To answer this question, it is important to first discuss what mortgage is. The Oxford Dictionary defines mortgage as, "a legal agreement by which a bank, building society, etc. lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt."

In the case of Stanley v Wilde, mortgage was defined as 'a conveyance of land as security for the payment of a debt or the discharge of some other obligation'.

Further, as per the Transfer of Property Act, 1882, a mortgage is:
"The transfer of an interest in specific immovable 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."

In this situation, the person transferring the property or the borrower is the mortgagor, and the person to whom such transfer is made is the mortgagee. The instrument of such a transfer is the mortgage-deed.

What Are The Types Of Mortgage?

Section 58 of the Transfer of Property Act delineates six types of mortgages that one may avail himself of in India. Further, Section 59 states that all of them require registration except mortgage by deposit of title deeds. Thus, a distinction can be made between registered and unregistered mortgages, with 5 kinds belonging to the former category, and mortgage by deposit of title deeds or equitable mortgage belonging to the latter.

The Different Kinds Of Mortgage Are:

1. Simple
2. Mortgage by conditional sale
3. Usufructuary mortgage
4. English
5. Anomalous
6. Mortgage by deposit of title deeds

What Is Equitable Mortgage?

The Transfer of Property Act, 1886, requires that all kinds of mortgages except for mortgage by deposit of title deeds, be made via an instrument validly registered as per Section 17 of the Indian Registration Act. As per Section 58(f) of the Transfer of Property Act, equitable mortgage is:
"Where a person in any of the following towns, namely, the towns of Calcutta, Madras 6[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 immovable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds."[1]

It was stated in Rachpal Maharaj vs Bhagwandas Daruka & Ors that:
"A mortgage by deposit of title deeds is a form of mortgage recognised by section 58 (f) of the Transfer of Property Act which provides that it may be affected in certain towns (including Calcutta) by a person "delivering to his creditor or his agent documents of title to immovable property with intent to create a security thereon." That is to say, when the debtor deposits with the creditor the title deeds of his property with 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 as in other forms of mortgage."[2]

To complete an equitable mortgage, all that is needed is deposition of title deeds of the relevant property with the mortgagee as intended security for the loan taken. The essence of this transaction is the delivery of the deeds. Further, intention is a key factor. If there is default on the loan, the holder of such title deeds bears the right to auction the property to recover the money that is owed to him.

Equitable mortgage is listed under Section 58(f) of the Transfer of Property Act, 1886, and is the only type of mortgage which does not require a written and registered instrument for it can be created simply by delivering the title deeds to the lender with requisite intention.

In The Law of Mortgage in India by Sir Rashbehary Ghose, he gives an appropriate illustration:
"The report of the case to which I refer is not very full. All that appears is that a certain person being indebted to the plaintiff and being pressed for payment, made over to him the title-deeds of some landed property. It does not, however, appear that the debtor, when he made over the title-deeds, expressly stated his intention to offer them as a security for the debt.

The property was afterwards sold under an execution by the sheriff, and the plaintiff then sought to enforce his security on it, contending that the purchaser under the execution had bought the property subject to the charge created in his favour by the deposit of the title-deeds. The Zillah Judge having given judgment in favour of the plaintiff, upon the ground that the deposit by the borrower of the title deeds was equivalent to a mortgage, the decree was affirmed on appeal by the Sudder Dewani Adalut."[3]

In Laksmi Vilas Bank Ltd vs Shreecharka Enterprises, it was established that there are three requirements of for a successful equitable mortgage to be concluded:

• Debt
  • A deposit of title deeds
  • An intention that the deeds shall be security for the debt.
     
• In Veerammal & Anr. vs Kr. L. Lakshmanan Chettiar & Anr., it was stated that, "the requisites of an equitable mortgage by deposit of title deeds are:
  • There must be a debt;
  • Delivery must be by a debtor or his agent;
  • Delivery must be in the towns mentioned in the Act;
  • Delivery must be to a creditor or his agent;
  • Delivery must be of documents of title to immovable property;
  • Delivery must be with intent to create a security thereon."
     
• Further, in this case the issue of debt was also considered, "The debt may be an existing debt or a future debt. The deposit may be to cover a present as well as future advances, or a general balance that might be due on an account. The mortgage may be extended to cover further advances."
   
• For completion of a contract of mortgage by deposit of title deeds, either a voiced confirmation of intention must be made or such intention must be clarified through actions. In K.J. Nathan vs S.V. Maruty Reddy & Ors, it was established that, "Intention of a party to create a mortgage coupled with delivery of title deed are the requirements for creating equitable mortgage."
   
• Further, in The Chief Controlling Revenue Authority, Madras vs Pioneer Spinners Private Ltd., it was laid down that, "A mortgage by deposit of title deeds, does not require any writing in law. Besides the deed and the deposit, what is required is an intention that the deeds shall be security for the debt."
   
• In Hubert Peyoli vs Santhavilasathu Kesavan Sivadasan, it was established that the delivery of a document of title alone is sufficient to create an equitable mortgage.
   
• In M/s. Money Line Credit Ltd. vs Sh. Sanjeev Kumar & Ors, it was held as follows:
  • The original title documents of the property must be provided since placing reliance solely on certified copies or photocopies has been deemed to be gross negligence.
  • Mere deposit of an allotment letter, agreement, or consent letter does not, per se, create a charge in the favour of the mortgagee. However, this may differ depending on the case.
  • Documentary evidence of title may not always be sufficient.
     
• What is stamping?
  • Stamping is the process of affixing by impressing or through adhesives, on a document, a stamp, to make such document legally valid. For the purpose of this process, the Union Government has instituted and imposed a tax known as stamp duty, which is collected by and assigned to state governments. According to Section 3 of the Indian Stamp Act of 1899, stamp duty is payable on the value of the property concerned and it is imposed on the instrument, not the transaction, for the affixation of the stamp. In India, the main reason for stamping is protection of state revenue.
     
• When must a document of equitable mortgage be stamped?
  • It is a rule that for registration, stamping is required. Further, registration is done on instruments as defined under Section 2(14) of the Indian Stamp Act, which states that, "any document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished, or recorded."
  • Registration is done under Section 17 of the Registration Act, wherein clause 1 sub-clause b states that, "other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property;"
     
  • Further, Section 17(2)(v) states that:
    • Nothing in clauses (b) and (c) of sub-section (1) applies to:
    • 5[any document other than the documents specified in sub-section (1A)] not itself creating, declaring, assigning, limiting or extinguishing any right, title or interest of the value of one hundred rupees and upwards to or in immovable property, but merely creating a right to obtain another document which will, when executed, create, declare, assign, limit or extinguish any such right, title or interest;

Should the agreement of equitable mortgage be oral, it will be intangible and thus, unable to be stamped or registered. However, if it is available in written form such that it contains the terms of the contract or lays down the rights and duties established by said contract, it will be the sole evidence of that transaction, making it an instrument under Section 2(14) of the Indian Stamp Act. Therefore, in case of a suit, it would be valuable evidence, which is why it ought to be registered.

In Obla Sundarachariar vs Narayana Ayyar, it was established that a document does not require registration unless it embodies the terms of the contract.[11]

Rachpal Maharaj v Bhagwandas Daruka & Ors. established that of intention – did the parties intend to reduce their bargain regarding equitable mortgage to writing? If so, the document requires registration, and if the document is merely evidential and not intended, then it does not. Further, in D. D. Seal v. R. L Phumra, the Supreme Court laid down a test, according to which a document should contain all requirements of the transaction when presented before the registrant. Further, the court stated that a document which does not disclose the creation of mortgage or is merely evidential and is therefore, not an operative instrument required registration.[12]

In a nutshell, it can be said that if a document is an instrument under Section 2(14) of the Indian Stamp Act, 1899, it shall require registration, unless it is not intended so.

References:

1. Transfer of property act § 58 (1882)
2. Rachpal Mahraj V. Bhagwandas Daruka & Ors, Honourable Mr. Justice Hiralal J. Kania (Supreme Ct. India 1950)
3. Sir Rashbehary Ghose, The Law of Mortgage in India (1902)
4. The Lakshmi Vilas Bank Ltd v. M/s.Shreechakra Enterprises, Honourable Mr. Justice M. Chockalingam (High Ct. Judicature At Madras 2002)
5. Veerammal & Anr v. Kr. L. Lakshmanan Chettiar & Anr, (Madras High Ct. 1959)
6. K.J. Nathan v. S. V. Maruty Reddy & Ors, J.R. Mudholkar (Madras High Ct. 1964)
7. The Chief Controlling Revenue Authority, Madras vs Pioneer Spinners Private Ltd. [AIR 1968 MADRAS 223]
8. Hubert Peyoli V. Santhavilasathu Kesavan Sivadasan, Justice Kurian Joseph. Justice P.R. Ramachandra Menon (High Ct. Kerala At Ernakulam 2009)
9. The Indian stamp act § 2(14) (1899)
10. The registration act § 17 (1908)
11. Obla Sundarachariar v. Narayana Ayyer [AIR 1931 PC 36]
12. Deb Dutta Seal v. Ramanlal Phumra And Ors, S.M. Sikri (Supreme Ct. 1969)