There may be instances where the parties agree to mortgage a property as security, but no formal charge or conveyance of any proprietary interest in the said property has taken place, still the same may be recognized as a mortgage. This is popularly understood as an ‘equitable mortgage’ where although under the law the formalities required for creating a legal charge or mortgage over a property are patently absent, yet the said property would be in equity deemed to have been mortgaged and as such may be apportioned or appropriated by the lender on the strength of mere intention of the parties to create a mortgage.
Under the English Law, whether the documents so deposited actually purport or transfer any title is immaterial for the purpose of creating an ‘equitable mortgage’ as long as the intention to do so is clearly discernible. The position in India however is quite different. This is because under the English Law, a mortgage created by deposit of title or documents is not construed as a legal mortgage and is only treated as an equitable mortgage. Whereas in India under the Act, 1882, more particularly under Section 58 sub-section (f) a statutory recognition has been given to the mode of creation of mortgage by deposit of title deeds. Such a mortgage by deposit of title deeds is for all purposes a ‘legal mortgage’ and not an equitable mortgage. The said provision is once reproduced hereunder: –
“58. “Mortgage”, “mortgagor”, “mortgagee”, “mortgage-money” and “mortgage-deed” defined.-
(a) A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.
(b) Simple mortgage.- Where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee.
(c) Mortgage by conditional sale.- Where the mortgagor ostensibly sells the mortgaged property-on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale:
Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale.
(d) Usufructuary mortgage.- Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorises him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage-money, or partly in lieu of interest or partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.
(e) English mortgage.- Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.
(f) Mortgage by deposit of title-deeds.- Where a person in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay, and in any other town which the State Government concerned may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immoveable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds.
(g) Anomalous mortgage.-A mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage, an English mortgage or a mortgage by deposit of title deeds within the meaning of this section is called an anomalous mortgage.”
Section 58 sub-section (a) stipulates the general rule that mortgage is “the transfer of an interest in specific immoveable” or as understood under the English Law as a “legal mortgage”. Section 58 sub-section(s) (b) to (g) further explains the different modes to create a mortgage under the Act, 1882. What is particularly important to note is the fact that, the subsequent subsection(s) do not either expressly or impliedly stipulate that no transfer of interest is taking place where mortgage is created in terms of the other modes provided therein. There is also nothing in the entire Act, 1882 that mortgage created by one particular mode under Section 58 would be subservient to another.
In such a scenario, any mortgage that happens to be created in terms of the Act, 1882 more particularly Section 58 would for all purposes be equal except in the consideration of priority of charge. Thus, while mortgage by deposit of title deeds under the English Law is an equitable mortgage and subservient to a legal mortgage, in India mortgage created by such deposit is not subservient to an equitable mortgage as such mortgage is in itself a legal mortgage.
Requisite for valid Equitable Mortgage
Deposit of title deeds is one of the many forms of mortgages where under there is a transfer of interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced by way of loan. The three requisites for a valid mortgage are, (i) debt; (ii) deposit of title deed; and (iii) an intention that the deed shall operate as security for the debt. In other words, when the debtor deposits with the creditor title deeds of his property with an intent to create a security, the law implies a contract between the parties to create a mortgage and no registered instrument is required under Section 59 of the Act, 1882 as in other classes of mortgage.
Procedure of Creating an Equitable Mortgage
It is essential to bear in mind that the essence of a mortgage by deposit of title deeds is the actual handing over by a borrower to the lender of documents of title to immovable property with the intention that those documents shall constitute a security which will enable the creditor ultimately to recover the money which he has lent. Whether there is an intention that the deed shall be security for the debt is a question of fact to be decided in each case on its own merits.
The said fact will have to be decided just like any other fact based on legal presumptions, oral, documentary and/or circumstantial evidence. Normally, title deeds are delivered to the bank along with a covering letter indicating therein an intention of delivering title deed i.e. to create security for the present or future liability. In turn, bank gives a letter to the person delivering title deeds indicating acceptance of the documents and/or title deeds by way of security either for the outstanding dues or for the loan to be advanced.
The banks, normally, maintain register of securities called Equitable Mortgage Register; wherein the entry of title deeds is taken in the form of memorandum signed by the Branch Manager alone, as a person accepting delivery of the documents as security. These formalities are done to establish three essential requisites of equitable mortgage, viz. (1) debit, (2) deposit of title deed and (iii) the intention that deed shall operate as security for the present or future debt. But if the parties choose to reduce the contract to writing, this implication of law is excluded by their express bargain, and the document will be the sole evidence of its terms. In such a case the deposit and the document both form integral parts of the transaction and are essential ingredients in the creation of the mortgage.
The deposit of part-deeds of title would not constitute a mortgage in terms of Section 58 sub-section (e) of the Act, 1882 unlike English Law, because under the latter such deposit is only an equitable mortgage and thus, the strict rigidities may not be imposed or insisted upon whereas in India mortgage by deposit of title deeds is a legal mortgage which in effect would defeat any equitable mortgage, and thus, the requirement to deposit all title deeds would have to mandatorily be required except those deeds which despite best of efforts of the mortgagee could not have been deposited or known to be outstanding.
The underlying reason behind why an equitable mortgage would be subservient to a legal mortgage, even where proper notice was effectuated may be understood in many different ways, we have already discussed one of them in the foregoing paragraphs, particularly that the former does not create any de jure charge or right in the subject property and rather is only a right in personam, however, the short answer to the above is that equity cannot sup-plant the law and can only supplement it.
Thus, where the law is unambiguous and clear, equity will always yield to the law. However, when it comes to equitable mortgages, we may rephrase the above to only say that equity will yield to the law only to the extent provided by the law. Thus, although the legal mortgage would have assumed priority in charge, yet an equitable mortgage may still be enforceable as secondary charge, provided the other considerations such as notice of such mortgage is fulfilled.
Precedents
The Court in K.J. Nathan v. S.V. Maruthi Rao reported in AIR 1965 SC 430 has explained the fine distinction between an equitable mortgage as understood in the English law and the mortgage by deposit of title deed. K. Suba Rao J. (as His Lordship then was) speaking for Court observed as under:-
“Under this definition (referring to section 58(f) of the Transfer of Property Act) the essential requisites of mortgage by deposit of title deeds are, (i) debt), (deposit of title-deeds, and (iii) an intention that the deeds shall be security for the debt. Though such a mortgage is often described as an equitable mortgage, there is an essential distinction between an equitable mortgage as understood in English Law and the mortgage by deposit of title deeds recognized under the Transfer of Property Act in India.
In England an equitable mortgage can be created either, (1) by actual deposit of title deeds, in which case collateral evidence is admissible to show the meaning of the deposit and the extent of the security created, or (2) if there be no deposit of title deeds, then by a memorandum in writing, purporting to create a security for money advanced; See White and Tudor’s Leading Case in Equity, 9th Edition, Vol. II, at p. 77.
In either case it does not operate as an actual conveyance though it is enforceable in equity; whereas under the Transfer of Property Act a mortgage by deposit of title deeds is one of the modes of creating a legal mortgage where under there will be transfer of interest in the property mortgaged to the mortgagee. This distinction will have to be borne in mind in appreciating the scope of the English decisions cited at the Bar. This distinction is also the basis for the view that for the purpose of priority it stood on the same footing as a mortgage by deed. […]”
“55. However, in order to obviate any confusion, we may clarify that the aforesaid observations in K.J. Nathan (supra) must not be understood to mean that equitable mortgage has no valid basis or is not recognized in to-to in India. Any act of the parties that evinces a clear intention of the parties to create a mortgage though the same might not have been created in terms of Section 58 of the Act, 1882, may still be a valid charge in terms of Section 100 of the Act, 1882.”
Reference
The Cosmos Co. Operative Bank Ltd Versus Central Bank of India & Ors. (2025)