2025 (6) TMI 174 - HC - Indian Laws

Seeking declaration that J.C. Flowers is the exclusive charge holder/mortgagee with regard to the suit property - validity of deeds of simple mortgage - subsequent mortgage deeds created without the prior written consent of the first mortgagee (Yes Bank later assigned to J.C. Flowers) are enforceable or not - HELD THAT - The apprehension of injury to J.C. Flowers is clearly demonstrated by the fact that under the IB proceedings all the financial creditors who claim to be secured financial creditors are treated at par i.e. no priority is accorded on the basis of first and second charge in terms of entitlement under Resolution Plan approved by CoC/NCLT. Moreover NCLT in IB proceedings may not be in a position to adjudge the invalidity of the subsequent mortgage and hence we find force in the submission of Mr. Sancheti that in such circumstances the position of J.C. Flowers as sole and exclusive charge holder would clearly be compromised. The impugned mortgage in favour of Omkara Asset is clearly contrary to the terms of the prior mortgage inasmuch as it purports to grant exclusive first charge in favour of Omkara Asset as mentioned in Clause 2 and Clause 3 of the impugned deed of mortgage. In the facts of the present case J.C. Flowers has prima facie made out a case that the essential condition about the instrument being void or voidable against J.C. Flowers and that J.C. Flowers reasonably apprehends serious injury by the instrument being left outstanding are met. In Bikram Chatterji and others 2019 (7) TMI 1233 - SUPREME COURT Their Lordships observed in paragraph 85 that In order to create a mortgage it was necessary to obtain clear NOC in order to create effective mortgage deed. As that has not been done so far no mortgage in the eye of the law has been created in favour of the bank. It was not open to the bankers to mortgage the land in view of the conditional permission to create mortgage the mortgage created in violation of condition cannot be said to be effective in accordance with law as the land was owned by the authorities concerned and the lessees had right to mortgage only subject to fulfilment of conditions imposed by the lessor/authorities. The facts of the present case and the conduct of Sumer as well the conduct on the part of Omkara Asset in seeking the deeds of mortgage executed even prior to the issuance of conditional NOC of Yes Bank cannot be overlooked. The huge loans of Yes Bank were not repaid. The loan account was not closed. The NOC of Yes Bank was a conditional one. It appears that mortgage deeds were executed by Omkara Asset hurriedly. In the light of the various clauses referred to hereinbefore it is obvious that the impugned mortgage deeds without a clear NOC from Yes Bank cannot be a mortgage in the eye of law. It was not open for Sumer to create a mortgage in favour of Omkara Asset. The conduct of Sumer is dishonest. The claim of J. C. Flowers cannot be defeated in such a manner. The provisions of law cannot be read in the given facts which would virtually amount to putting a premium on a dishonest transaction by holding that Omkara Asset still is entitled to a second charge. Conclusion - The manner in which the discretion is exercised by the learned Single Judge in the facts of the present case which cannot be said to arbitrary capricious or perverse to warrant interference in the Appeal. There are no merit in this appeal - appeal dismissed.

Summary

The core legal questions considered by the Court in this matter include:

(i) Whether the deeds of simple mortgage dated 30th July 2018 executed in favor of the appellant (Omkara Asset Reconstruction Pvt. Ltd.) over the suit property are valid, void, or voidable, particularly in light of the prior mortgage created in favor of the respondent (J.C. Flowers Asset Reconstruction Pvt. Ltd.) and the conditional No Objection Certificate (NOC) issued by Yes Bank.

(ii) Whether the subsequent mortgage deeds created without the prior written consent of the first mortgagee (Yes Bank, later assigned to J.C. Flowers) are enforceable or merely subordinate charges as per Clause 5 of the prior mortgage deed.

(iii) The applicability of Section 31 of the Specific Relief Act, 1963 regarding cancellation of written instruments and whether the twin conditions for cancellation are satisfied.

(iv) The scope of jurisdiction between the civil court and the National Company Law Tribunal (NCLT) under Section 60(5)(c) of the Insolvency and Bankruptcy Code (IBC) concerning the validity and priority of charges created on the suit property.

(v) Whether the interim reliefs granted by the learned Single Judge, including injunction against acting on or relying upon the impugned mortgage deeds, were rightly exercised or require interference.

Issue-wise Detailed Analysis

1. Validity and Enforceability of the Subsequent Mortgage Deeds

The legal framework governing mortgages includes the Transfer of Property Act, 1882, particularly Section 48 which deals with priority of rights created by transfer, and the Specific Relief Act, 1963, especially Sections 31 and 34 which provide for cancellation and declaratory reliefs concerning written instruments. The mortgage deeds executed in favor of Yes Bank (later assigned to J.C. Flowers) contained a clause (Clause 5) prohibiting the mortgagors from creating any subsequent mortgage or charge without the prior written consent of Yes Bank, with a stipulation that any such unauthorized mortgage would be subordinate to the prior charge.

The Court noted that the subsequent mortgage deeds in favor of Piramal Capital (later assigned to Omkara Asset) were executed on 30th July 2018, a day prior to the conditional NOC issued by Yes Bank on 31st July 2018. The NOC was conditional upon repayment of outstanding dues by 10th August 2018, which was not complied with. The subsequent mortgages were executed without Yes Bank's consent and without repayment of the prior loans.

The appellant argued that Clause 5 of the prior mortgage deed contemplates the possibility of subsequent mortgages created without consent but ranks them subordinate to the prior mortgage, implying enforceability of the subsequent mortgage as a second charge. The appellant relied on Section 48 of the Transfer of Property Act to support the validity of the subsequent mortgage as a subordinate charge and contended that the mortgage deeds are not void but only voidable, hence not warranting cancellation under Section 31 of the Specific Relief Act.

The Court, however, interpreted Clause 5 as a prohibition against creating any mortgage without prior consent, rendering any subsequent mortgage created in violation of this clause as voidable at the instance of the first mortgagee. It held that the subsequent mortgage deeds were executed in breach of the prior mortgage and without valid consent, and thus cannot be treated merely as subordinate charges. The Court emphasized that the deeds of simple mortgage themselves falsely represented the properties as free from prior charges, further undermining their validity.

Precedents such as the Supreme Court's decisions in Life Insurance Corporation of India vs. Dharam Vir Anand and Radha Sundar Dutta vs. Mohd. Jahadur Rahim were relied upon to affirm that contracts or deeds must be construed as a whole and in a manner that does not render any clause nugatory. The Court rejected the appellant's contention that the last sentence of Clause 5 should be given primacy to treat the subsequent mortgage as valid but subordinate.

Further, the Court found that the subsequent mortgage violated Section 6(h) of the Transfer of Property Act and Section 23 of the Indian Contract Act, as it was created without lawful consent and was contrary to the terms of the prior mortgage and financing documents.

2. Applicability of Section 31 of the Specific Relief Act and Cancellation of Mortgage Deeds

Section 31 of the Specific Relief Act empowers the Court to cancel a written instrument if it is void or voidable and if there is reasonable apprehension that the instrument may cause serious injury to the plaintiff. The appellant argued that the twin conditions under Section 31 were not met and that cancellation is discretionary and not mandatory. It was submitted that the subsequent mortgage deeds are not agreements enforceable by law and thus cannot be cancelled on this basis.

The Court examined the pleadings and facts and held that the subsequent mortgage deeds were voidable at the instance of J.C. Flowers due to breach of the prior mortgage terms and absence of valid consent. It found that J.C. Flowers had demonstrated a prima facie case that the instrument was voidable and that it had reasonable apprehension of serious injury if the deeds were left outstanding, especially given the insolvency proceedings where all secured creditors are treated pari passu, potentially compromising J.C. Flowers' exclusive charge rights.

The Court relied on the decision in Deccan Paper Mills Company Limited vs. Regency Mahavir Properties which sets out the protective and preventive nature of relief under Section 31, akin to quia timet actions. It also noted the Supreme Court's guidance in Zarina Siddiqui vs. A. Ramalingam that discretion under Section 31 must be exercised judiciously and not arbitrarily.

3. Jurisdictional Issue under the Insolvency and Bankruptcy Code

The appellant contended that the NCLT has exclusive jurisdiction under Section 60(5)(c) of the IBC to decide the validity and priority of charges created on the property during insolvency proceedings and that the civil court lacked jurisdiction to grant interim reliefs. The appellant pointed to J.C. Flowers' own appeal before the NCLAT asserting NCLT's jurisdiction.

The Court distinguished between the issues of legality of the mortgage deeds and the question of priority of charges. It held that as on the date of the interim order, insolvency proceedings had not been admitted against the mortgagors Sumer Radius and Sumer Buildcorp, and thus the civil court retained jurisdiction to decide the legality of the impugned mortgages. The Court clarified that Section 60(5) of the IBC pertains to priority disputes and not to the fundamental validity or illegality of the mortgage instruments themselves. Hence, the civil court's jurisdiction to grant declaratory and injunctive reliefs on the legality of the mortgage deeds was upheld.

4. Exercise of Discretion in Granting Interim Relief

The Court applied settled principles regarding appeals against interlocutory orders granting injunctions, as laid down by the Supreme Court in Wander Limited vs. Antox India Pvt. Ltd. and subsequent cases. It reiterated that appellate courts should not interfere with the exercise of discretion by the trial court unless such discretion is shown to be arbitrary, capricious, or perverse.

Having considered the facts, documents, and conduct of the parties, the Court found no perversity or arbitrariness in the learned Single Judge's grant of interim reliefs. The Court noted that the subsequent mortgage deeds were executed hurriedly without valid consent and prior to the conditional NOC, and that the loan accounts with Yes Bank were not closed. The Court also observed that the mortgagors' conduct in creating the subsequent mortgage was dishonest and that allowing Omkara Asset to assert rights under the impugned deeds would amount to putting a premium on such dishonesty.

The Court found that the learned Single Judge rightly concluded that J.C. Flowers had a prima facie case and reasonable apprehension of serious injury warranting injunction against Omkara Asset and Piramal Capital from acting on or relying on the impugned mortgage deeds pending final adjudication.

5. Treatment of Competing Arguments

The appellant's argument that the subsequent mortgage deeds should be treated as valid subordinate charges was rejected on the basis that the deeds were executed in violation of the prior mortgage and without valid consent, rendering them voidable rather than merely subordinate. The Court emphasized the contractual prohibition in Clause 5 and the principle that earlier clauses prevail over later contradictory provisions.

The appellant's reliance on Section 48 of the Transfer of Property Act was held inapplicable since it presupposes a validly created subsequent mortgage, which was not the case here.

The appellant's contention regarding the exclusive jurisdiction of the NCLT was addressed by distinguishing the issues of legality and priority and by noting the absence of admitted insolvency proceedings against the mortgagors at the relevant time.

The respondent's submissions emphasizing the breach of contractual terms, the conditional nature of the NOC, and the risk of serious injury due to the impugned mortgages were accepted as establishing the requisite grounds for interim relief.

Significant Holdings

"The deeds of simple mortgage were created in violation of Yes Bank's mortgage deed and therefore voidable at the instance of J.C. Flowers."

"Clause 5 of the mortgage deed reads: 'Any mortgage/ charge created hereafter by the Mortgagor on the Mortgaged Properties, in violation of this Deed, shall be subject to the present mortgage/charge created in favour of the Mortgagee under this Deed, and the mortgage/ charge created in terms of this Deed shall in all circumstances rank superior.'"

"Section 48 of the Transfer of Property Act, 1882 did not apply as it presupposes that a mortgage created subsequently is a validly created mortgage."

"The issue in the present Suit is to the very legality of the impugned mortgages and also a declaration that the same are void and illegal. Any application under Section 60(5) of the IBC would deal with the priority of charge and not the very legality of the impugned mortgage itself."

"Permitting Piramal Capital or Omkara Asset to assert any right under the impugned mortgages which would in any manner impinge upon J.C. Flowers exclusive first charge would amount to putting a premium on dishonesty."

"The Court would exercise discretion under Section 31 of the Specific Relief Act judiciously and not in an arbitrary manner."

"J.C. Flowers has prima facie made out a case that the essential condition about the instrument being void or voidable against J.C. Flowers and that J.C. Flowers reasonably apprehends serious injury by the instrument being left outstanding are met."

The Court ultimately dismissed the appeal, affirming the interim order granting injunctions and directions sought by J.C. Flowers, holding that the subsequent mortgage deeds were voidable and executed in breach of the prior mortgage and financing documents, and that the civil court had jurisdiction to entertain the suit and grant reliefs pending final adjudication.