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

The equitable doctrine of marshalling ordinarily requires the second security to secure an underlying personal liability owed by the chargor to the chargee. Once a chargee without such a liability has exhausted its rights against the charged asset, marshalling cannot create recourse against another asset and thereby increase the chargor’s exposure.

Marshalling may also be excluded by the transaction. The question is whether an objective reasonable bystander, considering the second charge, the arrangement which produced it, the parties’ dealings and the admissible surrounding facts, would conclude that marshalling was not intended. Statutory or human-rights protections making enforcement against a home more difficult do not alone exclude marshalling. Ordinarily, a binding obligation, or something closely equivalent, must require the first chargee to resort first to the common property.

The Assets Recovery Agency brought civil recovery proceedings under the Proceeds of Crime Act 2002 concerning properties held by Mr and Mrs Szepietowski. A settlement transferred specified properties to the agency’s trustee but left Mrs Szepietowski’s home, Ashford House, with her. A later charge in favour of the agency’s successor, SOCA, applied only to two Claygate properties and required their residual sale proceeds to be applied towards a stated secured amount.

The prior chargee realised its debt from Claygate, leaving only £1,324.16 for SOCA. SOCA claimed that the securities should be marshalled so that it could recover the shortfall against Ashford House. Henderson J upheld that claim in [2010] EWHC 2570 (Ch), and the Court of Appeal affirmed his decision in [2011] EWCA Civ 856.

The issues were whether marshalling was available without a surviving underlying personal liability, whether the parties’ transaction excluded it, and whether the special protection afforded to a home prevented it.

1. The appeal was allowed unanimously. SOCA had no right to marshal its charge over Claygate with the prior charge over Claygate and Ashford House.

2. Lord Neuberger, with Lord Sumption and Lord Reed agreeing, held that marshalling does not normally arise where the second charge secures no surviving underlying debt or other personal liability of the chargor. The doctrine enables enforcement of an existing liability; it does not create one. After SOCA received the residual Claygate proceeds, Mrs Szepietowski owed it no balance. Allowing recourse to Ashford House would therefore increase her exposure and conflict with the principle that marshalling is neutral in its effect upon the debtor. An exceptional case was not ruled out, particularly where express terms contemplated marshalling, but this was not such a case.

3. Lord Carnwath and Lord Hughes disagreed with that general requirement. In their view, marshalling principally concerns concurrent securities and may operate without personal liability where that result falls within the risk assumed by the chargor. They nevertheless agreed that the particular transaction excluded SOCA’s claim.

4. On an independently sufficient and commonly accepted ground, the transaction made marshalling unavailable. Lord Neuberger held that the objective question was whether a reasonable bystander at the date of the second charge, considering its terms, the arrangement which produced it, the parties’ prior dealings and the admissible surrounding facts, would conclude that marshalling was not intended. The asset-based statutory scheme, the absence of personal liability, the full-and-final settlement, the deliberate exclusion of Ashford House and its status as the appellant’s home established that conclusion. Lord Carnwath treated the same matters as excluding recourse to Ashford House on the proper construction of the agreement in its statutory context.

5. The protection afforded to dwelling-house mortgagors by section 36 of the Administration of Justice Act 1970, and respect for the home under article 8 of the European Convention on Human Rights, would not by themselves prevent marshalling. Ordinarily, exclusion on that ground requires a contractually enforceable obligation, or something closely equivalent, requiring the first mortgagee to proceed first against the common property.

1. United Kingdom Supreme Court: The appeal was allowed unanimously. The orders upholding SOCA’s marshalling claim were reversed: [2013] UKSC 65.
2. Court of Appeal: Arden, Sullivan and Patten LJJ dismissed the appeal and upheld Henderson J’s reasoning and conclusion: [2011] EWCA Civ 856.
3. High Court, Chancery Division: Henderson J held that SOCA was entitled to marshal its security against Ashford House: [2010] EWHC 2570 (Ch).
4. High Court, Chancery Division: In earlier proceedings concerning the settlement, Henderson J held that the charge required by clause 4.5(ii) extended to Claygate, but not Ashford House: [2009] EWHC 655 (Ch).