Serious Organised Crime Agency v Szepietowski

Marshalling – More than one creditor holding charge over same property – Respondent obtaining charges over certain of appellant’s properties as part of settlement of claim under Proceeds of Crime Act 2002 – Those properties subject to charge in favour of bank – Bank also holding charge over appellant’s family home – Proceeds of sale of settlement property discharging appellant’s liabilities to bank but insufficient to satisfy liability to respondent – Whether respondent entitled to equitable remedy of marshalling – Respondent held to be entitled to subrogation of bank’s charge over family home – Appeal dismissedIn 2006, the respondent brought proceedings against the appellant and her husband, claiming that their £6m portfolio of properties was recoverable property within section 266 of the Proceeds of Crime Act 2002. That claim was settled by a consent order made in January 2008, in terms that provided for the grant of charges to the respondent over some of the properties. In the event that certain of those properties were sold, charges over two other properties, defined as “the additional properties”, were to be granted as substitute security. All of the properties in question were subject to a charge in favour of a bank, which also held a second charge over the family home.In 2008, two properties were sold and the proceeds paid to the bank to reduce the appellant’s liabilities. This triggered the obligation to grant a further charge to the respondent over the additional properties. Owing to a downturn in the property market, and the consequent reduction in the value of the additional properties, the respondent sought a charge over the appellant’s family home, but, in proceedings between the parties, it was held that the terms of the settlement did not require this: see [2009] EWHC 655 (Ch).The additional properties were sold for a total of £2.33m. Although the net proceeds of sale were sufficient to discharge the appellant’s liabilities to the bank, only £1,324 was left to meet the appellant’s liabilities to the respondent. The respondent applied to the court for an order under the equitable principle of marshalling, claiming that it was entitled to be subrogated to the bank’s second charge over the family home, which would otherwise have been released following the repayment of the debts to the bank. That claim was allowed at first instance: see [2010] EWHC 2570 (Ch); [2010] PLSCS 265.The appellant appealed. She contended that, inter alia: (i) the terms of the consent order excluded the operation of the principle of marshalling; and (ii) the equitable jurisdiction should not be exercised to defeat the parties’ common expectation, at the time of the settlement, that there would be no recourse to the family home.Held: The appeal was dismissed.(1) The equitable remedy of marshalling applied where a debtor owed money to two or more creditors, secured by charges over its property, but one of the creditors had been given security over more than one of the debtor’s properties. In such a case, the court could marshal the securities so that the creditor that had a choice of security satisfied its claims, so far as possible, out of the security over which the other creditors had no claim. That principle did not extend to compelling a first mortgagee to realise any particular security in preference to another; it was entitled to realise them in whatever order it chose and could not be prevented from realising as security a property over which a second chargee also held a charge. Instead, the principle of marshalling would take effect by permitting the second chargee to rely on the benefit of the surplus security held by the first chargee over other property of the debtor. The second chargee was, in effect, subrogated to the first chargee’s rights under that security to the extent of the debtor’s secured liabilities to it.(2) The remedy of marshalling did not depend on the creditor with several available securities positively electing to disappoint the creditor that had only one. There was no requirement to show a deliberate act of vindictiveness or caprice on the part of the bank in the instant case. It was sufficient that a situation had arisen where a creditor in the bank’s position had realised a security that placed the other creditor at a disadvantage: Aldrich v Cooper (1803) 3 Ves Jun 382 considered.(3) The application of the principle was not excluded by the terms of the settlement. It was impossible to spell out of provisions that were not designed to address the issue of marshalling any agreement that the respondent’s rights in equity as against the other secured creditor should not be exercised even if otherwise available. Moreover, although the consent order was expressed to be in full and final settlement of the claims against the appellant and her husband in respect of the listed properties, it compromised only the claims in the existing section 266 proceedings and did not settle any future claims that the respondent might have against the properties. The claim to be subrogated to the bank charge against the family home was not a claim against the appellant in the section 266 proceedings. It was a claim to enforce the respondent’s subsisting charge by invoking the court’s equitable jurisdiction to marshal the available security between existing creditors.(4) The parties’ common expectations were insufficient to defeat the respondent’s claim to an equitable remedy to which it would otherwise be entitled. Such considerations were not sufficient to make it inequitable to grant the relief sought. In the absence of a contractual bar to the remedy, the appellant would have to show that the respondent’s reliance on the principle of marshalling involved it resiling from some assurance or representation given at the time and on which the appellant had relied to her detriment.Kevin Pettican (instructed by Devereaux Solicitors) appeared for the appellant; Sarah Harman and Kate Selway (instructed by the legal department of the Serious Organised Crime Agency) appeared for the respondent.Sally Dobson, barrister