Security Creation

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MORTGAGE AND HYPOTHECATION.



The term mortgage is derived from two French words- „mort‟ (dead)

and „gage‟ (pledge). It means a dead pledge, a thing put in the hands of a creditor.

It is one of the means of creating a „security‟.

„Security interest‟ has been defined in „THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORECMENT OF SECURITY INTEREST ACT, 2002 ‟ as a right, title and interest of any kind,created in favour of a secured creditor and includes any mortgage,charge, hypothecation, assignment other than those specified inSection 31.

Section 58(a) 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 giverise to a„pecuniary liability.



Simple mortgage (cl. b).

Mortgage by conditional sale (cl. c).

Usufructuary mortgage (cl. d).

English mortgage (cl. e).

Mortgage by deposit of title-deeds. (cl. f). Anomalous mortgage (cl. g).

Mortgage is essentially a form of security for a debt, this meansthat debt must subsist. Any document by which debt or liability

is discharged cannot therefore be a mortgage.

The Rule of Damdupt , which is an equitable rule, is applicableto cases of mortgage governed by the Transfer of Property Act.



• The validity of a mortgage is not dependent upon the passing of the consideration then and there. As soon as the deed is executeda transfer of an interest takes place.

•DESCRIPTION OF PROPERTY: there should be an accuratedescription of the property so as to render it capable of identification.

•THE PURPOSE OF A MORTGAGE: A mortgage, like every othercontract, requires consideration , which may be a loan, a debt or

the performance of an engagement which may give rise to apecuniary liability.

•LOAN: This is one of the purposes for which a mortgage isexecuted by a borrower.

•The loan may be “advanced ” or “to be advanced ” when themortgage contains a covenant by the lender to advance money at afuture date.



DEBT: The debt may be already due and as such an “existing debt , or itmay be to secure a liability which may arise in future and thus a “future debt” .

It includes a contingent liability.

PERFORMANCE OF AN ENGAGEMENT, ETC: A mortgage may beexecuted by a person as a security for the performance of a contract orthe fulfilment of a promise.

PRINCIPAL MONEY AND INTEREST- These are together known asmortgage-money, to which the mortgagee is entitled till the date of realization or actual payment at the time of the reconveyance.

DATE OF MORTGAGE DEED: It is the date of execution and not the dateof registration that counts.



A mere agreement to mortgage does not constitute either a mortgageunder S. 58 or charge under S. 100.

S. 58(b) : SIMPLE MORTGAGE.

No possession is delivered.

There is a personal covenant to pay.

An agreement, expressed or implied, that in the event of failureto pay

i. The mortgagee shall have the right to cause that mortgagedproperty to be sold, and

ii. The proceeds applied in payment of the mortgage-money.

Two fold security- personal security and security of theproperty.



POSSESSION. It is neither given nor claimed.

A simple or an equitable mortgagee have no legal right to take

possession of the mortgaged property or to claim security in the rentsand profits accruing from that property.

PERSONAL OBLIGATION. In every simple mortgage, unless there is a pecific covenant to thecontrary, a personal obligation to pay debt exists.

SALE

Besides the right to obtain a personal decree against the mortgagor, themortgagee‟s other remedy is to obtain a decree for judicial sale.

Under the CPC, O. 34, rr. 4 and 5, the power of causing the property tobe sold being the essence of the transaction, it need not be expresslystated in the deed and will be implied.



Remedies of a simple mortgage.

The mortgagee has concurrent remedies. He may obtain a decreeon the personal covenant or a decree for judicial sale which hemust work out in execution proceedings, or adopt both remedies.

No right of foreclosure.

Implied right of sale of the mortgaged property on mortgagor‟sfailure to pay the mortgage money.

RECEIVER- A simple mortgagee is not entitled to be a receiver.

SUIT FOR REDEMPTION- A suit to redeem a simple mortgage isregulated by Order 34, rules 7 and 8 of the CPC, 1908.



The mortgagor ostensibly sells the mortgaged property on the condition

i. that the sale shall become absolute on default of payment of themortgage money on a certain date, or

ii. that the sale shall become void on such payment being made, or

iii. that the buyer shall transfer the property to the seller on such paymentbeing mad.

It is this class which gave rise to a difficulty in distinguishing atransaction of sale from a mortgage.

The proviso of clause (c) to S. 58 by Act 20 of 1929 so as to set at restthe conflict of decisions.



A mortgagor by conditional sale must be evidenced by one documentwhereas a sale with a condition of re-transfer may be evidenced bymore than one document.

It must contain a condition that on default of payment of mortgagemoney on a certain date, the sale shall become absolute, or on acondition that on the payment being made, the buyer shall transfer theproperty to the seller.

The intention needs to be gathered from the language of the deed andthe surrounding circumstances.

This proviso is not retrospective.

In a mortgage, the debt subsists and the right to redeem is reservedthereby.

The essential feature of this mortgage is that on the breach of thecondition of repayment, the contract executes itself and the transactionis closed and becomes one of absolute sale without any further act of

the parties or accountability between them.



Requirements :

the existence of a debt,

the long period of repayment,

the continuance of the guarantor in possession,

a stipulation for interest on repayment,

a price below the true value,

a contemporaneous deed stipulating for reconveyance.

Where condition for reconveyance is not contained in the sale deeditself but in a separate document, the transaction cannot be regardedmortgage by conditional sale.



DIFFERENCE BETWEEN CONDITIONAL SALE AND A SALE WITH AN

OPTION TO REPURCHASE:

Mortgage- the relationship between the debtor and the creditor subsistsand the right to redeem remains with the debtor.

The debt subsists.

A stipulation for the payment of interest on repayment indicates a

mortgage.

The right of redemption and the right of foreclosure are co-etensive. Theabsence of such a right of mortgagee could only mean that it is aconditional sale.

Sale with an option to repurchase: It is an out and out sale whereby the owner transfers all his rights in theproperty in the purchaser reserving a personal right of repurchase.

The right to redeem is not reserved .



Possession-a. Is delivered

b. Or agreed to be delivered expressly or by implicationc. And to be retained till payment of the mortgage-money.

The rents and profits thereof are :-

a. to be received, andb. Appropriated

in lieu of :-a. Interest, orb. mortgage-money, orc. partly interest, ord. partly mortgage money.e. No time is fixed and there is no personal covenant.d. Conditions necessary-



•The mortgagee should either deliver possession or expressly or byimplication bind himself to deliver possession of the mortgaged property tothe mortgagee and

•The mortgagor must authorize the mortgagee to retain such possessionuntil payment of the mortgage money and to receive the rents and profitsaccruing from the property in lieu of interest of money or in payment of themortgage money.

•If the mortgagee cannot retain the possession of the mortgaged property

till the payment of the mortgage money, the mortgage would not beusufructuary mortgage.

•The only right left with the mortgagor is the right of redemption.

•The distinguishing feature- in lieu of payment of interest or adjustment of the whole part of the borrowed amount, the mortgagor permits themortgagee to enjoy the rents of a specified immovable property anddelivers the possession thereof, to the mortgagee.

•Where mortgage is a combination of simple and usufructuary mortgage,

decree for sale of the mortgaged property can be awarded by the court.



PERSONAL COVENANT.

A usufructuary mortgagee cannot have a personal remedy against themortgagor, yet there is no rule of law that if the mortgagor is so minded, hemay not also give his usufructuary mortgagee the power to sue him

personally or to sell the land, or both, at any time.

Unless there is a personal covenant to pay, a suit or recovery of amount dueon the mortgage does not lie.

No fixed time for repayment.

It is open to the mortgagor to pay off the mortgage or not as he pleases.

No stipulation in terms that the mortgagee is put in possession until thepayment of the mortgage-money- such a mortgage would ne anomalous.

An intention to deliver possession in present or future is one of theessentials for an usufructuary mortgage.

The requirements of law are satisfied if the mortgagor delivers suchpossession as the property is capable of: actual elivery of possession is notnecessary.

On dispossession, his remedy lies under Sec. 68 of the Transfer of PropertyAct.



On being deprived of his possession by a third party the mortgagee‟s onlyright is to sue to recover possession.

A usufructuary mortgagee is not bund to sue for possession. If he isdisturbed in his possession by the mortgagor or those claiming against him,

he is entitled to sue for money.

When he is kept out of possession by the mortgagor, he is entitled torecover the rents and profits received by the mortgagor during that period.

The mortgagee is entitled to remain in possession till the debt is satisfiedfrom the usufruct and it is not necessary for him to sue for the amount dueto him.

REDEMPTION SUIT.

•A suit for redemption would be under Orders 34, rules 7 and 8.

•The right of redemption under mortgage deed can come to an end but onlyin a manner known to law.



•It can take place by contact between the parties or by a decree of the courtor by a statutory provision which debars the mortgagors from redeemingthe mortgage

•

The mortgagor‟s right of redemption is exercised by the payment ortender to the mortgagee at the proper time and at the proper place, of themortgage money.The mortgagee cannot escape from his obligation bybringing the equity of redemption to sale in execution of decree onpersonal covenant.

REMEDIES OF THE USUFRUCTUARY MORTGAGE. •Under Section 67 such a mortgagee cannot as such sue either forforeclosure or for sale.

•Section 109 of the Transfer of Property Act entitles the usufructuarymortgagee includes his right to possession of such property and the right

to receive rents and profits accruing fro it.

•Therefore, when a tenant commits nuisance, the usufructuray mortgageecan evict the tenant from the tenanted premises.



A transaction is an English mortgage where :-

i. The mortgagor binds himself to repay the mortgage-money on a certain

dateii. Transfers the mortgaged property absolutely to the mortgagee

Subject to the proviso

a. That the mortgagee will retransfer it to the mortgagor

b. Upon payment of the mortgage money as agreed.

One of the essential features of English mortgage is that the mortgagorhas to bind himself to pay the mortgage money on a certain date.

Two elements are essential-

i. A covenant to repay, and

ii. A transfer of property.

PERSONAL COVENANT-

Being the essence of an English mortgage, the covenant is alwaysexpressed. Its omission will render the mortgagor liable by implication.



REMEDY OF AN ENGLISH MORTGAGE. •Prior to the Amending Act, 20 of 1929, he could foreclose or sell within 60years.

•

Now, being left with the remedy by sale only, the question whether Section147 will apply, will have to be determined in view of the observations of the Judicial Committee.

SECTION 58(f) : MORTGAGE BY DEPOSIT OF TITLE-DEEDS .

•Also known as Equitable Mortgage.

•There is deliver to the creditor (or his agent), documents of title toimmovable property, with intent to create a security thereon.

•It can be created in such towns by deposit of title deeds, even though the

property is outside those towns.

•The object of the Legislature in providing for this kind of mortgage is togive facility to the mercantile communities in cases where it may benecessary to raise money all of a sudden before an opportunity can beafforded of preparing the mortgage deed



•It can be created by mere deposit of title deeds without any writtencontract between the parties but once the contract or bargain as it is called,between the parties is reduced to writing it cannot become effective unless

the writing is registered.

•The intention that deeds deposited should be security for the debt shouldbe present.

•In order to prove the existence of an equitable mortgage, the following

requisites are necessary-

•There must be a debta) Delivery must be by a debtor or his agentb) Delivery must be in towns mentioned in the Actc) Delivery must be to the creditor or his agent

d) Delivery must be of documents of title to immovable property, ande) Delivery must be with the intent to create a security thereon.

•The debt may be an existing or a future debt.

•The mere fact of deposit does not raise the presumption that such an

intention exists.



FORMS OF EQUITABLE MORTGAGES. •The most common and the simplest way is by way of delivery of deeds tothe debtor or to his agent.•A promissory note is taken from the debtor accompanied with the depositand the creditor on the following day sending to the debtor a list of deeds

deposited.

•A third method is for the solicitor to create evidence of the deposit byrecording what takes place, when the promissory note is passed and thedeeds handed over.

•Another form is memorandum, in which case, are should be taken of registration.

•INDIAN COMPANIES ACT, VII OF 1913- Under Section 109 it is necessary tofile with the Registrar particulars of mortgage by deposit of title deedswhether or not it is accompanied by a memorandum of deposit.

•STAMP DUTY- on an equitable mortgage, where the amount is repayable ondemand or after more than three months from date of instrument, dutywould be according to Article 6 of the Stamp Duty Act, 1899.

•If the loan or debt is repayable not more than three months from the dateof the instrument, Article 13(h) would apply.



Where the sale deed transferring property was registered andsimultaneously an agreement to re-convey the property was executed,

possession was also transferred, the transaction was held anomalousand not sale.

A combination of simple and usufructuary mortgage is an anomalousmortgage.

The rights and liabilities of the parties to such a mortgage are to bedetermined by their contract, as evidenced in the mortgage-deed andfailing that, by local usage.

In such a mortgage, the possession may or may not be delivered.

The mortgagor‟s remedy is by sale, and also foreclosure, if the termsof the mortgage permit it.

Includes :

A simple mortgage usufructuary, and



•Simple mortgage usufructuary- In this, the mortgagee is in possession andpays himself the debts out of the rents or profits and there is also apersonal undertaking as well as a right to cause the property to be sold onthe expiry of the date fixed for payment.

•Mortgage usufructuary by conditional sale- In this, the mortgagee is inpossession as a usufructuary mortgagee for a fixed period and if the debt isnot discharged at the expiry of the period, he gets all the rights of amortgagee by conditional sale.

•ENFORCEMENT REMEDIES.

•The mortgagor‟s right to redeem as conferred by Section 60 is co - extensive with the mortgagee‟s right to foreclosure or sue for sale as given by Sec 67.

•A decree for foreclosure or sale is available only in the „absence of a contract to the contrary‟.

•A mortgagee cannot acquire any right except what is given by the mortgage deed or if he has pre-existing rights.



RIGHT OF FORECLOSURE: •Foreclosure is the process by which the mortgagor is deprived of hisinterest in the mortgaged property.

•SIMPLE MORTGAGE- Remedy by sale not by foreclosure. This was so under

the old section

•MORTGAGE BY CONDITIONAL SALE- Foreclosure and not sale. The remedywas the same under the old section.

•USUFRUCTUARY MORTGAGE- No foreclosure or sale. Under the old sectionthe law was the same.

•ENGLISH MORTGAGE- Sale only and not foreclosure. Under the old sectionthe remedy was both foreclosure and sale.

•

EQUITABLE MORTGAGE-Sale only not foreclosure. There was no expressprovision under old Sec 59.

•ANOMALOUS MORTGAGE- Ordinarily, sale; foreclosure allowed, if it isprovided by terms of the mortgage.



RIGHT TO APPOITEMENT OF A RECEIVER .

•PROCEDURE OF APPOINTMENT.

a. Under sub-sec. (2), the mortgagee can appoint as receiver

b. (i) a person named in the mortgage deed and able and willing to act assuch, or

c. (ii) otherwise any person to whose appointment the mortgagor agrees.

d. Failing such agreement the mortgagor can apply to the court for theappointment of a receiver.

•THE POSITION OF THE RECEIVER.

o Under clause (3), the receiver is deemed to be the agent of themortgagor.

o Under Order 40, rule 1 of CPC, 1908, the court may appoint a receiver if it appears just and convenient.



A “mortgage-deed” [S.2(17)] would be liable to stamp duty only if iteffected a transfer valid in law and not only that it purported to effect

a transfer.

Sec. 17- Instruments executed in India- all instruments chargeablewith duty and executed by any person in India shall be stampedbefore or at the time of execution.

The Stamp Act is made applicable to both movable and immovableproperties, while Sec 58 refers to mortgages relating to immovable property only.

The Income Tax Act, 1961. CHAPTER XXIII, SECTION 281.

If an assesse creates a charge on or parts with his possession duringthe pendency of any proceeding, transfer shall be void as against anyclaim in respect of any tax or any other sum payable by the assessee.



THE COMPANIES ACT, 1956. SECTION 293 (1) (a) AND

(d) :

RESTRICTIONS ON THE POWER OF THE BOARD.

The Company needs the permission of the Board, in a General Meeting,

before :

(a) Before it sells, leases or otherwise disposes the whole or part of theundertaking

(d) To borrow money after the commencement of the Act, where the moneys

to be borrowed, along with the moneys already borrowed will exceed theaggregate of the paid-up capital of the company.



Chapter III SECTION 13- ENFORCEMENT OF SECURITY INTEREST.

Notwithstanding anything contained in section 69 or section 69-A of the Transfer of Property Act,1882, any security interest created infavour of any secured creditor may be enforced, without theintervention of the Court or Tribunal, by such creditor in accordancewith the provisions of this Act.

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