Marshalling by a Subsequent Purchaser
Chapter Twenty-Nine
Syllabus topic 2.1, "Specific Transfers under the Transfer of Property Act, 1882: Sale [Sections 54 - 57]"
Pages 151 to 154 of 378
In one line
If a man mortgages two properties to one lender and then sells you only one of them, you can insist the lender take his money out of the property he kept.
In exam wording: section 56 provides that if the owner of two or more properties mortgages them to one person and then sells one or more of them to another, the buyer is, in the absence of a contract to the contrary, entitled to have the mortgage debt satisfied out of the property or properties not sold to him, so far as they will extend, but not so as to prejudice the rights of the mortgagee or of persons claiming under him, or of any other person who has for consideration acquired an interest in any of the properties.
Why the rule exists
Marshalling means arranging in order. The idea is one of equity's oldest: where a creditor can help himself from two funds and another person can reach only one of them, the creditor should be made to take from the fund the other cannot touch, provided this costs the creditor nothing.
The unfairness it prevents is easy to see. A mortgagor owes one debt secured on two plots. He sells plot A to a buyer, keeping plot B. If the mortgagee were free to choose, he could enforce entirely against plot A, wiping out the buyer, while the mortgagor keeps plot B free and clear. The buyer would have paid for a plot that was then taken to pay his seller's debt, and the seller would end up better off for having sold.
Section 56 answers that by directing the debt at the property the seller kept. The mortgagor cannot improve his own position at his buyer's expense.
The conditions
One, the same owner must own two or more properties.
Two, he mortgages them to one person. The section requires a single mortgagee holding all of them. If two separate lenders hold one property each, there is nothing to marshal.
Three, he then sells one or more of the properties to another person. The sale must come after the mortgage.
Four, there is no contract to the contrary. Like most of this Act, it is a default rule, and a buyer can be made to take subject to a different arrangement.
The right that follows: the buyer may require the mortgage debt to be satisfied out of the properties not sold to him, so far as those will extend.
The three limits, which are what the section is really about
The right is not absolute, and the section names three groups whose position may not be prejudiced.
The mortgagee. Marshalling must cost the mortgagee nothing. He bargained for security over everything, and equity will rearrange the order in which he takes but never reduce what he gets. So if the retained property is worth less than the debt, the buyer cannot use section 56 to leave part of the debt unpaid; the words are "so far as the same will extend", and the mortgagee may then come against the property sold for the balance.
Marshalling by a Subsequent Purchaser
Persons claiming under the mortgagee. For example someone to whom he has transferred the mortgage.
Any other person who has for consideration acquired an interest in any of the properties. This is the limit that decides competing-buyer problems. If the mortgagor sold plot B to a second buyer for value, that buyer's position cannot be prejudiced either, and neither purchaser can force the debt entirely onto the other's plot.
Note what those three have in common: each of them paid for their position. Marshalling redistributes a burden only where doing so takes nothing from anyone who gave value.
A worked example
Vikas owns three plots at Wagholi, each worth Rs. 30 lakh. He mortgages all three to a single bank for Rs. 36 lakh. He then sells plot A to Yamini for its full value.
Yamini's right. Under section 56 she may require the bank to satisfy its Rs. 36 lakh out of plots B and C, which Vikas kept. Those are worth Rs. 60 lakh between them, so they will extend to the whole debt, and plot A is left alone.
Change the numbers. Suppose the debt is Rs. 75 lakh and plots B and C are worth Rs. 60 lakh together. Yamini may still marshal, but only "so far as the same will extend". The bank takes Rs. 60 lakh from B and C, and may come against plot A for the remaining Rs. 15 lakh, because the alternative would prejudice the mortgagee, which section 56 forbids.
Add a second buyer. Suppose Vikas had already sold plot B to Zoheb for value before selling plot A to Yamini. Neither buyer may throw the whole debt onto the other's plot, because each has for consideration acquired an interest and neither may be prejudiced. The bank's claim is then borne between the plots, and the working out is a question of contribution under section 82.
Remove the common mortgagee. Suppose plot A was mortgaged to a bank and plot B to a finance company. Section 56 has nothing to operate on: marshalling requires one mortgagee holding several properties.
Reverse the order. Suppose Vikas sold plot A to Yamini first and mortgaged the remaining plots afterwards. Section 56 does not apply, because it requires the mortgage to come first and the sale after.
Marshalling by a Subsequent Purchaser
What it does NOT mean
It does not reduce the mortgagee's security. He may not be prejudiced, so where the retained property is insufficient he can still reach the property sold for the balance.
It does not require the buyer to have had notice. Section 56 does not turn on notice; it turns on the order of the transactions and on nobody who gave value being prejudiced.
It does not apply where there are two mortgagees. One mortgagee holding two or more properties is a condition.
It does not apply where the sale came first.
It does not defeat another purchaser for value. A person who has for consideration acquired an interest in any of the properties cannot be prejudiced.
It is not the same as contribution. Marshalling decides which property answers the debt; contribution under section 82 decides in what proportions several properties share it.
Distinctions
| Marshalling, s.56 | Contribution, s.82 | |
|---|---|---|
| Question answered | Which property should bear the debt | In what shares several properties bear it |
| Who claims | A buyer of one of the mortgaged properties | The owners of the several mortgaged properties, among themselves |
| Effect | The debt is pushed onto the property not sold | The debt is spread rateably by value |
| Section 56 | Section 81 | |
|---|---|---|
| Who may marshal | A subsequent purchaser | A subsequent mortgagee |
| Against whose properties | Those not sold to him | Those not mortgaged to him |
| Common limit | Neither may prejudice the prior mortgagee, those claiming under him, or anyone who acquired an interest for consideration |
Quick revision
- Marshalling means arranging in order: a creditor with two funds must take from the one his rival cannot reach, if it costs him nothing.
- Conditions: one owner; two or more properties; mortgaged to one mortgagee; then sold to another; no contract to the contrary.
- Right: the buyer may have the debt satisfied out of the properties not sold to him, so far as they will extend.
- Three limits: no prejudice to the mortgagee, to persons claiming under him, or to anyone who for consideration acquired an interest in any of the properties.
- If the retained property is insufficient, the mortgagee may still come against the property sold for the balance.
- The mortgagee's counterpart is section 81; the sharing rule is section 82.
Test yourself
1. State the conditions for marshalling under section 56. The owner of two or more properties mortgages them to one person, and afterwards sells one or more of them to another; and there is no contract to the contrary.
2. What exactly may the buyer require? That the mortgage debt be satisfied out of the property or properties not sold to him, so far as those will extend.
Marshalling by a Subsequent Purchaser
3. Does the buyer need to have had no notice of the mortgage? No. Section 56 does not turn on notice. It turns on the order of the transactions and on the three protected groups not being prejudiced.
4. The retained property is worth less than the debt. What happens? The mortgagee takes what the retained property will yield and may then proceed against the property sold for the balance, because marshalling may not prejudice the mortgagee.
5. Two plots are mortgaged to two different lenders and one is sold. Can the buyer marshal? No. Section 56 requires the properties to have been mortgaged to one person.
6. How does marshalling differ from contribution? Marshalling decides which property should answer the debt, and is claimed by a purchaser of one of them. Contribution under section 82 decides in what proportions the several properties share the debt among themselves.
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.