Rule
Marshalling applies where one creditor has two properties as security and a later creditor or buyer has only one of them. The later person can ask that the first creditor be paid, so far as possible, from the property the later person has no claim to.
- S.81: marshalling between a prior mortgagee and a later mortgagee.
- S.56: the same right for a later buyer of one of the mortgaged properties.
Contribution (S.82) applies where mortgaged property belongs to two or more persons with distinct and separate ownership. Each share bears the debt rateably, by its value.
The first creditor is paid in full whichever property he uses. Marshalling only directs him to the fund that does not hurt the later creditor. Contribution stops one owner carrying a debt that burdens all the shares.
| Provision | What it says |
|---|---|
| S.56, TPA | Later buyer of one mortgaged property can have the debt met first from the property not sold to him |
| S.81, TPA | Later mortgagee of one property can have the prior debt met first from the property not mortgaged to him |
| S.82, TPA | Separately owned mortgaged properties contribute rateably to the debt |
Requirements
Marshalling under S.81:
| # | Requirement | What to check |
|---|---|---|
| 1 | One owner of two or more properties | The same mortgagor owns both |
| 2 | He mortgages them to one person | The prior mortgagee holds both |
| 3 | He then mortgages one or more of them to another | The later mortgagee holds fewer |
| 4 | No contract to the contrary | S.81 applies "in the absence of a contract" |
| 5 | No prejudice to the prior mortgagee or to others who took for value | Marshalling cannot cut down their rights |
Contribution under S.82:
| # | Requirement | What to check |
|---|---|---|
| 1 | One mortgage debt | A single mortgage over the properties |
| 2 | Properties owned by two or more persons | Distinct and separate rights of ownership |
| 3 | No contract to the contrary | The parties may agree other shares |
| 4 | Value of each share | Value after deducting any other mortgage on that share |
Contribution under S.82 is subject to S.81. Where marshalling applies, it decides the order first.
Illustrations
1. Classic marshalling
- Facts: Ravi mortgages his house (Rs.30 lakhs) and plot (Rs.20 lakhs) to SBI for Rs.25 lakhs. He later mortgages only the plot to HDFC for Rs.15 lakhs. SBI wants to sell the plot.
- Result: HDFC can ask that SBI be paid first from the house (S.81). The house covers the full Rs.25 lakhs, so the plot stays free for HDFC.
- Why: SBI is paid in full either way, and HDFC has only the plot.
2. House not enough
- Facts: Same facts, but the house is worth Rs.15 lakhs and the plot Rs.20 lakhs.
- Result: SBI takes Rs.15 lakhs from the house and Rs.10 lakhs from the plot. HDFC gets the remaining Rs.10 lakhs of the plot.
- Why: Marshalling applies "so far as the property will extend". The balance can still fall on the plot.
3. Later buyer
- Facts: A mortgages Plots X and Y to a bank. He then sells Plot Y to C.
- Result: C can ask that the mortgage-debt be met first from Plot X (S.56).
- Why: The buyer gets the same protection as a later mortgagee.
4. Rights of an intermediate holder
- Facts: A mortgages the house and the shop to Bank A. Bank B then takes a mortgage of the house. Later Bank C takes a mortgage of the shop and asks that Bank A use the house first.
- Result: Marshalling is not ordered against Bank B's interest in the house.
- Why: S.81 cannot prejudice a person who has acquired an interest for consideration.
5. Contribution
- Facts: Arun and Bharat own separate parts of a building, worth Rs.30 lakhs and Rs.10 lakhs. Both parts are mortgaged together for Rs.20 lakhs.
- Result: Arun's part bears Rs.15 lakhs and Bharat's part Rs.5 lakhs (S.82). If Bharat pays more, he can recover the excess from Arun.
- Why: Each share bears the debt rateably by its value.
Key Cases
Aldrich v Cooper, (1803) 8 Ves 382
- Facts: One creditor could resort to two funds and another creditor only to one of them.
- Held: Equity will not let the first creditor's choice defeat the second. The second may be paid out of the fund he could reach, as if the first had used the other fund.
- Principle: The English source of marshalling, now set out in S.56 and S.81.
S.81 and S.82 are mostly applied on their own words. Two cases in the earlier version could not be verified for this point and have been removed (see the review report).
Distinctions
| Basis | Marshalling (S.81) | Contribution (S.82) |
|---|---|---|
| Who claims | Later mortgagee | Owner of one share who paid more than his share |
| Against | The prior mortgagee's choice of property | Owners of the other shares |
| Owners | One owner of several properties | Several owners of separate properties |
| Effect | Order of payment | Rateable sharing of the debt |
| Basis | Marshalling by buyer (S.56) | Marshalling by mortgagee (S.81) |
|---|---|---|
| Later person | Buyer of one property | Mortgagee of one property |
| Limit | No prejudice to the mortgagee or others who took for value | Same |
Exam Scenario
Suresh mortgages his house (Rs.80 lakhs) and shop (Rs.40 lakhs) to ICICI Bank for Rs.50 lakhs. He later mortgages only the shop to Rakesh for Rs.25 lakhs. ICICI plans to recover all Rs.50 lakhs by selling the shop. Advise Rakesh.
Approach
- Met: One owner, Suresh, of both properties.
- Met: Both were mortgaged to ICICI first.
- Met: Only the shop was then mortgaged to Rakesh.
- Met: No contract excluding marshalling is stated.
- Met: No prejudice to ICICI. The house alone covers the Rs.50 lakhs.
Conclusion: Rakesh is entitled under S.81 to have ICICI's debt met first from the house.
Remedy: Rakesh should seek a direction in ICICI's suit, or in his own suit, that the house be sold first. The shop then remains security for his Rs.25 lakhs.
Recall Check
- State the conditions for marshalling under S.81.
- How does S.56 differ from S.81?
- When will a court refuse marshalling?
- How is each share's value worked out for contribution under S.82?
Flashcards
What is marshalling under S.81?
Where an owner mortgages two or more properties to one person and then mortgages one or more of them to another, the later mortgagee can, unless there is a contract to the contrary, have the prior debt met from the property not mortgaged to him, so far as it will extend.
What is contribution under S.82?
Where mortgaged property belongs to two or more persons with distinct and separate ownership, their shares contribute rateably to the debt, each valued after deducting other mortgages on it.
What is the foundational principle of marshalling?
The senior creditor has two funds and the junior has one. Equity directs the senior to the fund the junior cannot reach (Aldrich v Cooper, 1803).
Does marshalling prejudice the senior mortgagee?
It must not. The senior is still paid in full. Marshalling only changes which property he uses, and is refused where it would prejudice him.
What is the basis of contribution?
Rateable sharing by value. If A's share is worth 3/4 and B's 1/4, A's share bears 3/4 of the debt and B's 1/4. If B paid more, he recovers the excess from A.
What is the doctrine of marshalling?
Where a senior creditor has security over several properties and a junior creditor over only one, the senior is directed to use first the property on which the junior has no claim (S.56, S.81).
What is the essential condition for marshalling to apply?
One owner mortgaged several properties to the senior creditor, and the junior creditor or buyer holds only some of them.
When will courts refuse to apply marshalling?
Where there is a contract to the contrary, or where it would prejudice the prior mortgagee or any person who acquired an interest in the properties for consideration.
What is the doctrine of contribution under S.82?
Properties of different owners mortgaged for one debt must contribute to it rateably, by value.
If A (owning 70%) and B (owning 30%) jointly mortgage property for Rs.10L, and A redeems the whole, how much can A recover from B?
Rs.3 lakhs (30% of Rs.10 lakhs), assuming the shares are valued at 70:30 and there is no contract to the contrary.