Serious Organised Crime Agency v Szepietowski & Ors

The equitable doctrine of marshalling may allow a junior creditor with security over one fund to resort to another security formerly available to a senior creditor. The doctrine is not automatic and may be excluded or varied by contract, or defeated by other equitable defences. Clear words, or an implication satisfying the usual test of necessity, are required to exclude it. A settlement which allocates expected sources of repayment does not necessarily exclude marshalling where the relevant security was expressly granted and the later shortfall arose. A security charge presupposes an underlying liability, even where the instrument contains no personal covenant to pay.

SOCA held second charges over properties in Claygate securing sums paid to the Bank from the sale of other properties under a settlement. The Bank also held a second charge over Ashford House. The Claygate Properties were later sold, but their proceeds were largely exhausted in repaying the Bank, leaving SOCA with a substantial shortfall.

SOCA sought to be subrogated to the Bank’s second charge over Ashford House by marshalling. Mrs Szepietowski argued that the settlement excluded Ashford House from liability for the Bank’s debt, that the settlement released future claims, and that no second debt existed because the SOCA charges contained no personal covenant. The central questions were whether the contractual arrangements excluded marshalling and whether its substantive requirements were satisfied.

1. Contractual exclusion. The Settlement Deed and Consent Order did not expressly or implicitly exclude SOCA’s reliance on marshalling. Paragraphs 4.5 and 4.6 dealt with the expected order and priority of realisation of the Claygate Properties and the Remaining RBS Properties. They did not provide that the Bank’s debt was to be satisfied exclusively from those properties. The words “shall be transferred ... only” had to be read in context and principally concerned release of the properties sold.
2. A contractual exclusion of marshalling required clear words or an implication satisfying the usual test of necessity. The parties’ expectation that the Claygate Properties would discharge the Bank’s debt was insufficient. The Bank was not a party to the compromise, and the parties could not by their agreement release Ashford House from the Bank’s charge.
3. The full and final settlement clause did not encompass a future marshalling claim. Applying the approach in BCCI v Ali [2001] UKHL 8, clear language would have been needed to release claims based on future factual circumstances unconnected with the claims settled.
4. Marshalling. Marshalling is an equitable doctrine applied to do justice. It may be excluded or varied by contract, and equitable defences may be available. It is not an automatic incident of proprietary rights. In this case there was no unfairness in applying it, because the charges were freely granted to secure the intended sums.
5. The requirements of two debts owed by one debtor to two creditors were satisfied. The obligation to grant the Claygate charges presupposed an underlying liability to SOCA. The absence of a personal covenant did not prevent a debt arising which could be enforced through sale of the charged properties.
6. SOCA was therefore entitled to be subrogated to the Bank’s second charge over Ashford House for the shortfall left after the sale of the Claygate Properties. The order had to preserve the Bank’s existing priority and any continuing rights in respect of further sums due to it.