Banks cannot withhold no dues certificate for non-discharge of another loan obtained in a different capacity, rules Madras High Court

The right of the bank to combine the accounts can be exercised if only the loan accounts belong to that of the same person in the same capacity, says the High Court.
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In a significant verdict, the Madras High Court has held that banks cannot withhold title deeds of a movable/ immovable property and refuse to issue no dues certificate even after discharge of the entire loan amount, with interest, just because the principal borrower happened to be a co-borrower/guarantor in another loan, for a different property, that remained undischarged.

Justice D. Bharatha Chakravarthy set aside an order passed by the Banking Ombdusman in favour of IndusInd Bank on March 19, 2024 and directed the latter to issue the no dues certificate as well as the title deeds of a LPG tanker lorry to its owner S. Balaji. He, however, granted liberty to the bank to approach the appropriate forum for attaching the tanker lorry in accordance with law.

The orders were passed while disposing of a writ petition filed by the lorry owner against the order passed by the Banking Ombusman in favour of the bank. Though the Ombudsman, serving under the Reserve Bank of India, too filed a counter affidavit justifying the decision taken by it as well as the bank, the judge refused to take the counter on file since the ombudsman was akin to a tribunal.

“It is a body set up to adjudicate disputes with specific impetus on resolving issues between the customers and the banks. Thus, it is not expected to defend the order passed by it and it is for the second respondent (IndusInd Bank) to defend the same and accordingly, I reject the counter affidavit and this court is not considering any of the contentions raised by the first respondent (Ombdusman) in the counter,” he wrote.

Further, the judge found that the bank was primarily relying upon a clause in the loan agreement which creates a lien for the bank in all other loans taken by the borrower. However, the judge found that the present writ petitioner was a principal borrower with respect to the tanker lorry but not so with respect to the loan obtained for another vehicle in which he was only a co-borrower/guarantor.

“The right of the bank to combine the accounts can be exercised if only the loan accounts belong to that of the same person in the same capacity… A banker’s right of lien cannot be exercised in case the other loan is not by the same person… The repayment of a loan is primarily by the borrower and the liability of the co-borrower is triggered only by the default of the principal borrower,” he said.

In the present case, “it can be seen that the nature of the loan for which the deposit of title deeds was made which is individually by the petitioner Balaji is different from the loan which is granted to the one Leelavathi, in which the said Balaji was shown as a co-borrower,” the judge concluded.