Supreme Court settles vehicle hypothecation dispute in SREI Equipment Finance Ltd. vs. Ramjan Ali (2021)

Date of the Judgment: 05 January 2021
Citation: 2021 INSC 6
Judges: Ashok Bhushan, J., R. Subhash Reddy, J., M.R. Shah, J.
Can a vehicle be released to a subsequent purchaser if the original hypothecation agreement was fraudulently removed from the registration records? The Supreme Court of India addressed this question in a recent case involving a dispute over the ownership of a JCB machine. The core issue revolved around the validity of a vehicle transfer when the original financier’s hypothecation entry was fraudulently deleted from the registration certificate. The judgment was delivered by a three-judge bench comprising Justices Ashok Bhushan, R. Subhash Reddy, and M.R. Shah, with Justice Ashok Bhushan authoring the opinion.

Case Background

The case began with Amarnath Yadav purchasing a JCB machine and entering a finance agreement with SREI Equipment Finance Ltd. (the appellant) on October 22, 2016. The appellant financed ₹19,83,360, with the agreement stipulating repayment in 46 monthly installments. The vehicle was registered in Basti, Uttar Pradesh, with the appellant’s hypothecation noted in the registration certificate as required under Section 51 of the Motor Vehicles Act, 1988. However, Amarnath Yadav defaulted on the loan payments. Subsequently, the dispute was referred to an arbitrator, who ruled in favor of the appellant on March 26, 2018, awarding them ₹25,97,053 with interest.

Despite the arbitration award, Amarnath Yadav applied to the Regional Transport Officer (RTO) in Basti to cancel the hypothecation entry of the appellant. On August 16, 2018, the RTO, without informing the appellant, cancelled the hypothecation entry and issued a fresh registration certificate in Amarnath Yadav’s name. A clearance certificate was also issued, stating the vehicle had been sold to Ramjan Ali (respondent No. 1) in Sitapur. Ramjan Ali then obtained a new registration certificate in Sitapur on August 27, 2018, with a hypothecation entry in favor of Magma Fincorp Limited. On January 9, 2019, the vehicle was seized, leading Ramjan Ali to file an FIR and seek its release. The Chief Judicial Magistrate rejected the release application, noting the ownership dispute. The appellant also filed an objection, claiming they were the rightful financer. Subsequently, the RTO Basti, on April 30, 2019, received an application from the appellant, and after an inquiry, canceled the previous order, reinstating the hypothecation of the appellant.

Timeline:

Course of Proceedings

The Chief Judicial Magistrate, Sitapur, rejected Ramjan Ali’s application for the vehicle’s release, noting the dispute over ownership between Ramjan Ali and the appellant. The appellant had objected to the release, asserting their right as the financier with a hypothecation agreement. The Magistrate observed that the original owner and Ramjan Ali had allegedly colluded to create fraudulent documents to obtain the clearance certificate. Subsequently, the appellant filed an application with the RTO Basti, which led to the RTO canceling the earlier order that had removed the appellant’s hypothecation entry. The High Court of Judicature at Allahabad, Lucknow Bench, however, set aside the order of the Chief Judicial Magistrate and directed the release of the vehicle to Ramjan Ali. The appellant then appealed to the Supreme Court against the High Court’s order.

Legal Framework

The Supreme Court referred to the following provisions of the Motor Vehicles Act, 1988 and the Central Motor Vehicle Rules, 1989:

• Section 51 of the Motor Vehicles Act, 1988: This section deals with special provisions regarding motor vehicles subject to hire-purchase agreements.
  • Section 51(1): “Where an application for registration of a motor vehicle which is held under a hire-purchase, lease or hypothecation agreement…is made, the registering authority shall make an entry in the certificate of registration regarding the existence of the said agreement.” This mandates that the registering authority must record the hypothecation agreement on the registration certificate.
  • Section 51(3): “Any entry made under sub-section (1) or sub-section (2), may be cancelled by the last registering authority on proof of the termination of the said agreement by the parties concerned…” This allows for cancellation of the hypothecation entry upon termination of the agreement.
  • Section 51(4): “No entry regarding the transfer of ownership of any motor vehicle which is held under the said agreement shall be made in the certificate of registration except with the written consent of the person whose name has been specified in the certificate of registration as the person with whom the registered owner has entered into the said agreement.” This prohibits the transfer of ownership without the written consent of the financier.
• Rule 61 of the Central Motor Vehicle Rules, 1989: This rule pertains to the termination of hire-purchase agreements.
  • Rule 61(1): “An application for making an entry of termination of agreement of hire purchase, lease or hypothecation referred to in sub-section (3) of section 51 shall be made in Form 35 duly signed by the registered owner of the vehicle and the financier…” This specifies that the application for termination of hypothecation must be made in Form 35, signed by both the owner and the financier.
• Section 55(5) of the Motor Vehicles Act, 1988: This section deals with the cancellation of registration.
  • Section 55(5): “If a registering authority is satisfied that the registration of a motor vehicle has been obtained on the basis of documents which were, or by representation of facts which was, false in any material particular…the registering authority shall…cancel the registration.” This allows the registering authority to cancel the registration if it was obtained through false documents or misrepresentation.

Arguments

Appellant’s Arguments:

• The appellant argued that the vehicle was initially registered with the Regional Transport Office (RTO), Basti, in the name of Amarnath Yadav, with an entry of the appellant as the hypothecatee.
• The original owner, Amarnath Yadav, failed to pay the loan installments, and an arbitration award was passed in favor of the appellant.
• Amarnath Yadav, with fraudulent intent, submitted forged documents, including a forged Form-35, to cancel the appellant’s hypothecation entry in the registration certificate.
• A clearance certificate was issued by RTO Basti based on these forged documents, and the vehicle was subsequently registered in the name of respondent No.1 at RTO Sitapur.
• The transfer of the vehicle by Amarnath Yadav was illegal and without jurisdiction because the vehicle was hypothecated to the appellant and could not be transferred without clearing the loan and without the appellant’s consent.
• The Regional Transport Office, Basti, had passed an order on 29.06.2019, cancelling the registration certificate and the No Objection Certificate, which the High Court failed to consider.
• The respondent No.1, being a beneficiary of fraud, was not entitled to the release of the vehicle.

Respondent No. 1’s Arguments:

• Respondent No.1 claimed to be a bonafide purchaser, having paid ₹7,50,000 to Amarnath Yadav and obtained a loan of ₹10 lakhs from Magma Fincorp Limited.
• The respondent argued that the registration certificate he received did not show any hypothecation in favor of the appellant.
• The vehicle was rightly released by the High Court in his favor as he had diligently obtained the transfer and registered the vehicle in his name with RTO Sitapur.
• The JCB machine purchased by respondent No.1 was not under any hire purchase agreement.
• The respondent had obtained insurance cover and was paying taxes for the vehicle.
• The vehicle was forcibly taken possession on 09.01.2019, thus the same was rightly released to him.

State’s Arguments:

• The State submitted that after the FIR was registered, an investigation was initiated, and it was found that Amarnath Yadav had died of cancer on 08.07.2019.
• The State provided the necessary facts of the case in its counter-affidavit.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

• Whether the High Court was correct in directing the release of the vehicle to respondent No.1, given the fraudulent removal of the appellant’s hypothecation entry and the subsequent cancellation of the registration certificate by the Regional Transport Office, Basti.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court distinguished the case of Manoj and Ors. Vs. Shriram Tpt. Finance Co. Ltd. and Ors., JT 2002(1) SC 293*, stating that the High Court wrongly relied on it. The Court clarified that unlike the cited case, the registration certificate of Amarnath Yadav was cancelled and hence the ratio of the cited case was not applicable.
• The Supreme Court upheld the applicability of Section 51 of the Motor Vehicles Act, 1988, emphasizing that the transfer of a hypothecated vehicle without the financier’s consent is invalid.
• The Court also upheld the applicability of Rule 61 of the Central Motor Vehicle Rules, 1989, noting that the termination of the hypothecation agreement required Form 35 to be signed by both the owner and the financier.
• The Court upheld the applicability of Section 55(5) of the Motor Vehicles Act, 1988, stating that the RTO Basti was correct in cancelling the registration certificate that was obtained through fraudulent means.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• Fraudulent Removal of Hypothecation: The Court emphasized that the original owner, Amarnath Yadav, fraudulently removed the hypothecation entry of the appellant by submitting a forged Form-35.
• Cancellation of Registration Certificate: The Court noted that the Regional Transport Office, Basti, had rightly cancelled the registration certificate issued in the name of Amarnath Yadav and the no-objection certificate, which were based on fraudulent documents.
• Invalidity of Subsequent Registration: The Court held that the registration obtained by respondent No.1 in Sitapur was invalid because it was based on the fraudulently obtained clearance certificate.
• Protection of Financier’s Rights: The Court underscored the importance of protecting the rights of the financier in a hypothecation agreement.
• Statutory Provisions: The Court relied on the provisions of the Motor Vehicles Act, 1988, particularly Section 51 and Section 55(5), and Rule 61 of the Central Motor Vehicle Rules, 1989, to support its decision.

Fact:Law Ratio

The court’s decision was influenced more by the factual aspects of the case, particularly the fraudulent activities, than by the legal aspects. The court considered the fraudulent removal of hypothecation, the cancellation of the registration certificate by the RTO, and the invalidity of the subsequent registration. While the court also considered the legal provisions, the factual matrix of the case was more influential in its decision.

Logical Reasoning

Judgment

The Supreme Court overturned the High Court’s decision, stating that the High Court had erred in directing the release of the vehicle to respondent No.1. The Court held that the registration certificate in the name of Amarnath Yadav, which was relied upon by the High Court, was cancelled by the Regional Transport Office, Basti. The Court also noted that the subsequent registration obtained by respondent No.1 was invalid. The Supreme Court ordered the release of the vehicle to the appellant, SREI Equipment Finance Ltd., as the rightful financier. The Chief Judicial Magistrate, Sitapur, was directed to ensure the vehicle was returned from respondent No.1 and released to the appellant within four weeks.

The Supreme Court observed that the High Court failed to consider the order dated 29.06.2019 passed by the Regional Transport Office, Basti, which had cancelled the registration certificate issued in Form 23 as well as the No Objection Certificate. The Court emphasized that “the legal consequence of the said order is that registration certificate issued in Form 23 by Regional Transport Office, Basti showing the name of only Amarnath Yadav with no entry of appellant has been treated to be null and void.” The Court further noted that “all subsequent proceedings including certificate of registration obtained by respondent No.1 on 27.08.2018 on the basis of certificate of clearance dated 16.08.2018 shall also automatically be treated non est.”

The Supreme Court also highlighted that the respondent No.1, though claiming to be a bonafide purchaser, was a beneficiary of fraud. The Court stated that “the High Court unduly influenced by the fact that application for release of vehicle was filed by respondent No.1, the High Court lost sight of the fact that the appellant has also filed objection to the application of release filed by respondent No.1 objecting the release and claiming itself to be entitled to the vehicle as being person with whom the vehicle was hypothecated.”

Key Takeaways

• Hypothecation Agreements: The judgment reinforces the importance of hypothecation agreements in protecting the rights of financiers.
• Fraudulent Transfers: It clarifies that fraudulent removal of hypothecation entries does not validate subsequent transfers of ownership.
• RTO Orders: Orders passed by Regional Transport Offices under statutory powers have legal consequences and cannot be ignored by courts.
• Bonafide Purchaser: A claim of being a bonafide purchaser does not hold if the purchase is based on fraudulent documents.
• Due Diligence: Purchasers of vehicles must exercise due diligence to verify the validity of the registration and hypothecation status.

Directions

The Supreme Court directed the Chief Judicial Magistrate, Sitapur, to ensure that the vehicle is returned from respondent No.1 and released to the appellant within four weeks, subject to such terms and conditions as may be deemed fit and proper.

Development of Law

The ratio decidendi of this case is that a vehicle’s registration obtained through fraudulent means, specifically by removing a hypothecation entry without the financier’s consent, is invalid. This judgment reinforces the principle that a subsequent purchaser cannot claim valid ownership if the transfer is based on a fraudulent cancellation of a hypothecation agreement. The Supreme Court’s decision clarifies that the rights of the financier are paramount and that statutory orders passed by the registering authority must be given due weight.

Conclusion

The Supreme Court’s decision in SREI Equipment Finance Ltd. vs. Ramjan Ali & Ors. underscores the importance of maintaining the integrity of vehicle registration records and protecting the rights of financiers in hypothecation agreements. The judgment clarifies that fraudulent activities to remove hypothecation entries will not validate subsequent transfers, and the original financier’s rights remain protected. This case serves as a reminder for vehicle purchasers to conduct thorough due diligence and for registering authorities to strictly adhere to statutory provisions.