Report No. 70
Marshalling Between Mortgage and Purchaser
The rights and liabilities of the seller and purchaser of immovable property having been dealt with, the Act deals with a special situation which may raise problems in connection with sale. The matter is dealt with in section 56, quoted below:-
"56. If the owner of two or more properties mortgages them to one person and then sells one or more of the properties to another person, 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 the same will extend, but not so as to prejudice the rights of the mortgagee or persons claiming under him or of any other person who has for consideration acquired an interest in any of the properties, creditor having two funds shall take to that which, paying him, will leave another fund for another creditor."
This is known as marshalling. The doctrine has been definitely in existence since the days of Lord Eldon. It cannot, however, be invoked if the interests of the creditor would be prejudicially affected by its application- as, for example, where the first creditor has not got equal rights over the two funds.1 The doctrine cannot also be invoked where the interests of third parties are, in any way, involved, as for instance, of persons claiming under the mortgage for value.
Many of the decisions relate to marshalling as between rival mortgagees. But the principle is the same where occasion for equitable adjustment arises between the two competing claims of a subsequent purchaser and an earlier mortgagee. In the scheme of the Act, marshalling as between two or more mortgagees is dealt with in section 81, while marshalling as between the subsequent purchaser and the mortgagee is dealt with in section 56.
1. Ghose Law of Mortages in India, (1902), p. 416.
The principle having been dealt with, let us go to the wording. The wording of section 56 is somewhat unhelpful inasmuch as the fact that there are two or more properties-as essential requisite-does not get the prominence which it deserves by reason of the use of the word "owner" in the forefront. The intention, however, is quite clear. The rule was stated by Dart1 in these terms:
"If two estates X and Y are subject to a common charge and estate X be sold to A, A will, as against his vendor and his representatives, have a prima facie equity in the absence of express agreement and whether or not he had notice of the charge, to throw it primarily on estate Y in exoneration of estate X."
1. Dart Vendor and Purchaser, cited by Mulla, (1973), p. 355.
52.4. History.- The section as originally enacted was in these terms:-
"Where two properties are subject to a common charge, and one of the properties is sold, the buyer is, as against "the seller in the absence of a contract to the contrary, entitled to have the charge satisfied out of the other property, so far as such property will extend."
In 1929, several amendments were made in the section. Of these, three are worth mentioning. In the first place, before 1929 the section was confined to the case of two properties, while it has now been widened to cover cases where there are more than two properties. In the second place, the word "charge" has been replaced by the word "mortgage". This change was, in part, faithful to the general scheme of the Act, which makes a distinction between mortgages and charges. But the amendment has created its own complications1.
Thirdly-and this also is an important change-the words "as against the seller" have been omitted, to show that the right can be enforced against the mortgagee also. Under the section as it stood before 1929, the mortgagee had a right to proceed as against whatever property he chose, and could not be compelled to select a security2. Under the amendment section, the purchaser can insist upon marshalling, as of right, even against the mortgagee. It is not necessary now-as was the position previously,-to invoke the discretion of the Court3 under Order 34, rule 5, Code of Civil Procedure, 1908, to adjust the equities by requiring the mortgagee to protest against the unsold property.4
1. See para. 52.8, infra.
2. Narayanaswamy v. Valiyya, AIR 1924 Mad 366.
3. Appayya v. Rangayya, 1908 ILR 31 Mad 419 (FB).
4. Sumbaandam v. Ramaswamy, AIR 1964 Mad 547.
52.5. Notice not condition precedent.-
The right given to the purchaser by section 56 is independent of notice.1 In regard to marshalling between two or more mortgagees-section 81-the legislature has, by the amendment of 1929, by removing the pre-existing words "who has not notice of the former mortgage", substantially made it clear that section 81 applies irrespective of notice.2 Since the requirement of the notice did no occur in section 56 even before 1929, there was no question of deleting any words.
1. Mulla, (1973), p. 356.
2. Karam Singh v. Shuklabedi, AIR 1952 Punj 477.
52.6. Contract to the contrary-Recommendation.-
The words "contract to the contrary" in section 56 seems to have raised questions as to whether they are restricted to a contract between a mortgagor and a mortgagee only, or whether they cover a contract between the mortgagor and the purchaser also. The latter view, that is to say, the wider view, has been taken in a Madras case.1 Since this aspect of the matter is not very apparent from the language of the section, we think that it would be worthwhile to make it clear and put the matter beyond doubt. For this reason, we recommend that in section 56, after word "in the absence of a contract to the contrary" the words "between the mortgagor and the buyer" should be added.
1. Managayya v. Achchayamma, AIR 1950 Mad 224.
52.7. Successive sales.-
Section 56 does not deal with the complex situation where there are successive sales by the mortgagor. In England, it would seem that a contributory fund must be so marshalled as to make the remaining property of the debtor applicable in the first instance and if that be insufficient, the property of a portion of the last purchaser must be applied before that of any prior purchaser.1
English books on vendor and purchaser deal with the subject more elaborately than the section. It is not very clear whether the section may literally apply in such a situation. Even if the section does not apply, it would seem that relief substantially on the same lines may be available in such cases on general equitable considerations. We are not proposing any amendment in this regard.
1. Hertlev v. O'Flahertey, (1828) 1 Beat 79, cited by Ghose Mortgage, (1902), p. 441.
52.8. Charges- Recommendation.-
There seems to be some difficulty as to the applicability of section 56 to charges. Before the amendment of 1929, the word used in section 56 was "charges", while, after the amendment, the word used is "mortgage". The change was made, so far as can be gathered, not with the intention of excluding charges from the section, but in view of the fact that the expression used in the scheme of the Act is "mortgage". The word "charge" was apparently used at that time in the section in view of the proposition enunciated in an English test book where 'charge" is used to cover all encumbrances securing pecuniary liabilities.
After the amendment, a conflict of decisions has arisen. The Chief Court of Oudh has held1 that the object of the amendment was to widen and not to narrow down the section as the section still applies to charges. On the other hand, the High Court of Nagpur has held2 that the omission of the word "charge" from section 56 indicates that the section is intended only for cases of mortgage.
The section does not, therefore, at present, apply to charges, though its principle may be availed of in suitable circumstances. The High Court relied upon Order 34, rule 15 of the Code of Civil Procedure, for applying the principle of section 56 to charges.
While substantial justice was achieved in the Nagpur case by applying the principle, it seems to us that there is no reason why the section itself should not apply to charges. The verbal change made in 1929 was considered necessary because, under section 100, the expression "charge" would not include a mortgage. It was, however, overlooked that the substitution of "mortgage" would rule out the case of charge. We are of the view that the best course would be to insert an Explanation to the effect that the provisions of this section apply, as far as may be, to charges as they apply to mortgages. We recommend that the section should be so amended.
1. Mohammed Yunus Khan v. Special Manager Court of Wards, AIR 1937 Oudh 301 (311) (Nanavatty & Smith, B.).
2. Nilkanthrao v. Satyabhama Rai, AIR 1944 Nag 25 (27, 28) (Grille, C.J. & Puranik, J.).
52.9. Revised draft.-
In the light of the above discussion, we recommend that section 56 should be revised as under:-
"56. (1) Where there is a mortgage of two or more properties to one person and the owner then sells one or more of the properties to another person, the buyer is, in the absence of a contract to the contrary between the owner and the buyer or the mortgagor and the mortgagee1, entitled to have the mortgage-debt satisfied out of the property or properties not sold to him, so far as the same will extend, whether or not he has notice of the mortgage but not so as to prejudice the rights of the mortgagee or persons claiming under him or of any other person who has for consideration acquired an interest in any of the properties.
(2) The provisions of this section apply, as far as may be, to charges as they apply to mortgages."
1. See para. 52.6, supra.