Highbury Pension Fund Management Company & Anor v Zirfin Investments Management Ltd & Ors

The equitable principle of marshalling concerns the relationship between creditors. Where one creditor can resort to two funds and another to only one, equity may require the first to resort to the fund unavailable to the second. In its extended form, the principle can operate where a common debtor and another debtor bear primary and secondary liability.

The gateway equity does not become the same as the marshalling equity between creditors. A contractual restriction on the common debtor’s subrogation rights therefore does not, without more, restrict the other creditor’s independent right to marshalling. The doubly secured creditor’s priority must be protected, but immediate realisation may be ordered where it will not defeat or delay that creditor and no prejudice is shown.

Highbury lent money to Zirfin secured by a second charge over 31 Brompton Square. Barclays held the first charge over that property and additional securities over properties owned by companies associated with Zirfin. Zirfin had guaranteed the affiliates’ debts, but its guarantee restricted its right of subrogation until Barclays had been paid in full.

Barclays sold 31 Brompton Square and applied part of the proceeds towards Zirfin’s liability under the guarantee. Highbury sought to require Barclays to resort to its additional securities under the extended principle of marshalling. Norris J held that the principle applied but that the guarantee clause prevented Highbury from exercising the right until Barclays had been paid in full, in [2013] EWHC 238(Ch), reported at [2013] 3 All ER 327.

Highbury appealed, arguing that the clause did not restrict its right, that the judge should not have decided the point, and that Barclays had waived reliance on the clause. The central issue was whether the contractual restriction on Zirfin’s subrogation rights limited Highbury’s independent equitable right to marshal Barclays’ securities.

Appeal allowed on the second point. Lewison LJ gave the judgment, with Rimer LJ and Silber J agreeing.

1. Point raised below. A judge must apply the law as he finds it and is not bound by parties’ concessions or agreements. He must, however, give the parties a fair opportunity to make submissions on the legal issue. Since the effect of the guarantee clause had been raised and argued below, and Highbury advanced its case fully on appeal, there was no procedural injustice.
2. Nature of marshalling. In its classic form, marshalling is an equity between the doubly secured and singly secured creditors. It focuses on the former creditor’s choice and power to prejudice the latter by resorting to their common fund. The debtor’s interest is not generally relevant. The principle was stated in Aldrich v Cooper (1803) 8 Ves. 382 and approved in Duncan, Fox and Co v The North and South Wales Bank (1886) 6 AC 1.
3. Extended principle and clause 8. The extended principle arises where a common debtor owes money to two creditors, one creditor can also recover against security given by another debtor, and the common debtor has an equity to require that other debtor to bear the ultimate liability. That equity, commonly an equity of exoneration, is the gateway to the extended principle but remains distinct from the marshalling equity between the creditors. The guarantee clause restricted Zirfin’s subrogation to Barclays’ rights before full payment. It did not prevent Zirfin from seeking exoneration before payment, nor did it restrict Highbury’s own equitable right against Barclays. Any contractual exclusion would have had to operate between the creditors themselves.
4. Protection of Barclays. Marshalling cannot defeat or delay the doubly secured creditor. Barclays’ priority over Highbury would remain protected when the additional securities were realised. Earlier realisation would accelerate, rather than delay, repayment, and Barclays had produced no evidence of prejudice. Highbury could therefore insist on immediate realisation.
5. The waiver issue did not arise. The order restricting Highbury’s exercise of marshalling was set aside.

1. Court of Appeal (Civil Division): allowed Highbury’s appeal on the effect of the guarantee clause. The waiver issue did not arise.
2. High Court of Justice, Chancery Division: Norris J held that the extended principle of marshalling applied but that Highbury could not exercise it until Barclays had been paid in full, in [2013] EWHC 238(Ch), reported at [2013] 3 All ER 327.