Oral Evidence Admissible To Prove Sham Transaction Despite Registered Deed; Mortgage Invalidated For Undue Influence & Lack of Consideration: Madras High Court - 2025-09-01

Madras High Court Voids Mortgage and Sale Agreement, Cites “Undue Influence” in Sham Transaction

Chennai: In a significant ruling on contractual fairness, the Madras High Court has declared a mortgage deed, a sale agreement, and other related financial instruments null and void, holding that they were executed under "undue influence" and constituted a sham transaction. Justice C.V. Karthikeyan decreed the suit in favour of two brothers, Prashanth and Dushyanth Krishna Singh, against moneylender G.C. Bohra Finance and its partners. The court found that despite the formal registration of documents, no actual consideration was passed to the borrowers, a fact evidenced by suspicious same-day bank transactions.

Case Background

The case was initiated by Prashanth and Dushyanth Singh against G.C. Bohra Finance, G.C. Bohra, and his son, Rohit Bohra. The plaintiffs, facing financial distress, sought a loan from the defendants, with whom the younger brother had a prior acquaintance through his classmate, Rohit Bohra.

The plaintiffs alleged that what began as a small loan escalated into a predatory scheme. They were coerced into signing a series of documents, including a registered mortgage deed for ₹20 lakhs, a memorandum of deposit of title deeds for another ₹20 lakhs, an agreement to sell their valuable Chennai flat for ₹1.22 crores, a general power of attorney, and several blank cheques, promissory notes, and stamp papers.

Arguments of the Parties

Plaintiffs' Arguments:

- Mr. R. Thiagarajan, counsel for the plaintiffs, argued that his clients were gullible and financially vulnerable. The defendants, experienced moneylenders, took advantage of their situation.

- He contended that the series of documents executed on August 6, 2009, were sham and nominal, created to usurp the plaintiffs' property.

- Crucially, he pointed to bank statements (Ex.P9) showing that while ₹40 lakhs was credited to the first plaintiff's newly opened bank account, the entire amount was withdrawn on the same and subsequent day. This, he argued, proved that no consideration was ever truly paid, and the transactions were a mere facade.

Defendants' Arguments:

- Mr. A. Thiyagarajan, Senior Counsel for the defendants, countered that the plaintiffs had borrowed a total of ₹40 lakhs and had voluntarily executed the mortgage deed and other documents as security.

- He asserted that the payments were made via cheque, and the documents were lawfully executed with the plaintiffs' full knowledge and consent.

- The defendants denied any fraud or coercion, stating that the plaintiffs had failed to repay any amount towards the principal or interest and filed the suit only after receiving a legal notice.

Legal Principles Applied by the Court

The court's decision hinged on the doctrine of "undue influence" under Section 16 of the Indian Contract Act, 1872, and the admissibility of oral evidence to invalidate a written contract under the proviso to Section 92 of the Indian Evidence Act, 1872.

The court observed that a fiduciary relationship or a situation of dominance existed, placing the burden on the defendants to prove that the transaction was fair and not induced by their dominant position. Justice Karthikeyan noted, "As between the plaintiffs on the one hand and the defendants on the other hand, the defendants were in a position to exert influence. The plaintiffs had no option but to submit such influence."

Citing the precedent in M.A. Abdul Malick Saheb v. T.P. Muhammad Yousuf Sahib (AIR 1961 Madras 190), the court held that when a presumption of undue influence is raised, the transaction is deemed invalid unless rebutted by "cogent evidence adduced by the donee."

Pivotal Excerpts and Court's Reasoning

The court found the plaintiffs' evidence, particularly the bank statement, to be compelling proof of a sham transaction. The judgment highlighted the unusual nature of the financial entries:

"That fact is established by the extremely strange entries found in Ex.P9 of both deposit and withdrawal of a huge sum of Rs.40/- lakhs in just two days... The account was opened on 10.08.2009 and there were no further transactions after 11.08.2009... The presumption is strong that it had been withdrawn only at the behest of the defendants."

The court further relied on the Supreme Court's decision in Smt. Gangabai v. Smt. Chhabubai , which held that the bar on parol evidence under Section 92 of the Evidence Act does not apply when a party alleges that a document was a sham and never intended to be acted upon.

Based on this, the court concluded that no consideration had flowed from the defendants to the plaintiffs under the mortgage or the memorandum of deposit of title deeds. The agreement of sale was also deemed fraudulent, noting that the defendants failed to prove the payment of the alleged sale consideration of ₹1.22 crores.

Final Decision and Implications

The Madras High Court decreed the suit in its entirety in favour of the plaintiffs. The court declared:

1. The Mortgage Deed, Memorandum of Deposit of Title Deeds, and Agreement of Sale are illegal, invalid, and not binding on the plaintiffs.

2. A permanent injunction was granted restraining the defendants from enforcing any rights based on the impugned documents.

3. A mandatory injunction was issued directing the defendants to return all original documents, including blank cheques and promissory notes, within two weeks.

This judgment serves as a strong reminder that courts will look beyond the formal execution of documents to uncover the true nature of a transaction, especially where one party is in a position to dominate the will of another. It underscores that the absence of genuine consideration, evidenced by manipulative financial entries, can be a key factor in invalidating seemingly legitimate contracts.