Long Period for Execution Despite Huge Advance—Sale Agreement Held a Sham Security for Loan: Madras HC Denies Specific Performance

“If a party pays two-thirds of the sale price upfront yet agrees to wait four years for execution, and no reason is stated—such arrangement is suspect and speaks of a disguised loan transaction” - In a crucial ruling Madras High Court overturned the Trial Court’s decree of specific performance in a property sale agreement, holding that the agreement was a sham document executed only as security for a loan. Justice R. Sakthivel concluded that “Ex-A.1 was intended to serve as a security for a loan transaction—not for an actual sale of property.”

Though the document was a registered sale agreement stating a sale consideration of ₹15 lakhs with ₹10 lakhs paid upfront, the Court found the long performance period (4 years), absence of property description accuracy, and the surrounding circumstances as indicative of a loan security disguised as a sale agreement.

The plaintiff (Ayyasamy) filed a suit seeking specific performance of a sale agreement executed on 29 January 2014, claiming that the defendant (Kamala) had agreed to sell a 1183 sq. ft. house site for ₹15,00,000. He claimed to have paid ₹10,00,000 as advance, and that the defendant was evading execution of the sale deed.

However, the defendant denied it was a sale transaction, stating the agreement was a mere security for a loan of ₹5,00,000, and that the plaintiff was a moneylender, who refused repayment in order to usurp the property. She claimed the agreement was nominal, and that the plaintiff even threatened her when she tried to repay and cancel the deal.

Justice R. Sakthivel found the following circumstances highly suspicious:

“The sale consideration was fixed at ₹15,00,000 and ₹10,00,000 was paid as advance on the same day—yet the time for execution was fixed at 4 years. There is no explanation for such an unusually long period of performance.”

“Had the parties intended a genuine sale, there was no reason to describe a house property as vacant land, particularly when tax records showed a house existed.”

The Court highlighted that if the transaction was bona fide, the parties would not have misdescribed the nature of the property. This lent weight to the defendant's plea that the agreement was never meant to be acted upon as a sale.

Additionally, the evidence of D.W.3 (Rajamani), who had earlier lent money to the defendant against a similar sale agreement, was crucial. She testified that the defendant had a pattern of using sale agreements to secure loans, and that the plaintiff repaid the earlier lender’s dues to secure his own loan arrangement—thus establishing a consistent financial dealing framework, rather than a true sale.

On the Admissibility of Oral Evidence:

The Court relied on the Supreme Court rulings in Roop Kumar v. Mohan Thedani (2003) 6 SCC 595 and R. Janakiraman v. State (2006) 1 SCC 697, to hold:

“Sections 91 and 92 of the Indian Evidence Act do not bar oral evidence to prove that a document is sham and nominal. Oral evidence is admissible to show that the document was never intended to be acted upon.”

The Judge emphasized: “The bar is to oral evidence that contradicts the terms of a contract—not to evidence that disproves the very existence of a real contract.”

The Court held that the Trial Court erred in granting specific performance. However, since the plaintiff had genuinely parted with money (and the agreement reflected ₹10,00,000 as advance), he was entitled to refund of that sum with interest:

“This Court holds that the defendant owed a principal sum of ₹10,00,000 to the plaintiff. The defendant is directed to repay the same with 9% interest p.a., within five months. A charge is created on the suit property to ensure recovery.”

The Court also allowed the plaintiff to withdraw the ₹5,00,000 he had deposited before the Trial Court, with accrued interest.

This judgment is a reminder that registered sale agreements are not immune to scrutiny, particularly where circumstances and conduct reveal a masked loan transaction. Courts will pierce the veil of formality where there is evidence that a document was never intended to be acted upon as such.

“The inordinate and unexplained time period for performance, despite heavy advance, creates serious doubts as to the intention of the parties.”

Date of Decision: 18 August 2025