Concepts relating to Mortgage

MARSHALLING OF SECURITIES

Section 81
 Marshalling of Securities
• Section 81 of the Transfer of Property Act, deals with the doctrine
of Marshalling of securities.
• According to Sec. 81 of the Transfer of Property Act:
If the owner of two or more properties –
i) mortgages them to one person,
ii)and then mortgages one or more of the properties to another
person,
in such a case, the subsequent mortgagee is entitled to have prior
mortgage-debt satisfied out of property or properties which are not
mortgaged to him. This will not affect the right of the prior
mortgagee who has acquired an interest in any of the properties for
consideration. (in the absence of a contract to the contrary).
• For eg: Mr ‘A’ mortgages two of his properties
namely; ‘X’ and ‘Y’ to Mr ‘B’. Thereafter, Mr. ‘A’
mortgages property ‘Y’ to Mr. ‘C’.  If the Mr ‘B’
mortgagee prefers to proceed against ‘Y’, then
subsequent mortgagee Mr ‘C’ may compel Mr
‘B’ to first proceed against ‘X’ to realize his
dues. But later, if Mr ‘B’ is unable to realize his
dues from ‘X’, then he may proceed towards
recovery of dues from ‘Y’.
• Marshalling is an equitable doctrine applied in the
context of lending. It was described by Lord Hoffmann in
Morris and Others v. Rayners Enterprises Incorporated
and Another, [1997] UKHL 44 as:

• “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.”
• It has also been described as :

• “(Marshalling)…..rests upon the principle that a

creditor having two funds to satisfy his debt may not,
by his application of them to his demand, defeat
another creditor, who may resort to only one of the
funds”
• The general principle underlying the doctrine of
marshalling is that a person having two funds at his
disposal to satisfy his claims, he has the option of
resorting to either property (fund) or both of them in
order to satisfy his debt, but while doing so he is not
entitled to prejudice the right of another person who
only has access to one of the two properties or funds.
 Restrictions on Marshalling
• It is to be noted that right of marshalling securities is not an
absolute right, it is subject to following conditions-
1. The mortgagee are maybe two or more persons but mortgagor
must be the same i.e. mortgagor must be common.
2. No prejudice to prior mortgagee- Marshalling cannot be
exercised by wrongly affecting the right of prior mortgagee. This
does not mean that claim of prior mortgagee prevails over the
claim of subsequent mortgagee, however it means that
subsequent mortgagee can protect his own interest but without
affecting the interest of prior mortgagee. Therefore, when two
properties X and Y are mortgaged to A and thereafter property Y
is mortgaged to be the subsequent mortgagee B, we cannot say
that the property Y should not be affected at all, even if debt of A
could not be satisfied by the sale of property X. If he is not able to
recover his money by sale of X, then he can sell the property Y.
3. No prejudice to third parties- The right of marshalling is available
to a subsequent mortgagee only when the prior mortgagee wants
to realise the mortgage debt. But it is possible that at the time
where prior mortgagee attempts to recover his debt, there is
already another person apart from the subsequent mortgagee who
has acquired an interest in the mortgaged property for valuable
consideration and if the subsequent mortgagee is allowed to
exercise his right of marshalling, the interest of this third person will
be affected wrongly. Section 81 does not allow him to do so.
Property X and Y are mortgaged to A
property X is mortgaged to B
property Y is mortgaged to C
subsequent mortgagee B may force marshalling against A, who is the
prior mortgagee. This would mean that he would ask A to satisfy his
debt only out of property Y as far as possible, but since property Y has
already been mortgaged to third person C, the exercise of marshalling
would be against his interest and marshalling will not be allowed.
 Marshalling in case of Sale v. in Mortgage
• In respect of sale, the rule of marshalling is that a subsequent purchaser has a
right to claim marshalling. For instance, there are three properties A,
B and C subjected to mortgage. The mortgagor sells A to Mr. X free from any
encumbrances. Mr. X is entitled to insist that the mortgagee should realize his
mortgage money out of the properties B and C as far as possible. If the whole
of the debt is not capable of being realized from B and C, the mortgagee has a
right to proceed against A. In that event, the purchaser Mr. X has a right to
claim from the mortgagor, the amount realized from A. This rule applies in the
absence of any contract to the contrary.

• In respect of mortgage, the subsequent mortgagee is entitled to regulate or

marshal the order in which the debt is to be realized by prior mortgagees. For
instance, Mr. A mortgages X and Y properties to Mr. B and then
mortgages Y alone to Mr. C. If Mr. B seeks to realize his mortgage out
of Y, Mr. C can compel Mr. B to proceed first against X and realize the debt
from it. If Mr. B is unable to realize the whole amount due to him from X, he is
entitled to recover the balance from Y.
CONTRIBUTION IN MORTGAGE-
DEBT
Section 82
 Contribution in Mortgage-debt
• Section 82 of the Transfer of Property Act, deals with Contribution
in mortgage-debt. The doctrine of contribution requires that
persons under a common burden share that burden equitably.
• According to Sec. 82 of the Transfer of Property Act:
If the mortgaged property(s) belongs to two or more persons having
distinct and separate rights of ownership in the property, then the
parts or portions belonging to each are liable to contribute ratably to
the debt secured by the mortgage.
The rate of contribution will be decided as per the value of that
portion at the date of the mortgage and the value of any other
mortgage or charge on that portion has to be deducted from the
amount. (in the absence of a contract to the contrary).
 Doctrine of Contribution
• If several properties belonging to several persons are mortgaged to secure
a debt due to taking of a loan, the law says that each property should
contribute towards the debt in proportion to its value. This is called the
doctrine of contribution.
• This law refers to the scheme of ratable distribution.
• If some persons takes a loan from one person by mortgaging their
separate properties which may be of different values and the
mortgagee/creditor realizes the loan amount from only one of the
properties, the owner of such property can compel the other property
owner to contribute in proportion to its value for the amount realized by
the mortgagee.
• For example if the property X belongs to A and the property Y belongs to
B, and A and B jointly executes a mortgage of both the properties for
securing a loan taken from C. Later C realized the debt from property X
alone. In this case B must contribute ratably in proportion to the value of
his property Y. Here A can claim contribution from B.
 Marshalling supersedes contribution
• The last para. of Section 82 provides that marshalling supersedes
contribution. If there is any conflict between the right of marshalling
and contribution, the right of marshalling prevails over that of
contribution. Therefore the contribution is subject to marshalling.
Properties X and Y are owned by one person
Property X is mortgaged to A
Property X and Y both are mortgaged to B
Property Y is mortgaged to C
• Exercising the right of marshalling C can insist that B should recover
his debt first from property X. Under Section 82, properties X and y
are liable to contribute to B’s mortgage in proportion of their values
after deducting from X the amount of A’s mortgage. But C’s right of
marshalling will prevail over contribution. Accordingly, C can require B
to first recover as much of debt from X as he could from this property.
SUBROGATION

Section 92
 Subrogation
• Subrogation is a right of a person to stand in the place of the
creditor after paying off his liabilities. In case of mortgage,
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.
• Right of Subrogation is statutorily recognized and described in
Section 92 of the Transfer of Property Act, 1882.
• 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 the rights
of the mortgagee. This doctrine was made applicable even in
those parts of India where the Act itself was not applicable.
• Subrogation is the process of substituting one person in the
place of another. The substituting person succeeds to the
claims and rights of the substituted person. A person, who
pays a mortgage when the original debtor fails to pay, can
obtain all the rights under the doctrine of subrogation.
• Thus, any person who has advanced to mortgagor, money
with which the mortgage has been redeemed shall be
subrogated to the rights of the mortgagee whose mortgage
has been redeemed, and in case of such person being a
stranger to mortgage, the mortgagor has to by a registered
instrument agree that such person(s) shall be so subrogated.
• Where mortgagor redeems, subrogation not applicable. The
mortgagor who discharges a prior debt is not entitled to be
subrogated to the rights and remedies of his creditor. This is
because by discharging a prior encumbrance created by
himself, he is discharging his own obligation to his creditor.
 Kinds of Subrogation
• Section 92 provides for two kinds of subrogation.
1. Legal subrogation
• Paragraph 1 of Section 92 deals with legal subrogation. It is
mentioned that any person, other than the mortgagor himself,
who has an interest in the mortgage property or in the equity
of redemption, if redeems that mortgage by paying the
complete amount, then he will be entitled to be subrogated in
the place of mortgagee. These persons have legal or statutory
right of being substituted in the place of mortgagee for the
purposes of redemption, foreclosure or sale. This right arises
by operation of law and does not depend on any agreement or
consent of the mortgagor. This legal subrogation is allowed to
be claimed by following persons-
i. Where the same property is mortgaged successively in
favour of several persons, then the subsequent mortgagee
has a right to redeem the prior mortgages by making
payments. By doing so so he can take the place of the prior
mortgagee or even the first mortgagee. The subsequent
mortgagee has a right to be substituted in the place of prior
mortgagee by discharging the debt due to such prior
mortgagee. Illustration-
property X is mortgaged to A in 1990
property X is mortgaged to B in 1991
property X is mortgaged to C in 1992
Now C has a right to pay the amount which B paid as
mortgage debt or even the amount which A paid as mortgage
debt and take the place of that person. If C is subrogated in
place of A, then he will get priority over B.
ii. Co mortgagor - Co mortgagor is co debtor. This means that his
share of the debt and his property is a part of the whole
mortgaged property. Now when he has the duty of
contribution, he also has a right that he can pay off the share
of the other mortgagor, along with his own and if he does so
he will be subrogated in place of mortgagee and the other
mortgagor will be liable to pay off his part to the mortgagor
who has paid off the whole debt.
iii. Surety – If along with mortgaged property, there has been a
surety as a guarantor of the debt payment and if he makes
the payment on behalf of the mortgagor, then he will take the
place of of the mortgagee as a creditor and he will obtain the
right of redemption, sale or foreclosure in respect of the
property mortgaged.
iv. Purchaser of equity of redemption is also entitled to be legally
subrogated.
2. Conventional subrogation - Paragraph 3 of Section 92 deals
with conventional subrogation. This takes place when a
person who is stranger to the mortgage advances money to
the mortgagor under and agreement that he will be
subrogated to the rights of mortgagee, if mortgagee redeems
the mortgage from such money.
This money should be provided only for redemption and no
other purpose and it is also necessary that when the stranger
to such mortgage advances money, there must be an
agreement between him and mortgagor that when the debt is
paid off from that money, such stranger would be subrogated
in place of mortgagee. The provision regarding conventional
subrogation requires that such agreement must be in writing
and must be registered.