S 171 Contract Act - Bank Can't Retain Title Documents After Repayment Of Loan Citing Pendency Of Another Loan : Bombay High Court

The bench partly-allowed a borrower's writ petition and directed Union Bank of India to handover title documents of his flat despite recovery proceedings, for another unpaid loan by the petition's company, pending before the DRT.

A division bench of Justice AS Chandurkar and Urmila Joshi Phalke observed that the bank's general lien on security (title document) under section 171 of the Indian Contracts Act, wouldn't apply after closure of the loan account.

This is because a general lien is impermissible in the absence of a contract. And closure of the loan account ends the contract, as well as, the bank-customer relationship.

The Court observed :

"...the material on record shows that the petitioner has cleared the entire dues in respect of loan which was obtained by him in his individual capacity to purchase the flat. The said loan transaction came to an end, therefore, the relationship of the banker and customer between the petitioner and the respondent in respect of the concerned loan account came to an end as he has repaid the amount. The relationship of banker and customer could not have been continued when the petitioner has repaid the amount on 31/05/2021 as the entire loan account is satisfied. The said transaction has been completed and there is no further relationship between the petitioner and the Bank as a banker and customer. In such circumstances, the contention of the respondent-Bank that it was exercising the right of general lien under Section 171 of the said Act is not sustainable"

"Act of the bank is not justifiable. Hence, for the reasons recorded we have no hesitation to hold that the respondent-Bank has no right of general lien over the Title Deeds deposited by the petitioner after the entire loan amount was fully satisfied by the petitioner," the court observed.

Case

The petitioner had borrowed Rs 21 lakhs from the bank payable in 300 instalments in 2011, and kept his flat as security. Subsequently, a company in which he was a director and personal guarantor had also taken a loan from the same bank. However, the company went into liquidation.

Due to financial crisis he decided to sell the flat and repay his personal loan and sought the bank's NOC for the same. After selling the flat, the borrower closed his personal loan account, but the bank refused to return his flat's title documents, which were meant to be handed over to the new flat purchaser.

Bank employees claimed they did not have permission from their superiors to release the documents, forcing the borrower to approached the Bombay High Court.

Before the court, the bank claimed that borrower should have approached the DRT. Moreover, the bank had also approached the DRT and for attachment of the petitioner's property regarding the second loan in which he is a guarantor.

The bank said it was justified in applying the general lien clause u/s 171 of the Contracts Act and retaining the title documents for the DRT proceedings.

However, the bench disagreed. The bench said that the petitioner had cleared all his dues for the personal loan he had taken to purchase the flat. Through this, the loan transaction came to an end, therefore, the relationship of the banker and customer between the petitioner and the respondent in respect of the concerned loan account, had ended.

"In such circumstances, the contention of the respondent-Bank that it was exercising the right of general lien under Section 171 of the said Act is not sustainable," the court observed.

It, however, held that the bank was free to pursue its case before the Debt Recovery Tribunal but must release the petitioner's flat's title deeds handed over 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 customer. It is further clear from the pleadings that the Title Deed of the property in question was handed over to the respondent-Bank as a security. Admittedly, said loan amount is repaid by the petitioner. Though the respondent-Bank has submitted that there is another loan account against the petitioner and Bank has already moved an application to the Debt Recovery Tribunal for obtaining necessary orders, Bank is at liberty to move against the petitioner and other Directors to recover the said loan amount. Admittedly, said security was given against the loan amount which was already satisfied by the petitioner. In such a situation, it is not open for the respondent- Bank to continue to exercise its general lien for the security deposited with it especially when the entire amount was repaid. Such a general lien is not being exercised for a general balance of account as required under Section 171 of the said Act. Moreover, it would not be open for the Bank to exercise its right of general lien for the securities on the pretext of the banker and customer relationship. It cannot exercise such general lien under Section 171 of the said Act thus, there is no justification on the part of the respondent-Bank to retain the said documents by relying upon the provisions of Section 171 of the said Act"

Case Title : Mr. Sunil v Union Bank of India

Citation: 2022 LiveLaw (Bom) 227

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