Summary
The Supreme Court held that Cosmos Co-operative Bank, which took deposit of the original share certificate of a flat (a document of title), had a legal mortgage by deposit of title deeds under Section 58(f) of the Transfer of Property Act. That mortgage ranked above Central Bank of India's earlier security, which rested only on unregistered agreements of sale, created no interest in the flat, and was at most an equitable mortgage or charge enforceable only against persons with notice. Central Bank's charge was in any case postponed under Section 78 for failing to give notice, and the sale proceeds were directed to be paid to Cosmos Bank.
Issues
- Whether deposit of an unregistered agreement of sale of a flat with a bank creates a mortgage or charge over the flat.
- Whether a bank holding an earlier equitable mortgage based on unregistered agreements of sale has priority over a later lender with whom the original share certificate (title deed) was deposited.
- How an equitable mortgage is treated under Indian law, including under Sections 58, 78 and 100 of the Transfer of Property Act.
- Whether the High Court erred in upholding the DRAT's finding that Central Bank had the first charge over the flat.
Provisions considered
- Section 54, Transfer of Property Act, 1882Relying on Suraj Lamp and Bank of India v. Abhay D. Narottam, held that an agreement of sale does not of itself create any interest in or charge on immovable property. An unregistered agreement of sale deposited with Central Bank therefore conferred no interest that could be given as security. (¶¶ 20, 21, 22, 25, 26)
- Section 58(a) and 58(f), Transfer of Property Act, 1882Held that a mortgage requires a transfer of an interest in specific immovable property. A mortgage by deposit of title deeds under clause (f), which requires a debt, a deposit of title deeds and an intention that they serve as security, is a legal mortgage in India, unlike an equitable mortgage in English law. Deposit of the share certificate with Cosmos Bank created such a mortgage. (¶¶ 19, 21, 49, 50, 51, 52, 54)
- Section 78, Transfer of Property Act, 1882Held that Central Bank, by not demanding the share certificate and giving no public notice of its charge (the society told Cosmos Bank the flat was unencumbered), was grossly negligent and induced the later advance. Its equitable charge was therefore postponed to Cosmos Bank's charge. (¶¶ 44, 45, 47)
- Section 100, Transfer of Property Act, 1882Held that equitable mortgages are recognised in India as 'charges'. The provisions on simple mortgages apply to them only so far as may be, and the charge cannot be enforced against a transferee for consideration without notice. Preferring M.L. Abdul Jabbar Sahib, the Court observed that a charge needs no writing or registration and that Haryana Financial Corpn. v. Gurcharan Singh prima facie appears incorrect on this point. (¶¶ 19, 23, 55, 56, 57)
- Section 59, Transfer of Property Act, 1882Noted that no registered instrument is required for a mortgage by deposit of title deeds, and held, following M.L. Abdul Jabbar Sahib, that Section 59 does not apply to the creation of a charge under Section 100. (¶¶ 51, 57)
- Sections 4, 4A and 11, Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963Read the requirement that flat sale agreements be registered, the limited evidentiary use of unregistered agreements, and the promoter's duty to convey title to the society. The Court held that title in the flat passed through the society's share certificate, not the agreement of sale, and that Central Bank knew this. (¶¶ 19, 47, 62, 63)
- Sections 2, 4 and 5, Maharashtra Apartment Ownership Act, 1970Reproduced as relevant to apartments as transferable immovable property. Section 4 was read with Section 11 of the 1963 Act in holding that conveyance of title to the flat took place through the share certificate. (¶¶ 19, 47)
Held
- An agreement of sale does not create any interest in or charge on immovable property. Central Bank's security, based only on unregistered agreements of sale deposited when the loan was given, could not amount to a mortgage under Section 58 of the Transfer of Property Act, and the High Court erred in proceeding otherwise. (¶¶ 20, 21, 22, 25, 28)
- Equity looks to intent rather than form. Where a borrower deposits documents such as an agreement of sale with a lender to offer property as security and the loan is advanced, the transaction may be treated as an equitable mortgage even though it conveys no title. Central Bank therefore held an equitable mortgage over the flat. (¶¶ 27, 28, 29, 30, 34, 35, 42)
- An equitable mortgage confers only rights in personam and does not bind subsequent incumbrancers without notice. A prior equitable mortgagee who, through gross negligence, fails to secure the title deeds or to give notice of the charge is postponed to a later mortgagee without notice, as recognised in Section 78. Central Bank never demanded the share certificate and gave no public notice, and the society told Cosmos Bank that the flat was unencumbered, so its charge was postponed. (¶¶ 43, 44, 45, 46, 47)
- Under the Transfer of Property Act, a mortgage by deposit of title deeds is a legal mortgage involving a transfer of interest, not merely an equitable mortgage as in English law. It requires a debt, a deposit of title deeds and an intention that they serve as security. Deposit of the original share certificate with Cosmos Bank created a legal mortgage that ranked above Central Bank's earlier equitable mortgage, irrespective of the order in time. (¶¶ 48, 49, 50, 51, 52, 54)
- Equity supplements but cannot supplant the law, so an equitable mortgage yields to a legal mortgage. It may still operate as a secondary charge where conditions such as notice are met. Because a mortgage by deposit of title deeds is a legal mortgage in India, all title deeds must ordinarily be deposited, except those the mortgagee could not obtain or know of despite best efforts. (¶¶ 52, 53)
- Equitable mortgages are recognised in India as 'charges' under Section 100. Simple-mortgage provisions apply to them only so far as may be, and they cannot be enforced against a transferee without notice. A charge needs no registered instrument, following M.L. Abdul Jabbar Sahib, and Haryana Financial Corpn. v. Gurcharan Singh prima facie appears incorrect on this. Kedar Lal v. Hari Lal does not exclude the equitable mortgage doctrine. A lender whose transaction falls short of a mortgage may claim an equitable mortgage, seek to perfect the mortgage, or sue for recovery. (¶¶ 55, 56, 57, 58, 59, 60, 61)
- The High Court overlooked that, when Cosmos Bank lent, the borrowers held a valid title deed in the form of the society's original share certificate, whose issue the society confirmed. As between a prior unregistered transaction and a later valid legal mortgage, the latter prevails under the rule of priority. (¶¶ 62, 63, 64, 65)
Result
Appeal allowed; High Court order set aside; Central Bank of India held not entitled to enforce its equitable mortgage against Cosmos Bank's recovery, and the sum of about Rs. 51 lakh deposited with the DRT directed to be disbursed with interest to Cosmos Bank; copies of the judgment directed to be sent to all High Courts for circulation to DRTs and DRATs.