20 banking update
More weight in the scales for marshalling by creditors
The Court of Appeal has upheld marshalling in order to allow one creditor to obtain the benefit of another creditor’s security, writes James McNeil, head of banking at Paris Smith
In Szepietowski v Serious Organised Crime Agency [2011] EWCA Civ 856, the Court of Appeal has provided further authority for the use of marshalling by creditors even in situations that are unfair to a debtor.
What is marshalling?
Marshalling is an equitable remedy which is used in order to try and provide ’fairness’ between two or more creditors, each of which is owed a different debt by the same debtor. The practical effect of marshalling is to ’subrogate’ the unsatisfied junior creditor to the security of the satisfied senior creditor ie: the unsatisfied junior creditor steps into the satisfied senior creditor’s shoes, so as to have the benefit of its rights and remedies against the debtor.
Background to the case
The case results from the Serious Organised Crime Agency (SOCA) entering into a settlement deed with Mrs Szepietowski (S) relating to an action by SOCA against the debtor under the Proceeds of Crime Act 2002 for recovery of property obtained through unlawful conduct. At the time, S was the owner of the following properties:
• Two properties in Claygate, Surrey (Claygate properties) which were subject to a first-ranking mortgage in favour of The Royal Bank of Scotland plc (RBS);
• Two other properties in Surrey which were subject to a first-ranking mortgage in favour of RBS (Surrey properties);
• The family home (Ashford House) which was subject to a first-ranking mortgage in favour of The Mortgage Business plc and a second-ranking mortgage in favour of RBS.
Under the settlement deed, the Claygate properties and the Surrey properties were transferred to the trustee for civil recovery. The properties were to be sold and the proceeds would be used to pay SOCA the agreed settlement sum of £5,375,000, after paying off any mortgage debt secured on those properties.
In return, SOCA gave
up its existing attempts to recover against Ashford House.
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When the settlement deed was entered into, it was expected that the debt S owed RBS would be discharged in full from the sale proceeds of the Claygate Properties alone. RBS would then have released its mortgages over the Surrey properties and Ashford House. In these circumstances, SOCA would have received the sale proceeds from the Surrey Properties (but not Ashford House) unencumbered by the RBS debt. These were expected to be enough to repay SOCA in full.
However in March 2008, the Surrey properties were sold. The sale proceeds were paid to RBS in part-payment of the debt owed to it by S and S, pursuant to the settlement deed, granted SOCA second-ranking mortgages over the Claygate properties to secure an amount equivalent to the sum paid to RBS (approximately £1.275 million). These new mortgages in favour of SOCA therefore ranked behind the original mortgages granted by S in favour of RBS. RBS also continued to have its second- ranking mortgage from S over Ashford House. SOCA had no security over Ashford House.
Between November 2009 and January 2010 the Claygate properties were sold for £2.33m. The sale proceeds fully discharged the remaining amounts due to RBS but, due to the downturn in the property market, only a small sum was available to be paid to SOCA under its second-ranking mortgages. This left SOCA with a shortfall and it therefore sought to invoke the equitable doctrine of marshalling so that it could step in to the shoes of RBS as second mortgagee of Ashford House as RBS had already been paid off.
The Court’s view
The High Court approved SOCA’s attempt to use marshalling. S then appealed on the basis that the settlement deed implicitly excluded marshalling and that, if it did not exclude it, had the High Court correctly exercised its discretion having regard to the effect it would have on the debtor?
James McNeil The Court of Appeal held that:
• the settlement deed did not exclude the court’s ability to marshal the available security between existing creditors as there was nothing in the settlement deed which limited the rights of SOCA as a secured creditor to whatever it can recover from a sale of the Claygate properties and the Surrey properties;
• the equitable remedy of marshalling is there to correct the imbalance in realisations by creditors against the same debtor, so far as there is other available security; and
• In the absence of a contractual exclusion of marshalling, S would have needed to show that SOCA’s reliance on marshalling involved it going back on some form of assurance or representation that it gave to S and upon which S had relied (to her detriment) ie: it was inequitable for SOCA to be able to utilise the remedy.
In conclusion
The case should act as reminder to all creditors that the equitable remedy of marshalling is available in order to do justice between two or more creditors. The point for debtors/borrowers to remember is that although a right to marshalling may be excluded in contract, the exclusion must be clearly and unambiguously worded.
Details: James McNeil Partner
023-8048-2108
james.mcneil@
parissmith.co.uk
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – OCTOBER 2011
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