The Cosmos Co. Operative Bank Ltd. v. Central Bank of India & Ors.

of notice to all subsequent transferees before the enforcement of a ‘charge’ as otiose and redundant, as the moment when such instrument is registered, notice is deemed to have been made. The very idea behind stipulating the requirement of notice under Section 100 of the Act, 1882 seems to be to save even those transactions which are not registered and do not amount to a mortgage yet in equity may still be enforceable provided the subsequent transferee has notice of such charge. We do not intend to dwell any further on the decisions of this Court in J.K. (Bombay) (P) Ltd. (supra) and Haryana Financial Corpn (supra) as the present case does not require examining whether the respondent no. 1 bank could be said to have an enforceable charge against the appellant bank, and even otherwise if an ‘equitable mortgage’ cannot be construed as a ‘charge’ in terms of Section 100 of the Act, 1882, the former may still be permitted to be enforceable in the extant of equity in the peculiar facts of each case. This is because 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. 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’.

58. We are conscious of the decision of this Court in Kedar Lal v. Hari Lal reported in AIR 1952 SC 47 wherein it was held that the whole of law of mortgage in India, including the law of contribution arising out of a transaction of mortgage, is now statutory and is embodied in the Act, 1882 read with the Civil Procedure Code, 1908 and that the courts cannot travel beyond these provisions. The relevant observations read as under: - “27. So far as Section 43 is concerned, I am not prepared to apply it unless Sections 82 and 92 can be excluded. Both Sections 43 and 82 deal with the question of contribution. Section 43 is a provision of the Contract Act dealing with contracts generally. Section 82 applies to mortgages. As the right to contribution here arises out of a mortgage, I am clear that Section 82 must exclude Section 43 because

p. 1137

when there is a general law and a special law dealing with a particular matter, the special excludes the general. In my opinion, the whole law of mortgage in India, including the law of contribution arising out of a transaction of mortgage, is now statutory and is embodied in the Transfer of Property Act read with the Civil Procedure Code. I am clear we cannot travel beyond these statutory provisions.”

59. However, a close reading of the aforesaid paragraph of Kedar Lal (supra) would reveal that the observations were made in light of the question whether Section 43 of the Indian Contract Act, 1882 which deals with right to contribution would be applicable to such a right which is arising out of a mortgage to the exclusion of Section 82 of the Act, 1882 which deals with mortgages. It was in this context this Court held that 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.

60. 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. Rather, the subsequent decision of this Court in K.J. Nathan (supra) it was specifically stated that although the concept of equitable mortgage as evolved under the English Law cannot be considered to be a rule of law, which as also discussed by us in the foregoing paragraphs is by-product of doctrine of equity and not the law of the land, yet they may serve as a guide. The relevant observations read as under: -

10. The foregoing discussion may be summarized thus : Under the Transfer of Property Act a mortgage by deposit of title deeds is one of the forms of mortgages whereunder there is a transfer of interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced by way of loan. Therefore, such a mortgage of property takes effect against a mortgage deed

p. 1138

subsequently executed and registered in respect of the same property. The three requisites for such a mortgage are, (i) debt, (ii) deposit of title deed; and (iii) an intention that the deeds shall be security for the debt. Whether there is an intention that the deeds shall be security for the debt is a question of fact in each case. The said fact will have to be decided just like any other fact on presumptions and on oral, documentary or circumstantial evidence. There is no presumption of law that the mere deposit of title deeds constitutes a mortgage, for no such presumption has been laid down either in the Evidence Act or in the Transfer of Property Act. But a court may presume under Section 114 of the Evidence Act that under certain circumstances a loan and a deposit of title deeds constitute a mortgage. But that is really an inference as to the existence of one fact from the existence of some other fact or facts. Nor the fact that at the time the title deeds were deposited there was an intention to execute a mortgage deed in itself negatives, or is inconsistent with, the intention to create a mortgage by deposit of title deeds to be in force till the mortgage deed was executed. The decisions of English courts making a distinction between the debt preceding the deposit and that following it can at best be only a guide; but the said distinction itself cannot be considered to be a rule of law for application under all circumstances. Physical delivery of documents by the debtor to the creditor is not the only mode of deposit. There may be a constructive deposit. A court will have to ascertain in each case whether in substance there is a delivery of title deeds by the debtor to the creditor. If the creditor was already in possession of the titledeeds, it would be hypertechnical to insist upon the formality of the creditor delivering the title deeds to the debtor and the debtor redelivering them to the creditor. What would be necessary in those circumstances is whether the parties agreed to treat the documents in the possession of the creditor or his agent as delivery to him for the purpose of the transaction.” (Emphasis supplied)

p. 1139

61. Thus, 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.

62. Before we close this judgment, we must look into the observations made by the High Court in para 8 of its impugned order. In para 8 the High Court has recorded that at the time of sanction and grant of the loan by the appellant-bank herein i.e. sometime in November, 1998 the flat in question was in custodia legis of the court receiver appointed in the year 1994. What weighed with the High Court was the submission canvassed on behalf of the Central Bank that the validity of the mortgaged flat in question in favour of the appellant bank was also questionable. The reason why the High Court said so is because both the agreements are unregistered. According to the learned counsel appearing for the Central Bank, the agreement which appellant bank accepted was also unregistered. Then both the banks are sailing in the same boat. However, what seems to have been overlooked by the Central Bank is the fact that when the borrowers approached the appellant bank for loan they had a valid title deed i.e., the original share certificate issued by the society. The issuance of the original share certificate was also confirmed by the society vide letter dated 13.11.1998, which forms a part of the record.

63. The original share certificate which was produced before the appellant-bank as availed Title deed assumes significance in view

p. 1140

of the provisions of Section 11 of the Act 1963, more particularly, sub-section (1) of Section 11 of Act which reads thus: - “11. Promoter to convey title, etc., and execute documents, according to agreement.— (1) A promoter shall take all necessary steps to complete his title and convey, to the organisation of persons, who take flats, which is registered either as a co-operative society or as a company as aforesaid, or to an association flat- takers or apartment owners his right, title and interest in the land and building, and execute all relevant documents therefor in accordance with the agreement executed under Section 4 and if no period for the execution of the conveyance is agreed upon, he shall execute the conveyance within the prescribed period and also deliver all documents of title relating to the property which may be in his possession or power.” (Emphasis supplied)

64. In para 8 of the impugned judgment, the High Court has recorded that the appellant bank herein had sought to rely upon the original share certificate issued by the Society as a valid piece of title deed. However, 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’.

65. 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. The reason is, otherwise, no effect can be given to the rule which implies that the later registered title is intended to prevail against an earlier unregistered title. No weight can, therefore, be attached to the contention that by a valid unregistered agreement of sale, the vendor’s title is exhausted, he has, afterwards, nothing to sell, and the later registered sale deed gives nothing to the predecessor. The fallacy in the contention lies in ignoring the reason of the rule, namely that as between the registered and unregistered transactions, the registered transaction creates the dominant right or title.

p. 1141

E. CONCLUSION

66. In view of the aforesaid, we have reached the conclusion that the impugned order passed by the High Court is not correct and it deserves to be set aside.

67. In the result the appeal succeeds and is hereby allowed. The impugned Order passed by the High Court is hereby set aside. Since, the respondent no. 1 had failed in bringing the factum of its ‘equitable mortgage’ to the notice of the appellant bank, the respondent no. 1 bank is not entitled to enforce the same qua the recovery proceeds of the appellant bank herein.

68. We are informed that an amount of Rs. 51 lakh is lying deposited with the DRT maintained in an escrow account. The same now be disbursed along with interest in favour of the appellant bank.

69. We direct the Registry to send one copy each of this judgment to all the High Courts with further request to each of the High Courts to forward the judgment to the DRTs and DRAT benches.

70. Pending application(s), if any, stand disposed of.

Result of the case: Appeal allowed.

ishani Narain, Hony. Associate Editor (Verified by: Ms. Liz Mathew, Sr. Adv.)