Borrower Can’t Cancel Assignment or Gift Mortgaged Property: Karnataka High Court Slams Fraud, Upholds ARCIL’s Rights

“Unilateral Declarations Based on Fraud Have No Legal Standing” – In a significant and scathing judgment Karnataka High Court dismissed a writ appeal filed by M/s Sridevi Hospital, holding that a borrower cannot "unilaterally cancel a valid registered assignment deed" nor "gift mortgaged property to family members" in an attempt to defeat a secured creditor’s rights. The Division Bench comprising Chief Justice Vibhu Bakhru and Justice C.M. Poonacha upheld a Single Judge’s verdict that had quashed a series of fraudulent registrations and ordered an inquiry into the conduct of the Senior Sub-Registrar.

"These are extraordinary facts that show an egregious abuse of the legal process by the borrower and complicity by public officers," the Court declared. "A person cannot cancel an agreement to which they are not a party."

The Court was dealing with a tangled web of documents—fabricated cancellations, declarations, and gift deeds—executed by the borrower in an attempt to wrest back control of mortgaged property from Asset Reconstruction Company (India) Ltd. (ARCIL), which had acquired the loan from Indian Overseas Bank under a legally registered assignment deed.

“Fraud Dressed as Paperwork” – High Court Unmasks Legal Subterfuge by Borrower and Family

The origin of the case lies in a 2010 assignment where Indian Overseas Bank, after declaring the loan a non-performing asset, transferred the borrower’s account—including the mortgaged 1.46-acre property in Peenya, Bengaluru—to ARCIL. This assignment was duly registered and acknowledged. When the borrower defaulted again, ARCIL invoked its rights under the SARFAESI Act, issued statutory notices, and took possession of the property in 2013.

But what followed was a “blatant misuse of the registration machinery,” as the Court noted. The borrower, Dr. Senthilnathan, proceeded to register:

• A deed of declaration unilaterally declaring the ARCIL assignment “null and void”
• A deed of cancellation of the same assignment agreement
• A gift deed transferring the mortgaged land to his daughter, who in turn transferred it to her brother, before signing an MoU with a third party.

All these documents were registered by the Sub-Registrar, Peenya, without any notice to ARCIL, the affected party.

"The declaration was 58 pages long—filled with quotes from Supreme Court judgments—and ends with the borrower proclaiming ARCIL’s assignment void due to fraud. This was not just legally untenable; it was audacious," the Court noted.

“Sub-Registrar Acted Without Jurisdiction” – Court Orders Inquiry, Confirms Cancellation of Fraudulent Documents

ARCIL filed writ petitions challenging the impugned registrations and also the letter issued by the Sub-Registrar impounding ARCIL’s resolution plan based on a complaint submitted by an entity calling itself the Anti-Corruption Council of India. The Court was quick to question this unknown body’s locus and access to private agreements.

“There is no indication how the Anti-Corruption Council obtained internal commercial documents or what authority it had to trigger such action,” the Bench observed. “No notice was issued to ARCIL before impounding its document. This was a clear violation of principles of natural justice.”

The Bench strongly affirmed the Single Judge’s order that such one-sided registrations had no legal sanctity. It found no merit in the borrower’s argument that since civil suits were pending, the High Court should not have exercised its writ jurisdiction.

"Existence of an alternative remedy is not a bar when fraud is evident and the public registration system has been misused,” the Court ruled. “These documents are ex facie void.”

“Legal Fiction Cannot Override Registered Rights” – Karnataka HC Reaffirms SARFAESI Enforcement

The judgment reiterates that once a secured creditor like ARCIL takes possession under the SARFAESI Act, borrowers cannot “gift, cancel, or reassign” the mortgaged asset in violation of registered agreements. The borrower’s actions—filing insolvency petitions, initiating dubious gift transfers, and generating misleading legal documents—were all aimed at blocking ARCIL’s recovery process.

“In normal circumstances, courts refrain from interfering in registered documents via writs. But when registration is abused to frustrate secured creditors’ rights, courts will not remain silent,” the Court said.

In this case, ARCIL’s rights stemmed from a registered assignment and a lawfully executed resolution plan. The borrower's attempts to unilaterally cancel or override these through non-consensual documents had no legal value.

“Truth Catches Up” – Government Confirms Fraud, Cancels Registrations, Launches Inquiry

During the proceedings, the State Government submitted a memo confirming that all disputed documents—the deed of cancellation, declaration, and gift deed—had already been cancelled from the Sub-Registrar’s records. An inquiry was also initiated against the concerned officer, with the government open to initiating criminal proceedings.

"In light of the steps already taken, we refrain from making further observations about the Sub-Registrar's conduct," the judges noted, even as they recorded serious concerns about misuse of the office and record-keeping system.

Appeal Dismissed. Justice Delivered.

With this ruling, the High Court has not only vindicated ARCIL’s legal position but also restored confidence in the integrity of property registration and recovery mechanisms under SARFAESI.

“The appeal is dismissed. There is no infirmity in the impugned judgment,” the Division Bench concluded.