Supreme Court Holds Earlier Equitable Charge Defeated Where Bank Failed to Give Notice; Directs Escrow Funds to Appellant Bank

A bench of Justices J.B. Pardiwala and R. Mahadevan heard the civil appeal against the Bombay High Court judgment which had affirmed the DRAT order on competing security interests over a Mumbai flat. The appeal raised the narrow issue whether Central Bank of India’s earlier possession of unregistered agreements created an enforceable charge or equitable mortgage that prevailed over the subsequent mortgage asserted by Cosmos Co. Operative Bank, which held the original share certificate.

The Court allowed the appeal, set aside the High Court order and directed that the recovery proceeds lying in escrow be released to the appellant bank. The bench held that while an equitable mortgage might arise from deposit of documents evincing an intention to create security, such equitable rights were in personam and required adequate notice to later lenders; on the facts the Central Bank had failed to bring the factum of its equitable mortgage to the notice of Cosmos and therefore could not enforce that charge against Cosmos’s recovery. The Court, in its reasoning, observed: “In view of the aforesaid, we have reached the conclusion that the impugned order passed by the High Court is not correct and it deserves to be set aside. In the result the appeal succeeds and is hereby allowed. The impugned Order passed by the High Court is hereby set aside. Since, the respondent no. 1 had failed in bringing the factum of its ‘equitable mortgage’ to the notice of the appellant bank, the respondent no. 1 bank is not entitled to enforce the same qua the recovery proceeds of the appellant bank herein.” The Court also reiterated the settled principle that “a contract of sale … does not, of itself, create any interest in or charge on such property.”

Background The dispute arose after original borrowers obtained a loan from Central Bank around 1989 by depositing unregistered agreements for sale as security, and later obtained a loan from Cosmos in 1998 on the strength of an unregistered agreement and an original share certificate issued by the co-operative housing society. The borrowers defaulted and the Central Bank initiated recovery proceedings before DRT-I, Mumbai; the DRT decreed recovery against borrowers but held that mortgage evidence before it was insufficient. DRAT allowed Central Bank’s appeal on the basis that original title deeds were subsequently placed on record before DRAT, finding the Central Bank’s mortgage valid and prior. Cosmos, which had intervened, challenged priority and the DRAT direction before the Bombay High Court; the High Court found the Central Bank’s earlier mortgage to be prior in time and dismissed Cosmos’s writ petition.

Before the Supreme Court the parties disputed the legal character and priority of the competing security interests. The Court examined Sections 54, 58 and 100 of the Transfer of Property Act, provisions of the Maharashtra Ownership Flats and Apartment Ownership statutes, and precedents including Suraj Lamp and K.J. Nathan. The bench analysed the doctrine of equitable mortgage — its origins in English equity and its recognition in India as a “charge” under Section 100 — and distinguished an Indian mortgage by deposit of title-deeds (recognised under Section 58(f)) from an equitable mortgage under English law. The Court found that Cosmos possessed the share certificate — a document of title — and thus had a legal charge by deposit of title deeds, whereas Central Bank’s security rested on deposited unregistered agreements which constituted an equitable mortgage/charge. Because Central Bank had not given notice of its equitable charge and had not produced material steps to protect or publicise that charge (and because the society had informed Cosmos of no prior encumbrance), the Court held Central Bank’s equitable mortgage was postponable under Section 78 of the Transfer of Property Act and could not be enforced against Cosmos’s recovery proceeds. The Supreme Court declined to admit additional documents sought to be placed on record given the long pendency, and directed the DRT Recovery Officer to disburse the ₹51 lakh held in escrow, with interest, in favour of Cosmos. The Court also directed circulation of the judgment to High Courts, DRTs and DRAT benches. The appeal succeeded and the impugned orders were set aside.

Case Details: Case No.: Civil Appeal No. 1565 of 2025 (@SLP (C) No. 11557/2019) Case Title: The Cosmos Co. Operative Bank Ltd. v. Central Bank of India & Ors. Appearances: For the Petitioner(s): Counsel not specified in the judgment record For the Respondent(s): Counsel not specified in the judgment record