Source: Supreme Court 

Why in News?

A bench of Justice JB Pardiwala and Justice R Mahadevan held that that the mortgage created by deposit of unregistered agreement to sell will not prevail over the mortgage created by deposit of title deeds. 

• The Supreme Court held this in the case of The Cosmos Co-operative Bank Ltd v. Central Bank of India (2025). 

What was the Background of The Cosmos Co-operative Bank Ltd v. Central Bank of India Case?   

• In the present facts there were two banks (mortgages) which granted loans to borrowers for flat purchases. 
• The Central Bank of India (Respondent No. 1) granted a loan based on an unregistered agreement of sale, deposited as security (equitable mortgage). 
• Cosmos Co-operative Bank (Appellant) also granted a loan with share certificates (title deeds) as security (legal mortgage). 
• The High Court in this case gave priority to the equitable mortgage over the legal mortgage. 
• The Appellant challenged the decision on the following grounds:  
  • An equitable mortgage should not be prioritized over a legal mortgage, as legal mortgages hold superior rights. 
  • An unregistered agreement of sale does not create a valid mortgage because it does not transfer title, making the mortgage invalid. 
• The Supreme Court thus, had to consider whether the High Court erred in prioritizing the equitable mortgage only based on its earlier creation. 

What were the Court’s Observations? 

• The Supreme Court made the following observations: 
  • Legal Mortgage Prevails Over Equitable Mortgage: The Supreme Court ruled that a mortgage created by the deposit of an unregistered agreement to sell (equitable mortgage) is subservient to a mortgage created by the deposit of title deeds (legal mortgage). 
  • No Interest Created by Agreement to Sell: Citing Section 54 of the Transfer of Property Act, 1882 (TPA), the Supreme Court emphasized that an agreement to sell does not create any interest or charge on a property. 
  • Equitable Mortgage is Only a Right in Personam: The Court held that an equitable mortgage binds only the parties involved and does not create an enforceable right against third parties or subsequent mortgagees. 
  • Application of Section 78 of the TPA: The Respondent bank (Central Bank of India) failed to issue public notice or create a document for the equitable mortgage, leading to its postponement in priority. 
  • Legal Mortgage Creates a Direct Charge: Unlike an equitable mortgage, a legal mortgage creates a direct charge on the property and transfers a proprietary interest to the lender, making it enforceable in rem. 
  • Deposit of Part-Deeds Insufficient for Mortgage: Unlike English law, under Indian law (Section 58(e) of TPA, 1882), an equitable mortgage requires full title deeds unless unavailable despite best efforts. 
  • Final Ruling: The legal mortgage created by Cosmos Co-operative Bank (Appellant) via deposit of share certificates took priority, and the High Court’s decision favoring the equitable mortgage was set aside. The appeal was allowed in favor of the Appellant. 

What is the Difference Between Legal Mortgage and Equitable Mortgage? 

• Equitable Mortgage: 
  • It is created when there is an intention to mortgage but no legal charge is created on the property. 
  • It is formed by the deposit of incomplete title deeds or documents like an agreement to sell. 
  • It operates in personam, meaning it only binds the parties involved and not third parties. 
  • No actual transfer of title or ownership, only documents are retained by the lender. 
  • Priority rule: Earlier equitable mortgages may have priority over later ones but not over a legal mortgage. 
• Legal Mortgage: 
  • It is created by a formal mortgage deed or deposit of title deeds under Section 58(f) of the Transfer of Property Act, 1882. 
  • It creates a charge directly on the property, giving the lender an enforceable right in rem (against the property itself). 
  • Even if possession or ownership remains with the borrower, the lender retains rights to possession, foreclosure, or sale in case of default. 
  • It is stronger than an equitable mortgage as it conveys an enforceable proprietary interest.