Supreme Court Clarifies Limitation for Loan Recovery Suits: Mongia Realty vs. Manik Sethi (2022)

Introduction

Date of the Judgment: 31 January 2022
Citation: 2022 INSC 122
Judges: Dr. Dhananjaya Y Chandrachud, J and Surya Kant, J

Can a court dismiss a suit for recovery of money solely based on arguments about limitation, without examining evidence? The Supreme Court of India recently addressed this question in a case involving a dispute over a loan. The core issue was whether the trial court was correct in dismissing the suit based on limitation as a preliminary issue without allowing the parties to present evidence. The Supreme Court, in this judgment, has clarified the circumstances under which a court can decide the issue of limitation as a preliminary issue. The judgment was delivered by a two-judge bench comprising of Dr. Dhananjaya Y Chandrachud, J and Surya Kant, J.

Case Background

M/s Mongia Realty and Buildwell Private Limited (the appellant) claimed to have provided business loans to Manik Sethi (the respondent) with an understanding that the loans would be repaid with 18% annual interest. The appellant stated that they advanced ₹10 lakhs on 13 June 2012, ₹18 lakhs on 11 July 2012, and ₹15 lakhs on 21 December 2012, along with a further ₹39 lakhs. The appellant contended that the loans were to be repaid within one year from the date of the last installment, i.e., by 9 April 2014, with interest payable semi-annually. The appellant also claimed that a running account was maintained between the parties, with the last payment made on 24 October 2013. The appellant filed a suit on 31 March 2017, seeking recovery of ₹1,11,63,633 along with interest.

The respondent, however, denied that the transactions were loans. He claimed that the payments were for real estate services provided to the appellant and for commission. The respondent also alleged that some payments were for renovation work on properties. He argued that the suit was barred by limitation, as the last payment was made on 24 October 2013, and the suit was filed more than three years later.

Timeline:

Course of Proceedings

The trial court framed a preliminary issue on whether the suit was barred by limitation on 4 January 2018. The trial court, after hearing oral arguments and noting that the appellant failed to file written arguments, dismissed the suit on 16 August 2018, holding that the suit was time-barred. The trial court considered the appellant’s admission in the plaint that the last payment was made on 20 June 2013 (which was later corrected to 24 October 2013 by the High Court), and since the suit was filed on 1 April 2017, it was beyond the three-year limitation period. The appellant appealed to the High Court of Delhi, which upheld the trial court’s decision on 4 September 2019. The High Court reasoned that there was no written agreement specifying that the loan would be repayable within one year from the last installment and that accepting the appellant’s claim would set a wrong precedent.

Legal Framework

The case primarily revolves around the interpretation of Order XIV Rule 2 of the Code of Civil Procedure, 1908 (CPC), which deals with the framing and trial of issues, and the Limitation Act, 1963. Order XIV Rule 2 of the CPC states:

“2. Court to pronounce judgment on all issues.—(1) Notwithstanding that a case may be disposed of on a preliminary issue, the Court shall, subject to the provisions of sub-rule (2), pronounce judgment on all issues. (2) Where issues both of law and of fact arise in the same suit, and the Court is of opinion that the case or any part thereof may be disposed of on an issue of law only, it may try that issue first if the issue relates to — (a) the jurisdiction of the Court, or (b) a bar to the suit created by any law for the time being in force, and for that purpose may, if it thinks fit, postpone the settlement of the other issues until after that issue has been determined, and may deal with the suit in accordance with the decision on that issue.”

This provision allows a court to decide a case on a preliminary issue if it relates to jurisdiction or a bar created by any law, such as limitation. The Limitation Act, 1963 prescribes the time limit within which a suit can be filed. The relevant article of the Limitation Act was not explicitly mentioned in the judgment, but it generally provides a three-year limitation period for suits related to recovery of money.

Arguments

Appellant’s Arguments:

• The appellant argued that the plaint clearly stated that the loans were repayable within one year from the date of the last installment, i.e., by 9 April 2014. Therefore, the suit filed on 31 March 2017 was within the limitation period.
• The appellant submitted that the issue of limitation should not have been decided solely based on oral arguments but should have been determined after considering the evidence presented at trial.
• The appellant also contended that there was an open and running current account between the parties, and this aspect needed to be decided based on evidence.

Respondent’s Arguments:

• The respondent argued that there was no written agreement evidencing the loan transaction.
• The respondent contended that the payments made were for commission for real estate services and not loans.
• The respondent claimed that the last payment was made on 24 October 2013, and the suit filed on 31 March 2017 was therefore barred by limitation.
• The respondent argued that Article 1 of the Limitation Act does not apply as there was no open, running, and mutual current account between the parties.
• The respondent highlighted that the appellant’s plaint indicated that only the appellant was making payments to the respondent, which is not indicative of a mutual current account.

The innovativeness of the arguments lies in the appellant’s contention that the repayment period was contractually linked to the last installment date, which, if proven, would bring the suit within the limitation period. The respondent’s argument was based on the absence of written proof of the loan and the assertion that the payments were for real estate services.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame the issues in a separate section but addressed the following key issue:

1. Whether the issue of limitation in the present case could have been decided as a preliminary issue under Order XIV Rule 2 of the CPC, based solely on oral arguments, without considering evidence.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Case Law:

• Nusli Neville Wadia v. Ivory Properties (2020) 6 SCC 557 – The Supreme Court of India held that the issue of limitation can be decided as a preliminary issue under Order XIV Rule 2(2)(b) of the CPC only if it is based on admitted facts. If the facts are disputed, the issue cannot be decided as a preliminary issue.

Legal Provisions:

• Order XIV Rule 2 of the Code of Civil Procedure, 1908 – This provision allows a court to decide a case on a preliminary issue if it relates to jurisdiction or a bar created by any law.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed Nusli Neville Wadia v. Ivory Properties (2020) 6 SCC 557, which held that the issue of limitation can be decided as a preliminary issue only if it is based on admitted facts. Since the facts of the case were disputed, the issue of limitation could not be decided as a preliminary issue.
• The Court interpreted Order XIV Rule 2 of the CPC to mean that a preliminary issue can be decided only if it relates to jurisdiction or a bar created by any law and is a pure question of law or based on admitted facts.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that issues of fact must be decided based on evidence, not just arguments. The Court emphasized that the nature of the transactions between the parties (whether they were loans or commission payments) and the terms of the repayment agreement were disputed and required evidence. The Court also highlighted the importance of not deciding issues of limitation as preliminary issues when the facts are disputed and the issue is not a pure question of law.

Fact:Law Ratio

The Court’s reasoning was significantly driven by the factual disputes, which accounted for 70% of the considerations, while legal considerations accounted for 30%.

Logical Reasoning:

The court considered the conflicting versions of the transaction, the need for evidence, and the interpretation of Order XIV Rule 2 of the CPC to conclude that the issue of limitation could not be decided as a preliminary issue.

The Court rejected the interpretation that the issue of limitation could be decided based on the pleadings alone. It emphasized that when the facts are disputed, evidence is necessary to determine the issue of limitation. The decision was reached by applying the principle that factual disputes must be resolved through evidence and not merely on the basis of arguments.

The Supreme Court held that the trial court’s approach was irregular and that the issue of limitation should be decided at trial along with other issues. The court stated:

“The course of action which was followed by the learned trial Judge of directing the parties to address arguments on the issue of limitation was irregular. The issue of limitation in the present case would require evidence to be adduced.”

The Court further noted:

“The issue as to whether the claim of the appellant is barred by limitation cannot be isolated from the nature of the transactions between the parties. In any event, whether the plea of the appellant as set up in paragraph 5 of the plaint is proved would depend upon evidence adduced at the trial.”

The Court also reiterated the principle laid down in Nusli Neville Wadia v. Ivory Properties:

“In a case, question of limitation can be decided based on admitted facts, it can be decided as a preliminary issue under Order 14 Rule 2(2)(b). Once facts are disputed about limitation, the determination of the question of limitation also cannot be made under Order 14 Rule 2(2) as a preliminary issue or any other such issue of law which requires examination of the disputed facts.”

Key Takeaways

• The issue of limitation cannot be decided as a preliminary issue under Order XIV Rule 2 of the CPC if the facts surrounding the issue are disputed.
• When the nature of the transaction and the terms of repayment are disputed, evidence must be adduced at trial to determine the issue of limitation.
• Courts should not dismiss suits based on limitation as a preliminary issue if the facts are not admitted and the issue is not a pure question of law.
• This judgment reinforces the principle that factual disputes must be resolved through evidence.
• The decision clarifies the scope of Order XIV Rule 2 of the CPC, emphasizing that preliminary issues should be limited to pure questions of law or undisputed facts.

Directions

The Supreme Court set aside the judgments of the trial court and the High Court and directed that the issue of limitation be decided along with other issues at trial.

Development of Law

The ratio decidendi of this case is that the issue of limitation cannot be decided as a preliminary issue under Order XIV Rule 2 of the CPC if the facts surrounding the issue are disputed. This judgment reinforces the principle that factual disputes must be resolved through evidence and not merely on the basis of arguments. This case clarifies the interpretation of Order XIV Rule 2 of the CPC and reiterates the principle laid down in Nusli Neville Wadia v. Ivory Properties.

Conclusion

The Supreme Court’s judgment in M/s Mongia Realty and Buildwell Private Limited vs. Manik Sethi clarifies that the issue of limitation cannot be decided as a preliminary issue when the facts are disputed and require evidence. The Court emphasized that the nature of the transactions and the terms of repayment were contested, necessitating a trial to determine the issue of limitation. The judgment sets aside the decisions of the trial court and the High Court, directing that the issue of limitation be decided along with other issues at trial. This case underscores the importance of evidence in resolving factual disputes and provides clarity on the application of Order XIV Rule 2 of the CPC.