Michaelmas Term
[2013] UKSC 65
On appeal from: [2011] EWCA Civ 856
JUDGMENT
Szepietowski (nee Seery) (Appellant) v The National
Crime Agency (formerly the Serious Organised
Crime Agency) (Respondent)
before
Lord Neuberger, President
Lord Sumption
Lord Reed
Lord Carnwath
Lord Hughes
JUDGMENT GIVEN ON
23 October 2013
Heard on 15 July 2013
Appellant Respondent
Romie Tager QC Sarah Harman
Kevin Pettican Kate Selway
Henry Webb
(Instructed by Devereaux (Instructed by National
Solicitors) Crime Agency Legal
Department)
LORD NEUBERGER
Introductory
1. This appeal raises an issue as to the applicability of the equitable doctrine of
marshalling. Lord Hoffmann explained the doctrine in characteristically pithy
terms in In re Bank of Credit and Commerce International SA (No 8) [1998] AC
214, 230-231 as:
“[A] principle for doing equity between two or more creditors, each
of whom are owed debts by the same debtor, but one of whom can
enforce his claim against more than one security or fund and the
other can resort to only one. It gives the latter an equity to require
that the first creditor satisfy himself (or be treated as having satisfied
himself) so far as possible out of the security or fund to which the
latter has no claim”.
2. It is perhaps also worth setting out how Rose LJ explained the doctrine in
the same case in the Court of Appeal [1996] Ch 245, 271:
“The doctrine of marshalling applies where there are two creditors of
the same debtor, each owed a different debt, one creditor (A) having
two or more securities for the debt due to him and the other (B)
having only one. B has the right to have the two securities
marshalled so that both he and A are paid so far as possible. Thus if a
debtor has two estates (Blackacre and Whiteacre) and mortgages
both to A and afterwards mortgages Whiteacre only to B, B can have
the two mortgages marshalled so that Blackacre can be made
available to him if A chooses to enforce his security against
Whiteacre. For the doctrine to apply there must be two debts owed
by the same debtor to two different creditors.”
3. The question in the present case is whether it is open to the respondent, the
Serious Organised Crime Agency (“SOCA”), to invoke the doctrine so as to
marshal a charge granted to the Royal Bank of Scotland (“RBS”) over the home of
Mrs Szepietowski and an investment property she owned, with a later charge
granted to SOCA over the investment property alone, thereby enabling SOCA to
look to Mrs Szepietowski’s home to satisfy the sum secured by the second charge.
(Pursuant to the Crime and Courts Act 2013, SOCA was replaced by the National
Crime Agency with effect from 7 October 2013, but it is more convenient to retain
the nomenclature used in the parties’ argument and most of the documentation in
these proceedings).
The facts giving rise to the issue
The Settlement Deed
4. In 1999, Mr Szepietowski was one of two partners in a firm of solicitors
which received a transfer of some US $2.5m which was alleged to represent the
proceeds of drug trafficking (although it is right to record that neither Mr
Szepietowski nor his wife has ever been charged with any offence, and they both
deny any wrongdoing). In July 2005, the Assets Recovery Agency (“ARA”, whose
staff, assets and functions were transferred to SOCA in March 2008 pursuant to the
Serious Crime Act 2007) obtained an interim receiving order over certain assets
acquired with the US $2.5m. Three months later, the receiving order was extended
to a number of other properties, which had allegedly been acquired with proceeds
of mortgage fraud and with income concealed from Her Majesty’s Revenue and
Customs (“HMRC”). In November 2006, the ARA began civil proceedings against
Mr and Mrs Szepietowski seeking to confiscate the various properties on the basis
that the proceeds of crime could be followed into them, and they accordingly
constituted recoverable property within the meaning of section 266 of the Proceeds
of Crime Act 2002 (“the 2002 Act”).
5. There were 20 properties in total, and they included (i) Ashford House,
Weybridge (“Ashford House”), which was Mr and Mrs Szepietowski’s home, (ii)
2 and 2a Thames Street, Walton on Thames (“Thames Street”), (iii) 3 and 5
Church Street, Esher (“Church Street”), (iv) 2, 4, and 6 Torrington Close,
Claygate, and (v) 109 Hare Lane, Claygate (together “Claygate”). All these five
properties were registered in the name of Mrs Szepietowski, and each of them was
subject to an all monies charge in favour of RBS. The parties have treated RBS as
having a single charge over the five properties (“the RBS Charge”), and I will do
the same.
6. Mr and Mrs Szepietowski and the ARA settled the proceedings on terms
contained in a consent order dated 16 January 2008, which stayed the ARA’s claim
save for the purpose of enforcing the terms of settlement. Those terms were
contained in documents attached to the consent order. Most of the terms were in a
Deed of Settlement (“the Settlement Deed”) dated 15 January 2008, which
included a schedule which had three annexes. Annexe A listed the 20 properties,
and recorded the secured creditor of, the value of, the amount charged on, and the
equity in, each property. Annexe B listed 13, and Annexe C a further two, of those
20 properties, with identical details plus the identity of the registered proprietor.
(The figures in the Annexes were in fact somewhat historic, but nothing hangs on
that for present purposes).
7. The general scheme of the arrangement embodied in the Settlement Deed
was that the 13 properties in Annexe B were vested in the Trustee for Civil
Recovery (“the Trustee”) on behalf of the ARA, the Trustee was also to have the
two properties in Annexe C vested in him, and the balance of the properties in
Annexe A were to remain with their registered proprietors free of the receiving
order. Any property so vested or retained was to be subject to any existing charges.
8. Clause 2.1 of the Settlement Deed provided that it was made “in full and
final settlement of all of the [ARA’s] claims against” Mr and Mrs Szepietowski “in
relation to the properties and the other assets listed in Annexe A” and in relation to
their tax liabilities. One of the properties listed in Annexe A (but not in Annexe B
or C) was Ashford House, which was accordingly to revert to Mrs Szepietowski
free of the receiving order. In Annexe A, Ashford House was recorded as having a
value of £2.3m, and charged to The Mortgage Business plc (“TMB”) and RBS for
about £1.46m, but it is clear that this was only the amount outstanding to TMB.
Ashford House was not in Annexe B or C.
9. By clause 3.1 of the Settlement Deed, Mr and Mrs Szepietowski agreed to
vest in the Trustee the 13 “Transfer Properties” listed in Annexe B, and the two
“Additional Properties” listed in Annexe C. The Transfer Properties included
Thames Street and Church Street. They were recorded as valued at £570,000 and
£785,000 respectively, and (together with the Additional Properties) as (i) charged
to RBS for a debt of about £3.225m and (ii) having equity of about £1.6m. Annexe
C contained the two Claygate properties, at Torrington Close and Hare Lane,
which were recorded as valued at £2.67m and £800,000 respectively, and, together
with Thames Street and Church Street, as charged to RBS for a debt of about
£3.225m, and having equity of about £1.6m.
10. The valuations of the Additional Properties, ie of Claygate, in Annexe C
suggested that the liability to RBS could be fully met from their sale, and indeed
the parties anticipated that the ARA would, in effect, be able to realise the Transfer
Properties free of any liability to RBS. They recorded at the end of Annexe B that
this would have enabled the ARA to recover just over £5.4m from the sale of the
Transfer Properties after clearing all mortgages thereon.
11. At the time of the settlement, Mrs Szepietowski was negotiating to sell the
Additional, Claygate, Properties, and clauses 4.1-4.3 of the Settlement Deed
enabled and required her to proceed with the proposed sale. If she had not
bindingly agreed to dispose of Claygate within six months, then, by clause 4.4, she
had to elect whether Claygate should remain vested in the Trustee, who would be
free to dispose of them, or be transferred to her by the Trustee.
12. Clause 4.5 of the Settlement Deed is of some importance for present
purposes, and it was in these terms (with paragraphs added for convenience):
“(i) If the Trustee wishes to sell [Thames Street and Church Street]
(“the Remaining RBS properties”) before the Additional [Claygate]
Properties are sold then [Mr and Mrs Szepietowski] agree that, if
[RBS] consent, the [RBS Charge] over these properties and the
Additional Properties in favour of [RBS] … shall be transferred to
the Additional Properties only.
(ii) If [RBS] does not so consent then [Mrs] Szepietowski will grant
a charge to the Trustee … for the sums paid by the Trustee to [RBS]
from the sale proceeds of the Remaining RBS properties”.
13. Clause 4.6 of the Settlement Deed contained an agreement that “the total
funds from the sale of the Additional Properties [would] be used in priority to the
funds from the sale of the Remaining RBS Properties [ie Thames Street and
Church Street] in satisfaction of the [RBS] Charge”. Clause 4.7 provided that, on
the sale of Claygate, the proceeds would be used to pay off what was owing under
the RBS Charge insofar as it was registered against those properties, and any
balance would be “fully accounted for by the Trustee to [Mrs] Szepietowski
without deduction or set off”.
14. The Settlement Deed contained a number of other provisions (including, in
clause 13.4 an obligation on Mr and Mrs Szepietowski each to pay HMRC
£687,500 in respect of back tax and national insurance payments in respect of the
14 tax years ending 2006/2007), but it is unnecessary to refer to them for present
purposes.
Subsequent events
15. Towards the end of January 2008, Church Street, Thames Street and
Claygate were duly vested in the Trustee, subject to the RBS Charge. However, the
sale of Claygate did not proceed as anticipated. The Trustee implemented clause
4.5(i) of the Settlement Deed, and marketed Church Street and Thames Street,
which were sold in April 2008 for £715,000 and £560,000 respectively. RBS
declined to release them from the RBS charge, and consequently the proceeds of
sale were paid over to RBS. It was becoming clear that the sum likely to be
realised on the sale of Claygate (when added to the proceeds of sale of Church
Street and Thames Street) would scarcely be sufficient to clear the RBS Charge.
This state of affairs was in marked contrast to the common expectation of the
parties at the time of the settlement, when they had anticipated that the proceeds of
sale of Claygate alone (estimated in Annexes A and C to be worth around £3.54m)
would be sufficient to clear the debt to RBS (recorded in the Annexes as being
about £3.225m).
16. A dispute then arose as to the properties over which Mrs Szepietowski was
obliged to grant SOCA (who had by now replaced the ARA and the Trustee) a
charge pursuant to clause 4.5(ii) of the Settlement Deed. In March 2009,
Henderson J decided that the charge was to be over Claygate as Mrs Szepietowski
contended, and not over Ashford House as well, as SOCA argued: – [2009]
EWHC 655 (Ch). At that hearing, Mrs Szepietowski made it clear that she wished
Claygate to be vested in her pursuant to her obligation to elect in clause 4.4 of the
Settlement Deed – see para 35 of the judgment. Accordingly, as he recorded in the
following paragraph, Henderson J ordered that Claygate be re-transferred by the
Trustee to Mrs Szepietowski, and that she grant a charge over them to SOCA.
17. Claygate was duly revested in Mrs Szepietowski on 4 September 2009, and
on the same day she granted a charge over Claygate to SOCA (“the 2009
Charge”).
18. Clause 1 of the 2009 Charge was concerned with interpretation, and
included a definition of “Secured Amount” as being just over £1.24m, together
with any sums due to SOCA under its terms. The figure of £1.24m was equal to
the net proceeds of sale of Thames Street and Church Street, which had been paid
in full to RBS under the RBS Charge, but which SOCA and the Szepietowskis had
hoped would be paid to SOCA under clause 4.5(i) of the Settlement Deed.
19. Clause 2 of the 2009 Charge was headed “Covenants”, and clause 2.1 was a
covenant by Mrs Szepietowski that “on completion of any sale of the Charged
Property effected by her”, after paying the costs of sale, she would “apply the
proceeds of sale … in settlement of the Secured Amount”. Clause 2 also contained
provisions which sought to ensure that any such sale would be effected at the best
price.
20. Clause 3 of the 2009 Charge was headed “Charges”, and, under it, Mrs
Szepietowski charged the Charged Property and the proceeds of sale thereof “by
way of legal mortgage” to SOCA as “continuing security for the settlement of the
Secured Amount”. Clause 7.1 provided that the Secured Amount “shall become
due and the security conferred by this Charge will become immediately
enforceable and the power of sale and other powers conferred by section 101 of the
Law of Property Act 1925 … will be immediately exercisable” after four months
or, if earlier, on any breach of the 2009 Charge by Mrs Szepietowski, or her death
or insolvency. Clause 7.2 provided that “for the avoidance of doubt”, clause 7.1
did not “constitute a covenant by [Mrs Szepietowski] to pay the Secured Amount
to [SOCA]”.
21. Around December 2009, Mrs Szepietowski sold Claygate for a total of
£2.33m, substantially less than had been anticipated two years earlier. The 2009
Charge was, of course, a second charge over Claygate, as it was still subject to the
RBS Charge, and when the net proceeds of sale of Claygate were used to pay off
RBS pursuant to the RBS charge, the relatively derisory figure of £1,324.16 was
all that was left to satisfy SOCA’s rights under the 2009 Charge.
SOCA’s marshalling claim
The competing contentions
22. SOCA’s case is that the classic requirements of marshalling are satisfied in
the present case in light of the facts that:
i) Claygate and Ashford House were both owned by Mrs
Szepietowski,
ii) Claygate and Ashford House were both subject to the RBS
charge, which secured the moneys owing to RBS by Mr and
Mrs Szepietowski,
iii) Claygate, but not Ashford House, was subject to the later 2009
Charge in favour of SOCA, which was a second mortgage
which secured some £1.24m,
iv) RBS was repaid the debt owing to it out of the sale proceeds of
Claygate, while Ashford House remains unsold, and
v) The £1.24m secured by the 2009 Charge remains unpaid (save
to a minimal extent) despite the sale of Claygate.
Accordingly, SOCA contends that, as second mortgagee of Claygate, which was
subject to a first mortgage, together with Ashford House, in favour of RBS, it is
entitled to look to Ashford House in order to obtain payment of the sum which was
secured by the 2009 Charge on Claygate, as the proceeds of sale of Claygate were
used to pay off what was due to RBS.
23. Mrs Szepietowski’s argument to the contrary has two strands. The first
strand raises the contention that, in the light of the terms of the Settlement Deed
and the 2009 Charge, SOCA’s marshalling claim cannot be maintained. The
second strand is that, even if marshalling could otherwise be justified, it cannot
succeed, as the property against which SOCA’s marshalling claim is focussed,
namely Ashford House, is and was the home of Mrs Szepietowski, the mortgagor,
whereas the property against which the RBS Charge was enforced is not and was
never her home.
The decisions of the courts below
24. Henderson J held that SOCA’s marshalling claim was well-founded and the
Court of Appeal (Arden, Sullivan and Patten LJJ) agreed with him: – see [2010]
EWHC 2570 (Ch) and [2011] EWCA Civ 856 respectively. The judgments in both
courts concentrated on the first strand of Mrs Szepietowski’s argument, and did
not consider the second (because it was not raised).
25. Henderson J had held in his 2009 judgment [2009] EWHC 655 (Ch), that
Ashford House was excluded from the ambit of the charge envisaged by clause
4.5(ii) of the Settlement Deed, in the light of the terms of the Settlement Deed, and
in particular clauses 4.5 and 4.6. However, in his subsequent judgment, he
concluded that there was nothing in the Settlement Deed or the 2009 Charge which
expressly provided, or necessarily implied, that SOCA’s right to marshal was to be
excluded: – see [2010] EWHC 2570 (Ch), paras 27 and 37. In particular, he did not
consider that clauses 4.5 and 4.6 of the Settlement Deed or the fact that there was
no debt due to SOCA from Mrs Szepietowski under the 2009 Charge, precluded
marshalling. He held that a debt due to SOCA arose from the creation of the
charge, if not earlier, albeit one limited to satisfaction from the proceeds of the sale
of Claygate – para 46. He also held that there was no other reason to deprive
SOCA of its prima facie right to marshal – para 49.
26. The Court of Appeal, in a judgment given by Patten LJ, agreed, and
approved the reasoning, as well as the conclusion, of the Judge, although, as is
frequently the position, they did not focus on all the same arguments as the Judge.
In particular, they concluded that clause 2.1 of the Settlement Deed did not
preclude marshalling: – (see [2011] EWCA Civ 856, para 48), and that marshalling
was not precluded by the fact that it was SOCA and Mrs Szepietowski, rather than
RBS, who decided to sell the Claygate properties, Thames Street and Church
Street: – (see at para 52). Nor did the Court of Appeal consider that marshalling
was precluded by the limited nature of the charge which Mrs Szepietowski gave,
and the absence of any underlying obligation to pay the Secured Amount; that was
treated as merely going to the discretion whether to exercise the equitable power to
marshal: – (see at para 54).
27. Mrs Szepietowski now appeals to this court.
Marshalling: the principles
28. As Paul Ali explains in his monograph, Marshalling of Securities: Equity
and the Priority Ranking of Secured Debt (1999), p 12, para 2.02, the earliest
surviving references to marshalling appear to be in two late 17th century cases,
Bovey v Skipwith (l671) 1 Ch Cas 201 and Povye’s Case (1680) 2 Free 51. The
principle was then considered in a number of 18th century cases, which Ali lists in
footnote 6 on p 13.
29. A relatively early exposition of the law of marshalling may be found in the
judgment of Lord Hardwicke LC in Lanoy v Duke & Duchess of Atholl (1742) 2
Atk 444, 446:
“Is it not then the constant equity of this court that if a creditor has
two funds, he shall take his satisfaction out of that fund upon which
another creditor has no lien … . Suppose a person, who has two real
estates, mortgages both to one person, and afterwards only one estate
to a second mortgagee, who had no notice of the first; the court, in
order to relieve the second mortgagee, have directed the first to take
his satisfaction out of that estate only which is not in mortgage to the
second mortgagee, if that is sufficient to satisfy the first mortgage, in
order to make room for the second mortgagee, even though the
estates descended to two different persons …”.
30. It is also worth referring to the judgment of Lord Eldon LC in Aldrich v
Cooper (1803) 8 Ves Jun 382, 395, where he postulated a case where:
“two estates [were] mortgaged to A; and one of them mortgaged to
B. He has no claim under the deed upon the other estate. It may be so
constructed that he could not affect that estate after the death of the
mortgagor. But it is the ordinary case to say a person having two
funds shall not by his election disappoint the party having only one
fund; and equity, to satisfy both, will throw him, who has two funds,
upon that, which can be affected by him only; to the intent that the
only fund, to which the other has access, may remain clear to him.”
31. Marshalling has thus been allowed to a creditor, in a case where (i) his debt
is secured by a second mortgage over property (“the common property”), (ii) the
first mortgagee of the common property is also a creditor of the debtor, (iii) the
first mortgagee also has security for his debt in the form of another property (“the
other property”) (iv) the first mortgagee has been repaid from the proceeds of sale
of the common property, (v) the second mortgagee’s debt remains unpaid, and (vi)
the proceeds of sale of the other property are not needed (at least in full) to repay
the first mortgagee’s debt. In such a case, the second mortgagee can look to the
other property to satisfy the debt owed to him.
32. Consider a case where the mortgagor owes £2m to the first mortgagee and
£2m to the second mortgagee, the common property and the other property are
each worth £3m, and the common property is sold, resulting in repayment in full of
the first mortgagee and a reduction of £1m in the debt of the second mortgagee.
The mortgagor still owes £1m to the second mortgagee, whether or not the second
mortgagee can marshal. The only effect of the second mortgagee being able to
marshal would be that it could directly enforce its outstanding £1m debt against
the other property rather than falling back on the status of unsecured creditor. This
emphasises the point that marshalling only really comes into its own where the
mortgagor/debtor is insolvent: marshalling improves the position of the second
mortgagee as against the unsecured creditors of the debtor, not as against the
debtor herself.
33. Of course, the fact that the second mortgagee could proceed directly against
the other property, without the need for a judgment and a charging order, is a
minor disadvantage to the mortgagor of the second mortgagee being able to
marshal. But Ali is correct in his statement (op cit para 4.48) that, at least in the
cases where it has been held to apply, “Marshalling is neutral in its impact upon
the residue available to the debtor following the discharge of its creditors’ claims”.
34. At one time judges expressed themselves in a way which suggested that a
second mortgagee with the right to marshal could compel the first mortgagee to
sell the other property to pay off the debt he was owed before having recourse to
the common property. Indeed, Lord Eldon LC referred to the second mortgagee
“ha[ving] a right in equity to compel” the first mortgagee “to resort to the other” in
Aldrich v Cooper 8 Ves Jr 382, 388. However, it soon became well established
that the first mortgagee had the right to have recourse to “any of his securities
which first come to hand” and to “realis[e] his securities in such manner and order
as he thinks fit”: – per Wood V-C in Wallis v Woodyear (1855) 2 Jur (NS) 179,
180, and Parker J in Manks v Whiteley [1911] 2 Ch 448, 466 respectively.
35. The principle behind the doctrine of marshalling has been identified by
Story in his Commentaries on Equity Jurisprudence, 2nd ed (1892), pp 416-417, in
these rather broad terms:
“The reason is obvious … [By] compelling [the first creditor with the
two securities] to take satisfaction out of one of the funds no
injustice is done to him … . But it is the only way by which [the
second creditor with one security] can receive payment. And natural
justice requires, that one man should not be permitted from
wantonness, or caprice, or rashness, to do an injury to another. In
short we may here apply the common civil maxim: ‘Sic utero tuo ut
non alienum laedas’; and still more emphatically, the Christian
maxim, ‘Do unto others as you would they should do unto you’.”
36. As I see it, there are also good practical reasons for equity adopting the
doctrine, namely the unattractive and adventitious benefit which would otherwise
be accorded to the first mortgagee. If marshalling was not available to the second
mortgagee, the first mortgagee’s free right to choose the property against which he
enforced could have substantial value. In effect, he could auction that right as
between the second mortgagee (who would be prepared to pay him to enforce
against the other property) and the unsecured creditors of the mortgagor (who,
especially where the mortgagor was actually or potentially insolvent, would be
prepared to pay him to enforce against the common property). Further, it appears
to be somewhat arbitrary that, if he could not marshal, a second mortgagee who
had sufficient resources and was prepared to take any associated risk, could
redeem the first mortgage (on the basis of “redeem up foreclose down” – see
Megarry & Wade, The Law of Real Property, 8th ed, paras 25-110 to 113), and
then protect its position as second mortgagee by selling the other property to
redeem the first mortgage, before selling the common property.
37. So far as the limits of the applicability of the doctrine of marshalling are
concerned, there are a number of cases where it has been held not to be applicable
– eg because there is no common debtor or where a third party mortgagee may be
prejudiced. However, we were taken to no case of specific relevance to the first
strand of Mrs Szepietowski’s argument. Guidance of a very general nature may,
however, be found in what Lord Eldon LC said in Ex p Kendall (1811) 17 Ves
514, 527:
“The equity is clear upon the authorities, that, if two funds of the
debtor are liable to one creditor, and only one fund to another, the
former shall be thrown upon that fund, to which the other cannot
resort; in order that he may avail himself of his only security: where
that can be done without injustice to the debtor or the creditor: but
that principle has never been pressed to the effect of injustice to the
common debtor…”
38. On the second strand of Mrs Szepietowski’s argument, there is Australian
authority to support the proposition that marshalling is not available to a second
mortgagee where the first mortgagee is contractually bound to look first to the
other property to satisfy the debt due to him – see In re Holland (1928) 28 SR
(NSW) 369 and Miles v Official Receiver (1963) 109 CLR 501. This seems to me
to be correct, at least where the contract is with the mortgagor or with someone
else with an interest in the other property, because the basis of the right to marshal
is the arbitrariness of allowing the first mortgagee’s decision as to which asset to
enforce against to affect the second mortgagee’s rights. It also seems to me that the
Australian cases accord with the approach of the Court of Appeal in Webb v Smith
(1885) 30 Ch D 192.
The first strand of Mrs Szepietowski’s argument
39. As the oral argument developed, it became apparent that the first strand of
Mrs Szepietowski’s argument as to why SOCA should be held to be unable to
marshal involved two somewhat different contentions. Her first contention is that
the simple fact that the 2009 Charge does not secure a debt from her to SOCA, or
indeed any debt at all, means that there is no right in SOCA to marshal as it seeks
to do. Alternatively, she contends that the provisions of the Settlement Deed and
the 2009 Charge, coupled with the circumstances in which they were executed,
demonstrate that marshalling is precluded. I shall take those two contentions in
turn.
The absence of an underlying debt from Mrs Szepietowski to SOCA
40. The first contention raises a point on which we were told by both counsel
that there is no authority. In all the cases (save in the so-called “surety exception”
discussed by Ali, op cit, chapter 8) where marshalling has been allowed, both the
first mortgagee and the second mortgagee have been creditors of the same
debtor/mortgagor. However, in this case, at least according to her argument, Mrs
Szepietowski never owed any money to SOCA – other than such sum, if any, as
was payable to SOCA out of the proceeds of sale of Claygate after payment of all
prior claims, and that sum has been paid to SOCA; indeed, according to her case,
the 2009 Charge does not secure a debt from anybody, other than that contingent
sum.
41. Although that proposition was challenged by SOCA, I consider that it is
correct. The terms of the Settlement Deed are concerned with the ownership of,
and rights over, property, and not with creating or acknowledging debts (other than
Mr and Mrs Szepietowski’s debts to HMRC). And the 2009 Charge is notable for
the absence of any provision which creates or acknowledges an obligation on Mrs
Szepietowski, the mortgagor, to pay “the Secured Amount”. All that she is obliged
to do in relation to that sum under clause 2 is to use the proceeds of sale of
Claygate towards settling it, after any prior obligations have been met. It is true
that clause 7.1 refers to the Secured Amount “becom[ing] due”, but it does not say
from whom, and its language is readily explained by the terms of section 101 of
the Law of Property Act 1925, to which it refers. In any event, SOCA’s contention
that the 2009 Charge secured a debt due from Mrs Szepietowski is given its
quietus by the unambiguous terms of clause 7.2.
42. It therefore appears clear to me that the 2009 Charge did not create, or
acknowledge the existence of, any debt from Mrs Szepietowski, or anyone else, to
SOCA, save that it rendered her liable for a contingent debt, in that she was bound
to pay SOCA an amount of up to £1.24m out of such sum, if any, as remained
from the proceeds of sale of Claygate after the RBS Charge was paid off.
43. The notion that the 2009 Charge did not impose or acknowledge an
obligation to pay the Secured Amount on the part of Mrs Szepietowski is also
supported by (i) the fact that the Settlement Deed, from which it originates, did not
impose such a duty, (ii) the terms of clause 4.5 of that Deed which provides for the
2009 Charge (a point dealt with more fully in para 69 below), and (iii) the fact that
both the Settlement Deed and the 2009 Charge originated from proceedings under
the 2002 Act, whose purpose is to recover specific properties not to recover a sum
of money.
44. The fact that the 2009 Charge involved giving SOCA security over
Claygate without an underlying debt being owed by the mortgagor (or anyone
else), save the contingent debt identified in para 42 above, throws up an intriguing
problem in relation to the right to marshal.
45. There is plainly a difference between marshalling in the normal case, where
the mortgage to the second mortgagee is security for a debt due from the
mortgagor to the second mortgagee, and marshalling in a case such as the present,
where there is no underlying debt from the mortgagor (or anyone else) to the
second mortgagee (other than a contingent liability to pay a sum out of the net
proceeds of sale of the common property).
46. As explained in paras 32-33 above, in the normal case, marshalling does not
result in the liabilities of the mortgagor being increased after the sale of the
common property. However, if the second mortgagee can marshal in a case such as
this, where there is no underlying debt due to it from the mortgagor, the
mortgagor’s liabilities would be increased – at least once the common property has
been sold by the first mortgagee. Thus, (i) if SOCA can marshal in this case,
Ashford House would effectively be subject to a second mortgage (ranking after
TMB’s first mortgage – see para 8 above) securing just under £1.24m, and Mrs
Szepietowski would have to pay that sum to SOCA or lose her home, whereas (ii)
if SOCA cannot marshal, then Ashford House would be free of any second
mortgage, and Mrs Szepietowski would be free of any further liability to SOCA.
47. We are therefore called on to decide whether, in a case where there is no
underlying debt from the mortgagor to support the second mortgage (save the
contingent debt described at the end of para 42 above), (i) the second mortgagee
can invoke the doctrine of marshalling because the basis for its application, as
described in paras 35 and 36 above, exists, or (ii) the second mortgagee should not
be able to marshal as there is no underlying debt from the mortgagor to the second
mortgagee after the sale of the common property and the distribution of its
proceeds of sale, and there is a fundamental, if unspoken, requirement for the
doctrine to be applicable that there is a debt owing to the second mortgagee at the
time when he seeks to marshal.
48. I refer to the alleged requirement being unspoken, as there is no judgment
which deals with this question, although many of the explanations of marshalling
assume that the second mortgagee is owed an underlying debt by the mortgagor
(for instance, the passages quoted from Lord Hoffmann and Rose LJ in paras 1 and
2 above refer to a debt owing to the second mortgagor), and other definitions do
not (see per Lord Hardwicke LC and Lord Eldon LC in paras 29 and 30 above
respectively). In the end, I do not find any these observations of assistance on this
issue because they were all made in the context of cases where there was an
underlying debt due from the mortgagor which was secured by the second
mortgage. The judges concerned were simply not addressing their minds to the
point at issue in this case.
49. I accept that it can fairly be said that the justification for marshalling,
namely that the extent or value of the second mortgagee’s rights should not depend
on which of the first mortgagee’s securities is realised first, and that the underlying
reasons for marshalling identified in paras 35 and 36 above, apply in the present
case. I also accept that the only difference between the result of marshalling in the
cases where it has been permitted and in the present case is the identity of the party
who is prejudiced by the marshalling (namely the unsecured creditors in the
previous cases, as against the debtor in the present case). Accordingly, I
acknowledge the force of Lord Carnwath’s reasoning in paras 101-104 below.
50. Nonetheless, despite Miss Harman’s attractively developed argument to the
contrary, I have concluded that as a matter of principle, marshalling is not
available to a second mortgagee where, as here, the common property does not
secure a debt due from the mortgagor, but is merely available as security for what
the second mortgagee can extract from that property. My reasoning can be put in a
number of different ways, but in the end they amount to much the same thing,
namely that, in such a case, there is simply nothing, in particular no debt due from
the mortgagor, from which the right to marshal can arise, once the common
property has been sold and the proceeds of sale distributed in accordance with the
legal priorities.
51. As already explained, the only debt which can be said to be due from the
mortgagor to the second mortgagee in a case such as this is the sum (if any) which
is left from the proceeds of sale of the common property after the costs of sale and
the debt due to the first mortgagee have been paid off: – see clause 2.1 (supported
by clause 7.2) of the 2009 Charge. Once that (admittedly derisory) sum was paid to
SOCA, there was nothing due from Mrs Szepietowski (or anyone else) to SOCA,
so it is difficult to see on what basis SOCA can say that it is entitled to enforce a
right to be paid out of another property owned by Mrs Szepietowski.
52. It is one thing for a second mortgagee, who was a secured creditor of the
mortgagor and has not been paid in full (or at all) from the sale of the secured
property, to be able to look to other property of the debtor to discharge a debt
which remains outstanding. It is quite another for a second mortgagee with no
outstanding debt due from the mortgagor to be able to look to another property of
the mortgagor to realise what it hoped to raise from the sale of the secured
property. In my judgment, once there is no debt due from the mortgagor to the
second mortgagee, the second mortgagee has no right to marshal. In this case,
therefore, it follows that SOCA can have no right to marshal.
53. My conclusion receives support if one considers the position where the
mortgagor is insolvent. As explained in paras 32-33 above, a second mortgagee,
whose mortgage secured a debt due to him from the mortgagor would (if he could
marshal) either be treated as a secured creditor whose security for the debt was the
other property to the detriment of her unsecured creditors, or (if he could not
marshal) would join the ranks of the unsecured creditors of the mortgagor’s estate
in respect of his debt. If a second mortgagee with no underlying debt from the
mortgagor could in principle marshal, then, were the mortgagor to be insolvent, the
second mortgagee would either be treated, in effect, as a secured creditor whose
security was the other property, whereas, if the second mortgagee could not
marshal in such a case, it would have no claim at all against the mortgagor’s estate.
There would be nothing surprising about the latter possibility, whereas it would be
surprising if marshalling could create what for all intents and purposes was a
secured debt, when, in the absence of marshalling, there would be no debt at all.
54. My conclusion is also supported if the right to marshal is an incident of the
second mortgage when it is granted, which appears to me to be logical and in
accordance with the Judge’s approach: – see [2010] EWHC 2570 (Ch), paras 27
and 37, as summarised in para 25 above. It is normally easy to imply a common
intention on the part of the parties to the second mortgage (the mortgagor and the
second mortgagee) that there should be a right to marshal where the second
mortgage secures a debt due from the mortgagor, because such a right is to the
manifest advantage of the second mortgagee and of no significance either way to
the mortgagor (see paras 32-33 above). However, where there is no underlying
debt due from the mortgagor (other than what the second mortgagee can extract
from the common property), it would be plainly contrary to the mortgagor’s
interest that the second mortgagee should be able to marshal; accordingly, normal
principle would suggest that, at least in the absence of special facts, there should
be no right to marshal in such a case.
55. I should briefly revert to the notion that the absence of an underlying debt
should be a factor which goes to the discretion of the judge when deciding whether
to permit the second mortgagee to marshal, as suggested by the Court of Appeal at
para 54 of its judgment. Not only does that seem to me to be wrong in principle, as
already explained. It also appears to involve a recipe for uncertainty. Marshalling
is an equitable right (or remedy), but that does not mean that its exercise should
depend too readily on the individual merits of the case. It should, so far as
possible, be governed by clear principles so mortgagors and mortgagees know
where they stand.
56. Accordingly, I conclude that, where the second mortgage does not secure a
debt owing from the mortgagor to the second mortgagee, the right to marshal
should not normally exist once the common property is sold by the first mortgagee
and the proceeds of sale distributed, because there would be no surviving debt
owing from the mortgagor to the second mortgagee. In such a case, equity should
proceed on the basis that the second mortgagee normally takes the risk that the first
mortgagee will realise his debt through the sale of the common property rather
than the sale of the other property.
57. I draw some support from the observation of Lord Eldon LC in Kendall 17
Ves 514, 527 that the doctrine of marshalling “has never been pressed to the effect
of injustice to the common debtor”. Of course, this can be said to beg the question
in the sense that it may be a matter of debate as to whether it would wreak an
“injustice” on the mortgagor in a case such as this to permit marshalling. However,
if one bears in mind that marshalling, as it has been understood normally, involves
no net increase in the liability of the debtor/mortgagor when the second
mortgagee’s right of marshalling arises, I consider that the observation tends to
support the notion that the doctrine of marshalling does not normally apply where
the second mortgagee does not secure a debt from the mortgagor.
58. Finally on this aspect, I have intentionally used the word “normally” in
paras 56-57 above, because marshalling is an equitable remedy. Accordingly,
whether it is available in any particular case may depend on the circumstances, just
as it may depend on the circumstances of a case where it would prima facie apply,
whether it actually does apply. Notwithstanding what I have said in para 55, it
would be wrong to rule out the possibility of an exceptional case, where the
generalisations in para 56 or para 57 would not apply, although absent express
words which permit or envisage marshalling, I find it hard to conceive of such a
case.
59. As I understand it, if, as I have concluded, marshalling is not normally open
to a second mortgagee where there is no underlying debt, SOCA does not contend
that this is an exceptional case where it would be open to it. Therefore Mrs
Szepietowski’s remaining two contentions need not be addressed. However, it is
right to express a view upon them, as they were fully argued and may be of some
significance in future marshalling disputes.
The terms of the Settlement Deed and the 2009 Charge
60. If, contrary to the above conclusion, marshalling should be available to a
second mortgagee where there is no underlying debt from the mortgagor in the
same way as where there is such an underlying debt, I would still have allowed
Mrs Szepietowski’s appeal on the basis of the other contention advanced as part of
the first strand of her argument.
61. As explained in para 25 above, the courts below approached the issue on the
basis that marshalling should not be excluded unless the parties expressly agreed
that it should be, or unless its exclusion was necessarily implied by the terms of the
2009 Charge. Marshalling is an equitable remedy or right, and it should not
therefore be available to a second mortgagee in circumstances where it would be
inequitable to allow it. While there is considerable overlap between the test applied
by the courts below and inequitability, and while, as is reflected in para 55 above,
any court must be careful to avoid an approach to equity which is too open
textured or subjective, I consider that the approach of the courts below involved
setting too high and too rigid a hurdle for a party seeking to mount a case against
marshalling.
62. In my view, the correct approach is to ask whether, in the perception of an
objective reasonable bystander at the date of the grant of the second mortgage,
taking into account, in very summary terms, (i) the terms of the second mortgage,
(ii) any contract or other arrangement which gave rise to it, (iii) what passed
between the parties prior to its execution, and (iv) all the admissible surrounding
facts, it is reasonable to conclude that the second mortgagee was not intended to be
able to marshal on the occurrence of the facts which would otherwise potentially
give rise to the right to marshal.
63. It is true that the possibility of marshalling can only arise some time after
the mortgage is granted (and indeed that it may never arise), and it is true that facts
could arise after the second mortgage which render it inequitable that the second
mortgagee should have (or should not have) the right to marshal. However, it
seems to me that the starting point for deciding whether there should be a right to
marshal must be when the second mortgage is created. In the absence of relevant
subsequent developments, the question must be judged as at that date.
Furthermore, it appears to me to accord with principle that the question must be
judged objectively, based on what passed between, was known to, and would
consequently have been reasonably understood by, the parties.
64. In my view, a combination of factors in this case establish that, even if,
given the facts summarised in para 22 above, the normal presumption would be
that SOCA, as the second mortgagee, should be entitled to marshal, it should not
be able to do so in this case.
65. First, the 2009 Charge was entered into to give effect to a claim under the
2002 Act. As Lord Carnwath points out in his judgment, ARA’s (and now
SOCA’s) rights and powers are purely statutory in nature. For present purposes, its
task under the 2002 Act was to identify, to claim and, through a court order, to
obtain “recoverable property” – see sections 243, 266, 276 and 304-310. SOCA’s
rights under the 2002 Act were thus against specific assets of a respondent, and
there could have been no question of a debt being created in favour of the ARA
against a person such as Mrs Szepietowski, unless, of course, she had agreed to it,
which, as explained above, she had not. Accordingly, it seems unlikely that the
parties to the 2009 Charge could have intended SOCA to have a claim against a
property which was not “recoverable” under the 2002 Act.
66. Secondly, there is the point that it would potentially be to the disadvantage
of one of the parties to the 2009 Charge, namely Mrs Szepietowski, if the other
party, SOCA, had the right to marshal. Of itself, this cannot be decisive, but,
because there is no underlying debt from the mortgagor, this would make the
normal presumption in favour of marshalling less strong than it would be in the
normal case where there is an underlying debt due from the mortgagor. (This is not
inconsistent with the point made in para 55 above, because, for present purposes, I
am assuming, contrary to my earlier conclusion, that the absence of an underlying
debt does not vitiate the right to marshal).
67. Thirdly, as explained in paras 7 and 8 above, Ashford House was included
in Annexe A, but not in Annexe B or C, to the Settlement Deed, so it is clear that
the parties intended it to remain with Mrs Szepietowski, unencumbered by any
liability to SOCA. It would therefore be somewhat curious if the effect of the 2009
Charge, which was executed pursuant to the Settlement Deed, should have the
result of encumbering Ashford House with a liability to SOCA.
68. Fourthly, in the Annexes, the parties did not treat Ashford House as subject
to the RBS Charge, unlike Church Street, Thames Street and Claygate (see paras 8
and 9 above). Given that it is fundamental to SOCA’s marshalling claim that
Ashford House was subject to the RBS Charge, it is again somewhat curious that
this claim arises out of a charge executed pursuant to a contract which plainly
proceeds on the assumption that it was not.
69. Fifthly, particularly in the context of these three points, the fact that the
Settlement Deed is expressed to be in full and final settlement of all claims SOCA
may have relating to the properties in Annexe A (see para 8 above) is not entirely
easy to reconcile with a subsequent marshalling claim by SOCA against Ashford
House.
70. Sixthly, the effect of clauses 4.4 and 4.5 of the Settlement Deed, as
explained in paras 11 and 12 above, is that Mrs Szepietowski would only have had
to grant a charge over Claygate if three separate conditions were satisfied, namely
(i) under clause 4.5(i), SOCA decided it wanted Thames Street and Church Street
sold, (ii) under clause 4.5(ii), RBS refused to release those properties from the
RBS Charge, and (iii) under clause 4.4, Mrs Szepietowski decided to have
Claygate vested back in herself (as she could scarcely have granted SOCA a
charge over a property it owned). If any of these three requirements had been
unsatisfied, there would have been no 2009 Charge, and, of course, without that
charge there would have been no possibility of marshalling, and therefore no
possibility of SOCA claiming that any sum was secured in its favour over Ashford
House. It seems particularly unlikely that SOCA’s ability to mount such a claim
would have been intended to depend on conditions (i) or (iii).
71. Seventhly, over and above these points on the contractual documentation,
there is the point that Ashford House was Mrs Szepietowski’s home. Common
sense suggests that it was one of the relatively few properties in Annexe A which
was not vested in the Trustee, because of that fact. The Settlement Deed
represented a compromise which left Mr and Mrs Szepietowski with some
properties, and it seems very likely that they would have been particularly keen to
keep their home, and that SOCA accepted this in the Settlement Deed. That does
not fit comfortably with the idea that SOCA and Mrs Szepietowski can have
intended that a document subsequently executed pursuant to that Deed should lead
to a substantial potential charge over that home.
72. In my view, the combination of these various factors establishes that, even
if a second mortgagee whose mortgage secures no underlying debt from the
mortgagor is entitled to marshal, the contractual documentation and background
facts in this case establish that it would be inequitable for SOCA to be permitted to
marshal against Ashford House. To permit SOCA to marshal would involve flying
in the face of the understanding of both parties to the mortgage said to give rise to
the right, namely the 2009 Charge, as revealed in the 2009 Charge itself, and the
Settlement Deed from which it originates and indeed to which it refers in its
preamble.
The second strand of Mrs Szepietowski’s argument
73. Mrs Szepietowski contends that the fact that Ashford House is her home
means that RBS would not, in reality, have been able to enforce its rights under the
RBS Charge against Ashford House before it could have enforced its rights against
Claygate. Accordingly, in reliance on the principle described in para 38 above and
the Australian decisions there cited, In re Holland 28 SR (NSW) 369 and Miles v
Official Receiver 109 CLR 501, she contends that marshalling would not, in any
event, be available to SOCA.
74. This argument relies on two separate legal points. The first is the protection
given by section 36 of the Administration of Justice Act 1970 (“section 36”) to
defaulting mortgagors of dwelling houses where the mortgagee is claiming
possession. The second point is the respect which is afforded to an individual’s
home under article 8 of the European Convention on Human Rights (“article 8”).
75. In my view, there is nothing in either of these points. The only thing which
can be made of the fact that the marshalling claim relates to Mrs Szepietowski’s
home is the point made in para 71 above. Assuming in Mrs Szepietowski’s favour
that section 36 and/or Article 8 would have rendered it more difficult for RBS to
enforce the RBS Charge against Ashford House than against Claygate, that would
be wholly insufficient to prevent SOCA being able to marshal, if it was otherwise
entitled to do so. Where the requirements of the right to marshal are otherwise
present, it would require a contractually enforceable obligation, or something close
thereto, on the first mortgagee to enforce against the common property in priority
to the other property for the second mortgagee to lose his right to marshal. (The
words “or something close thereto” are added out of an abundance of caution,
based on an acceptance that nobody can foresee every possibility: I find it very
hard to think of an arrangement short of a binding estoppel which would do).
76. It would be wrong, both in principle and in practice, if it were otherwise.
The right to marshal is based on a simple principle, and there is no reason to dilute
it in the way contended for on behalf of Mrs Szepietowski. After all, the right to
marshal is not based on the proposition that the first mortgagee is under an
obligation to sell the other property first – see para 34 above. Further, if Mrs
Szepietowski’s contention were accepted, one can readily imagine all sorts of
arguments as to whether one property is more difficult to sell than another, and
whether the extent or nature of the difficulty is such as qualifies for the purposes of
the contention.
77. Mr Tager QC suggested that if RBS had proceeded against Ashford House,
the court would have stayed the proceedings on the basis that it should go against
Claygate. I am by no means convinced that that is right. However, even if it was, I
do not consider that would disqualify SOCA from seeking to marshal if it was
otherwise able to do so.
Conclusion
78. In these circumstances, I would allow this appeal, and hold that SOCA does
not have the right to marshal as it contends. I should add that, since preparing this
judgment I have seen in draft the judgment of Lord Reed and the brief judgment of
Lord Sumption, with both of which I agree.
LORD SUMPTION
79. I agree with the order proposed by Lord Neuberger for all the reasons that
he gives. In particular I agree that subject to any contrary provision in the parties’
agreement, the charge must secure one or more underlying debts (or other personal
liabilities) of the chargor to the chargee before the latter can require it to be
marshalled with other securities given to other chargees. The reason is that a
charge to secure a liability of the chargor to the chargee is a secondary benefit. It is
available only for the purpose of enforcing the primary benefit, namely the
underlying personal liability which the chargor owes him The right to marshall is
an equity designed to ensure that the choices made by another chargee do not
frustrate the enforcement of the underlying personal liability. If there is no
underlying personal liability, then the sole effect of the transaction is to confer a
contingent interest in the charged asset, not as the means to the recovery of any
liability but as itself constituting the primary benefit. If the asset is subject to a
prior charge in favour of someone else, the benefit thus conferred may not be
worth very much. But that is the risk that the chargee necessarily accepts by taking
no right of recourse against the chargor personally but only a potentially flawed
interest in a specific asset. Once the chargee has enforced the charge against the
asset in question, his claims against the chargor are exhausted. There is no possible
equity that could entitle him to more. In this situation if the chargee can have the
securities marshalled and proceed in addition against a different asset which was
never charged to him, then the effect is to increase the chargor’s
financial exposure. Since this would conflict with the whole basis on which equity
developed the right to marshall, I cannot accept that it represents the law.
LORD REED
80. I agree that the appeal should be allowed, for the reasons given by Lord
Neuberger and Lord Sumption.
81. In view of the infrequency with which cases on this topic arise, and the
application of the Proceeds of Crime Act 2002 throughout the United Kingdom,
there may be some value in my adding some observations about the equivalent
Scottish doctrine of catholic securities, described succinctly by Lord Adam in
Nicol’s Trustees v Hill (1889) 16 R 416, 421:
“That doctrine is that when a prior creditor has one way of working
out his preference which is less injurious to the postponed creditor
than another, the prior creditor is bound either to adopt that course,
or by assignation to put the postponed creditor into his right.”
82. The equitable basis of the doctrine, as Lord Adam described it, was
explained by Lord President McNeill in Littlejohn v Black (1855) 18 D 207, 212:
“In the ordinary case of a catholic creditor – ie, a creditor holding
security over two subjects, which for the sake of simplicity I shall
suppose to be heritable subjects – and another creditor holding a
postponed security over one of them, there can be no doubt that the
catholic creditor is entitled to operate payment out of the two
subjects as he best can for his own interest, but he is not entitled
arbitrarily or nimiously to proceed in such a manner as to injure the
secondary creditor without benefiting himself – as, for instance,
capriciously to take his payment entirely out of the subjects over
which there is a second security, and thereby to exhaust that subject,
to the detriment of the second creditor, leaving the other subject of
his own security unaffected or unexhausted. The second creditor will
be protected against a proceeding so contrary to equity, and the
primary creditor will be compelled either to take his payment in the
first instance out of that one of the subjects in which no other
creditor holds a special interest, or to assign his right to the second
creditor, from whom he has wrested the only subject of his security.”
83. Securities are neutral in their effect upon the debtor. Their effect is to
strengthen the position of the secured creditor at the expense of unsecured
creditors, since the holder of a security holds a right, accessory in nature, which he
can exercise to secure the payment of the debt that is distinct from, and additional
to, the right of action and execution which any creditor can exercise to enforce the
performance of the debtor’s personal obligation. The doctrine of catholic securities
can therefore operate to the prejudice of unsecured creditors, but it cannot affect
the interests of the debtor. As the Lord President stated (ibid):
“The interest – ie the legitimate interest – of the primary creditor
goes no farther than to get payment of his debt, and that is secured to
him. The interest of the secondary creditor is to realize the value of
his postponed security, and that is secured to him, in so far as is
compatible with payment of the prior debt due to the primary
creditor. The interest of the common debtor is truly nothing, or rather
it is, or at least it ought to be, to allow both his creditors to receive
full payment out of the subjects he had pledged to them.”
84. The ideas underlying the Scottish doctrine evidently have much in common
with those underlying the English principle of marshalling, as explained in the
authorities cited by Lord Neuberger. Lord President McNeill’s explanation that
the Scottish doctrine protects the interests of the secondary creditor, but does not
affect the interests of the debtor, appears to me to be equally true of the English
principle, and to be particularly relevant to the present case.
85. As Lord Neuberger has explained, the debt which was owed to SOCA and
secured by the 2009 Charge was contingent upon a number of eventualities, one of
which was whether any amount (and if so, how much) was left over after prior
claims had been met out of the net proceeds of sale of Claygate: something which
depended upon RBS’s decision as to the order in which it should realise its
securities. It follows that the short answer to SOCA’s claim that it should be
entitled to the benefit of RBS’s security over Ashford House in order to secure the
payment of the balance of the debt owed to it is that there is no such balance: it
received, out of the sale proceeds of Claygate, all that it was entitled to receive.
SOCA’s argument to the contrary assumes, contrary to clause 7.2 of the 2009
Charge, that there was a debt owed to SOCA which was ascertainable
independently of RBS’s election. Another way of putting the point is to say that
there is no scope for marshalling of securities, as SOCA is no longer a creditor of
Mrs Szepietowski, and there is therefore no longer any personal liability which is
secured by the 2009 Charge.
86. It is because of the debt’s being contingent upon (amongst other things)
RBS’s decision as to the order in which to realise its securities that SOCA’s
argument is inconsistent with the principle that marshalling is neutral in its effect
upon the debtor. If SOCA were entitled to treat the balance of the Secured Amount
(as it was somewhat confusingly described in the 2009 Charge) as being secured
over Ashford House, the effect would be to increase the amount which Mrs
Szepietowski had to pay: in the light of clause 7.2, it cannot be argued that, absent
marshalling, SOCA would be a creditor for the balance of the Secured Amount.
That in itself demonstrates that SOCA’s claim is not a proper application of the
principle of marshalling.
LORD CARNWATH
87. I agree that the appeal should be allowed, but on narrower grounds than
those favoured by Lord Neuberger. In my view the solution is to be found, not in
the general law of marshalling, but in the interpretation of a particular contract
against its unusual statutory and factual background.
88. On that aspect, I agree with the conclusion and much of the reasoning of
Lord Neuberger under the heading – “The terms of the Settlement Deed and the
2009 Charge” (paras 60-71), but with a rather different emphasis. The starting
point to my mind is the statutory jurisdiction under which SOCA was operating,
and under which the compromise was agreed. SOCA’s jurisdiction under this part
of the 2002 Act is asset-based, rather than financial. Its task is to identify and
claim “recoverable property”, that is property acquired through unlawful conduct
as provided for in the Act. The essential purpose of the settlement deed was to
resolve a dispute between SOCA and the appellant as to the properties to be treated
as falling within that category.
89. It was consistent with that scheme that the appellant did not undertake a
personal obligation to pay any sum of money as such, beyond the value of her
interest in the properties specified. SOCA started with a potential claim to 20 items
of recoverable property (listed in annexe A) but they agreed to accept the 13
“transfer properties” listed in annex B in “full and final settlement” of their claims
“in relation to” all the properties in annexe A” (cl 2.1), they being expected at the
time to realise some £5.4m. Her home, Ashford House, was specifically excluded.
90. As I understand the arrangement, the two additional properties in annexe C
(Claygate) were needed solely to deal with the complication of the RBS charge
over two of the transfer properties (Thames Street and Church Street). If RBS had
agreed to the transfer of their charge to Claygate (under cl 4.5(i)), there would
have been no such complication, the additional properties could have dropped out
of the picture (cl 4.4), and no question of marshalling could have arisen. As it was,
the trustee’s rights to Thames Street and Church Street were, on their sale,
converted into another property right, a charge over Claygate for the amount
(£1.24m) of their sale proceeds as paid to RBS (cl 4.5(ii), 2009 charge cl 1).
91. Consistently with the scheme of the settlement, clause 2 of the charge
defined the appellant’s obligation on sale of that property as being to “apply the
proceeds of sale.., in settlement of the secured amount”. In this statutory context,
and taken with clause 7.2, I read this wording as not only excluding any personal
liability on the part of the appellant, but as also impliedly excluding recourse to
any source for payment other than those identified. If SOCA had wished to include
Ashford House as potentially recoverable property, they should have done so
specifically, rather than hope to bring it in later by an equitable backdoor.
92. In the result, I agree with Lord Neuberger’s conclusion at paragraph 72, not
so much on the basis that it would be “inequitable” to allow marshalling against
Ashford House, but that on the proper interpretation of the agreement in its
statutory context that possibility is excluded.
93. This conclusion accords with that provisionally reached by Henderson J in
his first judgment ([2009] EWHC 655 (Ch) para 31). In his later judgment on the
present issues ([[2010] EWHC 2570 (Ch) paras 35-36) he changed his mind. He
thought that clause 2.1 could not be read as extending to “future claims against or
relating to the released properties”. He took account of some words of Lord
Bingham of Cornhill in Bank of Credit and Commerce International SA v Ali
[2002] 1 AC 251, para 19 (“the BCCI case”), when holding that the general release
arrived at in a settlement agreement in that case did not extend to future claims for
stigma damages by BCCI employees who had been made redundant in 1990. In the
Court of Appeal, Patten LJ agreed. He said:
“The claim to be subrogated to the RBS charge against Ashford
House is not a claim against Mrs Szepietowski in the proceedings or
even a claim against her at all. It is a claim to enforce the subsisting
clause 4.5 charge by invoking the court’s equitable jurisdiction to
marshal the available security between existing creditors. Clause 2.1
is not directed to that issue which arises as a result of rights granted
to SOCA under the deed.” (para 47)
94. With respect to both courts, I think that Henderson J’s first thoughts were
correct. The marshalling claim is sufficiently linked to the subject matter of the
agreement to fall within the words of clause 2.1, in the context of an agreement
which, as I have said, was intended to define the limits of SOCA’s property claims
arising out of these particular allegations of unlawful conduct, and in relation to
these properties.
95. This is a very long way from the facts of the BCCI case. As the judge
acknowledged, and as is apparent from Lord Bingham’s words quoted by him, that
was a case in which the parties, at the time of the release, “could never have had in
contemplation at all” the type of claims subsequently advanced. Furthermore, with
respect to Patten LJ, to focus on whether the marshalling claim is one “against Mrs
Szepietowski” herself is to disregard the whole purpose of the agreement, which as
I have said was not to define personal claims, but to fix the limits of SOCA’s
property claims under the Act. The addition in clause 2.1 of the words “(claims)…
in relation to the properties … listed…” seems to me quite sufficient, if necessary,
to make that clear.
96. I would have been content to stop at that point. But in view of the attention
given to the issue of marshalling in the courts below, and since I have reservations
about Lord Neuberger’s reasoning on this topic, I think it right to add my own
comments.
97. The courts below struggled with the concept of a charge without an
underlying debt, which the judge described as a “contradiction in terms” (para 45).
He referred to Lord Hoffmann’s statement that an interest provided by way of
security entitles the holder to resort to the property “only for the purpose of
satisfying some liability due to him (whether from the person providing the
security or a third party)…” (In re Bank of Credit and Commerce International SA
(No 8) [1998] AC 214, 226 (“the BCCI (No 8) Case”)).
98. This discussion arose in the context of what he called the “two debts
condition” (para 47). This, as I understand it, he took from the statement of Rose
LJ in the Court of Appeal decision in the BCCI (No 8) Case [1996] Ch 245, 271 (in
the passage already quoted by Neuberger LJ para 2) that “for the [marshalling]
doctrine to apply there must be two debts owed by the same debtor to two different
creditors”. It was argued that since there was no debt due to SOCA, marshalling
could not be invoked. The judge concluded that this condition was satisfied, even
if the appellant could not be sued personally:
“That there was a debt owed by her to SOCA is in my judgment
undeniable, even if it was a debt that could be enforced only by sale
of the Claygate Properties” (para 46).
In the Court of Appeal, Patten LJ (paras 53-54) recorded that there had been no
challenge to the judge’s finding that a debt was created by the charge. Nor was this
issue as such reopened by the appellant’s printed case in this court (see para 154).
99. Notwithstanding that formal position, the majority of this court have as I
understand it thought it appropriate to re-examine the no debt issue, in order to
avoid the law being developed on a false basis. I do not dissent from that approach,
although I am not convinced that the issue is one of any general importance. On
any view, the concept of a charge without an underlying personal debt seems
sufficiently unusual for it to be difficult to consider outside the particular factual
context in which it may arise.
100. As to the principle, I agree with Lord Neuberger (para 48) that Rose LJ’s
words were not directed to the issue which arises in this case. They cannot in my
view be read as sufficient in themselves to establish a general “two-debts” rule. I
do not find it so easy, however, to discount the words used in the 18th and 19th
century authorities, since it is they which explain the basis on which the principle
was developed.
101. Those cases make clear to my mind, as Miss Harman submits, that it is a
remedy which operates primarily between security holders, not between them and
the common debtor or chargor. In the words of Lord Eldon LC in Aldrich v Cooper
8 Ves Jun 382, 395 (quoted by Lord Neuberger at para 30) “a person having
[access to] two funds shall not by his election disappoint the party having only one
fund…”; or as Professor Story put it (quoted at para 35) it is a matter of “natural
justice” between the two creditors. To achieve this, the second charge-holder has
“an equity to require that the first creditor satisfy himself (or be treated as having
satisfied himself) so far as possible out of the security or fund to which the latter
has no claim” (per Lord Hoffmann in the BCCI (No 8) Case [1998] AC 214, 231,
quoted at para 1). The Scottish cases, to which Lord Reed refers, are to the same
effect.
102. With regard to the interests of the common debtor or chargor, the only
qualification to be found in those judgments is in Lord Eldon LC’s observation in
Ex P Kendall 17 Ves 514, 527 that the principle “has never been pressed to the
effect of injustice to the common debtor” (quoted by Lord Neuberger at para 37).
However, it is not clear what form of injustice he had in mind. In the normal case,
the common debtor will have accepted the risk of enforcement of the two charged
sums in full against both securities. There is no injustice to him if that risk
becomes fact. That position, as it seems to me, is unaffected by whether or not the
charger is also subject to a personal liability. In either case, he has accepted the
risk of enforcement against both properties, contingent only on the choice of the
first chargee.
103. Lord Neuberger’s view to the contrary depends as I understand it on
looking at the position after the common property has been sold by the first
chargee (paras 46-47). However, that seems to me with respect to look at the
position from the wrong end. What matters is not how things turn out, but whether
that result is within the scope of the risk which the chargor has undertaken at the
time the charges were granted. Clearly, once the common property is sold,
assuming the chargor is solvent and there is no personal liability, he will be worse
off if marshalling is allowed than if it is not. Instead of enforcement being limited
to what can be extracted from the second property, it will extend to the remaining
value of both properties. However, there is no injustice in that result if it is within
the scope of the risk which he has voluntarily accepted.
104. On the wider issue, therefore, I agree with Miss Harman’s submissions.
Assuming that, at least in theory, there might be other circumstances (outside the
present statutory context) in which a charge would be granted without an
underlying personal liability, I see no reason in principle why the remedy of
marshalling should be excluded.
105. However, for the reasons already given, I would uphold the appeal on the
issue of construction.
LORD HUGHES
106. I entirely agree that this appeal should be allowed and that on the facts of
this transaction SOCA does not have the right to marshal against Ashford House.
With a single exception, I do so for all the reasons given by Lord Neuberger.
107. The single exception concerns the general proposition that before
marshalling can be claimed the security held by the second chargee must secure an
underlying personal debt of his to the chargor. It seems to me, as it does to Lord
Carnwath, that the essence of marshalling lies in the existence of concurrent
securities, rather than in the nature of the liability which they secure. Clearly
there will always be some liability by the chargee to the chargor. It will normally,
no doubt, be a personal debt from the chargee to the chargor. But it may
occasionally be something different, as for example if the chargor is prepared to
underwrite the debt of another to the extent of putting up security but is not
prepared to enter into an unlimited personal guarantee. If, in such a situation, the
security offered is a second charge on some asset (Blackacre) already charged to a
prior chargee and if that prior chargee also has additional security (Whiteacre) for
whatever liability the chargor has to him, the occasion for the second chargee to
seek to marshal may arise if the prior chargee opts to enforce the common security
(Blackacre) rather than his additional security (Whiteacre). There may be
something in the particular transaction, as there is here, which demonstrates that
marshalling would be inconsistent with its nature. But as a general proposition it
seems to me that there is no obstacle in the situation described to the second
chargee marshalling against Whiteacre up to the amount which would have been
available to him in Blackacre if the prior chargee had opted to enforce first against
Whiteacre. True it is that the second chargee has always known that he ranks
second to the prior chargee and that accordingly he has always faced the risk that
Blackacre may be used up by the prior chargee. But that is true equally where
there is also a personal liability. The function of marshalling is to avoid his losing
his security simply because the prior chargee opts to enforce against Blackacre
rather than against his additional security, Whiteacre. The existence or nonexistence
of a personal liability in the chargor makes no difference. Next, it is
certainly true that it is of the essence of marshalling that it is neutral so far as the
chargor/debtor is concerned, in the sense that he ends up paying in total out of the
two securities no more than he was always liable to pay. However, it does not
seem to me that the chargor’s total exposure is impermissibly beyond what it was
always likely to be by marshalling in the situation described. It will still be the
same as it would have been if either (a) the prior chargee had enforced first against
Whiteacre or (b) the liability to the prior chargee had otherwise been discharged,
both of which events were always on the cards.
108. For these reasons, although the occasion for the distinction to bite will no
doubt be rare, I prefer Lord Carnwath’s conclusion on this narrow point.
