Equitable mortgages are widely acknowledged in India as a ‘charge’ under Section 100 of the Transfer of Property Act, according to the Supreme Court.

The Supreme Court stated that ‘equitable mortgages’ are acknowledged in India as ‘charge’ under Section 100 of the Transfer of Property Act, 1882 (TPA). The Court mentioned that these charges can be enforced similarly to a simple mortgage, except for those who are unaware of the charge. This decision came from a Civil Appeal against a Bombay High Court ruling that dismissed a Writ Petition challenging the Debt Recovery Appellate Tribunal (DRAT) order. The two-Judge Bench, including Justice J.B. Pardiwala and Justice R. Mahadevan, noted that the last part of Section 100 of the 1882 Act confirms the personal nature of such charges. It states that they cannot be enforced against anyone who has received the property or interest without knowledge of the charge. Therefore, ‘equitable mortgages’ are recognized in India as ‘charge’ under Section 100 of the 1882 Act and can be enforced as much as possible like a simple mortgage, except for those who are not aware of the charge.

The Bench explained that if the parties show a clear intention to create a mortgage, it can still be valid under Section 100, even if it doesn’t meet the requirements of Section 58 of the TPA. AOR Sahil Tagotra represented the Appellant, while AOR Krishan Kumar represented the Respondents. The Respondents, as the original borrowers, took a loan of about Rs. 30 lakhs from the Central Bank of India (Respondent No. 1) based on an unregistered sale agreement. They offered a flat they intended to buy from the developer as security, but at the time of the loan application, they only had the unregistered agreement. The Central Bank approved the loan and placed a charge on the flat. After the borrowers failed to repay, the Central Bank started recovery proceedings at the Debt Recovery Tribunal-I in Mumbai (DRT).

The DRT ruled that the borrowers were jointly and severally responsible for paying Rs. 43,15,405.56 with 15% annual interest from the application date until payment. The Central Bank appealed to the DRAT due to comments made by the DRT in its ruling. The DRAT accepted the appeal, and while it was still pending, the Appellant bank was involved in discussions about which bank held the first charge on the security interest. Unhappy with the DRAT’s decision, the Appellant filed a Writ Petition in the High Court, which was dismissed. The Appellant then took the matter to the Apex Court.

The Supreme Court clarified that the main difference between a legal mortgage and an equitable mortgage under English Law is that a legal mortgage involves a transfer of ownership rights in the property according to the law, while an equitable mortgage does not meet all the legal requirements, but the parties clearly intend to create a mortgage. The Court pointed out that if equitable mortgages are established through the deposit of documents showing ownership or the intention to create an interest, these deposits will be recognized as valid mortgages in equity. Any earlier charges will take priority over later ones, but since an equitable mortgage is personal, its rights only apply to the parties involved and do not affect outsiders or later claimants who are unaware of it.

The Court also stated that equity only acts in personam, meaning that the creation of an equitable mortgage relies solely on the parties’ intentions. Therefore, any legal action can only be taken against those parties. In contrast to a legal mortgage, which creates a direct charge on the property and transfers ownership rights to the lender, an equitable mortgage does not formally create such a charge or transfer any interest in the property. Additionally, the Court explained that because an equitable mortgage is a personal right, it does not impact later claims and cannot be enforced against subsequent mortgagees if the equitable charge was not properly established.

Even if several equitable mortgages are established, the first one will take precedence, unless there is fraud, gross negligence, or a clear and unreasonable agreement by the first mortgagee to either keep the remaining deeds or not inform other parties, especially later mortgage holders, about the first equitable mortgage. The Court explained that depositing part of the title deeds does not create a mortgage under Section 58(e) of the TPA, unlike in English Law, where such a deposit is considered an equitable mortgage. In India, a mortgage by depositing title deeds is a legal mortgage, which can override any equitable mortgage. Therefore, all title deeds must be deposited, except for those that the mortgagee could not deposit or were unknown to be outstanding despite their best efforts.

When the law is clear and straightforward, equity will follow the law. In the case of equitable mortgages, we can say that equity will follow the law only as far as the law allows. So, even if a legal mortgage has priority, an equitable mortgage can still be enforced as a secondary charge if certain conditions, like notice of the mortgage, are met. The Court also noted that enforcing an equitable mortgage is based on the principles of fairness and justice, and it is up to the Court’s discretion. If an equitable mortgage cannot be enforced, it may not be considered a legal mortgage or charge, but it can still allow a lender to seek other remedies, such as enforcing the contract or recovering based on the original intent of the parties to create security through the equitable mortgage.

When discussing mortgages, it is important to stay within the limits of the Act of 1882 and not explore other laws. However, this does not mean that the idea of equitable mortgage is irrelevant in Indian law. Equitable mortgage arises from the principles of equity, and the lack of a specific mention in the Act of 1882 does not undermine its importance in promoting fairness and justice. There is no ruling that completely dismisses the application of this principle. The Court stated that if a transaction does not qualify as a mortgage but can be seen as an initial step toward creating a mortgage, the lender may have three options available.

1. He might argue that the transaction is an equitable mortgage because it aimed to create immediate security that a court of equity should recognize; or
2. He could assert that there has been enough partial performance of the contract, along with relevant circumstances that a court should consider to allow the lender to finalize the mortgage, meaning to take further actions to transfer the title or interest to establish a mortgage; or
3. He may file a lawsuit to recover money, relying on the original intention of the parties to create security and the resulting partial performance of the contract, as the loan was given based on that promise or security consideration.

The Court believed that the High Court was overly influenced by the fact that the first charge belonged to the Central Bank and not the Appellant bank. It overlooked the difference between an ‘equitable mortgage’ and a ‘legal mortgage’. The law states that while the transaction shown by the earlier unregistered document is valid, any title or interest from it can be overridden by a valid later sale or mortgage that is properly registered. Therefore, the Apex Court accepted the Appeal, overturned the High Court’s decision, and ordered the release of Rs. 51 lakhs with interest to the Appellant bank.

Cause Title: The Cosmos Co. Operative Bank Ltd. v. Central Bank of India & Ors. (Neutral Citation: 2025 INSC 243)
Appearance:
Appellant: AOR Sahil Tagotra, Advocates Ninad Laud, Ivo Dcosta, Guruprasad Naik, and Ishani Shekhar.
Respondents: AORs Krishan Kumar, Nitin Mishra, Advocates Seemant K Garg, Nitin Pal, Mitali Gupta, and Hargun Singh Kalra.