to realise its dues by sale of the mortgaged properties, the said fixtures and fittings and other assets, and if the sale proceeds thereof are insufficient to satisfy the dues of the Corporation, to recover the balance from the partners of the industrial concern and the other properties owned by them though not included in this security.”
(emphasis supplied)
4. It is thus to be seen that by virtue of the italicised portion of Clause 7, apart from the mortgage, an indemnity to pay if the sale proceeds were insufficient to satisfy the dues of the Corporation was also given. The obligation under the indemnity arose after sale and only if any balance remained, still due and payable. It is at that stage the Corporation would have a right to recover the balance from the partners and other properties owned by them even though those properties did not form part of the mortgage deed.
5. The principal debtor committed defaults in repayment. Therefore, on 4-1-1977, a notice was issued to them. Thereafter a publication declaring intention to take over the assets was made on 25-7-1981. On 25-10-1982 in exercise of powers under Section 29 of the Financial Corporations Act, possession was taken over.
6. The Corporation sold the assets on 28-3-1984 and 14-3-1985. From such sale, they recovered a sum of Rs 2,90,000. The Corporation then issued a notice dated 27-5-1985 to the respondents who had executed the indemnity referred to hereinabove. As the balance was not paid up, a civil suit for recovery of the balance amount was filed on 15-9-1985.
7. In the suit the respondents took up a preliminary contention that the suit was barred by limitation. It appears that a Single Judge of the Himachal Pradesh High Court had, in some other matter held, that the period of limitation for such a suit started after sale and when a balance was found due. When this suit reached hearing before another Judge of the same Court, the learned Judge disagreed with the earlier view. By an order dated 13-5-1993 the following question was referred to a larger Bench for decision:
“When the personal remedy on a mortgaged debt is lost but the remedy against the mortgaged property survives and the plaintiff Corporation realises the mortgage debt by the sale of the mortgaged property under Section 29 of the State Financial Corporations Act, and the mortgage ceases to exist, but the sale proceeds are not sufficient to cover the whole of the claim, can such a plaintiff be allowed to obtain a personal decree for the recovery of balance outstanding dues after the expiry of three years from the date of the breach of covenant contained in the mortgage deed.”
8. The Division Bench has, by the impugned judgment, answered the question by holding that suit for balance arose as a result of the non-payment of debt by the principal debtor. It was held that suit for obtaining a personal decree gets barred after a period of three years from the date of breach of covenant contained in the mortgage deed i.e the period of limitation starts from the date when the breach of payment of instalment under the mortgage deed was committed.
9. The matter then was sent back to the Single Judge who, on the basis of this order, has held that the suit is barred by limitation. Against that order a first appeal was filed. That first appeal has been dismissed with the liberty to have it restored in the event of this Court holding that the suit was not barred by limitation.
10. Whilst considering the question of limitation the Division Bench has given a very lengthy judgment running into approximately 50 pages. However, they appear to have not noticed the fact that under Clause 7 an indemnity had been given. Therefore, the premise on which the judgment proceeds i.e that the loan transaction and the mortgage deed are one composite transaction which was inseparable is entirely erroneous. It is settled law that a contract of indemnity and/or guarantee is an independent and separate contract from the main contract. Thus, the question which they required to address themselves, which unfortunately they did not, was when does the right to sue on the indemnity arose. In our view, there can be only one answer to this question. The right to sue on the contract of indemnity arose only after the assets were sold off. It is only at that stage that the balance due became ascertained. It is at that stage only that a suit for recovery of the balance could have been filed. Merely because the Corporation acted under Section 29 of the Financial Corporations Act did not mean that the contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession and sell the assets for recovery of the dues under the main contract. It may be that on the Corporation taking action under Section 29 and on their taking possession they became deemed owners. The mortgage may have come to an end, but the contract of indemnity, which was an independent contract, did not. The right to claim for the balance arose, under the contract of indemnity, only when the sale proceeds were found to be insufficient.
11. In this case, it is an admitted position that the sale took place on 28-3-1984 and 14-3-1985. It is only after this date that the question of right to sue on the indemnity (contained in Clause 7) arose. The suit having been filed on 15-9-1985 was well within limitation. Therefore, it was erroneous to hold that the suit was barred by the law of limitation.
12. Even otherwise, it must be mentioned that the Division Bench was in error in stating that the right to personally recover the balance terminates after the expiry of three years. It must be remembered that the question of recovery of balance will only arise after the remedy in respect of the mortgage deed has first been (sic exhausted). If a mortgage suit was to be filed, the period of limitation would be 12 years. Of course, in such a suit, a prayer can also be made for a personal decree on the sale proceeds being insufficient. Even though such prayer may be made, the suit remains a mortgage suit. Therefore, the period of limitation in such cases will remain 12 years.
13. For all the above reasons, we are unable to sustain the judgment of the Division Bench. It is accordingly set aside.
14. As stated above, OSA No. 2 of 1997 was dismissed with liberty to revive the same if the appellants succeeded in this appeal. We set aside the order of dismissal in OSA No. 2 of 1997 and restore that appeal to the file of the High Court. The High Court shall now dispose of that appeal in the light of this judgment.
15. This appeal stands disposed of accordingly. No order as to costs.