Marshalling and Contribution

Marshalling and Contribution

The term marshalling means to collect or gather and then arrange in proper order, in case of differences or conflicts in interests or claims rearrange in such a way that there is justice and maximum satisfaction to all. [i]The doctrine of marshalling has been set out under section 56 and 81 of the Transfer of Property Act 1882. Section 56 lays down the provision of marshalling by subsequent purchaser under sale and section 81 lays down the provision of marshalling under mortgage. The doctrine of contribution has been set out under section 82 of the Act. Marshalling is the opposite of contribution. The rule of marshalling safeguards the interests of all the mortgagees whereas the purpose of the rule contribution is to safeguard the interest of the mortgage.

Marshalling

Under section 81 of the Act “when the owner of two or more properties mortgages the property to one person and subsequently mortgages two or more properties to another person, the new mortgagee is, in the absence to the contrary, entitled to have the mortgage debt satisfied out of the property or properties not mortgaged to him. So far as the same will extend but not as to prejudice the rights of the mortgagee or persons claiming under him or of any other person who has for consideration acquired an interest in any of the properties.”[ii]

This section applies to mortgages in which the mortgagees have the same debtor. In such a case the first mortgagee might have one or more properties and the second mortgagee might have some of those properties and advanced loan without notice of the earlier encumbrance. In such a case the mortgagee is entitled to Marshall securities and the first mortgagee shall proceed against the properties which have not been encumbered in favour of the latter.[iii]

Under section 56 of the Act “ when a person who owns one or more properties mortgages them to a person and subsequently sells one or more properties to third party, the buyer is entitled to have his mortgaged debt satisfied out of the property or properties not sold to him so far as the same shall extend but not prejudice the rights of the mortgagees or person claiming under him or any of the person who has for a consideration  obtained an  interest in any of those properties.”[iv]

The mortgagee who has the means to satisfy his debt out of the properties shall exercise his rights and not prejudice the rights of the purchaser of one of those properties[v]

The object to be achieved and the principle involved under section 81 and section 56 is the same. These doctrines are based upon the principle of equity. The interest of both the precedent and subsequent mortgagees are protected under this section.It aims to provide justice to the mortgagor and the mortgagee and is based on the maxim “equality is equity”. The first mortgagee shall not do any act that will harm the interest of the second mortgagee.[vi]

Illustration

X is the owner of property A, B and C. X mortgages all three properties (A, B,C) to Y. Subsequently, X mortgages property B and C to Z. Hence under the rule of marshalling Y can satisfy is debt out the property A, B and C. If the debt of Y can be satisfied out of property A alone then property B and C should be left untouched. However, if Y’s debt cannot be satisfied out of property A alone then he can proceed to satisfy his debt from property B and C also.

Case law

D.C. Johar And Sons Ltd. vs Mathew[vii]Two brothers (A and B)who owned individual properties mortgaged their properties to Bank 1. Subsequently one of the brothers (A) also mortgaged his properties to Bank 2. Bank 2 contended that Bank 1 should proceed against the properties of the other brother (B) first. The court held that this case would not fall under section 81 as there should be a common debtor (mortgagor) of the properties.

In a leading English Case Aldrich v. Cooper[viii] , Lord Eldon stated that in a case where a person has two funds he shall not by his election disappoint or prejudice the rights of the parties. He should demarcate the interests and satisfy the precedent mortgagees debt having due regard of the subsequent mortgagees. Hence he reiterated the doctrine of marshalling and held that marshalling can be done in a way by arranging the securities so that one can satisfy various claims.

Essentials of the doctrine of marshalling:

1. There should be one common mortgagor between two or more mortgagees. The owner who is the mortgagor should own two or more properties and out of which he should mortgage one or more properties to two or more mortgagees.

2. There should be a subsequent mortgage of the said properties to another person.

3. The precedent mortgagee should satisfy his mortgage debt out of the properties exclusively held by him (if any) and then proceed to satisfy the remaining debt out of the other properties. In other words, the subsequent mortgagee is entitled to have the mortgage debt satisfied out of the property not mortgaged to him.[ix]

4. For the application of the doctrine of marshalling notice to the subsequent mortgagee of the prior mortgage is not relevant.[x]

Contribution

The rule of contribution has been laid down under section 82 of the Act. It states that when two or more persons have distinct and separate ownership rights and interests in a property in different proportions which is subjected to a mortgage, in absence to the contrary each of such persons will be liable to contribute proportionately towards the debt secured by the mortgage. For determining the share of contribution towards the debt of each person shall be deemed to be the value at the date of the mortgage after deducting the value of any charge or mortgage which it may have been subject on that date.

The rule of contribution is based on the maxim“ Questioncommodum senator debtedonus” which means that if one enjoys the benefits he should also enjoy the burden.[xi]

Where an owner owns two properties and mortgages one of the properties to secure a debt and then both are mortgaged to secure another debt, in this case the property mortgaged in the first case should be utilized to pay the first debt. Subsequently in the absence of a contract to the contrary, each property is bound to contribute rateably to the second debt after deducting the relevant amount of debt from the value of the property from which it has been satisfied.

Nothing in section 82 applies to the property liable under section 81 to the claim of the subsequent mortgage.

There is no personal responsibility under section 82. There is a liability imposed on the property. The amount of contribution will depend on the values of the property.[xii] The object of this section is to prevent any sort of collusion between the parties. A mortgagee cannot recover the entire debt from one party. Each party has to rateably contribute according to the ratio of the value of properties.

Illustration

X owns property 1 and Y owns property 2, both X and Y mortgage their properties (1 and 2) to C to secure a debt. C cannot realize the value of debt from X or Y alone. Both X and Y will be liable to contribute rateably in accordance with the value of the properties towards the debt. 

Case law

Thoppai M. Muthiah Bhagavatharvs T.V. Venkatarama Ayyar and Ors. [xiii] Section 82 solely pertains the distribution of the burden on the properties in a case where there is no other question as to who had the benefit of the money in the beginning or any other similar complication arises. In a joint family comprising of A and B, they mortgage two securities and subsequently the family separates and A becomes the owner of one security and B the other security mortgaged. The value of those securities were in the ratio 3:1. They there is no contract to the contrary under section 82, B will be liable to contribute three-fourth and A will contribute one-fourth towards the debt.

Conflict between marshalling and contribution

In case of a conflict between the rule of marshalling and contribution, the rule of marshalling shall prevail and subsist over-contribution.[xiv]

‘A’ owner of property 1 and property 2 mortgages property 1 to B and property 2 to C. A subsequently mortgages both the properties 1 and 2 to D and the mortgages property 1 to E. Under section 81 E can ask D to recover his debt from property 2 to the whole extent and then in case of deficit he can resort to property 1. Hence this right of E to marshallwill prevail over-contribution.

Frequently Asked Questions

Does the rule of marshalling and contribution highlight the same object?

The rule of marshalling under section 81 and the rule of contribution under section 82 are opposite to each other. Marshalling protects the interests of the subsequent mortgagees by satisfying the debt out of the properties not mortgaged to them. Contribution lays down that the burden of debt shall be borne by each rateably and each should contribute towards it.

Which doctrine has an overriding effect over the other?

In case of a conflict between the doctrine of marshalling and contribution, the doctrine of marshalling prevails.

Edited by Sakshi Agarwal

Approved & Published – Sakshi Raje

Reference

[i]Black’s Law Dictionary  (2nd Edition)

[ii] Transfer of Property Act 1882, Section 81

[iii]KosuriKoteswara Rao v.KothuVenkataramana Rao AIR 1973 AP 46

[iv] Transfer of Property Act 1882, section 56

[v] Ibid.

[vi]Md. Abu Bakar , Rules for Doctrine of Marshalling and Contribution in respect of Mortgage property https://www.academia.edu/39769400/Rules_for_Doctrine_of_Marshalling_and_Contribution_In_respect_of_Mortgage_property_Under_Transfer_of_property_Act_1882

[vii]AIR 1962 Ker 106

[viii]  (1803) 8 ves 382 (385)

[ix] Ibid.

[x]ChunilalVithaldas v. Fulchand (1893) 18 Bom. 160

[xi]Radhika Saxena, Doctrine of Marshalling and Contribution, 20 January, 2020 https://indianjudiciarynotes.com/notes/transfer-of-property/doctrine-of-marshalling-and-contribution/

[xii]Gopinath v/s Raghuvansh Kumar Singh A.I.R. 1949 Patna 522

[xiii]163 IndCas 977

[xiv]Ramabhadrachar vs SrinivasaAyyangarAndOrs. (1901) ILR 24 Mad 85

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I am Dhruvi Dharia from University of Mumbai Law Academy (UMLA), pursuing B.B.A.-LL.B.(Hons.) I have a penchant for studying Corporate laws like Companies Act, Securities Law, Insolvency and Bankruptcy Code, mergers and acquisitions etc. and strong inclination towards numbers. I am also a budding Company Secretary and one level away from becoming one. I aspire to become a Corporate Lawyer in the future. I have always enjoyed reading and working on various legal matters whenever given a chance to. I constantly try to better myself by reading various Acts, articles, interviews of eminent lawyers and professionals and researching on various topics. I like reading on various contemporary legal issues and articles and I sometimes attempt writing on the same. Apart from academics in my free time I like drawing, painting and travelling to new destinations.