This article is written by Akshay Douglas Gudinho, pursuing a Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from Lawsikho.com. Here he discusses “Rule of Marshalling and Contribution: Which will prevail?”.
The Rule of Marshalling and Contribution are concepts embodied in the Transfer of Property Act, 1882 (‘TOPA”). Section 81 and 82 of TOPA deals with the Rule of Marshalling and contribution respectively. Before the supersession of the rules are discussed, an understanding of the concepts themselves is imperative.
Rule of Marshalling
Marshalling means “to arrange” and the Rule is first introduced in TOPA under Section 56. Section 56 may be explained in the following manner:
- There must be an owner of two or more properties,
- He must mortgage two or more of his properties to any person,
- Thereafter, he must sell one or more of these properties to any person other than the one he mortgages the properties to. The sale must include at least one property that has been mortgaged by the owner,
- The buyer of such properties is entitled to have the owner satisfy the mortgage-debt out of the property or the properties not sold him before he purchases the property. This can be subject to a contract stating the contrary,
- The rule of marshalling should not be so exercised so as to prejudice the rights of the mortgagee, any persons claiming under the mortgagee, or any person who has acquired an interest with consideration in any of the properties.
In short, the Rule of Marshalling provides the buyer, in the above case, the right to demand from the owner that the property be free from any and all encumbrances before the buyer purchases the property.
Section 81 also adopts the Rule of Marshalling but in cases of Mortgages. Section 81 may be understood in the following manner:
- There must be an owner of two or more properties. He must mortgage two or more of these properties to any person,
- He must then mortgage one or more of these properties to another person,
- The subsequent mortgagee is entitled to have the mortgage-debt of the prior mortgagee satisfied out of the properties not sold to him. This can be subject to a contract stating the contrary too,
- Similar to Section 56, the rule of marshalling here too should not be so exercised so as to prejudice the rights of the mortgagee or any person who has acquired an interest with consideration in any of the properties.
Marshalling, in this context, may be explained by an illustration. If the mortgagor mortgages three of his properties X, Y and Z to A and then mortgages X to B, B is entitled to have the mortgagor satisfy his debt from the sale proceeds of the properties Y and Z and only if the said sale proceeds fall short, can property X be sold.
In Barness v. Rector, W mortgaged two of his properties A and B to X. W then mortgaged property A to Y and property B to Z. Here, the court held that X’s mortgages will be apportioned proportionately between properties A and B and the surplus of A will go to Y and surplus of B will go to Z.
The doctrine of Marshalling is thus based on 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 those funds.
Rule of Contribution
The Rule of Contribution relates to the collective contribution towards a mortgage debt by mortgagors. It gives one mortgagor the right to have the other’s property contribute to the discharge of the mortgage debt. When a creditor has a single claim against several debtors, he can realize the debt from any one of them, but as per the rule of contribution he can claim contribution to the debt by the other debtors, so that the burden might fall on all equally. The rule is encapsulated under Section 82 of TOPA and may be divided as per the following:
Mortgaged Property Belonging to two or more persons
This is based on the following essentials:
- A mortgaged property must belong to two or more persons based on a common loan,
- Each mortgagor, in absence to a contrary contract, is liable to contribute as per his share of the mortgage,
For example, X, Y and Z mortgaged their properties to D mortgaging a common debt. Now if D can recover the entire debt from the properties mortgaged by X, X is entitled to demand Y and Z to contribute their portion of the debt out of their mortgaged properties. The Privy Council has lucidly explained it in Kampta Singh v. Chaturbhuj. The Privy Council held that if a person owns one property subject, with the property of other persons, to a common mortgage, and has paid off the mortgage debt, he is entitled to call upon the owners of the other property to bear their proper proportion of the burden.
When One Property is Mortgaged First and then again mortgaged with another Property
When the mortgagor has two properties and he mortgages one to secure one debt and then mortgages both to secure another debt, if the former debt is paid out of the former property, each property is then liable to contribute to the latter debt after deducting the amount of the former debt from the value of the property from which it has been paid.
In Bohra Thakur Das v. Collector of Aligarh,the mortgagor mortgaged the village of Kachaura to one, Nand Kishore. He again mortgaged villages, Kachaura and Agrana, to Nand Kishore. The Plaintiffs purchased the equity of redemption from Agrana. The first mortgagees purchased Kachaura by a decree. The plaintiffs sued and contended that the first mortgagees were liable to pay the proportionate share of the debt for redemption of the second mortgage. The court held that since the whole of Kachaura was swallowed up by the first mortgage by the decree, the entire burden of the second mortgage fell entirely on Agrana. The Privy Council, in appeal, overruled the decision of the court and held that the first mortgagees would have to contribute to the second mortgage, as they purchased Kachaura.
However, in Sesha Iyer v. Krishna Iyenger, the situation was quite different. Two properties X and Y were mortgaged to R and properties X and Z were mortgaged to P. R executed his decree on the mortgage by sale of X. P then sued to enforce his mortgage. However, X had already been sold. P sought to sell Z and also demanded contribution against Y. The Court held that if the plaintiffs had bought part of the mortgaged property subsequently sold under R’s decree, they might by paying off the debt and saving the property from sale, have acquired a right to contribution by securing a lien on the other property. However, since the plaintiffs did nothing, no right to contribution arose.
Supersession of the Rule of Marshalling over the Contribution
The proviso to Section 82 denotes that the rule of Marshalling under section 81 supersedes Contribution under Section 82. The Hon’ble Madras High Court has even held it to be well settled that the Right to Contribution is controlled by the Right of Marshalling.This may be best understood by an example:
There is an owner of two properties X and Y, who mortgages property X to A then to B then X and Y properties to C and lastly property X to D. Since X and Y both contribute to C’s mortgage, the value of the said contribution must include a deduction from property X, the value of A’s mortgage and from property Y, the value of B’s mortgage. However, D being the last mortgagee still has a right of marshalling and he can ask C to pursue property Y first instead of property X. Thus, right of D to marshal his securities supersedes his contribution that is to be made.
The reason why marshalling supersedes contribution is because the last mortgagee is given an opportunity to make the mortgagor discharge the mortgage debt from other mortgaged properties first before he realizes the mortgage debt from the properties mortgaged to the person who holds the right of marshalling. However, if after exercising the right of marshalling, the amount realized from the other properties is insufficient, the last mortgagee must then contribute as his is the only mortgage debt left to be realized.
Marshalling is the right of subsequent mortgagees whereas contribution is with respect to mortgagors. Marshalling is if a creditor has multiple funds to realize his debt, he must first pursue the multiple funds instead of prejudicing the creditor who is secured only by one fund. Whereas in contribution all the co-mortgagors who have taken a debt by mortgaging their properties have to make contributions towards debt proportionately according to their respective shares. The Proviso to Section 82 of TOPA gives precedence to the former over the latter.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.