In a significant ruling, the Supreme Court has clarified that a mortgage created by the deposit of title deeds holds priority over one based on an unregistered agreement to sell. This decision came in a dispute between Cosmos Co-operative Bank Ltd. and the Central Bank of India over the first charge on a mortgaged property.
The case revolved around loans granted by both banks—Central Bank in 1989, backed by an unregistered sale agreement, and Cosmos Bank in 1998, secured by the deposit of share certificates. Lower tribunals and the Bombay High Court had upheld Central Bank’s claim, prompting Cosmos to challenge the ruling.
The Supreme Court overturned these findings, emphasizing that an agreement to sell does not create any legal interest in property, as per the Transfer of Property Act. The Court held that a legal mortgage—created through the deposit of proper title deeds—takes precedence over an equitable mortgage, which only binds the involved parties and does not operate against third parties.
Referring to Section 78 of the Transfer of Property Act, the Court pointed out that negligence in securing a mortgage could result in its claim being subordinated to a later, legally valid charge. Since the Central Bank’s loan was backed only by an unregistered sale agreement and lacked actual title deeds, its claim was set aside in favor of Cosmos Bank’s legal mortgage.
With this verdict, the Supreme Court reaffirmed that in property disputes, a legal mortgage—anchored by proper title documentation—prevails over an equitable mortgage, even if the latter was created earlier.