1. Loan facilities secured by unregistered agreements of sale and share certificates — Dispute over priority of charge between two banks — Application of Transfer of Property Act. (Para 3 )
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2025 Supreme(SC) 367
SUPREME COURT OF INDIA
J.B. PARDIWALA, R. MAHADEVAN, JJ.
The Cosmos Co. Operative Bank Ltd. – Appellant
Versus
Central Bank Of India & Ors. – Respondents
Civil Appeal No. 1565 of 2025 (@Special Leave Petition (C) No. 11557/2019)
Decided on : 04-02-2025
Advocates appeared:
For the Petitioner(s): Mr. Ninad Laud, Adv. Mr. Ivo Dcosta, Adv. Mr. Guruprasad Naik, Adv. Ms. Ishani Shekhar, Adv. Mr. Sahil Tagotra, AOR
For the Respondent(s): Mr. Krishan Kumar, AOR Mr. Seemant K Garg, Adv. Mr. Nitin Pal, Adv. Mr. Nitin Mishra, AOR Ms. Mitali Gupta, Adv. Mr. Hargun Singh Kalra, Adv.
For the Petitioner(s): Mr. Ninad Laud, Adv. Mr. Ivo Dcosta, Adv. Mr. Guruprasad Naik, Adv. Ms. Ishani Shekhar, Adv. Mr. Sahil Tagotra, AOR
For the Respondent(s): Mr. Krishan Kumar, AOR Mr. Seemant K Garg, Adv. Mr. Nitin Pal, Adv. Mr. Nitin Mishra, AOR Ms. Mitali Gupta, Adv. Mr. Hargun Singh Kalra, Adv.
Important Points
The court affirmed that a legal mortgage takes precedence over an equitable mortgage when valid title deeds are present, emphasizing the importance of intention in mortgage creation.
Subject
Property Law - Mortgage Law
Act Referred
COMPANIES ACT: S.125
CONTRACT ACT: S.43
EVIDENCE ACT: S.114
MAHARASHTRA OWNERSHIP FLATS REGULATION OF THE PROMOTION OF CONSTRUCTION, SALE, MANAGEMENT AND TRANSFER ACT: S.11, S.4
REGISTRATION ACT: S.17, S.32, S.36, S.49
SPECIFIC RELIEF ACT: S.3
TRANSFER OF PROPERTY ACT: S.100, S.40, S.48, S.5, S.53(a), S.54, S.55, S.58, S.59, S.78
TRUSTS ACT: S.91
CONTRACT ACT: S.43
EVIDENCE ACT: S.114
MAHARASHTRA OWNERSHIP FLATS REGULATION OF THE PROMOTION OF CONSTRUCTION, SALE, MANAGEMENT AND TRANSFER ACT: S.11, S.4
REGISTRATION ACT: S.17, S.32, S.36, S.49
SPECIFIC RELIEF ACT: S.3
TRANSFER OF PROPERTY ACT: S.100, S.40, S.48, S.5, S.53(a), S.54, S.55, S.58, S.59, S.78
TRUSTS ACT: S.91
Headnote
(A) Transfer of Property Act, 1882 - Sections 54, 58, and 100 - Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 - Sections 4, 4A, and 11 - Dispute over mortgage validity - The appellant bank's claim of a legal mortgage was upheld over the respondent bank's equitable mortgage due to the existence of a share certificate as a valid title deed at the time of loan sanction - The High Court's ruling was set aside as it failed to recognize the distinction between legal and equitable mortgages. (Paras 66-70)
(B) Mortgage - Nature and distinction - An unregistered agreement of sale does not create an interest in property, thus the respondent bank's claim was inferior to the appellant bank's legal mortgage established by the share certificate. (Paras 20-24, 36-50)
(C) Equitable Mortgage - The court emphasized that the intention of the parties to create a mortgage is paramount, and the absence of formalities does not negate the existence of an equitable mortgage. (Paras 27-35)
(B) Mortgage - Nature and distinction - An unregistered agreement of sale does not create an interest in property, thus the respondent bank's claim was inferior to the appellant bank's legal mortgage established by the share certificate. (Paras 20-24, 36-50)
(C) Equitable Mortgage - The court emphasized that the intention of the parties to create a mortgage is paramount, and the absence of formalities does not negate the existence of an equitable mortgage. (Paras 27-35)
Judgement Key Points
Key Points: - The Court holds that a legal mortgage takes precedence over an equitable mortgage when valid title deeds are present (!) (!) . - The judgment discusses that under the Transfer of Property Act, 1882, a mortgage by deposit of title deeds is a legal mortgage and can take priority over equitable mortgages, depending on notice and registration (!) (!) (!) . - It clarifies that an unregistered agreement of sale does not create an interest in property and cannot confer a mortgage or charge, reinforcing the priority of properly created and registered charges/mortgages (!) (!) (!) . - The decision emphasizes the need for publicity and registration to establish priority among multiple charges/mortgages over the same property (Suraj Lamp principles) (!) (!) . - The High Court’s view that the Cosmos Bank’s mortgage was subsequent and lacked title deeds was set aside in favor of recognizing the Cosmos Bank’s priority due to deposit of title deeds (share certificate) and legal mortgage status (!) (!) (!) . - The Court cites Section 58 and Section 100 of the Transfer of Property Act to distinguish between legal mortgages and charges, and to recognize equitable mortgages as recognised under Section 100 as charges (!) (!) (!) (!) . - It notes that deposit of title deeds can create a legal mortgage in India, not merely an equitable mortgage, when properly constituted under Section 58(f) and related provisions (!) (!) (!) . - The judgment discusses the consequences of non-disclosure of an equitable mortgage to prior or subsequent encumbrancers and the potential postponement under Section 78 of the Act for fraud or gross neglect (!) (!) . - The Court directs disbursement of funds deposited in escrow to the appellant bank, reflecting the priority determination (!) . - The decision references the importance of title deeds (share certificates) and promoter conveyance obligations under Maharashtra acts to determine valid title and mortgage status (!) (!) (!) .
What is the priority between a legal mortgage and an equitable mortgage when valid title deeds are present?
What is the effect of deposit of title deeds under the Transfer of Property Act, 1882 on mortgage validity and priority?
What are the implications of registration versus unregistered agreements of sale for establishing mortgage or charge over immovable property?
Legal Category Hierarchy
- property law
- practice and procedure
Table of Contents
2. Validity of mortgage based on unregistered agreement of sale — Priority of charge between a prior equitable mortgage and a subsequent legal mortgage. (Para 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 )
3. Unregistered agreements of sale do not create interest — Distinction between English equitable mortgages and Indian statutory mortgages by deposit of title deeds — Negligence in securing title. (Para 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 , 30 , 31 , 32 , 33 , 34 , 35 , 36 , 37 , 38 , 39 , 40 , 41 , 42 , 43 , 44 , 45 , 46 , 47 , 48 , 49 , 50 , 51 , 52 , 53 , 54 , 55 , 56 , 57 , 58 , 59 , 60 , 61 , 62 , 63 , 64 , 65 )
4. Legal mortgages by deposit of title deeds under Section 58(f), TP Act, prevail over prior equitable mortgages (charges under Section 100) if the latter's holder was negligent. (Para 49 , 50 , 52 , 54 , 56 )
5. Appeal allowed — High Court order set aside — Priority of charge granted to the subsequent mortgagee — Recovery proceeds ordered to be disbursed. (Para 66 , 67 , 68 )
6. Does an unregistered agreement of sale create an interest or charge on immovable property?
No, a contract of sale or agreement of sale does not, of itself, create any interest in or charge on the property under Section 54 of the Transfer of Property Act. (Para 20 , 21 , 25 , 26 )
7. What is the distinction between an equitable mortgage under English law and a mortgage by deposit of title deeds under the Transfer of Property Act?
In English law, deposit of title deeds creates an equitable mortgage. In India, under Section 58(f) of the Transfer of Property Act, it is a legal mortgage involving a transfer of interest. (Para 49 , 50 , 54 )
8. When is a prior mortgagee postponed to a subsequent mortgagee under the Transfer of Property Act?
Under Section 78, a prior mortgagee is postponed if, through fraud, misrepresentation, or gross neglect, another person is induced to advance money on the security of the mortgaged property. (Para 44 , 45 , 47 )
9. What is the nature of a charge created under Section 100 of the Transfer of Property Act?
A charge is a security that does not amount to a mortgage; it is a right in personam and cannot be enforced against a bona fide transferee without notice of the charge. (Para 43 , 55 , 56 )
10. Is the deposit of part-deeds sufficient to create a legal mortgage by deposit of title deeds in India?
No, unlike English law, a legal mortgage under Section 58(f) requires the deposit of all material title deeds; failure to do so may render the charge an equitable mortgage. (Para 52 )
JUDGMENT :
J.B. PARDIWALA, J.:
For the convenience of exposition, this judgment is divided into the following parts: -
| INDEX | |
| A. | FACTUAL MATRIX |
| B. | SUBMISSIONS OF THE PARTIES |
| i. | Submissions on behalf of the appellant Cosmos Co. Operative Bank. |
| ii. | Submissions on behalf of the respondent no.1; Central Bank of India |
| C. | ISSUE FOR CONSIDERATION |
| D. | ANALYSIS |
| i. | Relevant Provisions |
| ii. | Concept of Equitable Mortgage |
| iii. | Nature of an Equitable Mortgage |
| iv. | Distinction between Mortgage by Deposit of Title Deeds under the English Law and under the Transfer Of Property Act, 1882. |
| E. | CONCLUSION |
1. 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 respondent 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 before 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 Rs.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 redeposited 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
