Research paper on transfer of property act

By Kinshuk Barua

Roll no A013 B.A L.L.B Hons. III year

Doctrine of Marshalling

A.Introduction
Marshalling comes into play where there are two or more mortgagees or secured
creditors of a single debtor, but one of the mortgagee or creditors can enforce his
claim against more than one security or fund and the other can resort to only one.
The mortgagee who has the means to satisfy his debt out of the two or more
properties shall exercise his rights in such way not  to prejudice the rights of the
mortgagee of one of those properties.

OBJECTIVE

To understand concept of marshalling main it can be exercised and

circumstances when claim of marshalling is not allowed

Research Questions

1.What is doctrine of marshalling ?

2.What is rule of marshalling?

3.What are Cases on Marshalling?

4.Circumstances when claim of marshalling is not allowed?

C.Contents and Analysis

1.What is doctrine of marshalling ?

Marshalling is a equitable remedy for achieving fairness between two or more

secured creditors of the same debtor. Where the first creditor enforces its security
against assets over which both hold security but not against assets over which it
alone holds security, the second creditor may be entitled to use the assets over
which the former has security. Alternatively, the doctrine may require the former
creditor to satisfy itself out of the asset over which the latter has no security.

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.”

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.

The mortgagee who has the means to satisfy his debt out of the several properties
shall exercise his rights in such a way not to prejudice the rights of the new or
subsequent mortgagee of one of those properties.

For example-

· X mortgages properties A, B and C to Y for securing a loan of 30,000 rupees. 

· After that X mortgages property C to Z or securing another loan of 10,000 rupees.

In this Y is the first mortgagee on properties A, B and C which are securities for a
loan of 30,000 rupees. And property B mortgages to X for loan 10,000 rupees. Here
Y is the prior mortgaged and Z is the subsequent mortgagee. The right is given to Z
(subsequent mortgagee) entitles him to say that the loan of rupees 30,000, it should
be satisfied out of sale proceeds of properties A and B only and it is not from C
which has been mortgaged to him. In the case, A and B could be sold for less than
30,000 rupees, property C mat be sold to complete the amount. Although Z is a
subsequent mortgagee and his claim is not before the Y but Z has right of
marshalling or in other word he has right to arranging the securities in his favour.

According to this, the subsequent mortgagee under section 81 has right of

marshalling securities.

2.What is 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:

1.  There must be an owner of two or more properties, 

2.  He must mortgage two or more of his properties to any person,

3.  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,

4.  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,

5.  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:

1.  There must be an owner of two or more properties. He must mortgage two
or more of these properties to any person,

2.  He must then mortgage one or more of these properties to another

person,

3.  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,

4.  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

 3.What are Cases on Marshalling?

In the case of Devatha Pullaya v. Jaldu Manikyala Rao[,where a puisne mortgagee

has taken the mortgage expressly on condition of discharging certain amount due on
the prior mortgage but fails to fulfil that term, he cannot exercise the right of
marshalling.

In the case of Fiatallis North America, Inc Et Al v. Pigott Construction Limited Et

Al,held that there must be a single or common mortgagor or debtor.

In the case of Nova Scotia saving & loan v. O’Hara et al,held that the doctrine,
whose object is to achieve fairness, will not be applied to the prejudice of the third
party.

D.C. Johar And Sons Ltd. vs Mathew–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 , 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.

. 

4.Circumstances when claim of marshalling is not allowed?

A claim for marshalling will not be allowed by the courts where it would be unjust or unfair to
allow the junior creditor to marshal, and therefore;

 It cannot interfere or prejudice the position of the senior creditor.

 It cannot prejudice third parties.
 It must be brought in a fair and timely fashion

        .Marshalling is not available to a second or subsequent mortgagee where the first
mortgagee is contractually bound to look first to the other property to satisfy the debt due
to him.

D.Conclusion

Marshalling is an equitable doctrine applied in the context of lending. It is 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.
 

E.References

1.Devatha Pullaya v. Jaldu Manikyala Rao AIR 1926 AP 425.

2.Fiatallis North America, Inc Et Al v. Pigott Construction Limited Et Al (1992) 31

A.C.W.S.(3d) 266.

3.Nova Scotia saving & loan v. O’Hara et al (1979) 7 R.P,R 281.

4.D.C. Johar And Sons Ltd. vs Mathew on 16 March, 1961, AIR 1962 Ker HC106

5.English Case Aldrich v. Cooper , (Lord Eldon ), (1803) 8 ves 382 (385).

6.. Mulla's The Transfer of Property Act

7. Transfer of Property Act 1882,section 81,82