CAIIB BRBL Module B Unit 5 : Law Relating To Securities And Modes Of Charge – I

25/10/2023

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CAIIB Paper 4 BRBL Module B Unit 5 : Law Relating To Securities And Modes Of Charge – I (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Law Relating To Securities And Modes Of Charge – I”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module B (IMPORTANT ACTS/LAWS & LEGAL ASPECTS OF BANKING OPERATIONS – PART A) Unit 5 : Law Relating To Securities And Modes Of Charge – I, Aspirants must go through this article to better understand the topic, Law Relating To Securities And Modes Of Charge – I and practice using our Online Mock Test Series to strengthen their knowledge of Law Relating To Securities And Modes Of Charge – I. Unit 5 : Law Relating To Securities And Modes Of Charge – I

Introduction

A ‘charge’ is an interest or right which a borrower or guarantor creates on his/her/its assets as a security in favour of the lender/Creditor to fall back to in case the borrower/guarantor fails to pay back the debt.
There are two different types of charge fixed charge and floating charge, and different modes of charging securities.
When land/building is offered as a security, it is charged to the bank by a mortgage. Mortgages are of six kinds. The law, relating to mortgages is dealt with in the Transfer of Property Act, 1882, and more particularly in Sections 58 to 99 and 102 to 104.

Mortgage

Section 58(a) of the Transfer of Property Act, 1882 defines a mortgage as follows: ‘A mortgage is the transfer of interest in specific immoveable property, for the purpose of securing the payment of money advanced or to be advanced by way of loan, on existing or future debt or the performance of an engagement which may give rise to a pecuniary liability.’
The transferor is called the ‘mortgagor’ and the transferee a ‘mortgagee’. The principal money and interest of which payment is secured is called ‘mortgage money’ and the instrument by which the transfer is effected is called ‘mortgage deed’.

Simple Mortgage

According to Section 58(b) of the Transfer of Property Act, a simple mortgage is a transaction whereby, ‘without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage money and agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold by a decree of the Court in a suit and the proceeds of the sale to be applied so far as may be necessary in payment of the mortgage money.’

Features of simple mortgage

The mortgagee has no power to sell the property without the intervention of the Court.
The mortgagee has no right to get any payments out of the rents and produce of the mortgaged property.
The mortgagee is not put in possession of the property.
Registration is mandatory if the principal amount secured is Rs. 100 and above.

Mortgage by way of conditional sale

As per Section 58(c) of the Transfer of Property Act, a mortgage by way of a conditional sale of the property is a transaction whereby the mortgagor ostensibly sells the mortgaged property on the condition that on default of payment of the mortgage money on a certain date, the sale shall become absolute, or on such payment being made the sale shall become void

Essential features

The sale is ostensible and not real.
If the money is not repaid on the agreed date, the ostensible sale will become absolute upon the mortgagee applying to the Court and getting a decree in his favour.
The mortgagee can sue for foreclosure
There is no personal covenant for repayment of the debt and therefore bankers do not prefer this type of mortgage.

Usufructuary mortgage

According to Section 58(d) of the Transfer of Property Act, ‘a Usufructuary mortgage’ is a transaction in which

The mortgagor delivers possession expressly, or by implication and binds himself to deliver possession of the mortgaged property to the mortgagee; and
Authorises the mortgagee to retain such possession until payment of the mortgage money and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage money, or partly in lieu of interest and partly in payment of the mortgage money.

English mortgage

According to Section 58(e) of the Transfer of Property Act, an ‘English Mortgage’ is a transaction in which, 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 the provision that he will retransfer it to the mortgagor upon payment of the mortgage money as agreed’.

Essential features

It provides for a personal covenant to pay on a specified date notwithstanding the absolute transfer of the property to the mortgagee.
There is an absolute transfer of the property in favour of the mortgagee.
The mortgagee can sue the mortgagor for the recovery of the money and can obtain a decree for sale.

Equitable mortgage or mortgage by deposit of title deeds

According to Section 58(f) of the Transfer of Property Act, ‘Where a person in any of the following towns – namely, the towns of Kolkata, Chennai and Mumbai and in any other town which the State Government concerned may, by notification in the official gazette, specify in this behalf – delivers to a creditor or his agent documents of title to immoveable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title deeds.
Title deed in case of mortgage by deposit of title deeds shall be documents or instruments which evidence ownership of the mortgagor over the property. The territorial restriction refers to the place where the title deeds are delivered and not to the situation of the property mortgaged.

Anomalous Mortgage

According to Section 58(g) of the Transfer of Property Act, ‘a mortgage which is not a simple mortgage, a mortgage by conditional sale and usufructuary mortgage and English mortgage or a mortgage by deposit of title deeds within the meaning of this Section, is called an ‘Anomalous Mortgage.

Essential features

It must be a mortgage as defined by Section 58 of the Transfer of Property Act.
It is negatively defined and should not be anyone of the mortgages listed above.

Anomalous mortgages are usually a combination of two mortgages. Examples of such mortgages are:

A simple and usufructuary mortgage, and
An usufructuary mortgage accompanied by conditional sale.

Merits and Demerits of an Equitable Mortgage

Merits

Normally the borrower saves the stamp duty on the mortgage deed and the registration charges. It involves minimum formalities.
It involves less time and can be conveniently created. It can be done without much publicity and therefore, the customer’s position is not exposed to public gaze.

Demerits

In case of default, the remedy is to obtain a decree for sale of the property. Since, this involves going to the Court, it is expensive and time consuming.
Where the borrower is holding the title deeds in his capacity as a trustee and equitable mortgage of the same is effected, the claim of the beneficiary, under trust will prevail over any equitable mortgage.

Priority Of Mortgage

Priority among registered instruments: Section 47 of the Registration Act, 1908 provides that a registered document operates, not from the date of its registration, but from the time of its execution. Thus, a document executed earlier, though registered later than another, has priority over the documents executed later.
Priority between registered and unregistered instruments: In Section 50 of the Registration Act which under certain circumstances allows a registered mortgage priority over unregistered mortgage. However, it may be noted that prior mortgage by deposit of title deeds is not affected by subsequent registered mort- gage as the same need not be registered. This is provided in Section 48 of Indian Registration Act.

Limitation Period In Mortgage

Article 62 of the Indian Limitation Act, 1963 provides limitation period for filing of suit for recovery of mortgaged debt and sale of mortgaged property in the event of non-payment of the mortgaged debt.
Article 63(a) of the said Act provides a limitation period, in case of foreclosure of the mortgaged property.
The limitation period for filing a suit for sale of mortgaged property is TWELVE YEARS, from the date when the money sued for becomes due.
The limitation period for filing suit for foreclosure is THIRTY YEARS from the date the money secured by mortgage becomes due.
Article 62 of the Indian Limitation Act, 1963 provides limitation period for filing of suit for recovery of mortgaged debt and sale of mortgaged property in the event of non-payment of the mortgaged debt.
Article 63(a) of the said Act provides a limitation period, in case of foreclosure of the mortgaged property.
The limitation period for filing a suit for sale of mortgaged property is TWELVE YEARS, from the date when the money sued for becomes due.
The limitation period for filing suit for foreclosure is THIRTY YEARS from the date the money secured by mortgage becomes due.
Enforcement of mortgage is governed by the Code of Civil Procedure, 1908. Suit for sale of mortgaged properties are to be filed in the Court, within whose jurisdiction the mortgage property is situated.