Property – Security – Creditors – First defendant debtor granting charge over property to second defendant bank and claimant – Bank securing debt on two properties – Claimant taking charge over one property – Proceeds of sale of first property satisfying debt to second defendant but not to claimant – Claimant seeking to keep alive second charge over second property as security for unpaid balance of debt — Whether claimant entitled to invoke doctrine of marshalling – Claim allowed
The first and third defendants were the sole beneficial owners of their matrimonial home (Ashford House) where they lived with their four children. The first defendant was also the sole registered proprietor of other premises (the Claygate properties) until they were transferred to the trustee for civil recovery as recoverable property, within section 266 of the Proceeds of Crime Act 2002, because they had allegedly been acquired with the proceeds of unlawful conduct.
Under a compromise agreement, the first defendant granted to the claimant agency a second charge over the Claygate properties, which were already subject to a first charge in favour of the second defendant bank, which also held a second charge over Ashford House. The first and third defendants were therefore in debt to two creditors, namely the second defendant and the claimant. The second defendant was able to enforce its claim against two securities, namely Ashford House and the Claygate properties, whereas the claimant’s security was confined to the latter.
The Claygate properties were sold, but the proceeds of sale were almost exhausted in reimbursing the sums due to the second defendant under its first charge, leaving only £1,324.16 to be paid to the claimant in respect of the amount secured by its second charge, exceeded £1.24m.
Ashford House was subject to a first legal charge in favour M and the amount outstanding under that charge was around £1.5m. The second defendant had been repaid in full, subject only to a potential claim for costs in respect of the instant action. It followed that the equity in Ashford House amounted to at least £1.25m, which ought to be sufficient to satisfy the claimant’s outstanding secured claim, but only if it could rely on the principle of marshalling and step into the shoes of the second defendant, as the second chargee of Ashford House, and keep the second charge alive as security for the unsatisfied balance of the sums secured on the Claygate properties. An issue arose as to whether the claimant was entitled to invoke the equitable doctrine of marshalling.
Held: The claim was allowed.
The doctrine of marshalling was a principle for doing equity between two or more creditors, each of which was owed debts by the same debtor, but one of which could enforce its claim against more than one security or fund and the other could resort to only one. It gave the latter an equity to require that the first creditor satisfy itself (or be treated as having satisfied itself) so far as possible out of the security or fund to which the latter had no claim. The principle was not allowed to delay or defeat the creditor with several securities in the collection of its debt and the enforcement of its securities. It was allowed to realise its securities as it pleased: Re Bank of Credit & Commerce International SA (in liquidation) (No 8) [1998] AC 214
In the instant case, the claimant was not prevented by contract or any principle of equity from relying on the doctrine of marshalling. The basic requirements necessary for the principle to apply had been satisfied, because a single debtor (the first defendant) owed debts to two creditors (the second defendant and the claimant), but the second defendant could enforce its claim against two securities (the Claygate properties and Ashford House), whereas the claimant was confined to its security on the Claygate properties. In those circumstances, the claimant could be subrogated to the second defendant’s second charge over Ashford House as a security for the shortfall which was left unsatisfied following the sale of the Claygate properties. It was common ground that the process of subrogation had to be effected so as not to prejudice the second defendant and any right that it might have to rely on its second charge as security for further sums that have fallen due to it from the first defendant since the sale of the Claygate properties.
Sarah Harman and Kate Selway (instructed by the legal department of the Serious Organised Crime Office) appeared for the claimant; Andrew Mitchell QC and Linda Saunt (instructed by Devonshires) appeared for the first defendant; Georgina Peters (instructed by Addleshaw Goddard LLP) for the second defendant; the third defendant appeared in person.
Eileen O’Grady, barrister
