Priority, Contribution and Marshalling among Mortgagees
Chapter Thirty-Seven
Syllabus topic 2.1, "Specific Transfers under the Transfer of Property Act, 1882: Mortgage and Charge [Sections 58 - 104]"
Pages 193 to 198 of 378
In one line
The earlier mortgage wins, unless the earlier mortgagee behaved badly; a later mortgagee can push the earlier debt onto the properties he does not hold; and where several people own parts of the mortgaged property, they share the debt by value.
In exam wording: section 78 postpones a prior mortgagee whose fraud, misrepresentation or gross neglect induced another to advance money; section 79 protects a maximum-sum mortgage against a later one taken with notice; section 81 allows a subsequent mortgagee to marshal; and section 82 makes the several shares of mortgaged property contribute rateably to the debt.
The starting point
Section 48 settles priority generally: qui prior est tempore potior est jure, the earlier in time is stronger in law. A mortgagor cannot give a second lender better rights than he had left to give.
The four sections here are what qualifies that rule inside Chapter IV. Two are about priority (78 and 79) and two about which property answers the debt (81 and 82).
Section 78: postponement of a prior mortgagee
Where, through the fraud, misrepresentation or gross neglect of a prior mortgagee, another person has been induced to advance money on the security of the mortgaged property, the prior mortgagee is postponed to the subsequent mortgagee.
The reason is the same allocation of fault that runs through section 41: as between two lenders, the loss falls on the one whose own conduct produced the mistake.
Three points on its scope.
The three triggers are distinct. Fraud is deliberate; misrepresentation may be innocent; gross neglect is a failure so serious that it misleads. Ordinary carelessness will not do, and the word "gross" carries weight.
There must be inducement. The later lender must have advanced the money because of the prior mortgagee's conduct. A lender who never enquired and would have lent anyway was not induced.
The consequence is postponement, not extinction. The prior mortgage survives; it simply ranks second.
Section 79: a mortgage securing an uncertain amount, with a maximum
Where a mortgage made to secure future advances, the performance of an engagement, or the balance of a running account expresses the maximum to be secured, a subsequent mortgage of the same property, if made with notice of the prior mortgage, is postponed to the prior mortgage in respect of all advances or debits not exceeding the maximum, though made or allowed with notice of the subsequent mortgage.
The Act's illustration, which is the clearest possible statement:
A mortgages Sultanpur to his bankers, B & Co., to secure the balance of his account with them to the extent of Rs. 10,000. A then mortgages Sultanpur to C, to secure Rs. 10,000, C having notice of the mortgage to B & Co., and C gives notice to B & Co. of the second mortgage. At the date of the second mortgage, the balance due to B & Co. does not exceed Rs. 5,000. B & Co. subsequently advance to A sums making the balance exceed Rs. 10,000. B & Co. are entitled, to the extent of Rs. 10,000, to priority over C.
Priority, Contribution and Marshalling among Mortgagees
Read the last clause of the section again, because it is what students miss: B & Co. keep priority up to the maximum even though they knew of C's mortgage when they made the later advances. Notice of a second mortgage does not normally protect further lending, but a declared maximum does.
The justification is that the maximum was published in the first mortgage. C could see exactly how much of the property was already committed, and he chose to lend against what was left. He cannot complain when the first lender uses the room he had reserved.
The conditions, all of which must be present: a mortgage to secure future advances, an engagement, or a running balance; a maximum expressed in it; and the later mortgagee taking with notice of it.
Section 80, which abolished tacking, was repealed in 1929 and is noted as repealed. Tacking is dealt with in [Subrogation, and the Abolition of Tacking] under section 93.
Section 81: marshalling by a subsequent mortgagee
If the owner of two or more properties mortgages them to one person and then mortgages one or more of them to another, the subsequent mortgagee is, absent contrary contract, entitled to have the prior mortgage-debt satisfied out of the properties not mortgaged to him, so far as they 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.
This is section 56 with a mortgagee in place of a purchaser, and the reasoning is identical: a debtor may not, by his own later dealing, throw the whole burden onto the property he has given as security to somebody else while keeping the rest clear.
The limits are the same and are the examinable part. Marshalling must not prejudice the prior mortgagee, so if the other properties are insufficient he may still come against the property mortgaged to the second lender for the balance; and it must not prejudice anyone who acquired an interest for consideration, so a later purchaser or third mortgagee cannot be sacrificed.
Section 82: contribution to the mortgage-debt
The main rule. Where property subject to a mortgage belongs to two or more persons having distinct and separate rights of ownership, the different shares or parts are, absent contrary contract, liable to contribute rateably to the debt.
Priority, Contribution and Marshalling among Mortgagees
How the rate is fixed. For the purpose of determining the rate, the value of each share or part is deemed to be its value at the date of the mortgage, after deducting the amount of any other mortgage or charge to which it was subject on that date.
Two things there repay attention. The valuation date is the date of the mortgage, not the date of the suit, so a share that has since risen or fallen contributes on its original footing. And what is valued is the net value after prior charges, since a share already burdened is worth less as a contributor.
The second paragraph. Where, of two properties belonging to the same owner, one is mortgaged to secure one debt and then both are mortgaged to secure another, and the first debt is paid out of the first property, each property is, absent contrary contract, liable to contribute rateably to the second debt after deducting the amount of the first debt from the value of the property out of which it was paid.
That is simply the netting principle again: the property that has already borne the first debt gets credit for it before the second is shared.
The exclusion. Nothing in section 82 applies to property liable under section 81 to the claim of the subsequent mortgagee. Marshalling and contribution do not operate on the same property at the same time, and marshalling takes precedence.
A worked example
Nikhil owns three plots at Baramati: X worth Rs. 60 lakh, Y worth Rs. 40 lakh and Z worth Rs. 20 lakh.
Priority. He mortgages all three to a bank for Rs. 50 lakh in January, and mortgages plot X alone to Om for Rs. 30 lakh in June. Under section 48 the bank ranks first.
Section 78. Suppose that before Om lent, the bank told him, carelessly and quite wrongly, that it held no security over plot X, and Om lent on the strength of it. That is misrepresentation which induced the advance, and the bank is postponed to Om.
Section 81. Assume no such conduct. Om, as subsequent mortgagee of X only, may require the bank's Rs. 50 lakh to be satisfied out of Y and Z, which he does not hold. Those are worth Rs. 60 lakh together, so they will extend to the whole debt and plot X is left for Om.
The limit. If the bank's debt had been Rs. 80 lakh, Y and Z would yield only Rs. 60 lakh, and the bank could come against plot X for the remaining Rs. 20 lakh, because marshalling must not prejudice the prior mortgagee.
Priority, Contribution and Marshalling among Mortgagees
Section 82. Now suppose Nikhil dies and X, Y and Z pass to three heirs in separate ownership, the bank's Rs. 50 lakh still outstanding over all three. The heirs contribute rateably, by the values at the date of the mortgage: X bears 60/120, Y bears 40/120 and Z bears 20/120, that is Rs. 25 lakh, Rs. 16.67 lakh and Rs. 8.33 lakh. If plot Y had itself been subject to an earlier charge of Rs. 10 lakh at that date, it would be valued at Rs. 30 lakh for this purpose and the shares recalculated.
Section 79. Separately, suppose Nikhil had mortgaged plot X to his bankers to secure the balance of his running account up to a stated maximum of Rs. 25 lakh, and then mortgaged X to Om, who knew of it. When the bankers later advance further sums taking the balance to Rs. 25 lakh, they keep priority over Om to the full Rs. 25 lakh, even though they knew of Om's mortgage when they advanced.
What it does NOT mean
Section 78 does not require fraud. Misrepresentation or gross neglect will do, though ordinary carelessness will not.
Postponement is not extinction. The prior mortgage survives and simply ranks later.
Section 79 is not a general protection for further advances. It works only where a maximum is expressed and the later mortgagee had notice.
Section 81 does not reduce the prior mortgagee's security. Where the other properties are insufficient he may still reach the property mortgaged to the later lender.
Contribution is not calculated on present values. Section 82 fixes values at the date of the mortgage, net of charges then subsisting.
Sections 81 and 82 do not overlap. Section 82 does not apply to property liable under section 81 to the subsequent mortgagee's claim.
Section 80 is repealed and should be described as repealed.
Distinctions
| Marshalling, ss.56 and 81 | Contribution, s.82 | |
|---|---|---|
| Question | Which property answers the debt | In what proportions the parts share it |
| Claimed by | A subsequent purchaser (s.56) or mortgagee (s.81) | The owners of the several parts, among themselves |
| Basis | The properties not sold or mortgaged to him | Value at the date of the mortgage, net of other charges then subsisting |
| Limits | No prejudice to the prior mortgagee or to anyone who acquired an interest for consideration | Yields to a contract to the contrary; does not apply where s.81 governs |
| Section 48 | Section 78 | Section 79 | |
|---|---|---|---|
| Rule | Earlier in time prevails | The earlier is postponed for his fraud, misrepresentation or gross neglect | The earlier keeps priority up to the expressed maximum, despite notice of the later mortgage |
| Turns on | Time | The prior mortgagee's conduct and inducement | A declared maximum and the later mortgagee's notice |
Priority, Contribution and Marshalling among Mortgagees
Quick revision
- The base rule is section 48: earlier in time, stronger in law.
- s.78: a prior mortgagee is postponed where his fraud, misrepresentation or gross neglect induced another to advance money.
- s.79: where a mortgage for future advances, an engagement or a running balance expresses a maximum, a later mortgagee with notice is postponed as to everything up to that maximum, even though the advances were made with notice of his mortgage. Illustration: B & Co. keep priority to Rs. 10,000 over C.
- s.80 is repealed (tacking).
- s.81: a subsequent mortgagee may have the prior debt satisfied out of the properties not mortgaged to him, so far as they extend, without prejudicing the prior mortgagee or anyone who acquired an interest for consideration.
- s.82: separate owners of parts of mortgaged property contribute rateably, valued at the date of the mortgage net of other charges then subsisting; where one of two properties bore an earlier debt, that amount is deducted before sharing the later debt. It does not apply where s.81 governs.
Test yourself
1. When is a prior mortgagee postponed to a later one? Where, through his fraud, misrepresentation or gross neglect, another person was induced to advance money on the security of the mortgaged property. Section 78 then postpones him.
2. Does notice of a second mortgage stop a first mortgagee from keeping priority for later advances? Not where his mortgage expresses a maximum. Under section 79 he retains priority for all advances not exceeding that maximum, though made with notice of the subsequent mortgage.
3. State the illustration to section 79. A mortgages Sultanpur to B & Co. to secure the balance of his account up to Rs. 10,000, then mortgages it to C for Rs. 10,000, C having notice. The balance is then under Rs. 5,000. B & Co. later advance sums taking it above Rs. 10,000. B & Co. have priority over C to the extent of Rs. 10,000.
4. What may a subsequent mortgagee require under section 81? That the prior mortgage-debt be satisfied out of the properties not mortgaged to him, so far as they will extend, without prejudicing the prior mortgagee or any other person who has for consideration acquired an interest in any of the properties.
5. On what values is contribution calculated? On the value of each share or part at the date of the mortgage, after deducting the amount of any other mortgage or charge to which it was subject on that date.
Priority, Contribution and Marshalling among Mortgagees
6. Can sections 81 and 82 apply to the same property at the same time? No. Section 82 expressly does not apply to property liable under section 81 to the claim of the subsequent mortgagee.
7. Is ordinary carelessness by a prior mortgagee enough to postpone him? No. Section 78 requires fraud, misrepresentation or gross neglect, and the later lender must have been induced by it to advance the money.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.