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

The doctrine of marshalling may apply where a guarantor’s creditor seeks access to securities held over property belonging to the principal debtor, even though the securities do not derive from a single common debtor. The exception applies where the guarantor has an equitable right to require the principal debtor to bear the primary liability. The creditor cannot obtain greater rights than the guarantor possessed. Contractual restrictions governing the guarantor’s rights, including restrictions on subrogation or enforcement, must therefore be respected. A restraint order under the Proceeds of Crime Act 2002 should not diminish a pre-existing proprietary interest merely because its enforcement is achieved through marshalling.

Highbury and Cezanne lent money to Zirfin, secured by second and third charges over a property. Barclays held a first charge over the same property and also held charges over properties owned by companies affiliated with Zirfin. Zirfin had guaranteed the affiliates’ liabilities to Barclays.

After default, Barclays sold the charged property and applied the surplus towards the guaranteed liabilities, leaving Highbury and Cezanne without effective security. Highbury sought to marshal, or obtain the benefit of, Barclays’ charges over the affiliates’ properties.

The Serious Fraud Office also relied on a restraint order made under the Proceeds of Crime Act 2002. The court considered whether marshalling was available, whether contractual restrictions limited it, and whether the restraint order prevented enforcement.

1. Marshalling. The ordinary doctrine requires two creditors of the same debtor to have recourse to two funds, while one creditor has recourse to only one. However, the principle has an exception where the debtor whose security has been exhausted is a surety and has an equitable right to require the principal debtor to discharge the liability.

2. That exception applied. Zirfin was liable to Barclays as surety for the affiliates’ debts, and could in equity call on the affiliates to bear the burden. Highbury and Cezanne could therefore participate in Barclays’ charges over the affiliates’ properties, notwithstanding that those properties belonged to different debtors.

3. The right was analogous to subrogation and could extend only to the rights available to Zirfin. The contractual terms of the guarantee prevented Zirfin from competing with Barclays until Barclays had been paid in full. Highbury and Cezanne could not obtain any greater right through marshalling. They were entitled to participate only when all sums secured by the affiliates’ charges had been paid, unless all relevant parties agreed otherwise.

4. Restraint order. The court’s observations on the third issue were not necessary to the declaration. On the assumed facts, the charges pre-dated the restraint order and Barclays’ enforcement removed both an asset and an equivalent liability from the restrained property. Highbury’s pre-existing interest was not thereby extinguished. A variation permitting Highbury to enforce the affiliates’ charges should be granted, subject to the statutory policy of the Proceeds of Crime Act 2002. Different facts, including dissipation of the loan proceeds or a non-arm’s-length transaction, might lead to a different result.