Transfer of Property Act (TPA)
Priority, Marshalling and Contribution: Postponement of a Prior Mortgagee under Section 78, and the Adjusting Provisions
Where several securities exist over the same property, or one security covers several properties, three separate questions arise. Priority asks who is paid first, and the answer is the order of creation. Marshalling asks which fund a creditor with two of them must resort to first. Contribution asks how the burden of one debt is shared among several properties. Section 78 supplies the one large exception to priority: a prior mortgagee whose own fraud, misrepresentation or gross neglect induced a later advance is postponed to the lender he misled.
Figure 1: The order in which the proceeds are taken, and the provisions that adjust it
1. The Starting Point: Priority by Order of Creation
Section 48, TPA Where a person purports to create by transfer at different times rights in or over the same immoveable property, and those rights cannot all exist or be exercised to their full extent together, each later created right is subject to the rights previously created — in the absence of a special contract or reservation binding the earlier transferees. Qui prior est tempore, potior est jure. Applied to mortgages: the first mortgagee is paid in full out of the proceeds, then the second, then the third, and the mortgagee whose security is exhausted is left with a personal claim for the balance. |
2. Section 78: Postponement of a Prior Mortgagee
Section 78, TPA '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 shall be postponed to the subsequent mortgagee.' |
2.1 The three vices
The vice | What it means |
|---|---|
Fraud | An active deception practised by the prior mortgagee — a false statement about the state of the security, or the concealment of his own mortgage from a lender who enquired |
Misrepresentation | A statement untrue in fact on which the later lender acted, though made without any fraudulent intent |
Gross neglect | Not mere carelessness, but such want of prudence as the law will not excuse in a person holding a security. The classic instance is a mortgagee who allows the title deeds to remain with the mortgagor, so that the mortgagor is able to raise money again on the faith of an apparently unencumbered title |
2.2 What must be shown
- That the prior mortgagee was guilty of one of the three. The burden lies on the subsequent mortgagee who seeks to displace the ordinary rule.
- That the later lender was thereby induced to advance the money. There must be a causal link; a lender who advanced without reference to the state of the title has not been induced by anything.
- That the advance was made on the security of the same property.
- The consequence is postponement, not extinction. The prior mortgagee does not lose his security; he takes after the mortgagee he misled.
The section is the mortgage-chapter counterpart of the principle behind section 41: as between two innocent people, the loss falls on the one whose own conduct created the appearance on which the other acted.
3. Section 79: Mortgage to Secure an Uncertain Amount
Where a mortgage is made to secure future advances, the performance of an engagement or the balance of a running account, and the maximum to be secured is expressed in the mortgage deed, a subsequent mortgage of the same property takes effect subject to the prior mortgage in respect of all advances up to that maximum — notwithstanding that the prior mortgagee had notice of the subsequent mortgage. The section makes a running facility workable: a bank lending up to a stated ceiling need not check the register before every fresh advance.
4. Marshalling: Section 81
Section 81, TPA If the owner of two or more properties mortgages them to one person and then mortgages one or more of the properties to another person, the subsequent mortgagee is, in the absence of a contract to the contrary, entitled to have the prior mortgage debt satisfied out of the property or 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. |
- It arranges the order in which a creditor with several securities resorts to them, in favour of a claimant who can reach only one.
- It takes nothing from the prior mortgagee, who recovers his whole debt; only the sequence is arranged.
- Its counterpart in the sale chapter is section 56, under which the person marshalling is a subsequent purchaser rather than a subsequent mortgagee.
5. Contribution: Section 82
Where property subject to a mortgage belongs to two or more persons having distinct and separate rights of ownership in it, the different shares are, in the absence of a contract to the contrary, liable to contribute rateably to the debt secured by the mortgage, after deducting from the value of each share the amount of any other mortgage or charge to which it is subject. The valuation is made as at the date of the mortgage. Where one property has been sold subject to the mortgage and the other has not, or where one owner has paid more than his share, the section settles the ultimate incidence between them.
Marshalling — s. 81 | Contribution — s. 82 | |
|---|---|---|
What it decides | The order in which the creditor resorts to his securities | How the burden of the debt is shared among the properties liable |
In whose favour | A person who can reach only one of the properties | The owners of the several properties, as between themselves |
Effect on the creditor | None — he recovers in full, but in a stated order | None — the adjustment is between the owners |
The measure | So far as the other properties will extend | Rateably, according to the value of each share at the date of the mortgage |
6. Subrogation and the Abolition of Tacking
- Section 92 — subrogation. A person who redeems a mortgage is subrogated to the rights of the mortgagee he has paid off, including his priority, so far as the section allows. A subsequent mortgagee who redeems the first therefore steps into the first mortgagee's place.
- Section 93 — no tacking. A mortgagee who pays off a prior mortgage acquires no priority for his own later advances by reason of that payment. The English doctrine of tacking has no place in Indian law.
- Section 61 — no consolidation. A mortgagor who has executed several mortgages in favour of the same mortgagee may redeem any one of them separately, so the mortgagee cannot insist on being paid off on all together.
7. A Method for Problems on Priority
- Fix the dates of creation, remembering that a registered deed operates from execution under section 47 of the Registration Act.
- Apply section 48 — the later security is subject to the earlier.
- Ask whether the prior mortgagee misbehaved — fraud, misrepresentation or gross neglect under section 78.
- Ask whether a maximum was expressed for future advances — section 79.
- Then adjust — marshalling under section 81, contribution under section 82, subrogation under section 92, and no tacking under section 93.
8. Landmark Cases
📖 Aldrich v. Cooper, (1803) 8 Ves 382 Held: Lord Eldon stated the foundation of marshalling: where one creditor has a right to resort to two funds and another creditor can reach only one of them, the former shall not by his election disappoint the latter, but shall be required to take his satisfaction out of the fund which the other cannot touch, so far as it will extend. Ratio: A creditor with two funds may not, by choosing between them, defeat a claimant confined to one. |
📖 Barnes v. Racster, (1842) 1 Y & C Ch Cas 401 Held: Marshalling operates only to adjust the incidence of the burden as between the persons interested in the several properties. It cannot be applied so as to affect the rights of the paramount creditor, nor so as to prejudice a third person who has acquired an interest for value. Ratio: The right must not prejudice the creditor holding the securities, nor a purchaser for value of one of them. |
9. Related Topics and Provisions
- Section 48 and Priority Between Mortgages — the general rule of priority
- Marshalling by a Subsequent Purchaser, Section 56 — the counterpart of section 81
- Rights and Liabilities of the Mortgagee — the remedies whose order these provisions arrange
- Sections 91 and 92, TPA — the persons entitled to redeem, and subrogation
- Sections 61 and 93, TPA — the abolition of consolidation and of tacking
- Notice under Section 3 — registration as notice to a later lender