Understanding Marshalling of Securities in Mortgage Law

 
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 
and 
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 
and 
Y
 properties
to 
Mr
.
 B
 and then mortgages 
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 
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.
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Marshalling of Securities, as per Section 81 of the Transfer of Property Act, addresses the scenario where a property owner mortgages properties to different individuals. This doctrine ensures subsequent mortgagees are entitled to have debts satisfied from properties not mortgaged to them while protecting prior mortgagees. Marshalling is an equitable doctrine applied in lending to ensure fair treatment among creditors with claims against the same debtor but varying security rights.


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  1. Concepts relating to Mortgage

  2. MARSHALLING OF SECURITIES Section 81

  3. 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).

  4. 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 .

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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.

  10. CONTRIBUTION IN MORTGAGE- DEBT Section 82

  11. 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).

  12. 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.

  13. 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.

  14. SUBROGATION Section 92

  15. 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.

  16. 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.

  17. 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-

  18. 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.

  19. 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.

  20. 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.

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