Borrower Is Entitled To Expect Bank To Safeguard And Return Title Documents After Repaying Loan: Bombay High Court

The Bombay High Court has recently ruled that a borrower who has fully repaid a loan is entitled to assume that a bank or financial institution entrusted with original title documents will preserve them properly.

It must also return the documents after the secured liability is discharged.

"In our view, a borrower who has fully discharged the loan is entitled to proceed on the legitimate assumption that the Bank or a Financial Institution entrusted with the custody of valuable original title documents, will maintain proper custody of those documents and return them upon discharge of the secured liability," a division bench of Acting Chief Justice Ravindra V. Ghuge and Justice Gautam A. Ankhad observed.

The bench added that the responsibility for preserving, identifying, retrieving, and returning such documents rests solely with the bank. It cannot be shifted to the borrower merely because the borrower did not immediately ask for their return.

Allowing a writ petition filed by In Vogue Creations, the court directed State Bank of India to pay compensation of ₹5,000 per day from December 1, 2023. The ₹1 lakh already deposited will be adjusted against the compensation payable.

The compensation will continue until the bank provides certified copies of the documents for both properties. It must also reconstruct the title record, including the necessary supporting documents. The entire exercise must be completed within 12 weeks.

The dispute concerned original title documents deposited with the bank as security for loan facilities. Documents relating to the first property were deposited on July 26, 1979. The lease deed relating to the second property was also deposited with the same branch as security for the credit facilities.

The loan facilities were fully repaid on August 28, 2003. The bank thereafter had no claim or mortgage over the properties. However, the original title documents were not returned to the borrower.

In December 2023, the bank acknowledged that it could not locate the title documents for the two properties. It again confirmed in March 2024 that the originals could not be traced.

The borrower then sought compensation under the Reserve Bank of India's September 13, 2023 Circular on the release of property documents after a loan is repaid. The bank opposed the claim, arguing that the Circular could not apply retrospectively since the loan had been repaid in 2003.

The bank also pointed to the steps it had taken after the documents went missing, including lodging an FIR, publishing newspaper advertisements and obtaining copies from MIDC. However, the court observed that these steps could mitigate the consequences of the loss but did not erase the bank's primary default.

It directed the bank to obtain duplicate or certified copies of the lost documents and complete the reconstructed title record. This must include the necessary supporting documents required to establish the borrower's title.

The Reserve Bank of India Circular requires regulated lenders to release original property documents within 30 days after a loan is fully repaid or settled. Where a delay is attributable to the lender, it must compensate the borrower at ₹5,000 for each day of delay.

Where the original documents are lost or damaged, the Circular also requires the lender to assist the borrower in obtaining duplicate or certified copies. The lender must bear the associated costs. In such cases, it gets an additional 30 days to complete the process. The delay penalty is then calculated after a total of 60 days.

The court observed that the bank had not complied with the requirements under the Circular concerning the release of the documents.

It noted,"Neither of these two conditions have been complied with by the Respondent in the present case. Clauses 6 to 8 of the Circular then provide for compensation for delay in releasing of title documents..."

The bench agreed with the bank to the limited extent that the Circular could not be applied retrospectively from 2003. The Circular applies to cases where the release of original property documents fell due on or after December 1, 2023. Compensation at the prescribed rate would therefore run from that date, the court ruled.

The court also rejected the bank's argument that the ₹1 lakh deposited following the Banking Ombudsman's advisory exhausted the borrower's remedy. It observed that the Ombudsman's proceedings and the writ petition operated in different fields. The amount deposited did not alter the nature or extent of the bank's liability. It will be adjusted against the compensation payable under the order

For Petitioner: Advocates A. M. Saraogi a/w Prajot H. Jaggi, Prashant J. Rai and Amrita Singh

For Respondent: Advocates Bidan Chandran a/w Nukshinaro i/b M.V. Kini and Co.