Transfer of Property Act (TPA)
Application of the Proceeds of a Sale: Section 97, Order 34 Rule 13 of the Code, and Section 69(4)
When mortgaged property is sold, the money has to be applied in a settled order. Costs come first, then the claims of any prior encumbrancer, then the interest and costs of the mortgage under which the sale was held, then its principal, and the surplus goes back to whoever is interested in the property. Section 97 of the Act originally contained this rule. It was repealed by the Code of Civil Procedure, 1908, and the subject now lives in Order 34 Rule 13 for a sale under a decree, and in section 69(4) of the Act for a sale made without the intervention of the court.
1. Where the Rule Now Lives
The position to state in an answer Section 97 provided for the application of the proceeds of a sale in execution of a decree for sale. Along with sections 85 to 90 and section 99, it was repealed by the Code of Civil Procedure, 1908, which took the procedural parts of the mortgage law into Order 34. Order 34 Rule 13 now governs the application of proceeds of a sale held under a decree. Section 69(4) governs the application of proceeds where a mortgagee sells without the intervention of the court under the power conferred by section 69. |
2. Order 34 Rule 13: The Order of Application
Order | What is paid |
|---|---|
First | All expenses incident to the sale, or properly incurred in any attempted sale |
Second | Whatever is due to the prior mortgagee on account of the prior mortgage, and the costs properly incurred in connection with it |
Third | All interest due on account of the mortgage in consequence of which the sale was directed, and the costs of the suit in which the decree directing the sale was made |
Fourth | The principal money due on account of that mortgage |
Lastly | The residue, to the person proving himself interested in the property sold; and where there is more than one such person, to them according to their respective interests or on their joint receipt |
- The order is not a matter of discretion. Each class is exhausted before the next is reached, and a later claimant takes only what is left.
- The prior mortgagee is protected. He is paid before the mortgagee at whose instance the sale was held, which is the natural consequence of priority under section 48.
- Interest and costs precede principal within the mortgage under which the sale took place, which mirrors the rule of appropriation in section 76(h) for a mortgagee in possession.
- The residue goes to the owner of the equity of redemption, and not to the mortgagee. A sale is not a foreclosure: the mortgagee takes his money, and the surplus value of the property belongs to the mortgagor or those claiming under him.
3. Section 69(4): A Sale Without the Court
Section 69(4), TPA The money received by the mortgagee arising from the sale, after discharge of prior encumbrances to which the sale is not made subject, or after payment into court of a sum to meet any prior encumbrance, is to be held by him in trust to be applied — first, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale; secondly, in discharge of the mortgage money and costs and other money, if any, due under the mortgage; and the residue is to be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of its sale. |
The words 'held by him in trust' matter. A mortgagee selling under section 69 is not dealing with his own money when the price comes in; he holds the fund for the persons entitled to it in the order the section lays down, and he accounts for the surplus.
4. The Two Situations Compared
Point | Sale under a decree — Order 34 Rule 13 | Sale under section 69 |
|---|---|---|
Who conducts the sale | The court, in execution of the decree | The mortgagee himself, under the power conferred |
Expenses of the sale | Paid first | Paid first |
Prior encumbrances | The prior mortgagee is paid second out of the proceeds | Prior encumbrances are discharged, or a sum is paid into court to meet them, before the fund is applied |
The mortgage under which the sale was held | Interest and costs, then principal | The mortgage money, costs and other money due under the mortgage |
The surplus | To the persons interested in the property, according to their interests | To the person entitled to the mortgaged property, or authorised to give receipts |
The mortgagee's character | A decree-holder | A trustee of the proceeds for those entitled |
5. Where the Proceeds Fall Short
- The security is exhausted. Once the proceeds are applied, the mortgagee has no further claim on the property.
- A personal decree may follow. Under Order 34 Rule 6, where the net proceeds are insufficient to pay the amount due, and the balance is legally recoverable from the defendant otherwise than out of the property sold, the court may pass a decree for that balance — which in substance requires a personal covenant, as section 68 does.
- A usufructuary mortgagee has no such claim, since his mortgage carries no personal covenant.
- And rateable distribution may intervene where other decree-holders have applied for execution against the same judgment-debtor, under section 73 of the Code — though a secured creditor's claim on his own security is not displaced by it.
6. A Worked Application
One sale, four claims A property mortgaged first to P and then to Q is sold under a decree obtained by Q for ₹20 lakh. The expenses of the sale are ₹50,000. P is owed ₹8 lakh with ₹50,000 of costs. Q is owed ₹6 lakh of principal and ₹1 lakh of interest, with costs of ₹50,000. First: ₹50,000 of sale expenses. Second: ₹8.5 lakh to P. Third: ₹1.5 lakh to Q for interest and costs. Fourth: ₹6 lakh to Q for principal. Total applied: ₹16.5 lakh. The residue of ₹3.5 lakh goes to the person interested in the property — the mortgagor, or a purchaser of the equity of redemption. |
7. Related Topics and Provisions
- Rights and Liabilities of the Mortgagee — sections 67 to 77, including the power of sale
- Section 69, TPA — sale without the intervention of the court, and the trust of the proceeds
- Foreclosure vs Sale — and why only a sale produces a surplus
- Priority Between Mortgages — which claim is paid in which order
- Order 34, Rules 6 and 13, Code of Civil Procedure, 1908
- Section 73, Code of Civil Procedure, 1908 — rateable distribution among decree-holders