Szepietowski v The Serious Organised Crime Agency

A legal mortgage of real property confers upon the mortgagee a title by way of security which will subsist until the redemption of the mortgage or the sale of the property. Correspondingly the mortgagor retains an equity of redemption which entitles him to redeem the property from the mortgage upon payment of the mortgage debt, interest and costs. The position is, however, more complicated where the property is subject to more than one charge and the mortgagor has charged other property which he owns to the same lender or lenders. In cases of this kind the mortgagor may find that his ability to redeem a particular property upon satisfaction of his liabilities to the mortgagee may be inhibited by the right of the mortgagees of his other property to look to the security for satisfaction of the debts due to them.

So in a case where two or more creditors are owed money by the same debtor but only one of them has a charge over more than one of his properties equity empowers the court to marshal the securities so that the creditor with a choice of security satisfies his claims so far as possible out of the proceeds of the security over which the other creditors have no claim. This equitable principle does not extend to compelling a first mortgagee to realise any particular security in preference to another. He is entitled to realise them in whatever order he chooses. What amounts to a principle of maximum distribution therefore takes effect by permitting a second chargee of property which is realised and utilised by the first chargee to rely on the benefit of the surplus (and possibly unrealised) security of the first chargee over other property of the debtor in satisfaction of his own claim. He is in effect (but not as a matter of law) subrogated to the first chargee’s rights under that security to the extent of the debtor’s secured liabilities to him: see In re Bank of Credit and Commerce International S.A. (No. 8) [1998] AC 214 at pp. 230-1.

The appellant, Mrs Susan Szepietowski, is the registered proprietor of a property known as Ashford House, Four Winds Park, Old Avenue, St George's Hill, Weybridge ("Ashford House"). She lives there with her husband (Mr John Szepietowski) and their four children. There is some dispute as to whether she is the sole beneficial owner or shares beneficial ownership with her husband but that is not material for the purposes of this appeal.

In 1999 Mr Szepietowski was one of two partners in a firm of solicitors, De Verney Brooke Taylor. The firm received a transfer from Turkey of some US$2.5 million which it is alleged represented the proceeds of drug trafficking. In July 2005 the Assets Recovery Agency (“the ARA”) which later became the Serious Organised Crime Agency (“SOCA”) obtained a receiving order in the High Court over the assets which were alleged to represent the Turkish money. Further investigations by the interim receiver revealed that Mr and Mrs Szepietowski and various associated companies owned a substantial portfolio of properties which were estimated to have a net value of some £6 million. These were frozen by a subsequent court order obtained in October 2005.

The interim receiver produced a report in August 2006 stating that she believed that the properties had been acquired and maintained with the proceeds of unlawful conduct including fraudulently obtained mortgage finance and income concealed from HM Revenue & Customs. In November 2006 the ARA began proceedings against Mr and Mrs Szepietowski in which they claimed that the assets representing the Turkish money and the portfolio of properties were recoverable property within the meaning of s.266 of the Proceeds of Crime Act 2002.

In January 2008 Mr and Mrs Szepietowski concluded a settlement of the claims against the properties the terms of which were embodied in a consent order made by Master Moncaster on 16^th January. At the time of the settlement Mrs Szepietowski was the sole registered proprietor of Ashford House and of the following properties:

Ashford House was subject to a first charge in favour of The Mortgage Business plc and a second charge in favour of the Royal Bank of Scotland (“RBS”). Mrs Szepietowski had also given all monies charges in favour of RBS over the four groups of properties described in paragraph 6 above. These were all first charges.

Under paragraph 1 of the consent order, the properties listed in Schedules 1 and 2 to the order were vested in the Trustee for Civil Recovery. Schedule 1 included Thames Street and Church Street which, with the other Schedule 1 properties, are defined in the consent order as the Transfer Properties. The Schedule 2 properties comprised Torrington Close and the Old Bank (defined as the Additional Properties).

Paragraphs 2 and 4 of the consent order were in the following terms:

“2.

Upon the Trustee taking possession of the Transfer Properties and the Additional Properties, the Interim Receiving Order granted by Mr Justice Stanley Burnton on 26 October 2005 (POCA No. 8611 of 2005) (the “Interim Receiving Order”) shall be discharged as against any of those assets listed at Annexe A to Schedule 4 hereto or any other asset listed in Appendix 2 to the Interim Receiver’s Report dated 18 August 2006.

……

4.

Immediately after the vesting order made in paragraph 1 above takes effect, all further proceedings in this claim by the Claimant against the Compromising Defendants to the assets listed at Annexe A to Schedule 4 hereto, any other asset listed in Appendix 2 to the Interim Receiver’s Report dated 18 August 2006 and any asset of the Compromising Defendants of a value less than £20,000 (but, for the avoidance of doubt, excluding those aspects of the claim referred to at paragraph 5 below) be stayed upon the terms set out in Schedule 4 hereto save for the purpose of carrying such terms into effect and for that purpose the Claimant and the Compromising Defendants have permission to apply.”

Schedule 4 to the order contains a deed of settlement dated 15^th January 2008 which has been executed by the director of the ARA and the Trustee for Civil Recovery for the claimants and by Mr and Mrs Szepietowski and the other defendants to the recovery proceedings. The deed contains a number of annexes. Annexe A is a list of properties including Ashford House, Thames Street, Church Street, Torrington Close and the Old Bank. Annexe B and Annexe C contain schedules of the Transfer and the Additional Properties in the form in which they appear in Schedules 1 and 2 to the consent order.

These lists of the properties include particulars of the secured creditors with charges over the respective properties; the value of the properties as at October 2007; the amount of the outstanding debt; and a valuation of the available equity based on the preceding two figures. They were obviously prepared for use in the negotiations leading up to the settlement in order to provide an indication of the values available to meet the ARA’s claims. Annexe B (the Transfer Properties) shows Thames Street and Church Street having a net value of £1,600,331.23 when combined with Torrington Close and the Old Bank. The net amount available to the ARA from all the Transfer Properties is shown as £5,402,679.97 on the assumption that the debt due to RBS is discharged from the sale of Torrington Close and the Old Bank.

The deed of settlement provides in clause 2.1 that it is made:

“in full and final settlement of all of the Director’s claims against the Respondents in relation to the properties and the other assets listed in Annexe A to this Deed, the Tax Liabilities of John Szepietowski and Susan Szepietowski as defined in paragraph 13 below, any other asset listed in Appendix 2 to the Interim Receiver’s Report dated 18August 2006 and any asset of an individual value less than £20,000 (together the “Settled Claim”).”

Under clause 3.1 the defendants agreed to sign the consent order vesting the Transfer and the Additional Properties in the Trustee for Civil Recovery in satisfaction of the claims against the properties listed in Annexe A. On the basis of the net values calculated in October 2007, this would have given to the ARA realisable property in the sum of £5.4 million. In respect of Torrington Close and the Old Bank which were to be used to pay off the borrowings from RBS, clause 4 of the deed provided that:

“4.1.

Once the Vesting Order referred to at para 3.1 above has been made by the Court, Susan Szepietowski and the Trustee shall use their best endeavours to progress the sales of the Additional Properties to those buyers who are currently interested in the Additional Properties and shall keep each other informed of all steps they are taking in [that] regard.

4.2.

In the event that a materially higher offer is received for any Additional Property pre any exchange of contracts, than that received at the date of this deed, then provided that shall yield a higher net return on completion, taking into account the cost of borrowing, any such offer shall be considered and if agreed between Susan Szepietowski and the Trustee as being the best offer shall be proceeded with in addition to any existing offer, it is permissible to apply all reasonable commercial pressure including re marketing and contract races (by way of example) to sell the said properties.

4.3.

If the current offers do not proceed, then Susan Szepietowski shall be entitled to deal with the Additional Properties by selling them, or any one of them, at a price agreed with the Trustee and through the Trustee.

4.4.

If after 6 months following from the date of the vesting of the Additional Properties some or all of them have not been sold i.e., no contract for sale has been exchanged, then Susan Szepietowski must elect in respect of those Additional Properties either that the property:

4.4.1.

remains vested in the Trustee who shall then sell the property at the best price reasonably obtainable and use the proceeds of sale first in the discharge of any charges and secondly to account to Susan Szepietowski for any remaining monies by way of payment to Devonshires; or

4.4.2.

is transferred back to Susan Szepietowski, subject to the charges and any liability to any tax.

4.5.

If the Trustee wishes to sell the Transfer Properties at 2 and 2(a) Thames Street, Walton on Thames and 3 and 5 Church Street, Esher (the 'Remaining RBS Properties') before the Additional Properties are sold then the Respondents agree that, if the Royal Bank of Scotland consent, the combined charge over these properties and the Additional Properties in favour of the Royal Bank of Scotland (amounting to £3,398,507.18 as at 14 January 2008) (the 'Charge') shall be transferred to the Additional Properties only. If the Royal Bank of Scotland does not so consent then Susan Szepietowski will grant a charge to the Trustee or the Director, as directed by the Director, for the sums paid by the Trustee or the Director to the Royal Bank of Scotland from the sale proceeds of the Remaining RBS Properties.

4.6.

The Respondents and the Trustee agree that the total funds from the sale of the Additional Properties shall be used in priority to the funds from the sale of the Remaining RBS Properties in satisfaction of the Charge.

4.7.

The Respondents and the Director and the Trustee agree that on the sale of the Additional Properties the proceeds of sale shall be first applied against the settlement of any charges registered against those properties i.e., the bank charge and any charge under 4.5 above and the balance of the proceeds shall be fully accounted for by the Trustee to Susan Szepietowski without deduction or set off.

4.8.

In the period before the sale of all or any of the Additional Properties is completed, the said Additional Properties shall be managed by Susan Szepietowski. Susan Szepietowski shall receive all income and discharge all expenses including all services and insurances. If the Trustee is obliged to insure the Additional Properties then Susan Szepietowski shall reimburse the Trustee for the amounts paid.”

If the sale of the Transfer and the Additional Properties had proceeded as planned and at the values contemplated in the schedules contained in Annexes B and C, the liabilities to RBS would have been discharged and the net sum recoverable by the ARA, after payment of the secured creditors, would have been capped at £5,375,000 in accordance with clause 10.2 of the settlement deed. This provides that:

“The Director agrees that if, once all of the Transfer Properties are sold and all encumbrances are discharged, the Director receives funds amounting to more than £5,375,000.00 (Five Million Three Hundred and Seventy Five Thousand Pounds) then the Director will pay such excess, up to a maximum of £27,679.97 back to the Respondents (by way of a payment made to Devonshires Solicitors.”

Clause 4.5 was obviously intended to deal with an earlier sale of Thames Street and Church Street which had a combined value in October 2007 of £1.355 million and would not therefore have been sufficient to discharge the borrowings from RBS without the sale of Torrington Close and the Old Bank whose combined value was stated to be some £3.46 million. If the latter had been sold first then the ARA would (at the values stated) have taken Thames Street and Church Street free of the RBS charge.

Any sale of Thames Street and Church Street ahead of Torrington Close and the Old Bank could not produce any return for the ARA unless RBS was prepared to confine its security to the Additional Properties which, in the event, it was unwilling to do. Although the Additional Properties were to be vested in the Trustee under the consent order, it is clear from clause 4.7 of the settlement deed that Mrs Szepietowski was to continue to enjoy priority over the ARA in respect of the net proceeds of sale after satisfaction of the liabilities to RBS. This pre-supposes that the Transfer Properties are capable of generating values sufficient to meet the settlement figure of £5,375,000.

The purpose of clause 4.5 was therefore to provide the ARA with substitute security to the value realised for the benefit of RBS out of the sale of Thames Street and Church Street. They would be entitled to rely on the charge in priority to Mrs Szepietowski’s beneficial interest over the net proceeds of sale.

In March 2008 Thames Street and Church Street were sold for a total of £1.275 million and the proceeds of sale were paid to RBS in reduction of Mrs Szepietowski’s secured liabilities to the bank. This therefore triggered her obligation to grant the charge under clause 4.5. As a result of the downturn in the property market, it became apparent that the value of Torrington Close and the Old Bank would be insufficient to discharge the balance of the debts due to RBS. A dispute therefore arose as to the scope of the charge which Mrs Szepietowski was obliged to grant under clause 4.5.

SOCA contended that the intention of the parties was that it should receive the full amount of the equity in Thames Street and Church Street free of the RBS charge and that the obligation on Mrs Szepietowski was to grant a charge for the £1.275 million over both the Additional Properties and Ashford House in order to provide security in that sum. Counsel for Mrs Szepietowski (Mr Mitchell QC) argued that the settlement was property-based and carried with it the risk that the Transfer Properties might not produce the equity values assigned to them in Annexe B. Read in its proper context, the obligation on Mrs Szepietowski under clause 4.5 was limited to the grant of a charge over the Additional Properties.

Henderson J in a judgment delivered on 19^th March 2009 ([2009] EWHC 655 (Ch)) held that, on the true construction of clause 4.5, Mrs Szepietowski was only obliged to grant a charge over the Additional Properties. The context of clause 4.5 was the problem posed by a prior sale of Thames Street and Church Street and the refusal of RBS to release its charge over those properties. In that context, the natural inference was that the charge was to be granted over Mrs Szepietowski’s interest in the Additional Properties and not in anything else which she owned. Support for that view could be found in clause 4.7 which refers to the proceeds of sale of the Additional Properties being applied “against the settlement of any charges registered against those properties i.e., the bank charge and any charge under 4.5 above”.

One of the points made by the judge (which is relevant to the issues on this appeal) is that clause 4.5 confines itself to dealing with the RBS charges over Thames Street, Church Street and the Additional Properties even though the bank retained its second charge over Ashford House. Ashford House was not one of the properties transferred to SOCA as part of the £5.35 million settlement and Mrs Szepietowski contends that this is consistent with the scheme of the settlement which was to exclude Ashford House from any claims by the bank and (in consequence) from any secondary claim by SOCA based on the principle of marshalling.

The judge was able to resolve the construction of clause 4.5 without looking at the matter more generally but in paragraphs 31-2 of his judgment he said this:

“31.

This brings me on to a more general point. Looking at the Consent Order and the Settlement Deed as a whole, it appears to me that, for the purposes of the compromise, the parties drew a clear distinction between Ashford House on the one hand and the other four properties subject to the RBS charge on the other hand. Ashford House was one of the released properties and, as I have already said, the figure shown for the debt charged upon it in Annexe A to the Settlement Deed must exclude most, if not all, of the RBS debt. Furthermore, the deed was made in full and final settlement of all of SOCA's claims against Mrs. Szepietowski in relation to, among other properties, Ashford House: see para.2.1. The main such claim was obviously SOCA's claim that Ashford House was recoverable property, but the wording of para.2.1 is wide and general, and my provisional view (although I have not heard argument directed to this specific point) is that it is wide enough to rule out any claim by SOCA to be granted security by Mrs. Szepietowski on Ashford House.

32.

There would be nothing inherently surprising in the parties having agreed to exclude Ashford House in this way. It was, and is, the Szepietowskis' home where they live with their young family, one of whom has special needs. In January 2008, nobody foresaw the crash in the property market with which we are now all too familiar, and, on the basis of the figures set out in the schedules to the Consent Order, there appeared to be ample equity in the other four properties to discharge the RBS debt in full. One would indeed expect the unconditional release of Ashford House to have been a key feature of any compromise acceptable to the Szepietowskis.”

The issue of marshalling did not arise for decision on 19^th March but counsel for SOCA did put the judge and Mrs Szepietowski on notice that her client reserved its right to look to Ashford House as an additional source of payment even if the clause 4.5 charge was to be limited to the Additional Properties. The judge noted in paragraph 28 of his judgment that:

“Finally, Ms. Harman argued that even if, on the true construction of para.4.5, Mrs. Szepietowski could only be required to grant a charge over the Additional Properties, the court should still order her to do so, and should not take the short cut of simply directing that the net proceeds of sale of the Additional Properties should be paid to RBS. The reason for this, as Ms. Harman made clear, is that SOCA intends in due course to rely on the equitable doctrine of marshalling and, in broad terms, will ask the court to direct that RBS should satisfy its charge out of Ashford House (on which SOCA would, on this hypothesis, not have a charge) in priority to the Additional Properties (on which both SOCA and RBS would have a charge) or, alternatively, to order that SOCA should be subrogated to the rights of RBS in relation to Ashford House if that security were the first to be realised by RBS: see generally Fisher and Lightwood's Law of Mortgage, 12^th edition, paras.45.8 to 45.12, and Halsbury's Laws of England, 4^th edition, volume 32, paras.833 to 836.”

The passage quoted earlier indicates that the judge remained to be convinced that Ashford House could provide SOCA with the additional security it was looking for but he left the point open by ordering Mrs Szepietowski to execute the legal charges over the Additional Properties which she did on 9^th September 2009. These were, of course, second legal charges ranking behind the subsisting all monies charges in favour of RBS.

The Additional Properties were sold between November 2009 and January 2010 for a total of £2.33 million. The net proceeds of sale were sufficient to discharge the balance of the RBS loans but that left only £1,324.16 remaining with which to meet the liabilities to SOCA under its second charges. SOCA had commenced proceedings against Mr and Mrs Szepietowski and National Westminster Bank plc in September 2009 in which it sought an order under the court’s equitable jurisdiction for the marshalling of the securities over the Additional Properties and over Ashford House. It sought a declaration that it was entitled to be subrogated to the Bank’s second charge over Ashford House which would otherwise have been released following the repayment of the remaining debts to RBS out of the sale proceeds of the Additional Properties.

The matter came for on hearing before Henderson J and, despite his comments in paragraphs 31-2 of his earlier judgment, he decided that SOCA was entitled to be subrogated to the bank’s charge over Ashford house: see [2010] EWHC 2570 (Ch). Mrs Szepietowski now appeals against that order. There are two issues to be decided. The first is whether SOCA is precluded by the deed of settlement from seeking to rely on the principle of marshalling in order to enforce the RBS charge over Ashford house. This turns largely on the construction of clauses 4.1-4.7 of the deed and on whether SOCA can now seek to obtain the proceeds of sale of Ashford House notwithstanding its release of that property from all claims under clause 2.1. The second issue is whether (assuming it was not excluded by the deed of settlement) the judge properly exercised his discretion to order marshalling having regard to the effect it would have on Mr and Mrs Szepietowski.

The first question is whether the terms of the consent order and the deed of settlement have the effect of excluding the operation of the principle of marshalling in this case. This could be achieved either by construing the provisions of clauses 2.1 and 4 as limiting SOCA to the Transfer Properties and its charge over the Additional Properties for the recovery of its claims against Mr and Mrs Szepietowski or by treating Ashford House (as between the parties) as implicitly excluded from meeting the liability of Mrs Szepietowski to RBS notwithstanding the existence of the bank’s second charge.

RBS was not a party to the deed of settlement which was therefore limited to identifying which of the properties owned by Mrs Szepietowski should be utilised to discharge her liabilities to the bank; which should be made available to fund the compromise of the ARA’s claims; and which would be retained by Mr and Mrs Szepietowski free of those claims. On the basis of the October 2007 valuations, it was envisaged that the RBS debt would be discharged from the sale of the Additional Properties leaving the ARA with the benefit of the Transfer Properties but free of any liability to RBS in respect of Thames Street and Church Street.

Ashford House was included in Annexe A as one of the properties against which the ARA had a s.266 claim which was to be settled on the terms of the deed contained in the consent order. Ashford House was, as mentioned above, subject to a first charge in favour of The Mortgage Business PLC which, at the time the schedule in Annexe A was prepared, secured a debt of £1,459,848.34. This, as Mr Pettican emphasised, is the amount of debt listed against the property in Annexe A. It is not aggregated with the liabilities to RBS which then stood at over £3.2 million even though RBS retained a second charge over the property.

This is one of the features of the documentation which is relied upon by Mr Pettican as negativing any intention to treat the RBS debt as recoverable from the proceeds of Ashford House. It is confirmed, says Mr Pettican, by the entries for Thames Street and Church Street in Annexe B and for the Additional Properties in Annexe C which, as already mentioned, show the whole of the RBS debt as recoverable from the sale of those properties. These schedules were obviously drawn up on the assumption that the values shown would continue to obtain and, on that basis, recorded the parties’ expectations of how RBS would be paid what it was owed and SOCA would be paid the £5.35 million agreed as part of the compromise. It is accepted that they do not of themselves hold the parties to the allocation of security which was envisaged not least because there was no guarantee that property values would remain at that level. But they are relied on by Mr Pettican as clear evidence of the factual assumptions which underlay the operative parts of the deed of settlement and which are therefore said to be material to its construction.

The parties’ agreement that the Additional Properties should be realised to discharge the RBS debt is evident from clause 4.1. Clause 1.7 of the deed of settlement recites that Mrs Szepietowski had already given instructions for the sale of the two Additional Properties for a total of £3.9 million and clauses 4.1-4.4 contain detailed provisions for the disposal of these properties at a price agreed with the trustee. The provisions of clause 4.5 which Henderson J was called on to construe in his first judgment deal with what should occur in the event of an earlier sale by the trustee of Thames Street and Church Street.

In the judgment under appeal Henderson J had to consider an argument advanced on behalf of Mrs Szepietowski to the effect that the words “shall be transferred to the Additional Properties only” (my emphasis) should be read as limiting the discharge of the RBS debt to Thames Street, Church Street and the Additional Properties to the exclusion of Ashford House. He rejected that argument and said that the use of the word “only” merely reflected the assumption evident from the schedules that the Additional Properties would be sufficient to discharge the RBS liabilities and did not impose any contractual restriction on the right of SOCA to have recourse to Ashford House. That is obviously right. The short answer to the point is that the first part of clause 4.5 is concerned only with the discharge of the RBS debt as between Thames Street, Church Street and the Additional Properties in the context of a prior sale of the two Transfer Properties. It therefore refers to the possibility of the bank agreeing to limit its “combined charge over those properties and the Additional Properties” to one over the Additional Properties “only”. Only in that context must mean alone as between the two sets of properties. In any event RBS never agreed to limit its security in this way and the provision did not come into effect. Mr Pettican has not therefore sought to rely on this point in support of Mrs Szepietowski’s appeal on construction and I need say no more about it in this context.

The argument before us centred on clauses 4.6 and 4.7 of the deed of settlement. These sub-clauses dictate how the proceeds of sale of the Additional Properties are to be utilised. Clause 4.6 confirms that the proceeds of sale of the Old Bank and Torrington Close are to be used to discharge the RBS debt in priority to the proceeds of sale from Thames Street and Church Street but the clause recognises at least the possibility of the Additional Properties being insufficient to pay off all that is due to the bank. Clause 4.7 deals with what is to happen if (as contemplated) the proceeds of sale of the Additional Properties are sufficient to discharge the RBS debt and any sums secured in favour of SOCA under the provisions of clause 4.5. In that event, the balance is to be paid to Mrs Szepietowski “without deduction or set-off”.

Mr Pettican submits that the absence of any reference to Ashford House in clause 4.6 confirms the parties’ common intention that it should not be relied upon to meet the liability to RBS. The purpose of any charge granted to SOCA under clause 4.5 was to prevent SOCA being prejudiced by the order in which Thames Street, Church Street and the Additional Properties were realised. Without the charge SOCA would (under clause 4.7) have had no rights over the proceeds of sale of the Additional Properties in priority to Mrs Szepietowski’s beneficial interest. But the purpose of clause 4.5 was not, he says, to give SOCA the right to be treated as a secured creditor of Mrs Szepietowski so as to be able to avail itself of the principle of marshalling.

SOCA’s ability to invoke the principle of marshalling depends on the clause 4.5 charge granted over the Additional Properties. Had they been sold before Thames Street and Church Street and the proceeds of sale used to discharge the RBS debt in accordance with clause 4.6, SOCA would not have been a secured creditor of Mrs Szepietowski and would have had no right of recourse against the proceeds of sale of Ashford House. This would have been the case even if the sums realised from the sale of the Additional Properties had been insufficient to discharge the RBS debt in full. Under clause 4.6 the proceeds of sale of Thames Street and Church Street would have been used to meet the shortfall but SOCA would have received no further compensation for the diminution in the value of the assets which it recovered under the compromise. Although the bank would still have had recourse to Ashford House for any monies not recovered from the sale of Thames Street and Church Street, SOCA would have been limited to the sale of the remaining Transfer Properties.

None of this is, I think, in dispute. At one level SOCA’s ability to rely on the principle of marshalling is fortuitous. But for the prior sale of Thames Street and Church Street, it would not exist. That is not, however, decisive of the issue. It is clear that the assumptions about value which underpin much of the detail of the settlement have not been realised. The downturn in the property market has excluded any return for Mrs Szepietowski and SOCA under clause 4.7 but has left Ashford House with significant equity if the liability to RBS cannot be transferred.

As the judge pointed out, the frustration of the parties’ expectations in relation to the prices which could be obtained for the properties within the settlement has to be translated into contractual form before Mrs Szepietowski can succeed and Mr Pettican’s quest has been to identify the provisions in the deed which have this effect. He relies for this purpose on clauses 4.5 and 4.7 and on the release of claims in clause 2.1. The charge granted under clause 4.5 was, he says, for the limited purpose of preserving the order of priority specified in clause 4.6. Nothing more. Clause 4.7 contains, he says, a clear agreement by SOCA that the RBS debt would be paid out of the proceeds of sale of the Additional Properties (including by giving credit for any prior use of the proceeds of sale of Thames Street and Church Street) and, by implication, not from Ashford House. Alternatively, clause 2.1 releases Ashford House from the claims made against the property by the ARA in the action and this should be treated as excluding any right by SOCA to be subrogated to the rights of RBS under its second charge.

Mrs Szepietowski’s reliance on clauses 4.5 and 4.7 is, in my view, misconceived. The whole of clause 4 is concerned with the sale of the Additional Properties and the use of the proceeds of sale. They deal with the question of priority in relation to the payment of the RBS debt and clearly do so on the assumption that the Additional Properties are likely to be sufficient to discharge those liabilities: see clause 4.7. In any event, the proceeds of sale of the Additional Properties are to be used to pay off the bank before any resort is had to the Remaining RBS Properties (clause 4.6) and this order is preserved even in the event of a prior sale of the latter by the grant of the charge under clause 4.5.

The fact that the parties appear to have assumed that the RBS debt would be discharged from the Additional Properties or at least with some contribution from Thames Street and Church Street runs, if anything, counter to the submission that clauses 4.5-4.7 should be construed as excluding any right of recourse against Ashford House. The assumption explains why there is no reference to Ashford House and why no express provision to deal with it was considered necessary.

The focus of clause 4.7 is therefore on what rights Mrs Szepietowski would have to the balance of the proceeds of sale from the Additional Properties after payment of the RBS debt and any sums secured by a clause 4.5 charge. This is made clear by the reference at the end of the clause to the net proceeds of sale being accounted for to Mrs Szepietowski without deduction or set-off. It was obviously important to Mrs Szepietowski that she should be entitled to receive the money free from any other claims which the ARA might assert.

The scenario envisaged by clause 4.7 is one in which both the RBS debt and any liability to SOCA under clause 4.5 have been paid off by a sale of the Additional Properties at or near their October 2007 valuations. In that event, no question of marshalling could arise because SOCA would not be a secured creditor. I therefore find it impossible to spell out of provisions which were clearly not designed to address the issue of marshalling or the use of Ashford House to meet the RBS debt an agreement that SOCA’s rights in equity as against the other secured creditor should not be exercised even if otherwise available.

Henderson J at paragraph 30 said that:

“What the wording of paragraph 4.5 did in my judgment reflect, like the Annexes, was a common intention and expectation that the Bank's debt would be satisfied by the sale of either or both of the Claygate Properties and the Remaining RBS Properties. But as Miss Harman for SOCA submitted, a common intention and expectation of that nature is not the same thing as a contractually binding agreement that Mrs Szepietowski's debt to the Bank was to be regarded for the purposes of the compromise as being charged only on the Claygate Properties and the Remaining RBS Properties, to the exclusion of Ashford House. The need for such an agreement to be clearly expressed was all the stronger, in my view, because the Bank was not a party to the compromise, and the parties could not by agreement between themselves release Ashford House from the Bank's second charge. An agreement between the parties to proceed on the footing that Ashford House was released from the Bank's charge was, no doubt, conceptually possible, but if they had intended to contract on that basis one would expect them to have said so explicitly, and not to have left such an important point to be gathered from the indications relied upon by Mr Mitchell.”

I am of the same view.

The better argument is that SOCA’s right of recourse to the RBS charge over Ashford House is barred by the terms of clause 2.1 of the deed of settlement. The judge was impressed by this argument at the earlier hearing. In paragraph 31 of his first judgment (quoted earlier at paragraph 20) he made the point that Ashford House was one of the properties against which the ARA had asserted a claim and it was included in the list of properties in Annexe A which were released from those claims under clause 2.1 on the terms of the deed of settlement. The wording of clause 2.1 was, he suggested, wide enough to rule out a claim by SOCA to the security of Ashford House.

But, in the judgment under appeal, he changed his mind:

“35.

It remains to consider whether SOCA's marshalling claim is precluded by paragraph 2.1 of the Settlement Deed, which provided that it was made in full and final settlement of "all of the Director's claims" against the Szepietowskis in relation to the properties listed in Annexe A, including Ashford House. In my judgment, it is not. The Director's claim in relation to Ashford House was that it was recoverable property: see paragraph 20 above. Paragraph 2.1 did not refer to possible future claims against or relating to the released properties, and there is no reason to suppose that it was intended to do so. For example, if evidence were subsequently to come to light that Ashford House had been bought with the proceeds of alleged criminal conduct quite separate from that alleged in the present case, or if SOCA were to seek to enforce an order for costs by obtaining a charging order on Ashford House, I see no reason to doubt that the claim would fall outside the scope of the settlement. Clear words would have been needed if the settlement was to extend to future claims unconnected with the subject matter of the existing proceedings, and in particular to claims based on factual situations which had not yet arisen.

36.

Miss Harman referred me in this connection to the decision of the House of Lords in BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, where the House held that there were no special rules of interpretation applicable to a general release in a settlement agreement, and that it was to be construed in the same way as any other contract by reference to the principles expounded by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913. The facts in that case were more extreme than the facts in the present case, because there was no way in which the parties could have foreseen the claims for stigma damages that the employees of BCCI who had been made redundant in 1990 subsequently wished to advance. On the other hand, the settlement agreement which the employees had entered into with BCCI in 1990 was broadly worded, obliging the employees to accept the terms on offer "in full and final settlement of all or any claims whether under statute, common law or in equity of whatsoever nature that exist or may exist" against the bank. Despite the breadth of this wording, however, their Lordships held, Lord Hoffmann dissenting, that the stigma claims were not caught by the terms of the settlement. As Lord Bingham put it in paragraph [19]:

"On a fair construction of this document I cannot conclude that the parties intended to provide for the release of rights and the surrender of claims which they could never have had in contemplation at all. If the parties had sought to achieve so extravagant a result they should in my opinion have used language which left no room for doubt …"

See too the speech of Lord Nicholls at [35]. The present case is not, of course, on all fours, but application of the principle laid down by the House in that case satisfies me that the wording of paragraph 2.1 was not wide or clear enough to embrace a future marshalling claim by SOCA in relation to Ashford House.”

The claims released under clause 2.1 were the ARA claims against Mr and Mrs Szepietowski in relation to the properties listed in Annexe A. This was a compromise of the s.266 claims in the existing proceedings. There were no other claims. Nor (unlike in BCCI v Ali) did clause 2.1 settle any future claims which the ARA might have against the properties.

The claim to be subrogated to the RBS charge against Ashford house is not a claim against Mrs Szepietowski in the proceedings or even a claim against her at all. It is a claim to enforce the subsisting clause 4.5 charge by invoking the court’s equitable jurisdiction to marshal the available security between existing creditors. Clause 2.1 is not directed to that issue which arises as a result of rights granted to SOCA under the deed.

I therefore consider that the judge was right in his construction of clause 2.1. Even taking into account all the relevant circumstances, the natural and ordinary meaning of the words used is clear. They do not amount to an unconditional release of all possible claims by SOCA against Ashford House and, for the reasons which I have given, there is nothing in clause 4 which limits the rights of SOCA as a secured creditor to whatever it can recover from a sale of the Additional Properties. The fall in the property market which has created these difficulties was probably not foreseen and certainly was not provided for in the deed of settlement. Mr Pettican says that this means that SOCA was exposed to a risk that the Transfer Properties would not produce the £5.35 million settlement figure that was contemplated. But, in my view, it means that the risk lies where it falls and SOCA is entitled to exercise whatever rights as a secured creditor the law gives it unrestricted by the terms of the deed of settlement.

The second ground of appeal raises the issue of whether the judge was right to allow SOCA to marshal the relevant securities in this case. Mr Pettican submits that even if the deed of settlement, on its true construction, did not impose a contractual fetter on SOCA’s right to marshal, it would nonetheless be inequitable for it to be permitted to do so. This argument is based partly on whether the conditions precedent for marshalling are satisfied in this case and partly on more general considerations of fairness.

The first point taken is that the intervention of equity as between the secured creditors depends in the case of marshalling on the bank (as the creditor with two available securities) electing to disappoint the creditor with only one security (SOCA). This is based on a passage in the judgment of Lord Eldon LC in Aldrich v Cooper (1803) 3 Vesey Junior 382 at page 394 where he said that:

“But it is the ordinary case to say that a person having two funds shall not by his election disappoint the party having only one fund, and equity, to satisfy both, will throw him, who has two funds, upon that which can be affected by him only, to the intent that the only fund, to which the other has access may remain clear to him.” (emphasis added)

It is said that there is no suggestion that the bank has done anything to disappoint SOCA. The realisation of its security in the form of the Additional Properties and the properties at Thames Street and Church Street was carried out by SOCA and Mrs Szepietowski in accordance with their own agreement.

This point was not argued before the judge and, in my view, there is nothing in it. Lord Eldon cannot have been suggesting that the equity can only arise if the creditor with more than one security chooses positively to disadvantage the less-well secured creditor in selecting which property to sell. He was simply describing the situation which will arise when a creditor in the position of the bank has realised a security which places the other creditor at a disadvantage. In these circumstances, the equity arises to correct the imbalance so far as there is other available security to permit that. It does not depend on the existence of some deliberate act of vindictiveness or caprice on the part of the bank: see Across Australian Finance Pty Ltd v Kalls [2008] NSWSC 783.

The second point takes up Mr Pettican’s earlier submissions about the purpose of the charge granted pursuant to clause 4.5. Although he does not challenge the judge’s finding that the charge does secure a debt due to SOCA in the secured amount as defined, he repeats the point that the sole purpose of the charge was to preserve the priorities specified under clause 4.6 in the event of a prior sale of Thames Street and Church Street. No debt existed before the execution of the charge and it was a triumph of form over substance for the judge to have relied on the technical existence of a debt in order to satisfy the two debt condition required in order for marshalling to take place.

I am not sure that this point is available to Mr Pettican under the grounds of appeal for which permission was granted but it cannot really stand as a point on its own. There is no appeal against the judge’s finding that the clause 4.5 charge did create a relevant debt between Mrs Szepietowski and SOCA for the purpose of the marshalling rule. The point about the limited purpose of the charge granted by Mrs Szepietowski to SOCA really falls to be considered as part of Mr Pettican’s more general submission that the judge was wrong to exercise an equitable discretion in favour of SOCA in this case.

This part of the argument again centres on what is said to have been the common intention and expectations of the parties when they entered into the settlement. As mentioned earlier when I dealt with the arguments on construction, the parties are said to have negotiated the terms on certain assumptions about values which, in the event, were not realised. Their expectation was that the Additional Properties would be sold at a price which would discharge the RBS debt and anything due under a clause 4.5 charge, leaving SOCA with the full value of Thames Street and Church Street. At worst it might be necessary to use part of the proceeds of sale of those properties to meet that liability but it was not anticipated that any recourse would be needed to the charge over Ashford House.

Mr Pettican contends that what has happened has been in accordance with those expectations. The RBS debt has been satisfied out of the proceeds of Thames Street and Church Street and the Additional Properties. It would therefore be odd to re-allocate the payment of the RBS debt to the bank’s charge over Ashford House when this was the one property which neither party contemplated would be used for this purpose. An equitable jurisdiction should not, he says, be used so as to defeat the expectations of the parties and a real injustice would be done to Mrs Szepietowski and her family if that is allowed to occur.

I am not convinced that this is sufficient to defeat SOCA’s claim to an equitable remedy to which it would otherwise be entitled. The expectation of the parties can be used to support arguments on both sides about the unfairness of the situation in which the parties now find themselves. SOCA’s own expectations that it would take Thames Street and Church Street free of the RBS debt or recover what was due under its charge have also been frustrated by events. But, in my view, considerations of this kind are not sufficient to make it inequitable to grant the relief sought. Absent some contractual bar to the remedy, it would be necessary for Mrs Szepietowski to show that SOCA’s reliance on the principle of marshalling involved it resiling from some kind of assurance or representation given at the time which Mrs Szepietowski relied on to her detriment. The mere fact that neither party contemplated that the present situation would come about is not enough. The court does not have an unlimited discretion to exercise.

The judge was not asked to hear evidence directed to this point and the appeal has been argued solely by reference to the deed of settlement and the known history of events. It is not open to us, in my judgment, to interfere with the judge’s order on this ground.

I would therefore dismiss this appeal.

I agree.

I also agree.