[Sikha Bansal is a Partner and Shraddha Shivani an Executive at Vinod Kothari & Company]
Pledge, hypothecation and mortgage are all forms of security interest, albeit with different features. Although the common objective of any form of security interest is to create a right in rem (rather than in personam) in favour of the lender, the effectiveness of the security interest would depend on the extent of overarching rights created by such security interest in favour of the lender. In another article, we have drawn a quick snapshot of the characteristics of each form of security interest. As one compares the features associated with different forms of security interest, a mortgage has several motivations for the lender. From a lender’s perspective, it is always beneficial to have ‘better’ rights in terms of beneficial interest and control. Also, mortgages can be of various kinds (as discussed below); hence, the parties may have the flexibility to structure and opt for a suitable form of security interest.
However, a conventional notion around mortgages has been that the concept of ‘mortgage’ is only applicable to immovable property. This common view arises in view of explicit provisions under the Transfer of Property Act, 1882 (‘TP Act’). On the other hand, there are no written or codified provisions on mortgage of movable property. It is not that the courts have not discussed and debated on the same. There have been ample opportunities before the courts (as this article highlights), wherein they have upheld mortgages of movable properties as well. As such, it cannot be said that there has not been any decisive jurisprudence around the subject. However, the recent ruling of Supreme Court in PTC India Financial Services Limited v. Venkateshwar Kari strongly revives the discussion and reinforces the argument that ‘mortgage of movables’ is possible, although not exactly in terms of the Contract Act, although under common law principles of equity and natural justice. In fact, in his book “Securitisation, Asset Reconstruction and Enforcement of Security Interests”, Vinod Kothari has discussed about ‘chattel mortgages’.
This post analyzes the jurisprudence surrounding a mortgage of movable property, and the principles which must be followed in order to effect the same. However, before we do so, it would be important to understand the features of a mortgage and how a mortgage can be used as a superior tool of security interest.
Mortgage: Meaning and Types
In terms of section 58(a) of the TP Act, a mortgage has been defined as follows: “A mortgage is the transfer of an interestin 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.” [emphasis supplied] Going by the definition, a mortgage has several essential features: (i) it necessarily involves a ‘transfer’ of interest, (ii) the property must be specific property, and (iii) the purpose of such mortgage is securing payment of money. While every mortgage has the above common features, it can take several forms. The TP Act refers to several types of mortgages with certain distinguishing features, as indicated below:
|
Types of mortgages |
Rights of lender |
|||||
|
Passage of title |
Title Deed |
Delivery/ Possession |
Beneficial Interest |
Right to cause sale on default |
Right of foreclosure |
|
|
Simple Mortgage |
No |
No |
No |
No |
Yes |
No |
|
Mortgage by conditional sale |
Yes, but ostensibly |
Yes |
Yes |
No |
No, however, the same itself becomes absolute on default |
Yes, as sale becomes absolute on default |
|
Usufructuary mortgage |
No |
No |
Yes |
Yes |
No |
No |
|
English mortgage |
Yes, absolute |
Yes |
Yes |
Yes |
Yes |
No |
|
Mortgage by deposit of title deeds or equitable mortgage |
No |
Yes |
No |
No |
Yes |
No |
The aforesaid features are intrinsically linked to the mortgagee’s right of foreclosure, as discussed below.
Mortgagee’s Right of Foreclosure
Foreclosure is a clog on the mortgagor’s right of redemption (as discussed below), as the mortgagor gets forever debarred of its right to redeem the property. In the absence of a contract to the contrary, the mortgagee has a right to foreclose the property in terms of section 67 of the TP Act by obtaining a decree from the court, where the mortgage is either a mortgage by conditional sale or an anomalous mortgage. See Narayan Deorao Javle v. Krishna; Mahamaya Debi v. Haridas Haldar; Mahendra Mohanlal Mistry v. Mehta Mohanlal Mathurdas; Smt. Savitri Devi v. Smt. Beni Devi.
As to why such right is only available in a mortgage by conditional sale and an anomalous mortgage, Vinod Kothari explains[1]:
“Obvious enough, the question of foreclosure arises only in cases where the mortgagor makes a transfer of proprietary interest in the property. Therefore, section 67(a) authorises a suit for foreclosure only in case of a mortgage by conditional sale, or an anomalous mortgage where the mortgagee is entitled to foreclose. Suit for foreclosure is not allowed either in a simple mortgage or in English mortgage since in either case, the real right that is transferred by the mortgagor is the right of sale and not the right of ousting the mortgagor from the property. In case of a conditional sale, the understanding of the parties is that on default of the debt, the sale will become absolute—the remedy of foreclosure is to attach finality to such sale being absolute. In case of an usufructuary mortgage, the understanding between the parties was that the mortgagee will continue to enjoy the usufruct until as long as the debt is cleared—therefore, the mortgagee can neither foreclose, nor sell, as the usufruct is what was intended.” [emphasis supplied]
Mortgage vs. Other Forms of Security Interest
The essential distinction between a pledge and a mortgage is that unlike a pledgee, a mortgagee acquires the general property in the thing mortgaged, subject to the right of redemption of the mortgagor. In other words, the legal estate in the goods mortgaged passes on to the mortgagee. See rulings such as Sri Raja Kakarlapudi Venkata v. Andhra Bank Ltd., PTC India case, Shatzadi Begum Saheba v. Girdharilal Sanghi. On the other hand, a pledge can be distinguished from a hypothecation that in the latter there is no delivery of the hypothecated goods. Further, similar to pledge, there is no ‘transfer’ of interest in hypothecation. See Bhabani Sankar Patra v. State Bank of India.
One can draw the following comparison among the three common forms of security interest:
|
Points of discussion |
Hypothecation |
Pledge |
Mortgage |
|
Delivery and possession |
No |
Yes |
Depends on type of mortgage |
|
Transfer of general interest in property |
No |
No |
Yes |
|
Transfer of title |
No, hypothecatee gets only special rights |
No, pledgee gets only special rights |
Yes, in case of mortgage by conditional sale (ostensible), and English mortgage (absolute) |
|
Right to enjoyment or usufructs |
No |
No |
Only in case of usufructuary mortgage |
|
Right to accretions |
Belongs to hypothecator, unless contracted otherwise |
Belongs to pledgor, unless contracted otherwise |
Mortgagor will be entitled to any accession occurred during the continuance of mortgage, upon redemption. |
|
Lender’s remedies on borrower’s default |
Take possession of the hypothecated property and sell to secure debt |
Cause sale of the pledged property to secure debt |
Foreclosure in case of mortgage by conditional sale/anomalous mortgage. Sale in case of simple mortgage/English mortgage. |
|
Right of foreclosure |
No |
No |
Possible – in case of a mortgage by conditional sale and an anomalous mortgage |
|
Borrower’s right of redemption |
Until actual sale happens |
Until actual sale happens |
Until foreclosure or actual sale |
|
Court intervention |
Not required |
Not required |
Decree for foreclosure/sale needed. See discussion below. |
Therefore, a mortgage can serve better rights to the mortgagee, particularly if the mortgage is one by conditional sale. As we discuss below, such a mortgage (by conditional sale) can be very relevant in financing arrangements involving movable properties too.
Law on Mortgage of Movable Property
As indicated earlier, mortgage has been conventionally associated with immovable property. The reason is that Chapter IV of the TP Act is dedicated to mortgages of ‘immovable property’ and charges. However, as indicated by several noted commentators and as also held by the judiciary in several instances, the TP Act is not the only law on mortgages, and ‘mortgage’, as a concept, is equally applicable to movable properties. In fact, ‘chattel mortgage’ has been commonly used to describe mortgages of movable property.
Vinod Kothari, in his book referred to earlier, explains:
“10.13.2 Chattel Mortgage or Mortgage of Movable Property
Like in case of immovable property, a mortgage of movable property transfers an interest in property to the lender to secure the payment of the obligation of the borrower. There is no question of mortgage by deposit of title deeds in this case, as movable properties do not have any title deeds. Most likely, a chattel mortgage may take the form of a conditional sale, or usufructuary mortgage. There are several instances where a hire-purchase transaction has been construed by courts as a chattel mortgage.”
In PTC India, the Supreme Court too has clearly recognised the validity of a mortgage of movable properties. See also, Arjun Prasad v. Central Bank Of India Ltd.; Tehilram Girdharidas v. Longin D’Mello; Chinni Venkatachalam Chetti v. Athivarapu Venkatrami Reddi. Courts have also recognised the right of foreclosure in case of movable properties. See Bhupati Mohan Das v. Phanindra Chandra Chakravarty. As to whether such foreclosure in case of a mortgage of movable property would also need a court order as required for immovable property under TP Act, the courts do not seem to be taking any different view. See Mahamaya Debi v. Haridas Haldar.
Hence, going by the precedents and principles as above, one can envisage the following mechanics for effectuating mortgages on movable property (assuming mortgage by conditional sale is the most optimal option):
- Mortgage can be created by way of a formal written agreement in place. The agreement should record clear intention of the mortgagor to sell the property solely for the purpose of creating ‘security’ in favour of the mortgagee. Further, to create effective rights in favour of the mortgagee, it is important that the right of foreclosure is not taken away by the agreement.
- During subsistence of mortgage, the mortgagee would continue receiving repayments. The mortgage may or may not call for the mortgagee’s entitlement to usufructs from the property. The same would also depend on the type of property, and agreement between the parties.
- However, on default, the mortgagee would be entitled to foreclose the property, that is, obtain the title to the property. This is not possible in case of pledges (as also held by Supreme Court in PTC India). Once the property is foreclosed, conditional sale becomes absolute, the mortgagee becomes the absolute owner of the property and shall be entitled to exercise all rights of ownership as were earlier vested with the mortgagor. This would create a strong deterrent against default or non-payment by mortgagor.
Closing Remarks
Mortgage is one of the oldest forms of security interest that has developed organically in some form or the other all across the globe and continues to be the backbone of the financial credit system. While the mortgage of movable properties is less popular, however, given the added force a mortgage has, it may witness an increasing interest in the corporate world.
Creditors may now be keen on exploring mortgages of movable property where earlier pledge and hypothecation were the norm. However, given that the law around chattel mortgage is judge-made (and mostly sketchy, as discussed above), there would be inherent challenges, which may need further judicial intervention.
– Sikha Bansal & Shraddha Shivani
[1] See Part I, Chapter 10 of Securitisation, Asset Reconstruction and Enforcement of Security Interests, Vinod Kothari, LexisNexis, 2020