In a landmark ruling, the Supreme Court of India in The Cosmos Co-operative Bank Ltd. v. Central Bank of India & Ors. (Civil Appeal No. 1565 of 2025) has held that a mortgage created through the deposit of an unregistered agreement of sale cannot take precedence over a mortgage created through the deposit of valid title deeds. The judgment, delivered by Justice J.B. Pardiwala and Justice R Mahadevan, clarifies the principles governing equitable mortgages and the enforceability of security interests in banking transactions.
Background of the Case
The case stems from a dispute between Cosmos Co-operative Bank Ltd. (Appellant) and Central Bank of India (Respondent No. 1) over the priority of charge on a property mortgaged by a set of borrowers.
The borrowers had initially taken a loan from Central Bank of India in 1989 by depositing an unregistered agreement of sale as security. Subsequently, they availed another loan in 1998 from Cosmos Co-operative Bank Ltd., this time securing it by depositing the share certificate of ownership of the flat issued by the cooperative housing society.
When the borrowers defaulted on their repayments, both banks initiated recovery proceedings before the Debt Recovery Tribunal (DRT), Mumbai. The DRT ruled in favor of the Central Bank of India, granting it the first charge over the property. Cosmos Bank appealed to the Debt Recovery Appellate Tribunal (DRAT), which upheld the DRT’s decision. The Bombay High Court also affirmed the DRAT’s ruling. Aggrieved by this, Cosmos Bank moved the Supreme Court of India.
Legal Issues Involved
Whether an unregistered agreement of sale can constitute a valid mortgage under the Transfer of Property Act, 1882.
Priority of charge between two banks where one had an unregistered agreement of sale and the other had a valid title document.
The legal effect of an equitable mortgage created by the deposit of documents.
Applicability of principles of equity in determining enforceability of mortgages.
Observations and Decision of the Supreme Court
Justice J.B. Pardiwala, delivering the judgment, made several crucial observations while interpreting Sections 54, 58, and 100 of the Transfer of Property Act, 1882 and Maharashtra Ownership Flats Act, 1963:
An unregistered agreement of sale does not create any legal right, title, or interest in immovable property.
The Court reaffirmed its ruling in Suraj Lamp & Industries Pvt. Ltd. v. State of Haryana [(2012) 1 SCC 656], which held that an agreement to sell does not itself create a charge on the property.
A mortgage created through the deposit of valid title deeds (such as share certificates) takes priority over a mortgage created through an unregistered agreement of sale.
The Court emphasized that mortgage priority is determined by legal enforceability and not merely by the chronological order of loan sanctioning.
Equitable mortgages must be based on valid title documents.
The Court noted that an equitable mortgage is created when the borrower delivers original title deeds to the lender as security. A mere unregistered agreement does not fulfill this requirement.
A contract for sale does not by itself create any interest in or charge on immovable property.
Referring to Bank of India v. Abhay D. Narottam [(2005) 11 SCC 520], the Court reiterated that only a registered sale deed or a valid title document can create enforceable mortgage rights.
Key Quotes from the Judgment
Justice Pardiwala made strong observations regarding the nature of mortgages and their enforceability:
“A contract for sale of immovable property does not by itself create any interest in or charge over such property. This principle is enshrined in Section 54 of the Transfer of Property Act and has been upheld by this Court repeatedly.”
Further, he stated:
“Where a borrower willingly deposits title deeds as security for a loan, it is essential that such documents legally transfer an interest in the property. A mere agreement of sale, if unregistered, does not satisfy this requirement.”
Final Ruling
The Supreme Court overturned the Bombay High Court’s ruling and held that Cosmos Co-operative Bank Ltd. had the first charge over the property. It ruled that:
The mortgage in favour of Cosmos Bank, created through the deposit of a valid title deed (share certificate), was legally enforceable and took precedence over the mortgage created through an unregistered agreement of sale in favor of Central Bank of India.
The order of the High Court and DRAT was set aside, and Cosmos Bank was granted the right to recover its dues ahead of Central Bank of India.
