Limitation Act Applies to State Financial Corporation Proceedings: Madras High Court Rules Recovery Action After 12 Years is Time-Barred

Madurai Bench of the Madras High Court dismissed an appeal filed by the Tamil Nadu Industrial Investment Corporation Limited (TIIC) against the dismissal of its recovery petition under Section 31 of the State Financial Corporation Act, 1951. The Court upheld the lower court's ruling, finding that the claim against the guarantors of M/S. Jamal Bran Oil Mills Pvt. Ltd. was barred by limitation, emphasizing that the Limitation Act applies to proceedings under the State Financial Corporation Act.

TIIC had sanctioned a loan of Rs. 84,60,000 to M/S. Jamal Bran Oil Mills Pvt. Ltd. in 1991 for constructing a building and purchasing machinery. The company availed Rs. 76,40,000 and entered into an agreement to repay this amount in 14 half-yearly installments with interest. The first respondent, along with other guarantors, executed deeds of guarantee in 1992. Due to default in repayment, TIIC took possession of the mortgaged property on September 5, 1996, and after several failed attempts, sold it in an auction on August 11, 2003, for Rs. 52,00,000. Despite the auction, a significant balance remained unpaid, leading TIIC to file a petition under Section 31 of the State Financial Corporation Act to recover the remaining amount of Rs. 23,80,85,905 from the guarantors. The petition was filed on December 7, 2009, nearly six years after the auction.

The primary issue was whether the Limitation Act applied to recovery proceedings under Section 31 of the State Financial Corporation Act and if TIIC's claim was barred by limitation. TIIC argued that there was no limitation to enforce claims against the guarantors under Section 31 of the State Financial Corporation Act. However, the respondents contended that the action was barred by both Articles 137 and 55 of the Limitation Act.

The Court observed that neither the State Financial Corporation Act nor Section 31 specifically excluded the application of the Limitation Act. Therefore, the Limitation Act applied to decide the limitation period for filing the claim. The Court cited the Supreme Court's rulings, including Maharashtra State Financial Corporation v. Ashok K. Agarwal, which established that Article 137 of the Limitation Act applies to applications filed under Section 31, giving a three-year period from the date when the right to apply accrues​.

The Court found that the cause of action for filing the recovery application arose either on August 11, 2003, when the auction sale took place, or on December 30, 2003, when the sale proceeds were credited to the loan account. TIIC filed the application on December 7, 2009, which was well beyond the three-year limitation period under Article 137. Thus, the Court held that the claim was time-barred.

TIIC argued that the receipt of the foreclosure notice amounted to an acknowledgment of debt, extending the limitation period. However, the Court found no evidence to substantiate this claim. TIIC also contended that Article 112 of the Limitation Act, which allows a 30-year limitation for suits by or on behalf of the government, should apply. The Court rejected this, noting that the application under Section 31 is not a suit but a claim application to recover the amount due from the guarantor based on the contract of guarantee.

The Madras High Court dismissed TIIC's appeal, affirming that the recovery claim against the guarantors was barred by limitation under Articles 137 and 55 of the Limitation Act. The Court emphasized the need for vigilance and prompt action in enforcing claims, ruling that TIIC’s delayed action rendered the claim legally untenable.

Date of Decision: September 2, 2024