Szepietowski (nee Seery) v The National Crime Agency (formerly the Serious Organised Crime Agency)

The Supreme Court considered the scope of the equitable doctrine of marshalling where a later chargee (SOCA) held a charge which did not secure a personal debt of the chargor but only a contingent entitlement to any surplus from the sale of a specific charged property. The court held that, as a general principle, marshalling is not available to a second mortgagee once the charged common property has been sold and the proceeds distributed if there is no underlying personal debt owed by the mortgagor to that second mortgagee. The court also held, alternatively, that on the contractual construction of the Settlement Deed and the 2009 Charge in their statutory civil-recovery context the parties did not intend SOCA to have recourse to the mortgagor's home.

Background and parties: The Assets Recovery Agency (later SOCA) and Mr and Mrs Szepietowski settled civil recovery proceedings under the Proceeds of Crime Act 2002 by a Settlement Deed which vested a number of properties in a trustee on behalf of ARA/SOCA. Mrs Szepietowski retained her home (Ashford House) free of the receiving order, while other properties (including Claygate) were dealt with under the settlement and later charged to SOCA by a 2009 charge.

Nature of the claim: SOCA sought, by invocation of the equitable doctrine of marshalling, to require that the Royal Bank of Scotland's first charge (the RBS Charge) be treated as satisfied so far as possible out of property not subject to the later SOCA charge, thereby permitting SOCA to look to Ashford House to satisfy the sums secured by the 2009 Charge.

Procedural history: Henderson J in the Chancery Division held that SOCA could marshal; the Court of Appeal ([2011] EWCA Civ 856) affirmed. The case was appealed to the Supreme Court ([2013] UKSC 65).

Issues framed:

• Whether the equitable doctrine of marshalling could be invoked by a second mortgagee where the second charge did not secure a personal debt of the mortgagor but only a contingent entitlement to proceeds of sale of the charged property.
• Whether the terms of the Settlement Deed and the 2009 Charge (and their statutory civil-recovery context under the Proceeds of Crime Act 2002) precluded marshalling.
• Whether the fact that the property sought to be marshalled against was the mortgagor's home (with potential protection under section 36 of the Administration of Justice Act 1970 and article 8 ECHR) precluded marshalling.

Court’s reasoning and resolution: The majority (Lord Neuberger, Lord Sumption, Lord Reed and Lord Hughes concurring in parts) concluded as a matter of principle that marshalling should not normally be available where the second charge does not secure an underlying personal debt of the chargor because, once the common property has been sold and the proceeds distributed in accordance with legal priorities, there is no surviving debt from which an equitable right to marshal can arise. That conclusion reflected concerns that allowing marshalling in such circumstances would effectively create a new personal liability or increase the chargor's exposure contrary to the rationale of marshalling.

In addition, and alternatively, the court held (Lord Carnwath emphasising contractual construction) that, on the proper construction of the Settlement Deed and the 2009 Charge in their statutory context, SOCA’s rights were confined to recoverable property identified under the 2002 Act and the agreement did not envisage or permit a later equitable backdoor to encumber Ashford House. The protection of the mortgagor’s home under section 36 and article 8 did not, in itself, displace the doctrine where it otherwise applied, but on the facts those protections were not decisive.

Result: The appeal was allowed and SOCA was held not to have the right to marshal against Ashford House.

Appeal allowed. The majority held that marshalling is not normally available to a second mortgagee once the common property has been sold and the proceeds distributed if the second mortgage does not secure an underlying personal debt of the chargor; alternatively, on proper construction of the Settlement Deed and 2009 Charge in their statutory civil-recovery context, SOCA was not intended to have recourse to Ashford House.

High Court (Chancery Division): Henderson J on aspects of the Settlement Deed [2009] EWHC 655 (Ch). Subsequent Chancery Division decision (Henderson J) held for SOCA on marshalling [2010] EWHC 2570 (Ch). Court of Appeal (Arden, Sullivan and Patten LJJ) affirmed: [2011] EWCA Civ 856. Supreme Court: appeal allowed: [2013] UKSC 65.