Mortgage Created By Deposit Of Title Deeds Prevails Over Equitable Mortgage Created By Deposit Of Agreement To Sell : Supreme Court

The Supreme Court has held that a mortgage created by the deposit of an unregistered agreement to sell will be subservient to a mortgage which was created by the deposit of title deeds.

This is because an agreement of sale does not by itself create any interest in or charge on any property as per Section 54 of the Transfer of Property Act, 1882, as explained by the judgments in Suraj Lamps and Shakeel Ahmed v. Syed Akhlaq Hussain.

The Court agreed that the deposit of an incomplete title deed can create a mortgage, which is 'equitable' in nature. However, such an 'equitable mortgage' will be inferior to a 'legal mortgage' created by the deposit of proper title deeds.

A bench of Justices JB Pardiwala and R Mahadevan heard the case that arose from a mortgage dispute between the Cosmos Co-operative Bank Ltd. (Appellant) and the Central Bank of India (Respondent No.1). The Central Bank of India issued a loan in 1989 based on the deposit of agreement to sell the flat, and Cosmos Bank provided a loan in 1998 based on share certificate with respect to the flat.

"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.

The Court referred to Section 78 of the TP Act, which says that if due to the negligence of a mortgagee, another person has been induced to advance money on the security of the mortgaged property, then the prior mortgage will be postponed to the subsequent mortgage.

Here, the respondent advanced loan on the basis of an unregistered agreement to sell; no document of equitable mortgage was created and no public notice regarding it was issued.

"In such a scenario, the equitable charge of the respondent no. 1 bank herein is liable to be postponed to the charge created in favour of the appellant bank herein in terms of Section 78 of the Act, 1882, and the impugned order of the High Court is liable to be set-aside on this ground alone," the Court stated.

Legal mortgage would defeat equitable mortgage

The judgment stated further :

"We may clarify that deposit of part-deeds of title would not constitute a mortgage in terms of Section 58 sub-section (e) of the Act, 1882 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."

Explaining the difference between the equitable mortgage and legal mortgage and why the legal mortgage prevails over the equitable mortgage, the Court observed:

“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. Rather on the contrary, the de jure title or ownership continues to vest with the original borrower and only the documents thereof is ordinarily retained by the lender and as such the right of the lender in such a situation is being enforced through the party having title over the said property alone i.e., the borrower and thus is only a right in personam.”

Since the mortgage created in favor of Respondent No.1, the Central Bank of India, was an equitable mortgage due to the absence of actual delivery of title deeds, the Court ruled against Respondent No.1's claim, giving primacy to the Appellant's right over the property.

“In the case at hand, even though what was deposited with the respondent no. 1 bank herein was nothing but an unregistered agreement to sale having no legal effect of conveyance or transfer of the said flat or any right therein in favour of the bank, the undisputed factum that the said agreement to sale was deposited by the original borrowers herein so as to offer the said flat as security would tantamount to an equitable mortgage. Moreover, since at the time of availing the loan, the share certificate of ownership to the said Flat was yet to be issued, it could be said that the respondent no. 1 bank had all the documents to the said Flat that it could have at that time possibly taken in possession, and we even proceed on the footing that the respondent no. 1 bank might have undertaken all the necessary steps to assure itself that there were no other material documents to be taken possession of at the time of extending the loan.”, the court observed.

“Thus, when the original borrowers deposited with the appellant bank herein, the share certificate of ownership to the said Flat, on that very day and date, a legal charge is said to have been created on the flat in favour of the appellant bank, whereas, when it comes to the respondent no. 1 bank no such charge on the flat was created, rather what was created was only an equitable mortgage, though prior in time.”, the court added.

In terms of the aforesaid, the Court allowed the appeal and gave credence to the legal mortgage created by the Appellant-Bank upon deposit of the share certificate.

Case Title: The Cosmos Co-operative Bank Ltd. v. Central Bank of India & Ors.

Citation : 2025 LiveLaw (SC) 226

Click here to read/download the judgment

Appearances:

For Petitioner(s) :Mr. Ninad Laud, Adv. Mr. Ivo Dcosta, Adv. Mr. Guruprasad Naik, Adv. Ms. Ishani Shekhar, Adv. Mr. Sahil Tagotra, AOR

For 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.