HATTON NATIONAL BANK LIMITED
SELLERS SPORTS (PVT) LTD AND OTHERS
SUPREME COURTS. N. SILVA, CJ.
P. R. P. PERERA, J. ANDWEERASEKERA, J.
SC APPEAL (CHC) NO. 6/97(F)
CHC NO. 92/96(1)
JANUARY 24™. 2000
Civil Procedure Code – Cause of action – Section 5 oj the Code ■ BankJacUities secured by a mortgage by the principal debtor and guaranteed byan agreement of sureties ■ Prescription of action – Sections 5. 6 and 7 of thePrescription Ordinance.
The plaintiff Bank is the successor to the Emirates International BankLtd., whose rights were assigned to the plaintiff Bank by Deed ofAssignment No. 603 dated 17. 09. 92.
The plaintiff instituted an action against the defendants on 21. 05. 96jointly and severally to recover the sum of Rs. 12.413.814/46 being thetotal liability of the lsl defendant company as at 08. 01. 96 on creditfacilities provided by the plaintiffs predecessor Bank by way of overdraft,time loan, packing credit and pledge loans. This was the total amountdue on 30. 09. 89 plus interest thereafter. By way of security for the duere-payment of the accommodation granted to the 1st defendant by theBank, the Is' defendant executed a Mortgage Bond dated 04. 09. 86pledging the machinery, movables and book debts described in theagreement.
A statement of accounts was filed with the plaint. The Mortgage Bond wasfiled with the plaint and paragraph 6 of the plaint stated that it is pleadedpart and parcel of the plaint and that the action is filed to enforce theobligation created thereby. The 2nd to the 5lh defendants had entered intoa Guarantee Agreement with the Bank, dated 22. 08. 86 to pay the Bankthe money due from the lsl defendant upto a limit of Rs. 11.200,000/- ByClause 2 of the Guarantee they agreed to pay the Bank in Colombo, themoney therein mentioned 10 days after demand in writing is made. Suchdemand was made by writing dated 26. 04. 96.
In the light of the definition of “cause of action" contained in section 5 ofthe Civil Procedure Code and the averments in the plaint, the action
Hatton National Bank Limited v. Sellers Sports (Put) Ltd.
and Others (S. N. Silva. C. J.)
against the Is* defendant was not one for the recovery of money lentwithout written security or money lent “upon account stated" where theperiod of prescription is 3 years in terms of section 7 of the PrescriptionOrdinance which period has to be computed from the date of the defaultnamely, 30.09.89. The action was filed to enforce the obligation createdby the Mortgage Bond. The applicable section would be section 5 of thePrescription Ordinance which relates to instances where the action is forthe recovery of any sum due upon any mortgage of property or uponany bond conditioned for the payment of money. The action was notprescribed as it was filed within 10 years from the.date of the mortgageas provided by that section.
2. As regards the Guarantee of the 2nd to 5U' defendants, the applicablesection is section 6 of the Prescription Ordinance which relates toamounts due on a written promise or other written security andthe period of prescription is 6 years. That period should be computednot from the date of the default on the principal obligation namely.30. 09. 89 but from the date on which the payment upon the Guaranteebecame due namely, 10 days after demand in writing was made, as statedin clause 2 of the agreement. The demand for payment was made on 26.
96; and the breach took place upon the failure to make payment 10days after that demand. As such, the action which was filed on 21. 05.96 against the 2nd to 5* defendants was not prescribed in terms of section6 of the Prescription Ordinance.
Case referred to :
Croos v. Goonewardena Hamine 5 NLR 259 at 261APPEAL from the Judgment of the Commercial High Court Colombo.
Romesh de Silva P.C. with Palitha Kumarasinghe for the appellant.
A. Parathalingam P.C. with Faizer Muslhapha for the 1st, 2nd, and 5thdefendants-respondents.
Cur. adv. vult:
September 12, 2000.
S.N. SILVA, C.J.
This is an appeal from the judgment of the High Courtdated 24. 04. 97. By that Judgment the High Court dismissedthe action of the Plaintiff on the ground that it was prescribed.
The Plaintiff being a licensed commercial bank institutedthe action against the Defendants jointly and severally to
Sri Lanka Law Reports
1200013 Sri LR.
recover a sum of Rs. 12,413,814.46. The principal cause ofaction is against the Is* Defendant being a private company.The other Defendants are sued on the basis of a guaranteegiven by them in respect of the liability of the Is* Defendant.
The Is* Defendant was a constituent of the Union Bank ofMiddle East Ltd., which was later renamed as the EmiratesInternational Bank Ltd. The liability in respect of the actionhas been filed was contracted with the said Bank. The rightsof this Bank were thereafter assigned to the Plaintiff Bank byDeed of Assignment No. 603 dated 17. 09. 92 filed with theplaint.
According to the statement of Accounts (filed with thePlaint) the 1st Defendant availed of the credit facilities of thepredecessor Bank by way of an overdraft, time loan, packingcredit and pledge loans. The amount stated above in respect ofwhich the action has been filed is the total liability on theaforesaid lines of credit as at 08. 01. 1996.
The 1st Defendant entered into an Agreement in writingdated 04. 09. 96 with the predecessor Bank in the form ofa Mortgage, placing as security the machinery, movablesand books debts described in the Agreement for the due re-payment of the accommodation granted to the 1sl Defendant bythe Bank, under a drawing limit of Rs. 7,500,000/-. ThisMortgage has been registered under the Registration ofDocuments Ordinance and has been filed with the Plaint. The2nd to 5th Respondents entered into a Guarantee Agreementwith the Bank, dated 22. 08. 86 to pay the Bank the money duefrom the 1st Defendant upto a limit of Rs. 11,200,000/-.
The execution of the Mortgage and the Guaranteereferred to above are not denied. According to the answer, the .Defendants appear to dispute the statement of accounts.But, this matter has not been gone into. The action has beendismissed as stated above on the preliminary issue ofprescription.
Hatton National Bank Limited u. Sellers Sports (Put) Ltd.
and Others (S. JV. Silva. C. J.)
The High Court has accepted the submission of theDefendants that the action has not been filed to enforce theMortgage and as such it should be taken as being one for therecovery of money lent without written security. It is thefinding of the Court that the money is due “upon an accountstated" where the period of prescription is 3 years in terms ofsection 7 of the Prescription Ordinance. The court has heldthat this period of 3 years should be computed from the dateof default being 30. 09. 89, according to the statement ofaccounts. Therefore it was held that the cause of action againstthe 1st Defendant is prescribed.
As regards the Guarantee of the 2nd, 3rd, 4th and 5thDefendants, the Court held that the liability arises onthe written Guarantee and that the applicable period ofprescription would be 6 years in terms of section 6 of thePrescription Ordinance, which should be computed fromthe date of the default of the principal obligation, namely30. 09. 89 (as stated above) and not from the date of demandas contended by the Plaintiff.
On the said basis it was held that the action filed onthe 21. 05. 96 is prescribed in relation to the liability of all theDefendants and should be dismissed.
The submission of Counsel for the Plaintiff Appellant isthat the Court has erred in not taking into account theMortgage Bond and failing to consider section 5 of thePrescription Ordinance as the applicable section. In terms ofthis section the period of prescription is 10 years. It wascontended that since the Mortgage Bond dated 04. 09. 86 theaction filed on 21. 05. 96 is within the period of 10 years.As regards the Guarantee on which the other Defendants havebeen sued it was contended that the breach of the Guaranteetook place only upon the failure of the Defendant to pay themoney that was demanded by the Bank on the Guarantee. Onthat basis it was contended that the period of prescriptionshould be computed from 26. 04. 96 being the date of the letter
Sri Lanka Law Reports
120001 3 Sri L.R.
of demand sent to the Defendants by the Bank. Counsel for theDefendant supported the judgment on the grounds statedtherein as outlined above.
Upon a consideration of the several averments of thePlaint and the documents that have been filed with the plaintit is clear that the action against the 1st Defendant hasbeen filed to recover the amount outstanding on theaccommodation granted by the Bank by way of an overdraftand other lines of credit. The High Court has not stated anyspecific reason for the rejection of the Mortgage Bond whichhas been produced as being the basis of the action against the1st Defendant. It appears that since the statement of accountshas been produced annexed to the plaint, the High Court hasconsidered that to be the sole basis of liability. In this respectthe court has erred in failing to take into account the natureof the obligation of the 1st Defendant in respect of which theaction has been filed. The Court has totally ignored the causeof action as pleaded in the plaint and has looked into only thedocument which sets out the quantum of the liability.
Section 5 of the Civil Procedure Code defines a cause ofaction “as being the wrong for the prevention or redress ofwhich an action may be brought and includes the denial of aright, the refusal to fulfill an obligation, the neglect to performduty and the infliction of an affirmative injury."
The present action is based on a wrong which relates to therefusal to fulfill an obligation. The obligation is primarily of the1st Defendant who was granted accommodation by the Bank inthe form of an overdraft and other lines of credit as statedabove. In the case of Croos v. Goonewardena Hamine1" WendtJ stated as follows “I think that the word “obligation” in thisdefinition is to be understood not in the narrow sense in whicha parole promise to pay, a promissory note and a mortgage,although given for the same debt may be described as threedifferent “obligations", but in the more general understandingsense of a liability to pay that sum of money.”
SCHatton National Bank Limited v. Sellers Sports (Put) Ltd.331
and Others (S. N. Silva. C. J.)
The High Court has fallen into error of not looking at theobligation in the manner noted above. The court has merelylooked at the statement of accounts and drawn the inferencethat the obligation arises solely upon the account so stated. Inthis instance the account stated is the quantification of theliability incurred by the 1st Defendant on the different lines ofcredit granted to him. It sets out the total due under eachhead as at 30. 09. 89 and the interest debited thereon from30. 09. 89 to 31. 12. 95 except in the case of the pledge loanwhere the interest is computed upto 19. 10. 90. The obligationwhich forms the cause of action is the liability which arisesupon the total accommodation granted to the 1st Defendant bythe Bank and secured by the Mortgage Bond. It has beenclearly stated in paragraph 6 of the plaint that the MortgageBond is pleaded as part and parcel of the plaint and that theaction is filed to enforce the obligation created thereby. TheMortgage Bond that has been produced narrates that the Bankbeing an approved credit agency has agreed to grantaccommodation to the borrower by way of Overdraft. Loan.Cash, Credit Account or otherwise under a drawing limit ofRs. 7,500,000/-. It is further stated that the accommodationis granted on the agreed security consisting of machinery;movable property and the book debts set out in the bond. TheMortgage Bond is thus the legal framework within which theobligation to repay the debts contracted under different items,is constituted. In the circumstances it cannot be said that theaccommodation has been granted “without written security,”so as to attract the provisions of section 7 of the PrescriptionOrdinance. The applicable section in my view would be section5. which relates to instances where the action is for therecovery of any sum due upon any mortgage of any property orupon any bond conditioned for the payment of money. TheMortgage Bond produced clearly falls within that description.In the circumstances the action would not be prescribed if itis filed 10 years from the date of the mortgage. As noted abovethe action has been filed within that period and the claimagainst the 1st Defendant would not be prescribed.
Sri Lanka Law Reports
(200013 Sri L.R.
As regards the Guarantee it is common ground that theapplicable section is section 6 of the Prescription Ordinance,which relate to amounts due on a written promise or otherwritten security and the period of prescription is 6 years. Thequestion to be decided is whether the period of 6 years shouldbe computed from the date of the Guarantee being 22. 08. 86or, from the date on which there was a default in respect of theprincipal obligation or, the date from which the payment uponthe Guarantee became due.
The liability in respect of the Guarantee is specificallystated in clause 2, whereby the 2nd to 5th Defendants agreed topay the Bank in Colombo, the money therein mentioned. 10days after demand in writing is made on them provided alwaysthat the total liability ultimately enforceable under theGuarantee shall not exceed the sum of Rs. 11.200,000/.
It is thus seen that although the Guarantee of the 2nd to 5,hRespondents is valid from the date of its execution, paymentthereon becomes due only upon a demand being made. It is ona failure on the part of the guarantors to make payment uponthe demand that a breach of the Guarantee takes place. Interms of Section 6 of the Prescription Ordinance an action isnot maintainable unless it is brought within 6 years of suchbreach.
It is not disputed that the demand for payment on theGuarantee was made on the 2nd to 5lh Defendants by writingdated 26.04.96. Therefore the amount stated in the guaranteebecame due upon such demand and a breach takes placewhen there is a failure to make payment ten days after suchdemand is made. It could not be contended that the action filedon 21. 05. 96 against the 2nd to 5th Respondents is in any wayprescribed by the application of the provisions of Section 6 ofPrescription Ordinance.
The High Court has held, that a breach of the guaranteetakes place on the date the principal debtor (1st Defendant)
Hatton National Bank Limited v. Sellers Sports (Pvt) Ltd.
and Others (S. N. Silva. C. J.)
stopped making payment which has, been taken as 30. 09. 89from the statement of accounts. Once again the High Courthas failed to examine this question from the standpoint of thecause of action pleaded against the 2nd to 5th Defendants. Theobligation of the 2nd to 5th Defendants although intrinsicallyconnected with that of the 1st Defendant rests on a distinct anddifferent legal basis. A default on the part of the 1st Defendantto pay the sum due on the accommodation granted does notper se, (in the absence of a specific provision to that effect inthe Guarantee) amount to refusal on their part to fulfill anobligation so as to constitute a cause of action against theseDefendants. As noted above the obligation on their part tomake payment on the Guarantee becomes effective only whenthe demand is made. It is only at that stage the refusal to fulfillthe obligation and the concomitant breach of Guaranteetakes place so as to attract the provisions of Section 6 ofthe Prescription Ordinance. The basis on which the HighCourt has computed the period of prescription is thereforeuntenable.
For the reasons stated above I uphold the submissions ofthe Plaintiff Appellant and set aside the Judgment dated 24.04. 97. The case is referred back to the High Court for trial toproceed in respect of other issues before any Judge.
Plaintiff would be entitled to the costs of this appeal fixedat Rs. 15,000/-.
PERERA, J.WEERASEKERA, J.Appeal Allowed.
I agree.I agree.
HATTON NATIONAL BANK LIMITED v. SELLERS SPORTS (PVT) LTD AND OTHERS