When bank guarantees are enforced and the bank pays up, the amount thus payable to the bank becomes a debt to which the law of limitation applies. But when the firm disputes the amount payable to the bank and such dispute is finally resolved in favour of the bank, the amount payable not only becomes a debt but in addition is not subject to the law of limitation.

C.S. Company case

This was the verdict of Kerala High Court in C. S. Company vs Punjab and Sind Bank . The petitioner was a partnership firm at whose request the respondent-bank had furnished two guarantees for Rs 1 lakh and Rs 19 lakh in 1983 to Kerala State Electricity Board.

On enforcement of the guarantees by the electricity board, the bank demanded payment of the guarantee amount with interest from the petitioner. The matter got embroiled in litigation with the trial court holding in favour of the bank, but the High Court reversed the trial court verdict leading to appeal before the Supreme Court which ruled in favour of the bank.

The firm continued to persist with its delaying tactics and prevarications when the bank sought to read the riot act to it, invoking the Securitisation Act of 2002 to seize the firm’s properties to realise its dues.

Not an NPA

First the firm raised the bogey of the amount not having been declared an NPA (non-performing asset) when the amount decreed by the apex court was not paid.

The Kerala High Court, however, was not amused and held that the amount decreed by the apex court indeed was a debt within the meaning of the Securitisation Act and it was not necessary to declare the amount as NPA after every court proceeding.

That the amount was declared an NPA in 1987 was good enough for the purposes of the Securitisation Act.

The petitioner wanted to wriggle out of his liability on another ground — that between 1983 when the guarantee was extended and 2012 much had happened and the law of limitation of 12 years had caught up with the bank. The High Court pointed out that the law of limitation did not apply to amounts decreed by courts.

(The author is a New Delhi-based chartered accountant.)