Marshalling Securities, governed by Section 81 of the Transfer of Property Act, is a legal concept that plays a critical role in securing creditor rights and ensuring fairness in financial transactions involving multiple parties. The provision of marshalling securities allows for the orderly distribution of assets among creditors, particularly in cases where a debtor's properties are subject to multiple charges or mortgages. This introduction will delve into the background and significance of marshalling securities, outlining the objectives and scope of the study.

Sec. 81 of 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 the same 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."[1]

Simplifying "Marshalling Securities":

If an individual pledges two or more properties as collateral for a loan from one lender and then pledges one of those same properties as security for a loan from another, the second lender shall have the right, absent a contrary agreement, to have the first loan repaid with the proceeds from the properties they did not pledge as collateral. As much as practicable, this should be done without having a detrimental effect on the first lender or anybody else who has legitimately paid for an interest in any of the properties.[2]

Illustration:
Suppose Mr. A owns two properties, Property X and Property Y. He first takes a loan from Bank B and mortgages both properties as security. Later, Mr. A takes another loan from Bank C, but this time only mortgages Property Y. If Mr. A defaults on the loans, Bank C (the subsequent mortgagee) can request that Bank B (the prior mortgagee) first uses Property X (which is not mortgaged to Bank C) to recover its loan before claiming Property Y. This ensures that Bank C's interests are protected, provided that this arrangement does not harm Bank B's interests or those of any third party with a legitimate stake in either property.

Section 81 of the Transfer of Property Act codifies the principles of marshalling securities in India, providing a statutory framework for the enforcement of creditor rights in secured transactions. Under this provision, if a debtor's properties are subject to multiple securities, a secured creditor who holds a prior charge on one set of properties may be compelled to satisfy their claim out of the remaining assets before resorting to the properties subject to subsequent charges. This statutory recognition of marshalling securities serves to protect the interests of junior creditors and prevent unfair prejudice in the enforcement of creditor rights.

The significance of marshalling securities extends beyond its legal implications to encompass broader implications for financial transactions, property law, and commercial practices. In the context of mortgage transactions, marshalling principles provide a mechanism for balancing the interests of mortgagees and ensuring the orderly distribution of proceeds in foreclosure proceedings. Similarly, in insolvency proceedings, marshalling securities may influence the priority of creditor claims and the distribution of assets among competing stakeholders.

Key Provisions Of Section 81

Section 81 of the Transfer of Property Act lays down the statutory provisions governing marshalling securities in India. Understanding the key provisions of this section is crucial for comprehending the legal framework and principles underlying marshalling principles in secured transactions.

Conditions for Application:

Section 81 sets out specific conditions that must be met for marshalling securities to be invoked.[3] Such as:

• Same Debtor: Marshalling securities can be invoked only when the properties subject to multiple charges belong to the same debtor. This condition ensures that marshalling principles apply in situations where a single debtor's assets are insufficient to satisfy the claims of all secured creditors.
• Insufficient Assets: Marshalling may be applicable if the properties subject to subsequent charges are also available for the satisfaction of the prior creditor's claim. This condition ensures that marshalling is invoked when the assets of the debtor are limited and need to be distributed equitably among creditors.
• Voluntary Transactions: Marshalling principles primarily apply to voluntary transactions, such as mortgages, where creditors have consented to the creation of security interests over specific properties. In contrast, statutory or involuntary charges may not be subject to marshalling principles.

Parties Involved:

• the debtor,
• the prior creditor with a charge on specific properties, and
• the subsequent creditor with a charge on other properties belonging to the same debtor.

Section 81 regulates the rights and obligations of these parties, specifying the sequence in which their claims are to be satisfied and the extent to which they may access the debtor's assets.

Legal Requirements and Limitations:
Section 81 imposes certain legal requirements and limitations on the application of marshalling securities. For instance, the doctrine of marshalling applies primarily to voluntary transactions, such as mortgages, where creditors have consented to the creation of security interests over specific properties. In contrast, statutory or involuntary charges, such as liens arising from tax or government claims, may not be subject to marshalling principles.[4]

Moreover, the availability of marshalling securities may be subject to equitable considerations and judicial discretion, particularly in cases involving conflicting claims or complex factual scenarios. Courts may exercise their equitable jurisdiction to ensure that marshalling is applied fairly and in accordance with the principles of justice and equity.

Furthermore, Section 81 may have implications for the rights and liabilities of third parties, such as subsequent purchasers or transferees of the debtor's properties. These parties may be affected by the application of marshalling principles, as their interests may be subject to the prior claims of secured creditors.[5]

Practical Applications And Case Studies
Implementation of Marshalling Securities in Various Legal Contexts:
Marshalling securities, as enshrined in Section 81 of the Transfer of Property Act, find practical application in a variety of legal contexts, including mortgage foreclosures, debt recovery proceedings, and insolvency cases. Understanding how marshalling principles are implemented in these scenarios is crucial for navigating complex secured transactions and resolving disputes among creditors.

• Mortgage Foreclosures: In mortgage foreclosures, marshalling securities play a significant role in determining the priority of creditor claims and the distribution of proceeds from the sale of mortgaged properties. When a debtor defaults on a mortgage, the mortgagee holding a prior charge on specific properties may seek to enforce their security interest through foreclosure proceedings. Marshalling principles come into play when the mortgaged properties are insufficient to satisfy the claims of all secured creditors. In such cases, the mortgagee with the prior charge may be directed to exhaust their remedy against the mortgaged properties before seeking recourse to other assets subject to subsequent charges. This ensures that junior creditors have an opportunity to realize their security interests in the remaining assets of the debtor.
   
• Debt Recovery Proceedings: Marshalling securities also impact debt recovery proceedings, particularly when a debtor's assets are subject to multiple charges or encumbrances. Creditors seeking to recover debts owed by the debtor may encounter challenges when the debtor's properties are insufficient to satisfy all claims in full. Marshalling principles provide a mechanism for resolving competing claims among creditors and ensuring an equitable distribution of assets. Courts may apply marshalling principles to determine the sequence in which creditor claims are to be satisfied, taking into account the priorities established by the security interests held by each creditor.
   
• Insolvency Cases: In insolvency cases, marshalling securities may influence the priority of creditor claims and the distribution of assets among competing stakeholders. When a debtor becomes insolvent, creditors may compete for the limited assets available for distribution. Marshalling principles help to establish a hierarchy of creditor claims based on the nature and timing of their security interests. Secured creditors with prior charges on specific properties may be entitled to satisfaction of their claims before other creditors with subsequent charges. This ensures a fair and orderly distribution of assets among creditors in insolvency proceedings, minimizing the risk of unfair prejudice or preferential treatment.

Conflict between marshalling and contribution

• In Ramabhadrachar v. Srinivasa Ayyangar & Ors. case of a conflict between the rule of marshalling and contribution, the rule of marshalling shall prevail and subsist over contribution.
• 'A' owner of property 1 and property 2 mortgages property 1 to B and property 2 to C. A subsequently mortgages both the properties 1 and 2 to D and the mortgages property 1 to E. Under section 81 E can ask D to recover his debt from property 2 to the whole extent and then in case of deficit he can resort to property 1. Hence this right of E to marshall will prevail over contribution.

Case Laws
Devatha Pullaya v. Jaldu Manikyala Rao[10]
When this happens, a junior may make a claim on the mortgaged asset to the senior who took the mortgage specifically with the intention of paying off a certain sum due to the previous mortgage, even if the senior mortgage fails to meet its terms.

According to the court, he is not permitted to use his marshalling power during this case.

Shah Ram Chand v. Pandit Parbhu Dayal[11]
Note that Sections 81 and 82 are statutory equities in favour of owners of properties subject to charges against other individuals and other properties equally subject to such charges. None of these provisions raise the equity that is being sought here, and none of them can be claimed to do so.

Mahatab Uddin v Nim Chandra Shaha[12]
Despite a mortgagee's entitlement to have all properties mortgaged to him for sale, the court stated that it retains the discretion to determine how best to sell a property without jeopardising the mortgagees' interests.

Aldrich v. Cooper[13]
Held - The equitable principle of marshalling and said two estates were mortgaged to A and one of them mortgaged to B. He has no claim under the deed upon the other estate. It may be so constructed that he could not affect that estate after the death of the mortgagor. But it is the ordinary case to say a person having two funds shall not by his election disappoint the party having only one fund; and equity, to satisfy both, will throw him, who has two funds, upon that, which can be affected by him only; to the intent that the only fund, to which the other has access, may remain clear to him.

The Official Assignee of Madras v. F. Byramshaw & Anr.[14]
Held - In the event that its operation would in fact damage the interests of third parties other than volunteers, it does not apply. The right of rateable apportionment is the right held by a mortgagee against a mortgagor and volunteers claiming under the mortgagor, as in the case of marshalling. It would undoubtedly impact a third party's right in this situation, and it is no more relevant than the marshalling concept given the facts of the case.

D.C. Johar And Sons Ltd. v. Mathew[15]
Two brothers (A and B) who owned individual properties mortgaged their properties to Bank 1. Subsequently one of the brothers (A) also mortgaged his properties to Bank 2. Bank 2 contended that Bank 1 should proceed against the properties of the other brother (B) first. The court held that this case would not fall under section 81 as there should be a common debtor (mortgagor) of the properties.

Held - Section 81 of the Transfer of Property Act would apply as the right to claim for marshalling is subject to the condition that there must be a common debtor. Mathew alone is the mortgagor in the transaction on which the Palai Central Bank has sued, and Section 81 cannot therefore apply to this case. The Palai Central Bank which took the later mortgage has no special equity to Justify prayer that Kuruvilla's properties should be sold first.

In our opinion the right of the plaintiff to proceed against any of the properties mortgaged ought not to be interfered with in any manner. The direction that the appellant's properties should be sold first should therefore be set aside.

J.P. Builders and Another V. Ramadas Rao and Another[16]
Held - The application of the principle of marshalling may cause prejudice to the other party but the said prejudice is a pure question of fact and depends upon various factors. The High Court is right in applying the principle of marshalling favor of the plaintiff that to by safeguarding the interest of the third defendant bank.

Babu John v. South Indian Bank Limited[17]
Held - This Tribunal concluded and held that neither the applicants' argument that they were "bonafide purchasers" of the subject secured asset without being aware of the prior mortgage charge nor their request to proceed against other properties other than the subject secured asset in accordance with the principles of marshalling that they claimed to be entitled to under Section 56 of the Transfer of Property Act impressed this Tribunal.

Conclusion
The study on "Marshalling Securities - Sec. 81" within the Transfer of Property Act, 1882 provides valuable insights into the legal framework, principles, and practical implications of marshalling securities in secured transactions. Through an examination of the statutory provisions, case law analysis, and comparative perspectives, the study has elucidated the significance of marshalling principles in protecting creditor rights and ensuring fairness in asset distribution.

The analysis of marshalling securities has revealed the importance of Section 81 in balancing the competing interests of secured creditors, debtor obligations, and third-party rights. By establishing a hierarchical order of priority among creditors and regulating the enforcement of security interests, marshalling principles contribute to the stability and efficiency of financial transactions.

Furthermore, the study has highlighted the challenges and limitations associated with the application of marshalling securities, including legal ambiguities, equitable considerations, and conflicts with other legal principles. These challenges underscore the need for careful judicial interpretation, equitable discretion, and legal reforms to address emerging issues and ensure equitable outcomes in individual cases.

Overall, the study underscores the importance of marshalling securities as a critical component of property law and financial transactions. By providing clarity on the legal framework, principles, and practical applications of marshalling, the study aims to contribute to a deeper understanding of creditor rights enforcement and asset distribution in secured transactions. It is hoped that the findings and recommendations of this study will inform legal practitioners, policymakers, and scholars working in the field of property law and financial regulation, ultimately fostering fairness, efficiency, and equity in the administration of justice.

End Notes:

• Transfer of Property Act, 1882, sec. 81.
• https://www.wallcliffslawfirm.com/uploads/newsletter-files/2020093015030622465-Legal_Angle_-_September_2020_-_Issue_05.pdf
• https://www.wallcliffslawfirm.com/uploads/newsletter-files/2020093015030622465-Legal_Angle_-_September_2020_-_Issue_05.pdf
• https://lawcorner.in/marshalling-and-contribution-under-property-law/#_ftn4
• Id.
• Radhika Saxena, Doctrine Of Marshalling And Contribution, 20 January, 2020
  https://indianjudiciarynotes.com/notes/transfer-of-property/doctrine-of-marshalling-and-contribution/
• http://kanoon.nearlaw.com/2017/10/24/doctrine-marshalling-property-act/
• Radhika Saxena, Doctrine Of Marshalling And Contribution, 20 January, 2020
  https://indianjudiciarynotes.com/notes/transfer-of-property/doctrine-of-marshalling-and-contribution/
• (1901) ILR 24 Mad 85.
• AIR 1962 A.P. 425.
• (1943) 45 BOM LR 1.
• 4 DLR 95.
• (1803) 8 Ves 382 (385).
• (1931) 61 MLJ 512.
• AIR 1962 Ker 106.
• (2011) 1 SCC 429.
• 2015 SCC ONLINE DRT 11.