Home Page > Property Law Library > Mortgages > Marshalling

Home Page
Contact
Editorial Team

Negligence and loans
Charging orders
Exoneration
Facility agreement
Forgery
Interest
Limitation and shortfall
Marshalling
Mortgage possession
Duties on sale
Solicitor's breach of trust and negligence
Subrogation
Terms
Tenants of mortgagees
Undue influence

Current page






Marshalling

Introduction

Marshalling is an equitable remedy. It applies where the owner of two properties, X and Y, mortgages them both to lender A, and then mortgages one, say Y, to lender B. When A seeks to recover its debt, B can require that it does so first out of X. B is in effect (although not at law) subrogated to A’s rights under its security to the extent of the debtors secured liabilities to B.

The general principle is that the second creditor has a right in equity to require the first creditor to satisfy himself out of the security to which the second creditor has no claim. Otherwise, it is open to the first creditor to satisfy himself out of any security in any order, and if he chooses to satisfy himself out of the security which represents the second creditor’s only security, the second creditor is subrogated to the rights of the first creditor and can stand pro tanto in the shoes of the first creditor in relation to the security over which the second creditor has no legal security.


Scope of the doctrine

Highbury Pension Fund Management Co v Zirfin Investments Management Limited
[2013] EWCA Civ 1283

Summary

On the facts of the case, an equitable right to require a bank to marshal its securities in respect of certain guarantee liabilities was not dependent on the bank being paid in full under the terms of the guarantee.

Facts

A bank lent money to Z, secured by way of first charge on property 1. The bank subsequently lent money to four affiliated companies, secured on other properties. As additional security for these loans, Z gave the bank a guarantee which was also secured on property 1. Z subsequently borrowed money from H secured by a second charge on property 1.

Z and the affiliated companies all defaulted. The bank made formal demand, appointed receivers and sold property 1. The net proceeds were sufficient to discharge Z’s borrowings from the bank, but left a shortfall due under Z’s guarantee liability. There was nothing left over for H.

Had the bank not discharged Z’s borrowings out of property 1, but out of the other properties, there would have been sufficient to discharge the loan made by the H.

The issue was whether, in these circumstances, H could invoke the equitable doctrine of marshalling.

First instance

The High Court held that H could invoke the doctrine of marshalling and that H could participate in the securities provided by the affiliated companies to the bank. However, this could only be done after the bank had been paid in full because the guarantee given by Z to the bank restricted Z’s right to subrogation to the securities provided by the affiliated companies until the bank had been paid in full.

H appealed on three grounds, including that the guarantee did not restrict it’s right to require the bank to marshal its securities.

Decision

The Court of Appeal allowed the appeal.

The Court held that if the doubly secured creditor resorts to the fund over which both creditors have security, then the singly secured creditor is entitled to stand in the place of the doubly secured creditor as regards the remaining securities. The equity arising between the bank and H is not the same equity as that which arises between Z and the affiliates. The latter involves an equity of exoneration which, unlike the remedy of subrogation is not dependent on actual payment by the secondary debtor. As soon as the liability is crystallised he is entitled to go to court. The provisions of the guarantee did not impact on this principle.

However, H could not complain about the order in which the bank chose to realise its securities. If H seeks to realise its security over the affiliates’ properties it will still have to give priority to repayment of the bank’s loans. This does not prevent H from realising its securities immediately.

Comment

This decision and the Supreme Court’s decision in Szepietowski (below - decided shortly afterwards) helpfully set out and illustrate the general principles involved in marshalling, along with the two related topics of subrogation and exoneration.


Marshalling and subrogation

McLean v Berry and Chadwick
[2016] EWHC 2650 (Ch)

Summary

A private investor with security over one property was entitled to invoke the principle of marshalling against a bank with security over the same property and a second property of the borrower.

Facts

A bank (B) provided loan facilities to a partnership (and company), secured by a charge over the partnership assets, and third party charges over property operated by the partnership as well as a charge over the company’s assets. A private investor (P) provided loan facilities to the partnership (and company) secured by charges over the property operated by the partnership. B sought to realise the partnership property in preference to its company security, thereby depriving P of funds to discharge her indebtedness. The administrators of the partnership applied for directions as to the application of the proceeds of sale.

Decision

The High Court held that P was entitled to invoke the equitable principle of marshalling, applying the law as summarised by Lewison LJ in Highbury Pension Fund Management v Zirfin [2014] Ch 359. B had access to other security to reduce its debt. The principle of marshalling fastens on the conduct and the conscience of the double-secured lender, and the equity it creates arises between the two creditors (not between the creditor and the debtor). This could be shaped by any contract between the two creditors, such as a deed of priority, which in this case reinforced rather than limited the ordinary operation of the principle of marshalling. Even in the absence of such a bargain, when considering secured claims the equity requires the first mortgagee to be treated as if he had had recourse to the fund which was unavailable to the singly-secured creditor.

The principle of marshalling is not identical to the doctrine of subrogation. As Lewison LJ explained, the principle is that the second mortgagee ‘is entitled to stand pro tanto in the place of the first mortgagee in relation to the property over which the second mortgagee has no security, and it is in that sense that we say that the second mortgagee is in effect subrogated to the rights of the first mortgagee.

The trustees in bankruptcy were not entitled to claim in the administration of the partnership by operation of the doctrine of subrogation – being a restitutionary subrogation by operation of law rather than a contract-based subrogation, applying Menelaou v Bank of Cyprus UK Ltd [2016] AC 176. The trustees in bankruptcy were claiming in right of the partners themselves, but they were not entitled to prove in competition with creditors of the firm. In any event, even if there was any enrichment, it was not at the expense of the partners, nor was it unjust.


Proceeds of Crime Act 2002

National Crime Agency not entitled to use marshalling

Szepietowski v The National Crime Agency
[2013] UKSC 65

Summary

The National Crime Agency (formerly the Serious Organised Crime Agency) was not entitled to invoke the equitable doctrine of marshalling so as to secure the proceeds of crime from other property because NCA’s charge did not secure a personal liability of the mortgagor.

Introductory note

This decision deals with the doctrine of marshalling. This is a right, which in essence, applies in the following circumstances:
  • Two (or more) creditors are owed debts by the same debtor;
  • One creditor can enforce his claim against more than one security or fund; and
  • The other can only enforce against one security or fund.
In such circumstances the second creditor has an equitable right to require the first creditor to satisfy himself or be treated as having satisfied himself so far as possible out of the security or fund to which the second creditor has no claim.

Facts

Mr S received monies, which were alleged to represent the proceeds of drug trafficking and with which he purchased a number of properties in Mrs S’s name including Ashford House, which was their matrimonial home, and a number of investment properties (Claygate).

In essence Ashford house was subject to a charge to RBS. Claygate also was subject to a charge to RBS and it also became subject to a second charge granted to SOCA to secure money owing to it.

Mrs S subsequently sold Claygate. After discharge of the RBS charge it left only a nominal balance which was insufficient (together with the proceeds of sale of other properties) to discharge the sums due to SOCA.

SOCA commenced proceedings in which it sought to invoke the principle of marshalling on the basis that there was (a) a single debtor (Mrs S); (b) who owed debts to two creditors (RBS and SOCA); (c) RBS was able to enforce its claim against two securities (Ashford House and Claygate); (d) whereas SOCA was confined to its security over Claygate. In those circumstances SOCA contended that it was entitled to look to Ashford House in order to obtain payment of the sum secured by its charge on Claygate, as the proceeds of sale of Claygate had been used to pay off what was due to RBS.

Mrs S objected on the basis that the terms of a settlement deed (entered into to settle confiscation proceedings) prevented SOCA from marshalling.

First instance and Court of Appeal

At first instance the High Court held that SOCA’s marshalling claim was well founded, and on appeal the Court of Appeal agreed. Mrs S appealed to the Supreme Court. She raised two arguments:
  • SOCA was precluded from marshalling by the terms of the settlement deed; and
  • SOCA was not entitled to marshal against Ashford House.
Decision on appeal

The Supreme Court allowed the appeal.

The Court held (per Lord Neuberger SCJ (with whom Lords Sumption, Reed and Hughes SCJ agreed) that SOCA’s charge did not create or acknowledge the existence of a debt due from Mrs S. It simply rendered her liable for a contingent debt. If SOCA could marshal Ashford House this would, in effect, be subject to a second charge to SOCA to secure the monies due to it that Mrs S would have to pay. As a matter of principle, marshalling is not available in these circumstances.

In any event, marshalling is an equitable remedy which should not be available to a second mortgagee in circumstances where it would be inequitable to allow it. The correct approach is to ask whether, in the perception of an objective reasonable bystander at the date of the grant of the second mortgage, taking into account, in very summary terms (i) the terms of the second mortgage, (ii) any contract or other arrangement which gave rise to it, (iii) what passed between the parties prior to its execution, and (iv) all the admissible surrounding facts, it is reasonable to conclude that the second mortgagee was not intended to be able to marshal on the occurrence of the facts which would otherwise potentially give rise to the right to marshal. There was a combination of factors which suggest that a SOCA should not be entitled to marshal in this case.

Per Lord Carnwath JSC: The appeal should be allowed on narrower grounds. The solution is to be found, not in the general law of marshalling but in the interpretation of a particular contract against its unusual statutory and factual background. SOCA’s jurisdiction was asset-based rather than financial. The settlement deed and charge secured recoverable property; it did not impose a financial liability and impliedly precluded recourse to other property. If SOCA had wanted to include Ashford House as potentially recoverable property it should have done so specifically.

Comment

This case raised a particular issue about the nature of the security enjoyed by the second creditor (SOCA) and whether in the particular circumstances it gave rise to a right to marshal. Although on the face of it, one would have expected the scope of the equitable doctrine to be sufficiently wide to enable SOCA to marshal (and the High Court and Court of Appeal thought that it was) the Supreme Court held that because SOCA’s charge did not secure a personal liability, it did not permit marshalling. Lord Neuberger (with whom three of the other justices agreed) principally decided this case as a matter of principle and without authority. It is, with respect, a somewhat tenuous line of reasoning. It is implicit that Lord Carnwath did not agree, and his approach has much to commend it.

Marshalling can make a significant difference to the respective rights of recovery of competing lenders. The practical problem in most cases is how to spot it. Whilst lender 2 will know that lender 1 has a charge on the same property A, he will rarely be able to ascertain, without specific enquiry of lender 1 or the common borrower, whether lender 1 has security on other property.


Back to top
If you would like to subscribe to the full monthly update please click below.

Options
Monthly Updates From £207 + VAT (1 year)
(Free for charities and students)