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CASE NO.: Appeal (civil)  6894 of 1997

PETITIONER: Syndicate Bank

RESPONDENT: Channaveerappa Beleri & Ors.

DATE OF JUDGMENT: 10/04/2006

BENCH: Arun Kumar & R V Raveendran

JUDGMENT: J U D G M E N T

RAVEENDRAN, J.

       This appeal by special leave, is by the plaintiff Bank against the  judgment dated 6.3.1997 of the High Court of Karnataka dismissing  R.F.A. No. 107 of 1993 filed by it against the judgment and decree  dated 29.10.1992 of the Civil Judge, Gadag in O.S. No. 29 of 1990,  dismissing its suit on the ground of limitation.  

2.      The appellant Bank filed Original Suit No. 29 of 1990 against  Respondents 1 to 7 herein for recovery of Rs.19,77,478/60 (the  liability of Respondents 2 & 3 being restricted to Rs.15,75,960 and  liability of Respondents 6 & 7 being restricted to 17,56,070.60)  together with interest @18.5% per annum compounded quarterly  from the date of suit till the date of realization. The plaint averments  in brief are as under.   

2.1)    The Bank had extended credit facilities by way of overdraft,  goods loan, and demand loan against supply Bills to a company  known as Gadag Forge Fits (India) Pvt. Ltd., (’company’ for short).   Respondent 1 was its Managing Director and Respondents 2 to 7  were its Directors. The credit facilities were renewed and enhanced  from time to time. Respondents 1 to 7 executed the following  guarantee bonds in favour of the Bank, personally agreeing and  undertaking to pay and satisfy the Bank on demand all sums which  may be due on account of the credit facilities granted to the company  subject to the limits mentioned therein :  

i)      Guarantee Bond dated 17.9.1983/20.8.1983/29.8.1983  executed by Respondents 1, 2 and 3, the limit of liability  being Rs. 10.50 lakhs (a single deed executed by  Respondents 1, 2 and 3 on different dates).  ii)     Guarantee bond dated 4.4.1984 executed by respondents  4 & 5, the limit of liability being Rs. 10.50 lakhs.  iii)    Guarantee bond dated 10.9.1985 executed by  Respondents 1, 4, 5, 6 & 7, the limit of liability being  Rs.11.70 lakhs.  

Thus the limit of total liability undertaken exclusive of interest  was  Rs.22.20 lakhs in the case of Respondents 1, 4 & 5, Rs. 10.50 lakhs  in the case of Respondents 2 & 3 and Rs.11.70 lakhs in the case of  Resondents 6 & 7. Their liability was joint and several with the  company.  

2.2)    On account of the company allegedly incurring losses and  stopping its activities, operations in the accounts of the company with  the Bank stopped in the middle of 1986. In view of the failure on the

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part of the company (principal debtor) in paying the amounts due,   the Bank sent a letter dated 12.10.1987 to the company and its 7  Directors (Respondents 1 to 7) informing that the following amounts  were outstanding in the accounts of the company as on 30.9.1987  and calling upon the company as principal debtor and respondents 1  to 7 as guarantors to pay the said amounts aggregating to  Rs.13,48,264.79 with interest @ 18.5% per annum from 1.10.87  within 15 days :-  

Account No. Date of  Advance Limit/Amount  Advanced Balance as on  30.9.1987  

Over Draft 27/85 1/86 14/86

10.9.85 7.1.86 29.4.86

2,50,000/- 2,50,000/- 1,50,000/-

3,32,116.04 3,39,719.54 1,99,105.35

Goods Loan  49/84 48/85

23.7.84 12.10.85

1,61,000/- 27,450/-

1,91,654.00 35,894.85

Demand Loan  against Supply  Bills 229/85 232/85 233/85 234/85 235/85 237/85 2/86 3/86 5/86 8/86 10/86 12/86 14/86

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15/86 16/86 18/86 20/86

2.12.85 6.12.85 6.12.85 11.12.85 20.12.85 26.12.85 1.1.86 1.1.86  13.1.86 3.2.86 10.2.86 13.2.86 11.3.86 20.3.86 21.3.86 25.3.86 26.4.86

5,000/- 5,000/- 2,500/- 16,900/- 1,500/- 6,100/- 2,900/- 5,100/- 32,970/- 3,700/- 31,600/- 13,700/- 8,800/- 10,230/- 36,000/- 20,300/- 6,400/-

318.60 6,936.65 3,469.40 23,356.15 2,071.85 8,366.90 3,966.95 3,425.75 44,819.30 444.05 26,274.85 18.424.20 11,685.45 13,518.25 47,534.00 26,750.10 8,412.60 TOTAL

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13,48,264.79

2.3)    The company and its Directors  (Respondents 1 to 7) sent a  reply dated 31.10.1987 through counsel stating that the company  was passing though a financial crisis and the Bank had failed to assist  the company by making further advances by way of working capital.  They further alleged that in view of the failure to advance further  funds, the company sustained heavy loss and the company was  reserving liberty to file a suit for damages for an amount which would  be more than the amount claimed by the Bank. They also alleged that  the bank ought to have given a moratorium on interest to rehabilitate  the company. They also stated that without prejudice to their rights  and contentions, they were willing to discuss the matter with the  Bank, to arrive at an amicable solution. A formal notice through  counsel was sent by the Bank on 17.12.1987 demanding payment  which elicited a reply dated 30.12.1987 denying the demand.  

2.4)    The Bank initiated proceedings for winding up against the  company on account of its inability to pay its dues, on 11.10.1988  and the High Court ordered winding up of the company on 17.3.1989.  Therefore, the suit was filed by the Bank on 16.3.1990 only against  the Guarantors (Respondents 1 to 7) for recovery of Rs.19,77,478.60  (that is, the amount demanded in the notice dated 12.10.1987 with  interest up to date of suit).  The Bank restricted the claim to Rs.10.50  lakhs with interest at 18.5% P.A. from 17.12.87 to the date of suit  against Respondents 2 and 3 and to Rs.11.70 lakhs with interest at  18.5% P.A. from 17.12.1987 to date of suit against respondents 6  and 7. The Bank contended that the respondents were jointly and  severally liable to pay the amounts due by the company, as  aforesaid. It was alleged that the cause of action for the suit against  the guarantors (respondents 1 to 7)  arose on 17.12.1987 when the  demand was made and on 30.12.1987 when they denied the liability  by notice. The statements of account showing the particulars of  amount due as on 31.12.1989 were annexed to the plaint.  

3.      Respondents 4 and 7 remained ex parte. Respondents 1, 5 and  6 filed a common written statement which was adopted by 2nd  respondent. Respondent No. 3 filed a separate written statement.  They resisted the suit inter alia on the following grounds :-  

a)      The suit was not maintainable only against the  Guarantors and was liable to be rejected for non-joinder  of the principal debtor.  b)      The Bank cannot proceed against the guarantors without  first exhausting of remedies against the principal debtor.  

c)      The guarantee bonds were executed in the years 1983,  1984 and 1985. As the suit was not filed within three  years from the respective dates of the guarantee bonds,  in the absence of renewals or acknowledgement by them,  the suit was barred by limitation.  

4.      The trial court framed as many as 16 issues. We are concerned  with the issue no.4, that is, : ’Is the suit not in time?’. The Bank  examined its manager and respondents 1, 2 and 3 gave evidence on  behalf of the defence. Ex. P-1 to P-35 and Ex. D-1 to D5 were  marked. The trial court by an exhaustive judgment answered all the  issues, except the issue regarding limitation in favour of the Bank. It  held that the Bank had established the correctness of the amounts  claimed and the rate of interest. It, however, held that the suit was  barred by time and consequently, dismissed the suit. The appeal filed  by the Bank was also dismissed by the High Court. The said dismissal  is challenged in this appeal by special leave. The only question that  was argued and that arises for consideration in this appeal is whether

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the decision of the courts below that the suit was barred by limitation  is correct in law.  

5.      To appreciate the rival contentions, it is necessary to refer to  the relevant statutory provisions, the terms of the guarantee and the  decision of this Court relied on by both parties.  

5.1)    Section 126, 128, 129 and 130 of Contract Act, 1872 are  extracted below :

"Section 126. ’Contract of guarantee,’ ’surety,’  ’principal-debtor’ and ’creditor’ \026 A ’contract of  guarantee’ is a contract to perform the promise, or  discharge the liability, of a third person in case of his  default. The person who gives the guarantee is called the  ’surety’; the person in respect of whose default the  guarantee is given is called the ’principal-debtor,’ and the  person to whom the guarantee is given is called the  ’creditor.’ A guarantee may be either oral or written."  

"Section 128. Surety’s liability \026 The liability of the  surety is co-extensive with that of the principal-debtor,  unless it is otherwise provided by the contract."

"Section 129. ’Continuing guarantee’ \026 A guarantee  which extends to a series of transactions is called a  ’continuing guarantee."

"Section 130. Revocation of continuing guarantee \026  A continuing guarantee may at any time be revoked by  the surety, as to future transactions, by notice to the  creditor."  

5.2)    The relevant Articles in the Schedule to the Limitation Act, 1963  are extracted below :

Article  No. Description of Suit Period of  Limitation  Time from which  period begins to run 55 For compensation for the  breach of any contract,  express of implied not herein  specially provided for.   Three years When the contract is  broken or (where there  are successive breaches)  when the breach in  respect of which the suit  is instituted occurs or  (where the breach is  continuing) when it  ceases.  113 Any suit for which no period  of limitation is provided  elsewhere in this Schedule. Three years

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When the right to sue  accrues. 19 For money payable for money  lent. Three years When the loan is made. 21 For money lent under an  agreement that it shall be  payable on demand. Three years When the loan is made.

5.3)    The guarantee bonds have been executed in the standard Form  of the Bank. The relevant portions from the Guarantee bond dated  10.8.1985 (the Bonds are similarly worded) are extracted below :

"In consideration of SYNDICATE BANK, here-in/after  called the "Syndicate"\005\005\005\005. making, or continuing to  make advances or otherwise giving credit or financial  accommodation or affording banking facilities for as long  as the Syndicate may think fit to M/s. Godrej Forge Fits  (I) Pvt. Ltd. Hirakoppa village, Gadag taluk here-after  called the "Borrower"\005\005\005\005.., the undersigned (1) C. M.  Beleri, (2) I. M. Beleri, (3) K. M. Chhadda, (4) Mrs.  Shailaja Beleri and (5) T. Parthasarathy (hereinafter  referred to as the "Guarantor") hereby agrees to pay and  satisfy to the Syndicate on demand all and every sum  and sums of money which are now or shall at any time be  owing to the Syndicate in any of its offices on any account  whatsoever,\005\005.\005"

"PROVIDED ALWAYS that the total liability ultimately  enforceable against the Guarantor under this guarantee  shall not exceed the sum of Rs.11,70,000/- together with  interest thereon at the rate stipulated by the bank from  date of demand by the Syndicate upon the  Guarantor for payment."

"NOTWITHSTANDING the Borrower’s Account or Accounts  with the Syndicate may be brought to credit or the credit  given to the Borrower fully exhausted or exceeded or  howsoever the said financial accommodation varied or  changed from time to time; notwithstanding any  payments from time to time or any settlement of  Account, this guarantee shall be a continuing  guarantee for payment of the ultimate balance to  become due to the Syndicate by the Borrower not  exceeding Rs.11,70,000/- as aforesaid."

"NOTWITHSTANDING the discontinuance of this  Guarantee as to one or more of the Guarantors or the  death of any one of them, the Guarantee is to remain a  continuing Guarantee, as to the other or others or the  representatives and estates of the deceased and where  there is more than one Guarantor, their liability under  these presents being  construed as joint and several."  

"ANY ACCOUNT SETTLED or stated by or between the  Syndicate and the Borrower or admitted by him or on his  behalf may be adduced by the Syndicate and shall in that  case be accepted by the guarantors and each of them and

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their respective representatives as conclusive evidence  that the balance or amount thereby appearing is due from  to the Syndicate."   [Emphasis supplied]  

5.4)    MARGARET LALITA SAMUEL vs. INDO COMMERCIAL BANK LTD  (AIR 1979 SC 102) relied on both sides dealt with the question of  limitation with reference to a continuing guarantee. In that case the  guarantor sought to avoid liability by contending that every item of  an overdraft account was an independent loan and the limitation  would start from the date of each loan, and that with reference to  such dates, the suit was barred by limitation. While negativing the  said contention, this Court observed :

"In our view it is unnecessary for the purposes of the  present case, to go into the question of the nature of  an overdraft account. The present suit is in  substance and truth one to enforce the guarantee  bond executed by the defendant. In order to  ascertain the nature of the liability of the defendant,  it is necessary to refer to the precise terms of the  guarantee bond rather than embark into an enquiry  as to the nature of an overdraft account.

After referring to the terms of the guarantee bond, this Court held :

"The guarantee is seen to be a continuing guarantee and  the undertaking by the defendant is to pay any amount  that may be due by the company at the foot of the  general balance of its account or any other account  whatever. In the case of such a continuing  guarantee, so long as the account is a live account  in the sense that it is not settled and there is no  refusal on the part of the guarantor to carry out the  obligation, we do not see how the period of  limitation could be said to have commenced  running. Limitation would only run from the date of  breach under Art. 115 of the schedule to the Limitation  Act, 1908. When the Bombay High Court considered the  matter in the first instance and held that the suit was not  barred by limitation. J.C. Shah, J. speaking for the Court  said :

On the plain words of the letters of guarantee it is clear  that the defendant undertook to pay any amount which  may be due by the Company at the foot of the general  balance of its account or any other account whatever \005.  We are not concerned in this case with the period of  limitation for the amount repayable by the Company to  the bank. We are concerned with the period of limitation  for enforcing the liability of the defendant under the  surety bond \005 We hold that the suit to enforce the  liability is governed by Art. 115 and the cause of action  arises when the contract of continuing guarantee is  broken, and in the present case we are of the view that  so long as the account remained live account, and there  was no refusal on the part of defendant to carry out her  obligation, the period of limitation did not commence to  run.  (Emphasis supplied)

After expressing agreement with the above view expressed by Shah,

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J., this Court also agreed with the view expressed by the Privy  Council in Wright v. New Zealand Farmers Co-operative Association  of Canterbury Ltd. (1939 AC 439), and the Court of Appeal in  Bradford Old Bank Ltd. v. Sutcliffe [1918 (2) KB 833] that limitation  against a guarantor under a continuing guarantee (which specified  that the liability of the guarantor is to pay on demand) would not run  from the date of each advance, but only run from the time when the  balance (payment of which is guaranteed) was constituted and a  demand was made for payment thereof. This Court also referred to a  passage from Paget’s Law of Banking, with approval, though not  extracted. The said passage from Paget reads thus :

"In Bradford Old Bank Ltd v Sutcliffe - (1918) 2 KB 833, it  was pointed out that the contract of the surety was a  collateral, not a direct, one and that in such case demand  was necessary to complete a cause of action and set the  statute running. Moreover, bank guarantees  invariably specify that the liability of the surety is  to pay on demand, and in this connection the words are  not devoid of meaning or effect, even with reference to  this statute, as is the case with a promissory note payable  on demand, but make the demand a condition precedent   to suing the surety, so that the statute does not begin  to run till such demand has been made and not  complied with."                                                              (Emphasis supplied)

5.5)    Bradford (supra), in turn, relied on Hartland v. Jukes (1863) 1  H&C 667, wherein in the context of a continuing guarantee, it was  contended that the period of limitation would begin to run as soon as  the principal debtor becomes indebted to the Bank. The contention  was negatived by stating :  

"It was contended before us that the statute began  to run from the 31st of December, 1855, by reason of  the debt of Pound 179:1:11 then due to the bank;  but no balance was then struck, and certainly no  claim was made by the bank upon the defendant’s  testator (the Guarantor) in respect of that debt; and  we think the mere existence of the debt,  unaccompanied by any claim from the bank, would  not have the effect of making the statute run from  that date."

          6.      The trial court held that the accounts of the company with the  Bank became dormant and inoperative from 1986 and, therefore,  they ceased to be ’live accounts’. It held that a ’live account’ was one  which was currently being operated at the relevant time by the  borrower/customer. The trial court further held that in view of such  cessation of operation of the accounts, it should be deemed that the  company and consequently the guarantors had refused to discharge  their obligations; that once there was such refusal by stopping  operation of the accounts, the limitation would start to run  immediately; that time which begins to run, cannot be stopped; and  that the mere fact that the demand was made by the bank much  later, that is in the year 1987, will not postpone the commencement  of running of the period of limitation. The trial court refused to accept  the contention that the limitation will start to run only when a notice  was issued by the creditor Bank, demanding payment of the amount  from the guarantors and a refusal thereof by the guarantors. The trial  court was of the view that if Bank’s contention was to be accepted,

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then it would mean that the Bank, by postponing issue of a notice  making a demand, can postpone the commencement of the running  of limitation. The trial court purported to test the validity of the  Bank’s contention, by reference to a hypothetical situation, where the  Bank, by not making a demand for, say 20 or 30 years, or postponing  the demand indefinitely, could postpone the commencement of  limitation indefinitely, and held that such a situation was  impermissible. It, therefore, held that the period of limitation  commenced to run from the middle of 1986 when the operation of  the accounts was stopped, and the suit filed  in 1990 beyond 3 years  from the stoppage of operation of accounts was barred by time.

7.      The High Court affirmed the said finding. It held that the words  ’on demand’ had a specific connotation in legal parlance; and that  when an amount is payable on demand, it means ’always payable’  and a ’demand’ is not a condition precedent for the amount to be  paid. The High Court held that when the guarantee stated that the  guarantors were liable to pay on demand by the Bank, it meant that  the amount was payable from the moment of execution of the  guarantee and, consequently, no actual demand is necessary to make  the amount due under the guarantees. It was held that the money  became payable under the guarantee bond as soon as the guarantee  was executed. The High Court also held that when the accounts  became dormant in the middle of 1986 by non-operation and non- payment, it should be deemed that there was a refusal to pay the  amount under the guarantees and, therefore, the suit filed on  16.3.1990 was barred by limitation, being beyond 3 years. The High  Court held that the decision in Samuel (supra) will not apply to the  Bank’s suit, as this Court had stated that the limitation will not run  only if the account was a ’live account’ and there was no refusal on  the part of the guarantor to carry out the obligations. It held that the  word ’live’ meant that account should be operating and when an  account became dormant and inoperative, it was not a live account.  The High Court also distinguished the decision in Samuel on facts.

8.      The appellant-Bank contended that the guarantees executed by  the respondents were continuing guarantees; that the guarantors had  agreed to pay the amount/s on demand by the Bank; that such a  demand was made by the Bank on the guarantors on 12.10.1987 and  17.12.1987; and that the guarantors’ refusal to pay the amount  demanded is contained in their reply-letters dated 31.10.1987 and   30.12.1987; and that, therefore, the suit filed on 16.3.1990, within  three years from 31.10.1987 was in time. Reliance is placed on  Article 55 of the Limitation Act, 1963 and the decision of the Supreme  Court in Samuel (supra).  

9.        A guarantor’s liability depends upon the terms of his contract.  A ’continuing guarantee’ is different from an ordinary guarantee.  There is also a difference between a guarantee which stipulates that  the guarantor is liable to pay only on a demand by the creditor, and a  guarantee which does not contain such a condition. Further,  depending on the terms of guarantee, the liability of a guarantor may  be limited to a particular sum, instead of the liability being to the  same extent as that of the principal debtor. The liability to pay may  arise, on the principal debtor and guarantor, at the same time or at  different points of time. A claim may be even time-barred against the  principal debtor, but still enforceable against the guarantor. The  parties may agree that the liability of a guarantor shall arise at a later  point of time than that of the principal debtor. We have referred to  these aspects only to underline the fact that the extent of liability  under a guarantee as also the question as to when the liability of a  guarantor will arise, would depend purely on the terms of the  contract.

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10.        Samuel (supra), no doubt, dealt with a continuing  guarantee. But the continuing guarantee considered by it, did not  provide that the guarantor shall make payment on demand by the  Bank. The continuing guarantee considered by it merely recited that  the surety guaranteed to the Bank, the repayment of all money which  shall at any time be due to the Bank from the borrower on the  general balance of their accounts with the Bank, and that the  guarantee shall be a continuing guarantee to an extent of Rs.10  lakhs. Interpreting the said continuing guarantee, this Court held that  so long as the account is a live account in the sense that it is not  settled and there is no refusal on the part of the guarantor to carry  out the obligation, the period of limitation could not be said to have  commenced running.  

11.     But in the case on hand, the guarantee deeds specifically state  that the guarantors agree to pay and satisfy the bank on demand and  interest will be payable by the guarantors only from the date of  demand. In a case where the guarantee is payable on demand, as  held in the case of Bradford (supra) and Hartland (supra), the  limitation begins to run when the demand is made and the guarantor   commits breach by not complying with the demand.

12.       We will examine the meaning of the words ’on demand’. As  noticed above, the High Court was of the view that the words ’on  demand’ in law have a special meaning and when an agreement  states that an amount is payable on demand, it implies that it is  always payable, that is payable forthwith  and a demand is not a  condition precedent for the amount to become payable. The meaning  attached to the expression ’on demand’ as ’always payable’ or  ’payable forthwith without demand’ is not one of universal  application. The said meaning applies only in certain circumstances.  The said meaning is normally applied to promissory notes or bills of  exchange payable on demand. We may refer to Articles 21 and 22 in  this behalf. Article 21 provides that for money lent under an  agreement that it shall be payable on demand, the period of  limitation (3 years) begins to run when the loan is made. On the  other hand, the very same words ’payable on demand’ have a  different meaning in Article 22 which provides that for money  deposited under an agreement that it shall be payable on demand,  the period of limitation (3 years) will begin to run when the demand  is made. Thus, the words ’payable on demand’ have been given  different meaning when applied with reference to ’money lent’ and  ’money deposited’. In the context of Article 21, the meaning and  effect of those words is ’always payable’ or payable from the moment  when the loan is made, whereas in the context of Article 22, the  meaning is ’payable when actually a demand for payment is made’.  

13.    What then is the meaning of the said words used in the  guarantee bonds in question? The guarantee bond states that the  guarantors agree to pay and satisfy the Bank ’on demand’. It  specifically provides that the liability to pay interest would arise upon  the guarantor only from the date of demand by the Bank for  payment. It also provides that the guarantee shall be a continuing  guarantee for payment of the ultimate balance to become due to the  Bank by the borrower. The terms of guarantee, thus, make it clear  that the liability to pay would arise on the guarantors only when a  demand is made. Article 55 provides that the time will begin to run  when the contract is ’broken’. Even if Article 113 is to be applied, the  time begins to run only when the right to sue accrues. In this case,  the contract was broken and the right to sue accrued only when a  demand for payment was made by the Bank and it was refused by  the guarantors. When a demand is made requiring payment within a

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stipulated period, say 15 days, the breach occurs or right to sue  accrues, if payment is not made or is refused within 15 days. If while  making the demand for payment, no period is stipulated within which  the payment should be made, the breach occurs or right to sue  accrues, when the demand is served on the guarantor.  

14.     We have to, however, enter a caveat here. When the demand is  made by the creditor on the guarantor, under a guarantee which  requires a demand, as a condition precedent for the liability of the  guarantor, such demand should be for payment of a sum which is  legally due and recoverable from the principal debtor. If the debt had  already become time-barred against the principal debtor, the  question of creditor demanding payment thereafter, for the first time,  against the guarantor would not arise. When the demand is made  against the guarantor, if the claim is a live claim (that is, a claim  which is not barred) against the principal debtor, limitation in respect  of the guarantor will run from the date of such demand and  refusal/non compliance. Where guarantor becomes liable in  pursuance of a demand validly made in time, the creditor can sue the  guarantor within three years, even if the claim against the principal  debtor gets subsequently time-barred. To clarify the above, the  following illustration may be useful :

Let us say that a creditor makes some advances to a borrower  between 10.4.1991 and 1.6.1991 and the repayment thereof is  guaranteed by the guarantor undertaking to pay on demand by  the creditor, under a  continuing guarantee dated 1.4.1991. Let  us further say a demand is made by the creditor against the  guarantor for payment on 1.3.1993. Though the limitation  against the principal debtor may expire on 1.6.1994, as the  demand was made on 1.3.1993 when the claim was ’live’  against the principal debtor, the limitation as against the  guarantor would be 3 years from 1.3.1993. On the other hand,  if the creditor does not make a demand at all against the  guarantor till 1.6.1994 when the claims against the principal  debtor get time-barred, any demand against the guarantor  made thereafter say on 15.9.1994 would not be valid or  enforceable.

Be that as it may.  

15.     The respondents have tried to contend that when the  operations ceased and the accounts became dormant, the very  cessation of operation of accounts should be treated as a refusal to  pay by the principal debtor, as also by the guarantors and, therefore  the limitation would begin to run, not when there is a refusal to meet  the demand, but when the accounts became dormant. By no logical  process, we can hold that ceasing of operation of accounts by the  borrower for some reason, would amount to a demand by the Bank  on the guarantor to pay the amount due in the account or refusal by  the principal debtor and guarantor to pay the amount due in the  accounts.  

16.     In view of the above, we hold that the time began to run not  when the operations ceased in the accounts in mid-1986, but on the  expiry of 15 days from 12.10.1987 when the demand was made by  the Bank and there was refusal to pay by the guarantors. The suit  filed within three years therefrom is, therefore, in time.  

17.    In the view we have taken, it is not necessary to consider the  meaning of the words ’live account’ used and referred to in Samuel  (supra). Suffice it to say that the interpretation by the courts below  placed on the words ’live account’, that they refer to an account

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which is operational and not dormant, may not be sound. This Court  itself had indicated that ’live account’ means an account that is not  settled. The use of the term ’settled’ gives an indication that a ’live  account’ refers to an account where the balance has not been struck  by an "account stated" or "account settled". We may in this behalf,  refer to the following observations in Bishun Chand v. Girdhari Lal &  Anr. (AIR 1934 PC 147) :

"The essence of an account stated is not the  character of the items on one side or the other but  the fact that there are cross items of account and  that the parties mutually agree the several amounts  of each and, by treating the items so agreed on the  one side as discharging the items on the other side  pro tanto, go on to agree that the balance only is  payable. Such a transaction is in truth bilateral, and  creates a new debt and a new cause of action."

"There can be account stated although the balance of  indebtedness is not throughout in favour of one side.  It is irrelevant whether the debt in favour of the final  creditor is created at the outset by one large  payment or consists of several sums of principal and  several sums of interest. Nor is it material whether  the only payments made on the other side were  simply payments in reduction of such indebtedness  or were payments made in respect of other dealings.  In any event items must be ascertained and agreed  on each side before the balance can be struck and  settled."   

18.     Some arguments were addressed about the Article of limitation  that would apply in respect of a suit against the guarantors. Samuel  (supra) held that in the case of refusal of a guarantor to pay the  amount, the matter would be governed by Article 115 of the Schedule  to the Limitation Act, 1908, which corresponds to Article 55 of the  Limitation Act, 1963. One of the submissions made before us was  that the term ’compensation for breach of contract’ in Article 55  indicates to a claim for unliquidated damages and not to a claim for  payment of sum certain (as to what is the difference between a claim  for unliquidated damages and a claim for a sum certain or a sum  presently due, reference can advantageously be made to the classic  statement of Law by Chagla, CJ., in IRON AND HARDWARE (INDIA)  LTD., vs. FIRM SHAMLAL & BROS \026 AIR 1954 Bom. 423). If Article 55  does not apply, then a claim against a Guarantor in such a situation  may fall under the residuary Article 113 of the Limitation Act, 1963  corresponding to Article 120 of the old Act. The controversy about the  appropriate Article applicable, when the claim is found to be not  exactly for ’compensation’ but ascertained sum due has been referred  to as long back as 1916 in Tricomdas Cooverji Bhoja v. Gopinath Jin  Thakur (AIR 1916 PC 183). Under the old Limitation Act (Act of  1908), the periods prescribed were different under Article 115 and  116. The periods prescribed were also different under Article 115 and  120. But under the 1963 Act, the period of limitation is the same  (three years) both under Article 55 and 113. Having regard to the  fact that the period of limitation is 3 years both under Article 55 and  Article 113, and having regard to the binding decision in Samuel  (supra), we do not propose to examine the controversy as to whether  the appropriate Article is 55 or 113. Suffice it to note that even if the  Article applicable is Article 113, the Bank’s suit is in time.

19.    In view of our finding that the suit is not barred by time, we  allow this appeal and, consequently set aside the judgment and

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decree of the High Court and that of the trial court. Consequently, the  suit is decreed, as prayed for, with costs.