Discounting a letter of credit is not payment by the debtor: Madras HC dismisses Rs 5.19 crore leather suit

Justice A.D. Maria Clete held that a ledger entry showing a Chennai leather firm received Rs 24.15 lakh from its own banker on 1 July 2016 could not extend limitation under Section 19 of the Limitation Act, and refused to lift the corporate veil against the tannery directors and their family.

A Chennai leather exporter's suit for Rs 5,18,74,602 against a Nungambakkam tannery and seven members of the family that runs it has been dismissed by the Madras High Court. Everything turned on one date. The suit was filed on 10 June 2019, and the plaintiff could bring it within three years only by proving that the defendants paid it something on 1 July 2016. The only evidence of that payment was the plaintiff's own ledger, which showed Rs 24,15,580 coming in from its own bank after a letter of credit was discounted, less Rs 85,090 in discounting charges. Justice A.D. Maria Clete held that money a creditor's banker advances against a discounted bill is not payment by the debtor under Section 19 of the Limitation Act, 1963, that the plaintiff had produced neither the letter of credit nor any bank record to connect the receipt to the defendants, and that the suit was therefore barred. She also held there was no basis to make the directors personally liable for the company's debt.

Rs 8.75 crore, five bounced cheques and a memorandum of understanding

Salma Export Import Agency, a partnership firm, supplied leather and leather products to Eastern Chrome Tanning Corporation Private Limited during 2013-14. According to the plaint, Rs 8,75,71,447 was due as on 31 March 2014. After repeated demands, the company issued five cheques, Nos. 863073 to 863077, dated 9 January 2015 and drawn on Indian Bank, Ethiraj College Branch, for a total of Rs 4,25,00,000. They were dishonoured on 10 January 2015 with the endorsement “Funds Insufficient”, re-presented on the defendants' assurance on 31 March and 7 April 2015, and dishonoured again. A legal notice of 24 April 2015 drew a reply of 14 May 2015 denying liability.

The plaintiff started proceedings under Section 138 of the Negotiable Instruments Act. While they were pending, it says, the defendants represented that the company was a family concern whose corporate status was being used to obtain export subsidies, and agreed to make part payments and to sell a flat belonging to the fifth defendant in Koramangala, Bangalore, adjusting the proceeds against the dues. A memorandum of understanding followed on 9 November 2015. Relying on it, the plaintiff received Rs 2,31,96,000 by bank transfer on 5 April 2016, Rs 25,00,008 through a discounted letter of credit on 22 April 2016 and Rs 25,00,670 through another discounted letter of credit on 1 July 2016, a total of Rs 2,81,96,678, and withdrew the criminal cases. It claimed Rs 5,18,74,602 remained outstanding as on 1 July 2016, with interest at 24 per cent from the date of suit, and asked for a decree against all defendants jointly and severally on the footing that the company was a sham entity and the corporate veil should be lifted.

The company's defence was limitation: the claim was founded on the memorandum of 9 November 2015, three years from which expired on 9 November 2018, and the suit came only in June 2019. It disputed that the cheques related to the suit transactions, specifically denied that the 1 July 2016 payment was towards the suit claim, and rejected the sham-company allegation. The second defendant, Thadey Mohamadi Begum, filed a separate written statement saying she was not a director at all but a senior citizen and homemaker living at Ambur, a Pardanashin lady without formal education, who had signed nothing and given no undertaking. The fifth, sixth and seventh defendants filed similar statements which the third defendant adopted; all said the transactions were with the company alone and that directors cannot be made personally liable without a guarantee or independent undertaking. The fourth defendant, Kandrikar Ameenur Rahman, had suffered a stroke in July 2018 and died on 6 May 2021; his legal representative, Mohammed Akmal, was impleaded as the eighth defendant on 4 October 2021.

Four issues were framed on 16 December 2021: limitation; whether defendants 3 and 5 to 7 were necessary or proper parties; recovery and joint and several liability; and other reliefs. The plaintiff examined A.B. Mouinuddin, a partner, as P.W.1 and marked five documents, Exs. P1 to P5: photocopies of the cheques, the legal notice, the reply, the memorandum and a statement of accounts running to 1 July 2016. The defendants examined Hafeezur Rahman, a former accountant of the company, as D.W.1, and marked three documents including a notice to produce dated 22 December 2023.

What the two sides argued

Ms M. Vidya, for the plaintiff, said Clause 3 of the memorandum acknowledged the Rs 8,75,71,447 liability and that the directors had signed it as confirming parties, agreeing in Clauses 5, 6, 7, 12, 13 and 14(i) to settle the dues including by selling the Bangalore property. The last part payment on 1 July 2016, reflected in Ex. P5, put the suit within time, and the defendants had not shown the ledger entries were wrong or unrelated. D.W.1 had admitted in cross-examination that the transactions appeared in the company's books though he could not recall amounts, and knew nothing of the memorandum; the defendants had withheld their own books, inviting an adverse inference under Star Paper Mills v. Beharilal Madanlal Jaipuria. The written statements were evasive denials of the kind condemned in Thangam v. Navamani Ammal. And the defendants' applications for summary judgment on limitation, A. Nos. 617 and 131 of 2020, had been dismissed on 17 February 2020 and never challenged.

Mr K.M. Aasim Shehza, for the company and defendants 3 to 8, said P.W.1 had admitted in cross-examination that the liability crystallised on 31 March 2014; the memorandum merely recorded a pre-existing debt, and even as an acknowledgment it could not carry the suit to June 2019. The 1 July 2016 entry was a unilateral entry in the plaintiff's own books. Certain letter-of-credit payments had involved Florind Shoes Private Limited, a separate company, and Clause 14(iii) of the memorandum itself referred to an earlier Rs 25,00,000 routed through Florind Shoes to settle the cheque cases; nothing showed those payments were made for the first defendant. Without a written acknowledgment signed by the debtor or its agent, the entries did not satisfy Sections 18 and 19 (BSNL v. Nortel Networks). No invoice or delivery document had been marked despite a notice to produce, and a party's own ledger cannot by itself prove a liability under Section 34 of the Evidence Act (CBI v. V.C. Shukla). On personal liability he relied on Susela Padmavathy Amma v. Bharti Airtel and Sanjay Dutt v. State of Haryana: a director is not vicariously liable for the company's contracts merely by office or family relationship, and no specific fraud had been pleaded.

Why 1 July 2016 was the only date that mattered

The court did the limitation arithmetic on the assumption most favourable to the plaintiff. The execution of the memorandum was not in dispute, and it fixed 31 March 2016 as the last date for payment of Rs 4,25,00,000. Taking that as the starting point, three years ended on 31 March 2019. The receipts of 5 April and 22 April 2016, even if accepted as qualifying payments under Section 19, would not carry limitation to 10 June 2019. So the 1 July 2016 payment was crucial, and the burden of proving it, and the statutory conditions, lay on the plaintiff.

Section 19 requires a payment on account of the debt, before expiry of the prescribed period, by the person liable or an agent duly authorised, and its proviso requires an acknowledgment of the payment in the handwriting of, or in a writing signed by, the person making it. A creditor's receipt of money, without proof of its character and its attribution to the debtor, does not meet those requirements. The plaintiff's proof was Ex. P5, its ledger for 2015-16 and 2016-17. A ledger regularly kept in business is a book of account under Section 34 of the Evidence Act and its entries are relevant, but the section itself says such entries alone are not enough to charge anyone with liability.

The two entries for 1 July 2016 read: Union Bank of India, A/c No. 31047, Rs 24,15,580; L/C discounting charges, Rs 85,090; total Rs 25,00,670. What they showed, the court said, was that the plaintiff received net proceeds from its own banker and booked the balance as discounting charges. They did not show that the defendants or their authorised agent paid the debt that day. The defendants had never admitted that any letter of credit was opened at their instance in favour of the plaintiff, so both the existence of the letter of credit and its connection to the first defendant and the suit debt needed proof. The plaint's own words, that the sum came by way of a letter of credit discounted by the plaintiff with its bankers, were the plaintiff's assertion, not an admission, and the bankers referred to were the plaintiff's. Even assuming the discounting happened, it had to be distinguished from payment by the defendants or from the issuing bank honouring the bill on maturity.

A creditor's banker, the court held, does not become the debtor's authorised agent merely because it discounts a bill covered by a letter of credit, and an advance by that banker to the creditor cannot, without evidence of the underlying arrangement, be treated as payment by the debtor for Section 19. Whether the issuing bank later honoured the letter of credit, when it did so, and whether that would satisfy Section 19 were all matters requiring proof. “The discounting date cannot automatically be substituted for the date of a qualifying payment” by the debtor or its agent. The plaintiff had produced no bank statement, no letter of credit, no discounting advice and no record of the issuing bank's settlement, nor any other evidence that the letter of credit was opened at the first defendant's instance for the suit debt. In the face of the defendants' denial, neither the letter of credit nor a qualifying payment on 1 July 2016 was established by ledger entries and a plaint averment. The court was careful about the limits of the finding: “The finding is, therefore, one of failure of proof”, not a proposition that a payment through a letter-of-credit arrangement can never attract Section 19. The plaintiff's ledger of successive credits also did not establish a mutual, open and current account attracting a different limitation rule.

The summary judgment order decided nothing on limitation

The plaintiff's fallback was that the dismissal of the defendants' summary judgment applications on 17 February 2020 had settled limitation in its favour. The court accepted that a determination finally made at an earlier stage of a suit can bind the parties later, but said everything depends on what was actually decided. Paragraph 8 of the February 2020 order treated limitation as a mixed question of fact and law requiring trial and refused summary judgment on that basis; it did not decide that the suit was within time or that the 1 July 2016 payment was proved. Declining the Order XIII-A route because disputed facts need a trial does not stop the court from deciding those facts once the evidence is in. The earlier order left limitation open and was no res judicata. Even on the computation most favourable to the plaintiff, the plaint of 10 June 2019 was out of time.

Family control is not a reason to pierce the veil

On the second issue the court restated the rule in Salomon v. A. Salomon and Co.: a company is a legal entity distinct from its shareholders and directors, and its contractual obligations do not ordinarily become theirs. That directors belong to one family or control the company does not strip it of separate personality. Lifting the veil is an exception, not confined to oppression and mismanagement proceedings, available where the corporate structure is shown to have been used as a facade for fraud or to evade an existing obligation. But mere control, a bare allegation of fraud, or a default in payment does not justify loading the company's liability onto its directors.

The goods were supplied to the company. The plaintiff had not shown that any individual defendant bought them personally, guaranteed the company's dues or otherwise undertook personal liability, nor pleaded and proved specific fraudulent conduct. The general allegation that the defendants had taken loans from the plaintiff's group companies, without proof of its link to the suit transactions, established nothing. The legal representative of the deceased fourth defendant could not be made liable merely by that relationship; any claim against the estate would first require proof of an enforceable personal liability of the director himself. No basis existed for personal liability against defendants 2 to 7 or, in consequence, against the eighth. Defendants 3 and 5 to 7 were neither necessary nor proper parties to the claim arising from supplies to the company, though under Order I Rule 9 of the CPC the misjoinder did not by itself defeat the suit against the company.

Order

Issues (iii) and (iv) were answered against the plaintiff: with the suit barred by limitation, no recovery lay against the company, and with no independent personal liability established, no joint and several decree could go against defendants 2 to 8. C.S. No. 497 of 2019 was dismissed with costs. The judgment was reserved on 9 September 2026 and pronounced on 26 October 2026. Mr G.K. Muthukumar, for GMS Law Associates, appeared for the second defendant.