Essential Ingredients for Valid Equitable Mortgage

Supreme Court has reiterated in A.B. Govardhan vs P. Ragothaman - Civil Appeal No. 9975-9976 of 2024 [2024 INSC 640] decided on 29.08.2024 - For valid equitable mortgage it requires:

1. A Debt: Existing or future debt / loan / overdraft. Deposit without debt is not mortgage.
2. Deposit of Title Deeds: Physical or constructive delivery of documents showing title. Can be original, but in exceptional circumstances certified copy also valid if original lost.
3. Intention: Deposit must be with intention that deeds shall be security for the debt. Intention can be inferred from memorandum, letter, or surrounding circumstances.

If any of these 3 fails, mortgage can be challenged.

Other Legal Requirements:

• Property must be in a notified town - All State Govts have now notified almost all major towns, but still a ground of challenge in old cases.
• No registration required - Even if memorandum is written, it does not require registration unless that memorandum itself is intended to be the instrument creating the mortgage.

6 Common Grounds to Challenge Validity of Equitable Mortgage

1. No Original Title Deed deposited - Only Xerox/Copy
General Rule: Original required. Exception recognized in:

Syndicate Bank v. Modern Tile and Clay Works - Kerala HC: Court held equitable mortgage validly created even though some copies deposited, because intention was clear and originals were already with another bank. Sale of property allowed to realize dues.

Indian Bank vs Punjab National Bank - W.P. No.25502/2007 Madras HC 22.07.2009: Fight between two banks. DRT held there is no bar in creating equitable mortgage by deposit of certified copy of title deeds. Writ Court upheld DRT. If original is lost, certified copy with affidavit can create valid mortgage

C. Assiamma vs State Bank of Mysore - Kerala HC: Deposit of copies of title deeds can establish equitable mortgage provided there is clear intent.

Challenge succeeds only if defendant proves no title deed at all was deposited, or only irrelevant papers like tax receipt were deposited.

2. No Intention to Create Security
Mere handing over of deeds to lawyer, auditor for inspection is not mortgage.

K.J. Nathan vs S.V. Maruty Reddy AIR 1965 SC 430 [11.02.1964]: Supreme Court held - No document executed on day of deposit - Can intention be inferred from deed subsequently executed and registered? YES. If later memorandum records past deposit with intent, mortgage is valid from date of deposit

Rachpal Mahraj vs Bhagwandas Daruka 1950 SCR 548: The landmark SC judgment - Under Section 58(f), equitable mortgage by mere deposit does not require registration unless memorandum is intended as instrument creating contract. Court reaffirmed that intention is the essence

3. Memorandum Requires Registration - Hit by Section 17 of Registration Act
This is the most successful challenge.

If parties execute a document which creates the mortgage and not merely records it, it must be registered. If unregistered, mortgage fails.

Test laid down in Rachpal Mahraj:

• If memorandum is mere record of past transaction - No registration needed.
• If memorandum contains terms, rate of interest, repayment schedule, creates rights - It is instrument of mortgage - Registration compulsory.

4. Property Not in Notified Town
If deposit happened outside notified town, mortgage invalid. Deposit must be in notified town, but property can be anywhere in India. Many borrowers challenge that deposit was made at branch in non-notified area. Banks now cleverly take deposit at notified town branch and mention same in memorandum.

5. No Debt or Debt Already Discharged / Partnership Dissolved

Veeramachineni Gangadhara Rao vs Andhra Bank Ltd. - SC 25.03.1971: Supreme Court examined whether deposit by appellant was intended to secure only his personal loan of Rs.25,000 or also debts of his brother and associates. Held: Scope of security depends on intention at time of deposit. If memorandum restricts to personal loan, bank cannot extend to other loans

In C. Assiamma case - Dissolution of partnership does not absolve defendants of liabilities if mortgage created before dissolution.

6. Priority Challenge - Equitable vs Legal Mortgage

Latest Supreme Court ruling has clarified priority:

The Cosmos Co-operative Bank Ltd. vs Central Bank of India - SC 2025 LiveLaw: Supreme Court held that a mortgage created by deposit of an unregistered agreement to sell will be subservient to a mortgage created by deposit of title deeds. Deposit of incomplete title deed can create equitable mortgage, but such equitable mortgage will be inferior to legal mortgage created by deposit of proper title deeds like Sale Deed, Share Certificate etc.

Court relied on Suraj Lamps vs State of Haryana (2011) and Shakeel Ahmed vs Syed Akhlaq Hussain (2023) to hold that unregistered Agreement to Sell cannot create ownership or valid mortgage.

What Courts Look For to Uphold Validity

In A.B. Govardhan case 2024, Division Bench of Madras HC had quashed equitable mortgage. Supreme Court reversed and reinstated Single Judge findings and decree, emphasizing:

Production of title deeds of property as security towards debt amounts to creation of mortgage by deposit of title deeds under Section 58(f).

Court held agreement clearly showed respondent deposited title deeds for loan obtained - Valid mortgage under Section 58(f)

Practical Checklist to Challenge / Defend

To Challenge:

1. Demand original Memorandum of Deposit - Check wording - Does it say "deposited" [past tense - record] or "hereby deposit/mortgage" [present tense - creates]? If latter and unregistered - challenge under Registration Act.
2. Get proof of place of deposit - Branch location vs notified town notification.
3. Prove no debt on date of deposit - No loan sanction letter.
4. Prove documents deposited are not title deeds - Only encumbrance certificate, tax receipts, etc.
5. If certified copy - Challenge that original was available and intentionally not deposited.

To Defend as Bank/Lender:

1. Always take original Sale Deed / Mother Deed + Link deeds + EC.
2. Execute simple Memorandum recording past deposit with words "have deposited" not "hereby mortgage" - Avoid registration trap.
3. Take Letter of Intent + Declaration of notified town branch.
4. Enter in Title Deed Register with date, time, witness.