2025 (2) TMI 1186 - SC - Indian Laws

Validity of mortgage - legal effect of conveyance or transfer - Nature and concept of an Equitable Mortgage - enforceable right to take possession to foreclose or to sell the property - order of the Debt Recovery Appellate Tribunal (DRAT) - maxim of Quod fieri debuit pro facto censetur - Principles of Equity - Distinction between Mortgage by Deposit of Title Deeds under the English Law and under the Transfer Of Property Act 1882 - challenging the order of the Debt Recovery Appellate Tribunal (DRAT) which recognized the mortgage in favor of the respondent bank as prior in time and valid over the appellant bank s mortgage - HELD THAT - 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. 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. 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. 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 informed 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 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. Deposit of title deeds is one of the many forms of mortgages whereunder 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. 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 operate 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. 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 important because even if the agreements to sale deposited with the respondent no. 1 bank were registered and thereby giving public notice of their existence 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 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. 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. 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. Thus we have reached the conclusion that the impugned order passed by the High Court is not correct and it deserves to be set aside. 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. 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.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

(a) Whether the High Court erred in dismissing the writ petition challenging the order of the Debt Recovery Appellate Tribunal (DRAT) which recognized the mortgage in favor of the respondent bank as prior in time and valid over the appellant bank's mortgage;

(b) Whether the mortgage created in favor of the respondent no. 1 bank (Central Bank of India) based on deposit of unregistered agreements of sale constituted a valid mortgage or charge over the property;

(c) The legal distinction between a legal mortgage and an equitable mortgage under Indian law and English law;

(d) Whether an equitable mortgage created by deposit of title deeds or documents evidencing intention to create a charge can be enforced and what priority it holds vis-`a-vis a subsequent legal mortgage;

(e) The applicability and effect of statutory provisions under the Transfer of Property Act, 1882 (Sections 54, 58, 78, 100), Maharashtra Ownership Flats Acts (1963 and 1970), and the Registration Act, 1908;

(f) The effect of non-registration of agreements of sale and the relevance of share certificate of ownership issued by the cooperative housing society;

(g) The priority of charges created by the appellant bank and the respondent bank over the same immovable property;

(h) Whether the respondent no. 1 bank's equitable mortgage was enforceable against the appellant bank given the failure to give public notice or produce title deeds at the time of loan sanction.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity and Priority of Mortgage Created by Respondent Bank

Relevant Legal Framework and Precedents: Sections 54, 58 and 78 of the Transfer of Property Act, 1882 define sale, mortgage and provide for postponement of prior mortgagee in case of fraud or gross neglect. Section 100 defines charge and its enforceability. The Maharashtra Ownership Flats Acts regulate conveyance and ownership of flats. The Registration Act mandates registration of documents affecting immovable property and provides consequences of non-registration. Precedents include Suraj Lamp & Industries, Bank of India v. Abhay D. Narottam, Anita Enterprises, Dattatreya Shanker Mote, and others.

Court's Interpretation and Reasoning: The Court observed that the mortgage claimed by the respondent no. 1 bank was based on deposit of unregistered agreements of sale which do not confer any legal title or interest under Section 54 of the Transfer of Property Act. The Court emphasized that an agreement of sale, whether registered or unregistered, does not create any interest or charge in the property itself. The respondent bank's mortgage was thus an equitable mortgage or charge, not a legal mortgage.

Key Evidence and Findings: The respondent bank had only unregistered agreements of sale deposited as security and did not have the share certificate of ownership at the time of loan sanction. The appellant bank had the share certificate, a valid title deed, deposited along with an unregistered agreement of sale. The High Court had found the respondent bank's mortgage to be prior in time (1989) compared to the appellant bank's mortgage (1998).

Application of Law to Facts: The Court applied the principle that a legal mortgage requires transfer of interest in immovable property, which was absent in the respondent bank's case. The equitable mortgage or charge created by deposit of unregistered agreements does not confer a legal interest and is subject to the rights of subsequent legal mortgagees. The appellant bank's mortgage, supported by the share certificate, was a legal mortgage and thus had priority.

Treatment of Competing Arguments: The respondent bank argued the priority of its mortgage based on earlier deposit of agreements and loan sanction. The appellant bank argued that the respondent bank's mortgage was invalid or at best an equitable mortgage and that the appellant bank's legal mortgage had priority. The Court rejected the respondent bank's contention, emphasizing the absence of title deeds and registration.

Conclusions: The Court concluded that the respondent bank's mortgage was an equitable mortgage or charge, subordinate to the appellant bank's legal mortgage evidenced by the share certificate. The respondent bank failed to give public notice or produce title deeds, thus its equitable mortgage was postponed to the appellant bank's mortgage.

Issue (b): Concept and Nature of Equitable Mortgage and Its Recognition under Indian Law

Relevant Legal Framework and Precedents: The concept of equitable mortgage originates from English law, where deposit of title deeds or documents evidencing intention to create a charge without formal conveyance creates an equitable mortgage enforceable in equity. Indian law recognizes mortgage by deposit of title deeds as a legal mortgage under Section 58(f) of the Transfer of Property Act, 1882. Section 100 recognizes charges as security not amounting to mortgage but enforceable as far as possible like a simple mortgage. Precedents include Russel v. Russel, K.J. Nathan v. S.V. Maruthi Rao, Suraj Lamp & Industries, and others.

Court's Interpretation and Reasoning: The Court explained that under English law, equitable mortgage arises where formalities of legal mortgage are not met but intention to create a mortgage is clear. In India, mortgage by deposit of title deeds under Section 58(f) is a legal mortgage, not merely equitable. Equitable mortgage or charge under Section 100 is recognized but is a right in personam and subordinate to legal mortgages. The Court emphasized that equitable mortgages are enforceable only between parties and do not operate against subsequent bona fide purchasers without notice.

Key Evidence and Findings: The respondent bank's mortgage was based on deposit of unregistered agreements of sale without share certificate; thus, it was an equitable mortgage or charge. The appellant bank had the share certificate, constituting a legal mortgage. The respondent bank did not take steps to publicize its charge or ensure possession of all title deeds.

Application of Law to Facts: The Court held that the respondent bank's mortgage was an equitable mortgage or charge enforceable only in personam and subordinate to the appellant bank's legal mortgage. The failure to take possession of all title deeds and give notice to subsequent mortgagees led to postponement of the respondent bank's equitable mortgage under Section 78.

Treatment of Competing Arguments: The respondent bank contended that deposit of agreements of sale was sufficient to create a mortgage in its favor. The appellant bank contended that absence of share certificate and registration rendered the respondent bank's mortgage equitable and subordinate. The Court sided with the appellant bank.

Conclusions: The Court recognized the doctrine of equitable mortgage as applicable in India under Section 100 as a charge but held that such equitable mortgage is subordinate to a subsequent legal mortgage, especially where the equitable mortgagee fails to give notice or take possession of all title deeds.

Issue (c): Effect of Registration and Public Notice on Priority of Mortgages

Relevant Legal Framework and Precedents: The Registration Act, 1908 mandates registration of instruments affecting immovable property. Section 17 requires registration of documents creating or transferring interest in immovable property. Section 49 provides that unregistered documents required to be registered shall not affect immovable property or be received as evidence. Section 78 of the Transfer of Property Act provides for postponement of prior mortgagee in case of fraud or gross neglect. Suraj Lamp & Industries and Shakeel Ahmed v. Syed Akhlaq Hussain emphasize the importance of registration and public notice.

Court's Interpretation and Reasoning: The Court emphasized that registration provides public notice and protects against fraud and forgery. An unregistered agreement of sale does not confer title or charge. The respondent bank's failure to register or give public notice of its equitable mortgage meant that the appellant bank, having a legal mortgage supported by registered documents and title deeds, had priority. The Court noted that the appellant bank was informed by the cooperative society that the flat was free of prior encumbrances, indicating absence of public notice of respondent bank's charge.

Key Evidence and Findings: The respondent bank's agreements of sale were unregistered. The appellant bank had a share certificate and a registered mortgage. The cooperative society confirmed no prior encumbrances on the flat. The respondent bank failed to produce a memorandum of equitable mortgage or give public notice.

Application of Law to Facts: The Court applied the principle that registration and public notice are essential to protect subsequent mortgagees and purchasers. The respondent bank's equitable mortgage being unregistered and not publicized was subordinate to the appellant bank's legal mortgage.

Treatment of Competing Arguments: The respondent bank argued that the equitable mortgage was valid despite non-registration. The appellant bank argued that non-registration and absence of public notice defeated the respondent bank's claim. The Court agreed with the appellant bank.

Conclusions: The respondent bank's equitable mortgage was postponed due to failure to register and give public notice, affirming the priority of the appellant bank's legal mortgage.

Issue (d): Distinction Between Mortgage by Deposit of Title Deeds under English Law and Indian Law

Relevant Legal Framework and Precedents: Section 58(f) of the Transfer of Property Act, 1882 recognizes mortgage by deposit of title deeds as a legal mortgage. English law treats such deposit as creating only an equitable mortgage. K.J. Nathan v. S.V. Maruthi Rao distinguishes between English equitable mortgage and Indian legal mortgage by deposit of title deeds.

Court's Interpretation and Reasoning: The Court explained that under English law, deposit of title deeds creates an equitable mortgage, a right in personam. Under Indian law, mortgage by deposit of title deeds is a legal mortgage involving transfer of interest and enforceable in rem. This distinction means that a mortgage by deposit of title deeds under Indian law has priority over equitable mortgages. The Court held that deposit of part deeds or unregistered agreements cannot constitute a legal mortgage under Indian law, unlike English law where equitable mortgages may arise.

Key Evidence and Findings: The respondent bank had only unregistered agreements of sale (part deeds) deposited, whereas the appellant bank had the share certificate (title deed). The respondent bank's mortgage was thus an equitable mortgage or charge, subordinate to the appellant bank's legal mortgage.

Application of Law to Facts: The Court applied the statutory definition and distinctions to hold that the appellant bank's mortgage by deposit of share certificate was a legal mortgage with priority, whereas the respondent bank's mortgage was equitable and subordinate.

Treatment of Competing Arguments: The respondent bank relied on English law principles of equitable mortgage. The appellant bank relied on Indian statutory provisions and precedents. The Court favored the latter.

Conclusions: The Court clarified that under Indian law, mortgage by deposit of title deeds is a legal mortgage with priority over equitable mortgages, and deposit of unregistered agreements alone does not create a legal mortgage.

Issue (e): Enforcement and Remedies Available for Equitable Mortgages

Relevant Legal Framework and Precedents: Section 100 of the Transfer of Property Act, 1882 recognizes charges and provides for their enforcement as far as possible like simple mortgages. Courts have discretion to enforce equitable mortgages by granting relief such as specific performance or recovery suits. Precedents include ONGC Ltd. v. Official Liquidator and others.

Court's Interpretation and Reasoning: The Court recognized that equitable mortgages, being rights in personam, are enforceable only against parties and not against subsequent bona fide purchasers without notice. Enforcement may be through specific performance or recovery suits based on the parties' intention. The Court noted that failure to give notice or take possession of all title deeds may result in postponement of the equitable mortgage.

Key Evidence and Findings: The respondent bank failed to take possession of all title deeds or give public notice. The appellant bank had a registered legal mortgage.

Application of Law to Facts: The Court held that the respondent bank's equitable mortgage was enforceable only against the borrowers and not against the appellant bank, which had a legal mortgage with priority.

Treatment of Competing Arguments: The respondent bank sought enforcement of equitable mortgage. The appellant bank argued for priority and dismissal of respondent bank's claim. The Court sided with the appellant bank.

Conclusions: Equitable mortgages are enforceable only in personam and subordinate to legal mortgages with proper registration and notice.

3. SIGNIFICANT HOLDINGS

"A contract of sale i.e. an agreement of sale does not itself create any interest in or charge on any property."

"Under the Transfer of Property Act a mortgage by deposit of title deeds is one of the forms of mortgages whereunder 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 mortgage deed subsequently executed and registered in respect of the same property."

"The position in India is quite different from English law inasmuch as mortgage by deposit of title deeds recognized under the Transfer of Property Act is a legal mortgage and not an equitable mortgage."

"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 mortgage 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."

"The 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 Transfer of Property Act, 1882."

"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 preventing forgeries and frauds in regard to transactions and execution of documents."

"The 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 herein."

"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 Maharashtra Ownership Flats Act, 1963."

"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."