19 March 2020
You’re in the fortunate position of securing a debt with a registered mortgage over real property owned by your debtor. However, your mortgage is registered second in priority to that of a first registered mortgage in favour of another creditor. Your debtor becomes insolvent and the first mortgagee exercises its right of sale over the property against which your mortgage is registered. The proceeds of the sale pay a portion of the first mortgagee’s secured debt, with no surplus to cover your secured debt in full or in part and leaving you unsecured.
Fortunately, the law of equity will intervene in applicable circumstances to reduce any prejudice to subordinate creditors, by virtue of the equitable doctrine of marshalling. The doctrine of marshalling may also be applied to liens, charges and other forms of security – for the purposes of this article, we will focus exclusively on the application of marshalling in the context of mortgages as a form of security.
What is the equitable doctrine of ‘Marshalling’?
Marshalling is a principle which may be relied on by a second registered security holder in certain circumstances for further protection. In circumstances where the principle applies, the second registered security holder is able to access the security held by the first registered security holder, with respect to another security interest, rather than lose its security altogether.
Context within which the doctrine of marshalling will apply
The doctrine is best demonstrated with a working example, as follows:
In this example, the law of equity will intervene to ensure Entity B is not prejudiced by a decision of Entity A to exercise its power of sale over the property of its choice. In applying the doctrine of marshalling, Entity B is subrogated to Entity A’s mortgage over Property B for enforcement purposes – Entity B, through the doctrine of marshalling, will take the security position of Entity A, the first ranking mortgage.
Does the doctrine of marshalling apply?
In determining whether a subordinate secured creditor has a claim to the doctrine of marshaling, close consideration must be applied to the following:
Recent case law: Burness v Hill  VSCA 94 (“Hill”)
The recent decision in Hill provides practical commentary on the considerations the Court will have with respect to a creditor’s claim to marshal securities.
The Supreme Court of Victoria (SCV) Decision:
His Honour Sifris J. of the SCV held that Mr Hill was entitled to marshal the CBA’s security with respect to property over which Mr Hill did not have security, thereby subrogating to the CBA’s first ranking mortgage to the extent of the debt secured by Mr Hill’s original, second ranking mortgage.
The property over which Mr. Hill did not hold security was sold by the CBA
The Position of the Trustee of the Bankrupt Estate of Love
On appeal by the Trustee in the Court of Appeal, the Trustee contended that the marshalling doctrine could not be applied to the current factual scenario and made the following submissions:
The Court of Appeal (CoA) Decision:
In reaching its final decision, the CoA considered the elements of the doctrine of marshalling, which provides that a creditor is entitled to marshalling where:
“…(i) his debt is secured by a second mortgage over property (‘the common property’),
(ii) The first mortgagee of the common property is also a creditor of the debtor,
(iii) The first mortgagee also has security for his debt in the form of another property (‘the other property’),
(iv) the first mortgagee has been repaid from the proceeds of sale of the common property,
(v) the second mortgagee’s debt remains unpaid, and
(vi) the proceeds of sale of the other property are not needed (at least in full) to repay the first mortgagee’s debt.
In such a case, the second mortgagee can look to the other property to satisfy the debt owed to him”.
The CoA further held:
How can JHK Legal help?
The equitable doctrine of marshalling is an extremely useful tool for subordinate creditors when faced with the insolvency or otherwise default by a debtor. It is important that creditors are aware of the circumstances in which their ability to marshal securities may be extinguished and how to avoid this.
If you require further information with respect to the doctrine of marshalling, or if you are seeking tailored advice as to your current security position with respect to your debtor(s), please contact our office on
03 9927 3600 or by email at firstname.lastname@example.org to discuss how we may be able to assist you.
Written by Kathryn Koutoulas
 Port of Melbourne Authority v Anshun Pty Ltd  HCA 45
 National Crime Agency v Szepietowski  AC 338.