This article is written by Niharika Agrawal from IFIM Law School, Bangalore. This article explains about the doctrine of priority under the Transfer of Property Act, 1882, along with its essentials and exceptions. The author has also discussed the relevance of the doctrine of priority to the IBC. Further, case laws on the doctrine have also been discussed for better understanding.

Introduction 

The concept of the doctrine of priority is regulated by the Transfer of Property Act, 1882 (TPA) under Section 48. This doctrine helps the court in determining the correct party to whom the rights are to be given priority over the other in a case where the court has conflicting interests. The need for this doctrine arises in a situation where the transferor of the property deals with the same property with two different people subsequently. Hence, this resolves the problem of the courts to a large extent. 

This article explains how the conflicting interest created over a particular immovable property can be settled through the rule of priority and its applicability and exceptions under Indian laws. 

Doctrine of priority 

This doctrine is based on the Principles of Natural Justice which states that if the rights are made in favor of two different people at different times, then the one who has the advantage in time will also get the advantage in law. However, this principle applies only in the cases where the conflicting equities of the parties are involved are otherwise equal. The doctrine of priority under Section 48 is inspired from the legal maxim, qui prior est tempore potior est jure which ultimately means one who is first in time is better in law. 

This Section lays down an important principle that states, no man can convey a title other than what he has. This means when a transferor transfers the same property in favor of more than one transferee, then each transferee will enjoy the property along with its right as the former transferee. Under this doctrine, if a person has already created a transfer of the property in motion, then he cannot ignore his grant and deal with the property free from the rights that were created in an earlier transaction. This Section is absolute in nature and does protect or reserve in favor of the transferee, who may not even know about the prior transfer. The principle of the doctrine of priority explained under Section 48 is applicable where there is competition among the mortgagee by retaining title deeds and a subsequent transferee. 

Essentials of the doctrine of priority

1. There ought to be one owner or transferor of the property and more than one transferee. 
2. It is only applicable only to immovable property.
3. The transfer should be created at different times and at these different times there ought to be created rights to the transferee. 
4. This right cannot be exercised to the fullest at the same time.  

Illustration

A is the owner of the immovable property. He mortgaged that property to B in the month of August. Later, in July A transferred the same property to C. Here in this case all the essentials are satisfied and as per the rule of priority, B will get all the rights of the property prior to C. In case of default on the payment of the loan, the mortgagee can sell the property as the latter transfer is in accordance with the earlier transfer. 

Effect of the document registered under doctrine of priority

Under the rule of priority, registration of the document does not affect the rights of the prior transferee. That means if the document of the prior transferee is unregistered whereas the document of the subsequent transfer is registered, still the rule of priority would be applicable to the prior transferee and not the subsequent transferee unless and until the subsequent transaction is made with bonafide intention and without the knowledge of the prior transaction. Registration does not create any right in the property. It is merely proof of intention to transfer the title of the property. 

Illustration 

A mortgaged property to B where the deed is unregistered and will be registered at a later point in time. Later A transfers the same property to C where the deed is registered and was made with bonafide intention without the knowledge of the previous transfer. Here B’s right will have priority over C’s right as the registration of the document does not affect the rule of priority. 

In the case of Duraiswami Reddi v. Angappa Reddi (1945), it was observed that the prior transferee would be entitled to enforce his rights though his documents were registered later. And even if the subsequent transferee’s documents were registered earlier and he entered into a transaction with bonafide intention and without the knowledge of the previous transaction, still he is not entitled to the prior rights. It was also held that the result of the above case was implied and was a direct impact of the fused operation of Section 47 of the Registration Act and Section 48 of the Transfer of Property Act. It was concluded that the right of priority of the earlier transferee would be adjourned only if the latter transferee established any detailed incidents such as fraud, esstoples, or gross negligence. 

The Court was also of the opinion that if a document earlier registered should be considered and prevailed over the document registered later then it would be an advantage for the vendors and the subsequent transferee to enter into a transaction within the prescribed time for registration of the earlier document and get the new deed registered immediately and thus defeat the first transferee under the earlier deed.

Exceptions to the doctrine of priority

Postponement of prior mortgagee (Section 78)

Section 78 of the Transfer of Property Act is an exception to the doctrine of priority. According to this Section, if the prior mortgagee creates some fraud, gross negligence, or misrepresentation and induces any person to give security money for the same property, then the prior mortgagee is postponed to the subsequent mortgagees. Hence, the subsequent mortgagee will have priority in the rights of the property over the prior mortgagee. 

For example, A mortgages a property to B, subsequently, A also mortgages the same property to C. C unaware of the previous transaction inquiries about any debts (if any) in the property with B. B fraudulently conceals his mortgage due to which B advances money for the same to A. Here, though B is the prior mortgagee since B has committed fraud, his prior rights are postponed.

Non-compliance with the procedure of law in prior transfer

If the prior transfer is created non-complaining to the procedure laid down by the law, then such subsequent transfer would be given all the rights prior to the previous transfer. For example, A executed a lease deed of immovable property in favor of B for 5 years but did not get it registered which was mandatory. Later, A sold the same property to C. Here the rights of C would be given preference over B.

Estoppel

In this case, if the first transferee knew about the subsequent transfer, then the subsequent transferee will get the priority. This is an exception to the rule of priority. In this exception, it is not necessary that the first transferee should know the exact contents of the transfer. 

By registration

Every instrument starts its operation from the date of its execution. In cases where subsequent deeds are carried out on the same date and the order of execution is unknown, then all the deeds will be carried out at the same time. And in cases where two deeds consist of different dates and are registered on different days, then the priority, in this case, will depend upon the dates on the deeds and not on their respective registered dates. 

By notice

The presence of notice means being familiar with the facts. Therefore, when a bona fide contract, whether oral or written, is created for the sale of property, and further the third party buys the property concerning the notice of the earlier transfer, the title of the party claiming under the previous transfer would get the priority over the subsequent purchaser. But the transfer that has been created in time must be bona fide. 

Section 50 of the Registration Act also provides various classifications of the registered document which is related to the immovable property to draw effect against the unregistered document. Hence, in cases where the holder of the registered deed had notice of the earlier unregistered deed, at the time of execution, it gives the registered deed of the subsequent holder a priority because of his deed over the previous holder of an unregistered deed for not being ought to be registered. 

By court

When the court orders or passes a decree to take the subsequent transfer or the second transfer, then such transfer would prevail over the prior transfer and the rights of the subsequent transfer would be given preference. Thus, the rule of priority will not be applicable in such cases.

Relevance of the doctrine of priority with respect to Insolvency and Bankruptcy Code

The priority of charges agreed between the creditors in an inter-creditor or subordination agreement will be useless if a creditor gives up its security and comes to the verge of liquidation of the company under Section 53 of the code. However, this section does provide any rights of priorities over the mortgaged assets. This may have a negative impact upon the credit market as the lenders shall have no protection in case of insolvency of the corporate debtors. If the secured creditors opt to give up their security interest towards the liquidation estate, it will not be applicable under Section 48 of the Transfer of Property Act during distribution. 

In the case of ICICI Bank v. SIDCO Leather (2006), the Apex Court has discussed in detail, the inter se priority amongst the secured creditors of a company in case of liquidation. The Court held that the Parliament is deemed to consider the terms of Section 48 of TPA. According to the said provision, the claim of the first charge holder shall be given priority over the claim of the second charge holder, to be realized from the property that belongs to the mortgagor, the first charge holder will be repaid first. The Court also opined that the specific provision provided under the general statute shall prevail in all the cases, where the special statute does not include any particular provision for the contractual and other statutory rights among different kinds of the secured creditors

Case laws on the doctrine of priority

Chouth Mal v. Hira Lal

In this case, the sale of the land agreement was executed in favor of one defendant in January 1932 however, the sale deed was executed in May 1932. During the period of execution that is somewhere in February 1932, the owner of the property executed a usufructuary mortgage of the same land in the favor of the plaintiff. The court, in this case, held that the usufructuary mortgage will be given priority over the subsequent sale deed. It was observed by the court that if the parties intended and delivered the possession of the properties to the transferee, then the mere omission of the sale deed will not have any effect or consequence. It was opined that only transfer does not confer any right or title in the property. It depends upon the date of execution of the deed. It is also not mandatory to have a deed registered as it does not create any rights.

SFL Industries Ltd. v. Reliance Capital Ltd. (2015)

In this case, the court ordered the petitioner company to wind up on the recommendation of the Board of Industrial and Financial Reconstruction (BIFR). The question that arose, in this case, was whether the provision of the Companies Act shall have the effect of the doctrine of priority which includes whether the claim of the first charge holder would prevail over the claim of the second charge holder.  The court held that there is no specific provision for the right of priority in the Companies Act. In such cases, the rule of priority under Section 48 of the Transfer of Property Act can be made applicable. Hence, in the present case, the court ordered that the claim of the first charge holder would prevail over the claim of the second charge holder. 

Conclusion 

Section 48 determines the priority when there is more than one transferee. It safeguards the rights of the first transferee in absence of a special contract or reservation. It describes the essential principle that no person can carry their rights and titles better than himself. Thus, the transferor cannot harm the rights of the transferee by making any further transactions with the property. It cannot ignore the rights created by the earlier transfer. Also, the rule of priority has expanded its scope of relevance to the Registration Act and Insolvency and Bankruptcy Code. 

References

1. https://indianlegalsolution.com/the-doctrine-of-priority-in-tpa-1882/
2. https://www.studocu.com/in/document/karnataka-state-law-university/property-law/doctrine-of-priority/8790100
3. https://thenationaltv.com/Tech/doctrine-of-priority-meaning-under-property-law
4. https://www.pathlegal.in/Doctrines—principles-udner-the-Property-Laws-blog-922
5. https://www.linkedin.com/pulse/doctrine-priorty-rajesh-a/
6. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3859143&download=yes

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