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NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

A Project On

DOCTRINE OF MARSHALLING

Submitted to: Submitted by:

Vijay Kumar Singh Lucifer


Assistant Professor of Law

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ACKNOWLEDGEMENT

I have taken efforts in this project. However, it wouldn’t have been possible without the
constant and kind support and supervision of my professor Mr. Vijay Kumar Singh. I am highly
indebted to him for his guidance and the necessary information that he provided during the
completion of this work. I would like to extend my sincere gratitude to him.

I would also like to thank NLIU, Bhopal for the resources and encouragement that they
had provided during the completion of this project. I would like to express my special thanks to
my parents and colleagues for their support.

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INTRODUCTION

Marshalling is an equitable doctrine. It applies where the owner of two properties, X


and Y, mortgages them both to lender A, and then mortgages one of them, say X, to
lender B. When A seeks to recover its debt, B can require that it does so first out of
Y. B is in effect (although not in law) subrogated to A’s rights under its security to
the extent of debtor’s secured liabilities to B.

The general principle is that the second creditor has a right in equity to require the
first creditor to satisfy himself out of the security which the second has no claim.
Otherwise, it is open to the first creditor to satisfy any security in any order of his
choice and if he chooses to satisfy himself out the security which represents the
second creditor’s only security, the second creditor is subrogated to the rights of the
first creditor and can stand pro tanto in the shoes of the first creditor in relation to
the security over which the second creditor has no legal security. 1

There are two provisions in Transfer of Property Act, 1892, which deals with the rule
of marshalling. Namely, section 56 which talks about marshalling by subsequent
purchase and section 81, which talks about marshalling of securities. This paper will
try to discuss doctrine of marshalling with the help of aforementioned sections and
cases broadly.

1
Commentaries on Equity Jurisprudence, Joshep Story, page 382

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STATEMENT OF PROBLEM

How does the Transfer of Property Act, 1882 encompasses the equitable principle of
marshalling?

OBJECTIVES

 To understand the concept of marshalling.


 To analyze the sections in Transfer of Property Act, 1882 which talks about
the aforementioned principle.
 To analyze with the help of case laws how the said principle is enforced in
India.

METHOD OF RESEARCH

The method of research used in this project is doctrinal in nature.

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TABLE OF CONTENTS

1. Subsequent Purchaser………………………………………………………...6
2. Marshalling of Securities…………………………………………………….8
3. Essential Elements of Marshalling………………………………………….9
4. Common Debtor………………………………………………………………9
5. No Prejudice to Prior Mortgagee……………………………………………9
6. No Prejudice to Other Encumbrances………………………………………9
7. Contract to the Contrary…………………………………………………….10
8. Securities to be on Same Footing………………………………………….10
9. Right of Purchasers………………………………………………………….10
10. Leading Case Laws – India………………………………………………….11
11. Marshalling Between Mortgages – A forgotten Power……………………12
12. Conclusion…………………………………………………………………….13
13. Bibliography………………………………………………………………….14

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Subsequent purchaser

Marshalling by subsequent purchaser.—If the owner of two or more properties mortgages them to
one person and then sells one or more of the properties to another person, the buyer is, in the
absence of a contract to the contrary, entitled to have the mortgaged-debt satisfied out of the
property or properties not sold to him, so far as the same will extend, but not so 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.2

When we divide the section into parts accordingly, we will get the following;

1. If the owner of two or more properties,


2. Mortgages them to one person and sells one or more to another,
3. The buyer is entitled to have the mortgage debt satisfied out of the property or properties
sold to him, in the absence of a contract to contrary,
4. But this will not prejudice the rights of –
a) Mortgagee
b) Or, a person claiming under him
c) Or, of any other person

This section says that if person mortgages two or more properties to a person and sells one or more
properties of them to another, then the buyer is entitled to have the mortgage debt satisfied out of
the property not sold to him. Therefore, this provision safeguards the interest of the buyer and only
applies between the seller and buyer and not in the case of a subsequent purchaser.

This section is based on a principle that if a person purchases a property free of encumbrances,
then his absolute interest shouldn’t be prejudiced. Marshalling can be only exercised between
seller and buyer. It cannot be exercised detrimental to the rights of the mortgagee or any other
person claiming under him or any other person having interest on the property. The subsequent
purchaser can claim the right of the property only if the interest of the mortgagee or any other

2
Section 56, Transfer of Property Act, 1882

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person claiming under him or any other person who has acquired interest in any of the properties
for consideration effected thereby.3

This equitable principle has been stated by Lord Elden in the following words:

“a person having two funds shall not by the election the party having only one fund; and equity, to
satisfy both, will throw him, who has two funds upon that, which can be affected to him only; to
the intend the only fund, to which the other has access, may remain clear to him.”

As expressed by J Dart:

“If two estates X and Y are subject to a common charge and estate X be sold to A, A will as against
his vendor and his representatives will have a prima facie equity in the absence of a express
agreement whether or not he has notice of the charge throw it primarily on estate Y in exoneration
of estate X.”4

3
Transfer of Property by R.K. Sinha, page 228
4
Aldrich vs. Cooper, (1903), 8 Vas 382 (395) Quoted on Mulla, 9th edition, p.559.

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Marshalling of Securities

According to Section 81 of the Transfer of Property Act, 1882

1. If the owner of two or more properties mortgage them to one person and mortgages one or
more properties to another,
2. The subsequent mortgagee is, the absence of a contract to 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 far as to prejudice the rights of prior mortgagee or any other person who has for
consideration acquired interest in any of the properties.

Marshalling means arranging things. Section 56 provides right of marshalling to a subsequent


purchaser and section 81 confers the same on puisne mortgagees. This right arises when the owner
of two or more properties mortgage them to one person and then mortgages one or more of them
(already mortgaged to the first mortgagee) 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.

For example, a mortgager mortgages his three properties A, B and C to a mortgagee X for Rs.
15,000. He further mortgages C to Y for Rs. 5,000. This section confers Y with the right to say
that the debt of X shall be satisfied out of the proceeding of sale of A and B but not C. In case if
the proceeds of sale of properties A and B is less than Rs. 15,000, only then the property C can be
sold. Therefore, although Y is a subsequent purchaser and his claim is not prior to that of X, he
has the right of marshalling i.e., arranging the securities in his favor as far as possible.5

S. 56 deals with the concept of marshalling in a transaction involved in subsequent sale, on the
other hand, s. 81 is applicable only to mortgages. The doctrine of marshalling rests upon the
principle that a creditor who has the means of satisfying his debts out of several funds shall not,
by the exercise of his right, prejudice other creditor whose security comprise only one of the funds.

5
Mulla Transfer of Property Act, page 445

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Essential Elements of Marshalling

1. The mortgages may be two or more persons but the mortgagee must be common i.e., there
must be a common debtor.
2. The right cannot be exercised to prejudice the prior mortgagee’s rights.
3. The right cannot be exercised to prejudice any other person having claim on the property.

Common Debtor

It is necessary that the mortgagor is the same person. Both the prior and subsequent mortgagee
must have given 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 are creditors of the same person
and have claims against the property of a common debtor.6

No Prejudice to the Prior Mortgagee

Marshalling must not be in prejudice to the interest of the prior mortgagee. It being a rule of equity,
can’t be enforced so as to do injustice to the prior creditor. The subsequent mortgagee cannot
compel the prior mortgagee to proceed against a security which is insufficient. The Madras High
Court held that marshalling implies the existence of two sets of properties, one of which is subject
to both mortgagees 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 the first mortgagee,
but only one property which is subject to both the mortgages. Therefore, the doctrine of
marshalling cannot be invoked7

No prejudice to other encumbrances

The right of marshalling cannot be exercised so as to prejudice the rights of any other person, who
ha, for consideration, acquired an interest in any of the properties. The leading case on this point
is Barnes v. Rector8, for example,

6
Ex Parte Kendall, 1811 17 Ves 520; 1 WTLC 46
7
Transfer of Property Act, B.B. Mitra and Sengupta, page 223.
8
1842 1 1842 1 Y&C Ch 401

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1. A mortgages two properties X and Y to B.
2. A then mortgages X to C.
3. A gain mortgages Y to D

If C here insists that B should pay himself wholly out of Y, there might be nothing left for D.
Therefore, the court will apportion B’s mortgages 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 marshalling under this section is subject to contract to contrary. The right may be
excluded by a mutual agreement.

It is necessary that the prior mortgagee must have equal rights over the other two properties
mortgaged to him. Where the rights are not equal, there can be no marshalling. Different fragments
of the same property are not considered different properties. Where one portion of the property
already mortgaged is subsequently mortgaged to another person, they will not be considered as
different properties.

Securities to be on Same Footing

It is necessary for the application of equity that the securities should be on the same footing. Only
successive mortgages within the purview of this section. Where a double creditor has a change
over a fund and a right of set-off against another fund, he cannot be compelled by a second
encumbrance on the first fund to abandon his charge and rely on his right of set-off.9

Rights of Purchasers

Section 56 gives recognition to right of a purchaser, a puisne mortgagee, having right of


marshalling against a prior mortgagee. He does not lose his right because he has purchased the
equity of redemption. For example, X and Y properties are mortgaged by A to B and then he
mortgages X to C. B obtains an order of sale on his mortgage. C was held entitled to require B to
bring Y to sale first and realize his security out of Y as far as possible.10

9
Webb vs. Smith (1885) 30CH D 192 CA
10
Inderdawan Pershad vs. Gobind Lall, (1896) 23 Cal 790.

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Leading Case Laws – India

M/S J.P. Builders and anr. vs. A Ramdas Rao and anr.11

The question before the Supreme court was whether the right of marshalling by subsequent
purchaser as provide in section 56 of Transfer of Property Act, 1882 is available to a decree holder
in a suit for specific performance and whether the high court is justified in granting such a relief.
The Supreme court agreed with the findings of High Court and held that merely because the
plaintiff did not claim this relief specifically in the trial court, it did not bar the high court from
granting the said relief as the plaintiff had asked for a larger relief in the plaint. The court also held
that merely because for recovery of the loan secured by banks, a special Act, namely, Recovery of
Debts due to Banks and Financial Institutions Act, 1993 has been enacted which is not a bar for
the civil Court to apply to other relief such as Section 56 of the T.P. Act. We are also satisfied that
by issuing such direction on the application of Section 56 of the T.P. Act, the Division Bench has
not modified or eroded the order passed by the DRT. On the other hand, it is an admitted fact that
the Bank has accepted the impugned verdict of the High Court and did not challenge the same
before this Court by filing an appeal. We are also satisfied that by granting such a relief, the Bank
is not prejudiced in any way by bringing other properties for sale first to satisfy the mortgage debt
payable by defendant Nos. 1 and 2.

D.C. Johar and Sons Ltd. Vs. Mathew12

The court in this case held that, for section 81 of the Transfer of Property Act, 1882 to apply, there
must be a common debtor. In this case, there were more than one debtors and the bank which
provided the loan asked that the property of another debtor be sold before the defendant’s. The
court in its judgement said that the bank has no such right.

11
(2011) 1 SCC 429.
12
AIR1962Ker106

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Marshalling between mortgages – A forgotten power

The equitable doctrine of marshalling, which seeks to regulate creditors’ interests in a debtor’s
assets as between themselves, can be a valuable weapon in a creditor’s security-enforcement
arsenal. However, the remedy is all too often overlooked in favor of better-known methods of
enforcement or when writing debts off.

The doctrine of marshalling is predicated on the principle of law that a creditor who has security
over several properties (“the doubly-secured” creditor) and thus a choice of which fund to resort
to, should not when realizing that security disappoint a creditor who has security over only one of
these properties (“the singly-secured creditor”). The potential to marshalling remains subject to
the value of the security and the amount of the primary lender’s debt. The primary creditor remains
free to realize its security in any way it chooses.

If marshalling is available to a creditor the remedy has wide scope. For example, it is not just the
mortgagor who is bound by the doctrine; the ability to marshall securities also applies against the
mortgagor’s trustee in bankruptcy, his personal representatives and even against the mortgagor’s
own simple contract creditors. It can also arise against the wife of the mortgagor if she has charged
her own property to her spouse’s debt. However, save for that exception the doctrine only operates
in relation to securities given by the debtor and not against collateral security given by, for
example, a company.

On a practical level, the doctrine will often mean that creditors have to work closely together if
their securities are being marshalled. This is especially so where creditor Y is being subrogated to
the rights of creditor X – creditor X will have already realized its security but it cannot walk away
because creditor Y will be enforcing under creditor X’s registered charge. In order for creditor Y
to do this, creditor X will need to disclose the particulars of its charge to creditor Y.

It will be seen from the above that marshalling is an important tool which seeks to achieve a level
of fairness between creditors. Given its wide scope, it is perhaps surprising that it is not amongst
better-known methods of enforcing security.

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CONCLUSION

Rule of Marshalling is an equity law based on principles of natural justice. This is an English
principle and subsequently adopted by Indian law through Transfer of Property Act, 1882 in
Sections 56 and 81. This rule safeguards the purchaser and mortgager in receiving their part before
the mortgagee benefits himself out of the property. It also serves the purpose of sale and mortgage
resulting in a fair transaction. Since this is a principle of equity, the person who pleads under this
rule should possess clean hands.

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BIBLIOGRAPHY

Books

 Transfer of Property Act, B.B Mitra and Sengupta


 Transfer of Property Act, Mulla
 Transfer of Property Act, R.K. Sinha
 Commentaries on Equity Jurisprudence, Joshep Story

Websites

 http://www.tanfieldchambers.co.uk/resources/articles/marshalling-between-mortgagees--
a-forgotten-power
 https://www.legalcrystal.com/cases/search/name:transfer-of-property-act-1882-1882-
section-56

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