2026 Supreme(Online)(DRAT) 287

DEBT RECOVERY APPELLATE TRIBUNAL
Shri G. CHANDRASEKHARAN
A O Axis Bank Ltd – Appellant
Versus
Mr H Ramkumar ors – Respondent
11045/2018

A mortgage created through a power of attorney is invalid if the original power of attorney is not produced and its execution is disputed; the transaction's commercial improbability indicates fraud.

Headnote:(A) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) - Section 13(4) - Possession Notice - Validity of Mortgage by Deposit of Title Deeds - Registration Act, 1908 - Sections 17, 32, 34 and 60 - Where a mortgage is allegedly created by a power of attorney holder, the original power of attorney must be produced to establish the validity of the agent's authority, especially when the principal disputes its execution; mere registration of the mortgage document without mentioning the power of attorney or producing it is insufficient to create a valid mortgage. (Paras 19, 20)

(B) Contract Act, 1872 - Prudent Person Test - Security/Collateral - It is highly improbable that a prudent person would offer property valued far in excess of a small existing liability to substitute it as collateral for a substantially larger loan taken by unrelated third parties, indicating possible fraud or misrepresentation. (Paras 17, 18, 20, 21)

Facts of the case:
The Appellant Bank filed this appeal against the order of the DRT-II, Chennai, which set aside a Possession Notice dated 15.05.2017 under Section 13(4) of the SARFAESI Act. The 1st Respondent challenged the notice, claiming that his parents (Respondents 5 and 6) had only a life interest in the property under a Will, and that the property was fraudulently offered as collateral security for a loan of Rs. 10 Crores taken by Respondent No. 2 (a company) to settle a loan of only Rs. 60 Lakhs owed to another bank. The 1st Respondent disputed his signatures on loan documents and denied executing any Power of Attorney in favor of his father (Respondent No. 5). The Bank claimed that the Respondents 1, 5, and 6 voluntarily created a valid equitable mortgage by deposit of title deeds. Criminal complaints were filed by the Respondents alleging fraud by the Bank officials and directors of Respondent No. 2.

Findings of Court:
The Appellate Tribunal found that while the 1st Respondent may have signed some documents on 24.08.2013, this did not create a valid mortgage. The registered Memorandum of Deposit of Title Deeds dated 27.08.2013 was signed by Respondent No. 5 as a power agent for the 1st Respondent, but the Bank failed to produce the Power of Attorney deed, and the mortgage document did not mention it. In the absence of the original power of attorney and given the highly improbable commercial rationale, the court held that no valid mortgage was created. The court affirmed that a prudent person would not offer their property as collateral for a Rs. 10 Crores loan to settle a Rs. 60 Lakhs debt of an unrelated third party, concluding that the Respondents were duped.

Issues: The main issues were whether a valid mortgage by deposit of title deeds was created without producing the original power of attorney, and whether the bank’s action under SARFAESI was justified.

Ratio Decidendi: The court ruled that for a mortgage created through a power of attorney to be valid, the original power of attorney must be produced or its details mentioned in the mortgage document, particularly when its execution is disputed. The court also applied the prudent person test to infer that the transaction was likely procured by fraud or misrepresentation, thereby invalidating the security interest. Result : Appeal dismissed. Order of DRT-II, Chennai, affirmed. Parties to bear their own costs.

Table of Content
1. appeal against drt order setting aside possession notice. (Para 1)
2. appellant bank's arguments on validity of mortgage and power of attorney. (Para 2)
3. respondents' arguments disputing mortgage and power of attorney. (Para 3 , 4)
4. court's analysis of facts, documents, and credibility issues. (Para 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21)
5. appeal dismissed; drt order affirmed. (Para 22)

O R D E R

1. This Appeal is filed challenging the order of Learned Presiding Officer, DRT-II, Chennai, in SA 134/2017 dated 03.09.2018.

1.1 SA 134/2017 was filed by 1^st Respondent herein challenging the Possession Notice dated 15.05.2017. After the contest, the SA was allowed with exemplary costs of Rs.25,000/- imposed on the Appellant Bank. Aggrieved by the said order, this Appeal is filed by the Bank.

2. Learned Counsel for Appellant Bank submitted that the Learned Presiding Officer, DRT-II, Chennai, allowed the SA and aside the Possession Notice dated 15.05.2017, on the following grounds:

i. Security interest was created in respect of the property in which the Respondent Nos. 5 and 6 have only a limited interest. This is against the terms of the Will;

ii. They can raise loan with Banks only for the purpose of business or construction of building. Loan cannot be taken for a different purpose.

iii. The mortgage by Deposit of Title Deeds was executed by Respondent No.5 in his individual capacity and as a power agent of Respondent No.1; however, the Tribunal below found that when the Respondent No.1 disputed the execution of the power of attorney, the claim of execution of mortgage by Deposit of Title Deeds by a Power of Attorney deed, cannot be accepted, more so, when the Power of Attorney is not produced before the Tribunal; and iv. The liability was taken over by the Appellant Bank from M/s. SBI, Palani Branch.

2.1 Learned Counsel for Appellant Bank further submitted that as per the Will dated 22.09.1993, the Respondent Nos. 5 and 6 have been given life interest in respect of the mortgaged property. However, a limited power was given to Respondent No.5 to avail loan and create mortgage for any construction and for development of the business/Schedule property. An absolute interest was given to 1^st Respondent. When a person having an absolute interest over the property along with a person having limited interest of enjoyment over the property, had joined together and execute the loan documents, it is legally permissible. Therefore, the findings of the Learned Presiding Officer in this regard in not correct.

2.2 The Memorandum of Deposit of Title Deeds was executed on 27.08.2013 by Respondents 1, 5 and 6, wherein the Respondent No. 5 has clearly stated that he is executing the document in his individual capacity and as a power agent of Respondent No.1. Respondent No.6 has also joined in the execution of said document. There is a specific mention in the document that Respondent No.5 namely Shri Hariharan executed the document for himself and as power agent for his son Mr. Ramkumar, the Respondent No.1. Prior to the execution of the Memorandum of Agreement Evidencing Deposit of Title Deeds on 27.08.2013, the Respondent Nos.1, 5 and 6, had executed the acknowledgement of the receipt of sanction letter dated 24.06.2013. They had executed the Deed of Guarantee dated 24.08.2013, in their individual capacity. Respondent Nos.1, 5 and 6 had also executed the Memorandum of Entry on 24.08.2013, as mortgagors, confirming that the property was offered as collateral security for due repayment to the Bank. All these documents clearly exhibit that the documents were produced for creation of mortgage by deposit of title deeds. Besides these documents, the Respondent Nos.1, 5 and 6 have also executed Declaration cum Confirmation Deed dated 24.08.2013. They also executed Record of Mortgage by Deposit of Title Deeds dated 26.08.2013 with intent to create security thereof in favour of Appellant Bank.

2.3 Learned Cou

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