Kerala High Court: Bank Cannot Retain Title Deed for Unrelated Debt Once Secured Loan is Cleared

Kochi: The High Court of Kerala, in a significant ruling, has held that a bank cannot retain a title deed furnished as security for a specific loan once that loan is fully repaid, even if the guarantor has other alleged liabilities or connections to separate outstanding debts for which the said deed was not explicitly mortgaged. Justice Harisankar V. Menon emphasized that a mortgage is specific to the loan it secures and cannot be unilaterally extended by the bank to cover other dues without a formal agreement.

The decision came in a writ petition filed by M/S INKEL LTD. seeking the return of original sale deed No.701/2014 of Koothattukulam SRO from The Federal Bank Limited.

Case Background

M/S INKEL LTD. (petitioner) had stood as a corporate guarantor for a Rs. 24 Crore credit facility obtained by "Seguro - INKEL Consortium LLP" (an LLP where INKEL was a partner) from The Federal Bank Limited (respondent). For this guarantee, INKEL mortgaged its property covered by the aforementioned sale deed.

The LLP defaulted, leading the bank to file O.A.No.158 of 2021 before the Debt Recovery Tribunal-I, Ernakulam (DRT) for Rs. 2,70,65,555.78. INKEL LTD. subsequently remitted the entire amount, and the bank issued a clearance certificate on August 11, 2022, confirming the account closure. Following this, INKEL requested the return of its title deed and a No Objection Certificate.

However, the bank refused to return the deed. It cited separate proceedings (O.A.No.149 of 2021) initiated against M/s.Seguro Foundations and Structures Pvt. Limited (a private company, distinct from the LLP) for its independent credit facilities. The bank had impleaded INKEL LTD. as the 5th defendant in this second O.A., arguing that INKEL, as a purported holding company, was liable as a guarantor by "conduct and representations," despite not having formally executed a guarantee agreement for this specific loan with the mortgaged property.

Arguments Presented

Petitioner (M/S INKEL LTD.): Argued that the mortgage was exclusively for the LLP's loan, which was fully cleared. Therefore, the bank had no legal right to retain the title deed for an entirely different loan availed by another entity, for which no mortgage using this specific deed was created.

Respondent (The Federal Bank Limited): Firstly, challenged the maintainability of the writ petition, citing precedents. Secondly, contended that INKEL's conduct, representations, and alleged control over the private company justified proceeding against the mortgaged property for the private company's dues, even without a formal mortgage agreement linking this specific deed to that loan. The bank also pointed out that the title deed was currently filed before the DRT in the second O.A.

High Court's Analysis and Ruling

The High Court meticulously examined the contentions and legal precedents.

Maintainability of Writ Petition Affirmed: Justice Menon distinguished the cases cited by the bank ( Federal Bank Ltd. v. Sagar Thomas , K.K.Saksena v. International Commission on Irrigation and Drainage , and Sleebachan Y. v. State of Kerala ), noting they primarily dealt with service disputes or solvency certificates, not the public duty of a bank concerning the return of security. Instead, the Court relied on the Supreme Court's decision in Zonal Manager, Central Bank of India v. Devi Ispat Limited and Others [(2010) 11 SCC 186] , which held that a writ petition against a public sector bank for the return of title deeds after settlement of dues is maintainable.

Specificity of Mortgage is Paramount: The core of the judgment rested on the nature of the mortgage. The Court observed:

"Admittedly, the petitioner has created a mortgage as against the property covered by sale deed No.701/2014 of Koothattukulam SRO with respect to the credit facility availed by LLP alone. The fact that the petitioner has not created any similar mortgage with respect to the credit facility extended to the Private Limited Company is also admitted by the 1st respondent herein. In such a situation, I am of the opinion that the petitioner is entitled to get back the document in question and the 1st respondent is not justified in seeking to proceed against the afore property even when there is no mortgage created."

The Court found the bank's argument regarding INKEL's "conduct/representation" for the private company's loan insufficient to create a charge on the property in question without a formal mortgage under the Transfer of Property Act, 1882. A mere undertaking to consider a corporate guarantee, which did not materialize into an executed mortgage agreement for this deed, was deemed irrelevant.

Limits of Banker's Lien: Supporting its stance, the Court referred to a Madras High Court (Madurai Bench) judgment in M.Shanti v. Bank of Baroda , which held:

“Hence this Court is of the firm view that the respondent bank cannot exercise right of lien to secure any other liabilities of the mortgagor by retaining the documents of the mortgagor or guarantor, which are deposited with an intention to secure a particular loan transaction. … It is doubtful, whether in exercise of such right to retain the title deeds the mortgagee can bring the property for sale for recovery of some debt which is due from the mortgagor, in connection with a different transaction, which is not covered by the mortgage.”

Final Directions

The High Court concluded that INKEL LTD. was justified in seeking the return of its title deed. However, as the document was currently with the DRT in connection with O.A.No.149 of 2021, the Court directed:

1. The petitioner (INKEL LTD.) to file an appropriate application before the DRT, Ernakulam, seeking the return of sale deed No.701/2014.

2. The DRT, Ernakulam, to consider such an application and pass appropriate orders, taking into account the principles laid down in this judgment.

The Court also recorded the submission by INKEL's counsel that the company would not encumber or alienate the property covered by the said title deed until the final disposal of O.A.No.149 of 2021 by the DRT.