The Supreme Court Clarified the Priority of Charges and the Enforceability of Equitable Mortgages Under the Transfer of Property Act, 1882.
The Supreme Court Bench of Justice J.B. Pardiwala and Justice R. Mahadevan reviewed a Special Leave Petition and held that while an arrangement may not constitute a mortgage under Section 58 of the Transfer of Property Act, 1882, it can still create a charge under Section 100, and equitable mortgages, though not legal mortgages, remain enforceable except against bona fide transferees without notice. The Court further held that the priority of charges follows the principle qui prior est tempore potior est jure but can be subordinated if negligence or failure to provide notice misleads subsequent lenders under Section 78 of the Act.
The Supreme Court granted leave to appeal against the judgment of the Bombay High Court dated 12.12.2018, which had dismissed the writ petition filed by the appellant, thereby affirming the order of the Debt Recovery Appellate Tribunal (DRAT) dated 28.08.2015. The dispute arose from a loan facility of approximately ₹30,00,000 sanctioned by the Central Bank of India to the original borrowers based on an unregistered agreement of sale. The Central Bank created a charge over a flat that the borrowers intended to purchase. Upon default in repayment, the Central Bank initiated recovery proceedings before the Debt Recovery Tribunal-I (DRT), Mumbai, which held the borrowers jointly and severally liable for ₹43,15,405.56 with interest at 15% per annum but observed that the mortgage over the flat was not validly created due to the absence of primary title documents.
Aggrieved by the DRT’s findings, the Central Bank appealed before the DRAT, which allowed the appeal, holding that the mortgage in favour of the Central Bank was valid and subsisting. The DRAT also decreed the claim against the primary borrower. Dissatisfied, the appellant bank challenged the DRAT’s order before the Bombay High Court, arguing that it had a prior claim over the flat. The High Court, however, upheld the DRAT’s findings, noting that the Central Bank had a prior mortgage created on 31.10.1989, whereas the mortgage claimed by the appellant bank was of October 1998. The High Court also observed that the flat was under a court receiver’s custody when the appellant bank sanctioned the loan. The appellant bank, aggrieved by the High Court’s dismissal of its writ petition, approached the Supreme Court, contending that the High Court had erred in affirming the DRAT’s order and that the mortgage created in favour of the Central Bank was legally untenable.
The Supreme Court examined the legal framework governing mortgages and charges, referring to Sections 58 and 100 of the Transfer of Property Act, 1882, which define different types of mortgages, including simple, usufructuary, English, and mortgages by conditional sale and deposit of title deeds. The Court clarified that a charge created on immovable property for securing payment of money did not constitute a mortgage unless explicitly specified. The Court also analyzed Sections 4, 4A, and 11 of the Maharashtra Ownership Flats Act, 1963, which regulates the obligations of promoters in executing agreements for sale and the conveyance of ownership rights. It emphasized that unregistered agreements for sale could be admitted as evidence in specific performance suits or for part performance under Section 53A of the Transfer of Property Act, 1882.
The Court applied legal principles from precedent cases, including Dattatreya Shanker Mote, which held that a charge is equated with a simple mortgage under Section 100 of the Transfer of Property Act, 1882, subject to certain conditions. It emphasized that the priority of charge-holders depends on the principle ‘qui prior est tempore potior est jure’ but must align with the statutory framework. The Court also relied on Suraj Lamp & Industries, affirming that an agreement to sell does not create ownership rights in immovable property and that transfer of title requires a registered conveyance deed. It was reiterated in Shakeel Ahmed v. Syed Akhlaq Hussain that unregistered agreements and powers of attorney do not confer ownership or enforceable rights.
On the issue of equitable mortgage, the Court recognized that while a mere agreement to sell does not constitute a mortgage under Section 58 of the Transfer of Property Act, a charge could still be created if there was an intention to do so. The Court distinguished between legal and equitable mortgages, explaining that equitable mortgages could arise even in the absence of formal documentation if the parties intended to create a security interest in the property. It referred to the legal maxim ‘Quod fieri debuit pro facto censetur,’ meaning ‘what ought to have been done is considered as done,’ and examined equitable principles in mortgage transactions. It elaborated that equitable mortgages, particularly where borrowers deposited documents, promissory notes, or title deeds with lenders, could be recognized even without a formal mortgage deed.
Under English law, equitable mortgages were created through (i) the deposit of original title deeds or (ii) a memorandum of understanding recording the intention to create a charge. The Court held that the deposit of an unregistered sale agreement with the respondent bank demonstrated the borrowers’ intention to offer the flat as security, thus constituting an equitable mortgage. Regarding priority among multiple equitable mortgages, the Court affirmed that earlier charges had precedence unless negligence or fraud by the first mortgagee disadvantaged subsequent lenders. It emphasized that equitable mortgages, being rights in personam, did not automatically bind third parties unaware of the charge. However, Section 78 of the Transfer of Property Act, 1882, codified that fraud, misrepresentation, or gross neglect by a prior mortgagee could affect priority.
The Supreme Court held that when respondent No. 1 bank advanced the loan, it attempted to create a Memorandum of Equitable Mortgage by depositing an agreement to sell the flat. However, the bank failed to place this document on record and did not demand the share certificate of ownership, despite knowing that title conveyance for such flats occurs through the share certificate, not the agreement to sell. Additionally, the respondent bank did not issue a public notice of its equitable charge, which led the appellant bank to believe that the flat was unencumbered. As a result, under Section 78 of the Transfer of Property Act, 1882, the respondent bank's equitable charge was held to be subordinate to the legal mortgage created in favour of the appellant bank.
The Court emphasized that depositing an agreement to sell does not transfer title, but depositing a share certificate of ownership does. Consequently, the charge created in favour of the appellant bank took precedence over the respondent bank's equitable mortgage. The Supreme Court held that while an arrangement may not constitute a mortgage under Section 58 of the Transfer of Property Act, 1882, it could still create a “charge” under Section 100 of the Act. The Court clarified that equitable mortgages, though not legal mortgages under Section 58, are recognized as “charges” under Indian law and are enforceable except against bona fide transferees without notice. It reviewed earlier rulings, including J.K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd. and Haryana Financial Corporation v. Gurcharan Singh, and disagreed with the Haryana Financial Corporation ruling, which required registration of a charge under Section 59, relying instead on M.L. Abdul Jabbar Sahib v. M.V. Venkata Sastri & Sons, which held that a charge does not require attestation or registration.
The Court reiterated that the doctrine of equitable mortgage, rooted in principles of equity, remains relevant in Indian jurisprudence. It referenced K.J. Nathan, affirming that while equitable mortgages are not statutory, they may still be enforced in equity. The Court outlined three possible recourses for a lender in cases where a transaction does not amount to a legal mortgage: (i) claiming it as an equitable mortgage, (ii) seeking relief for part-performance of the contract, or (iii) filing a suit for recovery based on the intention to create a security. Finally, the Court noted the factual finding that the property in question was in custodia legis at the time of loan sanction, which influenced the High Court’s decision regarding the validity of the mortgage.
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