Marshalling by apportionment arises when there is a principal, first-ranking secured creditor with security over two or more assets, while ranked below that first-ranked credit are two or more equally ranked creditors with interests in one or more of those assets.

The interests of the secondary creditors are below that of the first-ranked creditor, if the first-ranked creditor seeks to realise its interests in the two or more assets. Osborne J defined the issues that arise for the secondary creditors succinctly at [115], “the vice protectable by the principle’s application is that the subordinate interest holders of equal standing should be protected from their securities being rendered valueless by the whim of the primary security holder”.

In the judgment, Osborne J described the relief that equity can offer by way of “marshalling by apportionment”. His Honour held that the doctrine operated differently to regular “marshalling” or “marshalling simpliciter”, noting at [110] – [111]:

Apportionment operates to ameliorate the risk of prejudice to subordinate security holders with equal ranking securities as a result of the order in which the primary security holder chooses to realise the securities. Whilst the primary security holder is free to sell whatever security it wishes to sell, it otherwise should be indifferent as to which security recourse is had, to satisfy its debt. In order to prevent the return to the subordinate security holder being dependent solely on the choice of the primary security holder, an equity arises in favour of each equal next ranking security, such as to deem the first ranking security to have been satisfied on a rateable basis.

If the relevant principal is accepted as operating in this way, then what is critical is that there are two creditors with equal ranking securities each of whom stands to be affected by the decision as to the order of sale chosen by the primary security holder. It is the effect on these equal ranking securities which enlivens the relevant equity which is relevantly unaffected by other securities that one or more might hold.

The court has clarified that “marshalling by apportionment” differs in a practical sense to basic “marshalling”. By determining that “marshalling by apportionment” provides a remedy in equity for the principal first-ranked creditor, the court found that a principal first-ranked creditor is limited in its freedom to recover money owed to it from any one or more of the assets to which it holds an interest.

The clarity that this decision brings to the equitable doctrine of apportionment, may be of relevance to banks and lenders.

By Joel Brook