SVKMS

NMIMS SCHOOL OF LAW

A PROJECT SUBMITTED ON;

DISTINCTION BETWEEN MORTGAGE AND CHARGE UNDER THE
TRANSFER OF PROPERTY ACT, 1882
IN COMPLIANCE TO PARTIAL FULFILLMENT OF THE MARKING
SCHEME, FOR TRIMESTER VII OF 2016-2017, IN THE SUBJECT OF
PROPERTY LAW
SUBMITTED TO FACULTY:
Ms. ISHA KHURANA
FOR EVALUATION

SUBMITTED BY:
RIDDHI TULSHIAN (A056)
TY B.B.A L.L.B (HONS.)

INDEX
SR.NO

PARTICULARS

1.
2.
3.
4.

ABBREVIATIONS
TABLE OF CASES
INTRODUCTION
DIFFERENCE BETWEEN MORTGAGE

5.
6.
7.

AND CHARGE
LITERATURE REVIEW
CONCLUSION
BIBLIOGRAPHY

PG.NO.
3
4
5-10
11-14
15
16
17

ABBREVIATIONS
1. C.P.C.
2. V.
3. S.
4. U/S
5. AIR
6. SCC
7. SC
8. ILR
9. SLP
10. Cr.L.J
11. Bom.
12. Q.
13. SCR
14. r/w
15. Ltd.
16. Pvt.

- Civil Procedure Code

- Versus
- Section
- Under Section
- All India Reporter
- Supreme Court Cases
- Supreme Court
- Indian Law Reporter
- Special Leave Petition
- Criminal Law Journal
- Bombay
- Queen
- Supreme Court Reporter
-Read with
-Limited
-Private

TABLE OF CASES
1. Santley v Wilde [1899] 2 Ch 474 at 474
2. Brhampal Singh v. State of Uttar Pradesh, AIR 2008 (NOC) 539 (All)
3. Tara Chand v. Sagarbai, AIR 2007 SC 2059
4. Sidhi Vegetable Oil Products v. Government of A.P., AIR 2007 (NOC) 638 (Del)
5. Vani v. Bani, ILR 20 Bom 553
6. Maung Tung v. Maung Aung, 2 Rang 313
7. Jeet Ram v. Ganga Phal, AIR 2010 (NOC) 834 (P&H)
8. Dattatraya Mote v. Anand Datar, (1974) 2 SCC 799
9. Goinda v. Dwarka Nath (1906) ILR 33 Cal 666
10. Raja Sri Shiva Prasad v. Beni Madhab (1922) 1 Pat 387 (392)
11. Gobinda Chandra v. Dwarka Nath (1908) ILR 35 Cal 837
12. M/s. J.K. Private Ltd. v. M/s. New Kaiser Hind Spinning and Weaving Co. AIR 1970
SC 1041

1. INTRODUCTION
1.1 MORTGAGE
A mortgage involves the transfer of the title to an asset as security for a liability.
The nature of a legal mortgage is described by Lindley MR in Santley v Wilde1:
The principle is this: a mortgage is a conveyance of land or an assignment of chattels as a
security for the payment of a debt or the discharge of some other obligation for which it is
given. This is the idea of a mortgage: and the security is redeemable on the payment or
discharge of such debt or obligation .
In India the Transfer of Property Act, 1882 deals with mortgage of immovable property.
Chapter IV, Sections 58 104 of the said Act deals with mortgage. The Transfer of Property
Act deals with the substantive part of mortgage of immovable property on the other hand The
Civil Procedure Code, 1908 deals with the procedural part of it. Chapter XXXIV of The Civil
Procedure Code, 1908- Suits relating to the mortgage of immovable property deals with the
procedural part of it.
The general principles of mortgage contract are guided by the Indian Contract Act, 1872.
1.1.1 Mortgage as defined in Transfer of Property Act, 1882
According to Section 58 of the Transfer of Property Act, a mortgage is the transfer of an
interest in 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 pecuniary liability.
There are therefore two elements of a mortgage:

In the first place, title to an asset must be transferred to the creditor or to someone on
his behalf. If it is legal title which is transferred, the mortgage is a legal mortgage. If
beneficial title is transferred, it is an equitable mortgage. Either way, the creditor
obtains a proprietary interest which remains effective in the insolvency of the debtor.
It is not necessary for the creditor to take possession of the asset.

1 [1899] 2 Ch 474 at 474

5

The second element is that the transfer must be by way of security. The creditor is not
intended to have the absolute entitlement to the asset concerned. It has been
transferred to secure a liability and, once that liability has been discharged, the debtor
is entitled to have the asset re-transferred to him. This right, which is itself a
proprietary interest, is generally referred to as an equity of redemption.

1.1.2 Types of Mortgages

1. Simple Mortgage - In a Simple mortgage, 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. Mortgage by Conditional Sale - Under such Mortgage, the mortgagor apparently sells
the property to the mortgagee on certain conditions

On failure to repay the mortgage money before a certain date the sale shall become

absolute, or
On condition that on such repayment of mortgage money the sale shall become

invalid, or
On condition that on such repayment the mortgagee shall retransfer the property.

3. Usufructuary Mortgage - In a usufructuary Mortgage, the possession of the mortgaged

property is transferred to the mortgagee. The mortgagee receives the income from the
property (rent, profit, interest, etc) until the repayment of the loan. The title deeds remain
with the owner.
4. English Mortgage - In an English Mortgage
a) The mortgagor binds himself to repay the borrowed money on a certain date.
b) The mortgagor transfers the property absolutely to the mortgagee.
c) But such transfer is subject to the condition that the mortgagee will retransfer the
property on repayment before the agreed date.
5. Mortgage by deposit of title of deeds - In such mortgage, the mortgagor delivers the title
document of the property to the mortgagee with an intention to create a security thereon.

Such mortgage is valid in towns of Kolkata, Mumbai and any other town as the State
Government may notify by publication in Official Gazette.
6. Anomalous mortgage - Anomalous mortgage is a combination of different types of
mortgages.
1.1.3 Mortgages Requiring Registration
When money more than Rs. 100 is taken as loan, registration is necessary. In other case,
mortgage is complete only by delivery of possession.
1.1.4 Mode of Transfer in Mortgage:
The property may be transferred by way of mortgage in the following three ways:
a) By a registered instrument- In a mortgage where the principal money secured is Rs.
100 or more, the mortgage can be effected only by:
A registered instrument2
Instrument signed by mortgagor3
Attested by at least two witnesses.
b) Delivery of Possession- Where the principal money secured is less than Rs. 100, a
mortgage may be effected either by a registered instrument or by delivery possession.
The registered instrument has to be signed by the mortgagor and attested by at least
two witnesses. The mortgage may be effected by delivery of possession only except in
the case of a simple mortgage.
c) Deposit of Title-Deeds- In mortgage by deposit of title deeds, whatever be the
amount of mortgage debt, writing and registration are not necessary. This type of
mortgage is allowed only in certain cities for promoting smooth flow of business.4

1.1.5 Effects of Non-Registration

2 Brhampal Singh v. State of Uttar Pradesh, AIR 2008 (NOC) 539 (All), a security bond creating a
charge or mortgage in respect of property of value of Rs 100 or more is compulsorily registrable.
3 Tara Chand v. Sagarbai, AIR 2007 SC 2059
4 Sidhi Vegetable Oil Products v. Government of A.P., AIR 2007 (NOC) 638 (Del)
7

Where the mortgage requiring registration is not registered, the mortgage is not converted
into a charge under Section 100 but it may be used to establish a personal liability.5 In such a
case, the mortgagor cannot sue for redemption because the mortgage is invalid but he can sue
for possession on his offering to repay the loan.6
The mortgagor cannot regain possession on the basis of oral mortgage as it could not be
proved in court for want of registration. But it would be open to him recover possession on
the strength of his title.7
1.2 CHARGE
A charge is a right created by any person including a company referred to as the borrower
on its assets and properties, present and future, in favour of a financial institution or a bank,
referred to as the lender, which has agreed to extend financial assistance.
Section 2(16) of the Companies Act, 2014 defines charges so as to mean an interest or lien
created on the property or assets of a company or any of its undertakings or both as security
and includes a mortgage.
1.2.1 Charge as defined in Transfer of Property Act, 1882
According to Section 100 of the Transfer of Property Act, 1882, where an immovable
property of one person is by act of parties or operation of law made security for the payment
of money to another and the transaction does not amount to a mortgage, the latter person is
said to have a charge on the property, and all the provisions which apply to a simple mortgage
shall, so far as may be, apply to such charge.
The following are the essential features of the charge which are as under:
1. There should be two parties to the transaction, the creator of the charge and the charge
holder.
2. The subject-matter of charge, which may be current or future assets and other properties of
the borrower.
3. The intention of the borrower to offer one or more of its specific assets or properties as
security for repayment of the borrowed money together with payment of interest at the agreed
5 Vani v. Bani, ILR 20 Bom 553
6 Maung Tung v. Maung Aung, 2 Rang 313
7 Jeet Ram v. Ganga Phal, AIR 2010 (NOC) 834 (P&H)
8

rate should be manifested by an agreement entered into by him in favour of the lender,
written or otherwise.
1.2.2 Types of Charges

Charges created by act of parties- An agreement which gives immovable property

as security for the satisfaction of a debt without transferring any interest in the
property constitutes a charge by act of parties. No particular form of words is
necessary case for creation of a charge. It is sufficient, if, having regard to all the
circumstances of the transaction. The document shows intent to make the land
security for the payment of the money mentioned therein. But there must be a clear
intention to make a property security for money in praesenti. If there is an intention to
create a charge in praesenti an agreement to mortgage may amount to a charge.
The following is an illustration of charges by acts of parties: A inherited an estate
from his maternal grand-mother and executed an agreement to pay his sister B a fix
annual sum out the rents of the estate; B has charges on the estate.

Charge arising out of operation of law- A charge by operation of law is one which
arises irrespective of the agreement of the parties. Such charges are known as
equitable liens in English Law. The inclusion, in the definition, of charges by
operation of law has been criticized as inconsistent with the scheme of the Act which
relates to transfers by act of parties. But as the SC observed in Laxmi Devi v.
Mukand Munwar, a plain reading of sec. 2(d) of the Transfer of Property Act leaves
no doubt that the provisions of chapter IV of the Act, and therefore of this section,
governs charges by operation of law. The Act however itself creates such charges, for
a charge by the operation of law arises in this Act under sec. 55(4)(b) in the case of an
unpaid vendor, under sec. 55(6)(b) for the purchase money paid in advance; and sec.
73 in favour of a mortgagee on surplus sale proceeds of a revenue sale.

Also charges can be categorised into the following two types:

1) Fixed Charge: Such a charge is against a specific clearly identifiable and defined
property. The property under charge is identified at the time of creation of charge. The nature
and identity of the property does not change during the existence of the charge. The company
9

can transfer the property charged only subject to that charge so that the charge holder or
mortgage must be paid first whatever is due to him before disposing off that property.

2) Floating Charge: Such a charge is available only to companies as borrower. A Floating

charge does attach to any definite property but covers the property of a circulating and
fluctuating nature such as stock-in-trade, debtors, etc. It attaches to the property charged in
the varying conditions in which happens to be from time to time. Such a charge remains
dormant until the undertaking charge ceases to be a going concern or until the person in
whose favour charge created takes steps to crystallise the floating charge. A floating charge
on crystallisation becomes a fixed charge.
1.2.3 Charges requiring registration:
A company must file within 30 days of creation of a charge with the Registrar complete
details of the charge together with the instrument of charge or its verified copy in respect of
certain charges. Otherwise the charge will be void. This does not mean that the creditors
cannot recover their dues. It merely means that the benefit of the charged security will not be
available to them. The following charges are compulsorily registrable: 1.
2.
3.
4.
5.
6.
7.
8.

A floating charge
A charge for the purpose of securing any issue of any debentures
A charge on uncalled share capital
Charge on calls made but not paid
A charge on any immovable property
A charge on ship
A charge on book debts of the company
A charge on goodwill or on patent or on license under the patent or on trademark or

copyright or on the license under the copyright

9. A charge other than a pledge on any movable property of the company.
1.2.4 Effects of Registration
Once a charge is registered, it acts as a notice to the public at large that the charge holder has
an interest in the charged property. No person can take a defence against the charge holder
that he was not aware that a charge was created against the property. That person will be
entitled to the property subject to the interest of the charge holder. Once certificate of charge
is issued by the Registrar, it is conclusive evidence that the document creating the charge
is properly registered.

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2. MORTGAGE & CHARGE

DISTINGUISHED:
2.1 The main points of difference:

In every mortgage there is a charge, but every charge is not a mortgage.8

A mortgage is a transfer of an interest in specific immovable property but a charge is
not. In a charge no right in rem is created, but the right is something more than a
personal obligation, for it is a just ad rem, that is right of payment out of property

specified, while a mortgage is a right in rem.

A charge may be created by act of parties or by operation of law; but a mortgage can
be created only by act of parties.

The creation of a charge does not necessarily imply the existence of a debt while it is
always so in case of a mortgage.

A mortgage is good against subsequent transferees and may be enforced against a

bona fide purchaser for value with or without notice, while a charge is good only
against subsequent transferee with notice.

A charge created by operation of law does not require registration prescribed by

S. 59 of the Act for a mortgage. A charge created by act of parties requires
registration irrespective of the amount involved.

A mortgage can be enforced by foreclosure suit for money and sale (under Sections
67, 68 and 69). But a charge can be enforced only by sale of property through the
Court.

A simple mortgage can be enforced within 12 years whereas other types of mortgages
can be enforced within 30 years. A charge can be enforced within 12 years.

A charge does not require to be attested and proved in the same way as a mortgage.

8 Dattatraya Mote v. Anand Datar, (1974) 2 SCC 799

11

It should be noted that a transaction intended to be a mortgage but not reduced to

writing and registration in cases where such a formality is required cannot operate as a
charge. In Goinda v. Dwarka Nath9, it was observed that: If an instrument is
expressly stated to be a mortgage, and give the power of realization of the mortgage
money by sale of mortgaged premises, it should be held to be a mortgage. The fact
that necessary formalities of the due execution were wanting would not convert the
mortgage into a charge. If, on the other hand, the instrument is not on the face to it a
mortgage, but simply creates a lien, or directs the realization of money from a
particular property without reference to sale, it creates a charge.

In the case of Raja Sri Shiva Prasad v. Beni Madhab 10, Justice Das said, The broad
distinction between a mortgage and a charge is this that whereas a charge only gives a right of
payment out of a particular fund or particular property without transferring that fund or
property, a mortgage is in essence a transfer of an interest in specific immovable property. A
mortgage is a jus in rem, a charge, a jus ad rem and the practical distinction is that a
mortgage is good against subsequent transferees and a charge is only good against
subsequent transferees with notice.
In the case of Gobinda Chandra v. Dwarka Nath 11, it was held that if an instrument is
expressly stated to be a mortgage, and gives the power of realisation of the mortgage money
by sale of the mortgaged premises, it should be held to be a mortgage and the fact that
necessary formalities of due execution were wanting would not convert the mortgage into a
charge. If, on the other hand, the instrument is not on the face of it a mortgage, but simply
creates a lien, or directs the realisation of money from a particular property, without reference
to sale, it creates a charge.
In the case of M/s. J.K. Private Ltd. v. M/s. New Kaiser Hind Spinning and Weaving
Co.12, it was stated that, where in the case of a charge there is no transfer of property or any

9 (1906) ILR 33 Cal 666

10 (1922) 1 Pat 387 (392)
11 (1908) ILR 35 Cal 837
12 AIR 1970 SC 1041
12

interest therein but only the creation of a right of payment out of the specified property, a
mortgage effectuates transfer of property or an interest therein.

13

2.2 Charge And Simple Mortgage Distinguished:

In simple terms a simple mortgage does not involve giving the possession of the
mortgagor's property to the mortgagee. It is under mutual agreement that in case of nonpayment by the mortgagee to the mortgagor within the specified time, the mortgagee can
cause the mortgaged property to be sold in accordance with law and have the sale proceeds
adjusted towards the payment of the mortgage money.

In a simple mortgage, there is a personal covenant to pay the mortgage money

whereas in charge, there is no understanding to pay the money personally.

In simple mortgage there is a transfer of interest in the property mortgaged, in a

charge there is no such transfer. Notwithstanding this vital distinction, the section
says: The provision hereinbefore contained which apply to simple mortgage shall, so
far may be, apply to charge." As in case of a simple mortgage, the charge-holder has
got a right to enforce the charge by sale of the property subject to charge.

2.3 Does the distinction between mortgage and charge matter?

It has been seen that the main distinction between a mortgage and a charge is that a
mortgagee obtains legal or beneficial title to the asset concerned, whereas a charge does not.
Is the distinction important?
There have been cases where the distinction between a mortgage and a charge has been
important. This failure to distinguish between mortgages and charges is understandable. They
both give the creditor a proprietary interest in the asset concerned which is effective in the
debtors insolvency. The important distinction is not between mortgages and charges but
between legal mortgages, on the one hand, and equitable mortgages and charges, on the other.
It is generally easier to enforce legal rights against third parties than equitable.
Mortgages and charges are also generally treated in the same way in the relevant legislation.
In the Companies Act, which provides for the registration of charges created by companies,
the expression charge includes a mortgage. The Law of Property Act, which is the key
legislation concerning security over land, conversely (but to the same effect) does not clearly
distinguish between mortgage and charge.
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There are two minor differences between mortgages and charges. First, because a chargee
does not obtain legal or beneficial title to the asset concerned, his powers of enforcement are
more restricted than those of a mortgagee. Unlike a mortgagee, a chargee does not have a
right of foreclosure or, in the absence of express provision in the charge document, a right to
possession of the charged asset. In practice, however, charges invariably contain extensive
powers of enforcement which give the chargee substantially the same powers as those of a
mortgagee. These limitations on a chargees powers of enforcement are therefore of little
relevance in practice.
Secondly, it has been seen that a mortgagors equity of redemption enables the mortgagor to
require the re-transfer of the asset to him on payment of the secured debt. This is not
necessary where the creditor only has a charge over the asset concerned, because the charge
terminates as soon as the secured liability has been paid.
Although there is a conceptual distinction between a mortgage and a charge, the practical
differences between them are therefore insufficiently important to require them to be
considered separately.
There is, however, an important distinction between:
Legal mortgages; and
Equitable mortgages and charges.
One of these distinctions has already been mentioned the fact that it is generally easier to
enforce a legal proprietary interest against third parties than an equitable one. The distinction
between legal and equitable interests is also very important when it comes to creating the
security. There are more formal requirements for the creation of a legal mortgage than an
equitable mortgage or a charge. It is also possible to create security over more types of asset
in equity than it is at law.

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3. LITERATURE REVIEW
Charges and mortgages are quite similar to one another in that they are both security
interests that banks use to provider lender with security over the borrowers assets. There
are, however, a few differences between them in terms of the ownership of the asset when
loans are taken out and the various properties of the assets that are being offered to secure
payment.
A mortgage is a transfer of an interest in specific immovable property but a charge is not. In
a charge no right in rem is created, but the right is something more than a personal
obligation, for it is a just ad rem, that is right of payment out of property specified, while a
mortgage is a right in rem.
If an instrument is expressly stated to be a mortgage, and give the power of realization of the
mortgage money by sale of mortgaged premises, it should be held to be a mortgage. The fact
that necessary formalities of the due execution were wanting would not convert the mortgage
into a charge. If, on the other hand, the instrument is not on the face to it a mortgage, but
simply creates a lien, or directs the realization of money from a particular property without
reference to sale, it creates a charge.13
-Vinod Kothari & Nidhi Ladha
In the above article, the authors have distinguished between mortgage and charge as a whole
but have stated that the broad distinction between the two is that whereas a charge only gives
a right of payment out of a particular fund or particular property without transferring that
fund or property, a mortgage in essence is a transfer of an interest in specific immovable
property. Although they are conceptually different, they will be treated together because, in
practice, the distinctions between them are not great. More important are the factors which
link mortgages and charges. They are both created by evidence of the intention of the debtor,
they are both effective without any necessity for the creditor to obtain possession of the
secured asset and they both give the creditor a proprietary interest in the secured asset which
(although the nature of the interest varies depending on whether the security is a legal
mortgage, an equitable mortgage or a charge) is effective in the debtors insolvency.
13 http://www.lawteacher.net/free-law-essays/land-law/transfer-of-property-topic-critically-lawessays.php
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4. CONCLUSION
Although mortgage and charge are conceptually different, they will be treated together
because, in practice, the distinctions between them are not great. More important are the
factors which link mortgages and charges. They are both created by evidence of the intention
of the debtor, they are both effective without any necessity for the creditor to obtain
possession of the secured asset and they both give the creditor a proprietary interest in the
secured asset which (although the nature of the interest varies depending on whether the
security is a legal mortgage, an equitable mortgage or a charge) is effective in the debtors
insolvency.
Now a charge gives rise to a new proprietary interest in favour of the
lender over the borrowers property. In contrast to a mortgage there is no
transfer of the borrowers existing interest but the creation of a new
burden upon the borrowers ownership. This interest by way of charge
appropriates the borrowers property to the repayment of the loan. In
other words it entitles the lender to look to the borrowers property should
the borrower fail to repay the loan, for instance by insisting that the
property to be sold. When the loan is repaid the charge will cease as there
is no longer any appropriation.
Strictly speaking, a charge does not involve the transfer of ownership, in the same way as a
mortgage of unregistered title. The charge holder is deemed to have all the legal rights of a
mortgagee. However, some mortgagee rights depend on ownership, such as the inherent right
to take possession. A charge holder does not have possession as a mortgagee. However, it is
often the case that conditions of a charge of registered land, right a grant mortgagee, by the
terms of the charge deed.
These two terms have been distinguished but practically these terms are used interchangeably
and lead to a lot of confusion. The law does not state any clear distinction between the two
concepts and according to me the difference should be clearly laid down by the law-makers
and should also be implemented by the banks and financial institutions. The difference
between the two concepts is important and the failure to distinguish between them is

17

understandable as the concepts are quite similar but a clear understanding of the two is
required for the proper functioning of loans and securities.

BIBLIOGRAPHY
Websites Used:

http://www.lawteacher.net/free-law-essays/land-law/transfer-of-property-topic-

critically-law-essaysphp, Last Accessed on 8.8.2016

http://www.differencebetween.com/difference-between-charge-and-vs-mortgage-and-

vs-pledge/, Last Accessed on 1.8.2016

http://qna.economictimes.indiatimes.com/Law-Regulations/Property-Law/what-isthe-difference-between-amortgage-and-a-charge-461142.html, Last Accessed on

9.8.2016
http://indiacorplawblogspot.in/2013/03/mca-circularsecured-corporate_25.html, Last

Accessed on 9.8.2016
www.lexisnexis.com
www.manupatra.com

Books Referred:

The Transfer of Property Act, By Dr. Avtar Singh, 4th Edition

Transfer of Property Act, By Justice P. S. Narayana, Reprint of 4th Edition
The Transfer of Property Act, By Poonam Pradhan

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