Canada: The UK Supreme Court Clarifies: No Marshalling Without An Underlying Debt, And Maybe No Marshalling In Any Event

Last Updated: December 3 2013
Article by Sam Rogers

Most Read Contributor in Canada, September 2018

The doctrine of marshaling has existed for centuries and was developed to address inequitable circumstances in which secured parties were unable to realize on their security. The UK Supreme Court has recently considered the doctrine in a case, Szepietowski (nee Seery) (Appellant) v The National Crime Agency (formerly the Serious Organised Crime Agency) (Respondent), which provides helpful guidance concerning the limits of the doctrine.

Although it arises infrequently, the doctrine does apply in Canada. For that reason, Szepiotwski will be of interest to holders of secured debt (and their lawyers) both for the particular holdings and the court's general comments concerning the doctrine.

Background on Marshalling

Some background on marshalling will be helpful before turning to the particular facts of Szepietowski. A classic definition, cited in Szepietowski, comes from Lord Hoffmann in In re Bank of Credit and Commerce International SA (No 8):

[A] principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim.

The particular circumstances where the doctrine will apply were set out by Lord Neuberger in Szepietowski:

(i) ... debt is secured by a second mortgage over property ("the common property"), (ii) the first mortgagee of the common property is also a creditor of the debtor, (iii) the first mortgagee also has security for... debt in the form of another property ("the other property") (iv) the first mortgagee has been repaid from the proceeds of sale of the common property, (v) the second mortgagee's debt remains unpaid, and (vi) the proceeds of sale of the other property are not needed (at least in full) to repay the first mortgagee's debt. (para 31)

Lord Neuberger also noted:

  • The doctrine "really comes into its own" where a debtor is insolvent as it allows the second secured creditor to improve its position against unsecured creditors. (para 32)
  • As traditionally applied, marshalling does not prejudice the debtor because the same amount remains owing whether it is applied or not. (para 33)
  • The doctrine does not allow the second secured creditor to "compel" the first secured creditor to resort to the other property. Rather, it allows the second secured creditor to resort to the other property if the event the first secured creditor chooses not to. (para 34)

Background on Szepietowski

In 2005, the UK's Serious Organised Crime Agency ("SOCA") brought a proceeding against Ms. Szepietowski (and her husband) in order to seize 20 properties on the basis that they were proceeds of crime and therefore constituted "recoverable property" within the meaning of section 266 of the UK Proceeds of Crime Act. The properties included two properties known collectively as "Claygate" as well as Ms. Szepietowski's primary residence, Ashford House. These properties were registered in the name of Ms. Szepietowski and the Royal Bank of Scotland ("RBS") had a charge against them (and others) for £3.225m (the "RBS Charge").

In 2008, the Szepietowskis settled the SOCA proceedings on terms contained in a "Settlement Deed." According to the terms of the Settlement Deed, Ashford House was not "recoverable property."

In 2009, by operation of the Settlement Deed, Ms. Szepietowski granted a charge to SOCA over Claygate for £1.24m. The charge explicitly confirmed that Ms. Szepietowski did not personally owe any money to SOCA. The RBS Charge was still not satisfied (about £2.33m remained) and the SOCA charge was a therefore a second charge on the property.

In December, 2009, Ms. Szepietowski sold Claygate for £2.33m, the proceeds were used to pay off the RBS Charge and the remainder, £1,324.16, was left to satisfy the SOCA charge.

SOCA brought an action against Ms. Szepietowski for marshalling of the debt. SOCA's case was that it was entitled to look to Ashford House to satisfy its charge, which was over Claygate only. This was because the RBS Charge was over both Ashford House and Claygate, RBS had satisfied itself from the proceeds of the sale of Claygate, and Ashford House remained unsold.

Ms. Szepietowski resisted on the basis that SOCA could not marshal because there was no underlying debt owed from Ms. Szepietowski to SOCA.

At trial, Justice Henderson held that marshalling did apply to the facts set out above. The Court of Appeal agreed.

The Decision

Lord Neuberger, concurred with by Lord Sumption and Lord Reed, found that the doctrine did not apply in the particular facts of the case for two reasons. First, he accepted the argument of Ms. Szepietowski, that marshalling cannot apply in a circumstance where there is no underlying debt owed. In such a circumstance, there is "simply nothing... from which the right to marshal can arise, once the common property has been sold and the proceeds of sale distributed in accordance with the legal priorities." (para 50)

Second, Lord Neuberger accepted, based on the language of the Settlement Deed and the nature of the resulting charge, that the doctrine of marshalling was precluded. As Lord Neuberger explained, to make such a determination a court must look to:

(i) the terms of the second mortgage, (ii) any contract or other arrangement which gave rise to it, (iii) what passed between the parties prior to its execution, and (iv) all the admissible surrounding facts, it is reasonable to conclude that the second mortgagee was not intended to be able to marshal on the occurrence of the facts which would otherwise potentially give rise to the right to marshal. (para 62)

This argument was advanced by Ms. Szepietowski for the first time at the Supreme Court.

Implications of the Decision

Two particular holdings arise from the decision which limit the scope of the doctrine of marshalling:

  1. A secured creditor cannot invoke the doctrine of marshalling unless there is an underlying debt owed to them by the debtor; and
  2. Marshalling will not apply if, taking into account the terms and admissible surround facts of the second charge, it is reasonable to concluded that the second secured party was not intended to be able to marshal.

Of the two holdings, (a) is likely confined to the particular facts of the case, however (b) may have more general application. As such, parties should turn their mind to the court's comments when drafting a charge, which they may wish to marshal in the future, and when deciding whether to attempt to marshal debt.

Marshalling in Canada

The doctrine is applied in Canada and therefore all secured creditors should be aware of its potential application. This is particularly true in circumstances where the debtor becomes insolvent as marshalling can allow a "second" secured creditor to improve its position against unsecured creditors.

Although not binding on Canadian courts, UK Supreme Court decisions are highly persuasive, particularly in cases concerning equitable remedies and therefore the particular holdings will likely be followed by Canadian courts moving forward.

The doctrine of marshalling is not often considered by Canadian courts (CanLii for example notes 24 cases in the last 10 years). Perhaps the most noteworthy recent case in Canada is Gerrow v. Dorais wherein the Alberta Queen's Bench held that the holder of a builder's lien, like any other secured party, may take advantage of the doctrine.

The last fulsome appellate consideration of the issue in Canada was Green v. Bank of Montreal, wherein the Ontario Court of Appeal declined to apply the doctrine in the absence of a common debtor and where a third party would be prejudiced by the application of marshalling.

Case Information

Szepietowski (nee Seery) (Appellant) v The National Crime Agency (formerly the Serious Organised Crime Agency) (Respondent), 2013 UKSC 65

Docket: UKSC 2011/0196

Date of Decision: October 23, 2013

To view original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions