Legality of Second Mortgage during Subsistence of First English Mortgage

The provisions of Sections 81, 82, 91 and 94 of the TP Act clearly recognize the concept of second mortgage and are not excluding English mortgage from the concept of second mortgage

In a typical project financing, the borrower company is required to avail of financial assistance from the lender(s) more than once till completion of the project. It is common practice among the lenders to obtain mortgage in English form over the immovable properties of the borrower company as security for the financial assistance so advanced. Since the English mortgage as defined in the Transfer of Property Act, 1882 ("TP Act") involves transfer of the mortgaged property absolutely to the mortgagee, very often a question arises as to whether during the subsistence of the first English mortgage, the borrower company continues to have any legal rights in the property so as to create a second mortgage.

Section 58 of the TP Act defines the expressions "Mortgage" and "English mortgage" as follows:

"(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 give rise to a pecuniary liability".

"(e) English mortgage - Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage."

Section 58 speaks of transfer of an interest by the mortgagor. Thus, it implies that the mortgager retains some bundle of rights relating to the mortgaged property and does not divest himself of the entire rights relating to the mortgaged property. It, therefore, follows that this principle would apply to every kind of mortgage specified in the TP Act, including the English mortgage. If it were not so, certainly the Legislature would have carved out an exception in respect of the English mortgage in the definition of "mortgage". Accordingly, notwithstanding the use of the expression absolute transfer in the definition of "English mortgage", the English mortgage has to necessarily fall within the (general) definition of "mortgage". Thus, the expression absolute transfer has to be read together with the definition of "mortgage" and when so read, it will mean that even in English mortgage, the mortgagor would retain some interest in the property with himself.

In this connection, it is noted that the commentary on section 60 of the TP Act by Mulla (10th Edition Pages 634, 636 and 637) observes as follows:

(i) The mortgagor in Indian law is the owner who had parted with some rights of ownership, and the right of redemption is a right which he exercises by virtue of his residuary ownership to resume what he has parted with. The section affirms a right of redemption in all mortgages.

(ii) The section is not prefaced by any such

words as "in the absence of a contract to the contrary". The right of redemption is, therefore, a statutory right which cannot be fettered by any condition which impedes or prevents redemption.

(iii) The right to redeem follows the interest of the mortgagor, and can be exercised by him and also by those taking the whole of his interest, whether by assignment inter vivos, or by devolution on death.

Attention is invited to the following observations of the Hon. High Court of Calcutta in Fala Krista Pal and Ors. vs. Jagannath Marwari and Ors. (AIR 1932 Cal 775):

"The definition of an English mortgage, as given in the Transfer of Property Act, Section 58, Clause (e) must be read subject to the definition of a mortgage as given in clause (a) of that section and consequently, an English mortgage in India can hardly be regarded as the transfer of the entire estate of the mortgagor to the mortgagee… In our opinion, therefore, it is not easy to say of an assignment by way of an English mortgage in India executed by a lessee that the whole of his estate passes under the mortgage to the mortgagee".

In this context, it is worthwhile to examine the provisions of section 54 of the TP Act which defines the expression "sale", as a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. In the commentary on section 54 of the TP Act by Mulla (10th Edition, page 448), the learned author has observed as follows;

"The definition indicates that in order to constitute a sale, there must be transfer of ownership from one person to another, i.e. all rights and interests in the properties which are possessed by that person are transferred by him to another person. The transferor cannot retain any part of his interest or right in that property, or else it would not be a sale".

This has to be read in the context of definition of "mortgage" which talks only of transfer of interest in immovable property in favor of the mortgagee. Hence, it clearly shows that mortgage of every kind, including English mortgage, cannot be comparable to "sale" which involves complete divestments by the seller of his interest in the property. In fact, if the English mortgage were to be interpreted as depriving the mortgagor of his entire interest in the mortgaged property, the same would amount to a sale. In this connection, attention is invited to the decision of the Privy Council in Ram Kinkar Banerjee vs. Satya Charan Srimani and Ors. (1939 41 Bom LR 672). The Privy Council while deciding on questions relating to the nature of interest of the lessee, has observed as follows:

"By Indian law, the interest which remains in the mortgagor is a legal interest and its retention may therefore prevent the whole of the mortgagor's interest from passing to the mortgagee – a result which would not follow if an equitable interest only were retained… Section 54, which deals with Sale, speaks of a sale as a transfer of ownership as opposed to the transfer of interest spoken of in Section 58(a) in the case of a mortgage, and though an interest may be absolute, the word, particularly when used in opposition to ownership, is more appropriate to a limited right".

The next question that arises is as to the nature of the interest in the mortgaged property which is retained by the mortgagor who has executed mortgage in English form. The answer to this question is to be found within the definition of the English mortgage itself. It has to be noted that the definition of English mortgage contemplates that the mortgagee would retransfer the mortgaged property to the mortgagor upon payment of the mortgage money as agreed. Thus, the right to have the property retransferred upon payment of mortgage money is the right of the mortgagor, which right has been specifically provided for in section 60 of the TP Act. Thus, the legislation itself has created a right in favor of the mortgagor which is the interest retained by him in the mortgaged property. Hence, it is clear that the mortgagor is not completely divested of his interest in the property despite the use of the expression "absolute transfer" in the definition of the English mortgage.

It is well settled that an interest in immovable property itself amounts to immovable property. (Please see Sri Tarkeshwar Sio Thakur Jiu vs. Dar Dass Dey & Co. and Ors. (AIR 1979 SC 1669)).

In Ram Kinkar Banerjee and Ors. Vs. Satya Charan Srimani and Ors. ibid, the Court has observed as follows:

"The Indian mortgagor, however, retains some rights though the English rules of equity do not apply. He retains a right to a re-conveyance of the land and a right to transfer such right by way of sale or second mortgage (see Sections 81, 82, 91 and 94), and this right in India is a legal right."

These cases clearly support the proposition that any mortgagor can transfer his residual interest in the mortgaged property either by sale or second mortgage.

The provisions of sections 81, 82, 91 and 94 of the TP Act clearly recognize the concept of second mortgage and are not excluding English mortgage from the concept of second mortgage. This lends further support to the proposition that even in English mortgage, the mortgagor continues to retain some interest in the mortgaged property which can enable him to create second mortgage in any form recognized by the TP Act.

Thus, it can be concluded that even in English mortgage, the mortgagor retains with him some interest in the property, namely, right to redeem the mortgage; and such right of redemption can be transferred by him either by way of sale or another mortgage in any form permitted by the TP Act.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.