The Madras High Court has held that a creditor relying on Section 19 of the Limitation Act must establish that the payment was made by the debtor or its authorised agent and satisfies all statutory requirements. Mere assertions or accounting entries are insufficient. While books of account are relevant evidence under Section 34 of the Evidence Act, the Court reiterated that unilateral ledger entries cannot, by themselves, prove a disputed payment or liability.
The plaintiff failed to produce the letter of credit, bank records, discounting advice, or other supporting evidence linking the alleged payment of Rs. 25 lakhs on 1 July 2016 to the defendant company. Consequently, the Court rejected the plea that limitation stood extended. Further, the Court reaffirmed that a company is a separate legal entity and that directors cannot be personally saddled with corporate liabilities merely because they control or manage the company.
Allegations that the company was a family-run concern or was being used to evade liabilities were not supported by specific pleadings or cogent evidence. In the absence of proof of fraud, personal guarantees, or misuse of the corporate form, the directors could not be held personally liable, added the Court.
Briefly, the dispute arose from commercial transactions between M/s. Salma Export Import Agency, a partnership firm dealing in leather products, and M/s. Eastern Chrome Tanning Corpn. Pvt Ltd., a leather manufacturing company. The plaintiff claimed that goods supplied during 2013-14 remained unpaid, leaving an outstanding liability of Rs. 8.75 crores as on 31 March 2014. To partly settle the dues, the company issued five cheques worth Rs. 4.25 crore, but all were dishonoured for insufficiency of funds.
Thereafter, the parties entered into a Memorandum of Understanding (MoU) dated 9 November 2015, under which the defendants allegedly acknowledged the liability and agreed to clear the dues, including through sale of a property in Bengaluru. Based on the assurances received, the plaintiff withdrew cheque dishonour proceedings and claimed to have received part-payments aggregating Rs. 2.81 crores. According to the plaintiff, a balance amount of Rs. 5.18 crores remained unpaid, leading to the present recovery suit against the company and its directors.
The defendants contested the suit on multiple grounds. They argued that the claim was barred by limitation, disputed the alleged payments relied upon by the plaintiff to extend the limitation period, and maintained that the individual directors could not be held personally liable for the company’s debts merely because they were directors or members of the same family.
A Single Judge Bench of Dr. Justice A.D. Maria Clete noted that the plaintiff’s attempt to save limitation depended primarily on proving an alleged payment of Rs. 25 lakhs made on 1 July 2016 through a letter of credit arrangement. The Court observed that where a party relies on a part-payment to obtain a fresh period of limitation under Section 19 of the Limitation Act, the burden lies on that party to establish not only the payment but also compliance with the statutory requirements.
The Court held that the plaintiff’s ledger entries alone could not establish such payment. While entries in regularly maintained books of account are relevant under Section 34 of the Evidence Act, they are insufficient by themselves to fasten liability. The plaintiff failed to produce supporting material such as bank statements, the letter of credit, discounting advice, or documents proving that the alleged payment was made by the defendant company or its authorised agent. Consequently, the Court found that the alleged payment dated 1 July 2016 was not proved.
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The Court further rejected the contention that an earlier order refusing summary judgment on limitation operated as res judicata. It clarified that the earlier order merely held that limitation required a full trial and did not finally determine that the suit was within limitation.
On the issue of directors’ liability, the Court reiterated the settled principle that a company is a separate legal entity distinct from its shareholders and directors. Merely because directors belong to the same family or exercise control over the company does not justify lifting the corporate veil. The plaintiff failed to establish any personal guarantee, independent undertaking, or specific fraudulent conduct by the directors that would warrant imposing personal liability upon them.
