Merely because mortgaged property is transferred, bank can’t withhold documents if loan is repaid: HC

The bank had contended that the petitioner had mortgaged the property and availed two more loans and hence this act was illegal in nature.

A bank cannot retain security documents related to a mortgaged property, if the loan amount has been paid in full, the Kerala High Court has held.

The court said that if the loans amount has been paid in full by the borrower, the ban cannot retain security documents merely because during the time of the mortgage, it was alienated to a third party by the borrower.

because the property was transferred by the petitioner during the subsistence of the mortgage, however the interest of the Bank is protected by closing the loan account, the Bank is not entitled to withhold the security documents on the ground that the petitioner has transferred the property during the subsistence of the mortgage," Justice Shahi P Chaly held.

In the instant case, the petitioner had availed a housing loan from the State Bank of India which was later closed. However when the petitioner asked the bank to release the security documents, including the title deed of the property, the bank refused to do so. The bank in turn told the petitioner that the account was classified as fraud due to the alienation of his property without permission of the Bank and hence legal action was being taken against him. The petitioner then moved the High Court challenging the actions by the bank.

The bank contended that during the subsistence of the mortgage, the petitioner alienated a part of the property, in favour of his wife. The bank said that by concealing the mortgage, a part of the property was also mortgaged to Kanayannur Taluk Co-operative Agriculture and Rural Development Bank and two more loans were availed by the petitioner.

Perusing Sections 58 (Mortgage, mortgagor, mortgagee, mortgage-money and mortgage-deed defined) ,60-A (Obligation to transfer to third party instead of re-transference to mortgagor.) 83 (Power to deposit in Court money due on mortgage) and 91 (Persons who may sue for redemption.) of the transfer of property Act, 1882 the court held that the bank is not entitled to retain the title deed of the petitioner, on account of alienation, when the loan had already been repaid to the bank.

"The Bank is not entitled to adjudicate an issue with respect to the fraud allegedly committed; and merely because the Bank initiates any action, the Bank is not entitled to detain the title documents and other security documents submitted by the petitioner before Bank. This is because the mortgage was created solely for the purpose of securing the loans, which was paid off by the petitioner. Therefore, if at all the bank suffered any loss consequent to the transfer of the property made by the petitioner, it has to be adjudicated by a competent court of law and not by the bank. Therefore, the unilateral action of the bank withholding the security document is an illegal and arbitrary action," Justice Chaly held, while ordering the bank to release the security documents, furnished by the petitioner.