Equitable mortgage upheld over properties despite non-registration of charge under Companies Act

The High Court of Kerala held that the State Bank of India had an equitable mortgage over properties sold in execution of a decree, created by the defendant company through the deposit of title deeds. The court determined that the non-registration of the charge under section 125 of the Companies Act did not invalidate the mortgage against the company. The court set aside the lower court's order and declared that the auction purchaser's title was subject to the mortgage in favor of the bank. The appeal was allowed, with no order as to costs.

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Issues: Interpretation of section 125 of the Companies Act, 1956; Validity of equitable mortgage in favor of a bank; Effect of non-registration of charge under section 125 on the rights of a creditor in a court auction sale.

In this judgment, the High Court of Kerala addressed the interpretation of section 125 of the Companies Act, 1956, concerning the validity of an equitable mortgage created in favor of a bank. The appellant, State Bank of India, challenged the rejection of its claim under Order XXI, rule 58, Civil Procedure Code against the attachment of properties of the defendant company. The appellant contended that the attached properties were subject to an equitable mortgage in its favor. The court analyzed the documents, including exhibits A-4, A-5, and A-2, which indicated the existence of a credit accommodation granted by the bank to the defendant company and the deposit of title deeds to create a security for the credit. The court held that the intention to create a mortgage by deposit of title deeds was evident, and the claimant bank had an equitable mortgage over the properties sold in execution of the decree in the suit.

Moreover, the court examined the effect of non-registration of the charge under section 125 of the Companies Act. It noted that while the charge created by the deposit of title deeds was not registered, it did not render the charge invalid against the company as a going concern. Citing precedents, the court emphasized that the failure to register the mortgage did not invalidate it as long as the company was operational. The court clarified that the mortgage remained valid against the company, and any purchaser in execution of a money decree could not claim that the purchase was free from the mortgage. The court highlighted that the mortgage's validity was not affected by non-registration under section 125, and the charge on the company's properties persisted, subject to certain restrictions in the event of winding up.

Ultimately, the High Court set aside the lower court's order and declared that the title obtained by the decree-holder-auction purchaser in the properties sold was subject to the mortgage in favor of the claimant bank created by the judgment debtor-company through the deposit of title deeds. The appeal was allowed, with no order as to costs.

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