The case involved the failed property development company, Starplus Homes Limited (In Liquidation). On liquidation, Starplus owned a number of properties which were subject to various registered mortgages. ASAP Finance Limited (“ASAP”) was a significant funder of Starplus and had first ranking mortgages over 20 properties owned by Starplus. ASAP enforced its mortgages and, after repayment, there was a surplus of $1.7 million (“Surplus”).
Importantly for the context of this case, the order of realisation by ASAP meant that two properties (“Redoubt Road properties”) were sold last. By that stage, ASAP had been repaid in full so all of the sale proceeds from those sales formed part of the Surplus.
The competing claims
Five parties claimed an interest in the Surplus:
- Mr Sun claimed an interest under a second ranking registered mortgage over two of the 20 properties (“Redoubt Road properties”). Mr Sun claimed that he had priority to the portion of the Surplus derived from the sale of the Redoubt Road properties (which was approximately 78% of the Surplus).
- A group of four of Starplus’ suppliers, Magsons Hardware Limited, Hamilton Hardware Retail Limited, United Timber Merchants Limited, and RD1 Limited (“Suppliers”), claimed an interest in the Surplus in reliance on an agreement to mortgage in each Suppliers’ terms of trade. The Suppliers claimed that each had an equitable mortgage in each of the 20 properties. The Suppliers also claimed that marshalling (explained below) needed to be applied before the Surplus could be distributed.
The Court had to consider:
- whether each of the claimed interests was valid; and
- if the Court found that any one of the Suppliers had a valid interest, what were the relative priorities of those valid interests.
The Court found that the agreements to mortgage in each Suppliers’ terms of trade provided each with a valid equitable mortgage. Importantly, the Court held that the relevant wording of each equitable mortgage was not limited to the properties owned by Starplus at the time the terms of trade were signed. Each equitable mortgage attached to properties subsequently purchased by Starplus.
Once the Court determined the equitable mortgages were valid, the Court then had to consider priority. At first blush, it might be expected that Mr Sun would have priority to the Surplus over any unregistered interests because Mr Sun had a registered second mortgage over the Redoubt Road properties, and because the bulk of the Surplus came from those properties.
However, if ASAP had sold the Redoubt Road properties first, then Mr Sun (having security only over the Redoubt Road properties) would have received nothing. Accordingly, without the intervention of equity, entitlement to the Surplus would depend on the arbitrary decision of ASAP as to which properties should be sold first. That is where the equitable principle of marshalling by apportionment comes into play.
Marshalling by apportionment is an equitable doctrine which applies where a senior creditor (in this case, ASAP) has access to a number of different securities or funds out of which its debt can be paid. The senior creditor’s right to realise its securities in whichever order it sees fit is untrammelled but equity will ensure that junior creditors are not prejudiced by the order of realisation. Marshalling by apportionment treats all junior creditors (Mr Sun and the Suppliers), having differing interests, equally once the senior creditor (ASAP) is repaid.
The Court accepted that marshalling applied. In this case, marshalling resulted in the Surplus being allocated in the following way:
- ASAP’s debt was approximately 75% of the total sale funds of the 20 properties. That left a surplus being 25% of the total sale funds.
- Marshalling therefore assumes 25% of the sale proceeds of each of the 20 properties is available for distribution to junior creditors.
In this case, Mr Sun had a second ranking mortgage over the Redoubt Road properties. The Suppliers had equitable mortgages over all 20 properties. Mr Sun’s registered mortgage had priority over the Suppliers’ equitable mortgages in relation to the Redoubt Road properties pursuant to s185, Property Law Act 2007. Therefore, Mr Sun had priority to the portion of the Surplus assumed to be from the Redoubt Road properties (25% of the sale proceeds).
Mr Sun had no security over the remaining properties. Therefore, Mr Sun had no right to share in the portion of the Surplus which, on the application of marshalling, was assumed to be from the remaining 18 properties. That portion of the Surplus, being approximately $1.3m, was shared between the Suppliers.
Equitable mortgages can be very valuable. If your terms of trade do not include an equitable mortgage, you should seek advice on whether it is appropriate for you.
If your terms of trade do contain an equitable mortgage, it may be time to check that your interest is in all property and not just property which exists on the date the terms are signed.
Anyone holding more than one security needs to be mindful that marshalling or subrogation issues may arise when those securities are realised.
This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.