Doctrine of priority

The Doctrine of Priority in the context of the Transfer of Property Act,

1882, is a legal principle that helps courts determine which party’s rights
should be given precedence when there are conflicting interests over the
same property. This doctrine is encapsulated in Section 48 of the Act and
is based on the maxim qui prior est tempore potior est jure, which
translates to “he who is earlier in time is stronger in law.”

In Nandkishore v. Harjarilal[1] the Madhya Pradesh High Court held that “a

transfer cannot prejudice the transferee of the right by any subsequent dealing with
the property”.

In essence, if a property has been transferred to two different

parties at different times, the one who received the transfer first
will have their rights upheld over the latter, provided all other
equities are equal. This principle ensures that a transferor cannot
grant rights to a property that has already been dealt with in a
previous transaction.
The term “equal” in this context refers to the fairness and legality of the
circumstances surrounding each transfer. It implies that the first
transferee’s rights will be upheld over the latter, assuming that both
transfers were conducted fairly and without any legal defects.
Here’s a breakdown of what “provided all other equities are equal”
means:
Fairness: Both parties must have engaged in the transaction in good
faith, without any fraudulent intentions.
Legality: Both transfers should comply with the legal requirements and
formalities for property transactions.
Notice: Neither party should have had prior knowledge of any claim or
interest that could affect their rights to the property.
If these conditions are met, and no other legal or equitable factors would
give the latter transferee a stronger claim, the doctrine of priority will
favor the first transferee. This principle ensures that property rights are
predictable and based on the order of transactions, which is crucial for the
stability of property law.

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.

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:
The statement refers to the legal principle that under the Doctrine of
Priority, the rights of the first transferee are considered superior,
regardless of whether subsequent transferees are aware of the earlier
transactions. This means that the law does not provide any protection to a
transferee who was unaware of a prior transfer when they acquired their
interest in the property.
In other words, even if a person buys property in good faith and without
knowledge of a previous sale or transfer, they may still lose their rights to
the property if it turns out that someone else had a prior claim. The law
prioritizes the first valid transfer over later ones, and this priority is
absolute – it doesn’t take into account the knowledge or ignorance of
subsequent transferees. This can sometimes lead to harsh outcomes, but
it is designed to maintain order and certainty in property transactions. It
emphasizes the importance of due diligence and thorough checks before
acquiring property
Burden of proof:
In the context of the Doctrine of Priority, the “burden of proof” refers to
the responsibility of a party to prove their claim when there are competing
interests over a property. Specifically, it means that the party claiming
priority based on an earlier transfer must provide evidence to establish
that their transfer was indeed first in time and complied with all legal
formalities.
Here’s how the burden of proof operates within the Doctrine of Priority:
1. Initial Burden: The initial burden lies with the party asserting their
rights based on the doctrine. They must show that their claim to the
property is superior due to an earlier transfer.
2. Evidence: This may involve presenting documents such as deeds,
registration details, or any other legal instruments that can
substantiate the timing and validity of the transfer.
3. Shift of Burden: If the initial party successfully proves their earlier
interest, the burden may shift to the subsequent transferee to prove
any exceptions or reasons why the doctrine should not apply, such
as fraud or lack of notice.
The principle is absolute, meaning that even if a subsequent transferee
was unaware of the prior transfer, they are not protected unless they can
demonstrate an exception to the rule. This underscores the importance of
conducting thorough due diligence before engaging in property
transactions.

This Section lays down an important principle that states, no man can
convey a title other than what he has. This means when a transferor
transfers the same property in favor of more than one transferee, then
each transferee will enjoy the property along with its right as the former
transferee. Under this doctrine, if a person has already created a transfer
of the property in motion, then he cannot ignore his grant and deal with
the property free from the rights that were created in an earlier
transaction. This Section is absolute in nature and does protect or reserve
in favour of the transferee, who may not even know about the prior
transfer. The principle of the doctrine of priority explained under Section
48 is applicable where there is competition among the mortgagee by
retaining title deeds and a subsequent transferee.

Essentials of the doctrine of priority

1. There ought to be one owner or transferor of the property and more
than one transferee.
2. It is only applicable only to immovable property.
3. The transfer should be created at different times and at these different
times there ought to be created rights to the transferee.
4. This right cannot be exercised to the fullest at the same time.

Illustration:
A is the owner of the immovable property. He mortgaged that property to
B in the month of August. Later, in July A transferred the same property to
C. Here in this case all the essentials are satisfied and as per the rule of
priority, B will get all the rights of the property prior to C. In case of
default on the payment of the loan, the mortgagee can sell the property
as the latter transfer is in accordance with the earlier transfer.

Effect of the document registered under doctrine of priority

Under the rule of priority, registration of the document does not affect the
rights of the prior transferee. That means if the document of the prior
transferee is unregistered whereas the document of the subsequent
transfer is registered, still the rule of priority would be applicable to the
prior transferee and not the subsequent transferee unless and until the
subsequent transaction is made with bonafide intention and without the
knowledge of the prior transaction. Registration does not create any right
in the property. It is merely proof of intention to transfer the title of the
property.

In the case of Duraiswami Reddi v. Angappa Reddi (1945), it was

observed that the prior transferee would be entitled to enforce his rights
though his documents were registered later. And even if the subsequent
transferee’s documents were registered earlier and he entered into a
transaction with bonafide intention and without the knowledge of the
previous transaction, still he is not entitled to the prior rights. It was also
held that the result of the above case was implied and was a direct impact
of the fused operation of Section 47 of the Registration Act and Section 48
of the Transfer of Property Act. It was concluded that the right of priority
of the earlier transferee would be adjourned only if the latter transferee
established any detailed incidents such as fraud, esstoples, or gross
negligence.

The case of Duraiswami Reddi v. Angappa Reddi (1945) is a

significant judgment in Indian property law, particularly concerning the
doctrine of priority in the context of the Registration Act. Here’s a
summary of the case:
The dispute involved two sale deeds for the same property. The first sale
deed was executed by the first defendant in favor of the plaintiff on July 9,
1941, but was lost by the plaintiff and subsequently found and registered
on September 22, 1941. Meanwhile, the second defendant had obtained a
subsequent sale deed from the first defendant, executed on July 16, 1941,
and registered on July 23, 1941.
The key issue was which sale deed had priority, given that the plaintiff’s
deed was earlier but registered later, while the second defendant’s deed
was later but registered earlier. The court held that, according to Section
47 of the Registration Act, the earlier deed should be given priority over
the later one, even if the later deed was registered first. This principle was
upheld even though the second defendant claimed to have purchased the
property bona fide without knowledge of the plaintiff’s earlier deed.
The judgment emphasizes that the date of the document, rather than the
date of registration, determines priority, provided the earlier document is
subsequently registered. This case is often cited in discussions of property
law and the doctrine of priority

Positives:
Clarity in Property Rights: The case reinforces the principle that the
date of the document, rather than the date of registration, determines
priority, which provides clarity in property rights.
Protection of Good Faith Transactions: It upholds the rights of
individuals who have conducted transactions in good faith, ensuring that
their rights are not undermined by later registrations.
Legal Precedent: It serves as a strong legal precedent for similar cases,
guiding future property disputes and registrations.
Negatives:
Potential for Overlooking Due Diligence: The case could potentially
encourage parties to overlook due diligence, assuming that earlier
documents will always have priority regardless of registration dates.
Risk of Fraud: There is a risk that this ruling could be exploited by
fraudulent parties who may secure an earlier dated document and register
it after a bona fide transaction has taken place.
Complexity in Disputes: The case adds a layer of complexity to
property disputes, especially in situations where the bona fides of the
parties and the timing of the registration are in question

APPLICABILITY OF THE RULE

Where the competition is between a mortgagee by deposit of title-deeds

and a subsequent purchaser, the principle embodied in Section 48 is
applicable.9
Section 48 of the Transfer of Property Act does not admit of any
exception.10

In Sitaram v. Rajnarain11, Rachpal Singh, J., and Smith, J., have held that
the question of priority between a mortgagee and a subsequent purchaser
is governed by Section 48 and is not protected by the provisions of Sec.41
there is no proof of negligence not the part of
the mortgagee.

The right of priority will have to be determined by the combined operation

of Section 48 of the Transfer of Property Act and Sections 47 and 49 of the
Registration Act. Any undue emphasis upon Section 49 of the Registration
Act in isolation would render nugatory and useless the equally important
provisions in Section 47 of the Registration Act and Section 48 of the
Transfer of Property Act. Once the document is registered, Section 49 of
the Registration Act has no relevance and the document takes effect from
the date of its execution by reason of Section 47 of the Registration Act
will necessarily have to be determined in accordance with the rule
embodied in Section. 48 of the Transfer of Property Act.

The charge which the Plaintiff has under the indemnity clause in the
partition deed is not entitled to priority or even equality with the charge
which Defendant 1 has for the money due to him for he is entitled to
priority over the charge in Plaintiff's favour.
Subsequent lease cannot operate to the prejudice of the old tenant.

Exceptions to the doctrine of priority

1. Postponement of Prior Mortgagee

Postponement of a prior mortgagee is an exception to the doctrine of
priority. It is provided under section 78 of the Transfer of Property Act.
According to this exception, if the prior mortgagee creates some fraud,
misrepresentation or gross negligence and induces any third person to
advance money for the mortgaged property, then the prior mortgagee is
postponed to the subsequent mortgagees. The subsequent mortgagee will
get priority in the rights of the property over the prior mortgagee.
The third person, that is, the subsequent person, was innocent at his end,
which means the third person was unaware of such fraud,
misrepresentation or gross negligence.
Example: Sanjay mortgages a property to Mukesh. Later, Sanjay
mortgages the same property to Shyam. Before advancing the money to
Sanjay, Shyam enquires from Mukesh whether the said property is free
from encumbrances or charges. Mukesh fraudulently conceals his own
mortgage, and Shyam advances money. Though Mukesh was the prior
mortgagee, since he had committed fraud, his prior right was postponed.

2. Mortgage to secure uncertain amount when the maximum is expressed

Section 79 of the Transfer of Property Act provides for the second
exception to the general rule of right to priority. These are its essentials:
There must be a maximum sum that has been secured under the first
mortgage.
The second mortgagee must have notice of the existence of the first
mortgage.
The prior mortgagee must have advanced more money within the
maximum limit after the second mortgage.
Let us understand section 79 with the help of an example:
Mukesh mortgages a property to Shyam to secure Rs. 5,000 (as a present
as well as a future advance upon a fixed sum of money, i.e. Rs. 5,000).
Later, Mukesh mortgages the same property to Priya to secure Rs. 2,000.
Subsequently, Shyam advances Rs. 1,000 to Mukesh on the same
security.
Under the rule of priority, the subsequent advance of Rs. 1,000 made by
Shyam is not prior to Priya’s mortgage. Priya’s mortgage of Rs. 2,000 is
prior to Shyam’s subsequent advance of Rs. 1,000. Thus, any further
advance made by Shyam within that maximum will be treated as part of
the first mortgage and take priority over Priya’s mortgage of Rs. 2,000.

(I) Salvage Charges

An exception to the rule qui prior est tempore is to be found in the

salvage charges created on account of advances made to save the
encumbered property from loss or destruction. Such advances are
payable in priority to all other charges of earlier date, and amongst
themselves have precedence in the inverse order of their respective
dates.24 On the same principle, where the court authorises the Receiver
to borrow money on a mortgage directing that it should constitute a first
charge on the property, it will take priority over any other mortgage
though of an earlier date.25 But in order to confer such priority the loan
must have been raised for the purpose of preserving the property.26 If in
such a case the Court even improperly confers priority, of which the
mortgagees affected thereby have notice, the order may hold good
against them unless it is set aside.

(ii) Estoppel

The rule also yields to the equitable principle of estoppel. This, in a case
where the first mortgagee was a witness to the second mortgagee, though
there was no actual proof of his knowing the contents thereof, yet, since
the presumption is that he might have known the same, he was
postponed to the second encumbrancer.27 So also, where the registered
purchaser was present when possession was made over to the
unregistered purchaser, the former was on that account postpones to the
latter.28 A party paying off a prior mortgage is not stopped but has a right
to use that mortgage as a shield against a subsequent mortgage if his
intention was to keep the prior mortgage alive.29 No subsequent
mortgage is bound in law to give notice of his encumbrance to the prior
encumbrancers. In any case nothing short of estoppels would postpone
him to the subsequent transferee. The rule is same in England, and no
rule of Hindu law requires such a notice. Mere absence of activity on the
part of an equitable encumbrancer cannot postpone his encumbrance.

(iii) By the Registration

An instrument operates from the date of its execution, and it is immaterial

that it is compulsorily registrable, for in that case too, it will operate from
the same date. Where two or more deeds are executed on the same day
and the order of their execution cannot be ascertained, all the deeds will
take effect at once, and pari passu. Such a case is analogous to that of a
devise to A, and then devise of the same estate to B in a subsequent part
of the will, which will give the estate to A and B either jointly or as tenants
in common.30 Where two deeds bearing different dates are registered on
different days, priority as between them is ascertained with reference to
the dates of the deeds and not with reference to the date on which they
were respectively registered; and this priority is not influenced by the fact
that the party having the later deed is in possession of the
property.31 Where after execution, but before registration, the deed is
lost and another had to be executed in its place, the vendor having
between the two dates re-sold the property by a registered deed to
another with notice of the prior sale, it has been held that the first
purchaser was entitled to a decree on his sale-deed.

(iv) By notice

Section 78 enunciates the cases in which the rule of this section would be
departed from. Thus, it has been held that Section 50 of the Registration
Act, 1877, did not avoid to give the holder of a subsequent registered
deed priority in respect of his deed over the holder of an earlier
unregistered deed not being compulsorily registrable, if in fact, the holder
of the registered deed had, at the time of its execution, notice of the
earlier unregistered deed.33 So where a bona fide contract, whether oral
or written, is made for the sale of property, and a third party, afterwards
buys the property with notice of the prior contract, the title of party
claiming under the prior contract prevails against the subsequent
purchaser, although the latter's purchase may have been registered, and
although he has obtained possession under this purchase.

(v) By

If a person who is about to take a mortgage which must be made by

registered deed, finds some person other than the intending mortgager in
possession, the fact of such possession is sufficient to put the would be
mortgagee on enquiry as to the title of such person, and if such person's
title is that of a prior mortgagee under a document not compulsorily
registrable, the second mortgagee cannot, by getting his mortgage
registered, obtain priority over the first mortgagee. Possession in certain
cases is notice of the title of the person in possession and a party
intending to deal with the property is bound to inquire into the nature of
the possession. If he assumes that the occupant is a tenant and it appears
that he had since purchased the land, the subsequent transferee would be
affected with notice of the purchase.

(vi) By decree or order

A decree or order passed in respect of a property does not by itself

acquire any priority over registered deeds. A decree or order obtained
upon an unregistered prior deed against the mortgagor alone,
subsequently to a registered transfer of the mortgaged property, does not
obtain preference in competition with the latter.
Relevance of the doctrine of priority with respect to Insolvency
and Bankruptcy Code
The doctrine of priority is relevant to the Insolvency and Bankruptcy Code
(IBC) as it helps determine the order in which creditors are paid during the
liquidation process. Under the IBC, the distribution of assets follows a
specific order known as the “Waterfall Mechanism,” which is outlined in
Section 53 of the Code. This mechanism prioritizes payments to various
stakeholders in a sequential manner, ensuring that certain debts, like
insolvency resolution process costs and liquidation costs, are paid first.
However, the doctrine of priority under the Transfer of Property Act, which
typically gives precedence to earlier interests, may not always align with
the IBC’s order of payment. For instance, inter-creditor agreements or
subordination agreements that establish a hierarchy of charges between
creditors could become ineffective if a creditor relinquishes its security
interest and the company approaches liquidation. Thus, the IBC can alter
the traditional order of priority to balance the interests of all stakeholders
and maximize the value of the insolvent entity’s assets.