In the past year two cases have brought marshalling under the spotlight. Marshalling is the ability of a secured creditor to take advantage of assets held under another creditor’s security where they are both owed a debt by the same person.
To give an example scenario: Creditor X has security over two properties (Properties A and B) but Creditor Y only has security over one property (Property A). Creditor X has chosen to enforce its security over Property A and been paid out but there is no longer any value in Property A. In such circumstances, Creditor Y may be able to use property B to repay the debts owed to it even though he doesn’t have security over Property B.
It’s an area that is not often touched upon, so read on to find out more…
Back in February 2013, the High Court caused a flurry of interest when it found that an exception could be made to the rule that marshalling is only available where two or more creditors have security over the assets of the same debtor (this is known as the common debtor rule).
In this case*, the High Court held that the junior creditor (Highbury) could benefit from the realisation of the assets of certain other debtors (the Affiliates) who were affiliates of the first “common” debtor (the Borrower) even though Highbury did not have security from the Affiliates.
Both Barclays Bank plc (Barclays) and Highbury had security from the Borrower but all of the value of this security was used to pay off sums owed to Barclays, as senior creditor. Barclays had no other security from the Borrower that Highbury could benefit from by marshalling.
The Borrower had, however, given Barclays a guarantee for the obligations of the Affiliates. The Borrower had made payment under the guarantee and so had a right to be subrogated to Barclays’ rights over the Affiliates properties. That is, the Borrower had the right to benefit from Barclays’ security over the Affiliates’ assets. The court decided that Highbury could benefit from these rights of the Borrower and so benefit from Barclays’ security over the Affiliates even though they were not a common debtor of both Barclays and Highbury.
However, the guarantee contained a fairly standard clause which said that until Barclays had been paid in full the Borrower couldn’t “participate in any security held or money received by the bank… or… stand in the bank’s place in respect of any security or money” (Clause 8).
Clause 8 meant the Borrower had agreed that it couldn’t yet enforce its rights to receive payment from the Affiliates. The court decided that as Highbury had been claiming through the Borrower, Highbury’s rights over the charged properties could also not be exercised until Barclays had been paid in full.
Overturned on appeal
Following this, Highbury appealed. On appeal it was held that the principle of marshalling was strongly linked to the power of the senior creditor (in this case Barclays) to choose which assets it could be paid out of, and ensuring that this choice did not leave the junior creditor out of pocket. It was a matter that existed between the two creditors and could only be varied by a contract between them. The junior creditor, Highbury would not lose out on its right because of a contractual agreement between other parties (such as Clause 8). For this reason, in October last year the decision of the High Court was reversed. Highbury was not bound by the provisions of Clause 8 and so did not have to delay enforcement, although Barclays retained its priority.
This case means that there is an exception to the common debtor rule (because the Affiliates were not debtors of Highbury) and the exception was not subject to the restrictions as to enforcement timing found in Clause 8 of the guarantee. It should be borne in mind, however, that the circumstances of this case were very specific.
*Highbury Pension Fund Management Company and Anor v Zirfin Investments Management Ltd and Ors http://www.bailii.org/ew/cases/EWCA/Civ/2013/1283.html