Agricultural Lending: The equitable doctrine of marshalling
Farm businesses often borrow from a variety of sources simultaneously, providing security through mortgages or charges over land and agricultural charges over other farm assets. What farmers may not realise, however, is how priority between lenders works to distribute funds realised, if the business gets into financial difficulties and the assets are sold.
This issue was considered in the recent decision of McLean and another v Trustees of the Bankruptcy Estate of Dent and others ,in which the High Court held that an individual may claim the proceeds of the sale of assets subject to an agricultural charge given to a bank, by the application of the principle of "marshalling".
What is marshalling?
Marshalling is an often forgotten equitable remedy that is based on the principle that a lender, who has recourse to a number of sources to satisfy his debt, should not disadvantage another lender, who only has access to one of those sources. It should be noted that the principle does not prevent a lender from resorting to whichever source he chooses. The practical effect of the application of the marshalling of securities is that it ensures the maximum distribution of assets among two secured lenders of a common debtor.
Essentially, for marshalling to be available, there must be two lenders to the same common debtor, each owed a different debt. It has been stated that a secured party may potentially contractually exclude or vary its right of marshalling of securities (Serious Organised Crime Agency v Szepietowski and others ). Accordingly, it seems that a clause expressly excluding marshalling would be upheld by the Courts.
The facts of the case
Barclays Bank PLC ("Bank") provided lending to Dent Limited ("Company") and to Dent Company ("Partnership"). The Company and the Partnership operated a haulage and farming business, including the largest outdoor pig producers in the United Kingdom. As security, the Bank was granted a debenture by the Company, containing fixed and floating charges over all the assets of the Company and third party charges over two farms ("Farms") belonging to individual members of the Partnership. In addition, the Partnership entered into an all-monies agricultural fixed and floating charge under the Agricultural Credits Act 1928 ("ACA 1928") in favour of the Bank ("Agricultural Charge").
In addition to the funding provided by the Bank, loans were made to the Company, the Partnership and individual partners by a member of the family, Lady Morrison. These loans were secured by third party charges over the Farms. The priority of the securities of the Bank and Lady Morrison was expressly set out in a Deed of Priority.
Subsequently, after significant cash flow issues, between December 2013 and April 2014, the Company entered into administration, the members of the Partnership appointed joint administrators of the Partnership, bankruptcy orders were made against each member of the Partnership and the Bank appointed Law of Property Act Receivers in respect of the Farms.
The proceeds of sale from the Farms discharged the entirety of Bank’s lending and the majority of Lady Morrison’s lending, with the shortfall being owed to her by the Partnership.
The joint administrators applied to the Court under the Insolvency Act 1986 for directions as to the distribution of funds.
One of the issues before the Court was whether the proceeds of sale from the assets, subject to the Agricultural Charge, could be made available to satisfy the shortfall suffered by Lady Morrison, by the application of the doctrine of marshalling. The trustees in bankruptcy of the individual members of the Partnership argued that an individual was not entitled to create an agricultural charge and therefore, an individual could not benefit from an agricultural charge under the doctrine of marshalling.
- The Court held that agricultural charges could be subject to the doctrine of marshalling and that marshalling should be applied in favour of Lady Morrison in respect of the Agricultural Charge. The ACA 1928 does not prohibit a bank from assigning security created under it. The term "Bank" in the Agricultural Charge included persons deriving title under the Bank. Consequently, it was held that if security was assignable, it could also be marshalled.
- Equity created by marshalling is between the lenders and not with the debtor.
- Equity may be shaped by the terms of any contract between the lenders, such as a Deed of Priority.
- Even if there is no contractual arrangement between the lenders, equity requires the senior lender (or double secured lender) to be treated as if it had had recourse to the funds which were not available to the singly-secured lender.
This case provides lenders and borrowers with a stark reminder of the doctrine of marshalling and its application to agricultural charges. It confirms that despite an individual lender not being entitled to create an agricultural charge under the ACA 1928, they may still benefit from a bank taking out an agricultural charge as the senior lender.
Lenders (such as family members) limited to recovery from a single source of security will be interested to know that the equitable doctrine of marshalling could be available to assist with any shortfall they may suffer upon a default. It is likely to place a greater emphasis on the need for secured lenders to monitor the loan to value ratios for agricultural borrowers and ensure they have taken security over as wide-ranging a net of assets as possible, including an agricultural charge.