Tautological Aspect of English Mortgage In India

Like simple mortgage, an English mortgage can also be enforced by sale, but it bears certain additional features as well. An important consequence resulting from the creation of an English mortgage is the validity of the power of extra judicial sale in certain circumstances. In default of money a mortgagee has the right to sell the mortgaged property without the intervention of the Court and it has been enumerated in section 69 of the Transfer of Property Act, 1882.
The legislature desired to create a dividing line between mortgages by Conditional Sale and English Mortgages. The former was meant primarily for those traditional Indian mortgages, which were framed as ostensible transfer of ownership.

The latter was meant for non-traditional mortgages framed as absolute transfers of ownership. Section 58(e) of the Transfer of Property Act speaks of an absolute transfer of ownership to the mortgagee in the case of English mortgage whereas the definition states that the mortgage is a transfer of interest in the specific immovable property. Thus, the relevance of this particular mode of mortgage has to be looked into as its very nature has made it a redundant method of mortgage. The sole purpose of this article is to find out validity of English Transfer in present time and a study of this method of transfer as a whole.

English Mortgage

In very simple words, mortgage is a transaction where a mortgagor takes a loan from a mortgagee, against a security. Thus, we can say that a mortgage is a transfer by way of security. Unlike other transfers, such as sale, lease, exchange or gift, a mortgage has no independent existence of its own. There can be no mortgage without a debt. The security provided is an immovable property. A property can be mortgaged in any of the following ways:
1. Simple Mortgage.
2. Mortgage by Conditional Sale.
3. Usufructuary Mortgage.
4. Mortgage by Deposit of Title of Deeds.
5. English Mortgage.
6. Anomalous Mortgage (which is a combination of any two of the above).

1. Simple Mortgage: When the possession of the mortgaged property is not transferred from mortgagor to the mortgagee. If the mortgagor fails to repay the loan, the mortgagee has the right to sell the property and recover the loan from the sale amount.

2. Conditional Sale: Here the mortgagor apparently sells the property to the mortgagee subject to certain condition. The condition may be either of the following:
a. On failure to repay the mortgage money before a certain date the sale shall become absolute, or
b. On such repayment of mortgage money the sale shall become invalid, or
c. On such repayment the mortgagee shall retransfer the property.

3. Usufructuary Mortgage: In this type of mortgage, the possession of the mortgaged property is transferred to the mortgagee. He receives the income from the property, eg. rent, profit etc, until the repayment of the loan. The title deeds remain with the owner.

4. Mortgage By Deposit Of Title Deeds: Here, the mortgagor delivers the title document of the property to the mortgagee with an intention to create a security thereon. This mortgage can be entered into only in the towns of Chennai, Kolkota, Mumbai or any other town, as notified by the State Government in the official gazette."

5. English Mortgage: In an English Mortgage:
a. The mortgagor transfers the property absolutely to the mortgagee.
b. The mortgagor binds himself to repay the borrowed money before a certain date.
c. Such transfer is subject to the condition that the mortgagee will retransfer the property on repayment before the agreed date.
When Can The Mortgagee Sell The Property? Is The Permission Of The Court Necessary In Order To Sell It?
It is very important to note at this juncture that the mortgagee can sell the property only when the mortgagor has failed to repay the loan. The permission of the Court is necessary, except in the following cases:
a. English mortgage.
b. Where the power of sale has already been conferred by deed to the mortgagee.
c. Where the power of sale has already been conferred by deed and the mortgaged property is situated within Chennai, Kolkota, Mumbai or any other notified town or area.

Relevance of English Mortgage in India

Before the passing of the Law of Property Act, 1925 a mortgage in the English form of properties situated in the mofussil between parties of whom one was a Hindu was always treated as mortgage by conditional sale. Where both the parties were Englishmen, all the incidents of English mortgage were held applicable. After the passing of the Act a mortgage in English form could be treated in the mofussil as well as in the presidency towns, no matter to what communities the parties belonged to.

The type of mortgage usually prevalent in England does not contain a personal covenant and in that sense the expression English in the definition of English Mortgage is not appropriate. The legislature seems to have employed this expression on the basis that transfer of property to the mortgagee with the specified proviso is of the essence of the mortgage as understood in England, at least before Law of Property Act, 1925. Grant of an estate in fee with the condition that if the mortgagor shall repay the mortgagee shall reconvey the estate to the mortgagor was the usual form of a mortgage deed in England. However, a personal covenant is not found in mortgages in England but it has been made a part of English Mortgage in India.

The first case in which the mortgagee can have the power to sell is mentioned in clause (a) of sub-section (1) of Section 69 of the Transfer of Property Act, 1882. It lays down the following conditions for the acquisition of the power, namely:
(1) That the mortgage must be an English mortgage, as defined in Section 58(e) of the Transfer of Property Act, 1882, and
(2) Neither the mortgagor nor the mortgagee must be:
a. a Hindu, Mohammedan or Buddhist, or
b. a member of any other race, sect, tribe, or class from time to time specified in this behalf by the State Government in the Official Gazette.

In L.V. Apte v. R.G.N. Price, AIR 1962 AP 274, the A.P. High Court applied Section 69 of the Transfer of Property Act, 1882, to an English mortgage between a company and trustees for debenture-holders, some of the trustees being Hindus.

Section 69(1)(a) of the Transfer of Property Act, 1882, is confined only to a select sect of mortgagors and mortgagees who do not belong to the majority communities in India. This section is taken advantage of by corporate bodies that are not natural persons since such bodies are not deemed to belong to any religion. As far as individuals are concerned, this section can be adopted if both the mortgagor and mortgagee do not belong to the religion, race, sect, tribe or class, which are excluded from the purview of Section 69(1)(a) of the Transfer of Property Act, 1882.

If the conditions in Section 69(1)(a) and Section 69(2) of the Transfer of Property Act, 1882 are complied with, mortgagee’s power of sale arises suo motu.
It is opined here that Section 69(1)(a) of the Transfer of Property Act, 1882 is outdated in the present circumstances since the stipulations cannot be applied to the commercial transactions like mortgages, in letter and spirit. No community can be compelled to exclude themselves from a particular commercial venture, as it would affect their constitutional rights.

Sale of Mortgaged Property Without Court Intervention

Section 69 of the Transfer of Property Act, 1882 is one of the rare instances and is an exception to the general rule of law. Under this section a person, who is not the owner of the property, could convey the right, title and interest of a third party- mortgagor in the mortgaged property even without the intervention of the court. Where the mortgagee sells the mortgaged property, he is selling it against the wishes of the mortgagor. So, he is not acting under the mortgagor or as an agent of the mortgagor.

Section 69 of the Transfer of Property Act, 1882, was modeled on the English Conveyancing Act, 1881 and the English Law of Property Act, 1925. Amending Act 20 of 1929 drawing the principles from the English law later remodeled section 69 of the Transfer of Property Act, 1882.

Section 69 of the Transfer of Property Act, 1882 contains five sub-sections. Sub-sections (1) and (2) as detailed hereunder, deal with the circumstances under which the mortgagee’s right to exercise the power of sale without the intervention of the court arises. Sub-sections (3) and (4) respectively dwell on the title of the purchaser from the mortgagee and the manner of deployment of sale proceeds of the mortgaged property by the mortgagee, his duties and responsibilities. Sub-section (5) states that nothing in this section applies to powers conferred before the first day of July, 1882.

The right under Section 69 of the Transfer of Property Act, 1882

is as much and as full a right as the right of redemption of the mortgagor. The mortgagee is, in no sense, a trustee for the mortgagor in the matter of the power of sale; as he holds it for protection of his interest and for his benefit. The mortgagee is not debarred from exercising the power of sale, even though the mortgagor files a suit for redemption. So long as the mortgage money is not paid or validly tendered, the mortgagee with full knowledge of a pending suit for redemption and even to defeat the suit can enforce his power of sale under this section.

While clauses (b) and (c) of sub-section (1) require that power of sale without intervention of the Court must be expressly conferred on the mortgagee by the mortgage deed, no such conditions need be fulfilled, where the mortgage is an English mortgage and neither of the parties is Hindu, Mohammedan or Buddhist or any sect, race etc., as stipulated under clause (a) of sub-section (1).

Well. If so, under what conditions/circumstances could the mortgagee exercise the above right? A mortgagee can exercise this right of private sale only in the following circumstances:
1. When the mortgage-deed expressly provides that the mortgagee is entitled to sell the mortgaged property, or any part thereof, in default of payment of the mortgage-money, without the intervention of the court.
2. And when the mortgagee is the Government. (Clause (b) of sub-section (1)).
3. If the mortgaged property or any part thereof is, on the date of execution of the mortgage deed, situate within the towns of Calcutta, Madras, Bombay or in any other town or area which the State Government may, by notification in the Official Gazette, specify in this behalf. (Clause (c) of sub-section (1)).

But, sub-section (2) puts some restraint over this right and requires the mortgagee to give three months advance notice in writing to the mortgagor, calling upon him to pay the principal or part of the principal that is still outstanding after the due date within 3 months from the date of receipt of said notice and that on his failure to comply with the request will result in the private sale of his mortgaged property. In the case of interest, if the interest amounting to at least Rs.500/- remains unpaid for three months after becoming due, similar notice must be given before the mortgagee wants to invoke the above provision of law. This power of sale can be exercised only when there has been a default of payment of mortgage-money. However, the mortgagee cannot buy the property for himself under this section even assuming there is a contract to that effect between the mortgagor and the mortgagee.

The words power of sale” refers to a clause expressly included in the mortgage deed. They mean conveyancing. The expression has not been defined in the Act, but it includes all steps that are necessary to be taken in connection with a sale. The law permits the greatest freedom of contract, unless it is expressly taken away. If any party contends that a particular clause restricts, in any way, the power of parties to enter into a contract, the burden rests on him to show that the words prevent an agreement between the parties.

The power of sale, under Section 69 of the Transfer of Property Act, 1882, can be exercised only in the three cases mentioned in clauses (a), (b) and (c) of sub-section (1) of Section 69 of the Transfer of Property Act, 1882. The situation of the property is immaterial in cases falling within clauses (a) and (b).

A mortgagee has no right of sale if there is no default in payment of the mortgage money. There can be default in payment of mortgage money only after it has become due, and not before. In cases, where no time is fixed for payment of the mortgage money, there must be a demand for payment before it can be said that the mortgagor has made a default in payment of the mortgage money. It has been held in Purasawalkam Hindu Janopakara Saswatha Nidhi Ltd. v. Kuddus Sahib, AIR 1926 Mad 841, that where the amount due for principal is not repayable at any particular date, nor is anything stated as to when it is to be repaid, there can be no default in the payment of the principal sum due until there is a demand made for the money.

The Securitization and Reconstruction of Financial Assets And Enforcement of Security Interest Act, 2002 (Act 54 Of 2002)

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, fondly called by bankers as Securitisation Act, has recently been enacted conferring powers on banks and financial institutions, if they are secured creditors, to realize the securities by sale etc., without intervention of court. The Act contains a provision overriding the provision of Section 69 of the Transfer of Property Act, 1882, viz., sub-section (1) of Section 13 of the said Act.

The provisions of the Act have been made applicable exclusively to banks and financial institutions as secured creditors to enforce their security interest with a view to recovering their debts. That is, if the banks and financial institutions are secured creditors having lent against securities like mortgage of immovable property, charge, hypothecation they can take over and sell such securities after giving 60 days’ notice to the borrowers so as to adjust the loan, without resort to litigation in a competent court of law. The provisions of the Act cannot be considered to have been extended to the secured creditors in general. In a nutshell, the provisions of Section 69 of the Transfer of Property Act, 1882 can be ignored by the banks and financial institutions in the matter of recovery of their debts ex curia whereas other creditors have to file a suit in a competent court for recovery of the loan.

Otherwise, Section 69 of the Transfer of Property Act, 1882 still remains on the statute and is applicable to other creditors who are not banks and financial institutions. The banks and financial institutions are empowered to short-circuit the legal process to enforce the securities for recovery of their loans while the other creditors such as individuals, association of persons have to undergo the rigmorale of court proceedings. This is a clear discrimination endowing one section with legal favouritism and depriving similarly placed others of such right. Hence, the suggestion for the amendment to make the law uniform to all creditors who have lent against mortgage securities.

The Court tried to distinguish in the case of Mardia Chemicals Ltd v Union of India, [2004] 51 SCL 513 (SC), attempted to distinguish between an equitable (referred to in India as an English mortgage) and legal mortgage. Section 69 of the Transfer of Property Act 1882 provides that, in the case of an English mortgage, the mortgagee shall have the power to sell the mortgaged property in default in payment of the mortgage money without the intervention of the court.

The Transfer of Property Act defines an English mortgage

as 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 retransfer it to the mortgagor upon payment of the mortgage money. Therefore, in the case of an English mortgage, absolute transfer of the property has already taken place, thus the question of court intervention does not arise. The borrowers argued that, in contrast, absolute transfer of the property does not occur in a legal mortgage; therefore, court intervention must be allowed. After considering the above arguments, the Supreme Court held as follows.

However, the Court struck down the requirement in section 17 of the Act that 75 per cent of the amount claimed in the section 13(2) notice must be deposited with the DRT as a condition for filing the appeal in that it rendered the remedy illusory for the following reasons: (i) the pre-deposit requirement is imposed while approaching the adjudicatory authority of first instance, not in appeal; (ii) there is no determination of the amount due as yet; (iii) the secured asset or its management is already taken over and under control of the secured creditor; (iv) there is no special reason for double security in respect of an amount yet to be determined; (v) 75 per cent of the amount claimed is no meager amount; (vi) the borrower will not be in a position to raise the funds required to make the 75 per cent deposit.The Apex Court concluded that the deposit requirement is thus onerous and oppressive. Therefore, section 17(2) is unreasonable, arbitrary and violates the Constitution of India..

For the above reasons, the Supreme Court concluded that the borrowers would get a reasonably fair deal and opportunity to have any dispute adjudicated upon before the DRT. The effect of some of the provisions may be a bit harsh for some of the borrowers, but on that ground the impugned provisions of the Act cannot be said to be unconstitutional in view of the fact that the object of the Act is to achieve speedier recovery of the dues declared as NPAs and better availability of capital liquidity and resources to help in the growth of the country's economy and the welfare of the people in general. The Supreme Court therefore upheld the validity of the Act except that of s.17 (2) which was declared ultra vires Art.14 of the Constitution of India.

Thus, the SC in the case of Mardia Chemicals distinguished between English mortgage and section 13 of the Securitisation Act.

Conclusion
It is not the intention of the legislature in India that an English Mortgagee as defined in section 58(e) of the Transfer of Property Act, 1882, should, by the very fact of execution of the mortgage, have a right to possession. If the English mortgagee is to be taken as acquiring the right to take possession as soon as the mortgage is executed whether a right of entry is expressly is covenanted for or not, then a jarring element is to be introduced in the section considered.
The remedy available constitutes a basic element of the scheme, even though on the surface it may appear that only the form of transfer is the criterion. The view taken in England is that if the mortgagee allows the mortgagor to remain in possession, the mortgagor is, at law, merely a tenant at sufferance, but in equity being the owner, the mortgagor can take the rents for his own use and is not accountable to the mortgagee. The mortgagor in India transfers only an interest. As a matter of legislative policy the remedy of sale should suffice in case of English mortgage. Therefore, it is recommended that it should be provided in section 58 (e) of the Transfer of Property Act, 1882, that an English mortgage does not carry a right to possession in the absence of an express agreement giving such right.

English Mortgage is of no relevance at present as it is violative of the basic fundamental rights of the citizens as provided in the case of section 69 of the Transfer of Property Act, 1882. Thus, it has become redundant and is not more in use now days.

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