The Kerala High Court has clarified that an execution sale under the Code of Civil Procedure does not extinguish a prior equitable mortgage, even if the mortgage is not recorded in the encumbrance certificate. This ruling reinforces the principle that proprietary rights existing prior to execution proceedings survive the sale, and the auction purchaser takes the property subject to such encumbrances.
Background & Facts
The Dispute
The dispute arose from the execution of a money decree against immovable property owned by judgment debtors. The property was sold in public auction to the decree holder, who became the auction purchaser. Subsequently, Dhanlaxmi Bank, a third party, filed an application under Order XXI Rule 90 CPC seeking to set aside the sale, claiming a prior equitable mortgage over the property created by deposit of title deeds.
Procedural History
- 2015: Original suit filed (OS 60/2015) resulting in a money decree
- 2019: Execution petition filed (EP 12/2019) for recovery of decree amount
- 2024: Bank filed EA 15/2024 under Order XXI Rule 90 CPC to set aside the sale
- 2025: Execution Court allowed the Bank’s application, setting aside the sale
- 2025: Decree holder appealed to the High Court via FAO No. 70 of 2025
Relief Sought
The Bank sought to set aside the execution sale on the ground that its prior mortgage right was ignored, rendering the sale void as against its interest. The decree holder sought to uphold the sale, arguing that the absence of mortgage registration in the encumbrance certificate negated the Bank’s claim.
The Legal Issue
The central question was whether an execution sale under Order XXI Rule 90 CPC can be set aside when a prior equitable mortgage exists, even if the mortgage is not reflected in the encumbrance certificate, and whether such a mortgage survives the sale.
Arguments Presented
For the Appellant (Decree Holder)
The appellant contended that the Bank’s mortgage, being equitable and unregistered, could not override the execution sale. Reliance was placed on the absence of the mortgage in the encumbrance certificate, arguing that the execution court was entitled to proceed on the assumption of clear title. It was further argued that Order XXI Rule 90 CPC requires proof of material irregularity or fraud in the sale process, which the Bank failed to establish.
For the Respondent (Bank)
The Bank argued that an equitable mortgage created by deposit of title deeds is a recognized proprietary interest under the Transfer of Property Act, 1882. It submitted that the existence of such a mortgage was established through documentary evidence (Exts. A1 to A5), and that the execution court was duty-bound to recognize prior rights, even if unregistered. The Bank emphasized that the sale could not extinguish rights existing prior to the decree.
The Court's Analysis
The Court examined the nature of equitable mortgages and the scope of Order XXI Rule 90 CPC. It held that the mere absence of a mortgage from the encumbrance certificate does not negate its existence, particularly where title deeds have been deposited with the mortgagee. The Court observed that equitable mortgages are valid and enforceable under Section 58(f) of the Transfer of Property Act, and their recognition does not depend on registration.
"The existence of a mortgage will not be reflected in the encumbrance certificate. But for the existence of the mortgage, any irregularity or fraud in publishing or conducting the sale could be made out. Therefore, the execution sale could not have been set aside."
The Court clarified that Order XXI Rule 90 CPC does not require the applicant to prove fraud or material irregularity in the sale process if the applicant’s interest predates the sale. The mere existence of a prior right, such as a mortgage, is sufficient to render the sale subject to that right. The auction purchaser acquires only the interest that the judgment debtor held at the time of sale - which, in this case, was subject to the Bank’s mortgage.
The Court further noted that the purpose of execution proceedings is to realize the decree amount, not to extinguish pre-existing proprietary rights. The sale operates as a transfer of the debtor’s interest, not as a wipe-out of all prior encumbrances.
The Verdict
The appeal was allowed. The High Court set aside the execution court’s order that had set aside the sale, but held that the execution sale itself is valid only subject to the prior equitable mortgage in favour of the Bank. The auction purchaser’s rights are therefore limited to the property free of the debtor’s unencumbered interest, but burdened by the Bank’s mortgage.
What This Means For Similar Cases
Prior Mortgage Rights Survive Execution Sales
- Practitioners must verify the existence of equitable mortgages through title deeds, not merely encumbrance certificates
- Execution petitioners and auction purchasers must conduct due diligence beyond registry records
- A mortgage created by deposit of title deeds is a valid, enforceable interest under Section 58(f) of the Transfer of Property Act
Order XXI Rule 90 CPC Applies Beyond Fraud or Irregularity
- Applications under Order XXI Rule 90 CPC are not confined to procedural defects in sale
- Any person with a prior proprietary interest may seek relief, even without alleging fraud
- Courts must examine the nature of the claimant’s interest, not just the sale process
Documentary Evidence Trumps Registry Records
- Title deeds deposited with a lender constitute conclusive proof of equitable mortgage
- Encumbrance certificates are not exhaustive; their absence does not invalidate a mortgage
- Courts must accept documentary evidence of prior rights unless rebutted by clear contrary proof
