The benefit of registration of charge is ‘two fold’. First of all registration protects the rights of charge holders and otherwise charge may be declared void in the event of a winding up. Another important benefit is the constructive notice declared under Section 126 of the Act. In Bank of Baroda v Official Liquidator of Alpic Finance Limited (under Liquidation), [2009] 149 Comp Cas 1 (Bom) the Bombay High Court decided an interesting issue about validity of sale deeds in favour of third parties when there was a valid registered charge in favour the Bank. The High Court found that the sale had taken place without verifying the records and the purchasers have not acted diligently and have not acted prudently by investigating title to the property. By summoning the records from RoC, the High Court found that the mortgage in favour of the Bank had been duly registered. The High Court held that by virtue of Section 126 of the Act, the purchasers are deemed to have notice of the mortgage and therefore they cannot be considered as bonafide purchasers. The high court further added that Section 125 is not limited in its scope only to a direct purchaser from the company; if such a view is accepted, it would leave the door open to frauds. The easiest thing to do then would be for the company to sell the property to a purchaser and to have that purchaser in turn sell the same to another purchaser and so on. The entire purpose of Section 125 could thus easily be defeated.
The Bombay High Court further held that a purchaser is bound to make all reasonable enquiries as to the title of his vendor. This would necessarily involve his ascertaining the title of his vendors' vendor and so on. Once it is obvious that the title of the property vested at some stage in a company, any prudent purchaser must enquire whether the company itself had the authority and power to sell the property. If the company had created a mortgage in respect of the property in favour of a third party and such mortgage or charge is registered under Section 125 the effect of Section 126 would operate even on subsequent purchasers.
