Marshalling, Contribution and Subrogation | TPA, 1882

By | April 13, 2020

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The article seeks to explain marshalling securities, contribution and subrogation as under Transfer of Property Act, 1882. Marshalling means an arrangement in this context it means, the arrangement of mortgages to ensure equity to the mortgagees. A contribution is the contribution of the mortgaged properties in paying bad the debt. The difference here is that under marshalling one or more properties belong to one person but in contribution, their properties belong to two or more persons. Subrogation is a right of a person to stand in the place of the creditor after paying off his liabilities.

Marshalling, Contribution and Subrogation explained as Under Transfer Of Property Act, 1882

I. Marshalling securities (S. 81) –

  1. If the owner of two or more properties mortgaged them to one person and then mortgages one or more of the properties to another person,

  2. The subsequent mortgagee is, in the absence of a 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 of the 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 gives the right of marshalling to a subsequent purchaser and section 81 confers a similar right on puisne mortgagees.

This right arises when the owner of two or more properties mortgages them to one person and then mortgages one or more of them (already mortgaged to the first mortgagor) to another person. The subsequent mortgagee is entitled, unless there is a contract to the contrary, to have the prior mortgage-debt satisfied out of properties not mortgaged to him.

If there are two creditors who have taken securities for their respective debts, and the security of the one is confined to both, the security of the other is confined to one of those funds, the court will arrange or marshal the assets, so as to throw the person who has two funds liable to his demand on that which is not liable to the debt of the second creditor i.e., it shall not depend upon the will of one creditor to disappoint another.[i]

Essential elements

  1. The mortgagees may be two or more persons but the mortgagor must be common i.e., there must be a common debtor.
  2. The right cannot be exercised to be the prejudice of the prior mortgagee.
  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 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.[ii]

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.

Marshalling implies the existence of two sets of properties one of which is subject to both the mortgages 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 first mortgagee, but only one property which is subject to both mortgages. Therefore, the doctrine of marshalling cannot be invoked.[iii]

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,

  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 insist 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.

Contract to the contrary –

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.

II. Contribution of Mortgage-debt (S. 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
  1. One is mortgaged to secure one debt, and
  2. 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 as given 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.

Distinction between marshalling and contribution

  1. Marshalling is the right of subsequent whereas contribution is related to mortgagors.
  2. 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.

III. Subrogation (S. 92)

Section 92 provides that –

  1. Any person other than the mortgagor referred to in section 91, and any co-mortgagor,
  2. On redeeming the mortgaged-property,
  3. Shall have the same rights as the mortgagee whose mortgage he redeems any have against the mortgagor or any other mortgagee,
  4. The rights are regarding redemption, foreclosure or sake of such mortgaged property.
  5. This right is known as the right of subrogation and a person acquiring the same is said to be subrogated to the rights of the mortgagee whose mortgage he redeems.

‘Subrogation’ is a Roman word which means ‘Substitution’. It is the right of a person to stand in the place of the creditor after paying off his liabilities. In case of a mortgage, the subrogation takes place only by redemption. Therefore, in order to be entitled to subrogation a person must pay-off the entire amount of a prior mortgage. A partial payment of the mortgage-debt cannot give rise to a claim for a partial subrogation.

The doctrine of subrogation is based on the principles of equity, justice and good conscience. The essence of the doctrine is that the party who pays off a mortgage gets clothed with all rights of the mortgagee. This doctrine was made applicable was even in those parts of India where the Act itself was not applicable.

Kinds of subrogation

The subrogation is of two types – legal and conventional subrogation. Legal subrogation takes place by operation of law whereas conventional subrogation takes place where the person paying off the debt has no interest to protect but he advances money under an agreement that he would be subrogated to the rights and remedies of the creditor.

i. Legal Subrogation

Legal subrogation is based on the principle of re-imbursement. Where a person interested in making some payment which another person is legally bound to make, than such a person must be reimbursed when he makes the payment.

Legal subrogation may be claimed by the following persons –

  1. Puisne mortgagee – a puisne (subsequent) mortgagee, who redeems a prior mortgage, has a right to be subrogated to the position of the prior mortgage.
  2. Co-mortgagor – co-mortgagor is a co-debtor. He is liable only to the extent of his share of the debt. When besides redeeming his own share, he pays off the share of the other mortgagor also, he becomes entitled to be subrogated in place of such other mortgagor. Here a co-mortgagor is considered to be the principal debtor for his own share and is presumed to be the surety for other co-mortgagors (co-debtor). The provision confers certain rights on the redeeming co-mortgagor and also provides for remedies of redemption, foreclosure and sale being available to the substitutes as they were available to the substituted. Therefore, the suit for declaration, partition and recovery of possession by non-redeeming co-mortgagor was held to be maintainable.[vi]
  3. Purchaser of equity of redemption – there were certain doubts regarding the purchaser of equity of redemption that whether he can be subrogated or not. Equity of redemption is regarded as a property of the mortgagor which he can sell or assign. The purchaser of such equity becomes owner of the property. Now the question arises whether he can be treated as a mortgagor in a mortgage transaction? If such a purchaser steps in place of the mortgagor then he will have no right of subrogation under section 92. To remove this difficulty the courts introduced the principle of intention.

It is not a settled law that where in India there are several mortgages on a property, the owner of the property subject to a mortgage may, if he pays off an earlier charge, treat himself as buying it and stand in the same position as his vendor, or to put it in another way, he may keep the encumbrance alive for his benefit and thus come in before a later mortgagee. This rule would not apply if the owner of the property had covenanted to pay the later mortgage-debt but in this case, there was no such personal covenant.[vii]

ii. Conventional Subrogation

The conventional subrogation takes place where the person paying off the mortgage-debt is a stranger and has no interest to protect, but he advances the money under an agreement (express or implied) that he would be subrogated to the rights and remedies of the mortgagee who is paid off.[viii]

Redemption in full – it is necessary that the mortgage must be redeemed in full. The right redemption shall be deemed to be conferred only when the mortgage in respect of which the right is claimed has been redeemed in full.

Subrogation, assignment and transfer – subrogation is the effect of the situation where a mortgage is redeemed by a person other than the mortgagor, and he is subrogated only to the rights of the mortgagor and no more. An assignment or transfer can take place only with specific acts of parties. The assignee or transferee acquires all the rights in the property. A transfer operates as a transfer of the totality of the rights.[ix]

[i] Aldrich v. Cooper, (1803) 8 Ves 382.

[ii] Ex Parte Kendall, (1811) 17 Ves 520

[iii] Re Muthammal, AIR 1938 Mad 503

[iv] (1842) 1 Y&C Ch 401

[v] Webb v. Smith, (1885) 30 Ch D 192 (CA)

[vi] Krishna Pillai Rajasekharan v. Padmandabha Pillai, AIR 2004 SC 1206

[vii] Malireddy Ayyareddy v. Gopi Krishnayya, (1924) 47 Mad 190

[viii] Gurdeo Singh v. Chandrikah Singh, (1909) 36 Cal 193

[ix] Gujrath Andhra Road Carriers Transport Contractors v. United India Insurance Co. Ltd, AIR 2006 AP 401

  1. Mortgage: Meaning, Explanation And Kinds
  2. Rights and Liabilities of Mortgagor and Mortgagee
Author: Kanishta Naithani

Kanishta is a student at Symbiosis Law School, Pune. She has published research papers, participated and placed National Essay Writing competition(s) and also presented a paper in a national seminar. She enjoys writing and researching, she aims to be a professional writer.