Under what circumstances can marshalling be claimed?

The doctrine of marshalling is a rule of equity enshrined in two distinct provisions of the Transfer of Property Act, 1882 — Section 56, which confers the right on a subsequent purchaser, and Section 81, which confers the same right on a subsequent or puisne mortgagee. Both provisions share the same underlying logic but operate in slightly different contexts. The word "marshalling" itself means arranging — the court arranges the available securities so that a creditor having access to two funds is directed towards the fund not available to the other creditor.

The Foundational Principle

The classic statement of the doctrine was made in Aldrich v. Cooper (1803) 8 Ves 382, where it was observed: "If there are two creditors who have taken securities for their respective debts, and the security of the one is confined to both funds, and the security of the other is confined to one of those funds, the court will arrange or marshal the assets, so as to throw the person who has two funds liable to his demand on that which is not liable to the debt of the second creditor." This principle has been fully adopted by Indian courts and given statutory shape in the Transfer of Property Act.

Section 81 — Marshalling by Subsequent Mortgagee

Section 81 applies when the owner of two or more properties mortgages them to one person (the prior mortgagee) and then mortgages one or more of the same properties to another person (the subsequent or puisne mortgagee). The result is that one property is mortgaged to both X and Y, while another property is mortgaged only to X. The subsequent mortgagee Y can insist that X first look to the property not mortgaged to Y before proceeding against the property common to both.

To take an illustration: A mortgages his three properties X, Y, and Z to B for Rs. 15,000 and then mortgages only property Z to C for Rs. 5,000. Now B holds a mortgage over all three properties and C holds a mortgage over only Z. If B proceeds to enforce his mortgage, C can insist under Section 81 that B must first exhaust properties X and Y before touching Z. It is only when the sale proceeds of X and Y are insufficient that B can turn to Z.

Section 56 — Marshalling by Subsequent Purchaser

Section 56 applies where the owner mortgages two or more properties to one person and then sells one or more of those properties to another person. The buyer is entitled — in the absence of a contract to the contrary — to insist that the mortgage debt be satisfied out of the properties not sold to him. The rationale is that a person who pays full value for a property should not have to bear the burden of a mortgage created before the sale and attributable to properties that remained with the seller. The Supreme Court affirmed in JP Builders v. A. Ramadeo Rao (2011) 1 SCC 429 that the plea of marshalling is a pure question of law and may be raised for the first time in appeal without having been specifically pleaded before the trial court.

Circumstances in Which Marshalling Can Be Claimed

The conditions that must be satisfied for marshalling to be available are as follows:

There must be a common debtor. Both the prior mortgagee and the subsequent mortgagee or purchaser must be creditors of the same mortgagor. Marshalling cannot be invoked unless the mortgagees between whom it is to be enforced have claims against the property of a common debtor. This was settled as early as Ex parte Kendall (1811) 17 Ves 520. A karta of a joint family, for instance, cannot claim marshalling where he mortgaged the joint family property and his personal property, since they are not properties of the same undivided owner.

There must be two or more distinct properties. Marshalling implies the existence of two sets of properties — one subject to both mortgages, and another subject only to the earlier mortgage. The Madras High Court held in Re Muthammal (AIR 1938 Mad 503) that once one of the properties is released, there are no longer two sets of properties and the doctrine cannot be invoked. Different fragments of the same property are not treated as different properties for this purpose.

The subsequent mortgagee or purchaser must be prejudiced by the situation. The entire logic of marshalling is to protect a party who has only one fund from having that fund depleted by a creditor who has access to other funds as well. Where there is no such disadvantage, the right does not arise.

The exercise must not prejudice the prior mortgagee. Marshalling is a rule of equity and equity cannot be turned against the very person it seeks to protect. The subsequent mortgagee cannot compel the prior mortgagee to proceed against a security which is insufficient, doubtful, or which might involve him in litigation. The Supreme Court, in Brahm Prakash v. Manbir Singh (AIR 1963 SC 1607), clarified that whether or not prejudice is caused to the prior mortgagee is purely a question of fact, intimately connected with the value of the property against which the first mortgagee is directed to proceed.

The exercise must not prejudice other encumbrancers. Section 81 expressly provides that the right cannot be exercised to the prejudice of "any other person who has for consideration acquired an interest in any of the properties." The leading illustration comes from the case of Barness v. Rector (1842), where it was explained that if a subsequent mortgagee's insistence on marshalling would deprive a third encumbrancer of any security at all, the court will instead apportion the prior mortgage debt rateably between the properties.

The securities must be on the same footing. Only successive mortgages come within the purview of Section 81. Where a creditor holds a charge over one fund and a right of set-off against another, he cannot be compelled by a second encumbrancer on the first fund to abandon his charge. As observed in Webb v. Smith (1885) 30 ChD 192, the equities must be comparable for the doctrine to apply.

There must be no contract to the contrary. The right of marshalling under both Sections 56 and 81 is subject to a contract to the contrary. Parties may expressly or even impliedly agree to exclude the right, and where one property is designated as collateral security or a mere indemnity, the courts examine whether this constitutes a contract to the contrary in the given facts.

Who Can Avail of Marshalling

Section 56 confers the right on the buyer of a property. Section 81 confers it on the subsequent or puisne mortgagee. Notably, a puisne mortgagee who has a right of marshalling does not lose that right merely because he subsequently purchased the equity of redemption — as confirmed in Low v. Hazarimull (AIR 1926 Cal 525).

However, an execution purchaser — that is, a person who purchased the property at a court auction to satisfy a money decree — cannot avail of marshalling under Section 56. The rule does not apply as between two purchasers who are both to contribute rateably to the satisfaction of the original charge. Nor does the doctrine apply to hypothecation of movables, as it is confined to immovable property.

Marshalling Supersedes Contribution

One important point that a student must note is that where marshalling and contribution come into conflict, marshalling prevails. Section 82 itself states that the rule of contribution shall not apply to property liable under Section 81 to the claim of a subsequent mortgagee. Equity first arranges the securities through marshalling and then, if necessary, falls back on the doctrine of contribution. These two doctrines are thus not rivals but complements, with marshalling given the higher priority.