The core issue revolves around which bank has the first charge over a mortgaged property due to defaulted loans. The Court meticulously analyzes the distinctions between equitable and legal mortgages under English Law and the Transfer of Property Act, 1882, particularly focusing on mortgages by deposit of title deeds and unregistered agreements of sale. Ultimately, the judgment sets aside the High Court’s order, ruling in favor of The Cosmos Co. Operative Bank Ltd., as the Central Bank of India’s equitable mortgage was not properly noticed, making the subsequent legal mortgage take priority.
(A) Transfer of Property Act, 1882, Section 54, 58(a), 78, 100 – Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963, Section(s) 4, 4A and 11 – Maharashtra Apartment Ownership Act 1970, Sections 2, 4 and 5 – Debt Recovery – Mortgage by deposit of title deed – in favour of appellant bank subsequent in time – Loan obtained from respondent No. 1 bank prior in time by deposit certain unregistered document like agreement of sale of flat – Priority of charge – Postponement of prior mortgagee – No steps were taken by the respondent no. 1 bank to issue a public notice of equitable charge that was created in its favour, as discernible from the fact that when the appellant bank upon inquiry was informed by the concerned cooperative housing society that the said flat was not subject to any prior encumbrances or charge – Equitable charge of the respondent no. 1 bank herein is liable to be postponed to the charge created in favour of the appellant bank herein in terms of Section 78 of the Act, 1882, and the impugned order of the High Court is liable to be set-aside on this ground alone – Although both of the aforesaid transactions seek to create mortgage by deposit of documents or title, yet there lies a very fine but pertinent distinction between the two transactions – In respect of the loan advanced by the respondent no. 1 bank, only two unregistered agreements to sale were deposited which do not purport any title as held in Suraj Lamps (supra) while with the appellant bank herein apart from one unregistered agreement to sale the share certificate of ownership had also been deposited which has the effect of conveyance of title – Under Section 58 sub-section (f) a statutory recognition has been given to the mode of creation of mortgage by deposit of title deeds – Such a mortgage by deposit of title deeds is for all purposes a ‘legal mortgage’ and not an equitable mortgage – The original share certificate which was produced before the appellant-bank as availed Title deed assumes significance in view of the provisions of Section 11 of the Act 1963, more particularly, sub-section (1) of Section 11 of Act – Impugned order passed by the High Court is not correct and it deserves to be set aside – Since, the respondent no. 1 had failed in bringing the factum of its ‘equitable mortgage’ to the notice of the appellant bank, the respondent no. 1 bank is not entitled to enforce the same qua the recovery proceeds of the appellant bank – An amount of Rs. 51 lakh is lying deposited with the DRT maintained in an escrow account – The same now be disbursed along with interest in favour of the appellant bank.
(Para 37, 38, 47, 48, 49, 63, 67 and 68)
(B) Transfer of Property Act, 1882, Section 58(f) – Equitable mortgage – Nature of – ‘Equitable Mortgage’ being a right in personam will not affect successive incumbrances and will not be enforceable against successive mortgagees if the creation of such equitable charge was no disclosed to them – This is particularly because, ‘equitable mortgages’ are construed as ‘incomplete mortgages’ (as no actual charge is created nor any conveyance of title has taken place) and thus no person can be permitted to derive any advantage from any incomplete title who has on his own volition not done everything requisite to complete its title – If a first mortgagee voluntarily either leaves the title deeds with the mortgagor, or voluntarily accepts part-deeds and fails to either secure the rest or assure himself of any outstanding deeds or documents, then the charge of such first mortgagee must be postponed to any and all subsequent mortgagees, without notice of the charge of first mortgagee, because he due to his own gross negligence enabled the subsequent incumbrances – Thus, even if multiple equitable mortgages are created, the first charge will have priority, unless in case of fraud or gross negligence, or a voluntary, distinct, and unjustifiable concurrence, on the part of the first mortgagee in either (i) retaining the remaining deeds or (ii) failure to take steps in putting everyone to notice, more particularly the subsequent incumbrancers about the first equitable mortgage – Where the first mortgagor has made bond fide inquiry for them and received a reasonable excuse for their non-delivery, he shall not be postponed to a subsequent equitable mortgage that may be created.
(Para 44)
(C) Transfer of Property Act, 1882, Section 58(f), 59 – Transfer of Property – Mortgage by deposit of title deeds – Deposit of title deeds is one of the many forms of mortgages where under there is a transfer of interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced by way of loan – The three requisites for a valid mortgage are, (i) debt; (ii) deposit of title deed; and (iii) an intention that the deed shall operate as security for the debt – In other words, when the debtor deposits with the creditor title deeds of his property with an intent to create a security, the law implies a contract between the parties to create a mortgage and no registered instrument is required under Section 59 of the Act, 1882 as in other classes of mortgage – The essence of a mortgage by deposit of title deeds is the actual handing over by a borrower to the lender of documents of title to immovable property with the intention that those documents shall constitute a security which will enable the creditor ultimately to recover the money which he has lent – Whether there is an intention that the deed shall be security for the debt is a question of fact to be decided in each case on its own merits – The said fact will have to be decided just like any other fact based on legal presumptions, oral, documentary and/or circumstantial evidence.
(Para 51)
(D) Transfer of Property Act, 1882, Section 58(e)(f), 59 – Mortgage by deposit of title deeds – Successive incumbrances – Priority of charge – Mortgage by deposit of title deed in favour of appellant bank subsequent in time – Loan obtained from respondent No. 1 bank prior in time by deposit certain unregistered document like agreement of sale of flat – When the original borrowers, deposited with the appellant bank, the share certificate of ownership to the said Flat, on that very day and date, a legal charge is said to have been created on the flat in favour of the appellant bank, whereas, when it comes to the respondent no. 1 bank no such charge on the flat was created, rather what was created was only an equitable mortgage, though prior in time – This distinction is particularly important, because even if the agreements to sale deposited with the respondent no. 1 bank were registered and thereby, giving public notice of their exist- ence, still the appellant bank by virtue of possession of the actual title deeds to the said Flat in the form of the share certificate of ownership would be accorded priority in charge for the sole reason that the charge created by it is a legal mortgage in terms of Section 58 of the Act, 1882 -Deposit of part-deeds of title would not constitute a mortgage in terms of Section 58 sub-section (e) of the Act, 1882 unlike English Law, because under the latter such deposit is only an equitable mortgage and thus, the strict rigidities may not be imposed or insisted upon whereas in India mortgage by deposit of title deeds is a legal mortgage which in effect would defeat any equitable mortgage, and thus, the requirement to deposit all title deeds would have to mandatorily be required except those deeds which despite best of efforts of the mortgagee could not have been deposited or known to be outstanding.
(Para 52)
(E) Transfer of Property Act, 1882, Section 58(e)(f), 59 – Mortgage by deposit of title deeds – Equitable mortgage – Successive incumbrances – Priority of charge – Mortgage by deposit of title deed in favour of appellant bank subsequent in time – Loan obtained from respondent No. 1 bank prior in time by deposit certain unregistered document like agreement of sale of flat – Held that the underlying reason behind why an equitable mortgage would be subservient to a legal mortgage, even where proper notice was effectuated may be understood in many different ways, particularly that the former does not create any de jure charge or right in the subject property and rather is only a right in personam and equity cannot supplant the law and can only supplement it – Thus, where the law is unambiguous and clear, equity will always yield to the law – However, when it comes to equitable mortgages, equity will yield to the law only to the extent provided by the law – Thus, although the legal mortgage would have assumed priority in charge, yet an equitable mortgage may still be enforceable as secondary charge, provided the other considerations such as notice of such mortgage is fulfilled.
(Para 52, 53)
(F) Transfer of Property Act, 1882, Section 58 and 100 – Charges – Simple mortgage – Equitable mortgage – Any mortgage which is not created in terms of Section 58 of the Act, 1882 i.e., all equitable mortgages are still nevertheless a “charge” to such property – The expression “and all the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge” assumes significance as it is not suggestive that such charge would be deemed a simple mortgage, rather it only goes so far as to provide that the provisions that apply to simple mortgage will also apply to such “charges” so far as possible but by no means does it provide that such “charge” is to be treated as a simple mortgage in terms of Section 58 of the Act, 1882 i.e., as a legal mortgage – The last part of Section 100 of the Act, 1882 further statutorily recognizes the in personam nature of such “charge” and provides that they shall not be enforced against any person to whom such property or interest therein has been transferred i.e., to whom it has been mortgaged in terms of Section 58 of the said Act or any other bona-fide transferee who does not have notice of the said charge – Thus, what may be discerned is that, ‘equitable mortgages’ are very much recognized in India under the nomenclature of “charge” in terms of Section 100 of the Act, 1882, and the same will be enforceable as far as possible in terms of the procedure and provisions applicable to a simple mortgage except those without notice of such charge.
(Para 56)
(G) Transfer of Property Act, 1882, Section 58 – Equitable mortgage – Held that the concept of equitable mortgage is purely a creation and by-product of the doctrine of equity, and thus, the absence of any specific provision under the Act, 1882 providing for such a mortgage will not run to the detriment of something which is essentially designed to ensure that principles of fair-play, good conscience and justice endure – There is no decision which either specifically excludes or out rightly rejects the application of this doctrine.
(Para 60)
Cosmos Co Operative Bank Ltd V. Central Bank Of India
Supreme Court: 2025 INSC 243: (DoJ 04-02-2025)
