Transfer of vehicle in lieu of fraud cannot be considered valid even if it is done with a bonafide interest: Supreme Court

Srei Equipment Finance Ltd. V. Ramjan Ali & Ors.

Criminal Appeal No. 6 of 2021 (arising out of SLP (Crl.) No.3893/2020)

Bench: Ashok Bhushan, R. Subhash Reddy & M.R.Shah, JJ.

Facts: 

Amarnath Yadav purchased a JCB machine and entered into a finance agreement with Srei Equipment Finance Limited [SEF], promising repayment in 46 instalments. The vehicle was registered by Regional Transport Officer [RTO] to Amarnath. The registration also mentioned the finance agreement with SEF, making an entry of hypothecation as required by Section 51 of the Motor Vehicles Act, 1988[1]. Amarnath did not pay two instalments, and SEF referred the dispute to an arbitrator. Amarnath failed to appear before the arbitrator. The arbitrator gave an award in favour of the SEF.

Amarnath made an application with the RTO to cancel the entry of SEF as the person with whom the vehicle was hypothecated. Without informing the SEF, RTO withdrew the entry from the registration certificate and issued a fresh registration certificate in the name of Amarnath. The RTO also issued a clearance certificate favouring Amarnath, noticing that vehicle has been sold to Ramjan Ali.

Based on RTO records, Ramjan Ali got clearance certificate, he got the vehicle registered in his name as the owner. The registration certificate noted the entry of hypothecation in favour of Magma Fincorp Limited. Ramjan obtained the transfer from the original owner and was using the vehicle.

One day, the vehicle was taken possession by four persons, and Ramjan lodged an FIR under Sections 364 and 392. The police seized the vehicle. Ramjan filed an application before the Chief Judicial Magistrate for release of the vehicle. SEF also appeared before Chief Judicial Magistrate and filed an objection claiming to be the vehicle’s financer. The Chief Judicial Magistrate noticed a dispute of ownership and did not release the vehicle favouring any of the parties. Therefore, CJM rejected Ramjan’s application for release of the vehicle and SEF’s objection filed.

Ramjan applied Section 482 Cr.P.C. before the High Court challenging the order passed by the CJM rejecting his application to release the vehicle. SEF was subsequently impleaded 3 in the application under Section 482 Cr. P.C.  The High Court allowed the application under Section 482 Cr. P.C and directed the release of the vehicle in favour of Ramjan Ali. SEF aggrieved by the said order appealed before the Supreme Court under Article 136 of India’s Constitution.

Issue: Was the decision of the High Court to allow the application under Section 482 Cr. P.C and releasing the vehicle in favour of 2nd owner was sound in law or not?

Held: The Supreme Court held that the RTO at the time of cancelling the vehicle’s registration issued by it should note that entry of the appellant as a person in whose favour the vehicle was hypothecated, had been fraudulently deleted.

In consequence of the above, all subsequent registrations will be considered as non-est (as if it does not exist). Although Ramjan might be a bonafide purchaser, he was the beneficiary of a fraud.

The Supreme Court also observed that the H.C. committed an error while directing the vehicle’s release favouring Ramjan. The High Court order was held to be unsustainable by the Supreme Court and was set aside. The court allowed the appeal accordingly and had that vehicle be released in favour of SEF. The court directed that CJM, Sitapur shall ensure that vehicle is received back from Ramajan and released in favour of SEF on such terms and conditions as may be deemed fit and proper, which exercise shall be completed within four weeks from the date of judgement.

The court also discussed Rule 61 of The Central Motor Vehicle Rules, 1989 deals with termination of hire purchase agreement etc. and Section 55(5) dealing with registration cancellation.

The Supreme Court also observed that the H.C. ignored the application for release of the vehicle was filed SEF and had also filed an objection to Ramjan’s application of release. The application was filed objecting the release and claiming ownership of the vehicle as the hypothecation entry was fraudulently removed. This fraudulent removal facilitated the transfer in favour of Ramjan was illegal and void.

[ See Provision Rule 61, which is relevant is as follows:- “61. Termination of hire-purchase agreements, etc.—(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, and shall be 14 accompanied by the certificate of registration and the appropriate fee as specified in rule 81.                                                                                                                    

(2) The application for the issue of a fresh certificate of registration under sub-section (5) of section 51 shall be made in Form 36 and shall be accompanied by a fee as specified in rule 81.                                                                                  

(3) Where the registered owner has refused to deliver the certificate of registration to the financier or has absconded then the registering authority shall issue a notice to the registered owner of the vehicle in Form 37.

(5) If a registering authority is satisfied that the registration of a motor 16 vehicle has been obtained on the basis of documents which were, or by representation of facts which was, false in any material particular, or the engine number or the chassis number embossed thereon are different from such number entered in the certificate of registration, the registering authority shall after giving the owner an opportunity to make such representation as he may wish to make (by sending to the owner a notice by registered post acknowledgement due at his address entered in the certificate of registration), and for reasons to be recorded in writing cancel the registration.]