Supreme Court clarifies when limitation can be decided as a preliminary issue in loan recovery suits: Mongia Realty vs. Manik Sethi (2022)

Date of the Judgment: 31 January 2022

Citation: 2022 INSC 78

Judges: Dr. Dhananjaya Y Chandrachud, J and Surya Kant, J

Can a court dismiss a loan recovery suit based on limitation without considering evidence? The Supreme Court of India recently addressed this crucial question. This case revolves around a dispute over a loan and whether the suit to recover it was filed within the legally prescribed time limit. The Court clarified that issues of limitation cannot be decided as preliminary issues if the facts are disputed and require evidence. The judgment was delivered by a two-judge bench comprising Dr. Dhananjaya Y Chandrachud, J and Surya Kant, J, with the opinion authored by Dr. Dhananjaya Y Chandrachud, J.

Case Background

M/s Mongia Realty and Buildwell Private Limited (the appellant) claimed that they had given loans to Manik Sethi (the respondent) which were to be repaid with interest at 18% per annum. The appellant stated that they had advanced ₹10 lakhs on 13 June 2012, ₹18 lakhs on 11 July 2012, and ₹15 lakhs on 21 December 2012, via cheques. They further claimed to have given ₹39 lakhs as a loan. 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. The appellant also claimed that a running account was maintained between the parties and that the last payment was made on 24 October 2013. The appellant filed a suit on 31 March 2017 to recover ₹1,11,63,633, along with interest.

The respondent, however, denied the loan transactions. They claimed that the payments made by the appellant were for commission for real estate services provided by the respondent to the appellant. The respondent argued that the suit was barred by limitation because the last payment was made on 24 October 2013, and the suit was filed more than three years after that date.

Timeline

Course of Proceedings

The trial court framed a preliminary issue on whether the suit was barred by limitation. The trial court, after hearing oral arguments, decided the issue of limitation against the appellant and dismissed the suit. The High Court of Delhi upheld the trial court’s decision, stating that since the last payment was made on 24 October 2013, the suit filed on 31 March 2017 was beyond the three-year limitation period. The High Court also noted that there was no written agreement stating that the loan was repayable within one year from the date of the last installment.

Legal Framework

The Supreme Court referred to Order XIV Rule 2 of the Code of Civil Procedure, 1908 (CPC), which deals with the court’s power to pronounce judgment on all issues. It 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.]”

The court also discussed the Limitation Act, which sets the time limit for filing a suit. The court noted that the issue of limitation can be decided as a preliminary issue under Order XIV Rule 2(2)(b) of the CPC if the facts are admitted. However, if the facts surrounding the issue of limitation are disputed, it cannot be decided as a preliminary issue.

Arguments

Appellant’s Arguments:

• The appellant argued that the plaint clearly stated that the loan was 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 contended that the claim of an open and running current account between the parties needed to be decided based on evidence presented at trial.
• The appellant submitted that the issue of limitation could not have been decided purely on the basis of oral arguments and required evidence.

Respondent’s Arguments:

• The respondent argued that there was no written agreement for the loan.
• The respondent contended that the payments were not loans but were for commission for real estate services.
• The respondent submitted that the last payment was made on 24 October 2013, and the suit was filed beyond the three-year limitation period.
• The respondent argued that Article 1 of the Limitation Act does not apply since there was no open, running, and mutual current account.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the main issue before the court was:

1. Whether the issue of limitation could be decided as a preliminary issue under Order XIV Rule 2 of the CPC without evidence, given the conflicting versions of the facts.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authority:

Judgment

How each authority was viewed by the Court?

The Supreme Court relied on Nusli Neville Wadia v. Ivory Properties [(2020) 6 SCC 557]* to state that the issue of limitation can be decided as a preliminary issue only if the facts are admitted. Since the facts were disputed in the present case, the issue of limitation could not be decided as a preliminary issue.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the facts surrounding the issue of limitation were disputed. The Court emphasized that the nature of the transactions between the parties (whether they were loans or commission payments) and the existence of a running account were contested. These factual disputes required evidence to be presented and could not be decided solely based on oral arguments. The Court also noted that the trial court’s decision to hear arguments on the issue of limitation without evidence was irregular. The Court’s reasoning was based on the principle that legal issues cannot be decided without a proper examination of the facts, especially when the facts are in dispute.

Logical Reasoning:

The Supreme Court rejected the High Court’s view that the absence of a written agreement meant that the appellant’s claim was not credible. The Court emphasized that the appellant’s claim that the loan was repayable within one year from the last installment was a matter of evidence to be determined at trial. The Court also rejected the High Court’s view that accepting the appellant’s case would set a wrong precedent. The Supreme Court held that the High Court’s reasoning was flawed and that the issue of limitation could not be decided without a proper examination of the facts.

The court stated:

“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 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.”

Key Takeaways

• The issue of limitation in a suit cannot be decided as a preliminary issue if the facts surrounding the issue are disputed.
• When there are conflicting versions of the facts, evidence must be adduced to determine the issue of limitation.
• The court cannot decide the issue of limitation solely based on oral arguments without considering evidence.
• The nature of the transactions between the parties is crucial in determining the issue of limitation.
• The absence of a written agreement does not automatically negate a party’s claim; it is a matter to be determined based on evidence.

Directions

The Supreme Court set aside the judgments of the trial court and the High Court. The case was remanded to the trial court to decide the issue of limitation along with other issues at trial after examining the evidence.

Development of Law

The Supreme Court reaffirmed the principle that issues of limitation cannot be decided as preliminary issues if the facts are disputed and require evidence. This clarifies the application of Order XIV Rule 2 of the CPC in cases where the facts surrounding limitation are contested. The ratio decidendi is that the issue of limitation cannot be decided as a preliminary issue under Order XIV Rule 2 of the CPC, if the facts are disputed and require evidence.

Conclusion

In the case of M/s Mongia Realty and Buildwell Private Limited vs. Manik Sethi, the Supreme Court clarified that the issue of limitation in a loan recovery suit cannot be decided as a preliminary issue without considering evidence when the facts are disputed. The Court emphasized that the trial court must consider the evidence presented by both parties before making a decision on limitation. This judgment ensures that cases are not dismissed prematurely based on limitation without a proper examination of the facts.