The Cosmos Co. Operative Bank Ltd. vs. Central Bank of India & Ors. (Civil Appeal No. 1565 of 2025)
2025 SCC OnLine SC 352
Introduction
- The Supreme Court's judgment in the case, The Cosmos Co. Operative Bank vs. Central Bank of India & Ors, highlights important legal principles about the different kinds of mortgages in Indian Law. It particularly sheds light on the legal mortgage and equitable mortgage about the Transfer of Property Act, 1882 (hereinafter referred to as "TP Act"), and the Maharashtra Ownership of Flats (Regulation of the Promotion of Construction, Sale, Management, and Transfer Act, 1963 (hereinafter referred to as "MOFA Act"). A division bench of the Supreme Court, comprising Justice J.B. Pardiwala and Justice R. Mahadevan, meticulously established the concept of Equitable Mortgage in India, its nature, rights flowing from it, and differences between English and Indian Law in this regard. The judgment effectively elucidates that an equitable mortgage created on the strength of a) part deeds, b) documents purporting title, or c) evincing intention of parties to create an interest is a valid mortgage; however, such rights are only rights in personam. Additionally, the judgment establishes the fundamental principle that a share certificate confirming ownership has the effect of conveyance of title.
Background facts
- Mortgage: In 1989, borrowers had availed a loan facility against their property from the Central Bank of India (hereinafter referred to as the "Respondent Bank") for 30 Lakh by furnishing an unregistered agreement of sale as security. The loan was passed based on said security, and a mortgage was created. In 1998, the borrowers availed another loan against the same property from The Cosmos Co-operative Bank Ltd (hereinafter referred to as "Appellant Bank") by furnishing the share certificates as security.
- Default of Loan: Subsequently, the borrowers defaulted in repayment of the loan and the Respondent Bank initiated proceedings for the recovery of the loan amount before the Debt Recovery Tribunal - I (hereinafter referred to as "DRT), Mumbai.
- Findings of DRT: The DRT held the borrowers jointly and severally liable to pay an amount of Rs 43,15,405.56 with interest thereon of 15% per annum to the Respondent Bank. However, it raised a question on the validity of the mortgage and the charge created. The Court alluded that unless the title deeds were brought on records, it could not be ascertained if the documents were sufficient to create the mortgage.
- Findings of DRAT: Based on the observations of the DRT, the Central Bank filed an appeal before the Debt Recovery Appellate Tribunal (hereinafter referred to as the "DRAT"). DRAT tried to adjudicate on the issue of which bank had the first charge over the borrowers' property. It held that the order passed by DRT was correct, on the basis that the title deeds surrendered were with the Respondent Bank and the mortgage was never denied by any party to the suit. Hence the mortgage in favour of the Respondent Bank was valid and the Appellant Bank had no claim to the property.
- Findings of High Court: The Appellant Bank aggrieved by the order of DRAT, filed a writ petition challenging the same. The High Court agreed with the findings of DRAT and recorded that the mortgage in favor of the Appellant Bank was invalid because they had no valid title deeds.
- Appeal in Supreme Court: Consequently, the Appellant Bankfiled an appeal in the Supreme Court of India challenging the judgment of the High Court.
Issue(s) at hand
Whether the High Court commit any error in passing the impugned
order?
Findings of the Court
- Relevant provisions: The Court interpreted and applied the legal provisions regarding mortgages in light of the relevant facts of the case. Special emphasis was given to interpretation of the Sections 58 and 100 of the TP Act. The Court highly relied on the landmark case of Suraj Lamp & Industries through Director v State of Haryana & Ors1 . The Court drew attention to the importance of registration of documents to give publicity and exposure to various transactions in respect of immovable properties and enable individuals to understand if the property is subject to any legal obligation or liability.
- Concept of equitable mortgage: After
considering the provisions of Section 58 of the TP Act and works of
various authors like Sir Willian Holdsworth on the subject, the
Court deduced that the intent of creating a mortgage is essentially
to create nothing more than a security. It is not intended as a
mechanism of transferring either ownership or vested interest in
the strictest sense but rather only as a means for providing
security.
This gives rise to the concept of equitable mortgage wherein based on the intent of the parties and mutual understanding between them, a charge that is legally recognized can be created on the property in exchange for a loan. Such an agreement requires no legal deeds, agreements, memorandum or note rather it primarily aims at hassle-free transactions without the cumbersome formalities of transfer of conveyance. The Court held that where the borrower willingly parts away with any title deed, document, promissory note, or an undertaking; and deposits the same with the lender to avail any credit facility and upon such deposit the loan is advanced; then such intention and conduct of parties alone would give an effect to mortgage.
Like in the present case, the deposit of agreement of sale albeit unregistered indicated the understanding between the parties to create a mortgage and an intention to create a charge and treat the subject property as collateral or security. The bank can demand specific performance of the contract through the concept of equitable mortgage. - Nature of equitable mortgage: The court held
that an equitable mortgage is a creation of and by-product of the
doctrine of equity and hence any rights flowing from such a
mortgage are in personal character and only affect rights in
personam. Such a right will not operate on any stranger or
subsequent incumbrance unaware of such equitable mortgage. The
equitable mortgage does not create any formal charge on the
property, nor any transfer or conveyance of interest is said to
occur.
Equitable Mortgage being a right in personam does not affect subsequent encumbrances and will not be enforceable against such successive mortgages if the creation of such equitable charge was not disclosed to them. If the mortgagee voluntarily, fails to create legally valid security then he may be said to have enabled the subsequent encumbrances due to his gross negligence.
- English law vs Indian Law on Mortgage by deposit of
title deeds: Under English Law, an equitable mortgage can
be created in 2 ways such as: a) by depositing original title deeds
of the subject property to the lender and such title deeds may or
may not be held by the lender, or b) by way of a memorandum of
understanding or an agreement recording the intention of the
parties to create a charge over specific property. English courts
have also considered a promissory note or an agreement for purchase
to create an equitable mortgage. English Law considers a mortgage
created by deposit of title or documents as an equitable mortgage
and not a legal mortgage.
In the Indian Law under Section 58(f) of the TP Act, statutory recognition is given to the mode of creation of mortgage by deposit of title deeds. Such a mortgage is considered a legal mortgage and not an equitable mortgage. It is considered a valid legal mortgage because it complies with all the essentials of a mortgage namely; a) the creation of debt, b) the deposit of title, and c) an intention that the deed shall operate security for debt. - Mortgage in our present case: In our present
case based on the deposit of an unregistered agreement of sale as
security for a mortgage to the Respondent Bank, and the
understanding of provisions of deposit of title under the TP Act;
the Court held that the mortgage was an equitable mortgage and not
a legal mortgage. The Court upheld the law laid down in the Suraj
Lamp & Industries through the Director v The State of Haryana
& Ors, that a contract of sale i.e. an agreement of sale does
not itself create any interest in or charge on any property.
Further, the Court observed that when the loan was advanced by the
Respondent Bank, a Memorandum of Equitable Mortgage recording the
deposit of the agreement to sale was sought to be created, though
it was not placed on record. The Court noted that there were no
correspondences where the share certificate of ownership was
demanded, despite the fact that the Bank was very well aware that
conveyance of title, as per Section 11 of the MOFA Act, 1963 read
with Section 4 of the Maharashtra Co-operative Societies Act, 1970,
takes place through such certificates and not merely by an
agreement for sale. Moreover, the Court found that no public notice
of the equitable charge was issued by the Respondent Bank, which
was evident from the fact that the Appellant Bank, upon inquiry,
was informed by the concerned cooperative housing society that the
flat was not subject to any prior encumbrances or charge.
Consequently, in terms of Section 78 of the Transfer of Property
Act, 1882, the equitable charge of the Respondent Bank was held to
be subordinate to the charge created in favor of the Appellant
Bank, and the impugned High Court order was set aside.
The Appellant Bank on the other hand had availed loan based on the share certificate of the property. The Court reaffirmed that the share certificate of ownership has the effect of conveyance. The Appellant Bank had also inquired with the co-operative housing society who had assured that there were no previous encumbrances or charges on the property.
Hence the Court set aside the order of the High Court and conclusively held that equitable mortgage does not create any right on the subject property but rather only a right in personam. A legal mortgage always assumes priority in charge over the equitable mortgage but that does not nullify the existence of an equitable mortgage. Equitable mortgages are still enforceable as secondary charges if the other considerations such as the notice of such mortgage are fulfilled.
Viewpoint
In the present case, the borrowers had taken two loans from two different banks on the strength of two different documents. The Court based on relevant provisions of the TP Act and the MOFA Act ascertained the real meaning of the legal & equitable mortgage and laid down the essentials of a valid mortgage. The Court has rightly emphasized the distinction between equitable and legal mortgage to conclude that the Appellant Bank had a valid charge and mortgage.
The Court underscored the value of a share certificate of ownership as a valid title of conveyance and concluded that a legal charge had been created on the flat in favor of the Appellant Bank. The Court rightly held that even if the agreement of sale given to the Respondent Bank had been registered and the public notice of their existence had been given, the share certificate of ownership would be given priority since it has the effect of actual title deeds of conveyance and fulfills all the requisites of a mortgage in terms of Section 58 of the TP Act.
The Supreme Court has rightly overturned the judgment of the High Court as they erred by undermining the legality of the share certificate of ownership over the unregistered agreement of sale and failed to understand the essentials of a valid mortgage. The Hon'ble Court has appropriately insisted on the registration of documents and their value in law. The Supreme Court has rightly emphasized the significance of a share certificate of ownership in determining the title and priority of a mortgage. The Court correctly noted that the Respondent Bank failed to demand the share certificate or issue a public notice of equitable charge, thereby allowing the Appellant Bank to rely on the society's confirmation of no prior encumbrances. By applying Section 78 of the Transfer of Property Act, 1882, the Court appropriately held that the equitable charge of the Respondent Bank is subordinate to the charge created in favor of the Appellant Bank. This decision reinforces the necessity of proper due diligence and compliance with legal requirements in mortgage transactions.
Kanahaiya Lal Arya Versus MD. Ehshan & Ors. (Civil Appeal No. of 2025) (Arising Out of SLP (C) No. 21965 0F 2022)
2025 SCC OnLine SC 432
Introduction
- The Supreme Court's judgment in the case, Kanahaiya Lal Arya Versus MD. Ehshan & Ors, highlights important legal principles about the 'bonafide requirements' for the eviction of the tenant. It particularly revolves around the issue of bonafide requirement for eviction of the tenant under the Rent Control Act (herein after referred to as "RC Act") governing landlord-tenant relationships and the Jharkhand Building (Lease, Rent & Eviction) Control Act (herein after referred to as the "JBC Act"). In India, the bonafide requirement of the landlord is a key ground for eviction, as per the provisions of the Rent Control Act applicable in various states. A landlord may seek eviction if they can establish that they genuinely and in good faith require the property for their own use or for the use of their family members. The law requires the landlord to prove that the demand for possession is not merely for increasing rent or for speculative reasons but stems from a genuine and sincere need.
Background facts
- Landlord- Tenant: The landlord is the owner of the suit land (herein after referred to as the "Appellant") The deceased father of the appellant during his lifetime had inducted the father of the tenant (herein after referred to as the "Respondent") in a portion of the tiled roof house on monthly rent. After the death of the Respondent father the respondent continued to have possession of the tenanted premises on the monthly rent basis. The appellant filed a eviction suit against the respondent as after the death of the appellant's father the Tenancy came to an end.
- Compromise: After filing of the suit by the Appellant the Respondent became angry and in frustration he set the tenanted premises on fire for which a case was filed against the respondent under section 436 of the Indian Penal Code for which the respondent entered into in a compromise and during the pendency of the suit under section 436 the respondent filed a petition under Section 9 (Directions for repairs to the building) of the Bihar Building (Lease, Rent, and Eviction) Control Act in the court of House Rent Controller but he lost upto the High Court. Thereafter, again the respondent filed a petition before the Court of Sub Divisional Magistrate, Chatra and a compromise was entered to by both the parties ant thereafter the Appellant got double storied pucca house constructed without removing the Respondent from the portion of the house in Occupation.
- Dispute: The Appellant in order to augment the
income of his Family required the premises occupied by the
respondent to set up an Ultrasound Machinery Facility for his two
Unemployed Sons. So, the Appellant filed an eviction Suit for the
eviction of the Respondent before the trial Courts on Two
Grounds.
a. For default in payment in rent and
b. Personal necessity of the Suit land by the appellant - Findings of Trial Courts: The learned trial
Court settled seven issues
a. Whether the defendant/respondent has failed to pay the monthly rent in respect of the tenanted premises and the plaintiff/appellant is entitled to recover the total arrear rent of Rs.3,825/- from February, 2001 to October, 2001? - Considering the evidence in the record the Court came to the
conclusion that the Respondent never defaulted in payment of rent
and the finding of fact was not challenged by the Appellant before
the First Appellate Court.
b. Whether the plaintiff has personal necessity of the suit premises for the income of his sons? - Considering the evidence in the record the Court came to the
Conclusion that the there is personal necessity of the tenanted
premises by the Appellant.
c. Whether the requirement of the defendant would be met by a partial eviction of the defendant? - Considering the evidence in the record the Court came to the Conclusion that partial eviction of the respondent will not fulfil the personal necessity of the respondent.
The trial court held that the Appellant is entitled to the reliefs for eviction of the suit premise and passed the Judgment and decree for eviction of the respondent from the suit land.
To view the full article clickhere
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
