Marshalling: A Supreme Court-Approved Remedy for MortgageesPrint publication
In Szepietowski v National Crime Agency (formerly the Serious Organised Crime Agency) , the Supreme Court set out a clear test for when the remedy of marshalling should be available to a second mortgagee.
Marshalling is a principle for achieving fairness between two or more secured creditors of the same debtor. Where the first creditor enforces its security against assets over which both hold security but not against assets over which it alone holds security, the second creditor may be entitled to use the assets over which the former has security. Alternatively, the doctrine may require the former creditor to satisfy itself out of the asset over which the latter has no security.
In 2005, the Serious Organised Crime Agency (SOCA) brought proceedings to seize properties owned by Mr and Mrs Szepietowski on the basis that they were the proceeds of crime (the SOCA Proceedings). Some of the properties, including the residential home, were registered in the name of Mrs Szepietowski and the Royal Bank of Scotland had a charge against them (and other properties) for a debt of £3.225m (the RBS Charge).
The SOCA Proceedings settled in 2008 on terms which included a deeming provision that the Szepietowskis’ home was not a “recoverable property”  and pursuant to which Mrs Szepietowski granted a charge to SOCA over other properties (the SOCA Charge). The SOCA Charge contained various provisions, including a statement that Mrs Szepietowski did not personally owe any money to SOCA, and it was registered as a second charge over properties (excluding the marital home) which were already subject to the RBS Charge. The intention behind the settlement arrangement was that there would be sufficient proceeds of sale of the other properties to satisfy both the RBS Charge and the SOCA charge. However, proceeds were ultimately less than expected. That left SOCA with only a nominal sum once the RBS Charge had been satisfied.
SOCA therefore brought an action to invoke the equitable remedy of marshalling in respect of the Szepietowskis’ residence. Mrs Szepietowski argued, in defence to that claim, that SOCA could not rely on marshalling because there was no underlying debt owed by her to SOCA. It was held at first instance that marshalling did apply on the facts and that decision was upheld by the Court of Appeal.
Supreme Court Decision
The case was appealed to the Supreme Court, which found that the doctrine did not apply in this case for two reasons. Firstly, that marshalling cannot apply in circumstances where there is no underlying debt owed; and secondly (on the particular facts) that the doctrine of marshalling was precluded due to the language of the settlement documentation and the nature of the SOCA charge.
Lord Neuberger clarified, in relation to the first limb of the Supreme Court’s decision, that there must be an underlying debt owed to the person seeking to marshall, otherwise there is nothing from which the equitable remedy can arise . In relation to the second limb, he confirmed that the correct approach to ask is whether, in the perception of an objective reasonable bystander at the date of the grant of the second mortgage, taking into account: (1) the terms of the second mortgage; (2) any contract or other arrangement which gave rise to it; (3) what passed between the parties prior to its execution; and (4) all the admissible surrounding facts, it is reasonable to conclude that the second mortgagee was nonetheless not intended to be able to marshal . In this case, it seemed clear that the intention of the settlement arrangements had been not to encumber the Szepietowskis’ home, and so to allow marshalling in respect of it would be inequitable.
Marshalling can be a very effective remedy for second mortgagees, but there are relatively few modern cases that have considered the nature and requirements of the doctrine. With clear guidance now given by the Supreme Court, and against a socio-economic climate in which both mortgage fraud and insolvencies have been rife for some years, it remains to be seen whether marshalling will more readily be deployed to assist debtors in otherwise discouraging cases.
  UKSC 65
 under section 266 of the Proceeds of Crime Act 1001
 para. 50
 para. 62.