A bank cannot keep the title deeds to a borrower’s home after a loan is repaid, citing a general lien on the documents, simply because of the expectation of another loan, said the High Bombay Court.
The bench partially cleared a borrower’s writ petition and ordered Union Bank of India to hand over title deeds to his apartment despite collection proceedings, for another unpaid loan by the petition company, pending before the DRT.
A dividing bench of Justice AS Chandurkar and Urmila Joshi Phalke observed that the bank’s general lien on collateral (title deed) under Section 171 of the Indian Contracts Act would not apply after the loan account is closed.
Indeed, a general privilege is inadmissible in the absence of a contract. And the closing of the loan account terminates the contract, as well as the bank-client relationship.
The Court observed:
“…the documents on file show that the applicant has paid in full the debt in respect of the loan which he obtained in his individual capacity to purchase the apartment. The said loan transaction has ended, therefore , the Banker-customer relationship between the Petitioner and the Respondent regarding the relevant loan account ended because he repaid the amount The banker-customer relationship could not have continued when the petitioner repaid the amount on 31/05 2021 as the entire loan account is satisfied.The said transaction has been completed and there is no longer a relationship between the petitioner and the Bank as banker and client In such circumstances, Respondent-Bank’s assertion that it was exercising the right of general lien under Section 171 of the said Act is not enduring.”
“The act of the bank is not justifiable. Therefore, for the reasons recorded, we have no hesitation in considering that the respondent bank has no general lien on the title deeds filed by the petitioner after that the total amount of the loan has been fully satisfied by the petitioner,” observed the court.
The petitioner had borrowed Rs 21 lakhs from the bank payable in 300 installments in 2011, and kept his apartment as collateral. Subsequently, a company of which he was a director and personal guarantor also took out a loan from the same bank. However, the company went into liquidation.
Due to the financial crisis, he decided to sell the apartment and repay his personal loan and requested the NOC from the bank for the same. After selling the apartment, the borrower closed his personal loan account, but the bank refused to return the title deeds to his apartment, which were to be given to the new owner of the apartment.
Bank employees claimed they did not have permission from their superiors to release the documents, forcing the borrower to go to the Bombay High Court.
In court, the bank claimed that the borrower should have approached the DRT. In addition, the bank had also contacted the DRT and the seizure of the petitioner’s property concerning the second loan for which he is guarantor.
The bank said it was justified in enforcing general lien clause u/s 171 of the Contracts Act and retaining the title deeds for the DRT proceeding.
However, the bench disagreed. The bench said the claimant had paid all his dues for the personal loan he had taken out to buy the apartment. With this, the loan transaction came to an end, therefore, the banker and client relationship between the Petitioner and the Respondent with respect to the relevant loan account, had come to an end.
“In such circumstances, the respondent bank’s assertion that it was exercising the right of general lien under Section 171 of the said Act is not tenable,” the court observed.
However, it considered that the bank was free to pursue its case before the Debt Recovery Tribunal but should release the title deeds to the applicant’s apartment given to the bank for the personal loan which had been repaid.
The Court observed:
“Admittedly, there was a relationship between the petitioner and the respondent as banker and client. It also appears from the pleadings that the title deed to the building in question was given to the respondent-Bank as Granted, the said loan amount is repaid by the applicant. Although the Respondent Bank has argued that there is another loan account against the Petitioner and the Bank has already filed an application with the Debt Recovery Court for the necessary orders, the Bank is free to act against the petitioner and other trustees to recover said loan. amount. Admittedly, the said guarantee was given on the amount of the loan which has already been paid by the petitioner. In such a situation, it is not open to the respondent Bank to continue to exercise its general lien on the security deposited with it, especially when the entire amount has been repaid. Such a general lien is not exercised for a general account balance as required by Section 171 of said Act. Moreover, it would not be open to the Bank to exercise its general lien on the securities under the pretext of the banker-client relationship. It cannot exercise such a general privilege under section 171 of the said law, so there is no justification for the respondent bank to keep the said documents in reliance on the provisions of section 171 of the said law”
Case Title: Mr Sunil v Union Bank of India
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