The contest in this case is between the plaintiff and the 3rd defendant. It relates to two questions:
(1) Is the equitable mortgage in favour of the plaintiff valid?
(2) Has the 3rd defendant a vendor's lien for unpaid purchase money, which can be enforced?
The 1st defendant mortgaged with the plaintiff on the 27th of June, 1918 his house at Madras for securing a sum of Rs. 8,000 which was lent. The mortgage was effected by a registered deed. The 1st defendant made continued default in payment and the plaintiff thereupon threatened to bring the property to sale. It was at this juncture that the alleged equitable mortgage was made. The 1st defendant wrote to the plaintiff on the 1st February, 1926 thus:
“As I personally told you yesterday, I send herewith a sale-deed, dated the 9th November, 1922 … … Kindly accept this deed as collateral security … … … … … On payment of Rs. 3,000 within the 20th instant, I shall take the above deed … … ”
The object was to secure the payment of a part of the amount already due under the original mortgage. I may add that this transaction relates to a mofussil property. The contention of the 3rd defendant is, that the letter of the 1st February constitutes the contract, and, that as it has not been registered, no valid equitable mortgage has been created. The question in such cases is, does the document in question constitute the bargain between the parties? If it does, the writing excludes oral evidence and no such evidence can be given. If it then be held that the contract is contained in the writing, the same becomes inadmissible in evidence for want of registration. The result is that the equitable mortgage cannot be proved. The point then is, was there a contract independent of this writing or was the writing itself the contract? I do not propose to deal in any detail with the law, as I have fully considered the point in a recent case, Ramakrishna Doss v. Kesavalu Chetty. The letter in the persent case closely resembles that in Subramonian v. Lutchman. It clearly constitutes the bargain between the parties and is not merely a record of an already completed transaction. I must therefore hold that no valid equitable mortgage was created in favour of the plaintiff.
For the latter, it was next argued that I must hold that there was an oral agreement on the 31st of January, that is, the day previous to the letter in question. There is literally no evidence that there was such an agreement. The plaintiff refers in his plaint in two places, to the fact that the mortgage was made on the 1st February, 1926. There is thus no substance in this contention. In the circumstances, it is unnecessary to enquire whether an agreement, made previous to the deposit of the title deeds, can constitute a valid equitable mortgage.
The next point relates to the vendor's lien claimed by the 3rd defendant. He was originally the owner and he sold the property to the 1st defendant by a sale-deed, dated the 9th of November, 1922. The price agreed upon was Rs. 1,500 and is made up of three items:
(1) Rs. 125 paid in cash;
(2) Rs. 1,000 which the purchaser was directed to pay to one K, to whom the vendor owed money, on a promissory note, dated 19th October, 1919;
(3) Rs. 375 which the purchaser was directed to pay to one S, to whom the vendor owed money, on a promissory note (date not given).
The consideration is thus in two parts. It consists of a cash payment and an undertaking by the 1st defendant to pay the creditors of the vendor. It has been proved that the former did not make any payment to either K or S and that, as a matter of fact, the debts were fully discharged by the vendor himself long subsequent to the sale. It is not suggested that there was a novation of the contract by reason of the arrangement set forth in the sale-deed, that the liability of the vendor to pay his debts was extinguished and that, with the consent of his creditors, the liability of the 1st defendant was substituted for it. It is thus apparent that there was a part of the purchase money owing to the vendor and the question is: was the lien extinguished by reason of the 1st defendant agreeing to pay the 3rd defendant's creditors? The point is dealt with in Webb v. Macpherson. In that case the price was Rs. 81,210 of which Rs. 30,000 was to he paid down in cash and the balance Rs. 51, 200 was to be secured by a deed to be executed. It was held that the agreement to defer the payment of the balance did not exclude the operation of the charge, the fact, notwithstanding, that a separate security was taken in respect of that sum. The question to be asked in such cases is, is the agreement in any way inconsistent with the existence of the charge? Their Lordships held in that case that it was not. The question in its present form arose pointedly in Sivasubrahmania Aiyar v. Subrahmania Aiyar. It was there held that a contract to forego the vendor's charge is not to be necessarily inferred from the fact that either the whole or a part of the price was to be paid by the purchaser to a third party on behalf of the vendor. It is contended for the paintiff that the words in the sale-deed in question clearly exclude the operation of the charge. The passage in the sale-deed relied upon is:
“As I have received in the aforesaid manner the said sum of Rs. 1,500 … … You shall yourself enjoy the said lands … … … with powers of alienation by gift, exchange or sale.”
One must not lose sight of the very important words in this extract, namely, “in the aforesaid manner”, which show that a part of the price remained unpaid. The statement that the whole price was received is a formal statement and is qualified by the preceding words, and it is the entire document that must be looked at. However, in view of this contention, I have sent for the printed papers of the case reported in Sivasubrahmania Aiyar v. Subrahmania Aiyar and I find that the words in the sale-deed in that case are identical with the words in the sale-deed before me. The plaintiff's contention fails and I must hold that the 3rd defendant's charge was not lost.
The next point to decide is, is the plaintiff a transferee with notice of the charge? On the evidence, I am disposed to believe that the plaintiff did not have actual notice, but that is hardly necessary. Under Sect. 3 of the Transfer of Property Act, a person is said to have ‘notice’ of a fact when he actually knows that fact, or, when but for gross negligence, he would have known it. The very sale-deed, which was deposited with the plaintiff, shows that part of the purchase money was unpaid. It was his duty to have enquired whether the 1st defendant subsequently paid the balance by discharging the debts of the vendor. This was an inquiry which he ought to have made and his abstention from that enquiry amounts to negligence. The case directly in point is Bank of Bombay v. Suleman Somji. In that case the testator died in 1885, leaving by a will, to his four elder sons, certain immovable property subject to a charge of Rs. 30, 000 in favour of his widow and four younger sons and made his four elder sons executors of the will. The latter, after their father's death, became indebted to the Bank of Bombay and on the 12th of January, 1899 executed a mortgage of this property in favour of the Bank without stating the charge upon it. In one of the documents of title deposited with the bank, the title of the mortgagors was indicated and had the Bank investigated the title they would have become aware of the will and the charge created thereby on the property. It was held that the Bank had constructive notice of the charge and the claim of the younger sons prevailed. The judgment of Sir Lawrence Jenkins, C. J., and Batty, J., was upheld by the Privy Council. The judgment of the appellate Court is given in the report. It shows that, if the Bank had made proper inquiry, they would have become cognisant of the will. It further shows (and this is important) that it would then become the duty of the Bank to enquire whether the legacy had been discharged or not. In the present case, if the plaintiff had looked at the sale-deed, he would have found that there was a portion of the price which originally remained unpaid. If he had pursued the inquiry properly, he would have known that the 1st defendant did not carry out his undertaking and discharge the debts. The plaintiff, therefore, must be held to have had constructive notice of the charge. Thus, even granting that this equitable mortgage is valid (and I have held that it is not), the 3rd defendant's charge must prevail over his mortgage.
In connection with the contention relating to the charge, there remains one further point to deal with. The 3rd defendant, finding that the 1st defendant failed to carry out his undertaking to discharge the former's debts, took a reconveyance of the same property on the 3rd of July 1926. The consideration is stated to be Rs. 1, 500. No cash was really paid, but the amount was in fact the aggregate of the debts which the 1st defendant had agreed to discharge, less Rs. 325, the sum waived when this reconveyance was executed. What really happened was this: When the 3rd defendant found that ic was hopeless to get the 1st defendant to carry out his undertaking, the former got the property reconveyed to himself. The alleged equitable mortgage in favour of the plaintiff was created, as I have said, on the 1st February, 1926, and the date of the reconveyance is the 3rd of July, 1926. For the plaintiff, it is contended that the vendor's charge became extinguished by reason of this transaction. This argument is scarcely tenable. Sect. 101 of the Transfer of Property Act, directly applies to the case and the material portion of it runs thus:
“Where the owner of a charge on immovable property becomes absolutely entitled to that property, the charge shall be extinguished unless such continuance would be for his benefit”.
The principle underlying the section is this. Supposing the mortgagee purchases the interest of his mortgagor; if there was an intermediate encumbrance at the time of his purchase and he was aware of it, the question arises, what was his intention when he purchased the property? Did he intend to keep his mortgage alive or to extinguish it? If he was not aware of the intermediate encumbrance, there can, in the very nature of the case, be no question of intention and the section assumes that the charge continues to subsist, the continuance being manifestly in his interests. As it is sometimes put, the intention to keep alive his charge is ascribed to him, the rule being, that a man having a right to act in either of two ways shall be assumed to have acted according to his interest. Sect. 101 is but an instance of the application of the doctrine of subrogation. The case relied upon for the plaintiff Bai Rewa v. Vali Mahomed is not in point. As is pointed out in the judgments in that case, there was no mesne incumbrance outstanding at the time. That distinguishes that case from the present. I hold therefore that the charge in favour of the 3rd defendant was not lost and, even if it be assumed that the equitable mortgage is valid, the charge has priority over it and must prevail.
The suit therefore against the 3rd defendant stands dismissed. This disposes of the case so far as the property in the mofussil is concerned.
Now turning to the other part of the case, there is no contest. It relates, as I have said, to the property at Madras. There is a first mortgage in favour of the 2nd defendant, dated the, 19th June, 1916, for Rs. 15,000 and a second mortgage in favour of plaintiff, dated the 27th June, 1918 for Rs. 8,000. There has been no repayment and the plaintiff is entitled to Rs. 8, 000 with interest at 9 per cent, per annum from the 1st May, 1926, to the date fixed for sale and with further interest at 6 per cent, on the aggregate amount thereafter. Similarly, the 2nd defendant is entitled to Rs. 15,000 with interest at 8 per cent per annum from the 1st August 1925, to the date fixed for sale and with further interest at 6 per cent. on the aggregate amount thereafter. I accordingly pass a mortgage decree. Time for redemption is 2 months. The 1st defendant shall pay the costs of the plaintiff and the 2nd defendant.
As the plaintiff has failed as against the 3rd defendant, I must direct him to pay the latter's costs calculated upon the value of his interest; but I must make an order that the plaintiff shall get these costs ultimately from the 1st defendant. The latter is a High Court Vakil and in his conveyance, dated the 3rd July 1926, he makes a definite statement that there are no encumbrances on the property. He further represented to the 3rd defendant that he was not in a position to produce the original sale-deed, as it had become mixed up with his papers and search was necessary. At that time he had parted with that deed to the plaintiff intending to create an equitable mortgage. The statement he made was a gross falsehood. He intended to deceive either the plaintiff or the 3rd defendant and in the event has succeeded in deceiving the plaintiff. That is the reason for this order I have made in regard to costs.
G.RSuit dismissed.