Highbury Pension Fund Management Company & Anor v Zirfin Investments Management Ltd & Ors

The principal of marshalling is an equitable principle. In its classic form it applies where two or more creditors are owed debts by the same debtor, one of whom can enforce his claim against more than one security or fund but the other can resort to only one. In those circumstances the principle gives the second creditor a right in 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 - see In Re Bank of Credit and Commerce International [1998] AC 214.

By extension the same principle applies where (1) there is a common debtor, A, who owes money to two creditors; (2) one of the creditors is also entitled to recover the same debt from security given by a different debtor, B; and (3) as between A and B, A has a right to ensure that B bears the ultimate liability for the debt. Typically the extended principle will apply where B is the principal debtor and A is a surety.

In our case Norris J decided that the extended principle applied. His judgment is at [2013] EWHC 238(Ch), [2013] 3 All ER 327 where the full facts may be found.

Put shortly and in very simplified form they were these.

Norris J had to decide a number of issues against most of which there is no appeal. He decided that Highbury was entitled to the benefit of the equitable principle of marshalling. This was because as between it and the affiliate Zirfin was entitled to ensure that the Affiliates bore ultimate liability for their own debts. Thus Zirfin was entitled to be subrogated to Barclays' rights over the properties charged to it by the Affiliates. This too is in principle no longer contentious. However, the guarantee given by Zirfin to Barclays contained a clause, clause 8, which said: "This guarantee is to be applicable to the ultimate balance that may become due to the bank from [an affiliate] and until payment of such balance no guarantor shall be entitled to participate in any security held or money received by the bank on account of any such balance or to stand in the bank's place in respect of any security or money."

By this clause, Zirfin had contractually modified the rights of subrogation to which as surety it would ordinarily be entitled on payment of a principal debtor's debt. Norris J held that because Highbury was claiming through Zirfin it is not entitled to any greater right than Zirfin would have had against the Affiliates. Having decided that the extended principle applied, he continued in paragraphs 49 and 50 of his judgment:

Accordingly the judge held that Highbury's rights over the properties charged to Barclays could not be exercised until Barclays had been paid in full. It is only that part of the judge's order that is challenged.

With the judge's permission Highbury appeals. Mr Deacock, who appears on its behalf, takes three points. (1) The judge should not have decided the point at all because it was not a point that Barclays was taking.

Barclays takes a neutral stance on the first two points but does not accept that it has waived any of the rights it has, whatever they may be. For reasons which have not been fully explained it does not wish to realise its additional securities at present.

For the reasons that follow, I would allow the appeal on the second of Mr Deacock's points.

Mr Deacock accepts that the impact of clause 8 was something that was raised before the judge but not by Barclays. It was a point that was raised on behalf of the Serious Fraud Office which appeared before the judge because there was also in place a restraint Order made under the Proceeds of Crime Act 2002 with which the judge was also concerned. This part of the SFO's argument, according to Mr Deacock, was deployed in support of its overall argument that Highbury was not entitled to invoke the principle of marshalling at all, rather than as a freestanding point on the effect of the principle if indeed it applied.

The judge's duty, as I see it, was to apply the law as he found it to be. When deciding what the law is, the judge is not bound by concessions or agreements made by the parties. He must of course give each party a fair opportunity to make submissions about legal points. If he does not do that that will amount to a procedural irregularity which may cause injustice. But in this case the point was raised and argued. I do not consider that the judge can be criticised for taking it into account in his determination of what the law was. In addition, since Mr Deacock has advanced his argument in full in this court, no practical injustice has resulted.

So I pass to the question whether the judge was wrong to hold that clause 8 restricted the application of the principle of marshalling. This I think requires us to consider the nature of the principle.

I begin with the classic statements of Lord Eldon LC in the several judgments he gave in Aldrich v Cooper (1803) 8 Ves. 382. The statements of principle are as follows:

These statements of principle were approved by the House of Lords in Duncan, Fox and Co v The North and South Wales Bank (1886) 6 AC 1. The latter case is now the leading authority on the principle of primary and secondary liability for debts. One consequence of the application of the principle that if the first mortgagee with more than one security satisfies his debt out of the property over which the second mortgagee has his only security, the second mortgagee is entitled to stand pro tanto in the place of the first mortgagee in relation to the property over which the second mortgagee has no legal security. That is the essence of Lord Eldon's final conclusion. It is in this sense that we can say that the second mortgagee is in effect subrogated to the rights of the first mortgagee.

The extended principle derives from another judgment of Lord Eldon LCin Ex parte Kendall (1811) 17 Vesey Jun 514. The judge quoted the relevant paragraphs from Lord Eldon's judgment in paragraphs 21 and 22 of his judgment, having corrected a misprint, as follows:

“We have gone this length: if A has a right to go upon two funds and B upon one, having both the same debtor, A shall take payment from that fund, to which he can resort exclusively; that by those means of distribution both may be paid. That course takes place, where both are creditors of the same person; and have demands against funds, the property of the same person. Here, it is true, there may be creditors, who have demands against the four, and others who have demands against the one: but it was never said, that, if I have a demand against A and B, a creditor of [B] shall compel me to go against A; without more; as, if B himself could insist, that A ought to pay in the first instance; as in the ordinary case of… principal and surety; to the intent, that all the obligations arising out of these complicated relations, may be satisfied: but, if I have a demand against both, the creditors of B have no right to compel me to seek payment from A; if not founded upon some equity, giving B the right for his own sake to compel me to seek payment from A.”

The judge rightly observed:

In my judgment the way in which the original principle in its classic form is framed fastens on the conduct and the conscience of the doubly secured creditor. It is the fact that he has the choice which fund to resort to and the power at law to disappoint the singly secured creditor which brings the equity into play. The equity requires him to have recourse to or be treated as having had recourse to that fund which is unavailable to the singly secured creditor. Thus the equity is an equity which arises as between the two creditors, in our case Barclays and Highbury. I do not doubt that the right could be excluded by contract, but the contract would in my judgment have to be one between the two creditors themselves. As Lord Eldon explained in Aldrich v Cooper, the interest of the debtor is not regarded. As he also explained, if the doubly secured creditor resorts to the fund over which both creditors have security, then the singly secured creditor is entitled to stand in the place of the doubly secured creditor as regards the remaining securities. Thus in my view the equity arising between Barclays and Highbury is not the same equity as that which arises between Zirfin and the Affiliates. The existence of a latter equity is the gateway for the application of the former equity but I do not see why it should fundamentally change the nature of the former. That is my first reason for respectfully disagreeing with the judge.

What then is the equity between Zirfin and the Affiliates? The equity on which Mr Deacock relies is the equity of exoneration. Where two persons are liable to a creditor for the same debt, but as between themselves one of them is primarily liable and the other is only secondarily liable, the debtor with the secondary liability is entitled to be exonerated from liability by the primary debtor. This equity, unlike the remedy of subrogation, is not dependent on actual payment by the secondary debtor. As soon as the liability is crystallised he is entitled to go to a court. Thus in Re Richardson [1911] 2 KB 705, Sir Herbert Cozens-Hardy MR said:

Plainly these personal remedies of a surety before payment are nothing to do with the surety's entitlement on payment of the guaranteed debt to be subrogated to the creditor's remedies or securities, yet they are still part of the equity of exoneration. Clause 8 of Zirfin's guarantee is in my judgment directed at precluding Zirfin from becoming subrogated to Barclays’ rights before payment of Barclays in full. It would not in my judgment have prevented Zirfin from having brought an action against an affiliate of the kind described in Re Richardson based on its equity of exoneration. Nor in my judgment does it prevent Highbury from relying on its own right in equity as between itself and Barclays. In addition, as Mr Deacock submitted, the purpose of clause 8 is to prevent a guarantor from competing with Barclays. Here Highbury will not complete with Barclays. On the contrary it will use its own right to procure payment of Barclays. This is my second reason for respectfully disagreeing with the judge.

Accordingly, I do not consider clause 8 impacts on the extension of the principle of marshalling as described by Lord Eldon. Accordingly, in my judgment the judge was wrong to hold Highbury's right to invoke the principle of marshalling was circumscribed by clause 8 of the guarantee.

That is not quite the end of the story. Miss Cooke, appearing for Barclays, points out in her written argument that the principle of marshalling is not allowed to defeat or delay the doubly secured creditor in the enforcement of his securities. The authorities upon which she relies for that uncontroversial proposition are Re Bank of Credit and Commerce International SA (No 8) [1996] Ch 245 and Szepietowski v SOCA [2011] EWCA Civ. 856.

In our case Barclays chose to realise its security over 31 Brompton Square. Highbury have no complaint about that. It is not disputed that if Highbury were to realise its securities over the Affiliates' properties it would have to give priority to repayment of the Barclays loans. Any other result would undoubtedly operate to the prejudice of Barclays. The question then is whether this limitation on the application of the principle of marshalling means that Highbury cannot insist on the immediate realisation of Barclays other securities over the Affiliates' property, even if Barclays is paid in priority to Highbury. On the footing that Barclays will retain its priority over Highbury, if and when the additional securities come to be realised, I cannot see that Barclays' rights as secure creditor will be defeated. Nor in my judgment will Barclays be delayed in realising the securities. On the contrary, the realisation of the securities and the redemption of Barclays’ loans will be accelerated rather than retarded. Barclays has not adduced any evidence to show that it would suffer any prejudice by the earlier realisation of the securities. That being so, I can see no reason to deny Highbury the right to realise the securities immediately.

Accordingly, I would allow the appeal on the second point. The third point, namely waiver, does not arise.