Doctrine of Marshalling and Contribution - sec 81 and 82

DOCTRINE OF MARSHALLING

Section 81 defines the doctrine of Marshalling of securities.

According to Section 81 of the Transfer of Property DOCTRINE OF MARSHALLING

If the owner of two or more properties –

i) mortages them to one person,

ii)and then mortages one or more of the properties to another person,

in such a case, the subsequent mortage is entitled to have prior mortage-debt satisfied out of property or properties which are not mortaged to him. This will not affect the right of the prior mortagee who has aquired an interest in any of the properties for consideration. (in the absence of a contract to the contrary).Act:

If the owner of two or more properties –

i) mortages them to one person,

ii)and then mortages one or more of the properties to another person,

in such a case, the subsequent mortage is entitled to have prior mortage-debt satisfied out of property or properties which are not mortaged to him. This will not affect the right of the prior mortagee who has aquired an interest in any of the properties for consideration. (in the absence of a contract to the contrary).

Essential elements

The mortgagees may be two or more persons but the mortgagor must be common i.e., there must be a common debtor.

The right cannot be exercised to be the prejudice of the prior mortgagee.

The right cannot be exercised to the prejudice of any other person having claim over the property.

Common debtor –

It is necessary that the mortgagor is the same person. Both 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 the creditors of the same person and have claims against the property of a common debtor.

No prejudice to prior mortgagee –

marshalling must not be in prejudice to the interest of the prior mortgagee. It being a rule of equity cannot be enforced so as to work injustice to the prior creditor. The subsequent mortgagee cannot compel to the prior mortgagee to proceed against a security which is insufficient.

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 an interest in any of the properties. The leading case on this point is Barnes v. Rector,[iv] for example,

X mortgages two properties S and M to Y

X then mortgages S to Z

X again mortgages M to F

If Z here insist that Y should pay himself wholly out of M, there might be nothing left for F. Therefore, the court will apportion b’s mortgages rateably between S and M and the surplus of S will go to Z whereas surplus of M to F.

The right of may be excluded by the parties to the mortgage by mutual agreement.

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 charge over one fund and a right of set off against another fund, he cannot be compelled by a second encumbrancer on the first fund to abandon his charge and rely on his right of set off.
[v]Rights of purchasers –Section 56 gives recognition to the right of a 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.

In Shah Ram Chand vs Pandit Parbhu Dayal it is to be noted that Sections 81, 82 are statutory equities in favour of persons owning properties liable to a charge against other persons and other properties equally liable on that charge. It has not been argued, and it cannot be argued, that any of these provisions raises the equity sought for here.

Contribution of Mortgage-debt (Section 82)

1.Where 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.

2.For the purpose of determination of the rate at which each such share or part will contribute, the value of it shall be deemed to be its value at the sale of the mortgage after deduction of the amount of any other mortgage or charge to which it may have been subject on that date.

3.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 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.

This section deals with the rules relating to contribution of money towards mortgage-debt. The doctrine of contribution that several properties mortgaged to secure one debt are liable to contribute to that debt rateably in proportion to their values at the date of mortgage, the amount of the previous mortgage or charge being deducted. This rule applied not only where several properties are mortgaged and their owner is compelled to satisfy the whole mortgage-debt but also where only one property held by several co-owners is mortgaged and the portion of co-owner is made to satisfy the mortgage.

Rules of contribution

The rules of contribution are stated below –

1. When mortgaged property belongs to two or more persons –

Where the mortgaged-property belongs to two to more persons who take a common loan then according to the rule of contribution all the co-mortgagors are liable to contribute rateably. The mortgagor from whose property alone the debt is recovered has a right to compel other co-mortgagors to contribute to the debt and can be compelled to contribute only up to the extent of their respective shares in the property.

This rule is also applicable where at the time of mortgage the property is one but later on it is partitioned and co-shares becomes owner of their respective shares.

2. When one property is mortgaged first and then again mortgaged with another property

Where the mortgagor has two properties and he mortgages one to secure one debt and then mortgages both to secure another debt and if former debt is paid out of the former property, therein, the absence of a contract to the contrary, each property is liable to contribute rateably to the latter debt after deducting the amount of the former debt from the value of the property from which it has been paid.

If the amount due on the earlier mortgage on one property exceeds the value of that property, the whole amount of the second mortgage is recoverable from the other properties because the value of that property for the purpose contribution is nil.

3. Marshalling supersedes contribution

Marshalling supersedes contribution according to the last paragraph of this section. In case of any conflict between the right of marshalling and contribution, the right of marshalling prevails over that of contribution. Therefore, a contribution is subject to marshalling.

Points to differentiate between marshalling and contribution

-Marshalling is the right of subsequent whereas contribution is related to mortgagors.

-A subsequent mortgagee requires that prior mortgagee shall recover his debt out of the property not mortgaged to him in marshalling. Whereas in contribution all the co-mortgagors who have taken debt mortgaging their properties have to make contributions towards debt rateably according to their respective shares.