2025 (3) TMI 489 - HC - Indian Laws

Seeking to attach the suit property - validity of mortgage which was created in favour of the erstwhile assignor SBI - principles of equity - HELD THAT - In an equitable mortgage the borrower can sell the mortgage property to the third party without knowledge of the lender as in an equitable mortgage the mortgage is created by depositing the title deed with the lender as a security for the loan amount. Registration is not compulsory for an equitable mortgage - In the present proceedings in the first transaction the SBI had collateral security by way of equitable mortgage by depositing title deed. However admittedly the title deed of the property was not deposited with the SBI or ARCL being the assignee. The only document referred by the ARCL was that of lodgment receipt. In the Indian Bank 2009 (7) TMI 1404 - MADRAS HIGH COURT the Court held that the Indian Bank in its apparent hurry to enter into the transaction had omitted to take precautions and because of such negligence the owner of the property induced Punjab National Bank to advanced loan by creating equitable mortgage by deposite of original title deeds. Therefore Appellate court has rightly applied law to derive conclusion that time the Indian Bank had not taken a proper care. The main issue was whether a first mortgagee (second defendant) should be postponed to a second mortgagee (plaintiff company) due to gross negligence in allowing the title deeds to remain in the possession of the mortgagor which enabled the mortgagor to obtain a subsequent loan from the plaintiff company? The Madras High Court confirmed the lower court s decision in Madras Building company v. Rowlandson Anr. 1891 (11) TMI 3 - MADRAS HIGH COURT and dismissed the appeal ruling in favour of the plaintiff company. The Court held that the second defendant (first mortgagee) should be postponed to the plaintiff company s mortgage due to gross negligence in allowing the title deeds to be out of his possession thereby enabling the mortgagor to fraudulently obtain a loan from the plaintiff company. The Court based its decision on several key points. Conclusion - The Appellate Court had rightly allowed the appeal by setting aside the impugned judgment and order - Petition dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary legal issues considered in this judgment are:

1. Whether the ARCL's mortgage, created through the deposit of title deeds, was valid and had priority over the subsequent mortgage created in favor of PNB.

2. Whether ARCL, as the assignee of SBI, was guilty of gross negligence under Section 78 of the Transfer of Property Act, which could result in the cancellation of its mortgage rights.

3. Whether the DRAT's decision to cancel ARCL's mortgage in favor of PNB's subsequent mortgage was justified based on the facts and applicable law.

ISSUE-WISE DETAILED ANALYSIS

1. Validity and Priority of ARCL's Mortgage

- Relevant legal framework and precedents: The case revolves around the principles of equitable mortgage by deposit of title deeds and the priority of mortgages under the Transfer of Property Act, 1882. Section 78 of the Act addresses the impact of gross negligence by a prior mortgagee.

- Court's interpretation and reasoning: The Court examined whether ARCL's mortgage was validly created and whether it had priority over PNB's subsequent mortgage. The Court noted that ARCL's mortgage was based on a lodgment receipt rather than the original title deeds.

- Key evidence and findings: The Court found that the original title deeds were not deposited with ARCL or its predecessor, SBI, at the time of creating the mortgage. Instead, ARCL relied on a lodgment receipt, which was not produced in Court.

- Application of law to facts: The Court applied the principles of equitable mortgage and the necessity of possessing original title deeds to establish a valid mortgage. The absence of original title deeds weakened ARCL's claim to priority.

- Treatment of competing arguments: ARCL argued that the mortgage was valid based on the lodgment receipt and industry practices. PNB contended that ARCL's negligence in not securing the original title deeds allowed the mortgagor to commit fraud, thus invalidating ARCL's priority.

- Conclusions: The Court concluded that ARCL's mortgage was not validly established due to the lack of original title deeds and that ARCL's negligence allowed the mortgagor to create a subsequent mortgage with PNB.

2. Gross Negligence under Section 78 of the Transfer of Property Act

- Relevant legal framework and precedents: Section 78 of the Transfer of Property Act addresses the effects of gross negligence by a prior mortgagee, which can result in the postponement of the prior mortgagee's rights.

- Court's interpretation and reasoning: The Court considered whether ARCL's actions constituted gross negligence, thereby justifying the cancellation of its mortgage rights in favor of PNB.

- Key evidence and findings: The Court found that ARCL failed to secure the original title deeds and did not take adequate steps to protect its mortgage rights. This negligence enabled the mortgagor to create a subsequent mortgage with PNB.

- Application of law to facts: The Court applied the principles of gross negligence, finding that ARCL's failure to act prudently resulted in the loss of its mortgage priority.

- Treatment of competing arguments: ARCL argued that it acted diligently and that the delay in obtaining the original title deeds was due to external factors. PNB argued that ARCL's negligence was evident and resulted in fraud.

- Conclusions: The Court concluded that ARCL's negligence was sufficient to justify the cancellation of its mortgage rights under Section 78 of the Transfer of Property Act.

SIGNIFICANT HOLDINGS

- Preserve verbatim quotes of crucial legal reasoning: "In an equitable mortgage, the borrower can sell the mortgage property to the third party without knowledge of the lender as in an equitable mortgage, the mortgage is created by depositing the title deed with the lender as a security for the loan amount. Registration is not compulsory for an equitable mortgage."

- Core principles established: The judgment reinforces the principle that possession of original title deeds is crucial for establishing a valid equitable mortgage and that gross negligence by a mortgagee can result in the loss of mortgage priority.

- Final determinations on each issue: The Court upheld the DRAT's decision to cancel ARCL's mortgage rights in favor of PNB, finding that ARCL's negligence in not securing the original title deeds justified the cancellation under Section 78 of the Transfer of Property Act.

The writ petition was dismissed, and ARCL was advised to pursue other legal avenues to recover its dues from the borrowers/guarantors.