Doctrines of contribution and marshalling

Principle of Marshalling in TP Act 

Overview

The doctrine of marshalling represents the concept of natural justice and it is that a mortgagee cannot be allowed to act, either with design or with caprice, whim or rashness, in such a way as to prejudice the rights of the other mortgagees.

Marshalling Meanings:

To Marshall means to arrange, to systematise, to methodize or to place in order. 

It is an equitable doctrine requiring that if one Mortgagee can obtain satisfaction of a debt from only one property and a second mortgagee can obtain satisfaction from more than one properties, the second mortgagee must claim against the properties that the other mortgagee cannot reach.

Origin of the doctrine of marshalling:

Aldrich v. Cooper lays down the principle, thus “it shall not depend upon the will of one creditor to disappoint another.” Moreover, “if a creditor has two funds, the interest of the debtor shall not be regarded, but the creditor having two funds shall take that which paying him and will leave another fund for another creditor.”

You can also read➣➣ Foreclosure of mortgage property

This idea has been incorporated in Section 81 of the Transfer of Property Act: 

Section 81 of Transfer of Property Act; Marshalling securities.

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 mortgagee 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. 

Explanation of Section 81 of Transfer of Property Act

The section is clear and enacts that where two mortgagees claim to be satisfied out of the same property, it is for the Court to apply this doctrine of marshalling whereunder it will so arrange the securities that both the mortgagees are paid as far as possible. This could be done by directing the first mortgagee (at the instance of the subsequent mortgagee) to satisfy his claim first from the property not mortgaged to the subsequent mortgagee and then to extend his claim to the other.The result would be that it will leave the other security or so much of a part of it, not required for the satisfaction of the first, for the subsequent mortgagee.

One has to note that the section includes the words “in the absence of a contract to the contrary”, which means that this “right” of the mortgagee can be excluded by contract of the parties.

Since the first mortgagee has two estates in his hands he, of his own will, cannot be allowed to act in a way to cause injustice and inflict loss to the other. But, if by marshalling the securities the first mortgagee’s interest is prejudiced or persons getting interest through him are put at a loss, this principle will not be applied.

Doctrine of contribution in property Law

Overview:

The doctrine of contribution is based on the maxim “equity delighteth in equality”, The principle underlying this doctrine is equality, for example, where several persons are debtors all shall be equal, and if the creditor does not make them to contribute equally the Courts of equity will see that the object is achieved by making them to contribute equally.

Meanings of doctrine of contribution:

In other words, it involves the fixation of the proportion or share in which two or more owners of an estate, subject to a common charge, ought to contribute for its redemption. This principle is incorporated in Section 82 of the Transfer of Property Act.

Explanation of doctrine of contribution

Dr. Ghos in his treatise has clearly explained that, “a mortgage debt is one and indivisible and if several distinct parcels of land are hypothecated to the creditor, which belong to two or more mortgagors, or subsequently pass to different owners, the creditor may, as a rule, proceed against any one of such parcels, and the only way to prevent a sale or foreclosure would be to pay the whole of the mortgage debt. It is but reasonable that in such a case, the person who is compelled to discharge the common burden should be permitted to seek indemnification from the others and no fairer rule can be suggested than that each of them should contribute according to the value of the property owned by him or to the extent of his interest in it. For the law would not suffer the creditor to select his own victim, and from caprice or favouritism to turn a “common burden’ into a gross personal oppression”. Principles of natural justice can be seen working here.

Section 82 of the Transfer of Property Act incorporates not only the case of a property once mortgaged and subsequently divided into several shares but also the case of a mortgage of several properties mortgaged. In other words, where the debt is one and the properties mortgaged are several, and where there are two properties and the debts are several the principle applies.

You should also read ➣➣ Redemption of mortgaged property

Marshalling Vs Contribution: Which Principle would prevail?

It should be noted that contribution is regulated by the principle of marshalling and where there is conflict between the two, principles of marshalling shall prevail. Section 82 will apply only up to the time the mortgage continues. Moreover, the liability created by contribution is not personal but it is attached to the property and the liability though statutory can be avoided or excluded by a contract, as the section itself provides. Looked at from a proper angle, one may say that contribution is marshalling in a different form. Leading case on the principle is Kidder Lall v. Hari Lall and Narayan v. Nallammal.