An England and Wales High Court decision ruled in favour of the creditor when considering the use of the equitable doctrine of marshalling debt. However, on appeal to the Supreme Court, the decision was overturned.
The doctrine of marshalling operates in the same way in Australia, therefore lenders should be aware of the recent rulings.
What is the doctrine of marshalling?
Where a single debtor owes two creditors, marshalling is the ability of a secured creditor to use the assets under another creditor’s security.
Let’s look at an example:
Creditor A has security over Properties X & Y while Creditor B only has security over Property X. Creditor A chooses to enforce its security over Property X and after settlement there is no further value in Property X. Under certain conditions Creditor B, although having no security over Property Y, may be able to use this property to secure its outstanding debt.
To apply the doctrine of marshalling a party must show that its use is necessary in order to do justice. Further, its application occurs only at the court’s discretion.
Mrs Szepietowski owed debts to both the Serious Organised Crime Agency’s (SOCA) and the Royal Bank of Scotland (RBS). The bank held first charges over Mrs Szepietowski’s home and an investment property (the Common Property). Due to a settlement deed, SOCA held a later charge over only the Common Property. However, the settlement excluded the home as security.
RBS sold the Common Property but there was not enough value to pay SOCA. Therefore, SOCA brought a marshalling claim against Mrs Szepietowski’s home in order to benefit from the bank’s charge over it. The High Court found in favour of SOCA and allowed the marshalling claim.
Court dismisses appeals
Mrs Szepietowski appealed on the following grounds:
- The settlement did not allow SOCA to use the doctrine of marshalling to enforce the Bank’s charge over the home.
- Did the High Court properly exercise its discretion when it granted marshalling?
The Court of Appeal upheld the ruling.
Supreme Court overturns decision
On appeal to the Supreme Court, the marshalling decision was overturned.
The Court found that the security over the Common Property did not create the existence of a debt owed by Mrs Szepietowski to SOCA. Therefore, once the Common Property was sold, no right to marshal could exist as there would be no remaining debt owed to SOCA.
SOCA only had the rights to the remaining proceeds after the sale of the Common Property. This was not possible due to a decrease in value.
The Court concluded that in order to enforce the doctrine of marshalling, there must be a debt owing to the second creditor at the time of marshalling. This was not the case in SOCA’s situation.
Also, the Court took into account the intentions of the parties. This included the terms of the second charge as well as the facts and circumstances surrounding it.
In light of this ruling, creditors wanting to clarify the right to marshal should do so in an agreement, such as a priority deed, between all the parties.
This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.