Validity of Mortgage Depends on Borrower’s Intention; Subsequent Sale Cannot Defeat Secured Creditor’s First Charge under SARFAESI Act
- REEDLAW
- 4 hours ago
- 3 min read
The REEDLAW Legal News Network reports: In a pivotal ruling, the Appellate Tribunal examined whether a secured creditor’s enforcement action under the SARFAESI Act could be invalidated merely because the title deed deposited by the borrower was subsequently found to be forged. Addressing the intersection of mortgage law and statutory enforcement, the Tribunal reaffirmed that the decisive factor in the creation of a valid mortgage is the borrower’s intention to create security, and not the mere physical deposit of an authentic title deed.
The Debts Recovery Appellate Tribunal (DRAT), Allahabad Bench presided over by Justice R.D. Khare held that once a mortgage and first charge stood created in favour of the secured creditor, any subsequent transfer of the secured asset during the subsistence of the mortgage was legally ineffective. Setting aside the order of the Tribunal below, the Appellate Tribunal restored the secured creditor’s enforcement rights under the SARFAESI Act, holding that the deposit of a genuine title deed was not a condition precedent for the creation of a valid mortgage where the borrower’s intention to secure the loan was clearly established.
The Appellant Bank had granted a housing loan to the borrowers, which was secured by creation of a mortgage over the subject property. The borrowers subsequently transferred the mortgaged property to a third party purchaser during the subsistence of the mortgage. Upon default in repayment, the loan account was classified as a non-performing asset, following which statutory measures under the SARFAESI Act were initiated, including issuance of demand notice and taking of symbolic and physical possession.
The purchaser challenged the enforcement proceedings before the Tribunal, contending that the mortgage was invalid on the ground that the title deed deposited with the Bank was forged and fabricated, and that no lawful security interest had been created. The Tribunal accepted this contention and directed restoration of possession to the purchaser.
In appeal, the Appellate Tribunal held that deposit of title deed was not an indispensable condition for creation of a valid mortgage where the surrounding circumstances and execution of loan and security documents clearly demonstrated the borrowers’ intention to create a charge in favour of the secured creditor. It was further held that a transfer effected during the currency of an existing mortgage, without discharge of the first charge, could not confer any enforceable right against the secured creditor. The Appellate Tribunal concluded that the Tribunal below had erred in law by invalidating the mortgage solely on the basis of defective title deeds and accordingly set aside the impugned order, restoring the Bank’s enforcement rights under the SARFAESI Act.
Mr. Krishna Kant Tiwari, Advocate, represented the Appellant Bank.
Mr. Ankur Goyal, Advocate, appeared for the Respondent No. 1.
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