Doctrine of priority under property law
Since India’s independence, Article 31 of the Indian Constitution has referred to the right to property as a fundamental right. The 44th Constitutional Amendment Act, however, removed it from the list of Fundamental Rights and changed its status to Constitutional Right under Article 300A of the Indian Constitution.
The Doctrine of Priority assists the court in determining which party’s rights should take precedence over the other when the court’s interests are at odds. When a property transferor deals with the same property with two separate people at the same time, the need for this idea becomes apparent. This thereby partially resolves the challenge raised by the court. The doctrine of priority is governed by Section 48 of the Transfer of Property Act of 1882. In situations where the court’s interests conflict with one another, this approach aids the court in deciding which side should receive the rights first. This notion is necessary when the person who transferred the property later trades with the same asset with two other parties. As a result, this largely answers the court’s difficulty.
Doctrine of Priority
Those who have the advantage in time will also have the advantage in law, according to this idea, which is founded on the Principles of Natural Justice, which state that if rights are granted to two separate people at different times. This rule, however, only applies in situations where the parties’ competing interests are otherwise equal. The legal maxim “qui prior est tempore potior est jure”, which translates to “one who is first in time is better in law,” served as the basis for Section 48’s priority theory. No one can impart a title different than what he has, according to a key premise laid out in this section. This means that each transferee will benefit from the property and the same rights as the previous transferee when a transferor transfers the same property in the interests of several transferees. According to this doctrine, a person cannot disregard his grant and deal with the property free from the rights that were generated in an earlier transaction if he has already set a transfer of the property in motion. The transferee, who could not even be aware of the earlier transfer, is not protected or reserved in any way by this Section because it is absolute in nature. Where there is competition between the mortgagee by maintaining title deeds and a future transferee, the doctrine of precedence explained under Section 48 is relevant.
In Duraiswami Reddi v. Angappa Reddi, the Madras High Court ruled that the prior transferee would be able to assert his rights even if the subsequent transferee engaged in lawful transactions without being aware of the initial transaction and even if the document was registered afterwards. This conclusion was found to be implicit and a clear result of the joint application of Sections 47 of the Registration Act and 48 of the Transfer of Property Act. It has also been noted that the first transferee’s entitlement to priority will only be delayed if the later transferee can prove any illuminating circumstances, such as fraud, estoppel, or egregious carelessness. This ruling was upheld by the Madras High Court in a subsequent judgement in Ramaswami Pillai v. Ramaswami Naicker and by the Bench of the Andhra Pradesh High Court in Jagannatha Rao v. Raghavarao. The Supreme Court ruled in K.H. Nathan v. Maruthi Rao that the mortgage-deed became valid and functional on July 5, 1947, the date it was registered, and that it would take precedence over any transfer that occurred between that date and the registration of the earlier transaction. The latter transfer is subject to the earlier transfer if the same asset is transferred repeatedly.
Essentials of the doctrine of priority
- The property must have a single owner or transferor and several transferees.
- It only applies to real estate that is moveable.
- The transfer should be created at several periods, and at each of these many instances, the transferee should have rights generated.
- This right cannot be fully utilised simultaneously.
For example, the owner of the real estate is A. In the month of August, he gave B a mortgage on the property. Later, in July, A gave the same property to C through transfer. In this situation, all requirements have been met, and according to the priority rule, B will receive all property rights before C. In the event of loan default, the mortgagee may sell the property because the sale is consistent with the initial transfer.
Application of the Doctrine
The principle stated in Section 48 is relevant where there is a competition between a mortgagee through deposit of title-deeds and a subsequent purchaser. No exemption is permitted under Section 48 of the Transfer of Property Act. In Sitaram v. Rajnarain, the court determined that Section 48 governs the issue of priority between a mortgagee and a subsequent buyer and that Section 41 does not apply because there is no evidence of negligence on the mortgagee’s behalf. The application of Section 48 of the Transfer of Property Act and Sections 47 and 49 of the Registration Act will be combined to determine the right of priority. Any overemphasis on Section 49 of the Registration Act alone would make Sections 47 of the Registration Act and Section 48 of the Transfer of Property Act meaningless and ineffective. The rule embodied in Section 48 of the Transfer of Property Act must be followed to determine the document’s validity after it has been registered, at which point Section 49 of the Registration Act is irrelevant and the document takes effect from the date of its execution due to Section 47 of the Registration Act. The Plaintiff’s claim under the indemnification clause in the partition deed does not have precedence over, or even equal standing with, the Defendant’s claim for the money owed to him since the Defendant has priority over the Plaintiff. A subsequent lease cannot be used against the interests of the previous tenant.
Owelty or equality of partition
Since there must be an allocation of properties with different volumes among the joint family members, it would not be possible to split the joint family’s property by metes and bounds during the partition process. A value adjustment would be necessary to allow for the payment by the former of the latter by way of equalising their shares. Those of more value might go to one member and properties of lesser value to another. This viewpoint has legal recognition, and the phrase “a provision for owelty or equality of partition” is used to describe a clause requiring such payment.
The co-sharer who is granted owelty is deemed to acquire a lien on an excessive allotment of property to the other co-sharer under this provision for owelty, which is interpreted as a lien. As a result, when an owelty is granted to a member of the joint family during a partition in order to equalise the shares on an excessive allocation of immovable properties to another member of the joint family, such a provision of the owelty typically results in the creation of a lien or charge on the property taken during the partition. The terms of the division decision itself have the authority to expressly impose a lien or charge. As a result, a member who receives such owelty would be the subject of a legal charge. However, even if no such charge is imposed explicitly, a lien may still exist since it is implied by the partition’s fundamental provisions in the absence of an express provision to that effect. The member who received an excessive amount of property as a result of the partition cannot claim to be exempt from paying the other members’ dues or claim ownership of any properties that come within his portion. Where the two interests do not conflict, the section’s general rule cannot be applied. This provision won’t apply in a situation when a person mortgages a property and then sells it to someone else because the buyer only received the equity of redemption. Therefore, as the latter does not grant any rights to the property, a completed sale and a contract for sale do not contradict. When registration is required, an unregistered sale-deed would also not grant the vendee any rights, therefore he is unable to bring a claim against the registered transferee. If the latter had known about the former, though, it would be different.
A land sale contract was signed in favour of one defendant in Chouth Mal v. Hira Lal on January 17, 1932. On May 5, 1932, the sale-deed was carried out in the defendant’s favour. However, on February 20, 1932, owners executed a usufructuary mortgage on the same property in the plaintiff’s favour. The mortgage must properly affect the future sale, it was decided. The simple omission of the plot numbers in the sale-deed is of no importance once it is acknowledged that the parties actually intended to convey the suit properties and that possession of the said properties was in fact delivered to the conveyee in accordance with the said conveyance. The Transfer of Property Act’s Section 48 states that if the same property has been transferred more than once, the most recent transfer cannot confer any rights, titles, or interests on the basis of the prior transfer.
Effect of the document registered under doctrine of priority
The rights of the preceding transferee are unaffected by the document’s registration under the priority rule. The rule of priority would still apply to the prior transferee and not the subsequent transferee unless and until the subsequent transaction was made with good faith and without knowledge of the prior transaction, even if the document of the subsequent transferee was registered while the document of the prior transferee was unregistered. Registration does not grant a property owner any rights. It just serves as evidence of the desire to transfer the property’s title.
For instance, Property owned by X was mortgaged by Y; the deed has not yet been recorded but will be at a later date. Later on, X transfers the same property to Z in a registered deed that was done with good intentions and without being aware of the earlier transfer. As the registration of the document has no bearing on the priority rule in this case, Y’s right will take precedence over Z’s right.
Postponement of prior mortgagee (Section 78)
The idea of priority is exempted under Section 78 of the Transfer of Property Act. According to this Section, the former mortgagee is deferred to the succeeding mortgagees if they commit fraud, egregious carelessness, or misrepresentation in order to persuade someone to provide security money for the same property. As a result, the following mortgagee will have precedence over the first mortgagee in terms of the property’s rights. E.g., P might mortgage a property to Q and then mortgage the same property to R. R is not aware of the prior transaction’s questions to Q on any debts (if any) in the property. Due to Q’s dishonest concealment of his mortgage, B lends P money to cover it. Despite being the prior mortgagee in this case since Q cheated, his prior rights are postponed.
Non-compliance with the procedure of law in prior transfer
If the initial transfer was made without following the legal process, the second transfer would inherit all of the rights from the initial transfer. For instance, A signed a lease deed for immovable property with a 5-year term in favour of B, but she neglected to register it as required. The same property was afterwards sold by A to C. In this case, C’s rights would take precedence over B’s.
In this situation, the later transferee will receive priority if the original transferee was aware of the following transfer. The priority rule does not apply in this situation. The first transferee need not be aware of the precise contents of the transfer in this exemption.
Every instrument begins working on the day it is executed. When multiple successive deeds are executed on the same date but the order of execution is unclear, all of the deeds will be executed simultaneously. Additionally, if two deeds have different dates and are registered on different days, the priority in this instance will be determined by the dates on the deeds rather than by the dates on which they were each registered.
Having notice entails being informed of the facts. As a result, when a legitimate contract for the sale of property is made—verbally or in writing—and a third party buys the property after receiving notification of an earlier transfer, the party claiming under the earlier transfer will have priority over the later buyer. However, the transfer that has been made over time must be legitimate.
The Registration Act’s Section 50 additionally offers different classes for registered documents pertaining to real estate that can be used to offset unregistered documents. This grants the registered deed of the following holder priority over the earlier holder of an unregistered deed since it wasn’t registered when it should have been in circumstances where the holder of the registered deed had knowledge of the earlier unregistered deed at the time of execution.
The rights of the later transfer will take precedence over those of the earlier transfer when the court orders or decrees to accept the subsequent transfer or the second transfer. The rule of priority won’t thus apply in these circumstances.
The salvage costs produced as a result of advances made to prevent the encumbered property from loss or destruction are an exception to the rule qui prior est tempore. These advances are payable prior to all other charges with an earlier due date, and they are paid in reverse chronological order of the due dates. According to the same rule, a mortgage that the court authorises the Receiver to borrow money on and directs that it be the property’s first charge will take precedence over any other mortgage, even if it was issued at a previous time.
However, the loan must have been raised with the intention of protecting the property in order to grant such priority. 26 The ruling may hold good against the mortgagees affected unless it is reversed if the court in this situation even incorrectly imparts priority, of which the mortgagees affected thereby have notice.
Relevance of the doctrine of priority with respect to Insolvency and Bankruptcy Code
If a creditor relinquishes its security and the company is about to be liquidated under Section 53 of the 2016 Insolvency and Bankruptcy Code, the precedence of charges agreed upon between the creditors in an inter-creditor or subordination agreement will be meaningless. However, no rights of priority over the mortgaged assets are granted by this clause. As lenders won’t have any protection in the event that corporate creditors go insolvent, this could have a severe effect on the credit market. If the secured creditors choose to waive their security interest in the liquidation estate, Section 48 of the Transfer of Property Act will not apply to the distribution.
The Apex Court extensively explored the inter se priority among secured creditors of a corporation in case of liquidation in the case of ICICI Bank v. SIDCO Leather (2006). According to the Court, the Parliament is presumed to have taken Section 48 of TPA into consideration. The aforementioned law states that in order for the first charge holder to be paid back from the mortgagor’s property, the claim of the first charge holder shall be given priority over the claim of the second charge holder. The Court further stated that in circumstances where the special statute does not contain any specific provisions for the contractual and other statutory rights among various categories of secured creditors, the specific provision given under the general statute shall prevail.
Case laws on the doctrine of priority
On the Board of Industrial and Financial Reconstruction’s advice in the case of SFL Industries Ltd. v. Reliance Capital Ltd., the court ordered the petitioner company to close (BIFR). The issue that emerged in this situation was whether the Companies Act’s clause would affect the theory of priority, including whether the first charge holder’s claim would take precedence over the claim of the second charge holder. The court ruled that the Companies Act does not specifically mention the right of precedence. In these circumstances, the priority rule outlined in Section 48 of the Transfer of Property Act may be applied. As a result, the court ruled that in the current case, the first charge holder’s claim would take precedence over the claim of the second charge holder.
In the case of Punjab & Sind Bank v. MMTC Ltd., a mortgagee got credit from the bank and a loan by depositing the title deeds to his property. Due to the lack of a non-obstante clause in the Act, a recovery certificate issued in the bank’s favour under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, cannot affect a mortgagee’s prior charge.
According to the judgment in Hafiz Md. Anwar v. Jamuna Prasad Singh, Section 48 of the TPA, 1882, states that if the same property has been transferred on more than one occasion, the subsequent transfer cannot confer any rights, titles, or interests on any basis over the earlier transfer.
In Herumbo Nath Banerjee v. Satish Chandra, it was decided that in a suit for partition, the party receiving a portion of a property (by government order) would be granted priority over execution creditors if the mortgagee secured a mortgage on all or a portion of the property or estate. A creditor who took possession of the property after the partition lawsuit was filed is known as an execution creditor. A prior mortgage by a co-owner of a share was required to be subject to prior charge by a manager of the entire estate under Section 98 of the Bengal Tenancy Act.
When there are many transferees, the precedence is determined by Section 48. It protects the first transferee’s rights in the absence of a particular agreement or reservation. It explains the fundamental idea that nobody can carry out their rights and titles better than themselves. Therefore, the transferor is prohibited from using the property in any further transactions that would violate the rights of the transferee. The rights established by the earlier transfer cannot be disregarded. Additionally, the Registration Act and the Insolvency and Bankruptcy Code now fall under the rule of priority’s wider sphere of applicability.
In order to break the impasse between the parties involved in the transfer of immovable properties, the doctrine of priority in property law is based on time. It gives someone who is ahead of time priority and gives them the legal edge over the transfer deed’s execution. The parties’ disagreement is brought on by the simultaneous transfer of one single piece of real estate to many parties.
Author: Arryan Mohanty,
Symbiosis Law School, Nagpur/Student