The partnership operated haulage and pig farming businesses. Some of the members of the partnership were also shareholders in and directors of a company, to which the partnership provided haulage services. The bank held third party charges of two farms which were used for the purposes of conducting the partnership business but which did not form part of the assets of the partnership. The partnership and company suffered cash flow pressure and required an injection of loan capital. M, an individual, loaned money to the company secured by legal mortgages over the farms, which ranked second after the bank’s security over the same assets. Also, the partnership entered into a fixed and floating charge over agricultural assets in favour of the bank, pursuant to the Agricultural Credits Act 1928. The partnership went into administration and bankruptcy orders were made against each member of the partnership. The farms were sold and the proceeds were sufficient to discharge all of the bank’s, and the majority of M’s, lending. Since the bank had been repaid in full without having to rely on the assets within the scope of the agricultural charge, the joint administrators applied for directions as to whether the proceeds of sale of those assets should, as a result of the doctrine of marshalling, be made available in the first place to M.
On the joint administrators’ application—
Held, the principle of marshalling appeared to the apply to the circumstances existing as between the bank and M. The bank had had the right to resort to two securities in support of its lending to the partnership: first the agricultural charge over partnership assets, and secondly third party legal charges over the farms. M had a right to resort to one security in support of her lending to the partnership and the company, namely the farms. Because the bank had elected to look to farms for repayment of the partnership indebtedness, the benefit of the agricultural charge went unused, and the proceeds of sale from the farms that would otherwise have been available to M were taken by the bank. While by section 5 of the Agricultural Credits Act 1928 an agricultural charge could only be created by a bank, the Act did not prevent the securities created from being assigned to persons and entities that were not banks. If the security was assignable there was not reason why it could not be marshalled. Accordingly, M was able to claim the proceeds of the assets subject to the agricultural charge by the application of the principle of marshalling (paras 15–16, 24, 28).
Hugh Jory QC (instructed by Gordons LLP) for the joint administrators of the partnership.
Graham Sellers (instructed by Walker Morris) for the trustees in bankruptcy of the partners.
Louis Doyle (instructed under the Direct Access Scheme) for M.