Mortgage Security Acquired: Karnataka High Court Applies Doctrine Of Substituted Security, Orders Compensation Deposit Until Adjudication Of Rights

The Karnataka High Court has said that a mortgagee (secured creditor/Bank) gets rights over the compensation amount to be disbursed when the property which is mortgaged with it is acquired by the state government, as per Section 73 of the Transfer of Property Act.

A single judge bench of Justice Krishna S Dixit allowed a petition filed by M/s D C B Bank Limited and directed Special Land Acquisition Officer (SLAO) to refer the claim of Petitioner – Bank forthwith to the Court of I Additional District Judge, Chitradurga, with all necessary papers, with intimation to the Petitioner. The Court after notice to all the stakeholders, shall adjudge the claim of Petitioner-Bank, within an outer limit of one year.

The bench said “Where the mortgaged property has been acquired, the amended provisions of Section 73 of the Transfer of Property Act Act becomes invokable.”

It added “This section is an instance of incorporation application of the “doctrine of substituted security”, viz that the mortgagee is, for the purpose of his security, entitled in lieu of only to the mortgaged property, to anything that is substituted for it. If, by a process of law or by a compelling situation sanctioned by law, the security given to a creditor for the repayment of debt is changed into something other than the property, the mortgagee gets rights over the substituted security namely, the changed one i.e., the compensation or the like.”

The bank had approached the court after its representation given to the SLAO was not considered. The petitioner contended that “Mortgage is one of the five traditional modes of transfer recognized by the provisions of the Transfer of Property Act, 1882 and therefore, his client has a vested interest in the subject property, which entitles it to the payment of compensation for its appropriation to loan account of the borrower. She expresses anguish against the 2nd Respondent in not considering her client’s Representation in terms of Sections 64 & 73 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.”

The authorities opposed the petition submitting that petitioner can approach the Civil Court for the redressal of its grievance since disputable fact matrix emanates from the case papers, writ remedy not being much suitable.

On going through the records the bench said “Counsel for the Petitioner is more than justified in heavily banking upon the provisions of Section 64 of the 2013 Act to contend that her client being the person interested has sent a Representation in terms of which the SLAO ought to have referred the dispute to the jurisdictional court, for adjudication since the mortgage is shifted to the compensation in lieu of the mortgaged property.”

Further it said “It hardly needs to be stated that this provision is substantially texted on par with Section 30 of the erstwhile Land Acquisition Act, 1894.”

Noting that the State Government being the appropriate Government has designated the I Additional District Judge of every District as & to be the “Authority” inter alia for the adjudication of disputes of the kind, the SLAO ought to have referred the matter to the said Judge for adjudication.

The bench held “This having not been done, there is justiciable right availing to the Petitioner to seek appropriate writ for its enforcement. In matters like this, driving the mortgagee to the ordinary Civil Court would only amount to the Writ Court shirking its responsibility to do justice in plain cases of the kind.”

Allowing the petition the bench clarified that “Till the Reference is decided, the compensation amount shall be kept in the interest earning scheme of some Nationalised Bank as a short time deposit of one year and that, the compensation shall follow its outcome.”

Case Title: M/s D C B Bank Limited And The Assistant Commissioner

Case No: WRIT PETITION NO. 18206 OF 2022

Citation: 2023 LiveLaw (Kar) 111

Date of Order: 16-03-2023

Appearance: Advocate Sreedevi K B for Advocate Patil J M for petitioner.

AGA R Srinivasa Gowda FOR R1 & R2;