Understanding mortgage is very important for understanding how banking and finance works. It is important to lawyers, bankers and businessmen. Here, Kunal Dey from College of Legal Studies, U.P.E.S, Dehradun explains a crucial aspect of mortgage.

The most common types of security in banking transactions is that of creation of mortgage over a immovable property, pledge of shares, hypothecation of or a floating charge over movable assets, book debts, personal guarantees by promoter companies and group entities. For the purpose of this article  we shall keep our focus on the different types of mortgages that area created under the pretext of banking transactions and which can be considered to be the as the most beneficial form of mortgage from the perspective of a lender.

Mortgages are regarded to be as the most common form of security which is created over an immovable property. It can be defined as the process by which a transfer of an interest in a specific immovable property as security for the repayment for the money advanced or to be advanced by way of a loan, an existing or a future debt, or the performance of an engagement which may give rise to a pecuniary liability.

The person who is borrowing and transferring his interest in the immovable property to the lender is called the mortgagor and the lender, which might be a person or any entity, in whose favour the mortgage is created is called the mortgagee. The fund which is lent against the immovable property is called the mortgage money; the instrument through which the transfer is affected is called the mortgage-deed.

The notion that exists in banks is that more the amount of money that needs to be lent out; the higher should be the value of the security which shall be secured. In today`s world, where commercial banks consists of the main chunk of lenders, loan against property is considered to be the most viable form of security and is generally given as a percentage of the property`s market value, usually around 40% to 60%.

There are various methods of creation of mortgage of immoveable properties. The method which is generally adopted by the institutions/banks in India is mortgage by way of deposit of title deeds. We shall now assess the benefit of this equitable form of mortgage:-

Mortgage by Deposit of Title Deeds

This is also called in English law an equitable mortgage. It is a well established rule of equity that mere deposit of document of title without writing or without word of mouth, will create in equity a charge upon the property referred to. The phrase ‘equitable mortgage’ might have been formerly justified in India on the ground that it was an inchoate mortgage perfected by equity. Equitable mortgages or mortgages by deposit of title deeds were accepted in India as equivalent to simple mortgages after the Privy Council decision in Varden Seth v. Luckpathy, and this still the case in districts to which the TP Act has not been extended.

The requisite of a mortgage by deposit of title deeds involves the following steps:-

A debt;

A deposit of title deeds;

A declaration of a director of a company depositing its title deeds(if the mortgagor is a company)

An intention that the deeds shall be security for the debt.

The above three requisites have also been reiterated in a Calcutta case. Mortgages by deposit of title deeds created in favour of secured creditors notified in accordance with the provisions of the SARFAESI Act must also be registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India. If the mortgagor is a company, certain authorisations are required, including:-

Passing of special resolutions of the mortgagor`s shareholders (Section 180(1)(a) Companies Act, 2013)

Board resolution of the mortgagor authorising the mortgagor to create the mortgage.

The company must then register the details of the mortgages with the Registrar of Companies within 30 days from the date of the mortgage. If security is created over immovable property situated in India in favour of a non-resident, prior approval of the Reserve Bank of India is required under the Foreign Exchange Management (Acquisition and Transfer of Immovable Property) Regulations 2000.

A mortgage by deposit of title deeds does not require any writing, But it is usual for the deposit to be accompanied by a memorandum in writing. If this writing is the contract of mortgage so that it creates the mortgage it must be registered and oral evidence to contradict it is not admissible. However, registration is not necessary if the mortgage is complete without the writing and the writing is merely a statement that the mortgage has been affected, or a statement of facts from which the contract of mortgage can be inferred. In Obia Sunadarachariar v. Narayanna Ayyar, the memorandum was merely a list of the deeds deposited, and it did not need registration, although it was deposited before the money was advanced. The necessary of registration thus depends upon the construction of the memorandum in the light of the surrounding circumstances, and if it is loosely worded the distinction is very fine.

There are three kinds of security that are recognised by the English common law, namely, the lien, mortgage and pledge. Equity, however, with its in personam jurisdiction, gave effects to various forms of security which were either invalid or unknown to the common law. It is not possible to clarify the subject without a detailed consideration of the intricate doctrines of the Courts of Chancery in England. It is an admitted position that the suit property came to be allegedly rented out/let out y the borrower after the creation if charge of equitable mortgage by him in favour of his son and hence charge of the petitioner Bank would prevail over the so called tenancy right of the present respondent and hence in any case the present respondent had no legal and/or better right, title and/or interest over the petitioner Bank, so long as the petitioner Bank realises its entire outstanding dues from the borrower either by attachment/sale-disposal of the said mortgaged immovable property belonging to the borrower under the provision of law. He has, therefore, submitted that the present respondent had no better right, title or interest as tenant over the admitted right, title or interest of the petitioner Bank as a mortgagee.

Equitable mortgages are the most recommended and popular form of mortgage as the risk of granting loan in such mortgage is lower than any other form because the loan is secured against the property. If anything goes wrong and the borrower fails to repay, the bank still has something as security of same or higher value (mortgagor`s property) to sell to cover the mortgage money lended.

In case of a mortgage by way of title deeds, the lender must institute a civil suit for the sale of the secured assets or sell the assets without court intervention under circumstances mentioned under Section 69 of the Transfer of Property Act, 1882. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) has conferred powers on banks and financial institutions by overriding the provisions of the Section 69 of the Transfer of Property Act, 1882, through sub-section (1) of Section 13 of the said Act, if they are secured creditors (mortgagee) without the intervention of the courts. The provision of the Act has been made applicable exclusively to Banks and Financial Institutions as secured creditors to enforce their security interest with the motive of recovering their debts. This means that if the banks and financial institutions are secured creditors having lent against securities like mortgage of immovable property, charge, hypothecation they can take over and sell such securities after giving 60 days` notice to the borrowers so as to adjust the loan, without resorting to litigation in a competent court of law.

The drawbacks with regard to equitable mortgages are:-

The period of limitation is 13 years as per Article 62 of the Limitation Act, 1963.

The transfer of an equitable mortgage falls under Section 54 of the Transfer of Property Act, 1882, and requires a registered instrument.

The law of mortgages of movables in India is still rather satisfactory. Before the Indian Sale of Goods Act was passed there were several cases in India in which it was decided that a mortgagor, who remains in possession of the goods, can pass a title to a bona fide purchaser for value, or to a pledge who takes possession of the goods free form the first mortgage. These judgments proceeded on the old Section 108 f the Indian Contract Act which provided that where a person was, by consent of the owner, in possession of the goods, any disposition of the goods, whether by sale or pledge, made by him to a bona fide transferee for value was binding on the owner. As under a mortgage, the whole property passes to the mortgagee, in law he is the owner and if the mortgagor, who has a bare equity of redemption, remains in possession with the consent of the mortgagee, the case is clearly one which would fall within the provisions of Section 108 and the first mortgagee`s rights would be naturally lost.

Section 108 of the Indian Contracts Act, 1872 has now been repealed and at present there is no provision either in the Indian Contracts Act, 1872 or the Sale of Goods Act, 1930 which governs these matters. On the other hand, Section 66(3) of the Indian Sale of Goods Act, 1930, expressly states that that the provisions of the Act relating to contracts of sale do not apply to any transaction in the form of a contract of sale which is intended to operate by way of mortgage, pledge, charge or other security. In the absence o any statutory provision, the accepted principle in the Indian Courts up to now is to follow the English common law.

In the case of Bank of Maharashtra v. Official Liquidator, the court held that in the case of hypothecation or pledges of movable goods, the creditor has the rights to take possession, to retain possession and to sell the goods directly without the intervention of the court for the purpose of recovery of dues. In United Bank of India v. New Glencoe Tea Co.Ltd. the bank lent money to the borrower on hypothecation  of movables. The bank filed a suit for the decreetal amount in instalments extending over 7 years and only on default of three consecutive installements the bank could exercise the right of sale. The court held that the bank was entitled for a decree for sale and court could not allow instalments.

These cases thus highlight the rights of a bank as a mortgagee when movable property is involved.