What is marshalling in Australia and what is its definition? Imagine you’re owed money by someone who struggles to pay. They have two assets you could claim against: a car (Asset A) and a house (Asset B). However, another creditor is also owed money and they only have a claim on the car (Asset A). Marshalling is a legal principle or an equitable doctrine of application that steps in to ensure fairness in such situations. Here’s the gist:
- Two Creditors, Unequal Claims: There are two creditors (you and the other person) and one debtor (the person who owes money).
- Unequal Security: A creditor (first creditor) has a claim on both assets (car and house), while the second creditor can only go after one (the car).
- Fairness Through Marshalling: You, with the two claims, can be ordered by the court to collect your debt from the house (Asset B) first. This “marshals” the assets, ensuring the other creditor can still recover their money from the remaining asset (the car).
Marshalling prevents a creditor with multiple options from grabbing the easiest asset and leaving nothing for the creditor with fewer options.
Examples of Marshalling
Example 1
Maria loaned money to a couple and has claims on both their savings account (with $15,000) and their investment portfolio (worth $100,000). Ben’s brother, another creditor who owed money, can only claim from the savings account. Marshalling might be applied here too.
The court could order Maria to claim her debt from the investment portfolio first, allowing Ben’s brother to access some funds from the savings account.
Example 2
David loaned money to a company and has claims on both their office building (worth $500,000) and their inventory (worth $200,000). Charles, a supplier who owed money, can only claim from the inventory. If the inventory sells poorly, it might not cover Charles’ debt. Marshalling could be an option.
The court, considering the value of the office building, might allow David to claim his debt from it first. This ensures Charles can potentially recover some money by selling the remaining inventory.
When Can Marshalling Be Used? Unlocking the Conditions
Marshalling, like a helpful mediator in debt repayment, steps in under specific circumstances. Here’s a breakdown of the key requirements:
1. Two Creditors, One Debtor: There must be two separate creditors (people owed money) and one debtor (the person who owes the money). This is usually called the “common debtor” rule.
2. Exception: A Separate Equity: In rare cases, there might be an exception. A separate and strong legal reason (like a guarantor’s right to certain protections) can allow marshalling even if there isn’t a single debtor for both creditors.
An example of this exception:
Imagine a scenario with Creditor A, Creditor B, a Borrower, and the Borrower’s Affiliate (a connected company).
1. Creditor A lends money to both the Borrower and the Affiliate.
2. To secure these loans, Creditor A gets:
- A first mortgage on the Borrower’s property (Blackacre). A hypothetical area of land known as “Blackacre”. It is frequently used as an example when demonstrating or teaching various aspects of property law.
- A guarantee from the Borrower for the Affiliate’s loan.
- A mortgage on the Affiliate’s property (Greenacre) to further secure the Affiliate’s loan. “Greenacre” refers to an imaginary or fictitious estate in land. It is sometimes used to debate the rights of different parties to a real estate parcel.
Creditor B lends money only to the Borrower and gets a second mortgage on Blackacre.
Now, if the Borrower defaults and Creditor A only claims from Blackacre (not Greenacre), Creditor B loses out because their second mortgage becomes worthless.
Here, Creditor B might be able to use the guarantor/primary obligor exception. Because the Borrower guaranteed the Affiliate’s loan, there’s a separate legal connection between them. This exception allows Creditor B to potentially share in the security of Greenacre (owned by the Affiliate) even though they weren’t a direct creditor of the Affiliate.
Read: Mortgages on Houses
Case Study: Hill V Love
Let’s discuss a legal case Hill v Love [2018] that involved the doctrine of marshalling securities. Here’s a summary:
The Involved Parties:
- Hill: A solicitor with a second mortgage on a property (275 O’Herns Road).
- Love: The borrower who owed money to Hill and the bank.
- Bank: The first mortgagee on 275 O’Hern Road (and two other properties).
Hill’s second mortgage was wiped out when the bank sold 275 O’Hern Road. The bank also had mortgages on two other properties (315 O’Herns Road and 460 Cooper Street) that Hill didn’t have claims on. Love later became bankrupt.
Hill learned about marshalling and tried to claim rights to the surplus money from the sale of 460 Cooper Street (the bank’s third property). Hill argued the bank should have sold its properties in a specific order to protect his second mortgage. The dispute was between Hill and Love’s bankruptcy trustees over the surplus money. Before the properties were sold and Love went bankrupt, Hill wanted the court to:
- Officially allow him to take the bank’s place as the creditor for the other two properties (315 O’Herns Road and 460 Cooper Street).
- Give him the legal right to claim those properties (by placing caveats).
- Prevent Love from selling or changing those properties in a way that would hurt Hill’s marshalling rights.
- Force Love to officially recognise Hill’s marshalling rights by signing mortgages on the other properties.
The court agreed with Mr. Hill. Since the bank had enough money from selling other properties to cover their loan, they essentially allowed Mr. Hill to claim the surplus money from the sale of 460 Cooper St (even though he didn’t have a direct mortgage on it).
How Can We Help?
Marshalling is a complex legal doctrine that can help ensure fairness among creditors in debt repayment situations. If you find yourself in a scenario where marshalling might be applicable, a commercial or property lawyer from JB Solicitors can be a valuable asset.
We can analyse your case, assess the potential benefits and risks, negotiate with other creditors, and represent you in court if necessary. Remember, a lawyer experienced in marshalling can provide the best possible guidance based on the specifics of your situation.
Reach out to us today for all your legal matters
