The Supreme Court of India has ruled that a mortgage created by the deposit of title deeds takes precedence over an equitable mortgage created by depositing an unregistered agreement to sell. This significant ruling was delivered in the case of The Cosmos Co-operative Bank Ltd. v. Central Bank of India & Ors., where the court clarified the legal standing of different types of mortgages under the Transfer of Property Act, 1882.
Case Background
The case involved a dispute between Cosmos Co-operative Bank Ltd. (Appellant) and Central Bank of India (Respondent No.1). The primary legal issue revolved around which bank had the first charge over a mortgaged property.
- In 1989, the Central Bank of India sanctioned a loan to borrowers based on an unregistered agreement to sell, treating it as a security for the mortgage.
- In 1998, Cosmos Bank granted a loan based on the deposit of a share certificate, claiming it created a stronger legal mortgage.
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When the borrowers defaulted, both banks sought to claim priority over the mortgaged property. Initially, the Debt Recovery Tribunal (DRT) ruled in favor of the Central Bank, stating that its mortgage was created first. This decision was upheld by the Debt Recovery Appellate Tribunal (DRAT) and the Bombay High Court. However, Cosmos Bank appealed to the Supreme Court, challenging the validity of the Central Bank’s mortgage.
The Supreme Court clarified that under Section 54 of the Transfer of Property Act, an agreement to sell does not create any interest in or charge over a property. The court stated:
“A contract of sale, that is, an agreement of sale, does not of itself create any interest in or charge on such property.”
The court explained that a legal mortgage is created when proper title deeds are deposited, whereas an equitable mortgage is based merely on intention and does not confer any real interest in the property.
The Supreme Court overruled the lower courts’ decisions and favored Cosmos Bank. The reasoning was:
- The Cosmos Bank's mortgage was created through the deposit of share certificates, which are recognized as equivalent to title deeds in cooperative housing societies.
- The Central Bank’s mortgage was based solely on an unregistered agreement to sell, which cannot create a legal charge on the property.
- As per Section 78 of the Transfer of Property Act, if a mortgagee (Central Bank) fails to notify subsequent lenders about their mortgage, their claim may be postponed to a later mortgage with a valid charge.
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The court emphasized:
“Where ‘equitable mortgages’ have been created based on deposit of part-deeds or documents purporting title, such deposits will be valid in equity. However, since an equitable mortgage creates only rights in personam, it does not operate against strangers or subsequent mortgagees unaware of it.”
This meant that while the Central Bank’s mortgage may be valid between the borrower and the lender, it does not affect third parties like Cosmos Bank, which later acquired a stronger legal charge.
1. Strengthening Legal Mortgages : This judgment reinforces that a legal mortgage through deposit of title deeds holds more weight than an equitable mortgage.
2. Importance of Proper Documentation : The ruling highlights the necessity for financial institutions to ensure they obtain and register proper title documents before granting loans.
3. Protection Against Multiple Loans on the Same Property : The decision protects banks and financial institutions from being misled by borrowers who use partial or insufficient documents to obtain multiple loans.
