Court’s Decision
The Bombay High Court (Justice Prafulla S. Khubalkar) held that once a court records a finding that the defendant has raised a bona fide and triable issue, it must grant unconditional leave to defend a summary suit, as per the settled law under Order XXXVII Rule 3 of the Code of Civil Procedure, 1908.
The Court quashed the order of the trial court that had imposed a condition of depositing 50% of the claim amount as a prerequisite to grant leave to defend, observing that such a condition was legally unsustainable when the defence disclosed genuine issues requiring trial.
The Court observed —
“Once the trial court records an inference that a triable issue is raised by the defendant, the defendant becomes entitled to unconditional leave to defend. Even in the case of a fair or reasonable defence, the defendant is ordinarily entitled to such leave.”
Facts
The petitioners had booked a row house in a housing project known as Sahara Prime City at Wardha Road, Nagpur, developed by Sahara Builders, for a total consideration of ₹56,30,000. After paying ₹22,69,330, a registered agreement to sell was executed on 24 April 2009.
The project had a financing tie-up with HDFC Ltd. (now amalgamated with HDFC Bank Ltd.). Based on an indemnity bond given by Sahara Prime City, HDFC sanctioned a housing loan of ₹35,00,000 to the petitioners. Out of this, ₹24,66,529 was directly disbursed to the builder on 25 January 2012.
The project, however, never took off. The builder failed to construct the row houses and ultimately abandoned the project. The petitioners had paid EMIs for more than three years, totalling ₹8,31,000, before stopping further payments. They subsequently filed a consumer complaint against the builder in 2015.
Meanwhile, HDFC declared their account as Non-Performing Asset (NPA) in 2016 and initiated recovery proceedings under Section 13(2) of the SARFAESI Act, 2002. Thereafter, it filed a summary suit before the Civil Judge (Senior Division), Nagpur, seeking recovery of the loan amount on the basis of the loan agreement and demand promissory note.
The petitioners sought leave to defend under Order XXXVII Rule 3 CPC, asserting that the loan was disbursed directly to Sahara Prime City and that they were being made scapegoats for the builder’s failure. The trial court, however, granted conditional leave, directing the petitioners to deposit 50% of the claim amount within three months. This conditional order was challenged under Article 227 of the Constitution before the High Court.
Issues
- Whether the trial court erred in imposing a condition of 50% deposit when triable issues were found to exist?
- Whether the suit was maintainable in absence of Sahara Prime City — the builder who received the loan — as a necessary party?
- Whether the absence of a registered sale deed or equitable mortgage affected the maintainability of the summary suit under Section 58(f) of the Transfer of Property Act, 1882?
Petitioners’ Arguments
The petitioners argued that once the trial court itself found that triable issues existed, it was legally bound to grant unconditional leave to defend, rather than imposing onerous conditions. The finding of a triable issue, they contended, implies that the defence is bona fide and merits full adjudication.
They submitted that they had been defrauded by Sahara Prime City, and the bank, acting in collusion, had disbursed the loan directly to the builder without verifying the progress of the project. The loan was sanctioned solely based on the indemnity furnished by Sahara Prime City.
Citing Section 58(f) of the Transfer of Property Act, they argued that the summary suit was unsustainable since there was no equitable mortgage by deposit of title deeds; the project had not resulted in any conveyance or sale deed in their favour. The bank could not rely on an agreement to sell as a valid mortgage document.
The petitioners further argued that the bank’s failure to implead Sahara Prime City — which had received the entire loan amount — made the suit defective for non-joinder of necessary parties.
They relied upon the following precedents:
- Mechelec Engineers and Manufacturers v. Basic Equipment Corp. [(1976) 4 SCC 687] — setting the classic test for unconditional leave when triable issues exist.
- IDBI Trusteeship Services Ltd. v. Hubtown Ltd. [(2017) 1 SCC 568] — reiterating that unconditional leave must be granted where the defence is fair or bona fide.
- B.L. Kashyap and Sons Ltd. v. JMS Steels and Power Corp. [(2022) 3 SCC 294] — clarifying that denial or conditional leave is permissible only when defence is sham or lacks credibility.
- Moreshwar Yadaorao Mahajan v. Vyankatesh Sitaram Bhedi (D) through LRs. [2022 SCC OnLine SC 1307] — non-joinder of necessary parties vitiates proceedings.
- United Bank of India v. Abhijit Tea Co. Pvt. Ltd. [(2000) 7 SCC 357] — jurisdiction of DRT prevails once bank amalgamation occurs.
Respondent’s Arguments
HDFC’s counsel argued that the loan was availed and utilized by the petitioners, who were fully aware of and bound by the terms of the loan agreement and the demand promissory note executed by them.
It was contended that the loan agreement contained explicit clauses regarding delay in EMI payments and borrower’s obligations, including Clause 2.7 and Clause 10.5, which held the borrower responsible for repayment irrespective of the project’s status.
The respondent defended the trial court’s discretion under Order XXXVII Rule 3 CPC to impose conditions while granting leave to defend, contending that imposing a monetary condition does not vitiate the order.
Reliance was placed on:
- Angu Pillai v. M.S.M. Kasiviswanathan Chettiar [AIR 1974 Mad 16] — holding that even an agreement to sell could form the basis for creating an equitable mortgage.
- Sanjeev Lal v. Commissioner of Income Tax [(2015) 5 SCC 775] — holding that an agreement to sell creates a “right in personam.”
- Indian Bank v. Blue Jaggers Estates Ltd. [(2010) 8 SCC 129] — emphasizing the binding nature of loan obligations on borrowers.
Analysis of the Law
The Court traced the evolution of principles under Order XXXVII CPC, governing summary suits. It reiterated that the purpose of a summary suit is speedy recovery, but the procedure must not prejudice the defendant’s right to defend when bona fide issues exist.
The Court referred extensively to B.L. Kashyap & Sons Ltd. v. JMS Steels & Power Corp. [(2022) 3 SCC 294], where the Supreme Court held:
“Grant of leave to defend (with or without conditions) is the ordinary rule; denial is the exception. If the defendant raises triable issues indicating a fair or reasonable defence, he is ordinarily entitled to unconditional leave to defend.”
The Court clarified that while the trial court enjoys discretion to impose conditions, such discretion must be judiciously exercised. Once a triable issue is recorded, any condition such as deposit of part of the claim amount becomes unjustified and contrary to the principles of fairness.
Precedent Analysis
- Mechelec Engineers (1976) — laid down that unconditional leave must be granted where the defence raises a bona fide issue.
- IDBI Trusteeship (2017) — refined the standard post the 1976 amendment, but reaffirmed that unconditional leave is the norm when substantial defence exists.
- B.L. Kashyap (2022) — synthesized all prior rulings and established that even a fair or reasonable defence entitles the defendant to unconditional leave.
- Moreshwar Mahajan (2022) — emphasized the necessity of joining all relevant parties to avoid miscarriage of justice.
- Syndicate Bank v. Estate Officer (2007) — interpreted Section 58(f) TPA, highlighting that an equitable mortgage requires deposit of title deeds, not merely an agreement.
These precedents collectively supported the petitioners’ case that triable issues such as mortgage validity, party joinder, and builder liability warranted a full trial without preconditions.
Court’s Reasoning
Justice Khubalkar observed that the trial court itself had found that the petitioners had raised a triable issue, yet still imposed a condition of deposit. Such imposition, the Court held, was inconsistent with the settled legal principles.
The Court noted that the loan was disbursed directly to Sahara Prime City, and hence the question of liability — whether it lies solely with the borrowers or jointly with the builder — is a substantial defence requiring adjudication.
It further emphasized that Sahara Prime City was not made a party to the summary suit, making the defence of non-joinder a valid and bona fide contention.
The Court concluded that the petitioners’ defence was neither sham nor frivolous. Instead, it raised legal and factual complexities involving the validity of mortgage creation, builder liability, and jurisdiction post-amalgamation of HDFC Ltd. into HDFC Bank Ltd.
Accordingly, the High Court held that imposing a 50% deposit condition amounted to a miscarriage of justice and interfered under Article 227 to set aside the order.
Conclusion
The Bombay High Court allowed the writ petition and granted unconditional leave to defend the summary suit.
“Once the trial court records an inference that a triable issue is raised by the defendant, the defendant becomes entitled for grant of unconditional leave to defend.”
The Court quashed the order of the trial court to the extent it imposed the 50% deposit condition, directing that the defendants be allowed to contest the suit on merits.
Implications
This judgment reinforces the principle that summary suits must not be used to stifle genuine defences. It reaffirms that imposing harsh monetary conditions despite acknowledged triable issues undermines the fairness of proceedings.
For homebuyers and borrowers facing builder defaults, this ruling is significant — it ensures that where financial institutions disburse funds directly to developers under tripartite arrangements, borrowers retain the right to contest liability without pre-deposit burdens.
It also clarifies that once triable issues exist, unconditional leave is the norm, preserving the sanctity of the defendant’s right to a fair trial.