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CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation

Vihaan mortgages his property Greenfield to Safe Bank to secure the running account balance up to a maximum of Rs 10 lakh. He then mortgages Greenfield to Colin for Rs 10 lakh, and Colin has notice of the bank's mortgage. At that time the balance was Rs 4 lakh, but later the bank advances further sums, with notice of Colin's mortgage, taking the balance to Rs 12 lakh. Under the Transfer of Property Act, 1882, what is the position of priority?

The bank has priority up to Rs 10 lakh. Where a mortgage securing a running account states a maximum, a later mortgagee with notice of it is postponed for all advances up to that maximum, even those made after notice of the later mortgage.

  1. AColin has priority for Rs 10 lakh as the bank had notice of his mortgage
  2. BThe bank has priority up to Rs 10 lakh, and Colin ranks after itCorrect
  3. CThe bank has priority only for Rs 4 lakh, the balance at the date of Colin's mortgage
  4. DThe bank and Colin rank equally in proportion to their claims

Explanation

Section 79 provides that where the mortgage expresses a maximum, a later mortgagee with notice of the prior mortgage is postponed in respect of all advances not exceeding that maximum, even if made with notice of the subsequent mortgage. The bank thus ranks first up to Rs 10 lakh. Option C ignores the stated maximum.

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