CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation
Ramesh mortgaged his shop in Indore to Sundaram Bank to secure the running balance of his cash credit account, expressly stating a maximum of Rs. 10,00,000 to be secured. Later Ramesh mortgaged the same shop to Kavita Finance, which had notice of the bank's mortgage. At that time the balance due to the bank was Rs. 4,00,000. The bank then made further advances, taking the balance to Rs. 9,00,000, with notice of the second mortgage. Which statement is correct?
The bank has priority for the whole Rs. 9,00,000. Because the first mortgage states a maximum of Rs. 10,00,000 and the second mortgagee had notice of it, later advances within that maximum rank ahead of the second mortgage, even if made with notice of it.
- AThe bank's mortgage has priority over Kavita Finance for the whole Rs. 9,00,000Correct
- BThe bank has priority only for Rs. 4,00,000, as further advances after notice rank behind the second mortgage
- CThe bank and Kavita Finance rank equally because the amount was uncertain
- DKavita Finance has priority because it gave notice to the bank
Explanation
Under Section 79, where the mortgage expresses a maximum, a subsequent mortgage made with notice of the prior one is postponed in respect of all advances not exceeding the maximum, even if made with notice of the subsequent mortgage. The Rs. 9,00,000 balance is within the Rs. 10,00,000 maximum. The option limiting priority to Rs. 4,00,000 ignores this rule.
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