1. The question raised in this Second Appeal is whether the appellant, who was defendant in the suit, was entitled to subrogation in respect of two mortgages discharged by him for the mortgagor.
2. The appellant had been given a usufructuary mortgage of property, which was subject to three prior simple mortgages in consideration of an advance of Rs. 8000 made by him to the mortgagor, the appellant undertaking to pay off these prior mortgages. As a matter of fact he paid off the two first mortgages, but he did not pay off the third mortgage. The third mortgagee brought a suit for sale on the footing of his mortgage, and the appellant set up in this suit a claim to be substituted for the two prior mortgagees whose debt he had discharged. The lower appellate Court rejected this claim, holding that it was not sustainable in the face of Section 92 of the Transfer of Property Act. It should be mentioned that the mortgages in question were antecedent in date to the amendment introduced by Section 92 into the Act.
3. The case has been argued on the assumption that Section 92, as held by a Full Bench in Tota Ram v. Ram Lal I.L.R.(1932) 54 All. 897 (F.B.) is retrospective. Assuming that it is, I think that the third paragraph of the Section is fatal to the appellant's claim. This paragraph runs:
A person who has advanced to a mortgagor money with which the mortgage has been redeemed shall be subrogated to the rights of the mortgagee whose mortgage has been redeemed, if the mortgagor has by a registered instrument agreed that such person shall be so subrogated.
4. The appellant has advanced money to the mortgagor with which mortgages have been redeemed. But it was argued that some person other than a mortgagee is intended. But the section does not say so; and there is no apparent reason why a person who has advanced money for the purpose named in the section should not be regarded as within the section simply because the mortgagor has given him a mortgage to secure the advance made. But in such case the right to subrogation is made by the section a matter of express contract between the mortgagor and the person who has advanced him the money. There is no right to subrogation unless the mortgagor has by registered instrument agreed that the person advancing the money shall be subrogated in respect of the mortgage or mortgages discharged. No such agreement is forthcoming in this case.
5. But assuming that Section 92 is not applicable, I think that the appellant's claim must equally fail. I do not propose to analyse the numerous cases which have been cited, because, in my opinion, the correct principle to be gathered from the authorities is stated in Abdul Razak Rowther v. Abdul Rahiman Sahib : AIR1933Mad715 as follows:
The general principle is that a later purchaser or mortgagee who undertakes to pay two prior encumbrances but pays only one and not the other, cannot resist the claim of the encumbrancer not so paid by setting up the discharge of the other encumbrance as a shield and claiming priority in respect of it
6. No doubt the same two learned Judges in an earlier decision in Bappu v. Venkatachalapathi Aiyar : AIR1934Mad227 appear to have overlooked this principle. But the later statement must be accepted as correct. It will be found to have been expressed in much the same language by Ramesam, J. in Lakshmi Achi v. Narayanaswami Naicker : (1929)57MLJ746
7. The question whether a mortgage paid off is kept alive of extinguished depends upon the intention of the parties, and this intention, in the absence of any declared intention, is to be inferred from the circumstances : Mohesh Lal v. Bawan Das. (1883) L.R. 10 I.A 62 : I.L.R. 9 Cal. 961 (P.C.) In that case their Lordships discussed the equity which is to be applied. Quoting an English authority they said:
If there is no reason for keeping it (the incumbrance) alive, then, especially in the Case of an owner in fee, equity will in the absence of any declaration of intention destroy it, but if there be any reason for keeping it alive, such as the existence of another incumbrance, equity will not destroy it
8. In the present case the appellant's undertaking to pay off all the mortgages would, I think, indicate an intention that the whole debt with which the property was encumbered was to be extinguished. That is the proper view of the mortgagor's intention when he made his bargain with the appellant. In the absence of any particular circumstance to the contrary there is no room for inferring that the appellant was intended to be substituted for the three mortgagees whom he had contracted to pay. But in any case no such inference can be drawn in favour of the appellant when in breach of his contract he has paid off only two of the three mortgages which he had undertaken to discharge.
9. For these reasons I hold that the appellant's claim to a right of subrogation fails, and that the Second Appeal should be dismissed with costs.
10. The only point for decision in this Second Appeal is whether in the circumstances stated in my learned brother's judgment, the appellant who holds the usufructuary mortgage (Ex. 1) dated 7th May, 1927, is entitled to claim priority over the plaintiff's rights under the mortgage deed (Ex. A) dated 3rd March, 1922.
11. In Lakshmi Achi v. Narayanaswami Naicker : (1929)57MLJ746 it was observed by Ramesam, J. that:
Where a mortgagor sells his property to a vendee requiring the vendee to pay off two or three prior debts of the mortgagor and if the vendee pays off only one of them, he cannot claim priority in respect of it over the others, though he may claim such priority in respect of some other debts the payment of which by him was not contemplated
12. If this statement of the law is correct and if the principle enunciated with reference to a 'purchase' is also applicabl to a mortgagee who is directed to discharge certain prio Mortgages - this was assumed in Abdul Razak Rowther v. Abdul Rahiman Sahib : AIR1933Mad715 the appellant's claim of priority cannot be sustained. On behalf of the appellant, Mr. Kuttikrishna Menon has contended that the proposition enunciated in Lakshmi Achi v. Narayanaswami Naitcker : (1929)57MLJ746 is not correct and that in any event it ought not to be extended to a mortgagee He has also contended that whatever might have been the position prior to 1930, the matter must now be taken to be settled in the appellant's favour by Section 92 of the Transfer of property Act as amended by Act XX of 1929, which he claims should be held to have retrospective operation, though the discharge of the prior mortgages in this case was made in 1927. On behalf of the respondent, it has been argued that the principle enunciated by Ramesam, J. is correct and is equally applicable to the case of a mortgagee, that Act XX of 1929 is not retrospective in its operation and that even under Section 2 as amended, the appellant will not obtain priority, as the case must be held to be governed by Clause (3) and not by Clause (1) of that section.
13. The argument based on Section 92 may first be disposed of. in the view I take of the construction of that section; it is not necessary to come to a decision in this case on the question of its retrospective operation. It is true that in Tota Ram v. Ram Lal I.L.R.(1932) All. 897 (F.B.) Full Bench of the Allahabad Court held that the provision on had retrospective effect but a contrary opinion has been expressed by a Bench of this Court in Kanji and Mooljt & Brothers v. Shanmughom Pillai : AIR1932Mad734 . I would only add that in deciding how far an inference in tavour of 'retrospective operation' is to be drawn from the fact that Section 63 of the Act XX of 1929 expressly excludes retrospective operation in respect of certain specified sections, the remarks of Lord Hatherly in Gardner v Lucas (1878) L.R. 3 A.C. 582 might have to be borne in mind, namely, that it may well be a provision inserted ex majore cautela. With reference to the concluding words of Section 63 of Act XX of 1929 the learned Judges of the Allahabad High Court observed that in that case nothing had already been done before the first day of April, 1930, in any pending proceeding and no remedy or proceeding was being affected by the new provisions. I beg leave to doubt the correctness of this statement. If the learned Judges were right in their view that the law was the same even prior to Act XX of 1929, or that Act XX of 1929 must only be understood as having declared the previous law (with a view to set conflicting decisions at rest) no exception could be taken to their relying on Act XX of 1929, because there will then be no question of 'retrospective operation' at all. If, on the other hand, Act XX of 1929 must be held to have changed the law prevailing prior thereto, it is difficult to agree that the learned Judges were giving full effect to the concluding words of Section 63, of Act XX of 1929, because in that case the suit was undoubtedly pending when the Act of 1929 came into force and that section not merely provides that the Act shall not affect 'anything already done' in any pending proceeding but goes on to say that such proceeding may be continued 'as if this Act had not been passed'.
14. Turning now to Section 92 as amended, the appellant contends that the present case must be held to be governed by the first clause in view of the generality of its language, and here again strong reliance is placed on the decision in Tota Ram v. Ram Lal I.L.R.(1932) All. 897 (F.B.). There can be little doubt that the proper method of interpreting the first clause is to construe it in the light of the third clause of the same section. It will be seen from the report of the Special Committee which considered the Bill that they assumed that under the previous state of the law a transferee from a mortgagor who has undertaken to discharge a prior mortgage debt cannot by the mere fact of paying off a prior mortgage claim subrogation though in certain circumstances the Court may presume an intention on his part to keep alive the security thus paid off by him. To meet such cases they recommended the provision now enacted as Clause (3) of Section 92 whereunder a person advancing money to a mortgagor to pay off a prior mortgage shall be subrogated to the rights of the mortgagee thus redeemed only if 'the mortgagor has by registered instrument agreed that such person shall be so subrogated'. This provision corresponds to what is described by Mukerjee, J., in Gur Deo Singh v. Chandrikah Singh and Chandrikah Singh v. Rash Behary Ghose I.L.R.(1907) 36 Cal. 193 'conventional subrogation'; and it gives effect to the decision in Dinobundu Shaw v. Jogmaya Dasi Mahomad Ibrahim Hossain v. Ambika Pershad and Vanmikalinga Mudali v. Chidambara Chetty I.L.R.(1905) 29 mad. 37 subject to the condition that the right of subrogation must be provided for by an agreement in writing registered. Cf. In re, Wrexham Mold Connah's Quay Railway (1899) L.R. 1 Ch. 440. In the present case the right to subrogation is claimed not as the result of an agreement between the parties but only on general principles of equity. The learned Judges of the Allahabad High Court make no reference to the third clause of Section 92. Mr. Kuttikrishna Menon contends that the third clause must be held to apply only to cases in which a person advances money without taking a mortgage therefore. I am unable to agree that that is the true construction of that clause. There is a well established distinction between cases in which a person who has a preexisting interest in property pays off a prior charge on that property for the protection of his own interest and cases in which a person acquires an interest in property only by reason of his advancing money to pay off an existing mortgage debt. It seems to me that the first clause of Section 92 must be held to relate to the first type of cases above referred to and the third clause to the second type.
15. Mr. Kuttikrishna Menon next contended that the Allahabad Full Bench decision is an authority in favour of the appellant even independently of Act XX of 1929. In this connection he also relied upon the decision of a Bench of this Court in Chidambara Nadan v. Muni Nagendrayyan : (1920)39MLJ445 and upon certain observations in the judgment in S.A. No. 401 of 1925. In the Referring Order in this case Madhavan Nair, J. also mentions the apparent conflict between Bappu v. Venkatar chalapathi Aiyar : AIR1934Mad227 and Abdul Razak Rowther v. Abdul Rahiman Sahib : AIR1933Mad715 .
16. So far as the two recent decisions reported in Law Journal are concerned, I may observe that the conflict must be held to be not so much as to the rule of law to be applied as to the application of it to particular circumstances; because both the decisions were pronounced by the same Bench and in the later case they accept the rule stated by Ramesam, J., in Lakshmi Achi v. Narayanaswami Naicker : (1929)57MLJ746 . It is not necessary for me to canvass whether the circumstances in Bappu v. Venkatachalapathi Aiyar : AIR1934Mad227 would not also have justified the application of the same rule because we are only concerned with the correctness of the principle enunciated in Lakshmi Achi v. Narayanaswami Naicker : (1929)57MLJ746 . So far as we can gather from the judgment, the decision in Lakshmi Achi v. Narayanasami Naicker : (1929)57MLJ746 does not appear to have been brought to the notice of the learned Judges and it seems to me unaccountable that when referring to the Privy Council decision in Ayyareddi v. Gopalakrishnayya the learned Judges should have lost sight of the express reservation made on page 195 that the rule as to keeping alive the discharged5 mortgage for the benefit of the owner 'would not apply if the owner of the property had covenanted to pay the later mortgage debt'. The decision in Chidambara Nadan v. Muni Nagendrayyan : (1920)39MLJ445 does not conflict with the decision in Lakshmi Achi v. Narayanasami Naicker : (1929)57MLJ746 because the right to subrogation was there recognised only as against a person whose debt the later mortgagee had not covenanted to discharge. The judgment in S.A. No. 401 of 1925, though it contains some observations on Govindasami Tevan v. Doraiswami Pillai : (1910)20MLJ380 does not bear on the question now under consideration.
17. The Allahabad Full Bench point out that Section 101 of the Transfer of Property Act deals only with cases in which there is a possibility of merger by reason of the prior mortgage interest and the residuary ownership vesting in the same person and the observations made in cases relating to discharge of prior mortgages, by a person who has become owner of the property, ought not to be applied to a case of discharge by a puisne mortgagee, because in the latter case no question of merger can arise. It is true that Section 101 will in terms apply only to an 'owner' paying off a prior charge and not to a mortgagee paying off a prior charge; but in the judgments in Dinobhandhu Shaw v. Jogmaya Dasi and Mohomed Ibrahim Hossein Khan v. Ambika Pershad Singh the Privy Council base their conclusions only on the theory or presumption of an 'intention to keep alive' even in cases when the prior charge has been discharged by a mortgagee. In Mohesh Lal v. Bawan Das (1883) L.R. 10 I.A 62 : 1883 I.L.R. 9 Cal. 961 (P.C.) also, the discussion proceeded on similar lines. The reference to this case in Tota Ram v. Ram Lal I.L.R.(1932) 54 All. 897 (F.B.) and in Shafiqullah v. Samiullah I.L.R.(1929) 52 All. 139 as the case of a purchaser whose interest it may be to extinguish the mortgage is somewhat misleading; for their Lordships discuss the question of intention not merely from the point of view of Mangal (the purchaser) but also from the point of view of the plaintiff who was the mortgagee that lent the money utilised to pay off the prior mortgage in favour of Latchminarain.
18. In Tota Ram v. Ram Lal I.L.R.(1932) 54 All. 897 the learned Judges recognise that in the majority of cases in that Court it has been held that a third mortgagee paying off the first mortgage in similar circumstances was not entitled to be subrogated to the position of the first mortgagee. To the cases cited by them I may add Balbhaddra v. Sheomangal : AIR1931All347 . But they refer to Shyam Lal v. Baghiruddin I.L.R.(1906) 28 All.778 and Chhote Lal v. Bansidar (1926) 24 A.L.J. 570 Vanmikalinga Mudali v. Chidantbara Chetty I.L.R.(1905) 29 Mad. 37 and Jagathar Narain Prasad v. A.M. Brown I.L.R.(1906) 33 Cal. 1133 as taking a contrary view. With due respect, I may point out that in none of these cases was subrogation claimed or allowed as against a person whose debt the later mortgagee had undertaken to pay. This distinguishing circumstance seems to have escaped the notice of the learned Judges.
19. The discussion at the bottom of p. 901 and at the top of p. 902 suggests that they proceeded on the assumption that subrogation has been denied in similar cases only on the strength of the theory of agency namely, that in paying off the prior charge, the purchaser or puisne incumbrancer merely acted as the agent of the mortgagor. The observation already extracted from the judgment of the Privy Council in Ayyareddi v. Gopalakrishnayya shows that that is not the true basis of the rule but an inference derived from or a disability founded on the fact that the person claiming subrogation has covenanted to discharge the debt due to the very person against whom he seeks to claim the priority. Among the Indian authorities, some cases hold that a covenant to discharge several pre-existing mortgages indicate an intention to extinguish them all, Govindasami Tevan v. Dorasami Pillai : (1910)20MLJ380 Peria Tiruvadi Ayyangar v. Pokutti Janaki : (1923)45MLJ693 , Muhammad Sadiq v. Ghaus Muhammad I.L.R.(1910) 35 All. 101 or to treat them as a consolidated debt without reference to the dates when they were incurred. Lakshmi Achi v. Narayanasami Naicker : (1929)57MLJ746 . It is some times said that a presumption most beneficial to the person paying off the prior charge can be made only when two courses are open to him in law, but no such option can be recognised in favour of a person who has bound himself by covenant to pay off another encumbrance also, Balbhaddra v. Sheo Mangal : AIR1931All347 for it will in effect be to permit him to benefit by breaking his own contract. Surjiram Marwari v. Barhamdeo Persad (1905) 2 C.L.J. 291 . Again it has been said that subrogation is only a rule of 'equity' and it cannot be allowed where its application will lead to injustice or inequitable results. Bisseswar Prasad v. Lala Sarvam Singh (1907) 6 C.L.J. 134 . Whichever of these views be held to be the true basis of the rule, it can make no difference whether the subrogation is claimed by a purchaser or a puisne incumbrancer, so long as there is a covenant between him and his transferor that the transferee should discharge the debt due to the person whom he seeks to postpone. There is no doubt a difference between a covenant in a sale-deed about payment of consideration and a similar covenant in a mortgage deed, in that the latter covenant may not be specifically enforced and even damages for its breach may ordinarily be nominal but it is nonetheless a legal covenant which may, in certain circumstances sustain a claim for substantial damages (see A.S. No. 114 of 1923; see also The Manchester and Oldham Bank Ltd., v. W.A. Cook & C0 (1883) 49 L.T. (N.S.) 674 and Arnold on Damages Ch. VII quoting from the The South African Territories Ltd. v. Wallington (1897) 1 Q.B. 696 and Prehn v. Royal Bank of Liverpool (1870) L.R.5 Ex. 92.
20. In the Allahabad Full Bench case the learned Judges say (at the bottom of p. 901) that there appears to be no difference between the case of a purchaser or mortgagee paying off a prior charge out of his own funds and at his own choice and the case where he pays off the prior charge out of funds forming part of the consideration for the transfer in his favour. With all respect, I am unable to agree; in the former case, there will be no occasion for suggesting an inference of disability founded on the fact of a covenant to discharge the intermediate mortgage as well, whereas in the latter case the question can arise whether out of the consideration amount, the transferee has agreed to pay off not merely the prior charge but also the debt due to the intermediate incumbrancer against whom priority is claimed.
21. I am of opinion that the rule as stated in Lakshmi Achi v. Narayanasami Naicker I.L.R.(1920) 53 Mad. 188 and Abdul Razak Rowther v. Abdul Rahiman Sahib (1933) 65 M.L.J. 399 is correct and well founded in principle. I agree that the Second Appeal must be dismissed with cost's.
Venkataramana Rao, J.
22. I agree with the judgments just delivered. As laid down by their Lordships of the Privy Council in Aiya Reddi v. Gopalakrishnayya (1928) I.L.R. 47 Mad. 190 at 194 : L.R. 51 IndAp 140 : 1928 46 M.L.J. 164 (P.C.):
It is now settled law that where in India there are several mortgages on a property, the owner of the property subject to the mortgages may, if he pays off an earlier charge, treat himself as buying it and stand in the same position as his vendor, or to put it in another way, he may keep the incumbrance alive for his benefit and thus come in before a later mortgagee. This rule would not apply if the owner of the property had covenanted to pay the later mortgage debt.
23. Therefore if, as in this case, a person advances money or covenants to discharge three incumbrances payment of two prior incumbrances cannot be availed of by him as a shield against the third vide Lakshmi Achi v. Narayanasami Naicker I.L.R.(1920) 53 Mad. 188 . The principle of subrogation cannot be invoked in such a case for as explained in Govindasami Tevan v. Doraisami Pillai : (1910)20MLJ380 'the object of the transaction was not to keep alive a mortgage against the puisne incumbrancer but to discharge the puisne incumbrancer as well'. This was undoubted law before the amendment of the Transfer of Property Act. But Mr. Kutti Krishna Menon contends that this rule of law would apply to the case of a purchaser but not to that of a mortgagee. I see no distinction in principle, vide Balbaddra v. Sheomangal : AIR1931All347 .
24. The next argument of Mr. Kutti Krishna Menon is that Section 92 of the amended Transfer of Property Act is retrospective and under Clause (1) of that section his client's right to subrogation cannot be questioned and he is supported in this view by the Full Bench decision in Tota Ram v. Ram Lal I.L.R.(1932) 54 All. 897 (F.B.). Assuming Section 92 to be retrospective, I am, with due respect, unable to agree with the interpretation placed on Clause (1) Clauses 1 and 3 of Section 92 must be read together Clause 1 enunciates no new principle (vide Section 74 of the Transfer of Property Act since repealed). It applies to all persons who have an interest in Equity of Redemption and are under no personal obligation to discharge prior incumbrances. Clause 3 has been enacted to confer a benefit on persons who advance money to discharge an incumbrance only if the mortgagee has by a registered instrument agreed that such persons shall be subrogated. The clause is intended to apply to all persons who acquire an interest in the mortgaged property by advancing moneys to discharge prior incumbrances and there is no warrant for restricting the scope of that clause to persons other than purchasers or mortgagees as contended by Mr. Kutti Krishna Menon. The distinction between the two classes of cases aforesaid namely, those who have an existing interest in the property and those who acquire an interest therein by advancing money is well recognised in the law relating to subrogation. The Privy Council decision in Jagannadha Das v. Jugal Kishore 36 C.W.N. 4 (P.C.) illustrates this clearly. A purchaser covenanted to pay half the amount of the money due on a prior mortgage but he was compelled to pay the whole and the right of subrogation was allowed only as to half the amount he had not covenanted to pay. In respect of this half he would now come under Clause 1 of Section 92 and in respect of the other half under Clause 3 if he obtains a registered instrument securing the right. Clauses 1 and 3 unmistakably indicate that the legislature has kept this distinction in view. The Allahabad decision fails to note this and consider Clause 3 and the principle underlying it. To give effect to the contention of Mr. Kutti Krishna Menon would be to enable every purchaser or mortgagee who enters into a contract to discharge a particular incumbrance to commit a breach thereof and profit by his own wrong and thus violate the equitable principles on which the doctrine of subrogation is based and it is impossible to attribute this intention to the legislature. There is no registered instrument as required by Clause 3 in this case and the appellant's claim is unsustainable.