Charges – Marshalling – Respondent obtaining charges over certain of appellant’s properties in settlement of claim under Proceeds of Crime Act 2002 – Those properties subject to existing 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 so as to be subrogated to bank’s charge over family home – Whether terms of settlement precluding such relief – Appeal allowed
In 2008, proceedings by the respondent 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, were settled by a consent order that provided for the grant to the respondent of charges over some of the properties. All those properties were subject to a pre-existing charge in favour of a bank, which also held a charge over the family home.
A dispute arose as to which properties the appellant was obliged to charge to the respondent pursuant to the settlement agreement. In further proceedings between the parties, it was held that the respondent was not, contrary to its contentions, entitled to a charge over the appellant’s family home: see [2009] EWHC 655 (Ch). By order of the court in those proceedings, the appellant granted a charge over certain other properties to secure the sum of £1.24m; the terms of that charge provided, that, on the sale of the properties, the proceeds would be applied in settlement of the secured amount.
The properties were subsequently 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 for the respondent. The respondent applied to the court for an order, under the equitable principle of marshalling, that it be subrogated to the bank’s charge over the family home, which would otherwise have been released following the repayment of the debts to the bank. In the courts below, the respondent was held to be entitled to that remedy: see [2010] EWHC 2570 (Ch); [2010] PLSCS 265 and [2011] EWCA Civ 856; [2011] PLSCS 218.
The appellant appealed. She contended that the remedy of marshalling was not available since: (i) the respondent’s charges secured no underlying debt; (ii) marshalling was otherwise precluded by the terms of the 2008 settlement; and (iii) the property in respect of which marshalling was sought was the appellant’s home.
Held: The appeal was allowed.
Per Lord Neuberger, Lord Sumption and Lord Reed: (1) Marshalling was available to a creditor whose debt was secured by a second mortgage over property, in circumstances where the first mortgagee was also a creditor of the same debtor, that first mortgagee had security over another property as well, but the first mortgagee had been repaid from the proceeds of sale of the common property. If the proceeds of sale of the other property were not needed, at least in full, to repay the first mortgagee’s debt, the second mortgagee could look to that other property to satisfy its own debt. Although the first mortgagee could not be compelled to resort first to its other property over the common property, but was entitled to have recourse to any of its securities in such manner and order as it thought fit, the doctrine of marshalling avoided the arbitrariness of allowing the first mortgagee’s decision as to which asset to enforce against to affect the second mortgagee’s rights. It came into its own where the debtor was insolvent, by improving the position of the second mortgagor as against the unsecured creditors of the debtor, rather than against the debtor herself. Marshalling should not result in the liabilities of the mortgagor being increased after the sale of the common property.
The respondent was not entitled to the remedy of marshalling since its charge did not secure a debt owed to it by the appellant. The terms of the settlement were concerned with the ownership of, and rights over, property, and not with creating or acknowledging debts. The charge granted pursuant to that settlement contained no provision that created or acknowledged any obligation on the appellant to pay the secured amount as a debt. All she was obliged to do was to pay to the respondent an amount up to £1.24m out of such sum, if any, as remained from the proceeds of sale of the properties after the bank was paid off. Marshalling should not normally not available where the common property did not secure any underlying debt due from the mortgagor to the second mortgagee but merely provided security for what the second mortgagee could extract from that property. In such cases, there was nothing from which the right to marshall could arise, once the common property had been sold and the proceeds of sale distributed in accordance with the legal priorities, since there would be no surviving debt owing from the mortgagor to the second mortgagee. If it were otherwise, the mortgagor’s liabilities would impermissibly be increased. If marshalling were available to the respondent, the effect would be to oblige the appellant to pay £1.24m to it or lose her home, whereas, if marshalling were not available, then the appellant’s home would be free of any mortgage and the appellant would be free of any liability to the respondent. Equity should proceed on the basis that the second mortgagee normally took the risk that the first mortgagee would realise its debt through the sale of the common property rather than the other property: Ex parte Kendall (1811) 17 Ves 514. Although there might be exceptional cases where that was not so, it was difficult to conceive of such a case existing in the absence of express words that permitted or envisaged marshalling.
(2) If, contrary to the above, marshalling was available to a second mortgagee where there was no underlying debt, it would none the les be inequitable to grant it in the instant case in light of the terms of the contractual documentation and background facts. It was relevant that the settlement and charge related to a claim by the respondent under the 2002 Act, the object of which was to identify “recoverable property” and thus gave rise to rights against specific assets rather than a personal debt owed to the respondent. It was unlikely that the parties to the charge could have intended the respondent to have a claim against a property that was not “recoverable” under the 2002 Act. Moreover, under the terms of the settlement, the parties had intended the appellant’s home to remain with her, unencumbered by any liability to the respondent. However, the fact that a property was the appellant’s home would not, in itself, have precluded the respondent from marshalling if it was otherwise entitled to do so.
Per Lord Carnwath and Lord Hughes: Marshalling was not necessarily confined to cases where there was a personal debt owing to the second mortgagee. It was a remedy that operated between security holders, not between them and the common debtor or chargor. The essence of marshalling lay in the existence of concurrent securities, rather than in the nature of the liability that they secured. Although the charge would normally secure a personal debt, the liability might occasionally be something different. However, in the instant case marshalling was precluded on the ground that it would be inconsistent with the underlying transaction. The purpose of the settlement deed was to identify properties to be treated as recoverable property within the 2002 Act. In the statutory context, and consistently with the scheme of the settlement, the definition of the appellant’s obligation in the charge, as being to apply the proceeds of sale of the charged properties in settlement of the secured amount, not only excluded any personal liability on the part of the appellant but also impliedly excluded recourse to any source for payment other than the identified properties.
Romie Tager QC, Kevin Pettican and Henry Webb (instructed by Devereaux Solicitors) appeared for the appellant; Sarah Harman and Kate Selway (instructed by the legal department of the National Crime Agency) appeared for the respondent.
Sally Dobson, barrister
