Highbury Pension Fund Management Company (A Liberian Company) and Another v Zirfin Investments Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 14 February 2013 |
| Neutral Citation | [2013] EWHC 238 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC11C03862 |
| Date | 14 February 2013 |
[2013] EWHC 238 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
The Rolls Building
London, EC4A 1NL
Mr Justice Norris
Case No: HC11C03862
Adam Deacock (instructed by Davenport Lyons) for the Claimants
Giles Bedloe (instructed by CJ Jones) for the 1 st, 2 nd, 3 rd, 4 th, 5 th and 8 th Defendants
Charlotte Cooke (instructed by Freshfields Bruckhaus Deringer LLP) for the 6 th Defendant
Richard Salter QC & Penny Small (instructed by The Serious Fraud Office) for the 7 th Defendant
Hearing dates: 9-10 October 2012
The present application was made to me sitting as a judge both of the Chancery Division and of the Southwark Crown Court. The questions raised by this application are:-
a) Does the doctrine of marshalling permit the marshalling of securities held over property that does not belong to the common debtor? In particular, is a creditor of a guarantor entitled to marshal (or be subrogated to) securities which have been granted to another creditor of the guarantor by the primary debtor liable under the guaranteed debt?
b) Does the answer depend in any way on the rights which the guarantor has as against the holder of the guarantee or as against the primary debtor?
c) Does any such claim to marshalling or subrogation take precedence over prohibitions contained in the Restraint Order, either as of right or by virtue of the exercise of some discretion of the Crown Court?
The facts by reference to which these questions fall to be answered are not in dispute.
In June 2004 Barclays Bank Plc ("Barclays") lent money to a BVI company called Zirfin Investments Limited ("Zirfin") to fund the acquisition and refurbishment of a property at 31 Brompton Square Knightsbridge ("No 31"). The loan was secured by a charge granted by Zirfin over No 31 ("the Zirfin Charge").
Subsequently, Barclays made loans to four companies related to Zirfin. The loans in each case were secured by a legal charge over the relevant company's single asset, in each case a flat or house in central London. I will refer to these borrowers as "the Affiliates", and to "the Affiliates' Loans", "the Affiliates' Charges" and "the Affiliates' Properties".
As additional security for the Affiliates' Loans on the 1 August 2008 Zirfin gave Barclays a guarantee ("the Zirfin Guarantee") which was itself secured by the Zirfin Charge. Two terms of the Zirfin Guarantee are material. First, clause 8 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 such balance or to stand in the Bank's place in respect of any such security or money".
Secondly, by clause 12 it was provided:-
"The Bank is to be at liberty without thereby affecting its rights hereunder at any time and from time to time… to give up modify exchange or abstain from perfecting or taking advantage of or enforcing any security or guarantees or other contracts or the proceeds of any of the foregoing… and to realise any securities in such manner as the Bank may think expedient".
In October 2008 Zirfin borrowed £2,000,000 ("the Highbury Loan") from Highbury Pension Fund Management Co (a Liberian Company) ("Highbury"). This was secured by a second charge granted by Zirfin over No 31 on the 27 October 2008 ("the Highbury Second Charge").
On the 19 December 2008 Cezanne Trading (another BVI company) ("Cezanne") lent Zirfin €1,049,844 secured by a third charge on No 31 ("the Cezanne Charge"). (For simplicity I will generally refer simply to "Highbury", intending to include Cezanne). For the purposes of this hearing both the Highbury Second Charge and the Cezanne Third Charge are to be treated as arm's length commercial transactions.
There was general default by Zirfin and the Affiliates which led to Barclays making demand for repayment of all of its loans, and a demand under the Zirfin Guarantee. On the 16 September 2011 receivers who had been appointed by Barclays sold No 31. The net proceeds (after allowing for a contentious deduction of £3,000,000 by the receivers in respect of the costs of realisation of the security) came to approximately £28,000,000. That sum was sufficient to discharge what Zirfin had borrowed from Barclays, leaving approximately £7,000,000 over. This amount ("the Surplus") was applied in part satisfaction of Zirfin's liability under the Zirfin Guarantee of the Affiliates Loans (because that liability was also secured by the Zirfin Charge). Barclays says that there remains a shortfall due from the Affiliates (though it is not necessarily the case that every Affiliate owes something).
Had the Surplus not been so taken it would have been available to satisfy (entirely) the sums secured by the Highbury Second Charge and the Cezanne Third Charge. As it is, Zirfin's liability to Highbury and to Cezanne remains outstanding, the Surplus having been used to reduce the liabilities of the Affiliates to Barclays. If matters so remain then Highbury and Cezanne are in practice no longer secured creditors (their claims under the Highbury Second Charge and the Cezanne Third Charge having been trumped by Barclays' rights under the Zirfin Charge).
I must now take up a second theme. Achilleas Kallakis ("Mr Kallakis") was charged on indictment with conspiracy to defraud, with using false instruments and with fraud itself on an indictment containing 23 separate counts. On the 22 April 2009 he was made the subject of a Restraint Order under the Proceeds of Crime Act 2002 (" POCA"). His Honour Judge Morris' order forbade Mr Kallakis from disposing of or dealing with any of his assets worldwide. For the purposes of the Restraint Order the term "assets" included any asset over which Mr Kallakis had the power (directly or indirectly) to dispose of or deal with it as if it were his own.
This provision has caused some difficulty. Mr Kallakis is a "consultant" to the "Hermitage Syndicated Trust" (an entity mentioned in the documents but whose precise nature is obscure). The Hermitage Syndicated Trust reputedly owns the shares in Zirfin and the Affiliates. The Serious Fraud Office ("the SFO") regards the shares owned by the Hermitage Syndicated Trust as falling within the extended meaning of the word "assets" for the purposes of the Restraint Order (and in September 2010 obtained a variation of the Restraint Order specifically to prohibit Mr Kallakis from disposing of or dealing with any property held in the name of the Hermitage Syndicated Trust). Moreover, the SFO regards the assets held by Zirfin and the Affiliates as also subject to the Restraint Order, and No 31 (along with another property in Brompton Square owned by one of the Affiliates) is specifically mentioned as subject to the prohibition contained in the Restraint Order.
The approach of the SFO is not agreed by Highbury, Cezanne, Zirfin or the Affiliates to be correct. For the purposes of the hearing before me it has been agreed by all parties that it should be assumed:-
a) That the assets of Zirfin and the Affiliates are to be treated as "realisable property" caught by the Restraint Order: but
b) It is not to be assumed that there is a general piercing of the corporate veil (with everything being treated as belonging to Mr Kallakis), on which assumption Zirfin and the Affiliates are to be treated as separate debtors.
It is in this context that the questions I have identified arise.
Where a guarantor is called upon to discharge the obligation of a principal debtor to a creditor, equity adjusts the rights between the parties. Thus, subject to the terms of any contract governing the position, as guarantor of the obligations of an Affiliate to Barclays, Zirfin had
a) A right to call on the Affiliate to pay the debt in exoneration of Zirfin's liability under the Guarantee:
b) A right to an indemnity from the Affiliate in respect of liabilities discharged:
c) A right of contribution from other Affiliates who are co-guarantors with Zirfin:
d) A right to be subrogated to the security rights of Barclays in respect of that Affiliate.
Highbury says that a similar position obtains as between the holders of securities granted by Zirfin. The key equitable principle is that of marshalling. This operates where a debtor (D) owes money to two creditors (C1 and C2), and where C1 has security over two properties (or some other call on two funds) (S1 and S2) but C2 has security over (or a right of resort to) only one (S1). In those circumstances C1 has a choice of recovering his money out of either S1 or S2. If C1 chooses to enforce the security over (or resort to) S2, then that leaves S1 available for C2. But if C1 chooses to enforce security over (or resort to) S1, then C2 has nothing to look to, and the security over S2 is not relied on at all, and becomes available to unsecured creditors (amongst whom C2 is now numbered). In that situation, in order to do justice equity applies a principle of maximum distribution and by a process akin to subrogation in effect gives C2 the benefit of C1's unused security over S2, thereby ensuring that both C1 and C2 are paid by D as far as possible.
The doctrine (and its ramifications) was explained by Patten LJ in Szepietowski v SOCA [2011] EWCA Civ 856 in these terms (at paragraph [2]):-
"So in a case where two or more creditors are owed...
To continue reading
Request your trial
-
Highbury Pension Fund Management Company v Zirfin Investments Ltd
...B is the principal debtor and A is a surety. 3 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. 4 Put shortly and in very simplified form they were these. (1) Barclays lent money......
-
Szepietowski v National Crime Agency
... ... his claim against more than one security or fund and the other can resort to only one. It gives ... satisfaction out of that fund upon which another creditor has no lien … ... Suppose a person, who ... , the Christian maxim, 'Do unto others as you would they should do unto you'." ... ...