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.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Bombay High Court in this case were:

1. Whether the mortgage created in favor of the Asset Reconstruction Company (India) Limited (ARCL) by deposit of title deeds was valid and prior to the mortgage created in favor of Punjab National Bank (PNB).

2. Whether ARCL was guilty of gross negligence under Section 78 of the Transfer of Property Act, 1882, which would result in the postponement of its mortgage in favor of PNB's subsequent mortgage.

3. Whether the writ petition filed by ARCL challenging the decision of the Debts Recovery Appellate Tribunal (DRAT) was maintainable.

ISSUE-WISE DETAILED ANALYSIS

1. Validity and Priority of the Mortgage in Favor of ARCL

The relevant legal framework includes the principles of equitable mortgage, which is created by the deposit of title deeds, and the provisions of the Transfer of Property Act, 1882.

The Court's interpretation focused on whether ARCL's mortgage was created with due diligence and whether it had priority over PNB's mortgage. ARCL argued that it had a valid mortgage by deposit of title deeds, supported by a lodgment receipt and other documents, and that its mortgage was prior in time.

Key evidence included the lodgment receipt and documents indicating the creation of the mortgage in favor of ARCL. However, the Court noted that the original title deeds were not deposited with ARCL or its predecessor, State Bank of India (SBI), and that ARCL had not produced the original lodgment receipt in court.

The Court concluded that ARCL's mortgage was not validly created due to the absence of the original title deeds and that the DRAT was correct in setting aside the DRT's order favoring ARCL.

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

The Court examined whether ARCL was guilty of gross negligence, which would allow PNB's mortgage to take precedence. Section 78 of the Transfer of Property Act addresses the postponement of prior mortgages due to fraud or gross neglect.

ARCL argued that there was no fraud or gross negligence on its part, as it had taken all necessary steps to secure the mortgage. However, PNB contended that ARCL's failure to secure the original title deeds constituted gross negligence, enabling the mortgagor to create a subsequent mortgage in favor of PNB.

The Court found that ARCL's lack of diligence in securing the original title deeds amounted to gross negligence, supporting the DRAT's decision to prioritize PNB's mortgage.

3. Maintainability of the Writ Petition

The Court considered whether the writ petition was maintainable under Articles 226 and 227 of the Constitution of India. The respondent argued that the petition was not maintainable as it involved an inter se dispute between ARCL and PNB and that the DRAT's decision was based on factual findings.

The Court agreed with the respondent's position, noting that the issues involved were primarily factual and that the DRAT had not committed any error of law warranting interference under the writ jurisdiction.

SIGNIFICANT HOLDINGS

The Court upheld the DRAT's decision, emphasizing the following principles:

1. The importance of securing original title deeds in creating a valid equitable mortgage.

2. The application of Section 78 of the Transfer of Property Act, where gross negligence in securing title deeds can lead to the postponement of a prior mortgage.

3. The limited scope of writ jurisdiction in reviewing factual findings of appellate tribunals.

The final determination was that ARCL's writ petition was dismissed, and the DRAT's order setting aside the DRT's decision was upheld. ARCL was advised to pursue recovery of its dues through other legal avenues.

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