2025 INSC 243
SUPREME COURT OF INDIA
(HON’BLE J.B.
PARDIWALA, J. AND HON’BLE R. MAHADEVAN, JJ.)
COSMOS CO OPERATIVE
BANK LTD
Petitioner
VERSUS
CENTRAL BANK OF INDIA
Respondent
Civil
Appeal No. 1565 of 2025 (@Special Leave Petition (C) No. 11557 of 2019-Decided
on 04-02-2025
Civil, TPA
(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)
JUDGMENT
J.B. Pardiwala, J.:- Leave granted.
2.
This appeal arises from the judgment and order passed by the High Court of
Judicature at Bombay (Civil Appellate Jurisdiction) dated 12.12.2018 in Writ
Petition No.11324 of 2015, by which the writ petition filed by the appellant
herein seeking to challenge the order passed by the (Debt Recovery Appellate
Tribunal) (for short, the “DRAT") dated 28.08.2015 in Appeal No. 41 of
2007 came to be rejected thereby affirming the order passed by the DRAT.
A.
FACTUAL MATRIX
3.
The facts giving rise to this appeal may be summarised as under: -
(a) We take notice of
the fact that the respondent nos. 2, 3 and 4 respectively, are the original
borrowers. However, the respondent No.4 has passed away and therefore his name
came to be deleted from the array of parties vide order dated 4.12.2020.
(b)The original
borrowers on the strength of one unregistered agreement of sale availed loan
facility from the Central Bank of India i.e. the respond- ent No. 1 to the tune
of Rs.30,00,000/- approximately. What was offered by way of security was a flat
which the original borrowers proposed to purchase from the developer and all
that they had on the day and date when they went before the bank to avail the
loan was an unregistered agreement of sale.
(c) It is not in dispute that the Central Bank
on the strength of an unregistered agreement of sale sanctioned the loan
creating a charge over the flat.
(d)Since the borrowers
defaulted in the repayment of the loan, the Central Bank initiated proceedings
for the recovery of the requisite amount be- fore the Debt Recovery Tribunal-I,
Mumbai (in short "the DRT"). The DRT Mumbai adjudicated the Original
Application No. 74 of 2002 and held the borrowers jointly and severally liable
to pay an amount of ₹43,15,405.56 paisa
with interest thereon @15% per annum from the date of filing of the O.A. till
its payment.
(e) The relevant observations made by the DRT,
Mumbai in Para 8 reads thus: -
"8. In
application affidavit of the applicant state that the Defendant No. 2 with
intention to create mortgage deposited title deeds of her flat No. C-28,
Sahyadari Apartment, L.T. Road, Borivali West, Bombay-400092 as security of the
loan. sanctioned to Defendant No. l. To prove this fact the Applicant's side
rely on Exh. 53, which is an unregistered memorandum. It being unregistered
document itself is not sufficient to create the mortgage. The applicants state
further on 04.02.1993, the Defendant No. 2 again attended Applicants office and
re- deposited the title deeds of her flat on the enhanced, revised loan. The
applicant's case about mortgage is based on the title deeds, the documents
produced by Defendants to create the mortgage. That was primary evidence. It
was not produced. Memorandum, Exh. 53 affidavit and pleading of applicant
cannot take place. The applicant do not state or explain why that primary,
basic evidence is not brought before the Tribunal. Unless these documents are
on record, it cannot be assessed/ascertained whether those documents were
sufficient to create mortgage or not. In all the circumstances, I hold the
applicant failed in proving the Defendant No. 2 mortgaged her flat as a
security of the loan given by the Applicants.”
(f) The operative part of the order passed by the
DRT reads thus: -
"A) The Defendant No. 2 and 3 shall
jointly and severally pay the amount of Rs. 43,15,405.56 ps (Rupees Forty Three
Lacs Fifteen Thousand Four Hundred Five and Paise Fifty Six only) to the
Applicant with interest thereon @ 15% p.a. from the date of filing of this application
till the payment.
B) The defendant No. 2
shall pay the Applicant, the amount of Rs. 5,70,787.21 ps. (Rupees Five Lacs
Seventy Thousand Seven Hundred Eight Seven and Paise Twenty One Only) as dues
of Overdraft Accounts, Rs. 4,08,157.25 ps. (Rupees Four Lacs Eight Hundred One
Hundred Fifty Seven and Paise Twenty Five only) as due of Short Term Loan
Account, Rs. 2,25,498.45 ps. (Rupees Two Lacs Twenty Five Thousand Four Hundred
Ninety Eight and Paise Forty Five only) as dues of Working Capital Loan with
interest thereon @ 15% p.a. C) The Applicant will be entitled to recover this
amount from the hypothecation created by the defendants as mentioned in the
application of the defendants fail to pay the above amount.” D) The defendants
No. 2 & 3 shall pay cost of this Application to the applicant and to bear
their own costs".
(g) The Central Bank
of India had to file an appeal before the DRAT be- cause of the observations
made by the DRT in its order as contained in para 8 referred to above.
(h)The order passed by
the DRAT, allowing the appeal filed by the Central Bank reads thus: -
“1. This appeal has
been filed by the plaintiffs /appellant herein being aggrieved by the order
dated 30/11/2006 passed by the learned Presiding Officer, DRT-I, Mumbai in O.A.
No. 74 of 2002, whereby the learned Presiding Officer directed the defendant
nos. 2 and 3 to jointly and severally pay the amount of Rs.43,15,405.56 ps. to
the applicant with interest thereon @15% p.a. from the date of filing of the
application till its payment. Further directed the defendant No. 2 to pay the
amount of Rs.5,70,787.21 ps. as dues of Overdraft Accounts, Rs. 4,08,157.25 ps.
as dues of Short Term Loan Account and Rs.2,25,498.45 ps. as dues of Working
Capital Loan with interest thereon @15% p.a.
2. The ld. counsel for
the appellant raised two grounds namely the description made by the defendant
no.1 is not correct one and second ground is that the original title deeds have
not been produced before this court. Hence he prayed that the appeal has to be
allowed against the defendant no.1 alone. The suit has been dismissed against
the defendant no.1. Anyhow the suit against the defendant nos. 2 and 3 has been
decreed.
3. The contention of the ld. counsel for the
appellant is that the defendant no.1 is real borrower and is sued in his
personal capacity as proprietor of M/s. Ajanta Industries which is evident from
Para No. 2. Hence he prayed that the appeal has to be allowed.
4. The contention of
the respondent is that the mortgage has not been proved before the DRT. Hence
the suit has been rightly dismissed. Thereafter respondent no. 4 has advanced
the loan to the respondent no. 1 and thereafter the property is sold to the
third person. Hence he prayed that the appeal has to be dismissed.
5. From the perusal it
is seen that it has been mentioned that the respondent no.1 was sued in his
personal and individual capacity as proprietor of M/s. Ajanta Industries as
clearly set out in Para No.2. Hence as per Order 30 Rule 10 he has been properly
described, hence the finding in this regard given by the DRT has to be set
aside and in turn is set aside.
6. The next contention
is that the original documents have not been produced before the trial court is
not in dispute. Now it has been produced before this court which pertains to
the mortgaged property and original agreement are now brought on record and is
taken on record. It is pertinent to note that the original title deeds are with
the appellants and mortgage is not denied by the guarantor. It is also clear
that respondent no.4 do not have title deeds pertaining to the property and
their alleged mortgage is very much subsequent to the mortgage of appellants.
Hence, I am of the view that it can be accepted that the appellant bank has
valid and subsisting mortgage in its favour and in turn mortgage is admitted
and finding given by the DRT in this regard has to be set aside and the O.A.
against the defendant no.1 also decreed and allowed as all parties are properly
sued and joined.
7.
The appeal is allowed.
8. Subsequent to sale
by respondent no. 4 in favor of third party and amount of deposit is concerned,
this point is left open to agitate before the appropriate forum."
(i) While the
proceedings before the DRAT were pending in the form of ap- peal filed by the
Central Bank of India, the appellant bank herein had to intervene, and they
were also heard on the question as to which bank had the first charge over the
security interest created by the original borrow- ers.
(j) The appellant bank herein being
dissatisfied with the order passed by the DRAT referred to above challenged the
same by filing a writ petition be- fore the High Court. The High court
proceeded on the footing that the DRAT was right in recording a finding that
the mortgage of the flat in question created in favour of the appellant bank
herein was subsequent in point of time and besides the same, the appellant bank
had no valid title deeds with them at the time of sanctioning the loan in
favour of the original borrowers.
(k)In short, the
finding of fact recorded by the High Court in its impugned judgment is that the
flat was mortgaged with the Central Bank of India on 31.10.1989, whereas the
mortgage claimed by the appellant Bank herein was of October, 1998.
(l) The High Court
observing as aforesaid, rejected the writ petition filed by the appellant
herein. The relevant observations made by the High Court in its impugned
judgment read thus: -
“6. By the impugned
order, therefore, the DRAT had arrived at a clear finding of fact that the
mortgage of the said flat to the Petitioner-Cosmos Bank is 'subsequent' to the
mortgage of the Respondent-Central Bank apart from the fact that the
Petitioner-Cosmos Bank did not have title deeds pertaining to the said flat. This
finding was arrived at by DRAT as the said flat was mortgaged to the
Respondent-Central Bank on 31-10- 1989, whereas the mortgage claimed by the
Petitioner-Cosmos Bank was of October 1998.
7. It is brought out
in the Affidavit-in-Reply of the Respondent-Central Bank that the
Respondent-Central Bank had Initially filed a suit against the
borrower/guarantors (Respondents Nos.2 to 4 herein) in this Court on 5
September 1994. By an interim order dated 20-10-1994, this Court had appointed
a Court Receiver in respect of the said flat.
8. It would thus be evident that at the time
of sanction and grant of the Loan by the Petitioner-Cosmos Bank i.e. sometime
in November 1998, the said flat was in custodia legis as the Court Receiver was
appointed in the year 1994. In these circumstances, there appears to be
substance in this submission of the learned Counsel for the Respondent-Central.
Bank that the validity of the mortgage of the said flat in favour of the
Petitioner-Cosmos Bank was even otherwise questionable. The suit which was
filed in this Court was ultimately transferred to DRT only in the year 2002 and
numbered as O.A.No. 74 of 2002. Before this Court, the Petitioner-Cosmos Bank
have essentially relied upon the Share Certificate which was as a matter of fact
issued by the Society only in the year 1989 (as the Society itself was formed
in the year 1986-87) and Agreement for Sale dated 7-12-1978 (which is
subsequent to Agreement for Sale dated 09-11-1978 relied upon by the
Respondent-Central Bank).
Both the Agreements
are unregistered. It Is not even pleaded by the Petitioner-Cosmos Bank in the
present Petition that the documents of title deeds relied upon by the
Respondent-Central Bank were not credible or that the mortgage of the said flat
in favour of the Respondent-Central Bank was not valid. In any event, it can be
hardly disputed that the mortgage in favour of the Respondent- Central Bank was
prior in point of time. In the circumstances, in our view, the DRAT rightly
held in the impugned order that the alleged mortgage of the Petitioner-Cosmos
Bank was subsequent in point of time to the mortgage of the Respondent- Central
Bank.
9. In view of the
aforesaid discussion, we are unable to find fault with the impugned order of
the DRAT. The Petition is, accordingly, dismissed. The Recovery Officer, DRT
may now pass appropriate orders as regards the distribution of the sale
proceeds of the said flat which has been deposited in the DRT.”
4.
In such circumstances referred to above, the appellant bank is here before this
Court with the present appeal.
B. SUBMISSIONS OF THE PARTIES
i. Submissions on behalf of the appellant
Cosmos Co. Operative Bank.
5.
The learned counsel appearing for the appellant bank vehemently submitted that
the High Court committed an egregious error in rejecting the writ petition
filed by his client and thereby affirming an equally egregious order passed by
the DRAT.
6.
He would submit that indisputably the first mortgage was created in favour of
the Central Bank of India, but the said mortgage was invalid or rather having
no force in law. According to him any bank, while sanctioning the loan would
ensure that what is being offered by way of security is some- thing valid. In
such circumstances, when an unregistered agreement of sale was offered as a
title deed, it was of no value as it is a settled law that agreement of sale
does not confer any right title or interest. Far from being a registered
agreement of sale, in the case on hand, what was offered by way of security to
the Central Bank was an unregistered agreement of sale.
7.
In the aforesaid context, the learned counsel first invited the attention of
this Court to Section 54 of the Transfer of Property Act, 1884 (for
short, the “Act, 1884”) which defines the terms sale. Thereafter he invited the
attention of this Court to Section 58 of the Act, 1884 which defines
the term "Mortgage”, “mortgagor”, “mortgagee”, “mortgage-money” and “mort-
gage-deed”.
8.
He laid much emphasis on sub-section (a) of Section 58, which explains
what is mortgage. Thereafter, he invited the attention of the Court
to Section 100 of the Act, 1884 which explains what is “charge”.
9.
The learned counsel thereafter invited the attention of this Court to certain
provisions of the Maharashtra Ownership Flats (Regulation of the promo- tion of
construction, sale, management and transfer) Act, 1963 (for short the "Act
1963") more particularly Section(s) 4, 4A and 11 therein, respectively.
10.He
thereafter invited the attention of this Court to few provisions of the Ma-
harashtra Apartment Ownership Act 1970 (for short the “Act, 1970”)
more particularly the preamble to the Act and Sections
2, 4 and 5 respectively.
11.
To fortify his submissions more particularly the principal contention that the
respondent no. 1 Bank cannot be said to have the first charge over the mortgaged
property, he relied on few decisions of this Court, which are as under:
i. Suraj Lamp &
Industries (P) Ltd. (2) through Director v. State of Haryana and
Another reported in (2012) 1 SCC 656 more particu- larly paras 16 and 19
respectively therein.
ii. Bank of India v.
Abhay D. Narottam and Others reported in (2005) 11 SCC 520 more particularly
the observations made in paras 9 and 11 respectively therein.
iii. Anita
Enterprises and Anr. v. Belfer Coop. Housing Society Ltd. and Ors. reported in
(2008) 1 SCC 285 more particularly the obser- vations made in para 41 therein.
iv. Dattatreya
Shanker Mote and Ors. v. Anand Chintaman Datar and Ors. reported in (1974)
2 SCC 799 more particularly the obser- vations made in para 67 therein."
12.In
such circumstances referred to above, the learned counsel prayed that
there being merit in his appeal, the same may be allowed and the impugned order
passed by the High Court may be set aside.
ii.
Submissions on behalf of the respondent no.1; Central Bank of In- dia.
13.
On the other hand, the learned counsel appearing for the Central Bank of In-
dia submitted that no error not to speak of any error of law could be said to
have been committed by the High Court in passing the impugned order. He would
submit that indisputably the first charge over the mortgaged property is that
of the Central Bank.
14.
At this stage, we must record that the learned counsel wanted to place few
additional documents on record to make good his case that the view taken by the
High Court is correct. However, considering the fact that this litigation is
pending past almost 10 years, we declined such request.
15.
We requested the learned counsel to proceed on the basis of the material on
record and make good his case that the impugned order passed by the High Court
needs no interference.
16.
He would submit that there are concurrent findings recorded by the DRAT and by
the High Court in so far as the validity of the mortgage is concerned and also
which bank has the first charge over the mortgaged property.
17.
In such circumstances, referred to above, the learned counsel would submit
that there being no merit in this appeal, the same may be dismissed.
C.
ISSUE FOR CONSIDERATION
18.
Having heard the learned counsel appearing for the parties and having gone
through the materials on record, the only question that falls for our consideration
is whether the High Court committed any error in passing the impugned order.
D. ANALYSIS
i.
Relevant Provisions
19.Before
adverting to the rival submissions canvassed on either side, we must look into
the few provisions of the law relevant for the purpose of deciding the present
appeal which are as follows: -
SECTION(S) 58 AND 100
OF THE ACT, 1884.
“58. “Mortgage”,
“mortgagor”, “mortgagee”, “mortgage-money” and “mortgage-deed” defined.—
(a) A mortgage is the
transfer of an interest in specific immoveable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, an
existing or future debt, or the performance of an engagement which may give
rise to a pecuniary liability. The transferor is called a mortgagor, the
transferee a mortgagee; the principal money and interest of which payment is
secured for the time being arc called the mortgage-money, and the instrument
(if any) by which the transfer is effected is called a mortgage-deed.
(b) Simple mortgage.—
Where, without delivering possession of the
mortgaged property, the mortgagor binds
himself personally to pay the mortgage-money, and agrees, expressly or
impliedly, that, in the event of his failing to pay according to his contract,
the mortgagee shall have a right to cause the mortgaged property to be sold and
the proceeds of sale to be applied, so far as may be necessary, in payment of
the mortgage-money, the transaction is called a simple mortgage and the
mortgagee a simple mortgagee.
(c) Mortgage by
conditional sale.— Where the mortgagor ostensibly sells the mortgaged property—
on condition that on default of payment of the mortgage-money on a certain date
the sale shall become absolute, or on condition that on such payment being made
the sale shall become void, or on condition that on such payment being made the
buyer shall transfer the property to the seller, the transaction is called a
mortgage by conditional sale and the mortgagee a mortgagee by conditional sale:
Provided that no such
transaction shall be deemed to be a mortgage, unless the condition is embodied
in the document which effects or purports to effect the sale.
(d) Usufructuary
mortgage.— Where the mortgagor delivers possession or expressly or by
implication binds himself to deliver possession of the mortgaged property to
the mortgagee, and authorises him to retain such possession until payment of
the mortgage-money, and to receive the rents and profits accruing from the
property or any part of such rents and profits and to appropriate the same in
lieu of interest, or in payment of the mortgage -money, or partly in lieu of
interest or partly in payment of the mortgage-money, the transaction is called
an usufructuary mortgage and the mortgagee an usufructuary mortgagee.
(e) English mortgage.—
Where the mortgagor binds himself to repay the mortgage-money on a certain
date, and transfers the mortgaged property absolutely to the mortgagee, but
subject to a proviso that he will re-transfer it to the mortgagor upon payment
of the mortgage-money as agreed, the transaction is called an English mortgage.
(f) Mortgage by deposit
of title-deeds.— Where a person in any of the following towns, namely, the
towns of Calcutta, Madras, and Bombay, and in any other town which the State
Government concerned may, by notification in the Official Gazette, specify in
this behalf, delivers to a creditor or his agent documents of title to
immoveable property, with intent to create a security thereon, the transaction
is called a mortgage by deposit of title-deeds.
(g) Anomalous mortgage.—A mortgage which is
not a simple mortgage, a mortgage by conditional sale, an usufructuary
mortgage, an English mortgage or a mortgage by deposit of title- deeds within
the meaning of this section is called an anomalous mortgage.”
“100. Charges.— Where
immoveable property of one person is by act of parties or operation of law made
security for the payment of money to another, and the transaction does not
amount to a mortgage, the latter person is said to have a charge on the
property; and all the provisions hereinbefore contained which apply to a simple
mortgage shall, so far as may be, apply to such charge. Nothing in this section
applies to the charge of a trustee on the trust property for expenses properly
incurred in the execution of his trust, 5 [and, save as otherwise expressly
provided by any law for the time being in force, no charge shall be enforced
against any property in the hands of a person to whom such property has been
transferred for consideration and without notice of the charge.”
SECTIONS 4, 4A AND 11
RESPECTIVELY OF THE ACT,
“4. Promoter before
accepting advance payment or deposit to enter into agreement and agreement to
be registered. – (1) Notwithstanding anything contained in any other law, a
promoter who intends to construct or constructs a block or building of flats,
all or some of which are to be taken or are taken on ownership basis, shall,
before, he accepts any sum of money as advance payment or deposit, which shall
not be more than 20 per cent. of the sale price enter into a written agreement
for sale with each of such persons who are to take or have taken such flats,
and the agreement shall be registered under the Registration Act,
1908 (hereinafter in this section referred to as
"the Registration Act") and such agreement shall be in the
prescribed form.” (lA) The agreement to be prescribed and sub-section (1) shall
contain inter alia the particulars as specified in clause (a); and to such
agreement there shall be attached the copies of the documents specified in
clause (b),-
(a)
particulars,-
(i) if the building is
to be constructed, the liability of the promoter to construct it according
to the plans and specifications approved by the local authority where such
approval is required under any law for the time being in force;
(ii) the date by which
the possession of the flat is to be handed over to the purchaser;
(iii) the extent of
the carpet area of the flat including the area of the balconies which should be
shown separately;
(iv) the price of the
flat including the proportionate price of the common areas and facilities which
should be shown separately, to be paid by the purchaser of flat; and the
intervals at which instalments thereof may be paid;
(v) the precise nature
of organisation to be constituted of the persons who have taken or are to take
the flats;
(vi) the nature,
extent and description of limited common areas and facilities;
(vii) the nature,
extent and description of limited common areas and facilities, if any;
(viii) percentage of
undivided interest in the common areas and facilities appertaining to the flat
agreed to be sold;
(ix) statement of the
use of which the flat is intended and restriction of its use, if any;
(x) percentage of
undivided interests in the limited common areas and facilities, if any,
appertaining to the flat agreed to be sold;
(b) copies of documents,-
(i) the certificate by
an Attorney at law or Advocate under clause
(a) of sub-section (2)
of section 3;
(ii) Property Card or
extract of village Forms VI or VII and XII or any other relevant revenue record
showing the nature of the title of the promoter to the land on which the flats
are constructed or are to be constructed;
(iii) the plans and
specifications of the flat as approved by the concerned local authority.
(2) Any agreement for sale entered into under
sub-section (1) shall be presented by the promoter or by any other person
competent to do so under section 32 of the Registration Act, at the
proper registration office for registration, within the time allowed
under sections 23 to 26 (both inclusive) to the said Act
and execution thereof shall be admitted before the registering officer by the
person executing the document or his representative, assign or agent
as laid down in sections 34 and 35 of the said Act
also within the time aforesaid:
Provided that, where
any agreement for sale is entered into, or is purported to be entered into,
under sub-section (1), at any time before the commencement of the Maharashtra
Ownership Flats (Regulation of the promotion of construction, sale, management
and transfer) (Amendment and Validating Provisions) Act, 1983, and such
agreement was not presented for registration or was presented for registration
but its execution was not admitted before the registration officer by the
person concerned, before the commencement of the said Act, then such document
may be presented at the proper registration office for registration, and its
execution may be admitted, by any of the persons concerned referred to
above in this sub-section, on or before the 31st December 1984, and the
registering officer shall accept such document for registration, and register
it under the Registration Act, as if it were presented, and its execution
was admitted, within the time laid down in the Registration Act:
Provided further that,
on presenting a document for registration as aforesaid if the person executing
such document or his representative, assign or agent does not appear before the
registering officer and admit the execution of the document, the registering
officer shall cause a summons to be issued under section 36 of the
Registration Act requiring the executant to appear at the registration office,
either in person or by duly authorised agent, at a time fixed in the summons.
If the executant fails to appear in compliance with the summons, the execution
on the document shall be deemed to be admitted by him and the registering
officer may proceed to register the document accordingly. If the executant
appears before the registering officer as required by the summons but denies
execution of the document, the registering officer shall, after giving him a
reasonable opportunity of being heard, if satisfied that the document has been
executed by him, proceed to register the document accordingly.
4A. Effect of non-registration of agreement
required to be registered under section 4.-
Where an agreement for
sale entered into under sub-section (1) of section 4, whether entered into
before or after the commencement of the Maharashtra Ownership Flats (Regulation
of the promotion of construction, sale, Management and transfer) (Amendment and
Validating Provisions) Act, 1983, remains unregistered for any reason, then
notwithstanding anything contained in any law for the time being in force, or
in any judgement, decree or order of any Court, it may be received as evidence
of a contract in a suit for specific performance under Chapter II of the
Specific Relief Act, 1963, or as evidence of part performance of a contract for
the purposes of section 53A of the Transfer of Property Act, 1882, or
as evidence of any collateral transaction not required to be effected by
registered instrument.
xxx xxx xxx
11.Promoter to convey title, etc., and execute
documents, according to agreement-
(1) A promoter shall
take all necessary steps to complete his title and convey to the organisation
of persons, who take flats, which is registered either as a co-operative
society or as a company as aforesaid or to an association of flat takers or
apartment owners, his right, title and interest in the land and building, and
execute all relevant documents therefor in accordance with the agreement
executed under section 4 and if no period for the execution of the
conveyance is agreed upon, he shall execute the conveyance within the
prescribed period and also deliver all documents of title relating to the
property which may be in his possession or power.
(2) It shall be the
duty of the promoter to file with the Competent Authority, within the
prescribed period, a copy of the conveyance executed by him under sub-section
(1).
(3) If the promoter
fails to execute the conveyance in favour of the Cooperative society formed
under section 10 or, as the case may be, the Company or the
association of apartment owners, as provided by sub-section (1), within the
prescribed period, the members of such Co-operative society or, as the case may
be, the Company or the association of apartment owners may, make an
application, in writing, to the concerned Competent Authority accompanied by
the true copies of the registered agreements for sale, executed with the
promoter by each individual member of the society or the Company or the
association, who have purchased the flats and all other relevant documents
(including the occupation certificate, if any), for issuing a certificate that
such society, or as the case may be, Company or association, is entitled to
have an unilateral deemed conveyance, executed in their favour and to have it
registered.
(4) The Competent
Authority, on receiving such application, within reasonable time and in any
case not later than six months, after making such enquiry as deemed necessary
and after verifying the authenticity of the documents submitted and after
giving the promoter a reasonable opportunity of being heard, on being satisfied
that it is a fit case for issuing such certificate, shall issue a certificate
to the Sub-Registrar or any other appropriate Registration Officer under
the Registration Act, 1908, certifying that it is a fit case for enforcing
unilateral execution, of conveyance deed conveying the right, title and
interest of the promoter in the land and building in favour of the applicant,
as deemed conveyance.
(5) On submission by
such society or as the case may be, the Company or the association of apartment
owners, to the Sub- Registrar or the concerned appropriate Registration Officer
appointed under the Registration Act, 1908, the certificate issued by the
Competent Authority alongwith the unilateral instrument of conveyance, the
Sub-Registrar or the concerned appropriate registration Officer shall,
notwithstanding anything contained in the Registration Act, 1908, issue
summons to the promoter to show cause why, such unilateral instrument should not
be registered as 'deemed conveyance' and after giving the promoter and the
applicants a reasonable opportunity of being heard, may on being satisfied that
it was fit case for unilateral conveyance, register that instrument as, 'deemed
conveyance’.”
SECTIONS 2, 4 AND 5
RESPECTIVELY OF THE ACT, 1970 “2. Application of the Act. -
This Act applies
only to property, the sole owner or all of the owners of which submit the same
to the provisions of this Act by duly executing and registering a Declaration
as hereinafter provided : Provided that, no property shall be submitted to the
provisions of this Act, unless it is used or proposed to be used for residence,
office, practice of any profession or for carrying on any occupation, trade or
business or for any other type of independent use :
xxx xxx xxx
4. Status of apartments. – Subject to the
provisions of the second proviso to section 2 of this Act, each
apartment, together with its undivided interest in the common areas and
facilities, appurtenant to such apartment, shall for all purposes constitute
heritable and transferable immoveable property within the meaning of any law
for the time being in force in the State; and accordingly, an apartment owner
may transfer his apartment and the percentage of undivided interest in the
common areas and facilities appurtenant to such apartment by way of sale,
mortgage, lease, gift, exchange or in any other manner whatsoever in the same
manner, to the same extent and subject to the same rights, privileges,
obligations, liabilities, investigations, legal proceedings, remedies and to
penalty, forfeiture and punishment as any other immoveable property, or make a
bequest of the same under the laws applicable to the transfer and succession of
immoveable property.
5. Ownership of
apartments. – (1) Each apartment owner shall be entitled to the exclusive
ownership and possession of his apartment in accordance with the Declaration
executed and registered as required by section 2 of this Act.
(2) Each apartment
owner shall execute a Deed of Apartment in relation to his apartment in the
manner prescribed for the purpose.”
20.Without
any doubt in our mind, we say that the High Court fell in error more
particularly, in view of, what has been observed in para 8 of the impugned
order. The law is very well settled as explained by this Court in Suraj Lamp
(supra) that a contract of sale i.e. an agreement of sale does not itself
create any interest in or charge on any property. This is evident on
plain reading of Section 54 of the
Act, 1884 which we have referred to above.
21.In
the aforesaid context, the decision of this Court in Abhay D. Narottam (supra)
is also relevant more particularly the observations made in para 11 therein.
Paras 9 and 11 read thus: -
"9. It is not
necessary for us to determine the import of Section 125 of the
Companies Act as we are of the opinion that the ap- peal must be dismissed on a
much more basic ground. “Mort- gage” has been defined in Section
58(a) of the Transfer of Prop- erty Act, 1882 as a transfer of an interest
in specific immovable property for the purpose of securing the payment of money
ad- vanced or to be advanced by way of loan, etc. Without a transfer of
interest there is no question of there being a mortgage. The same principle
would apply to a charge under Section 100 of the Transfer of Property
Act. Section 100 provides that all the provisions which apply to a simple
mortgage shall, so far as may be, apply to such charge. The definition of
simple mortgage in Section 58(b) of the Act merely speaks of the procedure and
de- scribes that species of mortgage.
xxx xxx xxx
11. As far as the flat
is concerned, it needs no authority to say that a contract for sale of
immovable property does not of itself create any interest in or charge over
such property. This is provided in Section 54 of the Act and is
well-settled law. In this case, the agreement for sale which was deposited by
Respondent 2 with the appellant Bank was not an agreement by which Respondent 2
agreed to sell the property to a third party, but an agreement to sell the flat
to Respondent 2. No interest was created in favour of Respondent 2 by virtue of
this agreement for sale which could have been transferred by way of security to
the appellant Bank. There is as such no question of the appellant Bank having
any charge over such non-existent interest."
(Emphasis
supplied)
22.The
observations referred to above are directly applicable to the facts of the
present case.
23.The
observations made by this Court in Dattatreya Shanker Mote (supra),
more particularly, in para 67 also assumes significance. Para 67 reads thus: -
"67. The
contention was that, although a charge may not be described as “a transfer”,
yet, the result of Section 100 of the Act was to equate it with a
simple mortgage which is a transfer because Section 100 says: “all the
provisions hereinbefore contained which apply to a simple mortgage shall, so
far as may be, apply to such charge”. I think that, apart from the qualifying
words, “so far as may be”, used by Section 100 of the Act, a
condition essential to the applicability of Section 48 of the Act is
that there must be an actual transfer of property. Furthermore, another
condition for invoking Section 48 of the Act is that the previous and
the subsequently created rights “cannot all exist or be exercised to their full
extent together”. In the case before us, this does not appear from facts found.
In any case, the prior right of the charge-holders could only obtain priority
provided other things are not unequal. This follows from words used indicating
that each of the two or more transactions must at least be a “transfer”.
Furthermore, the conditions of priority as between the holder of a previous
charge and a subsequent simple mortgage are completely covered by Section
100 of the Act. The principle underlying Section 48 is one
expressed in the maxim of Equity: “Qui prior est tempore potior est jure”
(first in time is stronger in right). This principle, applied to ranking between
rival equitable claims, is applied by Section 48 to contending claims
of otherwise equal legal validity. The effect of Section 100 is that while a
charge, which is not a “transfer” of property, gets recognition as a legally
enforceable claim, that enforceability is subjected by the proviso to the
requirements of a prior notice in order to give it precedence over a legally
valid transfer of property. The rights of the appellants charge-holders could
only be exercised, on facts found, subject to the priority obtained by the
respondent mortgagee's rights. This clear result of the law, as contained
in Section 100 of the Act, cannot be defeated by invoking either the
terms of or the principles underlying Section 48 of the Act read with
the first part only of Section 100 of the Act. If the respondent
simple mortgagee Oswal could not have claimed the benefit of the proviso
to Section 100, the first part of Section 100, read with Section
48 of the Act, could have come to the aid of the appellants. But, on the
view adopted by me, this line of reasoning does not help the unfortunate
charge-holders at all.”
(Emphasis
supplied)
24.The
observations made by this Court in Anita Enterprises (supra) in para
41 are also relevant. The para 41 reads thus: -
“41. It appears to us
that the status of a member in a tenant co- partnership housing society is very
peculiar. The ownership of the land and building both vests in the society and
the member has, for all practical purposes, right of occupation in perpetuity
after the full value of the land and building and interest accrued thereon have
been paid by him. Although de jure he is not owner of the flat allotted to him,
but, in fact, he enjoys almost all the rights which an owner enjoys, which
includes right to transfer in case he fulfils the two preconditions, namely, he
occupies the property for a period of one year and the transfer is made in
favour of a person who is already a member or a person whose application for
membership has been accepted by the society or whose appeal under Section
23 of the Societies Act has been allowed by the Registrar or to a person
who is deemed to be a member under sub-section (1-A) of Section 23 of
the Societies Act. In case any of these two conditions is not fulfilled, a
member cannot be said to have any right of transfer. Thus, we reiterate the
law laid down by this Court in Sanwarmal [(1990) 2 SCC 288] that a
member has more than a mere right to occupy the flat, meaning thereby higher
than tenant, which is not so in the case of a tenant within the meaning
of Section 5(11) of the Rent Act. This being the position, we have no
difficulty in coming to the conclusion that the status of a member in the case
of tenant co-partnership housing society cannot be said to be that of a tenant
within the meaning of Section 5(11) of the Rent Act, as such there
was no relationship of landlord and tenant between the Society and the member.”
(Emphasis supplied)
25.
The observations made by this Court in Suraj Lamp (supra) in paras 16 and 19
are also relevant. The paras 16 and 19 respectively read thus: -
“Scope of an agreement
of sale
16. Section
54 of the TP Act makes it clear that a contract of sale, that is, an agreement
of sale does not, of itself, create any interest in or charge on such property.
This Court in Narandas Karsondas v. S.A. Kamtam [(1977) 3 SCC
247] observed: (SCC pp. 254-55, paras 32-33 & 37) “32. A contract of sale
does not of itself create any interest in, or charge on, the property. This is
expressly declared in Section 54 of the Transfer of Property Act.
(See Ram Baran Prasad v. Ram Mohit Hazra [AIR 1967 SC 744 : (1967) 1 SCR 293]
.) The fiduciary character of the personal obligation created by a con- tract
for sale is recognised in Section 3 of the Specific Relief Act, 1963,
and in Section 91 of the Trusts Act.
The personal
obligation created by a contract of sale is described in Section
40 of the Transfer of Property Act as an obligation arising out of
contract and an- nexed to the ownership of property, but not amounting to an
interest or easement therein.
33. In India, the word
‘transfer’ is defined with refer- ence to the word ‘convey’. … The word
‘conveys’ in Section 5 of the Transfer of Property Act is used in the
wider sense of conveying ownership.
***
37. … that only on
execution of conveyance, ownership passes from one party to another….”
xxx xxx xxx
19. Any contract of
sale (agreement to sell) which is not a registered deed of conveyance (deed of
sale) would fall short of the requirements of Sections
54 and 55 of the TP Act and will not confer any title nor
transfer any interest in an immovable property (except to the limited right
granted under Section 53-A of the TP Act). According to the TP Act,
an agreement of sale, whether with possession or without possession, is not a
conveyance. Section 54 of the TP Act enacts that sale of immovable
property can be made only by a registered instrument and an agreement of sale
does not create any interest or charge on its subject-matter.”
(Emphasis
supplied)
26.
Suraj Lamp (supra) later came to be referred to and relied upon by this Court
in Shakeel Ahmed v. Syed Akhlaq Hussain reported in 2023 SCC OnLine
SC 1526 wherein the Court after referring to its earlier judgment held that the
person relying upon the customary documents cannot claim to be the owner of the
immovable property and consequently not maintain any claims against a
third-party. The relevant paras read as under: -
“10. Having considered
the submissions at the outset, it is to be em- phasized that irrespective of
what was decided in the case of Suraj Lamps and Industries (supra) the fact
remains that no title could be transferred with respect to immovable properties
on the basis of an unregistered Agreement to Sell or on the basis of an
unregistered Gen- eral Power of Attorney. The Registration Act,
1908 clearly provides that a document which requires compulsory
registration under the Act, would not confer any right, much less a legally
enforceable right to approach a Court of Law on its basis. Even if these
documents i.e. the Agreement to Sell and the Power of Attorney were registered,
still it could not be said that the respondent would have acquired title over
the property in question. At best, on the basis of the registered agree- ment
to sell, he could have claimed relief of specific performance in appropriate
proceedings. In this regard, reference may be made to sections
17 and 49 of the Registration Act and section 54 of
the Trans- fer of Property Act, 1882.
11. Law is well
settled that no right, title or interest in immovable property can be conferred
without a registered document. Even the judgment of this Court in the case of
Suraj Lamps & Indus- tries (supra) lays down the same proposition.
Reference may also be made to the following judgments of this Court:
(i). Ameer Minhaj
v. Deirdre Elizabeth (Wright) Issar (2018) 7 SCC
(ii). Balram
Singh v. Kelo Devi Civil Appeal No. 6733 of 2022
(iii). Paul
Rubber Industries Private Limited v. Amit Chand Mitra SLP(C) No. 15774 of
2022.
12. The embargo put on
registration of documents would not override the statutory provision so as to
confer title on the basis of unregistered documents with respect to immovable
property. Once this is the settled position, the respondent could not have
maintained the suit for pos- session and mesne profits against the appellant,
who was admittedly in possession of the property in question whether as an
owner or a licensee.
13. The argument
advanced on behalf of the respondent that the judg- ment in Suraj Lamps
& Industries (supra) would be prospective is also misplaced. The
requirement of compulsory registration and effect on non-registration emanates
from the statutes, in particular the Re- gistration Act and the Transfer
of Property Act. The ratio in Suraj Lamps &
Industries (supra) only approves the provisions in the two enactments.
Earlier judgments of this Court have taken the same view.” iii. Concept of
Equitable Mortgage.
27.
The question whether Central Bank of India i.e., the respondent no. 1 herein
had a valid mortgage or not can be looked at from one another angle. It is an
undisputed fact that the original borrowers herein whilst availing the loan
facility from the respondent no. 1 bank herein had offered the said flat in
question as a security, and pursuant to the same had willingly deposited the
agreement of sale in respect of the same with the respondent no. 1 bank.
28.
Although, indisputably as discussed in the foregoing paragraphs the said
agreement to sale can by no means be treated as title deeds to the said flat
and as such would not constitute a mortgage in terms of Section 58 of
the Act, 1884, yet could it be said that there was no charge created on the
said flat at all by the original borrowers? Could it be argued that the failure
to deposit the share certificate to the said flat at the time of availing the
loan for whatsoever reasons by a necessary implication nullifies the charge
that was intended or sought to be created over the said flat in favour of the
ap- pellant bank herein, merely because the agreement to sale in itself does
not purport any title even though the intention of the parties was to
create a charge over the flat? The answer to the same has to be an emphatic
“No”.
29.
Before we proceed to explain the aforesaid, it would be apposite for us to
understand the concept of “Equitable Mortgage”. Under the English Law, broadly
there are two kinds of mortgages; (i) a legal mortgage and (ii) an equitable
mortgage. A ‘legal mortgage’ entails creation of a charge by way of conveyance
of a proprietary interest over the property or security in fa- vour of the
lender in accordance with the formalities set out under the Law of Property
Act, 1925. This is typically effectuated through execution of a deed of charge
or a mortgage deed simpliciter. While such conveyance need not involve transfer
of the title or ownership in itself nor is the conveyance required to be
physical or actual and may be symbolic in nature where the borrower or
mortgagor continues to retain possession or even title of the mortgaged
property; however, the de jure effect of such conveyance must be in the nature
of vesting the lender with an enforceable right to take pos- session, to
foreclose or to sell the property in the event of default. Thus, the legal
effect of the deed of charge or mortgage must convey certain enforce- able
rights in favour of the lender or mortgagor over the mortgaged property even
though the title or ownership may not be transferred.
30.
However, there may be instances where the parties agree to mortgage a property
as security, but no formal charge or conveyance of any proprietary interest in
the said property has taken place, still the same may be recognized as a
mortgage. This is popularly understood as an ‘equitable mort- gage’ where
although under the law the formalities required for creating a legal charge or
mortgage over a property are patently absent, yet the said property would be in
equity deemed to have been mortgaged and as such may be apportioned or
appropriated by the lender on the strength of mere intention of the parties to
create a mortgage. In other words, where under the law no mortgage or charge is
said to have been created over a property i.e., no conveyance of a right or
interest over the subject property has been effected, yet if the intention of
parties to create a mortgage is clear, equity would demand that such intention
is not only respected but given some ef- fect to and the said property be
deemed to have been mortgaged so as to en- able the lender to assert its rights
over the same, it is known as an ‘equitable mortgage’.
31.The
concept or doctrine of ‘equitable mortgage’ owes its origin to the Eng- lish
case of Russel v. Russel reported in [1783] 28 E.R. 1121 wherein the
High Court of Chancery speaking through Lord Thurlow held that where there is
delivery of title by the borrower to the lender for the purpose of availing a
loan, although such deposit may not constitute a valid mortgage, but the courts
in granting specific performance to the lender to create a se- curity or lien
over the property would effectively be “supplying the legal formalities
necessary to create nothing but a mortgage though one in equity”. He explained
that the court in permitting the lender to create a security over the property
on the strength of the title deeds lying with it is not per se performance of a
contract but rather its execution and hence for all purposes would be a
mortgage inter se the borrower and the lender in equity. He lastly elaborated
that the further grant of relief to execute such a contract which is not a
valid mortgage but nevertheless being converted into one is grounded on it
being already being a contract part performed. [See; J.B. White & Tudor in
Equitable Mortgage and Leading Cases in Equity, 9 th Ed. (Sweet & Maxwell
(1928)]
32.
Thus, the underlying distinction between a legal mortgage and an equitable
mortgage under the English Law is that in the former, there is conveyance or
transfer of some proprietary interest in the mortgaged property in accord- ance
with the statute or law whereas in the latter the formalities required for a
legal mortgage are not fully satisfied, but the parties' intentions to create a
mortgage are clear as result of which it is deemed as a mortgage.
33.
The rationale behind the existence of the concept of an ‘equitable mortgage’
was elaborated upon by Sir William Holdsworth in A History of English Law. He
explained that the evolution of equitable mortgage is based on the principle
that a mortgage at its core is essentially nothing more than a ‘security’. It
is not intended as a mechanism of transferring either ownership or any vested
interest in the strict sense but rather only a means for providing a security.
He elaborated how ‘equitable mortgages’ of today’s time is a reflection of the
practicalities of the then mercantile system of the time where due to the
commercial exigencies and need for quick financial arrangements led the
community to resort to the informal practice of extending loans and creating
security by mere deposit of titles or a promissory note to repay solely on a
‘mutual understanding’ between the parties, without any actual agreement or
memorandum and without following the cumbersome formalities of any transfer of
conveyance of proprietary rights as required under a traditional or legal
mortgage.
34.
The aforesaid may be better understood through the well-known maxim of ‘Quod
fieri debuit pro facto censetur’ which means that ‘what ought to have been done
is considered as done’. Edward Henry Turner Snell in his book on The Principles
of Equity explained that the role of equity in law is only one i.e. to rectify
the injustice arising out of the rigidities of the law, to intervene and ensure
that substantive justice prevails over mere formalities or hyper
technicalities, even when strict legal requirements have not been met. Snell
articulated that equity operates as a "court of conscience" tempering
the harshness of the law and fulfilling its enduring mission to deliver fairness
and justice where the rigid application of legal rules would otherwise result
in inequity. In the context of mortgages, take a situation where there is no
express document or deed to evince that a charge was created over the subject
property and the parties at the time of availing the loan merely agreed that
they would create a mortgage in the event of default. In the eyes of law, it
would be said that no mortgage has been created whatsoever, yet the
understanding between the parties to later create a mortgage at the time whilst
advancing the loan shows the ab initio intention to create a charge and treat
the subject property as a security or a collateral for the sum so ad- vanced.
Under the general principle of law, the recourse that would ordinarily be
available to the lender in the aforesaid situation would be to seek specific
performance of the said agreement (oral or written) to create a mort- gage on
the strength that there has been part performance of the agreement i.e., loan
has been advanced and thus, charge should now be permitted to be created, and
thereafter proceed to exercise its rights after the said mortgage is created.
But a “court of conscience” would instead of subjecting the lender to the
rigmarole of the law, will directly give effect to the true sum and substance
of the intention of the parties and thereby give to the very agreement itself
the effect of creating a mortgage in ‘equity’ and enable the lender to exercise
its rights as he would be entitled to if the agreement had been performed.
35.Thus,
where a borrower willingly parts away with any title deed or a docu- ment or a
promissory note or an undertaking in respect of a property by de- positing it
with the lender for the purpose of availing any credit facility and upon such deposit,
the loan is so advanced by the lender, fairness, good con- science and justice
or in other words ‘equity’ would demand that some meaningful significance be
given to such act or conduct of the parties, as generally such act of
depositing documents against loans is more often than not for no other
purpose but to create a mortgage. Thus, a “court of con- science” would give
effect to the intention of the parties in the form of an ‘equitable mortgage’
even if there is no formal agreement or a shred of doc- ument expressly
providing that such deposit is for the purpose of creating a charge OR if the
documents so deposited do not necessarily have the effect of transferring or
conveyancing any title or interest in the subject property to the lender.
iv.
Nature of an Equitable Mortgage.
36.
Having understood the concept of ‘equitable mortgage’, it would now be apposite
to understand the ways in which an equitable mortgage may be created and its
nature. Under the English Law, the two primary ways for creating an ‘equitable
mortgage’ is either (i) by deposit of the original title deeds to the subject
property with the lender or where the original title deeds are retained by the
borrower then (ii) by way of a memorandum of understanding or an agreement
simpliciter recording the intention of the parties to create a charge over the
subject property.
37.In
the case on hand, the original borrowers had availed loan facilities from both,
the appellant bank and the respondent no. 1 bank herein by deposit of certain
documents in respect of the said Flat. For availing the loan facility from the
respondent no. 1 bank, the original borrowers deposited two unregistered
agreement to sale dated 15.10.1973 and 09.11.1978 respectively in relation
to the said Flat all the way back in 1989. Whereas, whilst availing the loan
facility from the appellant bank herein in the year 1998 the original borrowers
deposited one another unregistered agreement to sale dated 07.12.1978 in
respect of the said flat which is subsequent in time along with a share
certificate of ownership of the said Flat dated 14.09.1989 that was issued by
the concerned cooperative housing society.
38.
Indisputably, when the loan was granted to the original borrowers, the share
certificate of ownership being the sole document for conveyance of title had
not been issued by the concerned housing society. In such a scenario, could it
be said that in order to create a mortgage by deposit of title deeds, the re-
spondent no. 1 bank was required to take or collect all documents and deeds of
title to the said Flat in its possession, more particularly when the title deed
or share certificate of ownership was not in existence at that time?
39.
The High Court of Chancery in Robberts v. Croft reported in 44 E.R. 887 and a
catena of other decisions have emphatically answered the aforesaid question in
a negative. It has been held that “[...] It is not necessary, to create an
equitable mortgage, that all the title deeds, or even all the material title
deeds, should be deposited. It is sufficient if the deeds deposited are
material evidence of title.”
40.
In fact, the English Courts have gone to the extent of saying that the title
deeds are not the only documents a deposit of which may create an equitable
charge upon the subject property, and that even a promissory note or
an agreement for purchase of the subject property can create an equitable
mort- gage. [See; Ex parte Warner, reported in [1812] 19 Ves Jr 202; Lacon v.
Allen reported in [1856] 3 Drew. 579]. Samuel Miller in The Law of Equit- able
Mortgages explained the aforesaid with a illustration that take a case where
the owner has lost an important deed or where the deeds which have been
deposited while purporting title to the property contain no reference to any
other material deeds, or a situation where there exists no possible way for the
lender to ascertain whether any other deeds or documents are actually
outstanding, should the lender be deprived of the benefit of the deposit of the
other documents even if the intention of parties to create a mortgage is clear?
In his opinion, the principle underlying the doctrine of ‘equitable mortgages’
is premised to mitigate these very hardships or technicalities that often
emerge in transactions of such nature from coming in the way of creation and
enforcement of mortgages. He added, to hold otherwise, would be nothing but an
unfaithful dilution of the doctrine of equitable mortgages and by extension the
concept of ‘equity’ based justice. This is because for deciding a question of
an equitable mortgage, the court is not required to look for deposit of a valid
legal title, because no passing or transfer of title is involved in the first
place in equitable mortgage unlike a legal mortgage, rather what the courts
look for is a transaction in the nature of a contract whereby the interests of
the borrower embraced in the subject property may be later subjected and made
liable for the debt.
41.Even
though, the High Court of Chancery speaking through Lord Eldon in the case of
In Re: Rice reported in [1819] 36 E.R. 632 argued against the idea of extending
the doctrine of ‘equitable mortgage’ to instances of de- posit of ‘part-deeds’
to discourage the act of scrupulous borrowers of obtaining loans from multiple
creditors by dividing and depositing different deeds with each of them, the
position under the English Law has continued to remain the same i.e., part
deposits of title would be sufficient to create an equitable mortgage and that
there is neither any requirement that the mort- gagee or the lender should be
required to acquire every title deed, nor is there any requirement that the
documents so deposited show a good title to the vested property. [See; Robberts
(supra). What is required is that the deeds or documents so deposited
materially evinces the intention of the parties to create a charge over the
subject property and the mortgagor assures itself that he has acquired all
available titles or documents.
42.
The Court of Chancery speaking through Lord Eldon in Knight v.
Knight reported in (1840) 3 Beav 148 held that “equity looks to the intent
rather than the form”. Thus, even if the document that was deposited with the
lender falls short, it would still be enforceable in equity provided the intention
of the parties to do so is as clear as a noon day. In the case at hand, even
though what was deposited with the respondent no. 1 bank herein was nothing but
an unregistered agreement to sale having no legal effect of conveyance or
transfer of the said flat or any right therein in favour of the bank, the
undisputed factum that the said agreement to sale was deposited by the original
borrowers herein so as to offer the said flat as security would tan- tamount to
an equitable mortgage. Moreover, since at the time of availing the loan, the
share certificate of ownership to the said Flat was yet to be is- sued, it
could be said that the respondent no. 1 bank had all the documents to the said
Flat that it could have at that time possibly taken in possession, and we even
proceed on the footing that the respondent no. 1 bank might have undertaken all
the necessary steps to assure itself that there were no other material
documents to be taken possession of at the time of extending the loan.
43.Thus,
where ‘equitable mortgages’ have been created based on deposit of part-deeds or
documents purporting title or evincing intention of parties to create an
interest, all such deposits will be a valid mortgage in equity and the charge
that might have been created prior in time will assume priority over any
subsequent charges or mortgagors. However, since such a mort- gage is an
‘equitable mortgage’ any rights flowing from such mortgages are only of
personal character and only rights in personam and as such will not operate
against any strangers or subsequent incumbrancers unaware of such equitable
mortgage. This stems from the rule that equity acts only in perso- nam. The
very basis for creation of an ‘equitable mortgage’ is the intention of parties
alone, and as such any action or remedy can be directed only against the
parties so involved. This is because, unlike a legal mortgage where a ‘charge’
is created directly on the property itself and the title or any proprietary
interest therein is transferred to the lender thereby becoming a right
enforceable in rem in respect to the property, in case of an ‘equitable
mortgage’ no such charge is said to have been formally created on the prop-
erty nor any transfer or conveyance of interest has said to occur. Rather on
the contrary, the de jure title or ownership continues to vest with the original
borrower and only the documents thereof is ordinarily retained by the lender
and as such the right of the lender in such a situation is being en- forced
through the party having title over the said property alone i.e., the borrower
and thus is only a right in personam. Edgar N. Durfee in The Lien or Equitable
Theory of the Mortgage explaining the aforesaid stated that, in cases of
equitable mortgage in the absence of any ‘conveyance’ or creation of ‘charge’,
the money so advanced against the subject property is only in the form of a
personal debt and hence a right in personam at best and the right of the lender
to apportion or appropriate the subject property for repay- ment of loan only a
right to take such an action rather than a right in the property itself.
44.‘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 par- ticularly 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 re- quisite 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 docu- ments, then the charge
of such first mortgagee must be postponed to any and all subsequent mortgagees,
without notice of the charge of first mort- gagee, 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.
45.In
India, the aforesaid has been recognized in Section 78 of the Act,
1882 which provides that where on account of any fraud, misrepresentation or
gross neglect of a prior mortgagee, another person has been induced to ad-
vance money on the security of the mortgaged property, the prior
mortgagee shall be postponed to the subsequent mortgagee. The said
provision reads as under: -
78. Postponement of
prior mortgagee. — Where, through the fraud, misrepresentation or gross neglect
of prior mortgagee, another person has been induced to advance money on the
security of the mortgaged property, the prior mortgagee shall be postponed to
the subsequent mortgagee.
46.
It is in this very context, this Court in Suraj Lamps (supra) emphasized on the
need for registration of documents so as to give publicity and public ex-
posure to various transactions in respect of immovable properties and en- able
people to find out whether any particular property with which they are
concerned, has been subjected to any legal obligation or liability and who is
or are the person/s presently having right, title, and interest in the
property. The relevant observation reads as under: -
Advantages of
Registration
10. In the earlier
order dated 15.5.2009, the objects and benefits of registration were explained
and we extract them for ready reference: -
"The Registration
Act, 1908, was enacted with the intention of providing orderliness, discipline
and public notice in regard to transactions relating to immovable property and
protection from fraud and forgery of documents of transfer. This is achieved by
requiring compulsory registration of certain types of documents and providing
for consequences of non- registration.
Section 17 of the
Registration Act clearly provides that any document (other than testamentary
instruments) which purports or operates to create, declare, assign, limit or
extinguish whether in present or in future "any right, title or
interest" whether vested or contingent of the value of Rs. 100 and
up- wards to or in immovable property.
Section 49 al the
said Act provides that no document required by Section 17 to be registered
shall, affect any immovable property comprised therein or received as evidence
of any transaction affected such property, unless it has been registered.
Registration of a document gives notice to the world that such a document has
been executed.
Registration provides
safety and security to transactions relating to immovable property, even if the
document is lost or destroyed. It gives publicity and public exposure to
documents thereby pre- venting forgeries and frauds in regard to transactions
and execution of documents. Registration provides information to people who may
deal with a property, as to the nature and extent of the rights which persons
may have, affecting that property. In other words, it enables people to find out
whether any particular property with which they are concerned, has been
subjected to any le- gal obligation or liability and who is or are the person/s
presently having right, title, and interest in the property. It gives solemnity
of form and perpetuate documents which are of legal importance or relevance by
recording them, where people may see the record and enquire and ascertain what
the particulars are and as far as land is concerned what obligations exist with
regard to them. It ensures that every person dealing with immovable property
can rely with confidence upon the statements contained in the registers
(maintained under the said Act) as a full and complete account of all
transactions by which the title to the property may be affected and secure
extracts/copies duly certified."
(Emphasis
supplied)
47.
In the present case, it appears from the materials on record, that when the
loan was being advanced by the respondent no. 1 bank, a Memorandum of Equitable
Mortgage recording transfer / deposit of the agreement to sale in respect of
the said Flat was sought to be created, although the same has not been
placed on record. There are no correspondences or communications between the
respondent no. 1 bank or the original borrowers where the share certificate of
ownership was demanded, even though the Bank was well aware that the conveyance
of title where the subject Flat is situated only takes place through such
certificate and not by the agreement of sale in terms of Section
11 of the Act, 1963 read with Section 4 of the Act, 1970.
Moreover, it appears that 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 in-
formed by the concerned cooperative housing society that the said flat was not
subject to any prior encumbrances or charge. In such a scenario, the equitable
charge of the respondent no. 1 bank herein is liable to be post- poned 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. v. Distinction between Mortgage by Deposit
of Title Deeds under the English Law and under the Transfer Of Property
Act, 1882.
48.
At this stage we must also address ourselves on one another important aspect
where the High Court grossly erred whilst passing the impugned judgment and
order. As discussed in the foregoing paragraphs of this judgment, the original
borrower whilst availing the loan facility from the respondent no. 1 and
appellant, had deposited with them two unregistered agreement to sale, and
another unregistered agreement to sale along with the share certificate of
ownership, respectively. 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 as discussed earlier 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.
49.
Under the English Law, whether the documents so deposited actually purport or
transfer any title is immaterial for the purpose of creating an ‘equitable
mortgage’ as long as the intention to do so is clearly discernible. The
position in India however is quite different. This is because under the English
Law, a mortgage created by deposit of title or documents is not con- strued as
a legal mortgage and is only treated as an equitable mortgage. Whereas in India
under the Act, 1882, more particularly under Section 58 sub-section
(f) a statutory recognition has been given to the mode of cre- ation 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. At the
cost of repetition, the said provision is once again reproduced hereunder: -
“58. “Mortgage”,
“mortgagor”, “mortgagee”, “mortgage-money” and “mortgage-deed” defined.—
(a) A mortgage is the
transfer of an interest in specific immoveable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, an
existing or future debt, or the performance of an engagement which may give
rise to a pecuniary liability.
The transferor is
called a mortgagor, the transferee a mortgagee; the principal money and
interest of which payment is secured for the time being arc called the
mortgage-money, and the instrument (if any) by which the transfer is effected
is called a mortgage-deed.
(b) Simple mortgage.—
Where, without delivering possession of the mortgaged property, the mortgagor
binds himself personally to pay the mortgage-money, and agrees, expressly or
impliedly, that, in the event of his failing to pay according to his contract,
the mortgagee shall have a right to cause the mortgaged property to be sold and
the proceeds of sale to be applied, so far as may be necessary, in payment of
the mortgage-money, the transaction is called a simple mortgage and the
mortgagee a simple mortgagee.
(c) Mortgage by
conditional sale.— Where the mortgagor ostensibly sells the mortgaged property—
on condition that on default of payment of the mortgage-money on a certain date
the sale shall become absolute, or on condition that on such payment being made
the sale shall become void, or on condition that on such payment being made the
buyer shall transfer the property to the seller, the transaction is called a
mortgage by conditional sale and the mortgagee a mortgagee by conditional sale:
Provided that no such
transaction shall be deemed to be a mortgage, unless the condition is embodied
in the document which effects or purports to effect the sale.
(d) Usufructuary
mortgage.— Where the mortgagor delivers possession or expressly or by
implication binds himself to deliver possession of the mortgaged property to
the mortgagee, and authorises him to retain such possession until payment of
the mortgage-money, and to receive the rents and profits accruing from the
property or any part of such rents and profits and to appropriate the same in
lieu of interest, or in payment of the mortgage -money, or partly in lieu
of interest or partly in payment of the mortgage-money, the transaction is
called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.
(e) English mortgage.—
Where the mortgagor binds himself to repay the mortgage-money on a certain
date, and transfers the mortgaged property absolutely to the mortgagee, but
subject to a proviso that he will re-transfer it to the mortgagor upon payment
of the mortgage-money as agreed, the transaction is called an English mortgage.
(f) Mortgage by
deposit of title-deeds.— Where a person in any of the following towns, namely,
the towns of Calcutta, Madras, and Bombay, and in any other town which the
State Government concerned may, by notification in the Official Gazette,
specify in this behalf, delivers to a creditor or his agent documents of title
to immoveable property, with intent to create a security thereon, the
transaction is called a mortgage by deposit of title-deeds.
(g) Anomalous
mortgage.—A mortgage which is not a simple mortgage, a mortgage by conditional
sale, an usufructuary mortgage, an English mortgage or a mortgage by deposit of
title- deeds within the meaning of this section is called an anomalous
mortgage.”
50.
Section 58 sub-section (a) stipulates the general rule that mortgage is
“the transfer of an interest in specific immoveable” or as understood under the
English Law as a “legal mortgage”. Section 58 sub-section(s) (b) to
(g) further explains the different modes to create a mortgage under the Act,
1882. What is particularly important to note is the fact that, the subsequent
sub- section(s) do not either expressly or impliedly stipulate that no transfer
of interest is taking place where mortgage is created in terms of the other
modes provided therein. There is also nothing in the entire Act, 1882 that
mortgage created by one particular mode under Section 58 would be
subservient to another. In such a scenario, any mortgage that happens to be
created in terms of the Act, 1882 more particularly Section
58 would for all pur- poses be equal except in the consideration of
priority of charge. Thus, while mortgage by deposit of title deeds under the
English Law is an equitable mortgage and subservient to a legal mortgage, in
India mortgage created by such deposit is not subservient to an equitable
mortgage as such mortgage is in itself a legal mortgage.
51.
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 re-
quired under Section 59 of the Act, 1882 as in other classes of mortgage.
It is essential to bear in mind that 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. Normally, title deeds are delivered to the bank
along with a covering letter indicating therein an intention of delivering
title deed i.e. to create security for the present or future liability. In
turn, bank gives a letter to the person delivering title deeds indicating
acceptance of the documents and/or title deeds by way of security either for
the outstanding dues or for the loan to be advanced. The banks, normally,
maintain register of securities called Equitable Mortgage Register; wherein the
entry of title deeds is taken in the form of memorandum signed by the Branch
Manager alone, as a person accepting delivery of the documents as security.
These formalities are done to establish three essential requisites of equitable
mortgage, viz. (1) debit, (2) deposit of title deed and (iii) the intention
that deed shall op- erate as security for the present or future debt. But if
the parties choose to reduce the contract to writing, this implication of law
is excluded by their express bargain, and the document will be the sole
evidence of its terms. In such a case the deposit and the document both form
integral parts of the transaction and are essential ingredients in the creation
of the mortgage.
52.Thus,
when the original borrowers deposited with the appellant bank herein, 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 import- ant, 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. At this stage, we
may clarify that deposit of part-deeds of title would not constitute a mort-
gage 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 de-
posit 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.
53.
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, we have already discussed one of them in the foregoing
paragraphs, 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, however,
the short answer to the above is that 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, we may
rephrase the above to only say that 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.
54.This
Court in K.J. Nathan v. S.V. Maruthi Rao reported in AIR 1965 SC 430
has explained the fine distinction between an equitable mortgage as understood
in the English law and the mortgage by deposit of title deed. K. Suba Rao J.
(as His Lordship then was) speaking for Court observed as un- der: -
“Under this definition
(referring to section 58(f) of the Transfer of Property Act) the
essential requisites of mortgage by deposit of title deeds are, (i) debt),
(deposit of title-deeds, and (iii) an intention that the deeds shall be
security for the debt. Though such a mortgage is often described as an
equitable mortgage, there is an essential distinction between an equitable
mortgage as understood in English Law and the mortgage by deposit of title
deeds recognized under the Transfer of Property Act in India. In
England an equitable mortgage can be created either, (1) by actual deposit of title
deeds, in which case collateral evidence is admissible to show the meaning of
the deposit and the extent of the security created, or (2) if there be no
deposit of title deeds, then by a memorandum in writing, purporting to create a
security for money advanced; See White and Tudor's Leading Case in Equity, 9th
Edition, Vol. II, at p. 77. In either case it does not operate as an actual
conveyance though it is enforceable in equity; whereas under the Transfer
of Property Act a mortgage by deposit of title deeds is one of the modes
of creating a legal mortgage where under there will be transfer of interest in
the property mortgaged to the mortgagee. This distinction will have to be
borne in mind in appreciating the scope of the English decisions cited at the
Bar. This distinction is also the basis for the view that for the purpose of
priority it stood on the same footing as a mortgage by deed. […]”
(Emphasis
supplied)
55.
However, in order to obviate any confusion, we may clarify that the aforesaid
observations in K.J. Nathan (supra) must not be understood to mean
that equitable mortgage has no valid basis or is not recognized in toto in India.
Any act of the parties that evinces a clear intention of the parties to cre-
ate a mortgage though the same might not have been created in terms
of Section 58 of the Act, 1882, may still be a valid charge in terms
of Section 100 of the Act, 1882. The said provision reads as under: -
“100. Charges.— Where
immoveable property of one person is by act of parties or operation of law made
security for the payment of money to another, and the transaction does not
amount to a mort- gage, the latter person is said to have a charge on the property;
and all the provisions hereinbefore contained which apply to a simple mortgage
shall, so far as may be, apply to such charge.
Nothing in this
section applies to the charge of a trustee on the trust-property for expenses
properly incurred in the execution of his trust, and, save as otherwise expressly
provided by any law for the time being in force, no charge shall be en- forced
against any property in the hands of a person to whom such property has been
transferred for consideration and without notice of the charge.”
56.
Section 100 of the Act, 1882 provides that where a transaction does not
amount to a mortgage i.e., not a mortgage in terms of Section 58 of
the said Act, the person to whom the immovable property is offered as a
security would still nevertheless be said to have a “charge” in terms of
the said provision, and that all provisions under the Act, 1882 as applicable
to simple mortgage envisaged under Section 58 sub-section (b) of the
said Act shall apply to such “charge” insofar as possible. The key distinction
is that 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, ‘equit- able 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.
57.
We are conscious of the decision of this Court in J.K. (Bombay) (P) Ltd.
v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd. reported in 1968 SCC OnLine SC
32 which held that an agreement to create a mortgage only gives rise to perform
such an agreement and does not amount to either a mortgage or a charge and the
decision in Haryana Financial Corpn. v. Gurcharan Singh reported in
(2014) 16 SCC 722 wherein it was held that since all provisions applicable to a
simple mortgage shall, as far as possible, also apply to a charge, Section
59 of the Act, 1882 which requires a simple mortgage to be compulsorily be
registered would also be applicable and as such the cre- ation of a charge
under Section 100 of the Act, 1882 must be compulsorily
registered. However, a close reading of the decision in J.K. (Bombay)
(P) Ltd. (supra) will reveal that this Court never held that any agreement
to mortgage will be incapable of creating a charge in terms of Section
100 of the Act, 1882, rather what was held is that only those agreement to
mort- gage where the intention to create a charge in praesenti is absent will
be in- capable of creating either a mortgage or a charge, but where such
intention of parties is there, the same will definitely tantamount to a
‘charge’ under Section 100 of the Act, 1882 as held in ONGC Ltd. v.
Official Liquidator reported in (2015) 5 SCC 300. Similarly, the decision
of Haryana Finan- cial Corpn (supra) holding that registration in
terms of Section 59 of the Act, 1882 is mandatory in order to create a
charge prima facie appears to be incorrect in view of an earlier decision of a
larger bench of this Court in M.L. Abdul Jabbar Sahib v. M.V. Venkata
Sastri & Sons reported in (1969) 1 SCC 573 which in clear terms held
that the second part of Section 100 of the Act, 1882 does not attract
the provisions of Section 59 of the said Act and that a charge may be made
without any writing and there is no provision of law which require that such an
instrument must be attested or registered. We are also in agreement with
the decision of M.L. Abdul Jab- bar Sahib (supra) as to hold
otherwise would result in absurd consequences which could not have been
intended by the legislature. We say so because, if a charge can be made only by
a registered instrument in accordance with Section 59 of the Act,
1882, then the subsequent transferee will always have notice of the said charge
in view of Section 3 Explanation I which stipulates that “where any
transaction relating to immoveable property is required by law to be and has
been effected by a registered instrument, any person ac- quiring such property
or any part of, or share or interest in, such property shall be deemed to have
notice of such instrument as from the date of registration [...]”. This would
effectively render the second part of Section 100 of the Act, 1882
which mandates requirement of notice to all subsequent transferees before the enforcement
of a ‘charge’ as otiose and redundant, as the moment when such instrument is
registered, notice is deemed to have been made. The very idea behind
stipulating the requirement of notice under Section 100 of the Act,
1882 seems to be to save even those transactions which are not registered and
do not amount to a mortgage yet in equity may still be enforceable provided the
subsequent transferee has notice of such charge. We do not intend to dwell
any further on the decisions of this Court in J.K. (Bombay) (P)
Ltd. (supra) and Haryana Financial Corpn (supra) as the present
case does not require examining whether the respondent no. 1 bank could be said
to have an enforceable charge against the appellant bank, and even otherwise if
an ‘equitable mortgage’ cannot be construed as a ‘charge’ in terms
of Section 100 of the Act, 1882, the former may still be permitted to
be enforceable in the extant of equity in the peculiar facts of each case. This
is because the enforcement of an ‘equitable mortgage’ being a by-product of the
doctrine of equity is purely a matter of discretion that a court of conscience
may grant keeping in mind the principles of fair-play, good conscience and
justice. Where any ‘equitable mortgage’ is found to be unenforceable, the same
though neither a ‘legal mortgage’ nor a ‘charge’ may still nevertheless entitle
a lender to seek other reliefs such as specific performance of the contract or
a suit for recovery on the strength of the ab inito intention of the parties to
create a security evident from such ‘equitable mortgage’.
58.
We are conscious of the decision of this Court in Kedar Lal v. Hari
Lal re- ported in AIR 1952 SC 47 wherein it was held that the whole of law
of mortgage in India, including the law of contribution arising out of a
transaction of mortgage, is now statutory and is embodied in the Act, 1882 read
with the Civil Procedure Code, 1908 and that the courts cannot travel be- yond
these provisions. The relevant observations read as under: -
“27. So far as Section
43 is concerned, I am not prepared to apply it unless Sections 82 and 92 can be
excluded. Both Sec- tions 43 and 82 deal with the question of contribution. Section
43 is a provision of the Contract Act dealing with con- tracts
generally. Section 82 applies to mortgages. As the right to contribution here
arises out of a mortgage, I am clear that Section 82 must exclude Section 43
because when there is a general law and a special law dealing with a particular
matter, the special excludes the general. In my opinion, the whole law of
mortgage in India, including the law of contribution arising out of a
transaction of mortgage, is now statutory and is embodied in the Transfer
of Property Act read with the Civil Procedure Code. I am clear we cannot
travel beyond these statutory provisions.”
59.
However, a close reading of the aforesaid paragraph of Kedar
Lal (supra) would reveal that the observations were made in light of the
question whether Section 43 of the Indian Contract Act, 1882 which
deals with right to contribution would be applicable to such a right which is
arising out of a mortgage to the exclusion of Section 82 of the Act,
1882 which deals with mortgages. It was in this context this Court held that
when it comes to mort- gages it will not be permissible to travel beyond the
scheme of Act, 1882 and venture into the provisions contained in other laws.
60.
However, this by no stretch means that the concept of equitable mortgage has no
place in the Indian jurisprudence. 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 de- signed 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. Rather, the subsequent decision of this Court
in K.J. Nathan (supra) it was specifically stated that although the
concept of equitable mortgage as evolved under the English Law cannot be
considered to be a rule of law, which as also discussed by us in the foregoing
paragraphs is by-product of doctrine of equity and not the law of the land, yet
they may serve as a guide. The relevant observations read as under: -
10. The foregoing
discussion may be summarized thus :
Under the Transfer of
Property Act a mortgage by deposit of title deeds is one of the 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. Therefore, such a mortgage of property takes effect
against a mort- gage deed subsequently executed and registered in respect of
the same property. The three requisites for such a mortgage are, (i) debt, (ii)
deposit of title deed; and (iii) an intention that the deeds shall be security
for the debt. Whether there is an intention that the deeds shall be security
for the debt is a question of fact in each case. The said fact will have to be
decided just like any other fact on presumptions and on oral, documentary or
circumstantial evidence. There is no presumption of law that the mere deposit
of title deeds constitutes a mortgage, for no such presumption has been laid
down either in the Evidence Act or in the Transfer of Property Act. But a
court may presume under Section 114 of the Evidence Act that under
certain circumstances a loan and a deposit of title deeds constitute a mortgage.
But that is really an inference as to the existence of one fact from the
existence of some other fact or facts. Nor the fact that at the time the title
deeds were deposited there was an intention to exe- cute a mortgage deed in itself
negatives, or is inconsistent with, the intention to create a mortgage by
deposit of title deeds to be in force till the mortgage deed was executed. The
decisions of English courts making a distinction between the debt preceding the
deposit and that following it can at best be only a guide; but the said distinction
itself cannot be considered to be a rule of law for application under all
circumstances. Physical delivery of documents by the debtor to the creditor is
not the only mode of deposit. There may be a constructive deposit. A court will
have to ascertain in each case whether in sub- stance there is a delivery of
title deeds by the debtor to the creditor. If the creditor was already in
possession of the title deeds, it would be hypertechnical to insist upon the
formality of the creditor delivering the title deeds to the debtor and the
debtor redelivering them to the creditor. What would be necessary in those
circumstances is whether the parties agreed to treat the documents in the
possession of the creditor or his agent as delivery to him for the purpose of
the transaction.”
(Emphasis
supplied)
61.Thus,
in such a situation where a transaction does not amount to a mortgage but
nevertheless can be construed as a preliminary step towards the preparation of
a mortgage which will be security thereafter with nothing else done for
conveyance or transfer of title or interest, there three recourses may be
available to the lender: -
(i) He may simply
claim that the transaction amounts to an equitable mortgage as it was for the
purpose of creating a present or immediate security which a court of equity
ought to consider; or
(ii) He may claim that
there has been a sufficient part performance of the contract, with attending
circumstances which a court ought to relieve by permitting the lender to
‘perfect its mortgage’ i.e., to take further steps for the transfer of
conveyance of title or interest in order to create a mortgage; or
(iii) He may bring a
suit for recovery of money and base his claim simply on the ab initio intention
of the parties to create a security in the first place and the resultant
part-performance of the contract insofar as the loan was extended based on such
promise or consideration of security.
62.
Before we close this judgment, we must look into the observations made by the
High Court in para 8 of its impugned order. In para 8 the High Court has
recorded that at the time of sanction and grant of the loan by the appellant-
bank herein i.e. sometime in November, 1998 the flat in question was in
custodia legis of the court receiver appointed in the year 1994. What weighed
with the High Court was the submission canvassed on behalf of the Central Bank
that the validity of the mortgaged flat in question in favour of the appellant
bank was also questionable. The reason why the High Court said so is because
both the agreements are unregistered. According to the learned counsel
appearing for the Central Bank, the agreement which appellant bank accepted was
also unregistered. Then both the banks are sailing in the same boat. However,
what seems to have been overlooked by the Cent- ral Bank is the fact that when
the borrowers approached the appellant bank for loan they had a valid title
deed i.e., the original share certificate issued by the society. The issuance
of the original share certificate was also confirmed by the society vide letter
dated 13.11.1998, which forms a part of the record.
63.The
original share certificate which was produced before the appellant-bank as
availed Title deed assumes significance in view of the provisions of Sec- tion
11 of the Act 1963, more particularly, sub-section (1) of Section
11 of Act which reads thus: -
"11. Promoter to
convey title, etc., and execute documents, according to agreement.— (1) A
promoter shall take all necessary steps to complete his title and convey, to
the organisation of persons, who take flats, which is registered either as a
co-operative society or as a company as aforesaid, or to an association
flat-takers or apartment owners his right, title and interest in the land and
building, and execute all relevant documents there for in accordance with the
agreement executed under Section 4 and if no period for the execution
of the conveyance is agreed upon, he shall execute the conveyance within the prescribed
period and also deliver all documents of title relating to the property which
may be in his possession or power."
(Emphasis
supplied)
64.In
para 8 of the impugned judgment, the High Court has recorded that the appellant
bank herein had sought to rely upon the original share certificate issued by
the Society as a valid piece of title deed. However, the High Court got carried
away by the fact that the first charge was that of the Central Bank and not of
the appellant bank, and failed to notice the distinction that exists between an
‘equitable mortgage’ and a ‘legal mortgage’.
65.
The proposition of law is that though the transaction evidenced by the prior
unregistered document is valid in itself, yet any title or interest created by
it is liable to be defeated under the rule of priority by a valid later and
legal sale or mortgage evidenced by a duly registered document. The reason
is, otherwise, no effect can be given to the rule which implies that the later
registered title is intended to prevail against an earlier unregistered title.
No weight can, therefore, be attached to the contention that by a valid unregistered
agreement of sale, the vendor's title is exhausted, he has, after- wards,
nothing to sell, and the later registered sale deed gives nothing to the
predecessor. The fallacy in the contention lies in ignoring the reason of the
rule, namely that as between the registered and unregistered transactions, the
registered transaction creates the dominant right or title.
E.
CONCLUSION
66.
In view of the aforesaid, we have reached the conclusion that the impugned
order passed by the High Court is not correct and it deserves to be set aside.
67.
In the result the appeal succeeds and is hereby allowed. The impugned Order
passed by the High Court is hereby 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 herein.
68.
We are informed that 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.
69.
We direct the Registry to send one copy each of this judgment to all the High
Courts with further request to each of the High Courts to forward the judgment
to the DRTs and DRAT benches.
70.
Pending application(s), if any, stand disposed of.
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