267208614-law-of-marshalling.docx

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY VISAKHAPATNAM

RULE OF MARSHALLING PROPERTY LAW

SUBMITTED TO: Mr. Raghu Ram

Submitted By: Malavika Ganta

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Roll: 2013047

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Index Topic

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Introduction……………………………………………………………...2

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Marshalling by subsequent purchaser…………………………………...2

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Marshalling of securities………………………………………………..3

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Essential elements of marshalling………………………………………4

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Common Debtor………………………………………………………..5

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No Prejudice to the prior mortgage…………………………………….6

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No prejudice to the encumbrance………………………………………6

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Contract to the contrary………………………………………………...6

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Conclusion……………………………………………………………...7

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Bibliography……………………………………………………………8

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Introduction Marshalling is an equitable remedy. It applies where the owner of two properties, X and Y, mortgages them both to lender A, and then mortgages one, say Y, to lender B. When A seeks to recover its debt, B can require that it does so first out of X. B is in effect (although not at law) subrogated to A’s rights under its security to the extent of the debtors secured liabilities to B. 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.1 There are two provisions in Transfer of Property Act which deal with the rule of Marshalling. Namely, Section 56 which talks about Marshalling by subsequent purchaser and Section 81, speaks about marshalling of securities. These sections and their interpretation with appropriate case laws will be broadly discussed in this paper.

Marshalling by Subsequent Purchaser 2

According to section 56 of the Act, If the owner of two or more properties mortgages them

to one person and sells one or more properties to another person, the buyer in the absence of a contract to the contrary, entitled to have the mortgaged-debt satisfied out of the properties and properties not sold to him, so far as the same will extend, but not as to prejudice the rights of the mortgagee or person claiming under him or any other person who has for consideration acquired an interest in any of the properties. When we divide the section point by point accordingly:

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If the owner of two or more properties,

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Mortgages them to one person and sells one or more to another person,

Commentaries on Equity Jurisprudence, Joshep story, page 382 Text Book on Transfer of Property, Dr. Avatar Singh page 198

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iii)

The buyer is entitled to have the mortgage debt satisfied out of the properties or the properties not sold to him.(subject to contrary contract)

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But this will not prejudice the rights of – a) Mortgagee, b) or, person claiming under him c) or, of any other person

This section says that if a person mortgages two or more properties to a person and sells one or more properties of them to another person, then the buyer is entitled to claim the mortgage debt is satisfied out of the property not sold to him. Therefore, this provision safeguards the interest of the buyer and only applies between the seller and buyer and do not apply for a subsequent purchaser. This section is based on a principle that if a person purchases a property free from encumbrances, then his absolute interest should not be prejudiced. Marshalling can be exercised only between the buyer and seller. It cannot be exercised detrimental against the rights of the mortgagee or any other person claiming under him or any other person having interest on the property. The subsequent purchaser can claim the right of the property only if the interest of the prior mortgagee or person claiming under him or any other person who has acquired interest in any of the properties for consideration is not effected thereby.3 This equitable principle has been stated by Lord Elden in the following words“a person having two funds shall not by the election the party having only one fund; and equity, to satisfy both, will throw him, who has two funds, upon that, which can be affected to him only; to the intent the only fund, to which the other has access, may remain clear to him” As expressed by J Dart “If two estates X and Y are subject to a common charge and estate X be sold to A, A will as against his vendor and his representatives will have a prima facie equity in the absence of a express agreement whether or not he has notice of the charge, throw it primarily on estate Y in exoneration of estate X” 4 Marshalling of Securities

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Transfer of Property By R.K. Sinha, page 228 Aldrich vs. Cooper, (1903),8 Vas 382 (395) Quoted on Mulla 9th edition, p 559.

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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 X, but he has the right of marshalling i.e. arranging the securities in his favour as far as possible.5 S. 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.

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Mulla Transfer of Property Act, page 445

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(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 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. Rector8, 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.

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Ex parte Kendall. 1811 17 Ves 520; 1 WTLC 46. Transfer of Property Act, B.B. Mitra and Sengupta, page 223 8 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.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 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

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Webb v. Smith (1885) 30CH D 192 CA ( Mulla, The Tranfer of Property Act, 9th edn. Page.868) Inderdawan Pershad v. Gobind Lall, (1896) 23 Cal 790.

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Conclusion Rule of Marshalling is an equity law based on principles of Natural Justice, this is an English principle and subsequently adopted by Indian law through Transfer of Property Act in sections 56 and 81. This rule safe guards the purchaser and mortgager in receiving their part before the mortgagee benefits himself out of the property. It also serves the purpose of sale and mortgage resulting in a fair transaction. Indian courts’ view also agreed with the English principle. Terming this as rule of equity. Thus, person who pleads under this rule should possess clean hands and thus, become beneficial.

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Bibliography Books 

Transfer of Property Act, B.B. Mitra and Sengupta

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Mulla Transfer of Property Act

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Transfer of Property By R.K. Sinha

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Commentaries on Equity Jurisprudence, Joshep story

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Text Book on Transfer of Property, Dr. Avatar Singh

Statutes 

Transfer of Property Act, 1882