Cosmos Co. Operative Bank Ltd. vs Central Bank Of India 2025 INSC 243 - TP Act - Equitable Mortgage - Charge

Equitable mortgage -Where under the law no mortgage or charge is said to have been created over a property i.e., no conveyance of a right or interest over the subject property has been effected, yet if the intention of parties to create a mortgage is clear, equity would demand that such intention is not only respected but given some effect to and the said property be deemed to have been mortgaged so as to enable the lender to assert its rights over the same, it is known as an ‘equitable mortgage’ -Distinction between a legal mortgage and an equitable mortgage under the English Law - In the former, there is conveyance or transfer of some proprietary interest in the mortgaged property in accordance with the statute or law whereas in the latter the formalities required for a legal mortgage are not fully satisfied, but the parties' intentions to create a mortgage are clear as result of which it is deemed as a mortgage.- Where a borrower willingly parts away with any title deed or a document or a promissory note or an undertaking in respect of a property by depositing it with the lender for the purpose of availing any credit facility and upon such deposit, the loan is so advanced by the lender, fairness, good conscience and justice or in other words ‘equity’ would demand that some meaningful significance be given to such act or conduct of the parties, as generally such act of depositing documents against loans is more often than not for no other purpose but to create a mortgage. Thus, a “court of conscience” would give effect to the intention of the parties in the form of an ‘equitable mortgage’ even if there is no formal agreement or a shred of document expressly providing that such deposit is for the purpose of creating a charge OR if the documents so deposited do not necessarily have the effect of transferring or conveyancing any title or interest in the subject property to the lender. (Para 35) Equitable mortgage would be subservient to a legal mortgage - The former does not create any de jure charge or right in the subject property and rather is only a right in personam - Although the legal mortgage would have assumed priority in charge, yet an equitable mortgage may still be enforceable as secondary charge, provided the other considerations such as notice of such mortgage is fulfilled. (Para 53)

Transfer of Property Act 1882 - Section 58,100- ‘Equitable mortgages’ are very much recognized in India under the nomenclature of “charge” in terms of Section 100 of the Act, 1882, and the same will be enforceable as far as possible in terms of the procedure and provisions application to a simple mortgage except those without notice of such charge - Any act of the parties that evinces a clear intention of the parties to create a mortgage though the same might not have been created in terms of Section 58 of the Act, 1882, may still be a valid charge in terms of Section 100 of the Act, 1882. (Para 55-56)

Transfer of Property Act 1882 - Section 59,100-Section 100 does not attract the provisions of Section 59 -A charge may be made without any writing and there is no provision of law which require that such an instrument must be attested or registered. (Para 57)

Mortgage - 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. (Para 61)

Transfer of Property Act 1882 - Section 58(f)- A mortgage by deposit of title deeds is for all purposes a ‘legal mortgage’ and not an equitable mortgage- Deposit of title deeds is one of the many 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. The three requisites for a valid mortgage are, (i) debt; (ii) deposit of title deed; and (iii) an intention that the deed shall operate as security for the debt. In other words, when the debtor deposits with the creditor title deeds of his property with an intent to create a security, the law implies a contract between the parties to create a mortgage and no registered instrument is required under Section 59 of the Act, 1882 as in other classes of mortgage. It is essential to bear in mind that the essence of a mortgage by deposit of title deeds is the actual handing over by a borrower to the lender of documents of title to immovable property with the intention that those documents shall constitute a security which will enable the creditor ultimately to recover the money which he has lent. Whether there is an intention that the deed shall be security for the debt is a question of fact to be decided in each case on its own merits. The said fact will have to be decided just like any other fact based on legal presumptions, oral, documentary and/or circumstantial evidence. (Para 49-51)

Transfer of Property Act 1882 - Section 54 - A contract of sale i.e. an agreement of sale does not itself create any interest in or charge on any property - Referred to Suraj Lamp & Industries (P) Ltd. v. State of Haryana (2012) 1 SCC 656 (para 20)

Legal Maxims - ‘Quod fieri debuit pro facto censetur' - What ought to have been done is considered as done’. (Para 34)

Equity - Equity cannot supplant the law and can only supplement it. Thus, where the law is unambiguous and clear, equity will always yield to the law. (Para 53)

Transactions - Between the registered and unregistered transactions, the registered transaction creates the dominant right or title - 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.(Para 65)