FINAL PROJECT REPORT: REPORT:
DOCTRINE OF MARSHALLiNG
Submitted By: Mohammad Mohammad Faaiz Irfan
PRN : 16010324236
BBA.LLB, Division – C C
Symbiosis Law School, Hyderabad Symbiosis International (Deemed University), Pune
In the month of September 2018 PROPERTY LAW
Under the guidance of Prof. Shrishti Khare
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Acknowledgements
I feel highly elated to work on the topic “Doctrine of Marshalling.” The practical realization of this project has obligated the assistance of many persons. I express my deepest regard and gratitude to my teacher, Mrs. Shrishti maam for her unstinted support. Her consistent supervision, constant inspiration and invaluable guidance have been of immense help in understanding and carrying out the nuances of the project report. I take this opportunity to also thank the University and the Vice Chancellor for providing extensive database resources in the Library and through Internet. Some printing errors might have crept in, which are deeply regretted. I would be grateful to receive comments and suggestions to further improve this project report.
Faaiz Irfan Semester V Div-C BBA.LLB 2016-21 16010324236
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Contents Introduction …………………………………………………………………2 The Doctrine of Marshalling …………………………………………………………….3 Marshalling Under The Transfer of Property Act, 1992 ………………………….…...4
E ssential E lements…………………………………………………………….…..5
Common Debtor …………………………………………………………………...5
No Prejudice to the Prior Mortgagee………………………………..……………6
No prejudice to the encumbrances ………………………………………………..6
Contract to the contrary …………………………………………………………...7
Securites to be on same footing ………………………………...…………………7
Rights of Purchasers………………………………………………………………7
Marshalling V Contribution…………………………………….……………………….8 Conclusion ………………………………………………………………………………...9 Bibliography………………………………………………………………………………10
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INTRODUCTION
This assignment deals with one of the most very crucial concepts of the Transfer of Property Act, 1882. That is Marshalling . this principles is quintessential to the concept of mortgage and are based on the principles of equity. While Marshalling is the right of the subsequent mortgagee or the subsequent purchaser, this paper tried to prove how Marshalling settles the ri ghts of competing mortgagees. Section 56 and 81 of the Transfer of Property Act, 1882 (hereinafter referred as TPA) deals with Marshalling by subsequent purchaser and Marshalling of securities r espectively; Marshalling is an equitable remedy and is based on the principles of natural justice. This is the concept of English doctrines and had been incorporated in the TPA and have been further strengthened through different case laws in India. Marshalling is based on the ethical maxim sic utere tuo ut alienum non-laedas1 which means that you should exercise your right as not unnecessarily to prejudice that of your neighbour. Marshalling in common parlance means arranging (assets or securities) in the order in which they are available to meet various demands. So in a nutshell, both the doctrines of marshalling had evolved from the principle of equity and natural justice and we’ll look into these detail in the coming sections. Also, although Marshalling has been dealt with in both Section 56 (marshalling by subsequent purchaser) and Section 81 (Marshalling of securities), but we’re confining ourselves to Marshalling of securities (Section 81) only in this work. And try to determine the diffrence between Marshalling and Contribution as it is being always predicted that these doctrines are quite similar in nature.
1
Story, Equity Jurisprudence, Section 633
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THE DOCTRINE OF MARSHALLING
The doctrine of marshalling is an old equitable remedy that can be traced back as far as the mid-seventeenth century. The modern root of the doctrine can be found in the oft cited English case of Aldrich v. Cooper 2 ("Aldrich"), where Lord Eldon stated the doctrine as follows: “A person having two funds shall not by his election disappoint the party having only one fund, and equity, to satisfy both, will throw him, who has two funds, upon that which can be affected by him only, to the extent that the only fund, to which the other has access may remain clear to him.” Marshalling is an equitable doctrine applied in the context of lending. It was described by Lord Hoffmann as: “A principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim.” In the 8th Edition of Fisher and Lightwood's Law of Mortgages, the author writes: "The doctrine of marshalling rests upon the principle that a creditor who has the means of satisfying his debt out of several funds shall not, by the exercise of his right, prejudice another creditor whose security comprises only one of the funds."
Marshalling means to arrange/put in line. Section 81 of the Transfer of Property Act provides that if the owner of two or more properties mortgages them to one person and then mortgages one or more of the properties to another person, the subsequent mortgage is, in the absence of a contract to the contrary, entitled to have the prior mortgage-debt satisfied out of the property or properties not mortgaged to him, so far as the same will extend, but not so as to prejudice the rights of the prior mortgagee or of any other person who has for consideration acquired an interest in any of the properties. 2
(1803), 8 Ves. 382, 32 ER 402 (LC) at pg. 395
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For example, A mortgages his two properties X and Y to B and then mortgages Y to C. If B seeks to realize his mortgage out of A, C can compel B to proceed first against X and realize the debt from it. In case B is unable to realize the whole amount due to him from X, he is entitled to recover the balance from Y. The general principle is that the second creditor has a right in equity to require the first creditor to satisfy himself out of the security to which the second creditor has no claim. Otherwise, it is open to the first creditor to satisfy himself out of any security in any order, and if he chooses to satisfy himself out of the security which represents the second creditor’s only security, the second creditor is subrogated to the rights of the first creditor and can stand pro tanto in the shoes of the first creditor in relation to the security over which the second creditor has no legal security. 3
MARSHALLING UNDER THE TRANSFER OF PROPERTY ACT, 1882
According to section 81 of the Transfer of Property Act, 1882 1) If the owner of two or more properties mortgage them to one person and mortgages one or more properties to another, 2) The subsequent mortgagee is, in the absent of contract to the contrary, entitled to have the prior mortgage debt satisfied out of the property or properties not mortgaged to him, so far as the same will extend. 3) But not so as to prejudice the rights prior mortgagee or of any other person who has for consideration acquired an interest in any of the properties. Marshalling means arranging things. Section 56 right of marshalling to a subsequent purchaser and section 81 confers same on the puisne mortgagees. This right arises when two or more properties mortgage them to one person and mortgages one or more of them (already mortgaged to the first mortgager) to another person. The subsequent mortgage is entitled, unless there is contract to the contrary, to have the prior mortgage debt satisfied out of properties not mortgaged to him. For example, a mortgager mortgages his three properties A, B and C to a mortgagee X for Rs.15, 000. He further mortgages only property C to Y for 3
Commentaries on Equity Jurisprudence, Joshep story, page 382
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Rs.5, 00. This section give Y a right to say that debt of X shall be satisified out of sale proceeds of properties A and B and not C. In case if the proceeds of properties A and B is less than 15, 00 only then, the property C can be sold. Therefore, all though Y is subsequent mortgager his claim is not prior to that of X, but he has the right of marshalling i.e. arranging the securities in his favour as far as possible.4 Section 56 deals with the concept of marshalling in a transaction involved in subsequent sale, on the other hand, S. 81 is applicable only to mortgages. The doctrine of marshalling rests upon the principle that a creditor who has the means of satisfying his debt out of several funds shall not, by the exercise of his right, prejudice another creditor whose security comprises only one of the funds.
Essential Elements of Marshalling
(1) The mortgages may be two or more persons but the mortgager must be common i.e. there must be a common debtor. (2) The right cannot be exercised to the prejudice of the prior mortgagee. (3) The right cannot be exercised to the prejudice of any other person having claim over the property.
Common Debtor
It is necessary that the mortgager is the same person. Bothe the prior and subsequent mortgagee must have given the loan to the same person on the security of his properties. No marshalling can be exercised unless the mortgagees between whom it is to be enforced are creditors of the same person and have claims against the property of a common debtor. 5
4
Mulla Transfer of Property Act, page 445 Ex parte Kendall. 1811 17 Ves 520; 1 WTLC 46.
5
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No Prejudice to the Prior Mortgagee
Marshalling must not be in prejudice to the interes t of the prior mortgagee. It being the rule of equity cannot be enforced so as to work injustice to the prior creditor. The subsequent mortgagee cannot compel the prior mortgagee to proceed against a security which is insufficient. The Madras High Court held that marshalling implies the existence of two sets of properties one of which is subject to both mortgagees and the other is subject only to an earlier mortgage. By the release of one of the properties, there are no longer two sets of properties liable to be sold by the first mortgagee, but only one property which is subject to both the mortgages. Therefore, the doctrine of marshalling cannot be invoked. 6
No prejudice to other encumbrances
The right of marshalling cannot be exercised so as to prejudice the rights of any other person, who has, for consideration, acquired any interest in any of the properties. The leading case on this point is Barness v. Rector 7, for example, (1) A mortgages two properties X and Y to B (2) A then mortgages X to C (3) A again mortgages Y to D If C here insists that B should pay himself wholly out of Y, there might be nothing left for D. Therefore, the court will apportion B’s Mortgages rateably between X and Y and the surplus of X will go to C whereas surplus of Y to D.
6
Transfer of Property Act, B.B. Mitra and Sengupta, page 223 1842 1 1842 1 Y&C Ch 401
7
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Contract to the contrary
The right of marshalling under this section is subject to the contract to the contrary. The right may be excluded to the mortgage by mutual agreement. It is necessary that the prior mortgagee must have equal rights over the other two properties mortgaged to him. Where the rights are not equal there can be no marshalling. Different fragments of the same property are not considered different properties. Where one portion of the property already mortgaged is subsequently mortgaged to another person, they will not be considered as different properties.
Securities to be on Same Footing
It is necessary for application of equity that the securities should be on the same footing. Only successive mortgages come within the purview of this section. Where a double creditor has a change over a fund and a right of set off against another fund, he cannot be compelled by a second encumbrance on the first fund to abandon his change and rely on his right of set off.8
Rights of Purchasers
Section 56 gives recognition to right of purchaser, a poise mortgagee, having a right of marshalling against a prior mortgagee, does not lose his right because he has purchased the equity of redemption. For example, X and Y properties are mortgaged by A and B. Then mortgages X to C. In enforcement of his security C brings X property to sale and himself purchases X. Then B obtains an order for sale on his mortgage. C was held entitled to require B to bring Y to sale first and realise his security as far as possible out of Y only. 9
8
Webb v. Smith (1885) 30CH D 192 CA ( Mulla, The Tranfer of Property Act, 9th edn. Page.868) 9 Inderdawan Pershad v. Gobind Lall, (1896) 23 Cal 790.
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MARSHALLING V. CONTRIBUTION
Marshalling stands as an exception to contribution. Whenever there is a conflict between contribution and marshalling, marshalling prevails. Marshalling settles the rights of competing mortgagees, whereas, the contribution settles the right of mortgagors, whether they are in different properties or several shares in one property. Marshalling can be seen as the converse of contribution. Both belong to the same genus but are different species. Both are based upon the principle of equity and natural justice. Here is an illustration showing how marshalling supersedes or prevails over contribution.
Marshalling supersedes contribution : By the last paragraph of Section 82, it is in effect declared that, where marshalling and contribution might conflict with each other, marshalling is to prevail. Thus, if the owner of two properties X and Y: Mortgages X to…………………….A Mortgages X to…………………….B Mortgages X & Y to…………………….C Mortgages X to……………………..D Then, X and Y both contribute to C’s mortgage in the portion to their values after deducting from X the amount of A’s mortgage and from Y the amount of B’s mortgage; but under the right of marshalling, D could require C to proceed first against Y. This right of D to marshal would prevail against the right of contribution.
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CONCLUSION
In conclusion, all the paper concluded that both the concept of marshalling and contribution are based on the principle of equity and natural justice. Both these principles protect the rights of the subsequent mortgagee and the co-mortgagors of several properties or of several shares in one property. Doctrine of marshalling rests upon the principle that a creditor who has the means of satisfying his debt out of several funds shall not, by the exercise of his right, prejudice another creditor whose security comprises only one of the funds. Marshall ing can be achieved in two ways. Either the courts will require the senior creditor to resort to the singly secured fund, or, the courts will allow the junior creditor to subrogate to the senior creditor's interest in that fund. In other words: marshalling by compulsion or marshalling by subrogation. Marshalling is an equitable remedy available to protect the recovery of a junior creditor against the arbitrary action or whims of a senior creditor. Simply stated, the doctrine of marshalling dictates that where there are two creditors of the same debtor, one creditor having a right to resort to two funds for payment of his debt, and the other a right to resort to one fund only, the court will "marshal" or arrange the funds so that both creditors are paid as far as possible. Doctrine of contribution, on the other hand, provides that if several properties belonging to several persons or of a single mortgagor having several shares in one property are mortgaged to secure a debt due to taking of a loan, the law says that each property should contribute towards the debt in proportion to its value (rateably). Thus it is clearly established that Marshalling settles the rights of competing mortgagees
while Contribution settles the rights of mortgagors of several properties or of several shares in one property.
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BIBLIOGRAPHY
BOOKS
Mulla, Sir Dinshaw Fardunji, The Transfer of Property Act, 12th Edition, Lexis Nexis Publications
Tripathi, T.P., The Transfer of Property Act, 1882 , 3rd Edition, Allahabad Law Agency Publications
Saxena, Poonam Pradhan, Property Law, 2nd Edition, Lexis Nexis Publications
Sinha, R.K. The Transfer of Property Act , 11th Edition. Allahabad: Central Law Agency, 2010.
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