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MARSHALLING
(This Assignment work has been submitted towards the fulfilment of 7th
Semester BBA LLB 5 year Integrated studies.)

TRANSFER OF PROPERTY

Submitted by:
SUMIT
Regd. No.-1141845017
BATCH. - BBA LLB (7th Semester)

SIKSHA O ANUSANDHAN
NATIONAL INSTITUTE OF LAW

CONTENTS

Chapter-1: INTRODUCTION

6-9

Chapter-2: LEGISLATIVE PROVISIONS

09

Chapter-3: JUDICIAL ANALYSIS

10-11

Chapter-4: APPRAISAL AND SUGGESSTION

12

Annexure-1: BIBLIOGRAPHY

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PREFACE

It gave immense pleasure to write a preface on my Assignment work titled

MARSHALLING .
In this Assignment work provided to me I have fully categorized and divided the
whole subject to make it easier and critically analysed the intricate issues thereof. I have
traced various relations that relate the subject matter.
In the first part I have introduced the subject and then co-relate it so that it may help
researchers in future on the applied subject.

SU
MIT

ACKNOWLEDGEMENT

I express my deep sense of gratitude to those who have helped me in completion of

my Assignment work on the topic MARSHALLING.
My sincere thanks to Mr. CHINMOY MAHAPATRA sir who rendered me several
suggestions and modifications in preparing this Assignment work.
I will be failing in my duties if I do not express my thanks to our dean Dr. Prof.
Jaydev Pati who has cooperated in completion of my Assignment work.
I want to thanks my parents and friends for their support and motivation provided to
me in completion of my Assignment work.
There may be errors or omissions while preparing this Assignment for which I owe
responsibility and any one whosoever points them will be duly rectified.

SUMIT

DECLARATION

I, Sumit, a student of 7th Semester BBA LLB 5 years Integrated Law studies, of
Siksha O Anusandhan National Institute of Law, do hereby declare that the Assignment
work titled MARSHALLING " is a piece of original work and the same has not been
submitted for evaluation elsewhere.

Date- 15-nov-2014

SUMIT

CHAPTER-1

INTRODUCTION

Marshalling Legal Definition

If a creditor has access to two sources of payment, he shall take his payment out of that fund
upon which another creditor has no access or lien. A creditor who has a lien or a charge (such
as a mortgage) and thus, a priority on an asset (or fund), and also has access on another asset,
can collect off one or the other or both, to the satisfaction of his debt. This frustrates other
creditors who do not have access to the charged asset or fund. They see their only source of
payment depleted by a creditor who could have obtained satisfaction from the charged asset.
In stepped equity to the rescue, to construct a principle of fairness and which has become
known as the doctrine of marshalling, requiring the creditor with the enforcement choices to
act first upon the asset upon which he alone has rights or access.
Marshalling is an equitable doctrine applied in the context of lending. It was described by
Lord Hoffmann as:
A principle for doing equity between two or more creditors, each of whom are owed debts by
the same debtor, but one of whom can enforce his claim against more than one security or
fund and the other can resort to only one. It gives the latter an equity to require that the first
creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the
security or fund to which the latter has no claim.
In the United States, Justice Stone described that:
It rests upon the principle that a creditor having two funds to satisfy his debt may not, by his
application of them to his demand, defeat another creditor, who may resort to only one of the
funds.
In the 8th Edition of Fisher and Lightwood's Law of Mortgages, the author writes:
"The doctrine of marshalling rests upon the principle that a creditor who has the means of
satisfying his debt out of several funds shall not, by the exercise of his right, prejudice
another creditor whose security comprises only one of the funds."

General principles:
It has been held in Gerrow v. Dorais 1 that marshalling applies to all forms of secured
indebtedness, including liens. A claim for marshalling will not be allowed by the courts where
it would be unjust or unfair to allow the junior creditor to marshal, and therefore:
1. It cannot interfere or prejudice the position of the senior creditor.
2. It cannot prejudice third parties.
3. It must be brought in a fair and timely fashion.
In Lanoy (1742), Justice Hardwicke wrote:
"It is not then the constant equity of this court that if a creditor has two funds, he shall take
his satisfaction out of that fund upon which another creditor has no lien. "Suppose a person,
who has two real estates, mortgages both to one person, and afterwards only one estate to a
second mortgage, who had no notice of the first; the court, in order to relieve the second
mortgage, have directed the first to take his satisfaction out of the estate only which is not in
mortgage to the second mortgagee, if that is sufficient to satisfy the first mortgage, in order to
make room for the second mortgage, even though the estates descended to two different
persons."
In Ernst Brothers (1920), the Ontario court wrote:
The doctrine of marshalling, in its application to mortgages or charges upon two estates or
funds, may be stated as follows: If the owner of two estates mortgages them both to one
person the second mortgagee may insist that the debt of the first mortgagee shall be satisfied
out of the estate not mortgaged to the second, so far as that will extend. This right is always
subject to two important qualifications: first, that nothing will be done to interfere with the
paramount right of the first mortgagee to pursue his remedy against either of the two estates;
and, second, that the doctrine will not be applied to the prejudice of third parties.
More recently, in Bockhold (1999), Madam Justice Morrison of the British Columbia
Supreme Court wrote in her typical clear and succinct style:
"Marshalling is an equitable remedy that may arise when you have two creditors of the same
debtor, with one creditor, sometimes referred to as the senior creditor, having the right to
resort to two funds of the debtor for payment of the debt, and the other creditor, the junior
creditor, has the right to resort to one fund only. The court can marshal or arrange the funds
so that both creditors are paid to the greatest possible extent.
1 2010 ABQB 560 (3 September 2010), Court of Queen's Bench (Alberta, Canada)

"Equity will be invoked to protect the junior creditor, make the senior creditor realize on
assets in such a way that the senior creditor will not wipe out assets that would only be
available to the junior creditor. The junior creditor will be subrogated and will have a charge
on the second or subsequent funds."

The Doctrine of Marshalling:

The doctrine of marshalling is an old equitable remedy that can be traced back as far as the
mid-seventeenth century. The modern root of the doctrine can be found in the oft cited
English case of Aldrich v. Cooper2 ("Aldrich"), where Lord Eldon stated the doctrine as
follows:
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 extent that the only fund, to which the other has access may
remain clear to him.
Marshalling means to arrange. Section 81 of the Transfer of Property Act provides that 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 mortgage 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. For eg. Sreza mortgages his two properties X and Y to
Rishma and then mortgages Y to Ryan. If Sreza seeks to realize his mortgage out of Y, Ryan
can compel Sreza to proceed first against X and realize the debt from it. In case Sreza is
unable to realize the whole amount due to him from X, he is entitled to recover the balance
from Y.

2 (1803), 8 Ves. 382, 32 ER 402 (LC) at pg. 395

CHAPTER-II

LEGISLATIVE PROVISIONS
Section 56 of the Transfer of Property Act, 1882:
Marshalling by subsequent purchaser:
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.

Section 81 of the Transfer of Property Act, 1882:

Marshalling securities:
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 mortgage 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.
Section 56 deals with the concept of marshalling in a transaction involved in subsequent sale,
on the other hand, Section 81 is applicable only to mortgages. Doctrine of marshalling rests
upon the principle that a creditor who has the means of satisfying his debt out of several
funds shall not, by the exercise of his right, prejudice another creditor whose security
comprises only one of the funds.

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CHAPTER-III

JUDICIAL ANALYSIS
In M/s J.P. Builders & Another v. A. Ramadas Rao & another 3 Doctrine of marshalling
rests upon the principle that a creditor who has the means of satisfying his debt out of several
funds shall not, by the exercise of his right, prejudice another creditor whose security
comprises only one of the funds. Plea of marshalling being pure question of law based upon
the decree obtained for specific performance, cannot simply be thrown out merely because
the same was not specifically pleaded.
In Green v. Bank of Montreal4 the Ontario Court of Appeal restated the basic criteria that
must be met before the equitable doctrine of marshalling can be applied:
(i)
Two or more creditors must share a single common debtor; and
(ii)
The senior creditor must have a claim against two of the debtor's funds, while the
junior creditor, ranking behind the doubly secured creditor, has recourse to only
one.
In Corso Stein Enters. Inc.5 The Supreme Court has noted that the equitable doctrine of
marshalling rests on the principle that a creditor having two funds to satisfy his debt may not,
by his application of them to his demand, defeat another creditor who may have resorted to
only one of the funds. In other words, marshalling, when applied, requires a senior creditor to
satisfy its claim first from property or a fund in which a junior creditor has no interest.
The common debtor requirement renders marshalling unavailable in cases in which the two
funds consist of an interest in estate property and an interest in property of a non-debtor. In
Borges6, because marshalling is an equitable, rather than legal, doctrine, courts have
3 2011(2) L.A.R. 12 (SC).
4 (1999) 15 P.P.S.A.C. (2d) 156, 1999 CarswellOnt 3954 (Ont. C.A.).
5 79 B.R. 584, 587 (Banker. D. N.J. 1987).
6 184 B.R. 874, 879 n.3 (Banker. D. Conn. 1995).

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expanded, and recognized exceptions to, this requirement. In New Woodbridge Barrel &
Drum Co7. For instance, courts have applied marshalling where a non-debtor, typically a
corporate debtors controlling shareholder or guarantor, qualifies as the alter ego of the
debtor, or where the non-debtor has rendered the debtor inadequately capitalized.
Second, courts have recognized that a non-debtors property, pledged to secure the debtors
obligation and not solely the nondebtors obligation, may equitably be deemed a capital
contribution to the debtor and hence subject to marshalling
Third, courts have invoked marshalling where the non-debtor has engaged in inequitable
conduct such as fraud, breach of fiduciary duty or unjust enrichment. Finally, marshalling has
been applied against non-debtor shareholders solely for the equitable purpose of preserving a
distribution for the debtors unsecured creditors.
Historically, the doctrine arose from cases involving real property mortgages, however, case
law in England and Canada throughout the 20th century expanded the doctrine to personal
property security. More recently, the Ontario Court of Appeal in Ontario Inc. v Allison
(Trustee of) adopted the definition of marshalling set out in Aldrich. In a subsequent decision,
the Court of Appeal noted that, fundamentally, the purpose of the doctrine of marshalling is to
regulate the rights of creditors as among themselves. The Court further noted that in so
regulating the rights of two creditors, courts should be careful not to interfere with the
paramount claim of the superior creditor to pursue its remedy against either fund. Instead, the
doctrine provides that if the superior creditor resorts to the fund which the inferior creditor
alone can resort, the inferior creditor should not be prejudiced.
The goal of allocating a debtor's assets so as to satisfy all secured creditors equitably, without
prejudicing the senior creditor's position is usually achieved in one of two ways: either the
court will compel the senior creditor to resort to the singly secured fund to satisfy its claim, or
it will allow the junior creditor to subrogate to the senior creditor's claim to the singly secured
fund. A number of common law rules (pre-conditions and bars) to the application of
marshalling have developed over time. However, the equitable nature of the doctrine of
marshalling gives courts the flexibility to craft relief that is specific to the circumstances of
each case.

7 99 B.R. 221, 223 (Banker. D. N.J. 1988).

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CHAPTER-IV

APPRAISAL AND SUGGESTIONS:

Marshalling can be achieved in two ways. Either the courts will require the senior creditor to
resort to the singly secured fund, or, the courts will allow the junior creditor to subrogate to
the senior creditor's interest in that fund. In other words: marshalling by compulsion or
marshalling by subrogation. In Canada, there is some debate as to whether a senior creditor
can be compelled to resort to the singly secured fund, if interference with the senior creditor's
right to pursue its remedy against either fund is in fact a bar to marshalling. In First Investors
Corp. Ltd v. Butler Engineering Ltd8, the Alberta Court of Appeal overturned a decision of
the lower court allowing a junior creditor to compel a secured creditor to purchase certain
real property (at its appraised liquidation value) in order to satisfy the first mortgage debt as
part of a marshalling remedy. The Alberta Court of Appeal found that the lower court had
overlooked the important qualification to marshalling, namely that its application not
prejudice the paramount right of the first mortgagee to pursue its remedies as it pleases.
A party seeking the application of marshalling must generally establish the following
elements:
(1) the existence of two secured creditors with a common debtor,
(2) the existence of two funds belonging to the debtor and
(3) the right of the senior creditor to satisfy its demand from both funds and the right of
the junior creditor to resort to only a single fund,
e.g., where a mortgagee holds a senior mortgage on two tracts of land and another mortgagee
holds a subordinate mortgage on only one of the tracts. Assuming that the conduct at issue is
sufficiently inequitable to warrant subordination, application of the marshalling doctrine
against the assets of a guarantor can produce a benefit to the estate.
Marshalling is an equitable remedy available to protect the recovery of a junior creditor
against the arbitrary action or whims of a senior creditor. Simply stated, the doctrine of
marshalling dictates that, "where there are two creditors of the same debtor, one creditor
having a right to resort to two funds for payment of his debt, and the other a right to resort to
one fund only, the court will "marshal" or arrange the funds so that both creditors are paid as
far as possible."

8 (1988) 47 D.L.R. (4th) 46 (Alta. C.A.).

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ANNEXURE-1

BIBLIOGRAPHY
Wikipedia.
Google.

WEBSITES:
http://www.indiankanoon.com
http://www.research-degree-thesis.com
http://www.lawteacher.net/
http://www.lawyersclubindia.com
http://www.indianlawcases.com

BOOKS:
Banking Laws {B N Chaudhary}