Bank Cannot Enforce Mortgage After Underlying Sale Deed Held Void, DRAT Kolkata Sets Aside DRT Hyderabad Order

The Debts Recovery Appellate Tribunal (DRAT) at Kolkata has recently set aside an order of the Debts Recovery Tribunal-II, Hyderabad, which had dismissed a securitisation challenge filed by subsequent purchaser Mirza Sardar Baig, ruling that Indian Overseas Bank could not enforce a mortgage based on an earlier sale deed that was later declared null and void by a civil court.

The Appellate Tribunal held that the bank could not enforce any security interest once the sale deed on the basis of which the mortgage had been created had already been declared null and void by a civil court.

Mirza Sardar Baig had filed a securitisation application challenging the possession notice dated May 9, 2018, issued by Indian Overseas Bank under Section 13(4) of the SARFAESI Act. The Hyderabad DRT dismissed his application, following which he filed the present appeal before the Appellate Tribunal.

Allowing the appeal, Chairperson Justice Anil Kumar Srivastava observed that the bank's claim could not survive after the civil court decree invalidating the earlier transfer of the property.

“All the effect of the decree of the Civil Court would be that, when the deed, whereby the mortgage was created in favour of the bank, itself has been declared null and void, then no right in favour of the bank exists.”

The dispute relates to a residential property forming part of a housing complex developed on land originally owned by Shameem Begum, who had entered into a development agreement with a builder. After her death in 2015, the property devolved upon her husband, four sons, and five daughters as her legal heirs.

In 2016, one of the heirs, Mohammad Chand, who held only a one-tenth share, executed a sale deed in favour of Akula Amma Rao. On the strength of that transaction, the borrower created a mortgage over the property in favour of Indian Overseas Bank to secure a loan.

The transaction was later disputed within the family, and Mohammad Moinuddin, father of Mohammad Chand, filed a civil suit seeking a declaration that the sale deed executed in 2016 was invalid and that the property could not have been mortgaged in favour of the bank.

Subsequently, all ten legal heirs of Shameem Begum executed a registered sale deed dated January 29, 2018 in favour of Mirza Sardar Baig for Rs 97.92 lakh. In the civil suit, the court passed an ex-parte decree declaring the 2016 sale deed null and void. The bank had been impleaded as a defendant in that suit but did not appear, and no application was filed to set aside the decree.

The bank had issued a possession notice dated May 9, 2018, under Section 13(4) of the SARFAESI Act treating the property as a secured asset. Baig challenged the action before the Debts Recovery Tribunal-II, Hyderabad, under Section 17 of the Act, contending that once the earlier sale had been declared void, the mortgage created on its basis could not survive.

The Tribunal dismissed the application, observing that the case raised disputed questions of title and allegations of fraud, issues which it said could not be examined in proceedings under the SARFAESI Act.

Before the Appellate Tribunal, Baig maintained that his title flowed from a registered sale deed executed by all the legal heirs of Shameem Begum, and that the civil court had already declared the earlier sale void, leaving no basis for the bank to claim a mortgage over the property. He also pointed to an FIR lodged by the bank itself alleging fraud in the earlier transaction, arguing that the bank could not rely on a transaction which it had treated as fraudulent.

The bank resisted the appeal, arguing that Baig could not be treated as a bona fide purchaser since he had not verified the earlier transfer of the property before buying it. It further contended that the mortgage in its favour had been created earlier in time, and that the civil court proceedings had not directly determined the validity of the mortgage.

Rejecting the bank's stand, the Appellate Tribunal held that the civil court decree declaring the earlier sale deed null and void had attained finality and was binding on the parties, including the bank. Once the very document through which title had been conveyed to the borrower stood invalidated, the mortgage created on that basis could not continue.

The Tribunal further observed:

“Earlier deed executed by Chand Mohammad in favour of Respondent No. 2 & 3 has already been declared null and void. Accordingly, now the deed executed by the legal heirs of the Shrimati Shameem Begum becomes a valid document which is legally admissible. Accordingly, bank now can't claim any right over the secured assets on the basis of a document which is not in existence now.”

Holding that the Hyderabad DRT had wrongly declined relief, the Appellate Tribunal allowed the appeal, set aside the order dated September 18, 2024, and quashed the possession notice issued by the bank. The Tribunal clarified, however, that the bank would be at liberty to initiate proceedings to recover its dues in accordance with law.