eBAPTffl IX

CONCLUSION
 CHAPTER IX

CONCLUSION

A sincere attempt has been made in this research work to analyse

comprehensively "the Law of Securities for Bankers". For the first time, an
in - depth exploration has been undertaken to study the statutes and
judicial precedents to realise the securities without the intervention of the
court. The biggest ever challenge that the banking industry now faces is the
phenomenon of bad debts, euphemistically named as non - performing
assets. This research work aims at meeting this challenge and suggests the
legal routes to realise the securities expeditiously without the rigmarole of
resort to the court. The banking sector is miserably infested with alarming
bad debts which can, thus, be reduced. The whole banking fabric will
collapse like a proverbial "house of cards" if the mounting bad debts are not
recovered at least to the extent of realisation of the available securities, of
course, legally. Banks with uncontrollable bad debts are sarcastically
addressed as "weak banks". Expeditious realisation of securities will make
all the banks stronger and more viable.

Banker’s General Lien

Under Section 171 of the Indian Contract Act, 1872, bankers, factors,
wharfingers, attorneys of a High Court and policy brokers may retain, as
^ " “p
security for general balance of account, any goods bailed to them.
 297

The word "retain" in the section is the stumbling block for the banker
to realise the security held under lien. The lexical meaning of the word
"retain" is "to hold".

This section provides for retention of the liened goods by the bankers
and other four entities. That is, a general lien does not, as a rule, carry
with it the right to dispose of the property since no express power of sale is
conferred on the five entities enumerated in the section.

The banker’s lien is something more than an ordinary lien; it is an

implied pledge. Banker’s character of pledgee enables him to sell on default
if a fixed time is appointed for repayment of the advance, or, where no time
is fixed, after request for repayment and reasonable notice of intention to
sell1. 2

Though Lord Campbell in Brandao v Barnett1 held that banker’s

lien is an implied pledge the matter in India is governed by Section 171 of
the Indian Contract Act, 1872 which does not confer power of sale expressly
on the banker.

Section 6(1) (f) of the Banking Regulation Act, 1949 lays down that
the banker may manage, sell and realise any property which may come into
his possession in satisfaction or part satisfaction of any of his claims.

1 Halsbury’s Laws of England, Fourth Edition, 1989, Vol 3 (1), para 194

2 (1846) 3 CB 519
 298

Placing reliance on this section coupled with Section 171 of the Indian
Contract Act, the banker’s lien in India amounts to "implied pledge" and
hence the banker has right of sale of the securities held under lien.

Though Section 171 of the Contract Act confers right of general lien
on five entities banker is in a special position. Because the banker deals
with public money with deposit - taking and lending which other four
entities do nofeeal with. The doctrine of implied pledge applies only to the

case of the banker and not to the other four entities enumerated in Section
171 of the Indian Contract Act, 1872. The banker acquires the rights of
pledgee under Section 176 of the Contract Act which confers the power of
sale on the pledgee after reasonable notice to the pledgor.

Brandao v Barnett3 is the eye - opener for the concept of "implied

pledge" as far as banker’s lien is concerned. This case, though belongs to the
mid - nineteenth century, is still being quoted by the judicial fora following
English Law or as a persuasive precedent. This English decision may be
adopted by the Indian Courts in respect of the banker’s general lien.

In the absence of the concept of "implied pledge", the banker holding

the goods under general lien has to proceed against the borrower before a
competent court for obtaining a decree for the debt. Then these securities
have to be attached on initiating execution proceedings.

3
(1846) 3 CB 519
 299

The Supreme Court in Bombay Dyeing and Manufacturing Co.

Ltd v State of Bombay* held that when a creditor has a lien over goods
by way of security for a loan, he can enforce the lien for obtaining
satisfaction of the debt, eventhough an action thereon would be time -

barred.

The New Shorter Oxford English Dictionary gives the meaning of the
word "enforce" as "compel the observance of (a law, rule, practice, etc.)"4
5.

The employment of the word "enforce" in the judgment of the

Supreme Court6 enables the creditor-banker to realise the security of the
liened goods ex curia (out of court) by sale with reasonable notice to the
borrower or guarantor as the case may be.

The remedy through court of law is not available for realisation of

time - barred debts. Under the circumstances, the banker cannot proceed
through court for attachment of the liened goods, nor can the right of
banker’s general lien be deadlocked for ever. It would become a fruitless
and vain exercise for the banker to hold on to the liened goods ad infinitum
(to an indefinite extent) in the case of time - barred debts.

The judicial system does not foresee a nebulous procedure which

brings the principles of natural justice to a grinding halt, depriving the
banker of his legal and equitable right to recover the debt.

4 AIR 1958 SC 328

5 The New Shorter Oxford English Dictionary, 4th Edition, 1993, Vol I, p. 820

6 Footnote 4 Supra
 300

It is, therefore, submitted that the banker can, by self - help remedy
(not through legal process by filing suit), exercise the right of sale on the
liened goods under notice to the borrower / guarantor, considering banker’s
general lien as an implied pledge which confers power of sale on the banker
without filing suit against the customer.

In order to dispel the cloud of ambiguity, it is suggested that Section

171 of the Indian Contract Act, 1872 may be amended with a proviso that
the banker may sell the goods under lien with reasonable notice if the
borrower / guarantor commits default of repayment of the advance even
after such reasonable notice. This amendment would confer the power of
sale expressly on the banker to realise the liened goods without intervention
of the court. ~

Banker’s Right of Set - off

It was held in National Westminster Bank Ltd v Halesowen

Presswork Assemblies Ltd7 that the banker is entitled to exercise his
right of set - off without giving notice to the customer, although the contract
may provide that such a notice must be given.

7
[1972] A.C. 785. C & S 294
 301

When the accounts are still operative, however, opinions differ as to

whether a right of set - off accrues without notice. The case of Garnett v
McKewan8 is high legal authority for the legal proposition that a banker

may set - off different accounts of his customer without notice, whether
such accounts are kept at the same branch or different branches.

A period of notice would enable the customer to defeat the set - off or
combination of accounts by withdrawing the credit balance. If he has no
notice at all he may continue to pay into his account cheques that he would
have paid into another bank if he has known the true position.

Notice having become an important aspect of natural justice cannot

be totally ignored. It is suggested that the banker may give notice
immediately after or simultaneous to exercising the right of set - off so that
the customer is put on caution not to issue further cheques on the account
and that the banker will not be liable for dishonour of the cheques already
issued. This course of action will help avoid litigation by the customer
against the banker.

The normal canon of set - off is that it can be applied only to those
debts which are due (matured) and recoverable on the date of exercising set
- off. It is suggested that the banker should be able to exercise the right of
set - off even before the debt is due (unmatured) if he (the banker) is firmly
apprehensive of the likely default of the customer in settling the debt on the
due date.

8
(1872) LR 8 Exch 10
 302

In order to exercise the right of set - off, the accounts with the credit
balance and the borrowal accounts should be maintained in the same right
and same capacity. For example, a personal debit account cannot be
combined with the credit balance in the trust account maintained by the
individual. Sometimes the trust accounts are maintained by the customers
as conduit pipes to route the benami transactions. The banker should be
empowered to exercise the right of set - off in special situations where the
criteria of "same right and same capacity" can be ignored. Such a right of
set - off will block the escape - route of the defaulting borrower and will
help the banker realise the dues.

It is suggested that a new Section 171 A may be inserted to the \

Indian Contract Act, 1872 codifying the rights of the banker while
exercising the set - off and the circumstances when the right of set - off may
be exercised. The insertion of the new section will help the banker realise
the debts under the protection of the statute.

Contract of Guarantee

A contract of guarantee envisages two contracts, one between the

principal debtor and the creditor and the second between the creditor and
the surety. The first is a "primary contract" and the second "collateral
contract".

Though the guarantee has its genesis in the primary contract, yet it
is an autonomous and independent contract.
 303

The liability of the guarantor would always be hovering over his

head. As soon as the debtor defaults the liability of the guarantor descends
on his head and he (the guarantor) becomes a debtor himself. Since the
contract of guarantee is an independent contract the surety cannot require
the creditor to recover the debt from the principal debtor personally or from
the securities furnished by the principal debtor.

The principle of co - extensiveness under Section 128 of the Indian

Contract Act, 1872 indicates the liability of the surety and not the manner
of discharge of the debt of the principal debtor.

The Supreme Court in Bombay Dyeing and Manufacturing Co v

State ofBombay9 has laid down that the creditor is entitled to recover the
debt from the surety even though a suit on it is barred against the principal
debtor.

The surety becomes liable to pay the entire amount. His liability is
immediate on default by the principal debtor. It is not deferred until the
creditor exhausts his remedies against the principal debtor. The surety
cannot claim that the principal debtor is solvent10.

The bank can proceed against a guarantor without making the debtor
a party or without suing the debtor*11.

9 AIR 1958 SC 328

10 Bank of Bihar Ltd v Damodar Prasad AIR 1969 SC 297

11 State Bank of India v Indexport Regd. AIR 1992 SC 1740

 304

Where a guarantor dies his legal representative is liable on the

guarantee to the extent of the property of the deceased having come to the
hands of the legal representative12.

Though Section 50 of the Code of Civil Procedure, 1908 mentions the

word" judgment - debtor" it includes the guarantor also since the guarantor
is no less liable than the debtor. It is submitted that this section is equally
applicable to a guarantor.

The liability of the guarantor is inescapable and absolute, not

collateral.

In Mohiribibi v Dharmodas13, the Privy Council held that

guarantor for a minor’s contract is not liable since the liability against the
minor, the principal debtor, is unenforceable.

The Bombay High Court in Kashiba v Shripat14 held that the

surety for a minor’s contract is liable as a principal debtor.

The Madras High Court in Kelappan Nambiar v Kunhiraman15

held that where the liability of the principal debtor is held unenforceable,
the surety cannot be made liable.

12 Section 50 (2) of the Code of Civil Procedure, 1908

13 (1903) 30 IA 114

14 (1895) 19 Bombay 697

15 (1956) 2 MLJ 544

 305

The judicial decisions of various courts about surety’s liability for

minor’s contract are in conflict with each other. The law of surety’s liability
for contract of minor remains unsettled in India.
--------------- ----- ------ --------------------.— --------------- — -------- —.

The same situation prevailed in England before the year 1987. The
law in England was changed by the enactment of the Minors’ Contract Act,
1987. The Infants Relief Act, 1874 which let the surety for a minor go scot
free was repealed.

Section 2 of the Minors’ Contract Act, 1987 provides that where a) a

guarantee is given in respect of an obligation of a party to a contract made
after the commencement of the Act, and b) the obligation is unenforceable
against him because he was a minor when the contract was made, the
guarantee is not, for that reason alone, to be unenforceable against the
guarantor.

In order to settle the law relating to the surety for minor’s contract
and fasten the absolute liability on the surety, it is suggested that Section
128 of the Indian Contract Act, 1872 may be amended as follows:

"The liability of the surety is co - extensive with that of the principal

debtor, unless it is otherwise provided by the contract save where a surety
for a minor’s contract shall be liable as principal debtor".

The surety for a minor’s contract is at par with an indemnifier and

hence is absolutely liable.
 306

The following clause may be included in the guarantee documents to

be obtained by the bankers from the sureties until the suggested
amendment to Section 128 of the Contract Act is brought about :

"I agree that all sums of money which may not be recoverable from
me on the footing of a guarantee by reason of any legal limitation, disability
or incapacity on or of the principal debtor shall nevertheless be recoverable
from me as sole or principal debtor".

The letters of comfort have come to be accepted as a latent security

in India. This letter, though not directly undertaking any liability, is issued
to the banker by way of comfort that the borrower, being the subsidiary of
the issuer, will keep sufficient reserves to meet its obligations on repayment
of the loan. The purpose of the letter of comfort obtained by the banker
cannot be obliterated by lack of enforceability against the issuer. It is
submitted that the letter of comfort, despite the evasive wordings, should
be made to assume legal liability so that it can form part of the security for

the banker.

It is, therefore, suggested that Sec 126 of the Indian Contract Act,
1872 may be amended so as to include the letter of comfort as a guarantee
document. The amendment may be considered as follows:

"A contract of guarantee is a contract to perform the promise,-or

discharge the liability, of a third person in case of his default. The person
who gives the guarantee is called the "surety": the person in respect of
 307

whose default the guarantee is given is called the "principal debtor" and the
person to whom the guarantee is given is called the ‘creditor". A guarantee
may be either oral or written including a letter of comfort".

Pledge and Hypothecation

Section 176 of the Indian Contract Act, 1872 provides that the
pledgee may, on default by the pledgor, bring a suit against him (pledgor)
and retain the goods pledged as collateral security or he may sell the goods
pledged, on giving the pledgor reasonable notice of sale. The pledgee cannot
legally foreclose with a view to acquiring the absolute property in the goods
pledged.

There is a general rule of common law that a man cannot give a

\
better title to property than he himself possesses (Nemo dat quod non
habet). If a customer pledges stolen goods to his banker as security for a
loan, the banker - although acting in good faith without any knowledge of
the theft - will obtain no title to such goods.

The banker, as pledgee of the stolen goods, will be forced to restore

them to the true owner, unless it can be proved that the goods have been
sold in "market overt" (recognised market throughout the country) after
having been stolen; or unless it can be proved that the true owner is
precluded from asserting his rights, as would be the case if he knowingly
stood by when the pledge was made.
 308

As far as bankers (as pledgees) are concerned it is beyond

comprehension to ascertain the status of the goods to be pledged since the
enquiry by the bankers cannot be carried out discreetly in the midst of the
multifarious banking business. It is also not possible for bankers to abstain
from lending against pledged goods as it will adversely affect the economic
activity of the general public and mercantile community.

In view of the banker’s position in the society, a legislative

amendment to Section 178A (pledge under voidable contract) of the Indian
Contract Act, 1872 is suggested for protecting the bankers on accepting
pledge of goods in good faith in spite of the absence of title in the pledgor
on the basis of the doctrine applicable to negotiable instruments.

The maxim "nemo dat quod non habet" should not be made applicable
to the pledge as far as the bankers, being pledgees, are concerned.

Hypothecation is neither governed by any statute nor is there any

law on it directly or indirectly. It has been in mercantile usage since time
immemorial. The courts have to adjudicate the cases involving
hypothecation purely based on the terms of the hypothecation agreement.

The Mysore High Court (now Karnataka High Court) observed in

Bank of Maharashtra v Official Liquidator16 that hypothecation is an
extended idea of pledge where the creditor rmits the debtor to retain
possession either on behalf of or in trust for himself.

16
AIR 1969 Mysore 280
 309

The Madhya Pradesh High Court held in Tara Rerolling Mills v

Punjab National Bank17 that there is no distinction between pledge and

hypothecation for power to sell under Section 176 of the Indian Contract
Act, 1872.

The Madras High Court, laid down in Union of India v

Shenthilnathan18 that the hypothecatee is an unsecured creditor and his
remedy lies in realisation of the debt through court.

The Madhya Pradesh High Court in Bank of India v State of

M.P.19 categorised the hypothecatee - bank as a secured creditor and held
that the bank can sell the hypothecated bus in preference to the claim of
the R.T.O. for Passenger Tax and Motor Vehicle Tax.

The Madras High Court in Union of India v Shenthilnathan20

held that the Government dues have priority over the dues to the
hypothecatee and the Government can sell the hypothecated goods for its
dues overlooking the rights of the hypothecatee - bank over the goods.

The Supreme Court in Builders Supply Corporation v Union of

India21 ruled that hypothecatee - bank’s debts have to be satisfied first
and then only claims for crown debt arise.

17 1998 (4) All India Banking Judgments 273

18 (1977) 2 MLJ 499

19 1989 (2) BCLR 78

20 Footnote 18 Supra

21 AIR 1965 SC 1061

 310

Analysis of a few cases reveals that the judicial decisions on the

hypothecation as security are thus in conflict with each other.

The Supreme Court in Central Bureau ofInvestigation v Duncan

Agro Industries Ltd22 held that the offence of criminal breach of trust is
not committed under Section 405 of IPC by the hypothecator - borrower
even if he disposes of the hypothecated goods without the knowledge of the
hypothecatee - bank. The Bank’s remedy lies only in civil suit for breach of
contract.

The Punjab and Haryana High Court in Punjab National Bank v

Anand Kumar23 directed that the Chief Judicial Magistrate who tried the
case should consider whether Section 379 (punishment for theft) of IPC is
attracted for the illegal disposal of the goods by the hypothecator -
borrower.

Though hypothecation has become a usual security for the bankers

the absence of a statute is the stumbling - block to codify the rights of the
hypothecatee - banker. The conflicting judicial decisions categorise the
banker as secured creditor in one State and unsecured creditor in another
State. The same state of affairs prevails in respect of the priority of the
banker over the hypothecated goods.

22 (1996) 87 Comp. Cas. 849

23 2000 ISJ (Banking) 385
 311

Though the act of the borrower in disposing of the hypothecated

goods illegally is an offence with intention to cheat the banker the judicial
decisions do not hold the hypothecator criminally liable.

The peculiarity of hypothecation is that the creditor (banker) does not

come into possession of the hypothecated goods. The possession remains in
the custody of the hypothecator (borrower). This factor deprives the
hypotheeatee - banker of his valuable right to have control over the security.
The courts are not recognising the right of the banker to proceed against
the hypothecator criminally due to lack of possession with banker in case
the hypothecator disposes of the security illegally. Absence of possession of
security puts the banker in a vulnerable position.

It is, therefore, suggested that a legislation on "HYPOTHECATION"

is the need of the hour, codifying the rights and liabilities of the parties.
This legislation should include provisions that the borrower’s disposal of the
goods without the consent of the hypotheeatee (lender) shall amount to the
offence of criminal breach of trust as defined under Section 405 of the
Indian Penal Code, 1860. The new legislation may also include a provision jyratt'c
empowering the creditor to seize the goods without notice and sell without
intervention of court with notice to the debtor.

A secured creditor, who is entitled to dispose of the property without

recourse to court, shall also be entitled to dispose of the property with
taking possession of the same. The secured creditor should be capable of
assigning the title to the property without taking possession of the property.
 312

Such a provision in the legislation on "Hypothecation" will considerably help

the banks to concentrate on disbursement of credit for productive purposes
and save them from worries regarding realisation of the security by sale.

Timely action is necessary to preserve the j hypothecated security.

Since public funds are involved in lending by banks the State Governments
should help the banks in ensuring that the hypothecated properties are not
secreted away or are otherwise fraudulently disposed of by the defaulting
borrowers.

The offence of criminal breach of trust can be attracted only when the
hypothecator - borrower is made to hold the security in trust for the
hypothecatee - lender.

The legislation on ‘Hypothecation’ should include provisions for

transfer of possession of security to the lender who, in turn, is deemed to
have re - transferred the security to the borrower to be held in trust for the
lender. This provision would confer the status of trustee on the borrower.
Any breach of trust on the part of the borrower will automatically attract
penal provision under Sections 405 and 406 of the Indian Penal Code, 1860.

The bankers may include in their hypothecation agreements a clause

on "transfer and re-transfer" of possession of security, thus conferring
trusteeship on the hypothecator - borrower until the legislation on
hypothecation is enacted as suggested.
 313

Mortgage Security

Mortgage is the commonest and most important security for the

banker’s advances and equitable mortgage is the common form of mortgage
resorted to by the bankers for securing their advances. In English Law,
there are only two classes of mortgage, namely, Legal Mortgage and
Equitable Mortgage. Legal mortgage vests legal estate in the mortgagee and
requires a registered mortgage deed. Legal mortgagee is vested with the
power of sale on default by the mortgagor irrespective of whether the
mortgage deed includes an express clause conferring power of sale or not.
x

Equitable mortgage is only an agreement to create a legal mortgage

and hence is inferior to legal mortgage. If power of sale is to be resorted to
by the mortgagee the equitable mortgage should be by deed incorporating
a specific clause conferring power of sale on the mortgagee.

In Indian Law, six classes of mortgage are enumerated under Section

58 of the Transfer of Property Act, 1882 namely

1. Simple mortgage
2. Mortgage by conditional sale
3. Usufructuary mortgage
4. English mortgage
5. Mortgage by deposit of title deeds (Equitable Mortgage)
6. Anomalous mortgage
 314

Section 59 of the Transfer of Property Act, 1882 provides that where

the principal money secured is one hundred rupees or upwards, a mortgage
other than a mortgage by deposit of title - deeds can be effected only

by a registered instrument.

A mortgage other than a mortgage by deposit of title - deeds does not

become complete and enforceable until it is registered. Registration does not
suspend the operation of the mortgage and under Section 47 of the
Q
Registration Act^as soon as it is registered it takes effect from the date of
execution. Therefore if the property is attached after the date of execution
of the mortgage, but before the date of registration, the mortagage will not
be invalid as against claims enforceable under the attachment.

All classes of mortgage rank equally in India. While other mortgages

require a deed and registration if principal money is one hundred rupees or
upwards, mortgage by deposit of title - deeds does not require a deed, nor
registration irrespective of the amount of the principal money secured.
Hence it is more equal unlike in the English Law.

Bankers, in most of the cases, resort to mortgage by deposit of title -

deeds (equitable mortgage) as security for their advances. Since equitable
mortgage does not require a registered instrument it is difficult for the
bankers to verify whether the mortgagor has already created an equitable
mortgage by certified copies of the title - deeds alleging loss of title deeds.
It is submitted that equitable mortgage can be created by deposit of
certified copies of title deeds under certain circumstances such as loss of

originals.
 315

Non - registration of equitable mortgage does not facilitate the

recording of the encumbrance on the Encumbrance Certificate issued by the
Registering Authorities. This is an invincible handicap to ascertain the clear
title of the mortgagor.

Creation of registered mortgage does not require deposit of original

documents of title since the mortgage deed is sufficient to create a
mortgage. Non - registration of equitable mortgage by original title - deeds
facilitates creation of registered mortgage in favour of another lender who
cannot ascertain the previous encumbrance in favour of the equitable
mortgagee.

Under Sec 57 of the Indian Registration Act, the person requiring

certificate of encumbrance should make the search himself into the registers
and indexes available with the Registering Authority on payment of the
prescribed fees. In practice, this facility does not prevail. The Registering
Authority obtains the application for encumbrance from the parties and
makes searches in the registers by himself. Then the certificate of
encumbrance is issued with an evasive rider that the Registering Authority
will not on any account be responsible for any errors in the certificate. This
type of encumbrance certificate with disclaimer clause is common in
Tamilnadu (See Appendix).

A person aspiring to deal with an immovable property looks to the

encumbrance certificate to ensure whether there is any previous
encumbrance on the property. The evasive rider by the Registering
Authority disowning its responsibility on the contents of the encumbrance
 316

certificate has been creating the impression that the encumbrance

certificate is not final in verification of the title of the proprietor (owner) of
the property. Any Government Certificate or Order should be wrapped in
finality. Encumbrance certificate may be an "exception" to this finality rule!
This evasive clause in the encumbrance certificate infuses questionable
authority into the certificate which is a very important evidence of the
present nature and status of the property.

Registration of security should be essential as a form of public

notification for the perfection of the security. A person proposing to deal
with the property should be able to ascertain the encumbered title of the
property owner. Registration also helps third parties to know the details of
the lender in whose favour the property is encumbered. What should be
registered is therefore not the document but the fact that the security
interest arises from the document.

The mortgagor normally executes a memorandum in writing simply

reciting the past event of having deposited the title deeds with intent to
create the mortgage. This memorandum, called confirmation letter in
banking parlance, does not require registration.

In doubtful cases where the banker wants an assurance for the

mortgage, he insists upon the registration of the confirmation letter which
attracts only a nominal stamp duty. Nevertheless, it cannot assume the
character of registration per se since it recites only a past transaction bereft
of other important details of the mortgage terms.
 317

It is suggested that equitable mortgages created in favour of the(

banker should be made registrable with only a very nominal fee, say
Rs.100/-, so that the encumbrance is recorded with the Registering
Authority. Such registration will put on notice those persons or institutions
who propose to deal with the property, either for purchase or for creating
mortgage, that there is a subsisting encumbrance on the property. The
fraudulent intention, if any, on the part of any mortgagor who tries to
suppress the subsisting encumbrance will be defeated by registration of the
equitable mortgage.

Section 59 of the Transfer of Property Act, 1882 provides that where

the principal money secured is one hundred rupees or upwards, a mortgage
other than a mortgage by deposit of title - deeds can be effected only
by a registered instrument, that is, by a mortgage - deed duly registered
with the Registering Authority. The mortgage - deed must be presented for
registration within four months from the date of its execution as per Section
23 of the Indian Registration Act, 1908.

A mortgage with principal money of one hundred rupees or upwards

does not become complete and enforceable until it is registered except a
mortgage by deposit of title - deeds. Non - registration of mortgage (other
than an equitable mortgage) will make the mortgage ineffectual to achieve
the purpose for which it was brought into being. Equitable mortgage
becomes effectual as soon as the mortgagor delivers the documents of title
to the mortgagee at a notified town with intent to create a security thereon.
 318

Registration of equitable mortgage is, therefore, suggested only as an

information to the general public of the subsisting encumbrance on the
property.

Mere delivery of title deeds by the mortgagor to the mortgagee at a

notified town amounts to a transfer of interest in the property from the
mortgagor to the mortgagee, even without a deed. Registration or non -
registration of the equitable mortgage will not affect the validity of the
mortgage which has already been effected by deposit of title deeds.

Section 58 (f) of the Transfer of Property Act, 1882 provides that

delivery or deposit of documents of title should take place in a notified town
specified by the State Government in its official Gazette so as to create a
valid equitable mortgage.

The restriction of deposit of title deeds only to certain places creates

hardship for the general public. There is no sanctity or relevance for such
restriction in the prevailing circumstances where commercial activity and
banking business are ubiquitous.
** 1—— *w

It is suggested that the restriction regarding the place of deposit of

title deeds to create equitable mortgage should be removed by an
amendment to Section 58 (f) of the Transfer of Property Act, 1882.

Equitable mortgage is on equal footing with simple mortgage except

that equitable mortgage does not require any deed, as per Section 96 of the
Transfer of Property Act, 1882. An equitable mortgage, though without
deed, is treated as a mortgage with deed.
 319

Mortgage armoured with a power of sale is an effective instrument

of credit. Under Sec 101 (1) of the Law of the Property Act, 1925 in English
Law, a mortgagee, where the mortgage is made by deed, has power of sale
of the mortgaged property without intervention of the court on default by
the mortgagor. It is sufficient if the mortgage is by deed, even without a
clause for express power of sale, provided it is a legal mortgage. Since
equitable mortgage is inferior to legal mortgage an express clause for power
of sale is essential in the mortgage deed of an equitable mortgage.

The power of sale is statutorily available to a legal mortgagee while

it is contractual as far as equitable mortgage is concerned in English Law.

In Indian Law, the power of sale without intervention of court is

provided under Sec 69 of the Transfer of Property Act, 1882. Three
situations are envisaged for power of sale to a mortgagee in default of
payment of mortgage - money by the mortgagor.

Sec 69 (1) (a) provides that power of sale is available to a mortgage

where the mortgage is English mortgage and the mortgagor and mortgagee
are not Hindus, Muhammadans or Buddhists or members of any other race,
sect, tribe or class specified by the State Government in its official Gazette
from time to time.

Section 69 (1) (a) of the Transfer of Property Act, 1882 unduly

excludes the majority communities in India from exercising the power of
sale available for an English Mortgagee. This section appears to have been
enacted only for the transactions between mortgagors and mortgagees who
are English People or people of English origin or Christians.
 320

Though the amendment to Section 69 of the Transfer of Property Act,

1882 was last made in 1929 in the pre - Independence days, these
provisions still remain in the statute book.

Bankers cannot be selective in lending to a certain sect of the

borrowers. Though banks cannot be attributed to belong to a certain religion
it cannot be expected to extend credit only to persons not excluded under
Section 69 (1) (a) of the Transfer of Property Act, 1882. If the borrowers are
corporate sector who do not belong to any religion, then English mortgage
can be created so as to avail of the statutory power of sale by the bankers.
Bankers do not confine their credit delivery only to corporate sector. They
are equally catering to the credit needs of individuals where the
discrimination based on religion creeps in as far as English mortgage is
concerned.

When the debate on uniform civil code in India is hotting up amongst

the law - makers and the general public retention of Section 69 (1) (a) of the
Transfer of Property Act, 1882 is the "odd one out" in the statute book. This
section is a clear discrimination between religious communities in
commercial transactions in India.

Section 69 (1) (a) of the Transfer of Property Act, 1882 has lost its
relevance in the present day secular circumstances. English mortgage is
rarely resorted to by the banks in view of the religious discrimination in the
section itself and stamp duty and registration expenses being heavy to be
borne the mortgagors.
 321

It is suggested that an amendment to Sec 69 of the Transfer of

Property Act is the need of the hour deleting the portion regarding
restriction of the power of sale without intervention of the court only to
certain religious communities.

Section 69 (1) (b) of the Transfer of Property Act, 1882 provides that
power of sale without intervention of the court is available only to a
Government - mortgagee when the power is expressly incorporated in the
mortgage - deed.

Section 69 (1) (b) of the Transfer of Property Act, 1882 is not relevant
to the banker since it is confined to a situation where the Government is
the mortgagee. Banker’s status as mortgagee is discussed in this research
work.

Section 69 (1) (c) of the Transfer of Property Act, 1882 provides for
power of sale without intervention of the court where such power is
conferred on the mortgagee by the mortgage - deed and the mortgaged
property is situated within the towns of Calcutta, Madras, Bombay ... or in
any other town or area which the State Government may, by notification in
the Official Gazette, specify in this behalf.

Section 69 (1) (c) of the Transfer of Property Act, 1882 insists upon
the pre - requisite of a mortgage - deed for exercise of the power of sale by

the mortgagee.
 322

In India, all the mortgages are required to be by deed except the

mortgage by deposit of title deeds (section 58 (f) of the Transfer of Property
Act). Mortgage by deposit of title deeds is on the same footing with simple
mortgage (section 96 of the Transfer of Property Act) with the exception
that the mortgage by deposit of title deeds does not require any deed, nor
registration.

When the power of sale without intervention of the court is applicable

to a simple mortgage (where deed is necessary) it should be applicable to
equitable mortgage for which there is no necessity for any deed under the
statute. It should be possible to prove that the mortgagor was aware that
the mortgagee could realise the mortgaged property without the
intervention of the court. When the statute itself provides that mere deposit
of documents of title is sufficient to create equitable mortgage there is no
need for any deed.

The absence of deed in the case of equitable mortgage does not make
it inferior to any other mortgages. £

The legislative drafter who drafted Section 69 (1) (c) of the Transfer
of Property Act, 1882 has simply modelled the section importing the word
"mortgage - deed" in English law where equitable mortgage is not
equivalent to legal mortgage.

In India, equitable mortgage is a legal mortgage and is in no way

inferior to other mortgages enumerated under Section 58 of the Transfer of

Property Act.
 323

The legislative drafter of Section 69 (1) (c) of the Transfer of Property-

Act does not appear to have shown any application of mind while
incorporating the word "mortgage - deed". He should have known that there
is one mortgage (mortgage by deposit of title deeds) which does not require
any deed but is equivalent to any other mortgage with deed. The legislative
drafter should have inserted a special provision for equitable mortgage
enabling the mortgagee to resort to power of sale out of court provided he
(the equitable mortgagee) adduces an irrebuttable evidence, not necessarily
by deed, of the consent of the mortgagor for the mortgagee’s power to sell
under Section 69 (1) (c) of the Transfer of Property Act, 1882.

To put it in a nutshell, the equitable mortgage requires only an*

V' ,

evidence of mortgagor’s consent to resort to the provisions of Section 69 (1)

A
(c) of the Transfer of Property Act, 1882 for power of sale without
intervention of the court while all other mortgages require a mortgage ->
deed.

In order to prove the consent and awareness of the mortgagor for

conferring power of sale on the mortgagee, it is suggested that a
confirmation letter from the mortgagor reciting the past act of deposit of
title deeds may be obtained. This confirmation letter may include an
information that the mortgagor was aware that the mortgagee could realise
the security without intervention of the court.
 324

It is also suggested that the following additional clause may be

incorporated in the confirmation letter:

"I / We, as mortgagor (s), had already consented to the Bank, as

mortgagee, realising the security without intervention of the court on
default in payment by me / us".

The above said clause in the confirmation letter to be obtained from

the mortgagor (s) does not amount to written bargain between the parties
since it is not contemporaneous to the deposit of title - deeds nor does it
require registration.

Section 69 (1) (c) of the Transfer of Property Act, 1882 appears as if

an equitable mortgagee cannot resort to the provision for power of sale. In
actuality, an equitable mortgagee is, by means of the confirmation letter or
memorandum executed by the mortgagor, entitled to exercise the power of
sale of the mortgaged property without the intervention of the court even
in the absence of a deed. Section 69 (1) (c) of the Transfer of Property Act
places equitable mortgagee in a special position in that the power of sale is
available to him (equitable mortgagee) without a registered mortgage -
deed.

An amendment to Section 69 (1) (c) of the Transfer of Property Act,

1882 is suggested, by way of clarification, with a saving provision that an
evidence in any form of the consent by the mortgagor or his awareness
about the mortgagee’s power of sale without intervention of the court is
 325

sufficient to confer power of sale on the equitable mortgagee. This

amendment will help clear the ambiguity in respect of equitable mortgagee's

power to sell.

Though the power of sale under Sec 69 (1) (c) of the Transfer of
Property Act can be exercised only when the mortgaged properties are
situated within certain towns, the banker - mortgagees will presently be
benefitted resorting to power of sale without intervention of the court for
those properties situate in those notified towns. Such an act on the part of
the banker - mortgagees will help disburden the courts to a large extent
from adjudicating such mortgage suits which take decades together for
disposal.

The bad debts, euphemistically called non - performing assets, with

the bankers will be considerably reduced in this way. Bankers are, however,
apprehensive of resorting to power of sale of security in the case of
equitable mortgage due to ambiguity in Section 69 (1) (c) of the Transfer of
Property Act.

It is suggested that the stipulation of certain notified towns in ■

Section 69 (1) (c) of the Transfer of Property Act, 1882 should be deleted by
an amendment since such a stipulation does not have any sanctity or
reasonable purpose at the present circumstances.
 326

The last amendment to the Transfer of Property Act, 1882 was made
in the year 1929. Hence the amendments suggested are reasonable in this
globalised environment so as to mitigate the travails of the mercantile

community in India.

An expert panel on legal reforms in the banking sector was appointed

by the Government in March 1999. The panel was headed by
Mr.T.R.Andhyarujina, a senior Supreme Court advocate. The panel has
recommended to the Government that powers be given to banks to have
recourse to securities without going to the courts. The recommendations,
once implemented, would allow banks to recover their dues far more
expeditiously and efficiently24. The constitution of the expert panel on legal
reforms in the banking sector drives home the point that banks are not
merely money lenders but powerful instruments of social change.

The relevant statutes and judicial decisions discussed in detail in this

research work would certainly help the bankers to legally realise the
securities without intervention of the court.

24
The Hindu dt 11th May 2000