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Friday, July 26, 2013

Documentation - III : What a Banker Should Know About the Impact of Limitation Act, 1963

The Limitation Act prescribes the period within which existing rights can be enforced in a court of law. In other words, it believes that no unlimited period is to remain for any rights, title or interest for its adjudication by courts. In fact, the Act was passed with the intention of avoiding any uncertainty or anomaly with respect to limitation.

The prescription is that a right, not exercised for a long time, is to be presumed a non-existent right. The basic idea is that the law favours the diligent and not the indolent.

Limitation is associated with litigation. It limits the time after which a suit or other proceeding cannot be maintained in a court of law. The act prescribes the period within which the proceedings are to be initiated and lays down the rules for computation of such period.

These proceedings could be any of the following types:

Suit instituted  –   a civil proceeding instituted by the presentation of a plaint;
Appeal preferred  –   appeal from the original decree/order of the lower court to be preferred in the higher court; and

Applications made – applications made to the court, for example, to set aside a decree passed ex parte or application for execution of a decree.

The statute does not create an obligation or a right to sue where none existed. It simply imposes a time limit to litigation. Section 3 of the act states “that every suit instituted, appeal preferred and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence”.

However, under Section 5 of the Act, “an appeal or an application under any of the provisions of Order 21 of the CPC 1908 may be admitted after the prescribed period, if the applicant or the appellant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.” The parties cannot, by agreement, extend or alter the period of limitation as laid down by law. Similarly, they also cannot waive limitation by agreement.

4.1. Effect of Period of Limitation on Documents Obtained by Banks
There is a legal relation between a document obtained by a banker and the Limitation Act. Once the period of limitation for a document has expired, the banker will have no legal recourse against the defaulting borrowers to recover his dues. In short, the period of limitation bars the legal remedy by way of a suit. It is, therefore, of  paramount importance for bankers to keep the documents alive.

4.2. The Period of Limitation
It begins to run from the date of the document. Once the period of limitation has begun to run, no subsequent disability or inability to institute a suit or make an application stops it (Section 9).

Suppose a DP Note was executed on 1.1.1996. The period of three years for initiating a suit on the note commenced to run from the date of the note and would expire on 1.1.1999.

The period of limitation with regard to some of the Bank’s activities, as prescribed under the Act is as follows:

Article No.
Description of suit
Period of limitation
Time from which the limitation period begins
For the balance due on a mutual, open, and current account, where there have been reciprocal demands between the parties
3 years
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
For money payable for money lent
3 years
When the loan is made
For money lent under an agreement that it shall be payable on demand
3 years
When the loan is made
For money deposited under an agreement that it shall be payable on demand, including money of a customer in the hands of his banker so payable
3 years
When the demand is made
On a bill of exchange payable at sight, or after sight, but not at a fixed time
3 years
When the bill is presented
On a bill of exchange payable at a particular place
3 years
When the bill is presented at that place
On a bill of exchange or promissory note payable at a fixed time after sight or after demand
3 years
When the fixed time expires
On a bill of exchange or promissory note payable on demand and not accompanied by any writing restraining or postponing the right to sue
3 years
The date of the bill or note
On a promissory note or bond payable by installments
3 years
The expiry of the first term of payment as the part then payable; and for the other parts, the expiry of the respective terms of payment
On a promissory note or bond payable by installments, which provides that if there is a default in payment of one or more installments, the whole shall be due
3 years
When there is a default, unless where the payee or oblige waives the benefit of the provision; and then when there is a fresh default in respect of which there is no such waiver
To enforce payment of money secured by a mortgage or otherwise charged upon immovable property
12 years
When the money sued for becomes due
By a mortgagee
a)       For foreclosure
b)       For possession of immovable property mortgaged
30 years

12 years
When the money secured by mortgage becomes due
When the mortgagee becomes entitled to possession
Any suit (except a suit before the Supreme Court in the exercise of its original jurisdiction) by or on behalf of the Central Government, or any state government including the Government of the State of Jammu and Kashmir
3 years
When the period of limitation would begin to run under this Act against a similar suit by a private person
Under the Code of Civil
Procedure, 1908, to have the legal representative of a deceased plaintiff or appellant, or of a deceased defendant or
respondent made a party
90 days
The date of the death of the plaintiff, appellant, defendant or respondent, as the case may be
To restore a suit or appeal
or application for review or revision dismissed for default of appearance, or for want of prosecution, or for failure to pay costs of service of process, or to furnish security for costs
30 days
The date of dismissal
To set aside a decree passed ex parte or to rehear an appeal decreed or heard ex parte
30 days
The date of the decree or where the summons or notice was not duly served, when the applicant had knowledge of the decree
For a review of judgement by a court other than the
Supreme Court
30 days
The date of the decree or order
For the payment of the
amount of a decree by
30 days
The date of the decree
For the execution of any
decree (other than a decree
granting a mandatory
injunction) or order of any
civil court
12 years
When the decree or order becomes enforceable, or where the decree or any subsequent order directs any payment of money or
the delivery of any property
to be made at a certain
date, or at recurring
periods when there is a
default in making the
payment of delivery in
respect of which execution
is sought; provided that an
application for the
enforcement or execution
of a decree granting a
perpetual injunction shall
not be subject to any
period of limitation
*Article 19 is applicable to loans payable on demand; it is applied to cases where no time is fixed for repayment of loan. If there is an agreement in writing, fixing a certain date for repayment, Article 28 or 55 are applied. If the agreement is verbal, the case falls under Article 55.

4.3. Excluding Certain Periods from Limitation
Section 12 and 13 of the Act provide for exclusion of certain periods while computing the period of limitation.

Section 12 provides for the exclusion of the day from which such period is to be reckoned. Similarly in case of appeal, the day of impugned judgement and the time for obtaining copies are to be excluded.

According to Section 13, when an application for leave to sue as paper was made and rejected, the time during which the application was prosecuted in good faith, his application for such leave, shall be excluded.

4.4. Postponing the Commencement of Limitation
The Act provides for the postponement of the commencement of limitation in certain instances like:

According to Section 17, limitation begins to run from the time when the plaintiff has discovered the fraud or mistake, and this can be availed of when:
  • The suit is based on the fraud of the defendant or his agent; or
  • The knowledge of the right or title on which the suit is founded is concealed by the fraud of the defendant or his agent; or
  • The suit is for relief from the consequences of a mistake; or
  • Any document necessary to establish the right of the plaintiff has been fraudulently concealed from him.
5. Extending Limitation
Limitation period of a document can be extended in the following ways.

5.1. Fresh Documents
If the borrower executes a fresh set of documents for the old debt, the limitation is automatically extended from the date of the fresh set of documents. The documents may even be executed after the period of limitation has expired, as an old debt is a good consideration in the eyes of law [Sec. 25 (3) of Indian Contract Act 1872].

5.2. Acknowledgment
Section 18 of the Limitation Act extends the period of limitation “when an acknowledgement of debt is obtained in writing, where before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgement of liability in respect of such 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 titles, or liability, a fresh period of limitation shall be computed from time to time when the acknowledgement is so signed.”

It means:
  • Limitation can be extended by an acknowledgement.
  • Acknowledgement just means an admission of the fact of one’s own liability.
  • There is no prescribed form; the statement of facts from which an inference of liability can be reasonably drawn, is good enough.
  • It must relate to an existing liability and not to a past liability.
  • It must be specific; in other words, it must be in respect of the particular property or right claimed in the suit.
  • It should be in writing.
  • It must be signed by the party against whom the liability is sought to be enforced.
  • The signature should be across the revenue stamp.
  • It should be before the expiry of the prescribed period of limitation.
  • It should be dated.
  • In case of joint liability, the acknowledgement must be signed by all.
  • In the case of partnership account, all the partners must sign.
  • If it is a guaranteed account, it must also be signed by the guarantor.
Documents signed by joint borrowers on different dates
Sometimes, documents are executed by joint borrowers/partners on different dates owing to non-availability of all the persons on a given date. In such situations, the limitation period starts:
  • In the case of firms – from the earliest date, i.e., the date on which one of the parties first signed the document on behalf of the firm;
  • In the case of partners in their individual capacity – from the date on which the individual signed the document.
It is desirable for a lending banker to get the acknowledgement of debt and securities, taking into account the earliest date of the document.

Borrower abroad
The stay of a borrower abroad is not taken into consideration while calculating the period of limitation. But if the borrower makes a trip to India and stays in the country for a while before returning, the number of the days that he stayed in India is to be taken into account for determining the limitation period.

Acknowledgement of an authorised agent
An authorised agent can give an acknowledgement of debt provided the power of attorney clearly empowers the agent to give acknowledgement of debt, i.e., the power of attorney given to the agent merely to borrow and execute loan papers in favour of bank will not confer any right on the agent to give acknowledgement.

Acknowledgement from a guarantor
Acknowledgment is to be obtained from a guarantor within three years from the date of invocation of guarantee. Serving a notice is a demand on guarantor, and hence, the banks should be very careful while issuing such notices as limitation period starts running from the date of invocation.

A normal guarantee agreement obtained by the banks from the guarantors is of a continuing guarantee nature. Therefore, the period of limitation commences only after a demand is made on the guarantor.

Death of borrower
Upon the death of a borrower, acknowledgement of debt can be obtained from the legal heirs. But such acknowledgement extends the limitation period against the estate of the deceased borrower that is inherited by the legal heirs, only. If the deceased borrower has not left any property for legal heirs, the legal heirs can refuse to give acknowledgement and they are not personally liable.

5.3. Part Payment
According to Section 19, part payment of a debt or interest can also extend the period of limitation, provided such payment has been:
  • Authenticated by the borrower or his duly authorised agent under his signature
  • Received or made before the expiry of the prescribed period of limitation.
  • Remittances sent by the party under his signature for the credit of his account will  also  have the same effect.
Box 2: It is Always Good for Banks to Get Credit Vouchers Properly Signed by Borrowers
It is presumed here that all credits and debits into cash credit entries are at the behest of borrowers. This can be proved if all the vouchers relating to such entries are signed by the borrower or his authorised representative.

Cash Credit Accounts being mutual, open, running and continuous accounts, the period of limitation will be further extended up to three years from the date of last credit/debit entries (Article 1, Limitation Act 1963). However, a debit entry of interest due on loans would not be considered for such purposes.

5.4. Balance Sheet Entries
A debit entry shown on the Liability side of a borrower’s balance sheet i.e., of a Limited Company, signed by its agents is considered an acknowledgement of debt (Babulal Rukmandand vs. Official Liquidator 1968, I, com.lj). If such acknowledgement is recorded within the prescribed limitation period, it extends the limitation for a further prescribed period.

5.5. When the Court is on Vacation
When the document expires when the court is on vacation, the limitation period of that document will be extended till the court reopens.

Section 4 states, “Where the prescribed period of any suit, appeal or application expires on a day when the court is closed, the suit, appeal or application may be instituted, preferred or made on the day when the court reopens.”

5.6. Satisfying the Court of Law
Section 5 states, “Any appeal or any application other than an appeal under any of the provisions of order XXI of the CPC 1908 may be admitted after the prescribed period if the applicant or the appellant satisfies the court that he had sufficient case for not preferring the appeal or making the application within such period.” It is highly desirable for a lending banker not to resort to this provision ever, for the question of satisfying the court is always debatable.

6. Effect of a Time-Barred Document
        i.            Limitation bars the legal remedy by way of a suit; however, it does not extinguish the right.
      ii.            Suppose a borrower pays the debt without realising the expiry period of limitation, the banker can as well accept the payment. The borrower cannot thereafter sue the banker to refund him the money on the ground that the debt has become time-barred. However, there is one exception to this rule, Section 27 of the Act states, “As the determination of the period hereby limited to any person for instituting a suit for possession of any property, his right to such property shall be extinguished.”
    iii.            If the creditor has other remedies of recovery, he can resort to those for the recovery of the money due. For example, if Ram has more than one loan account in the bank and has made certain payment without appropriating the same to a particular debt, it would be open to the creditor to appropriate the payment towards any debt including the debt which is time-barred (Section 60 of the Contract Act).
   iv.            Where the law allows two or more remedies to obtain the same relief, each such remedy, depending on the cause of action on which it is based, would be governed by its own period of limitation. Suppose the bank has sanctioned a loan against mortgage security, it can then file a suit per personal decree and enforcing mortgage security. And, each one of these remedies would be governed by its own period of limitation. Suppose the limitation period for personal decree has expired, the bank can still proceed to enforce mortgage security.
7. Suits Under Guarantees
Suit against a surety for enforcement of his guarantee is not specifically provided for by any article. Hence, such a suit may fall under Article 113. If so, the period of limitation will begin to run when the cause of action against the surety arises. It may arise in the default by the principal debtor on the demand being made by the creditor.

In the case of continuing guarantees, limitation for a suit to enforce the guarantee would run from the date of the breach under Article 55. The Supreme Court has held that, in the case of a continuing guarantee of an overdraft or cash credit account, the period of limitation runs not from the date of each debit entry in the account but from the time the contract of guarantee is broken.

8. Bank Deposits and Limitation Act
A deposit may involve the relation of a debtor and creditor as in the case of a banker and his customer. There is, however, a clear distinction between a loan and a deposit.

Privy Council in M.A. Khan vs. Attar Singh AIR 1963 PC 171 differentiated a deposit from a loan in the following words: “The distinction which is perhaps the most obvious is that the deposit not for a fixed term, does not seem to impose an immediate obligation on the depositee to seek out the depositor and repay him. He is to keep the money till it is asked for. A demand by the depositor would therefore, seem to be a normal condition of the obligation of the depositee to repay.”

This being the peculiarity of deposits, the period of limitation for repayment begins to run from the date of the demand (Article 22), but not from the date of deposit. Such a claim in respect of deposits would be a single claim, i.e., for principal and interest.

Now, think of a different situation where the bank has paid principal with interest, but the borrower contends that the interest has been paid at a lower rate than agreed to. He, therefore, desires to file a suit for recovering the difference in the interest payment. Such a claim would not be for the payment of deposit. In such an event Article 25 would apply, and the period of limitation for three years begins to run when the interest becomes due.

 9. The Bankers Book Evidence Act, 1891
A situation may arise, where banks have to produce evidence from their books to prove a transaction etc. in a case under litigation in court. And it may not be possible to carry the books to court as it would disturb the day’s transactions. In all such situations they need not carry their books to court, and can instead submit a certified copy thereof as evidence of the said transaction.

As per the provisions of the Bankers Book Evidence Act, 1891, a certified copy of any entry in a Banker’s book shall in all legal proceedings be received as prima facie evidence of the existence of such entry, and shall be admitted as evidence of the matters, transactions and accounts therein recorded in every case where, and to the same extent as, the original entry itself is now by law admissible, but not further or otherwise.

  • “bankers’ book” includes ledgers, day-books, cash-books, account-books and all other books used in the ordinary business of a bank;
  • “trial” means any hearing before the Court at which evidence is taken; and
  • “certified” copy means a copy of any entry in the books of a bank together with certificate written at the foot of such copy that it is a true copy of such entry, that such entry is contained in one of the ordinary books of the bank and was made in the usual and ordinary course of business, and that such book is still in the custody of the bank, such certificate being dated and subscribed by the principal accountant or manager of the bank with his name and official title.
With the amendment to the Bankers’ Books Evidence Act, 1891, “bankers’ books” include ledgers, day-books, cash-books, account books and all other records used in the ordinary business of the bank, whether these records are kept in written form or stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism, either onsite or at any offsite location including a backup or disaster recovery site of both, and accordingly, a printout of any entry in the books’ of a bank stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism obtained by a mechanical or other process which in itself ensures the accuracy of such printout as a copy of such entry and such printout contains the certificate in accordance with the provisions of Section 2A.

On the application of any party to a legal proceeding, the Court or a Judge may order that such party be at liberty to inspect and take copies of any entries in a Banker’s Book for any of the purposes of such proceeding, or may order the bank to prepare and produce, within the time to be specified in the order, certified copies of all such entries, accompanied by a further certificate that no other entries are to be found in the books of the Bank relevant to the matters in issue in such proceeding, and such further certificate shall be dated and subscribed in a manner herein before directed in reference to certified copies.


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