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Case No.:

AC-APP-I961

Court:

Court of Appeal

Issue No.:

1962

 

Principles

·  Mortgage__Guarantor.mol.t qua guarantor Co-extensive with principal debtor both at law and in equity Mortgage__Guarantor.morrgagor_Marshallng in foreclosure actions—Mortgagee can be compelled, in equity, to claim property of principal debtor before claiming property of guarantor

Khogali, Taha and Abdel Hadi formed a partnership to be financed by Dolabgi. For Do1abgi loan of £S.1o, ooo. Taha and Abdel Hadi gave Dolabgi a mortgage on certain of their realty. Khogali without realty, arranged that his wife. Naima, become guarantor mongagor on the note, thereby mortgaging her, realty to Dolabgi and agreeing to be held jointly and severally Uable with Taha and Abdel Hadi on the note. Taha and Abdel Hadi then gave se mortgages on the realty to their sons. Zein El Abdin and Siddik, When tile note fell due unpaid, Dolabgi sued Taha and Abdel Hadi. The High Court sold properties of Taha and Abdel Hadi for £S.7,222 which was paid to Dolabgi iddik, second mortgagee, paid the rest due on the note. Siddik then brought this action against Naima for rectification of the register to transfer the mortgage in favour of Dolabgi to his name, on grounds that for paying off the ‘first n
claim he succeeded to first mortgagee’s rights to the secured debt against the mortgagors.
Held: (1) As a guarantor-mortgagor, defendant’s liability is co-extensive with .hat of principal debtor.
(ii) In equity the doctrine of marshalling requires the creditor in a suit for foreclosure against the guarantor-mortgagor to satisfy his claim against the property of the principal debtor before claiming the property of the guarantor- mortgagor.

Judgment

(COURT OF APPEAL) *

NAIMA MOHAMED HASSAN ABDEL MONEIM v. SIDDIG ABDEL HADI EL GABBANI

AC-APP-I961

Advocates: Dafalla El Hag Yousif for defendant-applicant Hussein Osman Wanni ... for plaintiff-respondent

Babiker Awadalla 1. September 1961: —This is an appeal against the decree of the Honorable Judge of the High Court, Khartoum, in HC-CS

360.1959, (1960) S.L.J.R. I9c.

The facts of the case are complicated and confusing and it is therefore necessary to restate them here fully and with sequential precision.

The parties to the present dispute are not unrelated. Defendant- appellant is the wife of plaintiff-respondent’s paternal uncle.

On May i8, I955 appellant’s husband, Khogali Abdel Magid El Gabbani, of Omdurman and his two brothers, Taha and Abdel Hadi, formed a partnership for the export of livestock to the Supplies Department of the Egyptian Army.

In order to finance the partnership, a capital of £S.10, 000 as required and the amount was agreed to be advanced to the partnership by Dolabgi Samgi Virani (Sudan), Ltd., of Omdurman. The sum, with interest amounting to £S.1000, was repayable by 10 monthly installments of £S.1000 and promissory notes for these installments were given by the partnership. Real security was also required by the lending company. It was this question of real security that brought appellant into the picture. For it appears that her husband, unlike his two co. partners, had no real property to mortgage. Taha and Abdel Hadi on the other hand owned several plots at Omdurman. Appellant owned three freehold and leasehold plots at’ Khartoum.

It was therefore arranged that appellant should join Taha and Abdel Hadi in the giving of this security and the mortgage deed, of which document 1 is a copy, was entered into on August 29, 1955.

By this deed of mortgage, Taha and Abdel Hadi, being described as debtor-mortgagors, created a charge in favour of the lending company o their lands described in the schedule, to secure payment of the loan above referred to. Appellant on the other hand, being described as the guarantor- mortgagor also created a similar charge on the property shown in her name in the said schedule.

All the three mortgagors undertook repayment of the loan as arranged i

and agreed that in case of any default, they were to be held jointly and severally liable.

It is not at all clear whether this deed of mortgage is the sole documentary evidence of the loan or whether there was another written agreement (besides the promissory notes) between the lending company and the partnership in which the terms of the transaction were more fully provided for. Suffice it to say that if any such agreement existed, it was neither produced before nor in any way disclosed to the court.

It is worth mentioning that all the properties of Taha and Abdel Hadi, as well as those of appellant, were, at the time of the loan, already mortgaged to Bank Misr to afford bank facilities, and Naima was there also described as guarantor-.mortgagor. This mortgage need give us no trouble for it was released on October 1956, and the mortgage to Dolabgi and Co. was thereafter subject to no priorities.

Had the partnership complied with the terms of repayment, the debt to Dolabgi would have been repaid by the end of June 1956, but until January i8, they only paid £S.9o0 and on that date the mortgagees (i.e., Dolabgi & Co.) instituted a suit for the realisation of their security by sale or foreclosure.

Appellant did not appear in those proceedings, and I doubt very much whether any summons was served on her. Anyway both advocates for mortgagee and the debtor-mortgagors agreed upon an immediate decree for sale. In spite of this agreement, however, the court issued a preliminary decree in accordance with Civil Justice Ordinance, Ord. X, r. 2 (x), in which the amount of debt was expressed to be payable forthwith. This meant that the mortgagee had to apply again if he wanted to insist upon a sale. No such application was made at all.

There is no doubt that Taha and Abdel Hadi were, since shortly after the formation of the partnership, conscious of the crisis which they were up against by reason of the failure of the business and so, in anticipation of and to provide for that crisis, they created highly suspicious if not fictitious mortgages in favour of their own sons. Abdel Hadi on October Jo, 1956, mortgaged his share in all the plots under consideration to his son Siddik (plaintiff-respondent) for repayment of £S.2o,ooo and Taha mortgaged his share on October 14, 1956, infavour of his son Zein El Abdin for repayment of £S.15,000.

Several money decrees were already on their way towards execution against Taha and Abdel Hadi at the time these suspicious mortgages were created but the majority of them appear to relate to debts incurred by the debtors at a date antecedent to the formation of the partnership.

These executions kept increasing in number and were ultimately grouped together in what is known in the Khartoum High Court as collection 26.

In the said collection, an order of sale of the immovable of Taha and Abdel Hadi was made on January 4, 1958, but sale was delayed for no just reason until July 23, 1958, when notice was issued for the first time. On July 31, 1958, advocate Ahmed Suliman, on behalf of Taha and Abdel Hadi, applied to the court for inclusion of the property of appellant in the sale. This application was accepted without any scrutiny whatsoever, for it is not at all clear how, in proceedings to which appellant cannot properly be made a party, the mortgagee can be heard to insist on a sale which was not made by due process of law, i.e., in accordance with the provisions of the Civil Justice Ordinance, Ord. X.

However, in those execution proceedings, advocate Kheir appeared on behalf of appellant, and on October 6, 1958, he applied to the executing court objecting to the procedure and stating that the sale of appellant’s property should be deferred until the property of the original debtors was exhausted, but this objection does not seem to have received any consideration and was ultimately ignored altogether.

The result was that four of the debtor-mortgagors’ plots were sold at a total of about £S.7,222 (it is impossible to tell the exact figure from the record) and there were no bidders for the plots of appellant.

On February 15, 1959, advocate Mahgoub on behalf of appellant applied to the Honourable Judge of the High Court repeating the same objections made by advocate Kheir, but his application was contested by advocate Ahmed Suliman on behalf of the partners on the ground that the liability of appellant was joint and several and that the second mortgagees (i.e., plaintiff-respondent and Zein El Abdin) were intending to redeem the first mortgagee (Dolabgi) acquiring whatever rights he might have against appellant. The court agreed to a temporary stay of the sale of appellant’s property. Plaintiff-respondent and Zein El Abdin were allowed three days within which to redeem Dolabgi. At the end of the three days (i.e., on February 18, 1959) they were unable to redeem and the court ordered that the proceeds of the previous sale of the four plots (i.e., the sum of £S.7, 222 be paid to Dolabgi towards satisfaction of the decree.

On that date advocate Wanni appeared on behalf of plaintiff-respondent and Zein El Abdin and stated on their behalf that they were prepared to pay to Dolabgi a sum of £S, towards satisfaction of the mortgage debt, stating that the payment was made on the understanding that they were to step into the shoes of the mortgagees to the extent of the sum paid by them. The court agreed and the amount was paid in court. In that sitting, the court took notice that some petitions in bankruptcy had already been presented against the debtors by some of their unsecured creditors, and so the Honourable Judge of the High Court made a note in the collection record that the sale of the White Building (a big building owned by Taha and Abdel Mageed at Omdurman) was to be adjourned until the petitions in bankruptcy were dealt with,

The Bankruptcy Record shows that those petitions were fixed for consideration on June 28. 1959. On that date a proposal for composition was submitted to and approved by the court under the Bankruptcy Ordinance, S. 24. It is in the record of that hearing that the note by the judge was made to which much importance was attached in subsequent litigation between the parties to this appeal.

This note, which was not at all relevant to the subject of the composition and so not embodied by the court in the order, made pursuant to section 45 (3), reads as follows:

“Whereas Siddik Abdel Hadi and Zein El Abdin have paid the debt of Dolabgi Samgi, they are entitled to claim from Naima Mohamed Hassan whatever amount was paid on her behalf.”

By virtue of this composition, the White Building and three other plots were to be registered in the names of Siddik (plaintiff-respondent) and Zein El Abdin. The White Building alone was to be subject to a charge in favour of the unsecured creditors. In consideration of this transfer to them, the debtors’ sons were to settle within three months all the unsecured debts in accordance with the terms of the composition. Failing this, the White Building was to be put up for sale by public auction in settlement of the debts. Siddik and Zein El Abdin failed to comply with the order, and the White Building was accordingly sold for £S.17, 101 and the proceeds paid out to the creditors. The other three plots, which were part of those subject to Dolabgi’s mortgage, continued to be registered in their names, but on what grounds and for what consideration it is not at all clear.

On July 21, 1959, while the bankruptcy proceedings were going on, and before the final composition order was made, plaintiff-respondent Siddik Abdel Hadi instituted a civil suit in the Khartoum High Court claiming rectification of the register of the property of defendant-appellant by transferring the mortgage in favour of Dolabgi to his name. He contended that he had paid the sum of £S. by order of court on the understanding that he was to be subrogated to the rights of Dolabgi & Co. vis-à-vis Naima. This sum was apparently the total of the sum of £S.3, paid on February I8, 1959, plus another sum of £S.7oo collected by the court from plaintiff- respondent one of the auction sales as a deposit on an abortive bid. Appellant denied liability, and contended (i) that she was simply a guarantor-.mortgagor (ii) that the whole mortgage debt was paid by the debtor and (iii) that payment by respondent of the sum of £S. was by way of, purchase of some of the properties of the mortgagors and not in settlement of the debt guaranteed by appellant

Respondent replied to the defence by contending that appellant was precluded by Civil Justice Ordinance, s. 40, from making the defence that she was a guarantor-mortgage or that payment of the mortgage debt was made by the debtor-mortgagors. I take it that he meant by such a reply that the matter sought to be raised by appellant had already been directly and substantially in issue in CS-6i-i

District Judge Muhammadi framed the following issues:

(1) Is the claim res judicata under Civil Justice Ordinance, s. 4o?

(Plaintiff)

(2) Did the other two defendants in that case (CS-61- namely,

Taha Abdel Magid El Gabbani and Abdel Hadi Abdel Magid El

Gabbani pay the said whole sum? (Defendant)

Or

(3) Was it that two-thirds of it was paid by them and one-third was paid

by the plaintiff in this case?            (Plaintiff)

Or

(4) Was it that a sum of £S. which happens to be one-third of the sum decreed in CS-6 was paid by plaintiff as a part of the purchase price of the property of the said Taha and Abdel Hadi to which an objection was raised by defendant? (Defendant) Or

(5) Was the share of Naima (present defendant) paid in accordance with the decree in that case (CS-6 by the plaintiff? (Plaintiff) Or

(6) Did the court, with the consent of Taha and Abdel Hadi, order that they both cause stocktaking of their property before taking recourse

to the defendant?            (Defendant)

(7)        What is the effect of the decree in CS-61-1957?

(a) Was the defendant joined there as a guarantor only? (Defendant) (b) If yes, did it make any difference as to the payment made by

plaintiff on her behalf? (Court)

(8)        To what relief, if any, plaintiff is entitled?            (Court)

The issues as framed above are no doubt very clumsily drawn. It was simply necessary to frame three issues only on the following lines:

(I) Is the defence of defendant (i.e., appellant) a res judicata?

(ii) If not, was the sum of £S. paid by or on behalf of the original debtors?

(iii) If the answer to (ii) is in the negative (i.e., if the said sum was paid on behalf of defendant), is plaintiff (i.e., respondent) entitled to any, and if so what relief?

However, the Honourable Judge of the High Court, Osman El Tayeb J. after hearing plaintiff-respondent, one witness on either side and calling for submissions, proceeded to give judgment not following the issues

framed, but ignoring altogether the reply to the defence and summarizing the defence itself into the following points:

(1) The defendant was a guarantor of the mortgage debt, and that her mortgaged properties cannot be put up for sale, that she should be compelled to pay the mortgage debt, except after the exhaustion of the principal’s properties, and

(ii) There was no express or implied agreement between the parties that plaintiff should pay off the debt, on assignment of the mortgage to him.

He found that the liability of appellant as guarantor-mortgagor was merged in the decree, which was passed in CS-61-1957 jointly and severally against the Taha and Abdel Hadi, defendants in that suit. As such he came to the conclusion that appellant was bound to pay one-third of the decretal debt on the ground that “equity” is “equality.” He then proceeded to deal with whether or not respondent paid the sum alleged to have been paid on appellant agreeing either expressly or impliedly that he is to have an assignment pro tanto of the mortgage to him, and he decided that the agreement of appellant was quite unnecessary. Despite the submissions of the learned advocate for respondent to the contrary, the Honourable Judge of the High Court found that respondent was not entitled to a transfer of the mortgage but was simply entitled to recover the amount paid by him as money paid for the use of the appellant. He accordingly passed a decree against appellant for a sum of £S.3,8 (i.e.. one-third of the decretal debt in CS-61-1957 and costs. Against this decree the appellant appealed.

Before us the appellant was represented by advocate Dafalla El Hag Yousif and respondent by advocate Wanni.

Advocate Dafalla attacked the decision that appellant was liable under the foreclosure decree for payment of one-third of the decretal debt and asserted that the liability of appellant does not at all arise until the means of the debtor-mortgagors have been exhausted when he should be called upon to pay, not only one-third of the debt but whatever amount was then due and owing. He admitted he knew of no English rule of either law or equity which is applicable to the facts of the case but he cited a rule in force in Egypt and the continent by virtue of which the property of a guarantor- mortgagor is immune from process of the law unless and until that of the debtor-mortgagor is exhausted.

Advocate Wanni on the other hand objected to the citation of principles, which do not derive from the English common law and contended:

First: that appellant’s contention that she is a surety only cannot be sustained because in truth and in fact her liability under the deed, properly construed, is original and not merely secondary;

Secondly: that assuming her liability under the deed was that of a surety, then she is stopped from setting up such a defence at this stages because once judgment is given against her in CS-61-1957 then her original liability is merged in the judgment;

Thirdly: that assuming she is not precluded from asserting that she is a surety, then she is liable to indemnify any stranger to whom the benefits of her contract of suretyship are assigned;

Fourthly: and lastly that the obligation of appellant to pay the sum now claimed arises under a contract of record, the money having been paid by respondent on the clear directions of the court (contained in the collection and Bankruptcy Records) that it was recoverable from appellant.

I have tried to make a logical reconstruction of the submissions of the learned advocate for respondent as far as I could follow them deviating to some extent from his actual wording which was not free from redundancy.

I would like to state from the outset that I can see nothing either in the bankruptcy proceedings or in the record of execution, which can fairly be relied upon by respondent in support of his case.

The proceedings before the Bankruptcy Court can in no way bind appellant because she was neither a party to nor in any way concerned with them and any reference by that court to the rights and liabilities of Naima (defendant-appellant) was certainly ultra vires.

Nonetheless, I do not think that the words of the Bankruptcy Court can be interpreted to mean that appellant was liable for anything not “paid on her behalf,” and it has first to be proved that the amount sought to be recovered was duly paid on appellant’s behalf before it can be alleged that it was made pursuant to any directions by that court.

Looking to the execution proceedings (i.e., collection 26 in which the payment was made) it will be seen that the said sum was accepted by the court on the express understanding that respondent was to be subrogated

pro tanto to the rights of Dolabgi, and the only inference that can fairly be drawn is that respondent being second mortgagee, was exercising his right of redemption incidental to his right as such mortgagee. But he is only second mortgagee of the properties of Taha and Abdel Hadi El Gabbani, and if therefore he seeks to redeem a first mortgage on these lands, he is doing so not on behalf of appellant but solely on behalf of his mortgagors.

Between appellant and respondent there is no connection whatsoever and their appearance face to face in the execution proceedings was simply due to some confusion in the mind of the executing court resulting in joining appellant despite her objections in a collection with which she was not at all concerned.

But let s assume for the sake of argument that the said sum was paid on behalf of appellant can respondent succeed in an action for its recovery from her? No doubt he can if it can be shown that:

(1) He was subrogated to the rights of the mortgagee;

(2) The mortgagee himself could have recovered against appellant.

The first point need give us no trouble, for respondent paid the amount in question on the express condition that he was to be subrogated to the rights of the mortgagee, and we are going to assume in his favour that he meant the rights of the mortgagee, not against Taha and Abdel Hadi El Gabbani, but against appellant.

What then are the rights of Dolabgi against appellant? Different interpretations are placed on the deed of mortgage between appellant on the one hand and respondent on the other. Both in the recitals and the operative part of the deed, appellant is described as the guarantor-mortgagor and Taha and Abdel Hadi as the debtor-mortgagors, and no parol evidence can be admitted to make appellant a principal debtor contrary to the very clear terms of the document.

But although appellant is and should remain liable simply as a guarantor the liability of a guarantor, quite apart from the mortgage, ha always been the same both at law in equity, i.e., his liability is coextensive with that of the principal debtor unless it is otherwise provided by the contract. In the present case, clause 4 of the deed stipulates that the liability of appellant and the principal debtors shall be joint and several, and judgment in HC-CS-61-1957 proceeded on those lines. To that extent therefore, appellant cannot claim any treatment, either in law or in equity, preferential to that of the principal debtors.

But when it comes to foreclosure against securities given separately by the principal debtor and the guarantor, equity always viewed the latter in a more favorable light and called to his aid the doctrine of marshalling.

The principle of marshalling in cases of this type is stated in Coote, Mortgages 121 (9th ed. 1927) as follows:

“Where two persons mortgaged in one deed their respective estates to secure an advance to one of them who, on the face o4 the deed, appeared to be principal debtor..  the other debtor h a charge upon the estate of the principal debtor by way of indemnity so as to enable him, in a foreclosure action, to have the estate of the principal debtor resorted to first for satisfaction of the debt.”

The principle may be stated more shortly as follows: “A surety who has given his property as security for the debt may require the creditor to resort to the other property of the debtor first.” Mulla, Transfer of Property Act, 1882 500 n..r. (4th ed. Das and Dhurandhar I9 and accompanying text.

In 18 Halsbury, Laws of England 476 (3rd ed. 1957) it is stated that a person mortgaging his estate to secure the debt of another stands in the relation of surety towards the person whose debt is thus secured, and can compel him to exonerate the estate.

If therefore the decree in HC..CS-6 went to the execution stage, appellant would have been entitled to compel Dolabgi to proceed first against the original debtors’ property which was no doubt more than sufficient to satisfy the debt. The same right is exercisable against any assignee of the creditor. At the time respondent brought this action against appellants the bulk of the principal debtors’ property was still undisposed of in the bankruptcy proceedings and there was nothing to prevent him from asserting his rights as assignee of the first mortgagee save his own desire to save as much of the property for the family as he possibly could. That is why he allowed the White Building to go in satisfaction of the unsecured debts. That is why he got registered to himself and Zein El Abdin Taha El Gabbani a considerable part of the property, which could have been made available to satisfy the sum, now claimed. Through his own acquisition of the residue of the mortgaged property respondent is not only depriving appellant of her equity to “marshal” but is also divesting himself of his remedies as mortgagee to which the equity of appellant is a condition precedent.

For the above reasons, I am of opinion that the decision of the court below cannot stand. It was based on an erroneous conception of the effects of the judgment in HC-CS-61-1957 and disregarded altogether the impact of the rules of equity on the legal aspect of the case.

But that is not the end of the case against respondents for I have been assuming throughout that respondent is entitled to bring a fresh action in his own name, but can he? It is certainly fatal to a claim by him that he is now claiming through the mortgagee who had already obtained a preliminary foreclosure decree. Civil Justice Ordinance, s. 40, precludes a fresh action on the same cause.

This appeal is therefore allowed with costs and the decree of the Honourable Judge of the High Court is hereby set aside.

M. A. Abu Rannat C.J. September 5,1961:  —I concur.

A. M Imam J. September 5, 1961: —I concur.

* Court: M. A. Abu Rannat C.J., B. Awadalla J. and A. M. Imam J.