Bombay High Court
Asset Reconstruction Company (India) ... vs Punjab National Bank on 21 February, 2025
Author: A.S. Chandurkar
Bench: A.S. Chandurkar
2025:BHC-OS:2894-DB
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Digitally signed
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
KANCHAN by KANCHAN
VINOD
VINOD MAYEKAR
MAYEKAR Date: 2025.02.21
20:06:26 +0530
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 763 OF 2020
Asset Reconstruction Company
(India) Limited ..... Petitioner
VERSUS
Punjab National Bank & Anr. ..... Respondents
Mr. Viraj Parikh a/w. Mr. Vinod Kothari, Mr. Kshitij Parekh i/b.
Apex Law Partners for the Petitioner.
Mr. Sarosh Bharucha a/w. Ms. Payal Upadhyay i/b. ANP
Chambers for the Respondent No.1.
Mr. Rohit Agarwal i/b. Mr. Girish Thanvi for the Respondent
No.2.
Coram : A.S. Chandurkar & Rajesh S. Patil, JJ.
Date on which the arguments were heard : 18th December 2024
Date on which the judgment is pronounced : 21st February 2025
::: Uploaded on - 21/02/2025 ::: Downloaded on - 22/02/2025 10:24:06 :::
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JUDGMENT ( PER - RAJESH S.PATIL, J.) :
-
1. The petitioner seeks to challenge the judgment and order
dated 6th November 2019 passed by the Debts Recovery Appellate
Tribunal (for short 'DRAT'), which has quashed and set aside the
judgment and order passed by the Debts Recovery Tribunal (for
short DRT) dated 9th January 2012.
FACTS
2. The petitioner - Asset Reconstruction Company (India)
Limited (for short 'ARCL') claims to be the securitisation and
reconstruction company under the Companies Act 1956, and also
a financial institution under Section 2(h) (ia) of the Recovery of
Debts and Bankruptcy Act 1993 (for short 'RDDB Act'). ARCL
claims to have power to recover dues from the borrower pursuant
to Assignment Deed executed by the State Bank of India (for
short 'SBI'), dated 30th March 2005. It is further case of ARCL
that the erstwhile assignor, SBI had granted various credit
facilities to the borrower M/s. Aggarwal Silk & Synthetics Pvt.
Ltd., to which Mr. Rameshchandra Aggarwal and Ms.Shashi
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Aggarwal executed a personal guarantee. Mr. Rameshchandra
Aggarwal mortgaged his immovable property being land
admeasuring Survey No. 44, Hissa No. 5/1, land admeasuring 31
gunthas and Survey No.44, Hissa No. 10/1, land admeasuring 6
½ gunthas, total land admeasuring 37 ½ gunthas situated at
Village Valiv, Taluka Vasai, District Palghar (hereinafter referred
to as 'the suit property') in favour of the then assignor, SBI.
3. According to the ARCL since the borrower company failed
to pay the loan amount, they on 12 th April 2006 filed the Original
Application No. 131 of 2006 before the DRT, Mumbai to recover
a sum of Rs.2,12,55,129/- from the borrower company and its
guarantors.
4. Subsequently, on 21st April 2006, the respondent no.1 -
Punjab National Bank (for short 'PNB') granted various credit
facilities to the borrower M/s. Atex Worldwide. It appears that
these facilities were secured by way of a mortgage by deposit of
title deeds created by Mr. Rameshchandra Aggarwal in favour of
PNB.
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5. In the meanwhile, on 5th March 2007 the DRT, Mumbai
passed an order issuing a recovery certificate against borrower
M/s. Aggarwal Silk & Synthetics Pvt. Ltd., in favour of the ARCL
for a sum of Rs.1,73,92,129/- in O. A. No.131/2006. Thereafter,
PNB filed Original Application No. 29 of 2007 before the DRT,
Mumbai, seeking recovery of Rs.6,20,74,490/- against M/s.Atex
Worldwide and the guarantors, thereby seeking enforcement of
the mortgage over the suit property.
6. The DRT on 6th November 2008 passed an order in the O.A.
No. 29 of 2007 mentioning therein that the PNB has charge over
the suit property.
7. According to the ARCL, on 10th March 2009, they became
aware that the PNB was seeking to attach the suit property. ARCL
hence on 13th July 2009 filed Miscellaneous Application No. 31 of
2010 under Section 19(25) of the RDDB Act, thereby seeking a
modification to the order passed on 6 th November 2008 by the
DRT to the extent that the PNB had charge over the suit property.
8. The DRT on 9th January 2012 allowed the ARCL's
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Miscellaneous Application No. 31 of 2010, and held that the
mortgage which was created in favour of the erstwhile assignor
SBI was valid and prior in time to the mortgage created in favour
of PNB and the declaration of mortgage in favour of the PNB as
cancelled.
9. Being aggrieved by the order passed by the DRT, the PNB
filed Miscellaneous Appeal No. 229 of 2012 before the DRAT.
Thereafter, the DRAT heard both the parties and by its judgment
and order dated 6th November 2019, set aside the order dated 9 th
January 2012 passed by the DRT, and held that the erstwhile
assignor SBI, was negligent at the time of creation of mortgage
by not insisting on the original title deeds, as a result, the
mortgage in favour of the ARCL was cancelled.
10. Being aggrieved with the judgment and order dated 6 th
November 2019 passed by the DRAT, the ARCL being the assignee
of SBI has filed the present writ petition.
11. On behalf of the petitioner Mr. Viraj Parikh appeared and
made his submissions :-
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11.1 He submitted that ARCL had a valid mortgage by way
of deposit of title deeds in the suit property. He submitted
that Mr. Ramchandra Aggarwal had executed a mortgage
by deposit of title deeds for the purpose of availing credit
facilities, which included the certified copy of the
Conveyance Deed dated 22nd December 1993 and the
original lodgment receipt issued by the Sub-Registrar of
Assurances, Vasai bearing Sr. No. 3306 of 1993 dated 22 nd
December 1993 and letter dated 17th August 2000
addressed by the Sub-Registrar of Assurances, Vasai
requesting to send the indenture to SBI after registration.
He submitted that it is settled law that the mortgage by the
deposit of title deed can be created based on the title along
with original registration receipt. He submitted that in the
following judgments, the Court has considered the
circumstances where the originals are missing/lost or not
forthcoming for any reason whatsoever :-
(a) The judgment of Andhra Pradesh High
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Court in case of Kanigalla Prakasa Rao vs.
Nanduri Ramakrishna Rao & Ors. 1
(b) The judgment of Andhra Pradesh High
Court in case of Ch. Sambasiva Rao vs. Bank
of Baroda reptd. By Branch Manager, Gontur
(c) The judgment of Kerala High Court in
case of Assiamma vs. State of Mysore 3
(d) The judgment of Madras High Court in
case of M/s. M.A.V.R. Nataraja nadar & Sons
& Ors. vs. State Bank of India & Anr. 4
(e) The judgment of Madras High Court in
case of M/s. Ride Master Rims Private Ltd.
Vs. ING Vysya Bank Ltd. Chennai 5
(f) The judgment of this Court in case of
Suresh Gyanchand Kumar vs. M/s. Nitul
Textiles & Ors.6
(g) The judgment in case of A.L.R.M.
Chettiar Firm vs. L.P.R. Chettiar Firm 7
(h) The judgment of Allahabad High Court
in case of Ratan Lal vs. Mukandi Lal & Anr. 8
11.2 He further submitted that ARCL's mortgage in the
subject property was examined and declared by the DRT in
its order dated 5th March 2007 read with 14th November
2008. The said orders were never challenged by PNB and
1 1981 SCC OnLine AP 154
2 1988 SCC OnLine AP 346
3 1990 (2) ILR Ker 44
4 1993 1 LW 456
5 2006 SCC OnLine Mad 683
6 2015 SCC OnLine Bom 4010
7 1926 ILR 4 Rang 238
8 1932 SCC OnLine All 251
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hence the orders have attained finality. He submitted that
there were no fraud or gross negligence on the part of the
petitioner. He submitted that Section 78 of the Transfer of
Property Act applies if fraud, misrepresentation or gross
neglect is committed on the part of the prior mortgagee is
proved in the fact of a matter.
11.3 He further submitted that in the present proceedings,
there is no allegation of fraud or misrepresentation.
Therefore, the only issue would be whether the ARCL was
in gross neglect while granting loan to the borrower. He
submitted that the ARCL had taken all care and all the
relevant documents from the borrower/guarantors at the
time of granting financial credit facilities. He submitted
that the facts demonstrates that although the Conveyance
Deed is lodged for registration on 22nd December 1993, but
it was only actually registered after 5th May 2005 which is
evident from the noting by the Sub Registrar of Assurances
on the registered Conveyance Deed. Therefore, it is
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incorrect to state that the erstwhile assignor of SBI ought to
have asked for the original registered Conveyance Deed as
the same was still lying with the Sub-Registrar of
Assurances at the time of creating the mortgage by deposit
of title deed on 17th August 2000.
11.4 He further submitted that the issue about the delay
caused in the registration of the documents, in 1990's and
the standard industry practice of creating mortgages by
deposit of title deeds on the basis of lodgment of original
registration receipt, was considered by the Single Judge of
this Court in the judgment of Suresh Gyanchand Kumar
(supra) and more particularly in paragraph nos. 13 and 18.
11.5 He further submitted that the erstwhile assignor of
SBI had registered a charge with the Registrar of
Companies, with regard to the financial credit facilities
granted to the borrower, hence due caution and diligence
at the time of creation of the mortgage was shown by the
erstwhile assignor.
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11.6. He further submitted that PNB had accepted the
mortgage by deposit of title deeds on 12 th April 2006 from
Mr. Rameshchandra Aggarwal when PNB had sufficient
notice that there was an existing mortgage on the subject
property for which detailed scrutiny is required. He
submitted that PNB should have considered that the
memorandum of deposit of title deeds in favour of PNB
records that the original registration receipt is deposited
with PNB. When in fact the original registration receipt
was deposited with the SBI. Further the memorandum of
deposit of title deeds records that the conveyance is dated
22nd September 1993 which is incorrect, hence a bare
perusal of the Conveyance Deed and Index II, demonstrates
that the Conveyance Deed is dated 22nd December 1993.
Further in the records of Registrar of Companies, it
reflected that the subject property was mortgaged to the
SBI.
11.7 The DRT Mumbai's judgment dated 6 th November
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2008 had considered all the documents on record and had
come to the finding that ARCL had the valid documents
pursuant to which they granted financial facilities to the
borrower. He submitted that the present writ petition be
allowed and the order passed by the DRAT be quashed and
set aside and the order passed by the DRT be confirmed.
12. In contrast, Mr. Sarosh Bharucha, learned counsel appeared
on behalf of PNB and made his submissions :-
12.1 He submitted that the petitioner's case is that the loan was
granted to the borrower on the basis of deposit of the original
lodgment receipt and on the basis of authority letter to collect the
original title deed. He submitted that the order dated 9 th January
2012 passed by the DRT was incorrect in as much as the same
proceeded on the basis that the mortgage in favour of ARCL was
by way of title deed. He submitted that ARCL is guilty of gross
negligence as contemplated under Section 78 of the Transfer of
Property Act, 1882. He relied upon the judgment passed in case
of Shan Maun Mulla & Anr. vs. Madras Building Company 9. He
9 (1892) ILR 15 Mad 268
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submitted that in the said judgment, it is mentioned that the
principles of equity that a person whose gross neglect enables
another to commit a fraud shall suffer for that fraud.
12.2 He submitted that similar kind of finding was arrived by the
Madras High Court in the judgment of Indian Bank vs. Punjab
National Bank & Ors., 10
12.3 He further submitted that the mortgage of the subject
property in favour of ARCL's predecessor in interest was
purportedly created on 7th August 2000. He submitted that even
on that day, the original title deed had been lying in the office of
the Sub-Registrar for seven years as per the case of the petitioner.
ARCL has entered into the shoes of the SBI in the year 2005 by
way of Deed of Assignment dated 30th March 2005. However,
ARCL did not take any steps in order to secure the original title
deed. The mortgage deposit of the original title deed in favour of
the PNB was created on 21st April 2006. He submitted that there
is no explanation on the part of ARCL as to what steps they had
taken to secure the original title deed. So also, there is no
10 2009 SCC OnLine Mad 1150
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explanation as to the steps taken by ARCL when according to
them they became aware about the mortgage of the subject
property in favour of PNB. He submitted that it is this gross
neglect on the part of ARCL and its predecessor in interest, which
enabled the mortgagor to commit fraud which induced the PNB
to advance money to the mortgagor on the security of the subject
property. Hence, for such fraud it must be ARCL who should
suffer and not PNB.
12.4 He submitted that ARCL has not produced the original copy
of the lodgment receipt. He submitted that the question of the
PNB being negligent does not arise, since the loan facilities was
granted by PNB after the original title deed was deposited with
them. He further submitted that there is no explanation from
ARCL, as to how the mortgagor acquired the original title deed
from the Office of the Sub-Registrar, prior to depositing them
with the PNB, if infact the original lodgment receipt was with
ARCL.
12.5 This means that one of the following two things must have
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happened :-
(a) the petitioner's case of being in possession of the original
lodgment receipt is false or
(b) the petitioner has suppressed how it gave up/lost possession
of the original lodgment receipt.
12.6 He submitted that ARCL and its predecessor in interest are
guilty of gross neglect under Section 78 of the Transfer of
Property Act. He submitted that there is no merit in the writ
petition and the same should be dismissed with cost.
13. Mr. Rohit Agarwal, learned counsel appeared on behalf of
the Respondent No.2 and submitted that the subject of the
present writ petition is a inter se dispute between the petitioner
and the respondent no.1. Hence, the writ petition filed under
Articles 226 and 227 of the Constitution of India is not
maintainable. He submitted that the respondent no.2's ownership
and the possessory rights qua the property cannot be decided in
the writ petition arising out of DRAT proceedings in which the
respondent no.2 was never a party. He relied upon the judgment
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of Supreme Court in case of Roshina T. vs. Abdul Azeez K.T. 11. He
also relied upon the judgment of Supreme Court delivered in
Mohan Pandey vs. Usha Rani Rajgaria 12 and in case of Dwarka
Prasad Agarwal vs. B. D. Agarwal 13.
ANALYSIS AND CONCLUSION :-
14. In an equitable mortgage, the borrower can sell the
mortgage property to the third party without knowledge of the
lender as in an equitable mortgage, the mortgage is created by
depositing the title deed with the lender as a security for the loan
amount. Registration is not compulsory for an equitable
mortgage.
15. In the present proceedings, in the first transaction the SBI
had collateral security by way of equitable mortgage by
depositing title deed. However, admittedly, the title deed of the
property was not deposited with the SBI or ARCL being the
assignee. The only document referred by the ARCL was that of
lodgment receipt.
11 (2019) 2 SCC 329
12 (1992) 4 SCC 61
13 (2003) 6 SCC 230
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16. The DRAT has reversed the decree of the DRT based on the
fact that the properties mentioned in the proceedings of PNB and
in the proceedings of ARCL are different. So also, the Court held
that the recovery certificate passed in O.A. No. 29 of 2007 for
recovery of money dated 6th November 2008 passed in
proceedings of PNB recognizing mortgage in favour of PNB.
ARCL challenged the same by way of Miscellaneous Application
No. 31 of 2010 invoking the provisions of Section 19(25) of the
RDDB Act, 1993, thereby seeking modification of the judgment
dated 6th November 2008 contending that the SBI had a prior
mortgage in respect of the same property. The DRT after
considering the arguments of both the sides, accepted the
submissions of ARCL and allowed the Miscellaneous Application
No. 31 of 2010 thereby cancelling the mortgage decree granted
in favour of PNB.
17. It is a matter of record that against the decree passed by
the Tribunal in Original Application No. 29 of 2007, no appeal
was preferred.
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18. So also, it is not in dispute that in ARCL (erstwhile SBI)
while granting loan, the original title deed was not deposited. So
also, it is not disputed that in the said mortgage proceedings, the
title deeds were never submitted only on the basis of lodgment
receipt, the loan was sanctioned and disbursed. So also, it is the
case of PNB that even the original lodgment receipt has not been
tendered in this Court, and the only argument in that regard is
that the original lodgment receipt has been lost. As regards the
loan sanctioned by PNB, the original title deeds was submitted to
them and on the basis of the original title deed, an equitable
mortgage was created.
19. PNB has also raised the issue about the properties being
different as mentioned in the loan sanctioned by the PNB and in
the loan sanctioned by ARCL (erstwhile SBI). It has been stated
that in the proceedings filed by the SBI, being Original
Application No. 131 of 2006 in the order dated 5th March 2007
passed by the Tribunal, the properties described is that "NA
Land" admeasuring 6422 sq.yards being Survey No. 39/2(P) and
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land admeasuring 5078 sq. yards both being in 39/2(P).
20. The SBI after passing of the judgment and order dated 5 th
March, 2007 by the Tribunal filed a review application being
Application No. 7 of 2009 seeking the amendment to the
description of the property. The said amendment was allowed on
the same day of the filing. By a subsequent order dated 14th
November 2008, recovery certificate was passed pertaining to
land bearing no.44, Hissa No. 5/1 and Survey No. 44, Hissa No.
10/1, admeasuring 31 acre and 6 ½ acre respectively. There is
no reference under which provisions of law such an amendment
was allowed, when the PNB was not a party, and the borrower
therein has not appeared.
21. The borrower had authorized SBI to collect the original
title deed from the Sub-Registrar's office. However, it has not
come on record what steps were taken by the SBI in order to
obtain the original title deeds. Nothing has come on record what
steps were taken for collecting the documents from the Sub-
Registrar's office. This according to us appears to be a clear case
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of lack of diligence.
22. In the Indian Bank (Supra) the Court held that the Indian
Bank in its apparent hurry to enter into the transaction had
omitted to take precautions and because of such negligence, the
owner of the property induced Punjab National Bank to advanced
loan by creating equitable mortgage by deposite of original title
deeds. Therefore, Appellate court has rightly applied law to
derive conclusion that time the Indian Bank had not taken a
proper care. Paragraph Nos. 12 and 13 of the said judgment
reads as under :-
"12. In the present case, there is no dispute that the owner
claims title by virtue of a sale deed of the year 1935 and a
subsequent registered Will. However, at the time of creation
of the equitable mortgage, dated 10.5.1989, the Indian Bank
does not appear to have acted in a manner expected of a
man of ordinary prudence. It is no doubt true that about two
months after creation of such equitable mortgage, the Indian
Bank had obtained an affidavit from the original owner that
the original title deeds were lost. This, however, instead of
fortifying the case of the Indian Bank on the question of
negligence, in our opinion, it would only be a circumstance
to prove that at the time of creation of equitable mortgage,
the Indian Bank had not acted prudently as would have been
expected from a Nationalised Bank.
13. If the original owner had stated at the beginning that
original title deeds were lost, in normal circumstances, a
Bank would be expected to make certain verification or even
require the intending borrower to publish adequate notice.
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Moreover, the fact that the affidavit was taken two months
after would only indicate that at the initial stage no query
was made regarding the absence of original title deeds.
Otherwise, under such normal circumstances, one would have
expected that the Bank would obtain an affidavit on the date
of transaction itself. From the facts and circumstances of the
case, it is apparent that the Indian Bank in its apparent hurry
to enter into the transaction, had omitted to take minimum
precaution and because of such negligence on the part of the
Indian Bank, the owner of the property was subsequently able
to induce Punjab National Bank to advance loan by creating
equitable mortgage by deposit of original title deeds. This is
precisely the conclusion of the Appellate Tribunal. Whether
there was gross negligence on the part of the Indian Bank was
essentially a mixed question of fact and law. It cannot be said
that the Appellate Tribunal has misapplied the law. If the
Appellate Tribunal, on the basis of the facts and
circumstances of the case, has come to a factual conclusion
can it be said that there was an error of law apparent on the
face of record requiring interference by the High Court in
exercise of jurisdiction under Article 226/227 of the
Constitution of India."
23. In the case of Sham (supra) that facts where First
mortgagee (second defendant) allowed title deeds to remain with
mortgagor - Mortgagor used these deeds to obtain subsequent
loan from plaintiff company - Second defendant's explanation for
not possessing title deeds deemed incredible by court. The main
issue was whether a first mortgagee (second defendant) should
be postponed to a second mortgagee (plaintiff company) due to
gross negligence in allowing the title deeds to remain in the
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possession of the mortgagor, which enabled the mortgagor to
obtain a subsequent loan from the plaintiff company? The
Madras High Court confirmed the lower court's decision in
Madras Building company v. Rowlandson & Anr. and dismissed
the appeal, ruling in favour of the plaintiff company. The Court
held that the second defendant (first mortgagee) should be
postponed to the plaintiff company's mortgage due to gross
negligence in allowing the title deeds to be out of his possession,
thereby enabling the mortgagor to fraudulently obtain a loan
from the plaintiff company. The Court based its decision on
several key points. Firstly, it interpreted Section 78 of the
Transfer of Property Act to mean that gross neglect alone, apart
from fraud, could be a reason for postponement of the prior
mortgagee. The Court found the second defendant's explanation
for not possessing the title deeds for 4 years lost his priority by
reason of his gross neglect under S. 78, given his experience as a
sowcar. The Court rejected the argument that registration of the
first mortgage amounted to legal notice, holding that registration
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is not of itself notice to subsequent purchasers and mortgagees.
The court also considered but ultimately rejected the argument
that the plaintiff company was guilty of gross negligence in not
searching the registration office.
24. The judgments/orders referred of different High Courts are
based upon the facts of those cases and they are distinguishable
on facts of the present proceedings.
25. In view of the above facts, the Appellate Court had rightly
allowed the appeal by setting aside the impugned judgment and
order dated 9th January, 2012 passed in Miscellaneous
Application No. 31 of 2010.
26. We find no merit in the present writ petition and the same
requires to be dismissed.
27. Writ petition is accordingly dismissed. No costs.
28. It is further clarified that ARCL is free to take such steps for
recovering its dues from the borrowers/guarantors, as per law.
[ RAJESH S. PATIL, J. ] [ A.S. CHANDURKAR, J. ]
