FINAL PROJECT REPORT: DOCTRINE OF MARSHALLiNG

Submitted By:
Mohammad Faaiz Irfan

PRN : 16010324236

BBA.LLB, Division – C

Symbiosis Law School, Hyderabad

Symbiosis International (Deemed University), Pune

In the month of

September 2018

PROPERTY LAW

Under the guidance of

Prof. Shrishti Khare

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Acknowledgements

I feel highly elated to work on the topic “Doctrine of Marshalling.” The practical realization
of this project has obligated the assistance of many persons. I express my deepest regard and
gratitude to my teacher, Mrs. Shrishti maam for her unstinted support. Her consistent
supervision, constant inspiration and invaluable guidance have been of immense help in
understanding and carrying out the nuances of the project report.

I take this opportunity to also thank the University and the Vice Chancellor for providing
extensive database resources in the Library and through Internet.

Some printing errors might have crept in, which are deeply regretted. I would be grateful to
receive comments and suggestions to further improve this project report.

Faaiz Irfan
Semester V
Div-C
BBA.LLB
2016-21
16010324236

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Contents
Introduction…………………………………………………………………2

The Doctrine of Marshalling…………………………………………………………….3

Marshalling Under The Transfer of Property Act, 1992………………………….…...4

 Essential Elements…………………………………………………………….…..5
 Common Debtor…………………………………………………………………...5
 No Prejudice to the Prior Mortgagee………………………………..……………6
 No prejudice to the encumbrances………………………………………………..6
 Contract to the contrary…………………………………………………………...7
 Securites to be on same footing………………………………...…………………7
 Rights of Purchasers………………………………………………………………7

Marshalling V Contribution…………………………………….……………………….8

Conclusion ………………………………………………………………………………...9

Bibliography………………………………………………………………………………10

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INTRODUCTION

This assignment deals with one of the most very crucial concepts of the Transfer of Property
Act, 1882. That is Marshalling . this principles is quintessential to the concept of mortgage
and are based on the principles of equity.

While Marshalling is the right of the subsequent mortgagee or the subsequent purchaser, this
paper tried to prove how Marshalling settles the rights of competing mortgagees.

Section 56 and 81 of the Transfer of Property Act, 1882 (hereinafter referred as TPA) deals
with Marshalling by subsequent purchaser and Marshalling of securities respectively;

Marshalling is an equitable remedy and is based on the principles of natural justice. This is
the concept of English doctrines and had been incorporated in the TPA and have been further
strengthened through different case laws in India.

Marshalling is based on the ethical maxim sic utere tuo ut alienum non-laedas1 which means
that you should exercise your right as not unnecessarily to prejudice that of your neighbour.
Marshalling in common parlance means arranging (assets or securities) in the order in which
they are available to meet various demands.

So in a nutshell, both the doctrines of marshalling had evolved from the principle of equity
and natural justice and we’ll look into these detail in the coming sections.

Also, although Marshalling has been dealt with in both Section 56 (marshalling by
subsequent purchaser) and Section 81 (Marshalling of securities), but we’re confining
ourselves to Marshalling of securities (Section 81) only in this work. And try to determine the
diffrence between Marshalling and Contribution as it is being always predicted that these
doctrines are quite similar in nature.

1
Story, Equity Jurisprudence, Section 633

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THE DOCTRINE OF MARSHALLING

The doctrine of marshalling is an old equitable remedy that can be traced back as far as the
mid-seventeenth century. The modern root of the doctrine can be found in the oft cited
English case of Aldrich v. Cooper2 ("Aldrich"), where Lord Eldon stated the doctrine as
follows:

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

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

Lord Hoffmann as:

“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.”

In the 8th Edition of Fisher and Lightwood's Law of Mortgages, the author writes:

"The doctrine of marshalling rests upon 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 only one of the funds."

Marshalling means to arrange/put in line. Section 81 of the Transfer of Property Act provides
that if the owner of two or more properties mortgages them to one person and then mortgages
one or more of the properties to another person, the subsequent mortgage 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, 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.

2
(1803), 8 Ves. 382, 32 ER 402 (LC) at pg. 395

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For example, A mortgages his two properties X and Y to B and then mortgages Y to C. If B
seeks to realize his mortgage out of A, C can compel B to proceed first against X and realize
the debt from it. In case B is unable to realize the whole amount due to him from X, he is
entitled to recover the balance from Y.

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 to which the second creditor has no claim.
Otherwise, it is open to the first creditor to satisfy himself out of any security in any order,
and if he chooses to satisfy himself out of 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.3

MARSHALLING UNDER THE TRANSFER OF PROPERTY ACT, 1882

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, in the absent of 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 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 right of marshalling to a subsequent

purchaser and section 81 confers same on the puisne mortgagees. This right arises when two
or more properties mortgage them to one person and mortgages one or more of them (already
mortgaged to the first mortgager) to another person. The subsequent mortgage is entitled,
unless there is 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 only property C to Y for

3
Commentaries on Equity Jurisprudence, Joshep story, page 382

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Rs.5, 00. This section give Y a right to say that debt of X shall be satisified out of sale
proceeds of properties A and B and not C. In case if the proceeds of properties A and B is
less than 15, 00 only then, the property C can be sold. Therefore, all though Y is subsequent
mortgager his claim is not prior to that of X, but he has the right of marshalling i.e. arranging
the securities in his favour as far as possible.4

Section 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 debt out of several
funds shall not, by the exercise of his right, prejudice another creditor whose security
comprises only one of the funds.

Essential Elements of Marshalling

(1) The mortgages may be two or more persons but the mortgager must be common i.e.
there must be a common debtor.

(2) The right cannot be exercised to 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 mortgager is the same person. Bothe 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 are
creditors of the same person and have claims against the property of a common debtor.5

4
Mulla Transfer of Property Act, page 445
5
Ex parte Kendall. 1811 17 Ves 520; 1 WTLC 46.

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No Prejudice to the Prior Mortgagee

Marshalling must not be in prejudice to the interest of the prior mortgagee. It being the rule of
equity cannot be enforced so as to work 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 invoked. 6

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 any interest in any of the properties. The leading case on
this point is Barness v. Rector7, 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 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 rateably between X and Y and the surplus
of X will go to C whereas surplus of Y to D.

6
Transfer of Property Act, B.B. Mitra and Sengupta, page 223
7
1842 1 1842 1 Y&C Ch 401

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Contract to the contrary

The right of marshalling under this section is subject to the contract to the contrary. The right
may be excluded to the mortgage by 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 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 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 change and rely on his right of set
off.8

Rights of Purchasers

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

marshalling against a prior mortgagee, does not lose his right because he has purchased the
equity of redemption. For example, X and Y properties are mortgaged by A and B. Then
mortgages X to C. In enforcement of his security C brings X property to sale and himself
purchases X. Then B obtains an order for sale on his mortgage. C was held entitled to require
B to bring Y to sale first and realise his security as far as possible out of Y only.9

8
Webb v. Smith (1885) 30CH D 192 CA ( Mulla, The Tranfer of Property Act, 9th edn. Page.868)
9
Inderdawan Pershad v. Gobind Lall, (1896) 23 Cal 790.

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MARSHALLING V. CONTRIBUTION

Marshalling stands as an exception to contribution. Whenever there is a conflict between

contribution and marshalling, marshalling prevails. Marshalling settles the rights of
competing mortgagees, whereas, the contribution settles the right of mortgagors, whether
they are in different properties or several shares in one property. Marshalling can be seen as
the converse of contribution. Both belong to the same genus but are different species. Both
are based upon the principle of equity and natural justice. Here is an illustration showing how
marshalling supersedes or prevails over contribution.

Marshalling supersedes contribution:

By the last paragraph of Section 82, it is in effect declared that, where marshalling and
contribution might conflict with each other, marshalling is to prevail. Thus, if the owner of
two properties X and Y:

Mortgages X to…………………….A

Mortgages X to…………………….B

Mortgages X & Y to…………………….C

Mortgages X to……………………..D

Then, X and Y both contribute to C’s mortgage in the portion to their values after deducting
from X the amount of A’s mortgage and from Y the amount of B’s mortgage; but under the
right of marshalling, D could require C to proceed first against Y. This right of D to marshal
would prevail against the right of contribution.

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CONCLUSION

In conclusion, all the paper concluded that both the concept of marshalling and contribution
are based on the principle of equity and natural justice. Both these principles protect the
rights of the subsequent mortgagee and the co-mortgagors of several properties or of several
shares in one property.

Doctrine of marshalling rests upon 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 only one of the funds. Marshalling can be achieved
in two ways. Either the courts will require the senior creditor to resort to the singly secured
fund, or, the courts will allow the junior creditor to subrogate to the senior creditor's interest
in that fund. In other words: marshalling by compulsion or marshalling by subrogation.

Marshalling is an equitable remedy available to protect the recovery of a junior creditor

against the arbitrary action or whims of a senior creditor. Simply stated, the doctrine of
marshalling dictates that where there are two creditors of the same debtor, one creditor
having a right to resort to two funds for payment of his debt, and the other a right to resort to
one fund only, the court will "marshal" or arrange the funds so that both creditors are paid as
far as possible.

Doctrine of contribution, on the other hand, provides that if several properties belonging to
several persons or of a single mortgagor having several shares in one property 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 (rateably).

Thus it is clearly established that Marshalling settles the rights of competing mortgagees
while Contribution settles the rights of mortgagors of several properties or of several
shares in one property.

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BIBLIOGRAPHY

BOOKS

 Mulla, Sir Dinshaw Fardunji, The Transfer of Property Act, 12th Edition, Lexis
Nexis Publications

 Tripathi, T.P., The Transfer of Property Act, 1882 , 3rd Edition, Allahabad Law
Agency Publications

 Saxena, Poonam Pradhan, Property Law, 2nd Edition, Lexis Nexis Publications

 Sinha, R.K. The Transfer of Property Act, 11th Edition. Allahabad: Central Law
Agency, 2010.

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