EQUITABLE RIGHTS-3

SALE WITHOUT THE INTERVENTION OF THE COURT

Section 69 of the Transfer of Property Act deals with the power of the mortgagee to sell the mortgaged property without the intervention of the court. The ordinary rule is that the mortgagee must sue for foreclosure or sale through court or sue for the mortgage money.

But in certain special cases this section gives the mortgagee the power to sell without recourse to courts. Those cases, which have been enumerated in this section, are detailed as under:

(1) Where the mortgage is an English mortgage and neither of the parties is Hindus, Mohammadan or Buddhist or a member. The doctrine of tacking is based upon two maxims of equity, of any other race, sect, tribe or class from time to time specified by the State Government.

(2) Where the mortgagee is the Government and the deed confers an express power of sale.

(3) Where the mortgaged property or any part thereof was, on the date of the execution of the mortgage, situate within the

town of Calcutta, Madras, Bombay or in any other town which the

State Government may specify in this behalf and the deed contained

an express power of sale.

CONDITIONS FOR THE EXERCISE OF POWER

Sub-section (2) prescribed certain conditions to be observed before the power can be exercised.

The power arises when default is made in payment of the mortgage money on the due date. But in no case the power be exercised till after three months’ notice to the mortgagor. This notice may be given to anyone of the mortgagors if there are more than one mortgagor. If the mortgagor has come to acquire the knowledge of the sale he has no right of complaint that he has not received notice if there has been no fraud or coil usion in th e matter. (Santosh Kumar Madar v India Bank Ltd., 1967 S.C. 1925).

The mortgagee exercising the power of sale cannot himself purchase the property.

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THE DOCTRINE OF TACKING OF MORTGAGES

The doctrine of tacking applies to equitable interest arising under a mortgage or in any other way.

Tacking means adding a subsequent mortgage to an earlier one. It unites securities given at different times, so as to prevent any intermediate purchasers from claiming a title to redeem the mortgage which is prior, without redeeming or discharging the other mortgages also, which are subsequent to his own title. Thus a third mortgagee having no notice of a second mortgage at the time his mortgage was made, might subsequently acquire the first mortgage and squeeze out the second mortgagee.

“There is, certainly, great apparent hardship in the application of the doctrine of tacking; for it seems conformable to natural justice that each mortgagee should, in such a case, be paid according to the order and priority of his incumbrance.”

The doctrine of tackling is based upon two maxims of equity viz.,

(i) He who seeks equity must do equity; and

(ii) where ere equities are equal the law shall prevail. When two persons have equitable claims over one and the same property and one of them in addition also gets the law on his side, i.e., obtains legal possession and equal equity, then he who has got legal estate shall have prior\claim. Thus suppose there are successive mortgages such as

X is mortgage d to …………….A

X is subsequently mortgaged to ……………B

X is again mortgaged to …………C

and A is in possession of the legal estate, the subsequent mortgagees B and C having equitable right only. Under the doctrine of tacking, if C who had advanced on his mortgage without notice of a second mortgage to B at the time his mortgage was made, pays off A and gets into possession of the estate X, he gets priority over B and might squeeze out the second mortgagee, though C’s mortgage was executed subsequently to that of B. But if the third mortgagee had paid off the first mortgage with notice of the intermediate mortgage of B, he could not squeeze out the second mortgage by uniting the two mortgages on the maxim where equities are equal, the first in time shall prevail. It was held in Marsh v. lee (1670) 9 Ventris, 337, that if a third mortgagee, having advanced his money  

without notice of a second mortgage, afterwards buys in a first mortgage, then such third mortgagee, having obtained the first mortgage and having the law on his· side and equal equity, shall there by squeeze out and gain priority over the second mortgagee.

The doctrine of tacking was, however, inapplicable where it was equitable to get in the legal estate as where the third mortgagee had notice of the first mortgagee’s being trustee for the second, or the mortgagor being himself a trustee for a third party. That proposition is based on the doctrine that a person claiming to be a bona fide purchaser for value of the legal estate must definitely establish himself as such.

The doctrine of tacking has been abolished in England by the Law of Property Act, 1925. It has introduced the principle of adapting to mortgage of a legal estate in land of the new system or priority by registration. Section 97 of the Law of Property Act, 1952, provides that:

“Every mortgage affecting a legal estate in land made after the commencement of this Act, whether legal or equitable (not being a mortgage protected by the deposit of documents relating mortgages the to the legal estate affacted) shall rank according to its date of registration as a land charge pursuant to the land Charges Act, 1925.”

It thus appears that priority of mortgages, whether legal or equitable, of a legal estate in land depends on registration, except in the case of a mortgage protected by the deposit of documents relating to the legal estate affected.

Section 93 of the Transfer of Property Act: also prohibits tacking in India by providing that “no mortgagee paying off a prior mortgage, whether with or without notice of an intermediate mortgage, shall there by acquire any priority in respect of the original security.” Thus in the above example C may redeem A and be subrogated to the rights of A, but he only takes priority over B in respect of A’s mortgage which he pays off and not in respect of his own mortgage.

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‘HE WHO IS PRIOR IN TIME IS PRIOR IN RIGHT’

As a property may be mortgaged more than once, a conflict is likely to arise as to the rights which the mortgagees possess among themselves. The fundamental rule is:  ‘he who is prior in time is prior in right.’ Suppose a property of the value of Rs. 10,000 is mortgaged first to A for Rs. 5,000 and then to B for Rs. 2,000 and then to C for Rs. 1,000. If the mortgage money is not paid and the property comes to be sold A will get his money first, and then out of the balance B will be paid before C.

Exceptions.-This general rule is subject to the following Under S. 61 of the two exceptions:-

 (1) Section 78 of the Transfer of Property Act lays down that where through the fraud, misrepresentation or gross neglect of a prior mortgagee, another person been induced to advance money on the security of the property mortgaged, the prior mortgagee shall be postponed to the subsequent mortgagee. For example, A has advanced Rs. 5,000 to B by way of deposit of title deeds. C, before advancing money to B enquires of A whether the property is free from incumbrance and A does not mention his own mortgage and tells C that the property is free from mortgage. In such circumstances C will have priority over A.

 (2) Another exception is provided under Section 79. It lays down that a mortgagee who makes a subsequent advance does not acquire priority with respect to that advance over an intermediate mortgagee. Thus A mortgages X to B to secure Rs. 5,000. A thereafter same property to C to secure Rs. 2,000. Subsequently B advances Rs. 1,000 to A on the same security. Here B’s mortgage of Rs. 5,000 is prior to C’s mortgage. Under the rule of priority, the subsequent advance of Rs. 1,000 mare by B is not prior to C’s mortgage. In fact, C’s mortgage of Rs. 2,000 is prior to B’s subsequent advance  of Rs. 1,000. But the exception mare by this section is that if B’s of mortgage No. 1 is to secure a present advance as well as future advances up to a fixed maximum, then any further advance mare by B within that maximum will be treated as part of the first mortgage and take priority over C’s mortgage of Rs. 2,000, No.2, provided C had notice of that type of mortgage.

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CONSOLIDATION OF MORTGAGES

IS A MORTGAGEE BOUND TO REDEEM TWO OR MORE MORTGAGES IN FAVOUR OF THE SAME MORTGAGEE TOGETHER?

It is an equitable doctrine that a mortgagee who held several mortgages by the same mortgagor could insist on the redemption of all, if the mortgagee sought to redeem any of them. This is based upon equitable maxim, “He who seeks equity must do equity”, i.e., a mortgagor seeking to redeem one of sever al mortgages is obliged to redeem all so as ‘to do equity to the mortgagee by redeeming all the mortgages.

The doctrine is now excluded by S. 93 of the Law of Property Act, 1925, unless a contrary intention is expressed in the deeds. The court does not favour the extension of the doctrine of ‘consolidation of mortgage’.

Under Sec 61 the Transfer of Property Act the law against consolidation lays down that a mortgagor who has executed two or more mortgages in favour of the same mortgagee shall be entitled to redeem separately or simultaneously.

Illustrations

(1) A, the owner of farms Z and Y, mortgages Z to B for Rs.1,000. A afterwards mortgages Y to B for Rs. 1,000. A may institute a suit’ for the redemption of the mortgage of Z alone, or for the redemption of both Z and Y. B the mortgagee, cannot compel A to redeem both Z and Y together.

(2) A mortgages X to B. Later on A mortgages X again to B by a subsequent mortgage. In this case A may either redeem the later mortgage or prior one or redeem them together unless restrained by a contract to the contrary.

In either of the two illustrations the mortgagor has a right to redeem separately or simultaneously and the mortgagee cannot insist the mortgagor to consolidate the mortgage, i..e., redeem all together.

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Marshalling of Securities

Where there are two or more creditors of the same debtor, one creditor having a right to resort to two funds of the debtor for the payment of his debt, and the other to resort to one fund only, the court will so marshal or arrange the funds that both creditors are paid as far as possible.

Thus suppose-

A mortgages X and Y to ……….B

A again mortgages X to ……………C

then, under the doctrine of marshalling B is to realise his debt first out of Y in order to leave as much as possible of X to satisfy C.

The doctrine is thus explained in Halsbury’s Laws of England.

“If the owner of two properties mortgages both to the same person, and afterwards mortgages only one to a second mortgage the court will marshal the two properties so as to throw the first mortgage as far as possible on the property not included in the second mortgage. The principle applies whatever be the nature of the estate, whether, for instance, they are freehold or copyhold; and it extend to charges and liens. But in accordance with the rule that marshalling will not be allowed to the prejudice of a third party, where two

estates, X and Y, are 1fI00tgaqed to A, and X to B, and then Y is mortgagee to C;  B cannot require A to himself out of Y and soexclude C, but, A must satisfy himself rateably out of the estates.  If, however, C s mortgage is expressly subject to prior satisfaction of A and B s debts, then B is entitled to marshal.

In order that a case for marshalling may arise, there must be two or more mortgages of the same mortgage or a common debtor.

The doctrine of marshalling has application to marshalling of assets and marshalling of securities. Applying that doctrine to the marshalling of securities, Lord Hardwicke observed in Lanoy v. Duches5 of Athol [(1742) 2 At K. 444]: “If a creditor has two funds, he shall take his satisfaction out of that fund upon which another creditor has no lien.”

Section 81 of the Transfer of Property Act enacts the provision of the doctrine of marshalling in India.

The doctrine of marshalling lays down a rule of natural justice that none should be permitted from wantonness or caprice to do an injury to another. But marshalling will not be enforced to the prejudice of the prior mortgagee. The prior mortgagee cannot be compelled where there is any doubt as to the sufficiency of the fund or where the fund is of a dubious character or is one which may involve him in litigation to realize. Thus

A mortgages  X and Y to ……………..B.

A mortgages X to ……………..C.

A mortgages Y to ……………..D.

If in the above case C were to insist that B should pay himself

out of Y, there might nothing be left for D. Marshalling will not, therefore, be enforced.

It should be noted that this section safeguards the interests or consideration and not those of a volunteer. The right of marshalling may be excluded by a contract between the parties.

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CONTRIBUTION

It is based on “equality is equity.”

Where several properties, whether of one or several owners, are mortgaged for one debt, they shall contribute rateably to its discharge. 1he rule is based upon the principle that a fund wi1i en is equally liable with another to pay a debt shall not escape because the creditor has been paid out of the other fund alone, but that both should rateably contribute to the debt.

Illustration.-X and Yare mortgaged to M. X belongs to A and Y to B. The value of X is Rs. 10,000 and the value of Y is Rs20,000. X and Y must contribute to the payment of M’s mortgage in the ratio of 1: 2.

In India S. 82 of the Transfer of Property Act enshrines the principles of, contribution. It lays down that where property subject to a mortgage belongs to two or more persons having distinct and separate rights of ownership therein, the different shares in or parts of such property owned by such persons are, in the absence of a contract to the contrary, liable to contribute ratably to the debt secured by the mortgage, and for the purpose of determining the rate at which each such share or part shall contribute, the value thereof shall be deemed to be its value at the date of the mortgage after deduction of the amount of any other mortgage or charge to which it may have been subject on that date. Further, where, of two properties belonging to the same owner, one is mortgaged to secure one debt and then both are mortgaged to secure another debt, and the former debt is paid out of the former property, each property in the absence of a contract to the contrary, liable to contribute rateably to the latter debt after deducting the amount of the former debt from the value of the property out of which has been paid. The section, further lays down that where marshalling and contribution might conflict with each other, marshalling is to prevail.

It is therefore evident that the contribution must be rateably and no alternative method can be adopted for the purpose of ascertaining the rate at which persons who are jointly responsible are to contribute to do so. [Indian Overseas Bank Ltd. v. R.E.M. Ibrahim & others, A.I.R. (1975) Mad. 92].

The doctrine, in the words of Fisher, provides that if several estates be mortgaged for a subject equally to one debt, the several estates shall, contribute rateably to that debt, being valued for the purpose after deducting from each estste any other incumbrance by which it is affected.

The obligation to contribute is personal but not attaches to the properties.

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CONTRIBUTION AND MARSHALLING

Contribution is the converse of marshalling, Marshalling requires that a mortgagee who has the means of satisfying his debt out of several properties shall exercise his right as not to take from another mortgagee the property which forms his only security. Contribution requires that a property which is equally liable with another to pay a debt shall not escape because that mortgagee has been paid out of that fund alone.

The right of contribution is subject to the right of marshalling. Suppose there are two properties X and Y. X is worth Rs. 1,000 and Y is worth Rs.200andYaremortgagedtoAforRs.600.Y is mortgaged to B, for Rs. 1SO.If X and Y contribute towards the debt of A, X must furnish. Rs.500andYRs.100.It means that if the rule of contribution is applied Rs. 100 would be left out of which B will have to be paid. In this case marshalling is to be applied. A shall have his Rs. 600 paid out of X. Y should be left to satisfy the debt due to B.

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THE PERSONS, BESIDES THE MORTGAGOR, WHO CAN CLAIM REDEMPTION OF THE MORTGAGED PROPERTY

 PERSONS WHO MAY SUE FOR REDEMPTION

Besides the mortgagor, any of the fallowing persons may redeem or institute a suit for redemption of the mortgaged property, namely

(a) any person (other than the mortgagee of the interest sought to be redeem) who has any inter.est in, or charge upon, the property mortgaged or In or upon the right to redeem-this will include puisne mortgagees:

 (b) any surety for the payment of the mortgage debt or any part thereof this will include the purchaser of the equity of redemption ;or

 (c) any creditor of the mortgagor who has in a suit for the administration of his estate obtained a decree for sale of the mortgaged property.

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PRINCIPLE OF SUBROGATION

IT IS BASED ON ‘EQUALITY IS EQUITY’

WHO ARE THE PERSONS ENTITLED TO THE RIGHT OF SUBROGATION?

SUBROGATION

The term ‘subrogation’ means substitution.

It is the substitution of one person or thing for another, so the same rights and duties which attached to the original person or thing attach to the substituted person or thing. Prior to the Transfer of Property (Amendment) Act of 1929, this doctrine was only confined to a subsequent mortgagee paying off a prior mortgagee. As a matter of justice and equity, it should apply generally to all cases other than those of a mortgagor who pays off his own debt or of a mere volunteer. In Biseswar Prasad v. Lala Sarnam Singh (1907) 6 Cal. L.J. 134, it was observed as follows:

“While ‘the doctrine will be applied in general wherever the person other than a mere volunteer pays a debt or a demand, which in equity or good conscience should have been satisfied by another or where the liability of one person is discharged out of a fund belonging to another, or where one person is compelled for his own protection or that of some interest which he represents to pay a debt for which another is primarily responsible or wherever a denial of the right would be contrary to equity and good conscience, the doctrine will never be permitted where application of it would work injusticeto the rights of those having equal or superior equities.”

The Report of the Special Committee pointed out:

“In our opinion, all persons who have an interest in the mortgaged property or in the right of redemption, except the mortgagor, that is, all those who are referred to in section 91 as having the right of redemption, should be entitled to be subrogated to or substituted in the place of the creditor who is paid off.”

In order to give effect to the above re commendation, the Amending Act of 1929 omitted sections 74 and 75 and provided section 92, which is more comprehensive than the old sections.

Section 92 of the Transfer of Property Act lays down that when a person other than mortgagor pays off the mortgage money he is substituted in the place of the mortgagee whom he pays off.

ILLUSTRATIONS:-

(1) A mortgages to B.

A mortgages to C.

C pays off B and stand in his place.

(2) A and B mortgage ‘X’ to C. B is the surety. B can payoff C and be subrogated to the place of C.

In equity the doctrine of subrogation has been applied in three cases:

 (1) Where a person has supplied money to the wife for necessaries;

 (2) where a person has lent money to a company which borrowed it in excess of its borrowing powers, and the money has been applied in reducing the liabilities of the company; and

(3) where an executor has incurred debts in carrying on the business of a testator.

Kinds of subrogation.-Subrogation is of two kinds:

(a) legal and

(b) conventional, i.e., by agreement.

(a) Legal subrogation.-It arises by operation of law. According to section 92, any of the persons referred to in section 91 on redeeming property subject to the mortgage have, so far as regards redemption, foreclosure or sale of such property, the same rights as the mortgagee whose mortgage he redeems may have against the mortgagor or any other mortgagee. In Laxmi Ramji v. Smt. Lohana Rao. A.I.R. 1970 Guj. 73, it was observed that the person desiring the legal subrogation must prove-

(i) that he had pre-existing interest or charge on the property;

(ii) that he had redeemed the same in full; and

(iii) That he had paid the amount for the protection of his interest.

 (b) Conventional Subrogation.-A conventional subrogation takes place where the person paying off the mortgage debt is a stranger and has no interest of his own to protect, but he advances money under an agreement, express or implied, that he would be subrogated to the rights and remedies of the mortgagee whose mortgage is paid off by his money.

The doctrine of subrogation is not applicable to a mere stranger and volunteer who has paid the debt to another without any agreement for subrogation. Partial redemption of the mortgage debt also does not give rise to the right of subrogation.

PERSONS ENTITLED TO THE RIGHT

The persons who are entitled to the right of subrogation are the following:

1. Any person who has any interest in the property mortgaged or in the right to redeem, viz., a puisne mortgagee redeeming a prior mortgagee and a purchaser of the right of redemption redeeming a mortgage 2. A co-mortgagor redeeming the mortgage.

3. A mortgagor’s surety redeeming the mortgage.

4. Any creditor of the mortgagor who has obtained a decree for sale of the mortgaged property.

Section 69 of the Indian Contract Act also embodies the doctrine of subrogation. It enacts: “FA person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it is entitled to be reimbursed by the other.

ILLUSTRATIONS

B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of B’s lease. B, to prevent the sale and the consequent annulment of his own lease, pays to the Government of the sum due from A. A is bound to make good to B the amount so paid.

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A MORTGAGED A HOUSE TO B. THE HOUSE WAS LATER ON ACQUIRED BY THE GOVERNMENT UNDER THE LAND ACQUISITION ACT

IS B ENTITLED TO LAY CLAIM TO THE COMPENSATION MONEY PAYABLE TO A?

Sub-section (2) of S. 73 provides that where the mortgaged property or any part thereof or any interest therein is acquired under THE LAND ACQUISITION ACT, 1894, or any other enactment for the time being in force providing for the compulsory acquisition of immovable property, the mortgagee shall be entitled to claim payment of the mortgage-money, in whole or in part, out of the amount due to the mortgagor as compensation. In accordance with these provisions the mortgagee B is entitled to claim payment out of the sum awarded as compensation.

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LIEN

VARIOUS DIVISIONS AND DISTINCTION BETWEEN THEM

EQUITABLE LIEN AND SOLICITOR’S LIEN

A lien is the right to hold the property of another as security for the performance of an obligation.· According to STORY a lien is not, in strictness, a jus in re or jus ad rem but it is simply a right to possess and retain the property subject thereto, until some charge attaching to it is paid or discharged.

A lien may either be legal or equitable. A legal lien is that which was recognized by the common law; an equitable lien is that which was recognized and enforceable only in courts of equity.

POSSESSORY LIEN

An instance of legal lien recognized by common law is furnished by possessory ‘lien. Bankers, factors, wharfingers attorneys of a High Court and policy brokers may retain, as a security for general balance of account, any goods bailed to them. Possessory liens may either be general or particular. The former III enables the person in possession of chattels to retain them until all his claims against the owner of the chattels are satisfied. There is a general lien in the case of solicitors, bankers, factors, stockbrokers,  etc. A particular lien enables the possessor to retain the goods until all charges incurred by him in respect of those goods only have been paid. An artisan’s right to retain an article delivered to him to work until he is paid for the labour expended thereon furnishes an instance of particular lien.

EQUITABLE LIEN

An equitable lien is an equitable right conferred upon one man to a charge upon the real or personal property of another until the satisfaction of certain specific claims. An equitable lien does not depend upon possession and is not enforceable against a purchaser for value without notice.

A legal lien differs from an equitable lien in two ways, viz.,

(1) There is an element of possession involved in a legal lien, conferring on the person in possession to detain the property until payment; equitable lien exists irrespective of possession, and enables the owner of such lien to have the right to a judicial sale to satisfy the lien;

(2) The common law lien is lost as soon as the person loses possession of the property subject to the lien, but as long as it lasts it is available against the whole world; an equitable lien cannot be asserted against the purchaser of the legal estate for value without notice of the lien, but it binds every person receiving the property even for value if such person had notice of the lien.

Kinds of Equitable lien.-The two important kinds of equitable lien are:

(1) vendor’s lien on land, and

(2) vendee’s lien on land.

 (1) Vendor’s lien on Land.

The principle underlying the vendor’s lien on land was thus explained by Lord Eldon in Mackreth v. Symmons (15 Ves.  329) ;

“Where a vendor, in compliance with a contract for the sale of an estate, executes conveyance thereof but the purchase money is wholly or partially unpaid, then, notwithstanding that on the face of the conveyance it is expressed to have been paid, or that a receipt for it is endorsed thereon, the vendor has a lien on the estate for the money remaining due to him.”

The vendor’s lien is enforceable against

(i). the purchaser himself and his heirs and all persons taking under him or them as volunteers;

(ii) subsequent purchasers of the property for valuable consideration but with notice of the lien; and

(iii) the assignee in bankruptcy of the purchaser.

The vendor’s lien may be lost by express or implied waiver, latches, or by limitation.

(2.) Vendee’s lien on Land.-This arises where the vendee after having paid the purchase--money or any part of it is unable to enforce the contract for want of title in the vendor, or for any other valid reason does not enforce the contract.

Solicitor’s lien.-A solicitor may have

(i) a general, passive or retaining lien,

(ii) a common law lien on property recovered or preserved through his instrumentality, or

(iii) a statutory lien enforceable by a charging order.

The solicitor’s general lien enables him to retain deeds, books and papers of his clients coming into his hands as solicitor for the purpose of his cost of litigation. The lien is available only against the client and not against third persons. The lien is not defeated on account of his discharge by the client.

The solicitor’s lien at common law extends to property recovered or preserved or proceeds of any judgment obtained for the client by his efforts. Such lien extends only to costs of recovering or preserving the property in dispute including, of course, costs or protecting his right to such trusts, and does not extend to the general balance of account or to real property.

In India, in the absence of a statute governing solicitor’s lien, the English common law governs the rights and duties of attorneys and it has been held that this lien is upon the funds, money or property recovered for the client by his solicitor. Section 171 of the Indian Contract Act provides that attorneys may, in the absence of a contract to the contrary, retain as a security for general balance of account, any goods bailed to them. A solicitor has therefore, a general lien upon all his client’s papers and documents for payment of all taxable costs, charges and expenses incurred by him on behalf of his client.

Disclaimer: In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views. This blog, between contributor and readers, shall not create any attorney-client relationship.