McLean & Anor v Trustees of the Bankruptcy Estate of Dent & Ors

Marshalling may apply to an agricultural charge created under the Agricultural Credits Act 1928. The equity operates between creditors and does not depend on the creditor seeking to marshal being capable of creating the security. A contractual priority arrangement may reinforce the ordinary operation of marshalling. The doctrine is distinct from restitutionary subrogation, and the language of subrogation must not obscure that distinction. A partner or the partner’s bankruptcy trustees cannot use restitutionary subrogation to compete with partnership creditors merely because the partnership’s creditor enforced security over the partners’ separate assets. Resort to security granted by the partners is not, without more, unjust enrichment.

The joint administrators of a partnership sought directions concerning the distribution of proceeds from partnership assets. The partnership’s bank held an agricultural charge over farming stock and agricultural assets, as well as third-party charges over farms owned personally by the partners. Lady Morrison had security over the farms for loans to the partnership, company and partners. The bank was repaid from the farms, leaving Lady Morrison with a shortfall, while the agricultural-charge assets were realised separately.

The issues were whether Lady Morrison could claim the agricultural-charge proceeds by marshalling and whether the partners’ bankruptcy trustees could claim in the partnership administration by restitutionary subrogation.

1. Marshalling. Lady Morrison was entitled to marshal. The bank had two funds available for the partnership debt: the agricultural charge and the third-party charges over the Penrith Farms. Lady Morrison had access to only the latter. The principle therefore entitled her to be treated as if the bank had resorted, so far as possible, to the fund unavailable to her. The principle stated in Highbury Pension Fund Management v Zirfin [2014] Ch 359 was applied.
2. The Agricultural Credits Act 1928 did not prohibit assignment of an agricultural charge to a person who was not a bank. Nor did the character of the security prevent marshalling. The equity concerned the conduct and conscience of the doubly secured creditor and arose between the creditors, not between the creditor and the debtor. The Priorities Agreement reinforced, rather than restricted, that conclusion.
3. Marshalling was not identical to subrogation. The statement that the second creditor was “in effect” subrogated to the first creditor’s rights described the result of the equity and did not convert the remedy into ordinary restitutionary subrogation.
4. Restitutionary subrogation. The trustees in bankruptcy could not prove in the partnership administration for the value of partnership assets outside the agricultural charge. The partnership was insolvent, so distribution was governed by the Insolvent Partnerships Order 1994. The partners’ separate assets had always been available to satisfy partnership creditors through the security granted to the bank. Enforcement of that security was not an unjust enrichment at the expense of the partners or persons claiming through them.
5. Lady Morrison could claim the agricultural-charge proceeds and prove as an unsecured creditor for any shortfall. The trustees’ claim was rejected.