Highbury Pension Fund Management Company v Zirfin Investments Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Mr Justice Silber,Lord Justice Rimer |
| Judgment Date | 03 October 2013 |
| Neutral Citation | [2013] EWCA Civ 1283 |
| Docket Number | A3/2013/0847 |
| Date | 03 October 2013 |
| Court | Court of Appeal (Civil Division) |
[2013] EWCA Civ 1283
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London, WC2
Lord Justice Rimer
Lord Justice Lewison
Mr Justice Silber
A3/2013/0847
Mr A Deacock (instructed by Messrs Davenport Lyons) appeared on behalf of the Applicants
Miss C Cooke (instructed by Messrs Freshfield Bruckhaus Deringer LLP) appeared on behalf of the Respondents
( )
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.
(1) Barclays lent money to Zirfin secured by a charge over 31 Brompton Square.
(2) Barclays also lent money to companies associated with Zirfin ("Affiliates") secured by charges over the Affiliates' properties.
(3) Zirfin guaranteed the loans to the Affiliates and its guarantee was also secured by the charge over 31 Brompton Square.
(4) Highbury lent money to Zirfin secured by a second charge over 31 Brompton Square.
(5) Having called in its loans and made demand under the guarantee, Barclays appointed receivers who sold 31 Brompton Square as Zirfin's agents. The proceeds of sale discharged Zirfin's own debt to Barclays. There was a surplus which would also have discharged Zirfin's debt to Highbury, but Barclays applied that surplus in part discharge of Zirfin's liability under its guarantee.
(6) The Affiliates have not repaid Barclays in full and hence Zirfin's liability under its guarantee has not been fully discharged. The shortfall still due to Barclays is of the order of £329,000 plus costs.
(7) As a result of the sale of 31 Brompton Square, Highbury no longer has any legal security for the debt due to it.
(8) The value of Barclays' additional securities is more than enough to discharge the debts owed both to Barclays and to Highbury.
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:
"49. That does not necessarily provide an instant answer in the present case. Counsel for the SFO take the point that a straightforward application of the doctrine would give Highbury greater rights as against Barclays than Zirfin itself enjoyed. Under the terms of the Guarantee Zirfin could never compete with Barclays in enforcing the Affiliates' Charges until such time as Barclays had been completely repaid. It is not disputed that at present Barclays is still owed money by some one or more of the Affiliates which is secured by the Affiliates' Charges. But because the exception from the 'common debtor' rule identified by Lord Eldon is founded upon the surety's right to call upon the principal to discharge the debt (i.e. Zirfin's right of exoneration/indemnity against the Affiliates) it takes no account of what rights exist as between Zirfin and Barclays. The SFO submit that this is inequitable.
50. I agree. If Highbury's ability to avoid the constraints of the 'common debtor' rule is dependant upon the 'equities' that exist as between Zirfin and the Affiliates, then those 'equities' ought to include not only the right to demand payment but also the rights to enforce any security. If those rights are restricted by the contract which creates the relevant relationship of principal and surety on which Zirfin relies, then that restriction must be recognised in the marshalling of the security. If Zirfin would not be subrogated to Barclays' rights until such time as the Barclays debt had been entirely repaid, then Highbury cannot by a process akin to subrogation become entitled to any greater right."
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.
(2) Clause 8 did not apply to or restrict Highbury's right to require Barclays to marshall its securities.
(3) If clause 8 did apply, then Barclays had waived reliance upon it.
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...
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McLean (as Administrators of Dent Company (A Partnership) ((in Administration))) v Berry
...himself as far as possible out of the security to which the latter has no claim. The law was so summarised by Lewison LJ in Highbury Pension Fund Management v Zirfin [2014] Ch 359 at paragraph [1]. As Lewison LJ went on to point out in paragraph [15]:- "One consequence of the application of......