Case Note & Summary
The appellant, Tamil Nadu Industrial Investment Corporation Limited, a public financial institution, filed an appeal under Order XXXVI Rule 1 of O.S. Rules read with Clause 15 of Letters Patent against the order dated 31.03.2016 passed by a learned Single Judge in O.P.No. 625 of 2010. The appellant had sanctioned a term loan of Rs.5.50 lakhs on 28.08.1995 to the second to fourth respondents for starting a leather garments manufacturing unit, and a further capital term loan of Rs.5.50 lakhs. The second to fourth respondents hypothecated their machineries by deed of hypothecation dated 28.02.1996. The fifth respondent mortgaged his immovable property as security on 28.02.1996 by depositing title deeds, which was confirmed on the same day. The second to fourth respondents executed a deed of guarantee on 28.02.1996 and undertook to repay the loan in 28 quarterly instalments with interest at 17.5% p.a. The appellant contended that the respondents never repaid the loan and removed the machineries. The appellant initially invoked Section 29 of the State Financial Corporation Act, 1951 and took constructive possession, but withdrew the action after the Supreme Court held that Section 29 does not confer power to recover from guarantors' properties. Thereafter, the appellant filed O.P.No. 625 of 2010 under Sections 31 and 31(aa) of the SFC Act seeking a judgment and decree against the respondents. The learned Single Judge allowed the petition against the first to fourth respondents but absolved the fifth and sixth respondents from liability. The appellant challenged that portion of the order. The court considered whether the deposit of title deeds by the fifth respondent created a valid equitable mortgage under Section 58(f) of the Transfer of Property Act, 1882, and whether the fifth and sixth respondents were liable as guarantors under Section 31(aa) of the SFC Act. The court held that the deposit of title deeds constitutes a valid equitable mortgage, and the guarantor is liable under Section 31(aa) of the SFC Act. The court allowed the appeal, set aside the order of the learned Single Judge insofar as it absolved the fifth and sixth respondents, and directed that the Original Petition be restored against them.
Headnote
A) State Financial Corporation Act, 1951 - Section 31(aa) - Guarantor Liability - Equitable Mortgage - The court considered whether a guarantor who deposits title deeds to create an equitable mortgage is liable under Section 31(aa) of the SFC Act. The court held that the deposit of title deeds constitutes a valid mortgage under Section 58(f) of the Transfer of Property Act, 1882, and the guarantor is liable to be proceeded against under Section 31(aa) of the SFC Act. The court allowed the appeal and set aside the order of the learned Single Judge absolving the fifth and sixth respondents from liability. (Paras 1-10) B) Transfer of Property Act, 1882 - Section 58(f) - Equitable Mortgage by Deposit of Title Deeds - The court examined whether the deposit of title deeds by the fifth respondent created a valid equitable mortgage. The court held that the deposit of title deeds, confirmed by a letter, is sufficient to create an equitable mortgage under Section 58(f) of the Transfer of Property Act, 1882, and the guarantor is liable under Section 31(aa) of the SFC Act. (Paras 3-10)
Issue of Consideration
Whether the fifth and sixth respondents, who had deposited title deeds as security for a loan, are liable as guarantors under Section 31(aa) of the State Financial Corporation Act, 1951, despite the absence of a registered mortgage deed.
Final Decision
The court allowed the appeal, set aside the order of the learned Single Judge insofar as it absolved the fifth and sixth respondents from liability, and directed that the Original Petition be restored against them.
Law Points
- Equitable mortgage by deposit of title deeds
- Guarantor liability under State Financial Corporation Act
- 1951
- Section 31(aa) SFC Act
- Section 58(f) Transfer of Property Act
- 1882
- Letters Patent Appeal
- Original Petition under SFC Act
