‘Equitable Mortgages’ Very Much Recognized In India As ‘Charge’ U/S 100 TP Act: Supreme Court

The Supreme Court held that ‘equitable mortgages’ are very much recognized in India under the nomenclature of ‘charge’ in terms of Section 100 of the Transfer of Property Act, 1882 (TPA),

The Court said that they will be enforceable as far as possible in terms of the procedure and provisions application to a simple mortgage except those without notice of such charge.

The Court held thus in a Civil Appeal preferred against the Judgment of the Bombay High Court by which a Writ Petition challenging the Order of the Debt Recovery Appellate Tribunal (DRAT) was rejected.

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan observed, “The last part of Section 100 of the Act, 1882 further statutorily recognizes the in personam nature of such “charge” and provides that they shall not be enforced against any person to whom such property or interest therein has been transferred i.e., to whom it has been mortgaged in terms of Section 58 of the said Act or any other bona-fide transferee who does not have notice of the said charge. Thus, what may be discerned is that, ‘equitable mortgages’ are very much recognized in India under the nomenclature of “charge” in terms of Section 100 of the Act, 1882, and the same will be enforceable as far as possible in terms of the procedure and provisions application to a simple mortgage except those without notice of such charge.”

The Bench elucidated that any act of the parties that evinces a clear intention of the parties to create a mortgage though the same might not have been created in terms of Section 58 of TPA, may still be a valid charge in terms of Section 100.

AOR Sahil Tagotra represented the Appellant while AOR Krishan Kumar represented the Respondents.

Facts of the Case

The original borrowers i.e., the Respondents on the strength of one unregistered agreement of sale availed loan facility from the Central Bank of India (Respondent No. 1) to the tune of approximately Rs. 30 lakhs. 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. The Central Bank sanctioned the loan, creating a charge over the flat. 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 (DRT).

The DRT Mumbai adjudicated the Original Application 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 Application till its payment. The Central Bank had to file an Appeal before the DRAT because of the observations made by the DRT in its Order. The DRAT’s Order allowed the said Appeal and while the proceedings before the DRAT were pending in the form of Appeal, the Appellant-bank had to intervene and it was also heard on the question as to which bank had the first charge over the security interest created by the original borrowers. Being dissatisfied with the DRAT’s Order, the Appellant approached the High Court via Writ Petition. The said Petition was rejected and being aggrieved by this, the Appellant was before the Apex Court.

Reasoning

The Supreme Court in view of the above facts, explained, “… the underlying distinction between a legal mortgage and an equitable mortgage under the English Law is that in the former, there is conveyance or transfer of some proprietary interest in the mortgaged property in accordance with the statute or law whereas in the latter the formalities required for a legal mortgage are not fully satisfied, but the parties' intentions to create a mortgage are clear as result of which it is deemed as a mortgage.”

The Court noted that 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.

“… equity acts only in personam. The very basis for creation of an ‘equitable mortgage’ is the intention of parties alone, and as such any action or remedy can be directed only against the parties so involved. This is because, unlike a legal mortgage where a ‘charge’ is created directly on the property itself and the title or any proprietary interest therein is transferred to the lender thereby becoming a right enforceable in rem in respect to the property, in case of an ‘equitable mortgage’ no such charge is said to have been formally created on the property nor any transfer or conveyance of interest has said to occur”, it added.

Furthermore, the Court elucidated that ‘Equitable Mortgage’ being a right in personam will not affect successive incumbrances and will not be enforceable against successive mortgagees if the creation of such equitable charge was not disclosed to them.

“… 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”, it said.

The Court clarified that deposit of part-deeds of title would not constitute a mortgage in terms of Section 58 sub-section (e) of TPA 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.

“… 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”, it also remarked.

Moreover, the Court observed that the enforcement of an ‘equitable mortgage’ being a by-product of the doctrine of equity is purely a matter of discretion that a Court of conscience may grant keeping in mind the principles of fair-play, good conscience and justice. It added that, where any ‘equitable mortgage’ is found to be unenforceable, the same though neither a ‘legal mortgage’ nor a ‘charge’ may still nevertheless entitle a lender to seek other reliefs such as specific performance of the contract or a suit for recovery on the strength of the ab inito intention of the parties to create a security evident from such ‘equitable mortgage’.

“… when it comes to mortgages it will not be permissible to travel beyond the scheme of Act, 1882 and venture into the provisions contained in other laws. … However, this by no stretch means that the concept of equitable mortgage has no place in the Indian jurisprudence. The concept of equitable mortgage is purely a creation and by-product of the doctrine of equity, and thus, the absence of any specific provision under the Act, 1882 providing for such a mortgage will not run to the detriment of something which is essentially designed to ensure that principles of fair-play, good conscience and justice endure. There is no decision which either specifically excludes or outrightly rejects the application of this doctrine”, it further said.

The Court enunciated that 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.

The Court was of the view that the High Court got carried away by the fact that the first charge was that of the Central Bank and not of the Appellant bank, and failed to notice the distinction that exists between an ‘equitable mortgage’ and a ‘legal mortgage’.

“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”, it concluded.

Accordingly, the Apex Court allowed the Appeal, set aside the High Court’s Order, and directed that the amount of Rs. 51 lakhs lying deposited be disbursed along with interest in favour of the Appellant-bank.

Cause Title- The Cosmos Co. Operative Bank Ltd. v. Central Bank of India & Ors. (Neutral Citation: 2025 INSC 243)

Appearance:

Appellant: AOR Sahil Tagotra, Advocates Ninad Laud, Ivo Dcosta, Guruprasad Naik, and Ishani Shekhar.

Respondents: AORs Krishan Kumar, Nitin Mishra, Advocates Seemant K Garg, Nitin Pal, Mitali Gupta, and Hargun Singh Kalra.

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