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Suing directors for loan recovery

The Supreme Court last week ruled that though a mortgage of assets of a company which failed to return a loan may have come to an end with their sale, the contract of indemnity with regard to the loan would continue. They are independent contracts. The directors who stood guarantee will still be liable to return the full loan.

Therefore, the financial institution which proceeded against the borrower firm can sue it and the guarantors for recovery of the balance of the loan if the sale proceeds are not sufficient to satisfy the claims of the secured creditors. The court reconciled two of its earlier judgments which were apparently contradictory in the new judgment, Deepak Bhandari vs Himachal Pradesh Industrial Development Corporation. In this case, the corporation issued recall notice to the firm in 1990 and sold the assets in 1994. But the amount recovered was not sufficient to meet the claims of the corporation and another secured creditor.

Therefore, the directors of the firm were sued in the high court in 1994 for the balance of the dues. They opposed it arguing that the suit was beyond the time limit as the recall notice was in 1990 and the suit was filed four years later. It should have been within three years according to the law of limitation. The high court rejected the contention. One director appealed, but the Supreme Court upheld the high court view and asserted that the period of limitation starts from the date when the assets were sold (1994) and not when the recall notice was given (1990).

Article referred: http://www.business-standard.com/article/opinion/suing-directors-for-loan-recovery-114020200781_1.html

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