Section 81 of the Transfer of Property Act, 1882: Marshalling of Securities
Imagine you own two properties: a house in the city and a farm in the countryside. You first
mortgage both properties to Bank A to secure a loan of Rs. 10 lakhs. Later, you need more
money and mortgage only the farm to Bank B for a loan of Rs. 5 lakhs.
Now, if you default on both loans, Bank B can exercise its right to sell the farm to recover its
loan. However, Section 81 of the Transfer of Property Act, 1882, introduces a principle called
marshalling to protect the interests of Bank B.
Marshalling is a legal doctrine that requires a creditor with security over multiple properties
to proceed first against those properties that are not subject to the claims of other creditors. In
our example, Bank B can insist that Bank A first exhaust its remedies against the city
house before proceeding against the farm. This is because the farm is subject to the claims
of both banks, while the city house is only subject to Bank A's claim.
Why does marshalling happen?
Equity: It's considered equitable to protect the interests of a creditor who has security over a
property that is also subject to the claims of another creditor.
Fairness: Marshalling helps prevent one creditor from gaining an unfair advantage over
another.
Essentials:
Two or more properties: The owner must have mortgaged two or more properties.
Different mortgagees: The properties must be mortgaged to different people.
Subsequent mortgagee: The mortgagee who has security over only one property is entitled
to marshalling.
No contract to the contrary: Unless there is a specific agreement between the parties,
marshalling is applicable.
Conclusion, Section 81 ensures that creditors are treated fairly and prevents one creditor
from gaining an unfair advantage over another. It is a valuable tool for protecting the interests
of mortgagees in cases where multiple properties are subject to mortgage claims.
Subrogation is a legal principle where one person steps into the shoes of another and
acquires their rights and liabilities. In the context of the Transfer of Property Act, 1882
(TOPA), Section 92 outlines the circumstances under which a mortgagee can acquire the
rights of a prior encumbrancer.
Key points of Section 82:
Payment of prior encumbrance: If a mortgagee discharges a prior encumbrance on
the mortgaged property, they are subrogated to the rights of the prior encumbrancer.
This means they can exercise the rights that the prior encumbrancer had, such as the
right to claim the mortgaged property.
Consent or notice: Subrogation can occur with the consent of the prior encumbrancer
or even without their consent if the mortgagee acted bona fide (in good faith) and
without notice of the prior encumbrance.
Protection of mortgagee: Subrogation is intended to protect the interests of the
mortgagee by preventing them from incurring double liability. If a mortgagee pays off
a prior encumbrance without acquiring the rights of the prior encumbrancer, they
could be liable to both the original mortgagee and the prior encumbrancer.
Illustration:
Imagine you own a property and mortgage it to Bank A. Later, you mortgage the same
property to Bank B. If Bank B pays off the mortgage to Bank A, Bank B will be subrogated
to the rights of Bank A. This means Bank B can now exercise the rights that Bank A had,
such as the right to claim the property if you default on your mortgage to Bank B.
Subrogation is a valuable tool for mortgagees as it allows them to protect their interests
and avoid double liability. However, it's important to note that subrogation is subject to
certain conditions and exceptions, and it's advisable to consult with a legal professional for
specific advice in your situation.
Case Law 1: United Commercial Bank Ltd. v. P.L.D. Enterprises Ltd. & Ors. (2002) 6
SCC 155
Facts: The plaintiff bank had two mortgages over the defendant's properties. The
defendant later mortgaged one of the properties to another bank. The plaintiff bank
foreclosed on both properties, leading to a dispute over the application of the
marshalling principle.
Decision: The Supreme Court held that the marshalling principle was applicable in
this case. The plaintiff bank was required to first exhaust its remedies against the
property that was not subject to the claim of the other bank before proceeding against
the property subject to both mortgages.
2. Indian Bank v. S.R.M. Properties Pvt. Ltd. (2012) 5 SCC 281
Facts: The plaintiff bank had a mortgage over the defendant company's property. The
defendant company later mortgaged the same property to another bank. The plaintiff
bank paid off the prior mortgage to the other bank.
Decision: The Supreme Court held that the plaintiff bank was subrogated to the rights
of the prior mortgagee and could exercise the rights that the prior mortgagee had,
including the right to claim the mortgaged property.
