Marshalling is an equitable remedy. It applies where the owner of two properties, X and Y, mortgages them both to lender A, and then mortgages one, say Y, to lender B. When A seeks to recover its debt, B can require that it does so first out of X. B is in effect (although not at law) subrogated to A’s rights under its security to the extent of the debtors secured liabilities to B.
The general principle is that the second creditor has a right in equity to require the first creditor to satisfy himself out of the security to which the second creditor has no claim. Otherwise, it is open to the first creditor to satisfy himself out of any security in any order, and if he chooses to satisfy himself out of the security which represents the second creditor’s only security, the second creditor is subrogated to the rights of the first creditor and can stand pro tanto in the shoes of the first creditor in relation to the security over which the second creditor has no legal security.
Scope of the doctrine
Highbury Pension Fund Management Co v Zirfin Investments Management Limited
 EWCA Civ 1283
On the facts of the case, an equitable right to require a bank to marshal its securities in respect of certain guarantee liabilities was not dependent on the bank being paid in full under the terms of the guarantee.
A bank lent money to Z, secured by way of first charge on property 1. The bank subsequently lent money to four affiliated companies, secured on other properties. As additional security for these loans, Z gave the bank a guarantee which was also secured on property 1. Z subsequently borrowed money from H secured by a second charge on property 1.
Z and the affiliated companies all defaulted. The bank made formal demand, appointed receivers and sold property 1. The net proceeds were sufficient to discharge Z’s borrowings from the bank, but left a shortfall due under Z’s guarantee liability. There was nothing left over for H.
Had the bank not discharged Z’s borrowings out of property 1, but out of the other properties, there would have been sufficient to discharge the loan made by the H.
The issue was whether, in these circumstances, H could invoke the equitable doctrine of marshalling.
The High Court held that H could invoke the doctrine of marshalling and that H could participate in the securities provided by the affiliated companies to the bank. However, this could only be done after the bank had been paid in full because the guarantee given by Z to the bank restricted Z’s right to subrogation to the securities provided by the affiliated companies until the bank had been paid in full.
H appealed on three grounds, including that the guarantee did not restrict it’s right to require the bank to marshal its securities.
The Court of Appeal allowed the appeal.
The Court held that if the doubly secured creditor resorts to the fund over which both creditors have security, then the singly secured creditor is entitled to stand in the place of the doubly secured creditor as regards the remaining securities. The equity arising between the bank and H is not the same equity as that which arises between Z and the affiliates. The latter involves an equity of exoneration which, unlike the remedy of subrogation is not dependent on actual payment by the secondary debtor. As soon as the liability is crystallised he is entitled to go to court. The provisions of the guarantee did not impact on this principle.
However, H could not complain about the order in which the bank chose to realise its securities. If H seeks to realise its security over the affiliates’ properties it will still have to give priority to repayment of the bank’s loans. This does not prevent H from realising its securities immediately.
This decision and the Supreme Court’s decision in Szepietowski (below - decided shortly afterwards) helpfully set out and illustrate the general principles involved in marshalling, along with the two related topics of subrogation and exoneration.
Common debtor rule
Highbury Pension Fund Management v Zirfin Investments
 EWHC 238 (Ch)
As an exception to the “common debtor rule”, the equitable doctrine of marshalling can be invoked to require a creditor to discharge its debt out of security belonging to other debtors.
A bank lent money to company 1, secured by way of first charge on property 1. The bank subsequently lent money to four affiliated companies, secured on other properties. As additional security for these loans, company 1 gave the bank a guarantee that was also secured on property 1. Company 1 subsequently borrowed two further sums from two different lenders, secured by second and third charges on property 1.
Company 1 and the affiliated companies all defaulted. The bank made formal demand, appointed receivers and sold property 1. The net proceeds were sufficient to discharge company 1’s borrowings from the bank, but left a shortfall due under company 1’s guarantee liability. There was nothing left over for the other lenders.
Had the bank not discharged the guarantee liability out of property 1, but out of the other properties, there would have been sufficient to discharge the loans made by the other lenders.
The issue was whether, in these circumstances, the other lenders could invoke the equitable doctrine of marshalling. The doctrine and its ramifications was explained in Szepietowski v SOCA  EWCA Civ 856 by Patten LJ as follows:
“So in a case where two or more creditors are owed money by the same debtor but only one of them has a charge over more than one of his properties equity empowers the court to marshal the securities so that the creditor with a choice of security satisfies his claims so far as possible out of the proceeds of the security over which the other creditors have no claim. This equitable principle does not extend to compelling a first mortgagee to realise any particular security in preference to another. He is entitled to realise them in whatever order he chooses. What amounts to a principle of maximum distribution therefore takes effect by permitting a second chargee of property which is realised and utilised by the first chargee to rely on the benefit of the surplus (and possibly unrealised) security of the first chargee over other property of the debtor in satisfaction of his own claim. He is in effect (but not as a matter of law) subrogated to the first chargee's rights under that security to the extent of the debtor's secured liabilities to him…".Two of the necessary conditions are:
- Two or more creditors being owed money by the same debtor, and
- Only one of those creditors having a charge over more than one of the debtor’s properties
(So, the two funds must be funds of the same debtor – the “common debtor rule”).
Here, the bank was doubly secured in respect of company 1’s guarantee liability – it had one charge over property 1 belonging to company 1 and other charges over other properties belonging to the affiliated companies. Can marshalling work in these circumstances?
After a review of the authorities, Norris J held that it could. The doctrine should be applied in an equitable manner. Accordingly the two further lenders were entitled to participate in the security of the charges provided by the affiliated companies to enable them to recover from those properties the amount it otherwise would have obtained from the surplus proceeds of sale of property 1.
The equitable doctrine of marshalling means that where A’s debt to lender 1 is secured on two properties X and Y, but A’s debt to lender 2 is only secured on one of them, say X, lender 2 can require lender 1 to discharge its debt out of property Y first.
This case extends the principle to where A’s debt to lender 1 is doubly secured on property belonging to A and property belonging to others. Lender 1 should discharge its debt out of the other properties first so as not to prejudice lender 2.
Proceeds of Crime Act 2002
National Crime Agency not entitled to use marshalling
Szepietowski v The National Crime Agency
 UKSC 65
The National Crime Agency (formerly the Serious Organised Crime Agency) was not entitled to invoke the equitable doctrine of marshalling so as to secure the proceeds of crime from other property because NCA’s charge did not secure a personal liability of the mortgagor.
This decision deals with the doctrine of marshalling. This is a right, which in essence, applies in the following circumstances:
In such circumstances the second creditor has an equitable right to require the first creditor to satisfy himself or be treated as having satisfied himself so far as possible out of the security or fund to which the second creditor has no claim.
- Two (or more) creditors are owed debts by the same debtor;
- One creditor can enforce his claim against more than one security or fund; and
- The other can only enforce against one security or fund.
Mr S received monies, which were alleged to represent the proceeds of drug trafficking and with which he purchased a number of properties in Mrs S’s name including Ashford House, which was their matrimonial home, and a number of investment properties (Claygate).
In essence Ashford house was subject to a charge to RBS. Claygate also was subject to a charge to RBS and it also became subject to a second charge granted to SOCA to secure money owing to it.
Mrs S subsequently sold Claygate. After discharge of the RBS charge it left only a nominal balance which was insufficient (together with the proceeds of sale of other properties) to discharge the sums due to SOCA.
SOCA commenced proceedings in which it sought to invoke the principle of marshalling on the basis that there was (a) a single debtor (Mrs S); (b) who owed debts to two creditors (RBS and SOCA); (c) RBS was able to enforce its claim against two securities (Ashford House and Claygate); (d) whereas SOCA was confined to its security over Claygate. In those circumstances SOCA contended that it was entitled to look to Ashford House in order to obtain payment of the sum secured by its charge on Claygate, as the proceeds of sale of Claygate had been used to pay off what was due to RBS.
Mrs S objected on the basis that the terms of a settlement deed (entered into to settle confiscation proceedings) prevented SOCA from marshalling.
First instance and Court of Appeal
At first instance the High Court held that SOCA’s marshalling claim was well founded, and on appeal the Court of Appeal agreed. Mrs S appealed to the Supreme Court. She raised two arguments:
Decision on appeal
- SOCA was precluded from marshalling by the terms of the settlement deed; and
- SOCA was not entitled to marshal against Ashford House.
The Supreme Court allowed the appeal.
The Court held (per Lord Neuberger SCJ (with whom Lords Sumption, Reed and Hughes SCJ agreed) that SOCA’s charge did not create or acknowledge the existence of a debt due from Mrs S. It simply rendered her liable for a contingent debt. If SOCA could marshal Ashford House this would, in effect, be subject to a second charge to SOCA to secure the monies due to it that Mrs S would have to pay. As a matter of principle, marshalling is not available in these circumstances.
In any event, marshalling is an equitable remedy which should not be available to a second mortgagee in circumstances where it would be inequitable to allow it. 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. There was a combination of factors which suggest that a SOCA should not be entitled to marshal in this case.
Per Lord Carnwath JSC: The appeal should be allowed on narrower grounds. 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. SOCA’s jurisdiction was asset-based rather than financial. The settlement deed and charge secured recoverable property; it did not impose a financial liability and impliedly precluded recourse to other property. If SOCA had wanted to include Ashford House as potentially recoverable property it should have done so specifically.
This case raised a particular issue about the nature of the security enjoyed by the second creditor (SOCA) and whether in the particular circumstances it gave rise to a right to marshal. Although on the face of it, one would have expected the scope of the equitable doctrine to be sufficiently wide to enable SOCA to marshal (and the High Court and Court of Appeal thought that it was) the Supreme Court held that because SOCA’s charge did not secure a personal liability, it did not permit marshalling. Lord Neuberger (with whom three of the other justices agreed) principally decided this case as a matter of principle and without authority. It is, with respect, a somewhat tenuous line of reasoning. It is implicit that Lord Carnwath did not agree, and his approach has much to commend it.
Marshalling can make a significant difference to the respective rights of recovery of competing lenders. The practical problem in most cases is how to spot it. Whilst lender 2 will know that lender 1 has a charge on the same property A, he will rarely be able to ascertain, without specific enquiry of lender 1 or the common borrower, whether lender 1 has security on other property.
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