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Report No. 178

12. Proposed sections 89B, 89C and 89D Mortgage by deposit of title deeds: Intimation to registering officers by mortgager and mortgagee. Separate register to be maintained and provision for making rules. Offence under the Registration Act, 1908 created.-

Under the provisions of section 58(f) of the Transfer of Property Act a mortgage can be created in regard to immovable property by mere deposit of the title deeds if the parties so intend, in the towns specified in the said section as also in other towns which may be identified by the State Government by notification in the official Gazette.

A mortgage by deposit of title deeds does not require to be in writing. It is a deposit of title deeds with intent to create a mortgage and not a mere deposit of title deeds for safe custody or for inspection. Parties usually prepare a memorandum recording the past transaction of deposit with intent to create a mortgage and the memorandum too does not require registration unless it is considered by the parties to be the only repository and appropriate evidence of the agreement.

If the memorandum describes that a deposit of title deeds has been made, that is to say, as a past event and not one made under the memorandum, it will require no registration. Of course, there has been considerable case law upon the language employed by parties while preparing the memorandum. We are here not concerned with those aspects.

In as much as a mortgage by deposit of title deeds does not require to be in writing, it is sometimes not possible for a transferee from the same mortgagor to know if there has been a mortgage created earlier by deposit of title deeds. It is true that every purchaser is supposed to insist upon looking into the original title deeds of his vendor but in some cases, the vendor may represent to the purchaser that the title deeds are lost or are not immediately available.

There may also be cases of mortgage of ancestral property for which sometimes there are no title deeds as such and the only documents that may be available and may be deposited are the tax receipts or plans etc. In law, in such circumstances, a deposit of even such documents is treated as sufficient to create a mortgage under Section 58(f). In any event, it is proposed that there must be some public evidence of a mortgage for deposit of title deeds to prevent deliberate suppression of facts and to prevent fraud and misrepresentation.

Take the case of a vendor who enters into an agreement of sale or executes a sale-deed. He may later come forward with a case of an anterior deposit of title deeds with another person which may be wholly untrue. Such a plea may be collusive but the purchaser under the agreement or sale deed is put to the trouble of raising an issue as to the genuineness of the so called deposit of title deeds and as to whether it has not been made subsequent to the date of the agreement or sale-deed..

In order to have an authentic record of the factum of deposit of title deeds by the owner with an intention to create a mortgage on a particular 86 day, it is necessary to provide a mechanism by which it can be verified whether the deposit of the title deeds has in fact been made on the date upon which it is alleged to have been made. The procedure must enable anybody proposing to deal with such a person to know the date, description of property etc. in relation to such a mortgage by deposit of title deeds. A provision for compulsory registration of every memorandum of deposit of title deeds may seriously interfere with the freedom attached to commercial transactions and we do not propose such a course.

We find that the procedure prescribed under Section 89 of the Registration Act, 1908 can be of immense help. That section requires copies of certain loans by public authorities granted under mortgage or otherwise or copies of sale-certificates to be sent to Registering Officers to be filed in Book I. Further, section 57 of the Registration Act provides for inspection and lays down the procedure for obtaining copies of the entries in Book I.

Question is whether it is possible to make a provision on the lines of Section 89 of the Registration Act of intimation of the deposit to the registering officers which can be filed in Book I because Book I is open for public inspection and copies of entries can also be obtained. Question also arises whether such intimation should be before or after the deposit of title deeds.

It is important that any procedure that may be prescribed should not have adverse effect on commercial transactions which take place every day where they involve equitable mortages. Further, there should be little scope 87 for allowing State Governments to levy normal stamp duties which are otherwise leviable in the case of a mortgages reduced to writing. In fact, the transaction of mortgage by deposit of title deeds has been invented to keep the transaction free from such problems.

Apart from section 89 of the Registration Act, there is another provision which can be useful. There is a procedure of public notice as to the pendency of suit or proceeding, adopted under Bombay Act 14/1939 for purposes of Section 52 of the Transfer of Property Act. The Bombay Legislature realized that sometimes parties purchase properties which are under litigation. The seller who is a party to the case does not disclose the pendency of the litigation.

The legislature, therefore, devised a procedure of registration of a public notice regarding pendency of case before any transfer pendente lite is made. In view of that amendment, transferees pendente lite in Bombay can have knowledge of the pendency of a suit from registration offices by virtue of the registration of the notice or information sent to registering officers by any party to the suit. The Bombay Act of 1939, no doubt, made the registration of the public notice optional. If such notice is not given and registered, the purchaser pendente life does not suffer the disability referred to in Section 52 that his sale is subject to the result of the suit.

If we prescribe that notice of a proposed deposit to be registered before a registering officer prior to the making of a deposit, there is every chance of State legislatures, which are today in great financial need, imposing the stamp duties as leviable in case of a mortgage in writing. That, 88 as already stated, will seriously impair the very purpose of a mortgage by mere deposit of title deeds in commercial transactions. It is, therefore, necessary that public notice must not be immediately prior to a mortgage transaction. It should be after the creation of the mortgage. A time limit of, say, thirty days can be prescribed within which a public notice of a previous equitable mortgage must be sent to the registering officers and filed in Book I.

The next question is as to what will happen if the mortgagor fails to register a public notice of that deposit, within the time prescribed, after the mortgage by the title deeds has been created? The mortgagor may indeed enter into other transactions within the thirty days with third parties without informing them about the earlier mortgage. Should it be then stated that any such transferees within that prescribed period, without notice of the mortgage, will be protected and that such subsequent transfers will not be subject to the mortgage?

Or should any such transaction entered into after the date of the mortgage and before registration of the public notice be void? Or should non-registration of public notice be made punishable under the Act? There are the three alternatives available before us.

The first alternative of enabling a subsequent transferee without notice to ignore the mortgage will, in the opinion of the Commission, seriously affect commercial transactions and will be a serious deviation from existing law. If a time limit is imposed and it is said that fresh transactions entered into in that period by the mortgagor will not be subject to the mortgage, then 89 that may indeed encourage unscrupulous mortgagors to enter into fresh transactions collusively to defeat the anterior mortgage by deposit of title deed entered into (say) with Banks or Financial Institutions.

If we make the subsequent transactions to be dependent upon the bona fides of the purchaser and want of actual notice, we will be compelling every mortgagee to raise an issue that the subsequent transfer was not bona fide or that the transferee had notice of mortgage. That will lead to lot of litigation. Therefore, the first alternative is out of question.

We are then left with the remaining two alternative.- either to make the subsequent transactions void or to penalize the transferor for suppression of the fact relating to the anterior mortgage.

In reality, we are torn between our desire to preserve the even flow of commerce of which the mortgage by deposit of title deeds is an important facet and our desire to protect subsequent transferees who have no knowledge of the earlier mortgage. Which of these is to have priority is the question?

In the opinion of the Commission, the cause of protecting commerce has to outweigh the interests of individual persons like subsequent transferees. At the same time if a subsequent transferee has been roped into a transaction by an unscrupulous seller, who has earlier mortgaged his property, the seller should not be allowed to go scot-free, if he had not put the subsequent transferee on notice.

The Commission is, therefore, of the view that in the context of the peculiar problems arising out of the present state of law of total absence of public notice in the case of mortgage by deposit of title deeds, the proper course is to combine the second and third alternatives as follows. The transactions, if any, entered into after the date of the mortgage by deposit of title deeds and before the expiry of the time prescribed (we proposed thirty days) for registration of the public notice must be declared void and at the same time the seller must be made liable for imprisonment and there must also be a provision that the subsequent transferee will be entitled to get back his monies with interest and also to monetary compensation from his unscrupulous vendor.

It is, therefore, proposed to introduce Section 89C into the Registration Act in Part XVI requiring the registration of a public notice in Book No. 1 within thirty days of the mortgage and also to provide that transactions subsequent to the deposit and before registration will be void but that the purchaser will be entitled to get back whatever money he has paid with interest and also to compensation. It is also proposed to add Section 89 D to enable rules to be made in this behalf.

It is also proposed to introduce Section 82A in Ch. XIV of the Registration Act relating to 'Penalties' to the effect that any subsequent transaction entered into by a mortgagor with a third party, without a recital 91 as to the mortgage by deposit of title deeds, should be punishable with imprisonment which may extend up to three years but subject to a minimum sentence of imprisonment for one year apart from fine.

The proposed Section 89B, 89C and 89D are as follows:

"89B. Notice to be sent to registering officers by mortgagor after creation of mortgage by depositing title deeds and provision for compensation in favour of subsequent transfere.- (1) Every person who has mortgaged immovable property by way of a mortgage by depositing title deeds under clause (f) of section 58 of the Transfer of Property Act, 1882 shall within thirty days from the date of the mortgage, file a notice of intimation of his having so mortgaged the property, giving details of his name and address, name and address of the mortgagee, date of mortgage, amount received under the mortgage, rate of interest payable, list of documents deposited, and description of the immovable property as detailed in section 21, before the registering officer within the limits of whose jurisdiction the whole or any part of the property is situated and the said officer shall file the same in his Book I.

Provided that if the property so mortgaged falls within the jurisdiction of more than one registering officer, the procedure specified in this sub-section shall be followed in respect of the property within the jurisdiction of each such officers.

(2) If the person who has mortgaged the property as aforesaid fails to file a notice within thirty days as stated in sub-section (1) before the registering officer or officers,as the case may be, and enters into any transaction in relation to or affecting the immovable property which is the subject matter of the mortgage, with a third party; such a transaction shall be void and the third party shall be entitled to refund of any amount paid by him together with interest at twelve percent 92 from the date of payment and also to compensation for any damages suffered by him , from his transferor.

(3) The amount recoverable by such transferee as specified in subsection (2) shall be a charge on the interest of the mortgagor, in the mortgaged property.

The proposed section in the Registration Act for failure to register a notice shall be as follows:

"Section 89C: Punishment for failure to register notice under sec.89B: Any person who failed to file a notice under section 89B before the registering officer within the period specified in that section; shall be punishable with imprisonment for a period which may extend up to three years but subject to a minimum punishment of imprisonment of one year together with fine."

We also propose that Section 89 D be introduced to enable rules to be made for filing of documents and notices contemplated under section 89A and 89B as above-stated.

"89C. Power to make rules for filing of true copies of documents and notices referred to section 89A and 89.- (1) The State Government may by notification in the Official Gazette, make rules for all purposes connected with the filing copies of documents or notices referred to section 89A and 89B, in the appropriate book under this Act.

(2) In particular and without prejudice to the generality of the foregoing power, such rules may provide fo.-

(a) the manner in which notices or true copies of documents shall be prepared; and

(b) the manner of filing the notices or true copies.

(3) Every rule made under this section shall be laid as soon as may be after it is made, before each House of the State Legislature where it consists of two Houses or where such Legislature consists of one House, before that House."

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