CONTENTS INTRODUCTION.................................................................................................. 2 THE DOCTRINE OF MARSHALLING.......................................................... MARSHALLING.................................... .................................. ............ 4 MARSHALLING UNDER THE TRANSFER OF PROPERTY ACT, 1882 ....................... 6 Essential Elements of Marshalling............................................ ...................... ........................................... ....................... .. 7 Common Debtor ......................................... .................... ........................................... ........................................... .............................. ......... 7 No Prejudice to the Prior Mortgagee .......................................... ..................... ......................................... .................... 8 No prejudice to other encumbrances ............................................. ....................... ...................................... ................ 8 Contract to the contrary ...................................................... ................................ ........................................... ........................... ...... 9 Securities to be on Same Footing Fo oting......................................... ................... ............................................ ........................... ..... 9 Rights of Purchasers ....................................................................................... 9 DOCTRINE OF CONTRIBUTION ......................................... ................... ............................................ ................................ .......... 11
Where the mortgage property belongs to two two or more more persons ............ 12
Where one property is mortgaged first and then again mortgaged with another property .......................................................................................... 14
MARSHALLING V. CONTRIBUTION CONTRIBUTION ............................ ...... ........................................... ....................................... .................. 15 Marshalling supersedes contribution.......................................... ..................... ....................................... .................. 15 CONCLUSION ................................................................................................... 16 BIBLIOGRAPHY ........................................... ...................... ........................................... ............................................ ................................ .......... 17
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INTRODUCTION This assignment deals with two very crucial concepts of the Transfer of Property Act, 1882. These two are Marshalling and Contribution. Both of these principles are 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, Contribution to debt, on the other hand, is the right of the comortgagors of several properties or of several shares in one property. In this assignment, I’ve tried to prove how Marshalling settles the rights of competing mortgagees while Contribution settles the rights of mortgagors of several properties or of several shares in one property.
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 respectively; while Section 82 deals with Contribution to mortgage debt. These sections and their interpretation with appropriate case laws will be broadly discussed in this paper. Both Marshalling and Contribution are equitable remedies and are based on the principles of natural justice. Both of these are English doctrines and have 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-laedas 1 which means that you should exercise your right as not unnecessarily to prejudice that of your neighbour. Marshalling in common parlance means
1
Story, Equity Jurisprudence, Section 633
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arranging (assets or securities) in the order in which they are available to meet various demands. The doctrine of Contribution according to Justice Story2 rests upon the legal maxim: qui sentit commodum, sentire debet et onus which means he who receives the advantage ought to suffer the burden. So in a nutshell, both the doctrines of marshalling and contribution have 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.
2
Equity Jurisprudence (by A E Randall) 3rd Eng. Edn.
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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. Cooper3 ("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."
3
(1803), 8 Ves. 382, 32 ER 402 (LC) at pg. 395
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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. 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.4
4
Commentaries on Equity Jurisprudence, Joshep story, page 382
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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 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
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X, but he has the right of marshalling i.e. arranging the securities in his favour as far as possible.5 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.6
5 6
Mulla Transfer of Property Act, page 445 Ex parte Kendall. 1811 17 Ves 520; 1 WTLC 46.
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No Prejudice to the Prior Mortgagee Marshalling must not be in prejudice to the interest 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. 7
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 8, 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.
7 8
Transfer of Property Act, B.B. Mitra and Sengupta, page 223 1842 1 1842 1 Y&C Ch 401
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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.9
Rights of Purchasers Section 56 gives recognition to right of purchaser, a puisne 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
9
Webb v. Smith (1885) 30CH D 192 CA ( Mulla, The Tranfer of Property Act, 9th edn. Page.868)
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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.10
10
Inderdawan Pershad v. Gobind Lall, (1896) 23 Cal 790.
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DOCTRINE OF CONTRIBUTION The fundamental rule of contribution is – “Equity delights in Equality”. Where a creditor has a single claim against several persons, he has the option of realizing the debt from any one of them, and by the common Law, the debtor who had thus been compelled to pay the debt in full, had no remedy against his codebtors. But in Equity he could claim contribution from the latter, so that the burden might fall equally on all. The right to compel marshalling as well as contribution rests upon the principles that a fund which is equally liable with another to pay a debt shall not escape because the creditor has been paid out of that other fund alone; and, on the other hand, that a creditor who has the means of satisfying his debts out of several funds shall so exercise his right as not to take from another creditor or claimant the fund which forms his only security. Section 82 of the TP Act deals with the doctrine of contribution. The section reads as, “W here property subject to a mortgage belongs to two or more persons having distinct and separate rights of ownership therein, the different shares in or parts of such property owned by such persons are, in the absence of a contract to the contrary, liable to contribute rateably to the debt secured by the mortgage, and, for the purpose of determining the rate at which each such share or part shall contribute, the value thereof shall be deemed to be its value at the date of the mortgage after deduction of the amount of any other mortgage or charge to which it may have been subject on that date. Where, of two properties belonging to the same owner, one is mortgaged to secure one debt and then both are mortgaged to secure another debt, and the former debt is paid out of the former property, each property is, in the absence
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of a contract to the contrary, liable to contribute rateably to the latter debt after deducting the amount of former debt from the value of the property out of which it has been paid. Nothing in this section applies to a property liable under Section 81 to the clai m of the subsequent mortgagee. Illustration:
The property X belongs to A and the property Y belongs to B, and A and B jointly executes a mortgage of both the properties for securing a loan taken from C. Later C realised the debt from property X alone. In this case B must contribute rateably in proportion to the value of his property Y. Here A can claim contribution from B. As is clearly evident from the plain reading of this section, Marshalling stands as an exception to Contribution. Thus it is in effect declared that, where marshalling and contribution might conflict with each other, marshalling is to prevail. Here, for better understanding this section, let us break it into two parts based on the first and second para of Section 82.
Where the mortgage property belongs to two or more persons
The first para of Sec. 82 deals with contribution in cases where the mortgaged property is owned by two or more persons. This part is comparatively less complex than the other part. The only two essentials for this section to apply are:
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i.
Mortgaged property is owned by two or more persons having distinct and separate shares therein
ii.
Such property is subject to one mortgage and there isn’t any contract to
the contrary. In such cases, all the different shares in the property or parts of such property owned by such persons are liable to contribute rateably. For determining the ratio in which the various properties are to contribute, their actual market value at the date of the mortgage is taken. If some part is already under mortgage or has some charge on it at the date of the mortgage, then that is duly subtracted from its actual value. The mortgagor may recover his whole debt from any of the share or part of the mortgaged property. In that case, doctrine of subrogation comes into force and the mortgagor who paid out the mortgage debt from his share steps into the share of original mortgagee and gets the right to sue his co-mortgagors for contributing rateably to the debt. This can be better understood with this illustration: There is a property X in which A, B, C and D have equal shares. All four of them jointly mortgaged this property to E for Rs. 1 Lakh. Now E realises the whole mortgage debt from A alone. Now B, C and D are liable to contribute Rs. 25,000 each to A in pursuance of their contribution to mortgage debt.
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Where one property is mortgaged first and then again mortgaged with another property
The second para of Sec. 82 deals with cases in which two properties are owned by the same person. Firstly, one is mortgaged to secure one debt and subsequently both are mortgaged to secure another debt. In such cases, the property which is subject to both the mortgages is liable to contribute rateably to the discharge of second mortgage. But first, the former debt has to be paid from it and the amount of former debt has to deducted from it while determining its value for contribution towards the second debt. Illustration:
A is the owner of two properties X and Y both worth 1 Lakh rupees. Now he mortgages X to B for a sum of Rs. 40,000 and subsequently mortgages both X and Y to C for a sum of Rs. 80,000. Now first of all, the debt of Rs. 40,000 will be satisfied from X towards the payment to B. So, while calculating the contribution towards the debt payment to C, the value of X will be just Rs. 60,000, while it will be Rs. 1 Lakh for Y. Thus both will contribute in the ratio of 3:5, that is X will contribute Rs. 30,000 and Y will contribute Rs. 50,000.
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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 I can say is 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 comortgagors of several properties or of several shares in one pro perty. 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 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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