Unjustified For Bank To Proceed Against Property Based On Prior Settled Mortgage, When No New Mortgage Was Created: Kerala High Court

The Kerala High Court has observed that it was not appropriate to proceed against the property of a guarantor who has not created mortgage over the property as collateral, merely because the guarantor had previously acted as a surety in another mortgage that has already been settled.In the case before the high court, the petitioner company mortgaged its property to avail itself of a credit facility for an LLP, and that mortgage was settled, and dues were cleared, but the bank did not return its original title deeds. The bank proceeded to attach the petitioner's property to another mortgage where it was not a guarantor, and that order was set aside. The petitioner company approached the Court seeking the return of the original title deeds. Justice Harisankar V. Menon directed the petitioner to approach the Debt Recovery Tribunal for the return of original title deeds. “In such a situation, I am of the opinion that the petitioner is entitled to get back the document in question and the 1st respondent (bank) is not justified in seeking to proceed against the afore property even when there is no mortgage created.”The petitioner company entered into a Limited Liability Partnership Agreement (LLP) with another company and secured a credit facility of 24 crore rupees from the Federal Bank, with the petitioner acting as guarantor by mortgaging his property and providing the sale deeds. When the LLP defaulted, the Federal Bank moved before the Debt Recovery Tribunal (DRT) for recovery of money. The petitioner remitted the entire amount to the bank and settled all the dues and closed the mortgage over his property. Subsequently, the petitioner requested for the release of his title deeds which were furnished as collateral. Meanwhile, the other company independently obtained credit facilities from the bank. As repayments were irregular, debt recovery proceedings were initiated before the DRT where the petitioner was also arrayed as respondent even though he was not a guarantor. Subsequently, the bank filed for attachment of the petitioner's property that he had mortgaged earlier when he stood as the guarantor. The DRT issued an ex-parte order directing petitioner to repay the amount or that his property would be attached. The ex parte order was set aside and his application to recall attachment was also allowed. Hence, the petitioner has filed this writ petition seeking the return of his original title deeds which are still in the bank's custody. The petitioner submitted title deeds were mortgaged when that it stood as a corporate guarantee and that mortgage was closed and clearance was obtained. On the other hand, the bank submitted that the writ petition was not maintainable. Relying upon Zonal Manager, Central Bank of India v. Devi Ispat Limited and Others (2010), in which the Supreme Court had ordered the bank to return original title deeds upon settlement of outstanding dues, the High Court concluded that the present writ petition was maintainable. The Court observed that since there all outstanding dues were cleared, the mortgage was closed and the petitioner was entitled to seek the return of his original title deeds. It also took note of the fact that the petitioner has not created any other mortgage over the property. The Court referred to Madras High Court's decision in M.Shanti v. Bank of Baroda (2016) wherein it was held that the respondent bank cannot exercise the right of lien to secure other liabilities of the mortgagor by retaining the documents of the mortgagor or guarantor, which were deposited in another loan transaction. The Court thus stated, “In the result, I am of the opinion that the petitioner is justified in seeking for return of the document in question.”As such, the Court directed the petitioner to approach the DRT seeking the return of his original title deeds. Case Title: M/S Inkel Ltd V The Federal Bank LimitedCounsel for Petitioners: Advocates M.S.Amal Dharsan, Thushara James, Noel JacobCounsel for Respondents: Advocate Mohan Jacob George Case Number: WP(C) NO. 18685 OF 2023Citation: 2024 LiveLaw (Ker) 771Click here to Read/Download Order

Unjustified For Bank To Proceed Against Property Based On Prior Settled Mortgage, When No New Mortgage Was Created: Kerala High Court

Tellmy Jolly

Tags