The Madras High Court has held that a registered sale agreement executed as security for a loan is a sham document and cannot be enforced for specific performance. The bar under Sections 91 and 92 of the Indian Evidence Act, 1872 does not preclude a party from leading oral evidence to show that the document was never intended to operate as a sale agreement but was executed for an altogether different transaction. The Court clarified that the true nature of the transaction must be determined by a cumulative assessment of surrounding circumstances, including the advance-to-balance ratio, the time period fixed for performance, the purchaser’s diligence in verifying title and encumbrances, the timing of the pre-suit notice, the credibility of attesting witnesses, and any concealment of material facts.
The Court emphasised that specific performance being a discretionary equitable relief under Section 20 of the Specific Relief Act, 1963 (as it stood before the 2018 Amendment), a plaintiff who conceals material facts, fails to produce documentary evidence of readiness and willingness, and whose conduct is inconsistent with a genuine intention to purchase, is not entitled to such relief. However, where the defendant admits the obligation to return the advance amount, a Money Decree can be passed in lieu of specific performance to avoid multiplicity of proceedings, with interest calibrated to the commercial reality of the transaction.
A Single Judge Bench of Justice R. Sakthivel observed that where a party to a registered document contends that the document was never intended to be acted upon and was a sham, and instead alleges that an altogether different transaction was entered into between the parties, the bar under Sections 91 and 92 of the Indian Evidence Act, 1872 does not apply, as the party is not seeking to vary or contradict the terms of the document but is challenging its very nature.
Second, the Court emphasised that in cases where a sale agreement is alleged to have been executed merely as security for a loan, courts must examine the surrounding circumstances cumulatively, including the proportion between advance payment and balance consideration, the time period fixed for performance, the conduct of the purchaser in verifying title and encumbrances, the timing of the pre-suit notice, the credibility of attesting witnesses, and any concealment of material facts, to determine the true nature of the transaction.
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Further, the Court clarified that the specific performance is an equitable relief and the plaintiff must come to Court with clean hands. Concealment of material facts such as custody of original title deeds, failure to produce documentary evidence of readiness and willingness, and conduct inconsistent with a genuine intention to purchase, disentitle the plaintiff to the discretionary relief of specific performance under Section 20 of the Specific Relief Act, 1963 (as it stood before the 2018 Amendment).
Moreover, the Court said that even where the plaintiff has not prayed for the alternate relief of return of advance amount in the plaint, a Money Decree can be passed where the defendant has admitted the obligation to return the advance amount in the written statement and has made a voluntary submission before the appellate court to that effect, in order to avoid multiplicity of proceedings and in the interest of justice.
Briefly, the suit properties, measuring a total of 5 Acres 10 Cents, originally belonged to the first defendant, V. Govindasamy, who acquired them through a Settlement Deed dated 19 July 2002 executed by his mother in his favour. The second defendant, Varun Venkat, is the son of the first defendant and was a college student at the relevant time. The plaintiff, S. Natarajan, and the first defendant entered into a registered Agreement of Sale on 9 September 2015, with the second defendant also being a party to the agreement. The sale price was fixed at Rs. 12 lakhs, and on the very date of the Sale Agreement, the plaintiff paid Rs. 10 lakhs, as advance, leaving a balance of only Rs. 2 lakhs. Eleven months’ time was fixed for execution of the Sale Deed, i.e., on or before 9 August 2016.
The plaintiff claimed he was always ready and willing to perform his part of the contract and approached the defendants within the stipulated time for execution of the Sale Deed, but the defendants evaded. The plaintiff sent a legal notice and the first defendant received the notice, but the notice to the second defendant was returned with an endorsement “not claimed.” The defendants did not send any reply notice. The plaintiff then filed suit before the Sessions Judge (Fast Track Mahila Court), Tiruppur, seeking specific performance.
The first defendant’s case was entirely different. He contended that he never intended to sell the suit properties. In August 2015, he was in urgent need of money to discharge a loan and meet the educational expenses of his son, the second defendant. He, along with his friend Palanisamy, approached the plaintiff, who was a money lender, for a loan of Rs. 10 lakhs. The plaintiff agreed to advance the loan but demanded that the first defendant hand over the original Settlement Deed and also execute a registered Sale Agreement as security for the loan. The plaintiff also obtained signatures of the first defendant and his son on several printed promissory notes and stamp papers as security. The plaintiff assured the first defendant that he would not misuse the registered Sale Agreement and would cancel it once the loan was repaid. The first defendant claimed he was paying Rs. 25,000/- per month as interest till March 2016, and upon default, the plaintiff issued the legal notice in April 2016.
The first defendant further contended that the suit properties were worth more than Rs. 25 lakhs at the relevant time (at Rs. 5 lakhs per acre), whereas the sale consideration in the Sale Agreement was only Rs. 12 lakhs. The fixation of a longer period of eleven months for the minimum balance sale consideration of Rs. 2 lakhs was, according to him, evidence that the Sale Agreement was executed only as security for the loan and was not a genuine agreement for sale.
The Trial Court held that the documentary evidence clearly proved that the Suit Sale Agreement) was true and valid and that the plaintiff had proved his readiness and willingness. The Trial Court decreed specific performance in favour of the plaintiff, directing the first defendant to execute the Sale Deed on receiving the balance sale consideration within two months. The Suit was dismissed qua the second defendant.
