Memorandum of Entry for equitable mortgages: A Mortgage by Conduct?

– Neha Sinha, Assistant Legal Advisor | Shraddha Shivani, Executive | corplaw@vinodkothari.com

Mortgage is a transfer of an interest in a 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 agreement, which may give rise to a pecuniary liability.

Section 58(f) of the Transfer of Property Act, 1882 (“TP Act”) provides, among other modes, for the creation of mortgage by deposit of title deeds, widely known as equitable mortgage.  Applicable to the notified towns under this provision, when a person delivers to a creditor or his agent documents of title deeds to immoveable property, with an intent to create security, then the transaction is called mortgage by deposit of title deeds.

Legally there is no document needed to create an equitable mortgage. In fact, if there is a document, it will be mortgage by instrument and not mortgage by conduct, and hence, will cease to be an equitable mortgage. The Supreme Court expounded in Rachpal Mahraj v. Bhagwandas Daruka and others^[1]–

“…when the debtor deposits with the creditor the title deeds of his property with intent to create a security, the law implies a contract between the parties to create a mortgage, and no registered instrument is required under section 59 as in other forms of mortgage.”

However, in practice, a memorandum accompanies the deposit of title deeds. The lender may execute a Memorandum of Entry (“MoE”) which records the delivery of title documents for the creation of mortgage by the mortgagor to the lender. The purpose of the MoE is most intuitive – the title deeds are valuable documents, and lie with the lender or a trustee for the lender. The MoE serves as a matter of record that the borrower placed these documents of his own free will with the intention to create a charge on his property with the lender/trustee, as also serves as a safeguard if the borrower were to play mischief claiming those very title deeds having been lost.

The borrower may also give an undertaking known as Memorandum of Deposit of Title Deed (“MoDT”) which states that the borrower, at his own free will, has deposited his property’s title document with the lender in order to secure a loan by creating a mortgage.

Significance of MoE as an instrument

When a person deposits title deeds of their property with a lender with the intent to provide security to the lender and to secure financial assistance, such deposit of title deeds itself, based on its language,  may be an evidence of the contract between the parties under section 58(f) of the Transfer of Property Act, 1882. Further, as per section 59 of the TP Act, such a mortgage does not need to be effected by a registered instrument.

However, practically, a number of issues may arise in the absence of any written evidence of the creation of such a mortgage. For instance, to prove the creation of a mortgage, one must prove the intention of the parties to create such security by deposit of title deeds. It was laid down in  Bejoy Ranjan Das vs Ajit Kumar Dutta^[2] that –

“Whether there is an intention that the deed shall be security for the debt is a question of fact in each case. The said fact will have to be decided just like any other fact on presumption and on oral, documentary or circumstantial evidence.”

It is towards this necessity that the practice of executing MoE and MoDT has evolved. The Calcutta High Court in Kedarnath Dutt vs Shamlal Khetry^[3] held that a MoE is not the instrument by which an equitable mortgage is created, nor is it the evidence of creation of such mortgage. It is merely an entry recording the transaction.

However, it has also been held in the above ruling as well as multiple others^[4] that, where the terms of the bargain have been reduced to writing in such a memorandum, it ceases to merely be a record and needs to be considered an instrument through which the equitable mortgage has been created. So, much of the distinction between a mere record of having placed the title deeds, and an active record of rights and obligations, remains a blurred line. There have been rulings often enough which have gone into the language of the MoE and held it to be either such an aide-de-memoire, or an instrument.

Creation of mortgage through MoE

As explained by Patna HC in the case of Rangabati v. Union Bank of India,^[5] the requisites of an equitable mortgage are:

1. A debt
2. A deposit of title deeds
3. An intention that the deeds shall be security for the debt.

Indian Stamp Act, 1899 has an inclusive definition for ‘instrument’^[6] whereby ‘instrument’ includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. Hence, for a MoE to be considered as an instrument, it must create the rights and obligations under equitable mortgage.

An equitable mortgage is not reduced into writing.^[7] If there is a debt and the debtor has submitted the title deeds with the intention that the same shall be security for the debt, then the mere act of deposit of title deeds with such intention constitutes an equitable mortgage.^[8] Although equitable mortgage itself does not provide documentation, it may be accompanied by a writing, i.e., MoE. It is to be determined if this MoE itself constitutes bargain between the parties or if it constitutes evidence of the contract of mortgage between the parties. In the Rangabati case, the Court laid down the test for registrability as: whether a document is merely evidential or whether it contains the terms of the contract itself?

When the mortgage has been reduced to writing as in a memorandum, then such document also becomes integral to the transaction and an essential ingredient in creation of mortgage.^[9] When such a memorandum is considered as the only repository and evidence of the agreement, then the memorandum would be the instrument by which the equitable mortgage was created and would be registrable.^[10] If the writing evidences the agreement, then it is deemed that the parties themselves have agreed for the writing to act as the repository of the agreement.^[11]

From the above, it is can be gathered that MoE would be considered to be an instrument by which equitable mortgage was created on the fulfillment of all of the following conditions: 

1. When the transaction is reduced in writing, i.e., MoE;
2. MoE has the terms of the bargain;
3. MoE acts as the only evidence to the transaction;
4. A deposit of title deeds is done with the intent to create security.

Stamp Duty requirements

Stamp duty is not chargeable on a transaction, it is chargeable on the instrument. An instrument chargeable with stamp duty is inadmissible as evidence if it is not duly stamped.^[12]

Under Schedule I of the Indian Stamp Act, 1899, article 6 provides for the stamp duty on agreement relating to deposit of title deeds, wherein “any instrument evidencing an agreement relating to the deposit of title deeds” is chargeable with stamp duty^[13]. The primary question is whether MoE is an instrument evidencing an equitable mortgage.  In Chief Controlling Revenue Authority, Madras v. Pioneer Spinners Private Ltd.^[14] the question arose as to whether an instrument (called ‘Articles of Agreement’), containing the list of title deeds of property which had been submitted as a security, and also executed on the date of deposit of title deeds could be construed as an instrument evidencing an agreement and fall within the scope of article 6. The Court held the following:

“The instrument styled articles of agreement, even though it is executed on the date of the deposit of the title deeds, does not itself evidence or contain the terms regarding the deposit of title deeds…The deposit of title deeds and the execution of the articles of agreement may all be in the course of the same transaction. But the articles of agreement does not itself embody the bargain for security by the deposit of title deeds; in fact it proceeds upon the existence of the security when it is executed. It is only the instrument which itself is the agreement relating to deposit of title deeds that is taken in under article 6. It cannot be said that in the present case the deposit was contemporaneous with the execution of the instrument and the instrument was intended to evidence the deposit of title deeds. The instrument by itself does not evidence any deposit of title deeds. It itself does not bring about any security by deposit of title deed.”

Hence, for MoE to be chargeable under Article 6, it must ‘embody the bargain’ and evidence the agreement.

Constructive delivery of title deeds

The essence of an equitable mortgage i.e. the deposit of title deeds with the lender may be actual or constructive. Instances of constructive delivery of title deeds arise where the title deeds are already deposited with the lender or the trustee of the lender and further mortgage is being created on the property. 

In the case of constructive delivery, we need not go into the specifics of the document to determine whether the same is an instrument of mortgage or not as the line of distinction between the act of actual or physical delivery and the act of constructive delivery is very thin.

Here the evidence of the equitable mortgage is only by virtue of the documents i.e. MoE and declaration/ undertaking by the borrower.

Therefore, in case of a constructive delivery of title deeds, the contention that these documents do not have the impact of creating a mortgage may be untenable. However, as a normal industry practice, it is seen in many states except for Maharashtra, Gujarat, etc, that mortgage by way of deposit of title deeds is  not considered to be an instrument for creating a mortgage.

Registration requirements

As discussed above, an equitable mortgage does not need to be affected by a registered instrument, however, where the parties have reduced the terms of the bargain to a written document, such a document would be treated as an instrument of creation of such a mortgage. In Obla Sundarachariar v. Narayana Ayyar,^[15] the Bombay High Court held that when the document in question was merely a list of title deeds and did not indicate the terms of agreement or the nature of the matter, such document did not require registration.

The Supreme Court in the case of State of Haryana & Ors vs Navir Singh & Anr^[16] held that-

“Nothing has been brought on record to show existence of any instrument which has created or extinguished any right or liability. In the case in hand, the original deeds have just been deposited with the bank. In the face of it, we are of opinion that the charge of mortgage can be entered into revenue record in respect of mortgage by deposit of title-deeds and for that, instrument of mortgage is not necessary. Mortgage by deposit of title-deeds further does not require registration. Hence, the question of payment of registration fee and stamp duty does not arise. By way of abundant caution and at the cost of repetition we may, however, observe that when the borrower and the creditor choose to reduce the contract in writing and if such a document is the sole evidence of terms between them, the document shall form integral part of the transaction and same shall require registration under Section 17 of the Registration Act.”

Here once again the intention of the parties plays an integral part. If the parties had the intention of reducing the terms of the equitable mortgage to a written document from the beginning then such a document would be considered an instrument and would be required to be registered under section 17 of the Registration Act, 1908.

However, the requirement of registration is not always open to interpretation. For instance, Explanation II to Article 7 of Schedule 1-A of the Indian Stamp Act, 1899 as amended for the State of Madhya Pradesh specifically states that any letter, note, memorandum or writing relating to the deposit of title deeds….such letter, note, memorandum or writing shall, in the absence of any separate agreement or memorandum of agreement relating to deposit of such title deeds, be deemed to be an instrument, evidencing an agreement relating to the deposit of title deeds and accordingly be chargeable to stamp duty under the said Article.

Concluding remarks

While equitable mortgage is one of the most preferred forms of mortgage in the financial world owing to the convenience and cost efficiency it offers, the need to prove intention brings into existence certain documents into existence the necessity of certain documents. Where documents dealing with immovable property come into the picture, the stamp duty and registrations closely follow. These requirements depend on a number of factors such as the nature and content of the documents, the place of execution of documents, the jurisdiction under which the immovable property is situated, etc and it becomes imperative to understand these conditions to ensure no potential untoward circumstances. Hence, while documenting the equitable mortgage, the parties must bear in mind the implications of such written records as the contents of the document shall be decisive in determining stamp duty chargeability and registrability. 

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^[1] 1950 AIR 272.

^[2] AIR 1974 Cal 319.

^[3] 11 Beng LR (OC) 405 Couch.

^[4] State Bank Of Mysore vs M/S. S.M. Essence Distilleries, Narvir Singh And Anr. vs State Of Haryana And Ors, Housing Development Finance vs Asstt. Commissioner Stamps & Anr, Rachpal Mahraj vs Bhagwandas Darukaand Others.

^[5] AIR 1961 Pat 158.

^[6] Section 2(14).

^[7] Veerammal and Another v. Kr. L. Lakshmanan Chettiar, AIR 1960 Mad 529.

^[8] H.G. Nanjappa v. M.F.C. Industries (P) Ltd., AIR 1987 Mad 108.

^[9] Allahabad Bank v. Ley Bros., A.S. No. 74 of 1995 (C), Kerala High Court (decision dated 22 january 2010). 

^[10] Rangabati v. Union Bank of India, AIR 1961 Pat 158.

^[11] Housing Development Finance Corporation Ltd. v. Assistant Commissioner, Stamp, Civil Misc. Writ Petition No. 58682 of 2005, Allahabad High Court (decision dated 31 August 2015).

^[12] Indian Stamp Act, 1899, section 35.

^[13] Refer to our detailed  article on the applicability of Maharashtra Stamp Duty Act on equitable mortgages.

^[14] AIR 1968 Mad 223.

^[15] (1931) 33 BomLR 878.

^[16] Civil Appeal No. 9049 of 2013; Special Leave Petition (Civil) No. 924 of 2009.