[1] I capitalise the noun, and related concepts.
[2] I will the language of security interest interchangeably with securities. I tend to find security interest more illuminating, however, particularly in the area of Marshalling. That is because the topic concerns real security rather than personal security, for the most part: see Sykes, Edward I and Walker, Sally, Law of Securities, 5th ed (Sydney: Law Book Co, 1993), Chapter 1.
[3] Texts on equity do indeed devote space to Marshalling. The doctrine is not restricted to the context of securities – it also extends to the administration of estates. See eg Dal Pont, GE and Chalmers, DRC, Equity and Trusts in Australia and New Zealand, 2nd ed (Sydney: LBC, 2000), 379 - 384.
[4] As one recent such collection does: see McDonald, Barbara, “Marshalling”, in Parkinson, P ed, The Principles of Equity (Sydney: LBC, 1996), Chapter 16.
[5] See the Table of Cases in the text referred to in note 8, infra.
[6] See the coverage in Sykes & Walker, supra note 2, at 182 - 185; Tyler, ELG et al, Fisher & Lightwood’s Law of Mortgage, Australian ed (Sydney: Butterworths, 1995), at 655 - 660.
[7] As will be discussed below.
[8] See Ali, Paul A U, Marshalling of Securities (Oxford: Clarendon Press, 1999).
[9] As well as providing a valuable bibliography listing what appear to be the major writings on the subject.
[10] Although it has to be admitted that it does not seem to figure largely in any of the undergraduate courses on equity or secured transactions that I am aware of.
[11] There is a draft bill to make such a change, presently under consideration in this country. See Simmonds, Ralph, “A User’s Guide to Australian Secured Transactions Law Reform” (2001), a copy of which I attach as an appendix to this paper. On marshalling under the Canadian PPSAs, see MacDougall, Bruce, “Marshalling and the Personal Property Security Acts: Doing unto Others …” (1994) 28 UBC Law Rev 91..
[12] In this fact pattern, and all of the others I use, I try to remain consistent as to the asset over which a creditor is asserting a marshalling right, and the asset over which the creditor has security.
[13] Or DR1 may have more than two: it does not matter, provided that the senior security interest subsists in all of those for which Marshalling rights are to be asserted and the other conditions in the example are met.
[14] Ali, supra note 8, para 1.01.
[15] One might ask, why would SP1 enforce on asset A first? Most obviously, it might be because of the comparative ease in realising that asset’s value – consider if asset A was a parcel of marketable shares and asset B was rural real estate. There is some support for a version of marshalling that does involve restraint, however. See below.
[16] See also Ali, supra note 8, paras 3.24, 3.25.
[17] See Ali, supra note 8, paras 7.14 (read with para 7.13n 23) and 11.57n 79. The language in that text sometimes obscures the point, however: see eg para 11.23n 39.
[18] Ali, supra note 8, para 11.02 (footnotes citing to authority omitted). As his text indicates, in the United States a version of marshalling by the trustee in bankruptcy on behalf of unsecured creditors is permitted; however, this has no counterpart in Australia law. See id Chapter 10 discussing and criticising the US position.
[19] It does not matter when the SP3 interest was granted relative to the grant of the security interest to SP2. This flows from the nature of the marshalling permitted here. See following text.
[20] See Ali, supra note 8, paras 11.18 to 11.40 (see especially para 11.27, on limits to this form of Marshalling). It follows that once SP2 has taken its rateable portion, and SP3’s claim has been satisfied, SP2’s marshalling rights for the balance of the senior security apply in respect of any residue: id, para 11.24.
[21] Ali, supra note 8, paras 11.32, 11.33. Thus it is evident that it does not matter whether or not SP3’s interest arose before or after SP2’s, nor if subsequently whether or not SP3 took with notice of SP2. Note that SP3 is still, after Marshalling by Apportionment, better off than it would have been if SP1 had realised first on asset B.
[22] See Ali, supra note 8, Chapter 2, at paras 2.02 – 2.03 (as late as mid-nineteenth century England, near unanimous support for this view).
[23] See Ali, supra note 8, paras 3.35 to 3.37. However, if the senior creditor manages to realise before intervention, then the US authorities leave the junior creditor to a post-realisation model of Marshalling: id at para 3.36 (characterising the position overall as a “hybrid” model of Marshalling).
[24] See Smit Tak International Zeelspin Bergingsbedrijf v Selco Salvage Ltd [1988] LJ Rep 398; and Re Bank of Credit and Commerce International SA (No 8) [1998] 1 BCLC 68.
[25] See Commonwealth Trading Bank v Colonial Mutual Life (1970) 26 FLR 338 (Tas SC).
[26] See Ali, supra note 8, Chapter 3, discussing the matter.
[27] Id.
[28] Ali, supra note 8 paras 3.23 and 3.24; and 5.53 and 7.04. See also the authority he cites, Westpac Banking Corporation v Daydream Island Pty Limited [1985] 2 Qd 330, at 332.
[29] However, it would seem that when the asset B (in my example) has been realised and the proceeds distributed among the general creditors of DR, or when the senior security has been formally discharged, marshalling rights cease: see McDonald, supra note 6, at 566. However, it is “arguable” that, even then, in some circumstances at least, the senior creditor may be subject to a fiduciary obligation to the junior creditor, at least if the former was aware of the latter at the relevant time: Laws of Australia, EQUITY 15.3 ‘Contribution, subrogation and marshalling’ Chapter 4 ‘Marshalling’ [28] (Update 62, 1997) (source of quotation; citing authority).
[30] Ali, supra note 8, para 11.14.
[31] See Ali, supra note 8, para 3.23n
[31] (citing authority).
[32] Ali, supra note 8, para 11.13n 21.
[33] Ali, supra note 8, para 11.13 (footnotes omitted). The best illustration of the point that Marshalling rights are not a “mere equity” is in respect of the debtor granting security over asset B after the rights arise, that is, after the senior creditor has realised on asset A. Provided that the subsequent security was granted subject to the senior interest, it seems, then the subsequent secured party is liable to marshalling by apportionment whether or not it has notice of the junior creditor: Ali, supra note 8, para 11.26n 42. However, it would seem unlikely that that subsequent party would agree or be taken to have agreed to take the asset subject to a senior security whose debt has been discharged, as that debt must have been for Marshalling rights to have arisen: see Ali, supra note 8, para 11.45n 61.
[34] See Ali, supra note 8, para 4.20n 15; and eg Sarge Pty Ltd v Cazihaven Homes Pty Ltd (1996)
[34] NSWLR 658, 662, per Young J.
[35] See Ali, supra note 8, paras 4.20 to 4.33.
[36] See Ali, supra note 8, para 4.39 for those terms and citation of authorities.
[37] See Ali, supra note 8, paras 4.39 to 4.54.
[38] See Ali, supra note 8, para 5.02.
[39] See Ali, supra note 8, paras 5.22 to 5.27 (refutation).
[40] See Ali, supra note 8, paras 5.28 and 5.44 to 5.48.
[41] See Ali, supra note 8, paras 5.37 to 5.43 and 5.48 (refutation, including of claim that Marshalling by Apportionment is a form of contribution).
[42] See Ali, supra note 8, para 5.49.
[43] See Ali, supra note 8 paras 5.50 to 5.53.
[44] From Ali, supra note 8, para 7.02: the emergence of these requirements is chronicled at 2.30 to 2.40.
[45] See Ali, supra note 8, paras 9.12, 9.13 and 9.15 to 9.24 (discussing the contrary authority of Webb v Smith (1885) 30 Ch D 192, which would restrict Marshalling to securities of the first two types).
[46] See Ali, supra note 8, paras 9.26 to 9.34 (discussing the contrary authority of Smit Tak International Zeelspin Bergingsbedrijf v Selco Salvage Ltd [1988] LJ Rep 398).
[47] See Ali, supra note 8, para 9.37.
[48] See Esanda Finance Corp Ltd v Plessnig (1989) 63 ALJR 238, at 246 per Brennan J (on the protection of something akin to an equity of redemption). Howevdr, the most recent extended discussion of title retention security in the High Court is as I read it antagonistic to any re-characterisation of such security along such lines: see Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrications Pty Ltd (2000) 171 ALR 568; [2000] HCA 25 (11 May 2000, HC, FC). Elsewhere I have discussed this case in such terms: see Simmonds, Ralph, “A User’s Guide to Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrications Pty Ltd, for the Seminar “Round-up of Current Law”, Financial Services Committee (Perth) of the Business Law Section of the Law Council of Australia, 9 November 2001, Perth.
[49] Most obviously, under the Consumer Credit Codes: see Duggan, A and Lanyon, E, Consumer credit law (Sydney: Butterworths, 1999), 230 – 243 (some title retention devices treated as mortgages), read with Chapter 10 (enforcement).
[50] See the Appendix to this paper on such reform.
[51] See Ali, supra note 8, paras 8.05 to 8.13.
[52] This exception may extend beyond suretyship to any situation where the junior debtor’s creditor can “shift the senior debt to the debtor”: Ali, supra note 8, para 8.07 (instancing the overpaying co-debtor with a right of contribution).
[53] See Ali, supra note 8, para 8.11.
[54] See Ali, supra note 8, paras 8.01n 1 (noting that this is not recognised as an exception by the authorities, but functions as one) and paras 11.50 to 11.
[54] (noting also a line of authority suggesting that only notice of the junior creditor by the transferee permits the former to marshall; but showing the difficulty with that view).
[55] See Ali, supra note 8, paras 7.27 to 7.30.
[56] But see Ali, supra note 8, para 7.31n 42 (indicating it is “uncertain” whether or not marshalling would be allowed in such a case).
[57] For that matter, as has been seen, Marshalling rights are vulnerable to the possibility that the debtor before those rights arise has entered into an arrangement with the senior creditor binding it to resort first to its senior security over the asset over which the junior creditor has security. What is of concern in this first portion of this section of the presentation is those situations where third party transactions can have an equivalent effect. I return to inter-parties preclusion situations at the end.
[58] See Ali, supra note 8, para 11.45n 61 in fine (on transfers or dispositions).
[59] See Ali, supra note 8, para 11.43.
[60] See Ali, supra note 8, para 11.44.
[61] See Ali, supra note 8, para 11.44n 60.
[62] Such as where the senior security is equitable and the third party is a purchaser of the legal title for value without notice. On the relevance of the agreement of the senior creditor to a transfer free of its interest, see Ali, supra note 8, para 11.43n 58.
[63] See Ali, supra note 8, para 11.54.
[64] See Ali, supra note 8, paras 12.03 to 12.05, and 12.07 to 12.08 (the quotation is from para 12.08).
[65] As Ali, supra note 8, para 12.06 points out, it is hard to see what benefit the senior creditor gains from the covenant absent compensation for it by the debtor.
[66] See Ali, supra note 8, para 12.08n 7.