Serious Organised Crime Agency v Szepietowski & Ors

The issue in this action is whether the Serious Organised Crime Agency (“SOCA”), in its capacity as the former second mortgagee of certain properties at Claygate in Surrey (“the Claygate Properties”), is entitled to invoke the equitable doctrine of marshalling in relation to first charges held by National Westminster Bank Plc (“the Bank”) over the Claygate Properties and a second charge, also held by the Bank, over a property known as Ashford House, Four Winds Park, Old Avenue, St George’s Hill, Weybridge, Surrey (“Ashford House”). The position, in brief, is that the Claygate Properties have now been sold, and the proceeds of sale were nearly exhausted in paying off the sums due to the Bank under its first charges, leaving only a small sum of £1,324.16 to be paid to SOCA in respect of the amount secured by its second charges, which is in excess of £1.24 million. In these circumstances, SOCA wishes to step into the shoes of the Bank as second chargee of Ashford House, and to keep the second charge alive as a security for the unsatisfied balance of the sums secured on the Claygate Properties.

Ashford House is the matrimonial home of John Szepietowski, the third defendant, and his wife, Susan Szepietowski (née Seery), the first defendant. They live there with their four children, one of whom has special needs. Mrs Szepietowski is the sole legal owner of Ashford House, which is registered at HM Land Registry under title number SY582158. In earlier proceedings between SOCA and the Szepietowskis it was common ground that Mr Szepietowski has a 50 per cent beneficial interest in Ashford House, but this is not conceded in the present action. The Szepietowskis do, however, expressly accept that they are between them the sole beneficial owners of Ashford House.

Mrs Szepietowski was also the sole registered proprietor of the Claygate Properties at all material times before they were transferred to the Trustee for Civil Recovery shortly after 16 January 2008, pursuant to the terms of a Consent Order of that date (“the Consent Order”) and a deed of settlement dated 15 January 2008 (“the Settlement Deed”) made in the earlier proceedings.

The Bank’s charges which I have mentioned were all granted by Mrs Szepietowski to the Bank. They were “all monies” charges, in the Bank’s standard form, securing payment to the Bank of all her liabilities to it of any kind, whether past, present or future, together with the Bank’s charges and commission, interest and expenses. The second charge over Ashford House was granted by her on 10 October 2002. The first charges over the Claygate Properties were granted by her on various dates between 2 January 2001 and 12 March 2004.

The second charges which Mrs Szepietowski granted to SOCA over the Claygate Properties were given on 4 September 2009. The obligation to grant them was contained in paragraph 4.5 of the Settlement Deed, and arose in circumstances where (as happened) two of the properties transferred to the Trustee for Civil Recovery, defined in the Settlement Deed as “the Remaining RBS Properties” and in respect of which Mrs Szepietowski had also granted all monies charges to the Bank, were sold before the Claygate Properties (which were defined in the Settlement Deed as “the Additional Properties”). The amount to be secured by the charges was to be equivalent to the sum paid by the Trustee for Civil Recovery to the Bank from the proceeds of sale of the Remaining RBS Properties. It is common ground that this sum was £1,240,974.90, which was paid to the Bank and applied by it in reduction of Mrs Szepietowski’s indebtedness to the Bank.

The parties were unable to agree whether the replacement charges granted by Mrs Szepietowski to SOCA were (as she contended) to be charges over the Claygate Properties alone, or whether (as SOCA contended) they were also to include Ashford House. In due course I heard an application by Mrs Szepietowski against SOCA which was brought to resolve this point, and in a judgment which I delivered on 19 March 2009 I held that Mrs Szepietowski’s contention was correct: see The Director of the Assets Recovery Agency v John Szepietowski and others [2009] EWHC 655 (Ch), unreported. SOCA (as the Assets Recovery Agency had become on 1 April 2008) did not seek permission to appeal against my judgment, and although the parties were for some time unable to agree on the precise form and wording of the charges, they eventually managed to resolve their differences without a further application to the court, and a minute of order was sealed on 16 July 2009.

The order directed the Trustee for Civil Recovery to transfer the Claygate Properties into Mrs Szepietowski’s name, and directed her then to execute a legal charge substantially in the form of the draft deed annexed to the order over each of the properties. These were the charges which she finally executed on 4 September 2009. They were, of course, second charges, because the Claygate Properties were all subject to existing first charges in favour of the Bank.

The judgment which I gave on 19 March 2009 sets out the background to the case and the relevant provisions of the Consent Order and the Settlement Deed. I will not repeat most of that material, and the present judgment should be read with and treated as a sequel to it.

As my earlier judgment makes clear, the present problem has been caused by the downturn in the property market since the date of the compromise in January 2008. As paragraph 4.5 of the Settlement Deed records, the total amount owed by Mrs Szepietowski to the Bank on 14 January 2008 was £3,398,507.18. At that date, it was the confident expectation of all parties that this debt would be discharged in full on the sale of the Claygate Properties, which Mrs Szepietowski had already placed on the market with instructions to exchange contracts, at a combined asking price of £3.9 million: see recital 1.7 of the Settlement Deed (which refers to the Claygate Properties as “the Torrington Close properties” and “the Old Bank properties”). If those sales had proceeded as expected, the Bank would have been repaid in full and its other charges over the Remaining RBS Properties (Thames Street and Church Street) and Ashford House would have been released. In those circumstances, SOCA would have obtained the full unencumbered value of the Remaining RBS Properties, which were among the Transfer Properties set out in Annexe B to the Settlement Deed, and no question of marshalling could have arisen.

In fact, however, the sales of the Claygate Properties did not proceed, and the first of the properties subject to the Bank’s charges to be sold were the Remaining RBS Properties. This triggered the provisions of paragraph 4.5 of the Settlement Deed, and since the Bank was naturally unwilling either to confine its security to the Claygate Properties, or to release its security over the Remaining RBS Properties, the net proceeds of sale had to be paid to the Bank in partial satisfaction of its debt. This then gave rise to the obligation on Mrs Szepietowski to grant SOCA corresponding second charges over the Claygate Properties.

All would still have been well if the sale of the Claygate Properties, when it eventually occurred, had realised a large enough sum to pay off both the balance of the Bank’s debt and the secured amount of approximately £1.24 million due to SOCA. But that is not what happened. The Claygate Properties were sold by Mrs Szepietowski between November 2009 and January 2010 for a gross consideration of only £2.33 million. There is no suggestion that the price thus realised represented anything less than the market value of the properties in the conditions then prevailing. This sum was just sufficient to redeem the Bank’s charges in full, but it left only the small sum of £1,324.16 which I have already mentioned to pay to SOCA under its second charges.

The current position, therefore, is as follows. Unless SOCA can throw the unsatisfied burden of its second charges onto Ashford House, and step into the shoes of the Bank as second chargee of Ashford House, the outcome is that the charges granted by Mrs Szepietowski to SOCA over the Claygate Properties have yielded next to nothing, and SOCA will receive correspondingly little in respect of the Remaining RBS Properties, even though they were included in the list of Transfer Properties, and their estimated unencumbered value of £1.355 million formed part of the total equity of £5,402,679.97 set out in Annexe B to the Settlement Deed. As the notes at the end of Annexe B make clear, the Transfer Properties were selected in order to provide SOCA with the equivalent of an agreed settlement sum of £5.375 million. The estimated equity in the Transfer Properties exceeded this sum by £27,679.97, but clause 10.2 of the Settlement Deed provided for the repayment of this surplus to the Szepietowskis if SOCA eventually realised more than £5.375 million from the sale of the Transfer Properties.

In related proceedings last year concerning the part of SOCA’s claim against the Szepietowskis which was not settled in 2008, I found that the current market value of Ashford House was in the region of £2.75 million to £3.25 million: see Serious Organised Crime Agency v Szepietowski and others [2009] EWHC 344 (Ch), [2010] 1 WLR 1316 at paragraph 49 on p.1336. Ashford House is subject to a first legal charge dated 4 September 2002 in favour of The Mortgage Business Plc, and it is agreed that the amount now outstanding under that charge is in the region of £1.5 million. Since the Bank has now been repaid in full, subject only to a possible claim for costs in respect of the present action, it follows that there should be equity in Ashford House of between about £1.25 million and £1.75 million. This ought to be enough to satisfy SOCA’s outstanding secured claim, but only if it can rely on the principle of marshalling.

The principle of marshalling was described by Lord Hoffmann in In re Bank of Credit and Commerce International S.A. (No.8) [1998] AC 214 at 230-1 in the following terms:

“This is 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.”

SOCA submits that the basic requirements for application of the principle are satisfied, because there is a single debtor (Mrs Szepietowski) who owed debts to two creditors (the Bank and SOCA), but the Bank was able to enforce its claim against (relevantly) two securities, namely the Claygate Properties and Ashford House, whereas SOCA was confined to its security on the Claygate Properties. In those circumstances, says SOCA, it has an equity to require the Bank to be treated as having satisfied itself so far as possible out of Ashford House, and by a process akin to subrogation SOCA should be entitled to enforce the Bank’s second charge against Ashford House to the extent of the shortfall.

On the face of it, this is a powerful submission, and SOCA very fairly gave notice at the hearing in March 2009 that it would in due course seek to rely on the doctrine of marshalling: see paragraph 28 of my earlier judgment. Indeed, this was one of the reasons why SOCA insisted on Mrs Szepietowski granting charges pursuant to clause 4.5 of the Settlement Deed. In my judgment, however, there is a prior question which has to be answered before one reaches the stage of considering whether the principle of marshalling can apply. That question is whether the agreement reached between the parties and embodied in the Settlement Deed and the Consent Order implicitly excluded Ashford House, as between the parties to the compromise, from bearing any part of Mrs Szepietowski’s liability to the Bank, and (if so) whether such an agreement precludes the operation of marshalling in the events which have now happened.

This was the issue to which counsel for Mrs Szepietowski (Mr Andrew Mitchell QC, leading Ms Linda Saunt) devoted most of his written and oral submissions, and I agree with him that it needs to be determined first.

For completeness, I should record that the present action was begun by a claim form under CPR Part 7 issued on 4 September 2009. It soon transpired, however, that the basic facts were unlikely to be in dispute, and in the end the case was tried on the basis of an agreed statement of facts, most of which I have already incorporated in the foregoing narrative. A number of witness statements were exchanged, but none of the authors was called to give evidence and there was no cross-examination. Although some reference was made to the statements during the hearing, I am satisfied that with the exception of factual material replicated in the agreed statement they contain nothing which will assist me to resolve the case.

The arguments advanced by Mr Mitchell in support of the alleged agreement to exclude Ashford House from bearing any part of the liability for the debt due to the Bank from Mrs Szepietowski are in essence the same as the arguments which led me to conclude in my earlier judgment that paragraph 4.5 of the Settlement Deed did not oblige her to grant a charge over Ashford House.

A convenient starting point is the inclusion of Ashford House in Annexe A to the Settlement Deed, that is to say in the list of properties which were to be released from the interim receiving order once the Trustee for Civil Recovery had taken possession of the Transfer Properties and the Claygate Properties: see paragraph 2 of the Consent Order. By virtue of paragraph 4 of the Consent Order, all further proceedings by SOCA in its claim to Ashford House were stayed on the terms of the Settlement Deed, save for the purpose of carrying those terms into effect. The Settlement Deed provided, by paragraph 2.1, that it was made “in full and final settlement of all of the Director’s claims against the Respondents” in relation to Ashford House and the other assets listed in Annexe A.

The nature of SOCA’s claim against Ashford House was that it constituted recoverable property within the meaning of section 266 of the Proceeds of Crime Act 2002, having allegedly been acquired with the proceeds of unlawful conduct, namely fraudulently obtained mortgage finance and income concealed from HMRC. Accordingly, by the compromise SOCA gave up, at least, any existing claims which it then had to establish that Ashford House was recoverable property, and the interim receiving order was discharged in relation to Ashford House, thereby restoring it to the Szepietowskis as an asset which they were free to retain or deal with as they thought fit. It is relevant to bear in mind, says Mr Mitchell, that the compromise was a property-based one, and that the original purpose of the proceedings, so far as Ashford House was concerned, had been to establish that it was recoverable property.

Ashford House was, however, an encumbered asset. It was subject to the first charge in favour of The Mortgage Business Plc, securing approximately £1.5 million, and to the second all monies charge in favour of the Bank. As I have already explained, the Bank also held similar charges over all of the Claygate Properties and the Remaining RBS Properties. The Remaining RBS Properties were included in the list of Transfer Properties in Annexe B, that is the properties to be transferred to the Trustee for Civil Recovery. The Claygate Properties were not included in the Transfer Properties, although they were also to be transferred to the Trustee: see paragraph 3.1 of the Settlement Deed. After the transfer, they were to be dealt with in accordance with the procedure laid down in paragraphs 4.1 to 4.8, which I quoted in full in paragraph 16 of my earlier judgment.

Mr Mitchell emphasises, as he did at the previous hearing, that the only debt shown as secured on Ashford House in Annexe A was an amount of £1,459,848.34, although the parties were plainly well aware that the Bank was also a secured creditor (as shown in the second column of the Annexe) and that the amount of Mrs Szepietowski’s debt to the Bank was in excess of £3.2 million (the figure for the Bank’s debt used in the Annexes is £3,224,668.77; by 14 January 2008 it had evidently grown to £3,398,507.18 as recorded in paragraph 4.5). It is now common ground that the whole of the sum of £1,459,848.34 shown as charged on Ashford House was referable to the first charge in favour of The Mortgage Business Plc. By contrast, the full amount of the Bank’s debt was shown as charged on each of the Claygate Properties and the Remaining RBS Properties, and the contrast is reinforced by notes in the debt column of the Annexes which explained that the Bank’s debt was a combined liability charged on all of those properties, but with no mention of Ashford House.

If one asks why the parties should have treated Ashford House as though it were free from any liability for the Bank’s debt, the answer, submits Mr Mitchell, is to be found in the provisions of paragraphs 4.5 and 4.6 of the Settlement Deed. In view of the importance of these provisions, I will now set them out again, substituting the definitions which I am using in this judgment:

“4.5

If the Trustee wishes to sell [the Remaining RBS Properties] before [the Claygate Properties] are sold then the Respondents agree that, if the [Bank] consents, the combined charge over these properties and [the Claygate Properties] in favour of the [Bank] (amounting to £3,398,507.18 as at 14 January 2008) (the “Charge”) shall be transferred to [the Claygate Properties] only. If the [Bank] 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 [Bank] 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 Claygate Properties] shall be used in priority to the funds from the sale of the Remaining RBS Properties in satisfaction of the Charge.”

These provisions make it clear, says Mr Mitchell, that the parties agreed to proceed on the footing that only the Claygate Properties and the Remaining RBS Properties should be liable for discharge of the Bank’s debt. That is the force of the words “shall be transferred to [the Claygate Properties] only” in paragraph 4.5, which mean exactly what they say. Had the parties intended that Ashford House should also be potentially liable, they would have said so. Full force must be given to the word “only”, which shows that Ashford House was excluded from consideration. Similarly, paragraph 4.6, although primarily dealing with the question of priority as between the Claygate Properties and the Remaining RBS Properties, envisages that their combined sale proceeds, and nothing else, will be used to satisfy the charge.

These submissions were skilfully deployed by Mr Mitchell, and for a time I found them persuasive; but on reflection I am satisfied that he is asking the court to read too much into the agreement. The treatment of the Bank’s debt in the Annexes is readily explicable on the basis that everybody expected there to be enough equity in the Claygate Properties to discharge the Bank’s debt in full, and the Claygate Properties were already on the market for sale. Had those sales proceeded, Ashford House would indeed have been released from the Bank’s second charge, and there would have been no threat to its continued use and occupation by the Szepietowskis as their family home. The Bank’s debt was therefore shown in the Annexes as an encumbrance on the properties which were expected to discharge it, with alternative provisions to cater for the possibility that the Remaining RBS Properties might be sold first. However, a common expectation of this nature falls well short, in my judgment, of a contractual obligation which would have precluded SOCA from having any recourse to Ashford House, by virtue of charges granted to it pursuant to paragraph 4.5, if it turned out that the sale proceeds of the Claygate Properties were insufficient to discharge the balance of the Bank’s debt and the amount due to SOCA.

A contractual obligation of this nature would have meant that SOCA took all the risk of a downturn in the property market, and would have prevented SOCA from having recourse to Ashford House, even though the calculation of the equity in the Transfer Properties in Annexe B assumed that the Claygate Properties alone would suffice to discharge the Bank’s debt. This assumption was reinforced by paragraph 4.5, the evident purpose of which was to ensure, as far as possible, that SOCA would not be prejudiced by the order of realisation of the Claygate Properties and the Remaining RBS Properties. This purpose was achieved by giving SOCA the right to require security over the Claygate Properties for an amount equal to the sum paid to the Bank from the proceeds of the Remaining RBS Properties in reduction of its debt. Such a security had to be a second charge, ranking behind the Bank’s charge for the balance of its debt. But the Bank also had its security over Ashford House, so the principle of marshalling would potentially come into play if SOCA’s charges were left unsatisfied on a sale of the Claygate Properties.

It seems to me that clear words, or an implication which satisfies the usual test of necessity, would have to be found in order to preclude SOCA contractually from invoking the principle of marshalling in such circumstances. Mr Mitchell submitted that appropriately clear words are to be found in paragraphs 4.5 and 4.6, but I am unable to agree.

To begin with paragraph 4.6, I consider that its focus is only on the question of priority, and that nothing further can be gleaned from the words “in satisfaction of the Charge”. These words merely show that the question of priority related to the use of the proceeds of sale to satisfy the charge. They do not carry the necessary implication that the charge was to be satisfied exclusively from those proceeds of sale, without recourse to Ashford House in any circumstances.

With regard to paragraph 4.5, Mr Mitchell’s submissions went significantly further (as he acknowledged) than at the earlier hearing, when it was common ground that the words “shall be transferred to [the Claygate Properties] only” cannot be read literally, and must have been meant to refer to the release of the Remaining RBS Properties from the Bank’s security. Thus in paragraph 22 of my earlier judgment I said this:

“It is common ground that what the parties must have meant by this rather inaccurate language is that Thames Street and Church Street would be released from the RBS charge and not that the RBS charge should thenceforth be secured on the Additional Properties alone, to the exclusion of Ashford House.”

In my view this must indeed be the correct interpretation, because the transfer of the charge was expressly predicated on the Bank’s consent to it. Whatever the parties may have agreed between themselves, they cannot sensibly have contemplated the Bank being asked, and agreeing, to give up not only its security on the properties to be sold, but also its security on Ashford House. The Bank was not, after all, a party to the compromise, and although it may well have regarded its second charge over Ashford House as a long-stop or back-up security for Mrs Szepietowski’s business debts, it must have had good reason for requiring the charge to be given. It is improbable enough that the Bank should have been thought willing to contemplate giving up its security over the Remaining RBS Properties, which were valued for the purposes of the compromise at £1.355 million. The suggestion that the Bank might have been thought willing also to give up its security over Ashford House, valued at £2.3 million, I find simply incredible.

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.

Mr Mitchell sought to gain further support for his argument by pointing out that if the Claygate Properties had been sold first, but the proceeds of sale had been insufficient to discharge the Bank’s debt in full, the Bank would then have been paid the balance of its debt when the Remaining RBS Properties were subsequently sold; but paragraph 4.5 would not have applied, so SOCA would have had no charges to secure the amount paid to the Bank on the subsequent sale, and no question of marshalling could have arisen. Accordingly, SOCA would have had to bear the resulting shortfall in the equity of the Transfer Properties.

All this is true, but there are two reasons why I do not think the point assists Mr Mitchell.

The first reason is that this is a very unlikely sequence of events. If the Claygate Properties had been sold first, this would almost certainly have been pursuant to the sales which were already in hand and progressing towards exchange of contracts in January 2008; but the combined asking price for those sales was £3.9 million, comfortably in excess of the Bank’s debt. So the possibility that the Claygate Properties would be sold first, but would not realise enough to discharge the Bank’s debt, was a remote one.

Secondly, and more importantly, the difference in outcome simply reflects the fact that the provisions of paragraph 4.5 presupposed a sale of the Remaining RBS Properties before the Claygate Properties. It was only in that order of events that the obligation on Mrs Szepietowski to grant the second charges over the Claygate Properties, and thus the possibility of marshalling, could arise. The fact that SOCA might have been left without a remedy in other, even more unlikely, circumstances is not a reason for concluding that the parties meant SOCA to have no remedy in a situation where SOCA was expressly granted the right to a further charge and where the principle of marshalling would prima facie be capable of applying.

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.

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.

For all these reasons, I conclude that there is nothing in the Settlement Deed or the Consent Order which either explicitly or implicitly prevents SOCA from relying on the principle of marshalling in relation to Ashford House. I acknowledge that this conclusion does not sit very easily with some of the views which I expressed in paragraphs 31 to 33 of my earlier judgment, and I do not disguise the fact that I have, to a certain extent, changed my mind in the light of the further argument addressed to me at the present hearing. However, I still think that my actual decision on the earlier occasion was correct, and Miss Harman has not sought to suggest the contrary. Furthermore, I made it clear in the discussion which followed the handing down of my earlier judgment, a transcript of which is included in the bundle, that I was expressing no view on the merits of the marshalling argument, because I had not yet heard full argument on it. Mr Mitchell rightly did not argue that the point was res judicata, and although I regret the element of inconsistency between my present judgment and its predecessor, I can only say that it is my clear duty to state the conclusions which I have now reached, in a different case and with the benefit of further argument.

I should also add, for completeness, that if I had concluded that SOCA’s marshalling claim was contrary to the terms of the Settlement Deed, or that SOCA was in some way estopped from advancing it, I would have had no hesitation in saying that the claim could not succeed. At times, Miss Harman seemed to come close to submitting that the principle of marshalling was one which the court always applied automatically, as an incident of the proprietary rights conferred on a mortgagee. However, I do not think that such an extreme proposition can be correct. Marshalling is a doctrine of equity, and like other equitable principles it should only be applied in order to do justice. I have no doubt that the right to marshal can be excluded or varied by contract, and I consider that other equitable defences to an application of the doctrine should also in principle be available. But, as I have explained, I cannot see any unfairness in the present case in allowing SOCA to rely on the doctrine. On the contrary, it is only in this way that the charges which Mrs Szepietowski freely agreed to grant over the Claygate Properties can yield to SOCA the sums which they were intended to secure.

I have already quoted Lord Hoffmann’s pithy description of the principle of marshalling in In re Bank of Credit and Commerce International S.A. (No.8) (loc.cit): see paragraph 14 above. It is unnecessary for me to examine the principle in any detail, because subject to two points which I will discuss there appeared to be no disagreement between the parties about the way in which it operates, or about its application to the present case if, as I have held, SOCA is not precluded contractually from relying upon it.

I will, however, cite two further formulations of the doctrine, one ancient and one modern.

In Aldrich v Cooper (1803) 8 Vesey Junior 382, 32 E.R. 402, Lord Eldon LC said at 395:

“But it is the ordinary case to say 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.”

In In re Bank of Credit and Commerce International S.A. (No.8) the principle was discussed by the Court of Appeal (Rose, Saville and Millett LJJ) as well as by the House of Lords. Giving the judgment of the court, Rose LJ had to deal with a submission that the doctrine prevents a creditor who has the means of satisfying his (single) debt out of several funds from prejudicing another creditor whose security comprises only one of the funds. The question arose in the context of an application for directions by the liquidators of BCCI. The bank had made loans to several companies, which were secured by charges executed by third parties over their deposit accounts maintained at the bank. The charges provided that the third parties would not be entitled to repayment of their deposits until the relevant loan had been repaid in full. The principal issue was whether rule 4.90 of the Insolvency Rules 1986 obliged the liquidators, in seeking recovery of the loans from the debtor companies, to set off the relevant amounts standing to the credit of the deposit accounts. However, various other arguments were advanced, including an argument that the depositors could compel BCCI to have resort to the deposits by invoking the doctrine of marshalling. After referring to the submission which I have mentioned, Rose LJ continued ([1996] Ch 245 at 271F):

“The submission is completely misconceived. The doctrine of marshalling applies where there are two creditors of the same debtor, each owed a different debt, one creditor (A) having two or more securities for the debt due to him and the other (B) having only one. B has the right to have the two securities marshalled so that both he and A are paid so far as possible. Thus if a debtor has two estates (Blackacre and Whiteacre) and mortgages both to A and afterwards mortgages Whiteacre only to B, B can have the two mortgages marshalled so that Blackacre can be made available to him if A chooses to enforce his security against Whiteacre.

For the doctrine to apply there must be two debts owed by the same debtor to two different creditors. It has no application in a case such as the present, where there is only one debt, even though there are two debtors liable in respect of it. The surety’s right to be indemnified by the principal debtor, which arises only after the surety has paid the debt in full, make[s] him a creditor of the principal debtor in respect of the same debt as that for which the principal debtor was formally liable to the creditor.

But in any case the doctrine would not help [the depositors]. It is never allowed to delay or defeat the creditor with several securities in the collection of his debt and the enforcement of his securities. He is allowed to realise his securities as he pleases. The doctrine goes no further than this: that if the creditor (A) with several securities (Blackacre and Whiteacre) chooses to resort to the only security (Whiteacre) which is available to another creditor (B), as he is entitled to do, B may have resort to Blackacre. In the present case, therefore, the doctrine, even if applicable, would not enable the depositor to compel the bank to have resort to the deposits; it would merely allow him recourse to the deposits if the bank resorted to the mortgages.”

The first point taken by Mr Mitchell is that the Settlement Deed did not create a debt due from Mrs Szepietowski to SOCA in respect of the sum to be secured on the Claygate Properties under paragraph 4.5. If that is right, he says, there were never two debts owed by her to different creditors, and the doctrine of marshalling can therefore have no application.

Presumably with a view to some such argument being advanced, care was taken in drafting the charges given by Mrs Szepietowski over the Claygate Properties to exclude any covenant on her part to pay the secured amount to SOCA. Clause 7.1 of each charge provided that the secured amount should become due, and the security conferred by the charge would become immediately enforceable, upon the expiry of four calendar months from the date of the charge. However, clause 7.2 then provided as follows:

“For the avoidance of doubt, clause 7.1 of this Charge does not constitute a covenant by the Chargor to pay the Secured Amount to the Chargee.”

Furthermore, in a letter dated 18 June 2009 to Mrs Szepietowski’s solicitors SOCA expressly confirmed “that it does not assert that the Charge creates any new freestanding obligation on your client which had not … arisen already”.

The argument is a purely technical one, and I am satisfied that it has no merit. The short answer to it is that the obligation to grant the charge in paragraph 4.5 of the Settlement Deed presupposed the existence of a liability which was to be secured by the charge. A security for a non-existent liability is a contradiction in terms. As Lord Hoffmann said in In re Bank of Credit and Commerce International S.A. (No.8) [1998] AC 214 at 226E:

“A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether on the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged.”

Nobody suggests that the charges granted by Mrs Szepietowski over the Claygate Properties were nullities, or that her obligation to grant them was an unreal one. The charges themselves expressly recognised that the secured amount would “become due” after four months: see clause 7.1, referred to above. Thus a debt due to SOCA would arise at that point, if not earlier; and the only person who could have owed that debt to SOCA was Mrs Szepietowski. This is not a case like Bank of Credit and Commerce (No.8) where a security was granted to secure a debt owed by a third party. I will assume (without deciding) that in the absence of a personal covenant by Mrs Szepietowski SOCA could not have sued her for payment of the debt; but that there was a debt owed by her to SOCA is in my judgment undeniable, even if it was a debt that could be enforced only by sale of the Claygate Properties. It seems to me to be necessarily implicit in paragraph 4.5 of the Settlement Deed that, in the circumstances there set out, Mrs Szepietowski assumed a liability to SOCA for an amount equal to the reduction in the Bank’s debt. It is only on that basis that her obligation to grant the charge over the Claygate Properties could have had any legal content.

I therefore conclude that the “two debts” condition is satisfied, and that this objection to the application of the doctrine of marshalling fails.

Mr Mitchell’s second point was that marshalling is an equitable remedy. He submitted that it is a form of equitable subrogation, designed to reverse or prevent unjust enrichment, and that it cannot be invoked by a lender who has obtained all the security for which he bargained, or so as to put him in a better position than he would have been in if he had obtained all the rights for which he had bargained. Mr Mitchell referred me in this context to the principles stated by Lord Hoffmann in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 at 231-7 and to the judgment of the Court of Appeal (Lord Phillips of Worth Matravers MR, Kennedy LJ and Neuberger LJ), delivered by Neuberger LJ, in Cheltenham & Gloucester Plc v Appleyard & another [2004] EWCA Civ 291 at paragraphs 30 to 44. In my judgment, however, there are two answers to this submission. In the first place, it is far from clear that the doctrine of marshalling should be regarded as a species of equitable subrogation. Although the effect of the doctrine, when it applies, is to subrogate the unsatisfied junior creditor to the security of the satisfied senior creditor, there are important differences between the conditions which have to be satisfied for the doctrine to apply and those which give rise to the other established categories of subrogation: see the discussion by Paul Ali in his monograph Marshalling of Securities (Clarendon Press, Oxford, 1999) at paragraphs 4.20 to 4.55, leading to the conclusion that “[m]arshalling operates in an entirely different manner from the seven established categories of subrogation, and the restitutionary principles applicable to subrogation have no application to marshalling”. Other scholars would no doubt disagree with this conclusion, and argue that the categories of subrogation should be expanded to include marshalling, but on any view it is a doctrine with its own particular and distinct characteristics. Secondly, and more importantly, the arguments advanced by Mr Mitchell under this heading added nothing of substance to the points which I have already considered, and rejected, in concluding that SOCA is not prevented by contract or any principle of equity from relying on the doctrine.

Accordingly, I consider that there is no obstacle to SOCA’s claim, and that SOCA should now be subrogated to the Bank’s second charge over Ashford House as a security for the shortfall which was left unsatisfied following the sale of the Claygate Properties. It is common ground that the process of subrogation must be effected in a way which does not prejudice the Bank and any right which it may have to rely on its second charge as security for further sums which have fallen due to it from Mrs Szepietowski since the sale of the Claygate Properties. I hope that the parties will be able to agree on an appropriate form of order in the light of this judgment, but if there are any difficulties I will deal with them when this judgment is handed down.

I should finally record, for completeness, that both the Bank and Mr Szepietowski were joined as defendants to the present claim. The Bank was represented by solicitors and counsel, Ms Georgina Peters, but its stance was, very properly, neutral in relation to the dispute between SOCA and the Szepietowskis, and I was able to release her at the start of the hearing after SOCA had confirmed that it would not seek any relief which prejudiced the existing priority ranking of the Bank’s charge over Ashford House. Mr Szepietowski was present in court throughout the hearing, but did not seek to participate in the proceedings and expressly confirmed that he wished to add nothing to Mr Mitchell’s submissions on behalf of his wife.