Simmonds, Ralph --- "Marshalling Securities in the Context of Insolvency: A Guide" [2003] MurdochUeJlLaw 32; (2003) 10(4) Murdoch University Electronic Journal of Law

Imagine a debtor DR1. DR1 has two assets, A and B.[13] DR1 has granted security over A and B to secure a debt to SP1. Subsequently, DR1 has granted security over A (only) to SP2 to secure a debt to SP2 such that SP2’s interest in asset A is junior to SP1’s (hence the numbering). That is, SP2 has no security interest in asset B.

Now imagine that DR1 has defaulted on its obligations to both SP1 and SP2. SP1 decides to enforces its security against asset A instead of asset B. The proceeds of realisation are sufficient to pay out SP1, but there is not enough left to pay out SP2. Can SP2 assert SP1’s security interest in asset B, at least up to the lesser of the amount SP1’s security interest secured before realisation, and the amount left owing to SP2 under its (eroded) security?

Marshalling says that the answer to the question is yes. The long form of the answer is that a second ranking secured creditor of a single fund whose security has been eroded by the enforcement strategy of the first ranking secured creditor with security over that fund and another or others should be able to marshall the latter’s intact security over that other fund or those others. By Marshalling is meant

… the junior creditor will, via the intervention of equity, be placed in the position of of the senior creditor, as against those other assets of the debtor which are subject to only the senior creditor’s security, to the extent of any deficiency in the junior creditor’s security.[14]

There is an initial problem that the quotation nicely captures. For what amount may the junior creditor – SP2 – assert the security interest of the senior creditor – SP1? Is it the lesser of the amount SP1’s security interest secured before realisation (as my original statement suggested) and the amount owing to SP2? Or is it the latter amount? Assume for the sake of the discussion that SP2’s is the larger amount.

The answer seems to be, notwithstanding the language of the quotation, and most of the general discussions of Marshalling I have encountered, marshalling is for the smaller of the two amounts. This follows, I believe, from the nature of Marshalling.

Marshalling is meant to protect the junior creditor – SP2 – from the effect of choices of enforcement strategy by the senior creditor – SP1. It is meant to do this without interfering with the making of that choice by the senior creditor. It is also meant to do this without granting the junior creditor more than it could reasonably have expected to result from its security had the senior creditor realised on the asset over which it alone had security, here asset B.

Assume asset B was worth more than asset A, that both were worth more than SP1’s debt, but that both were worth less than SP2’s debt. In the example, SP1 enforced against asset A, a choice the law in Australia will not restrain.[15] But had SP1 enforced first against the property asset B over which SP2 had no claim, leaving a residue, SP2 would have recovered under its security no more than the amount of the lesser of SP2’s claim and the value of asset A. It would not have been able to make up a portion of the shortfall from the residue on asset B, over which it had no security interest. The proceeds of asset B would then (on the assumption of no other secured creditors) have been available in insolvency to the trustee or liquidator for distribution among the general body of creditors (one of whom will of course be SP2). Marshalling is not meant to put SP2 in any better position than that.[16] The simplest explanation for this intuitively plausible position is that it is because DR1 bargained to throw the burden of the claim secured by SP1’s security interest on to asset B, not a larger claim.[17]

The point of this exploration into the detail of Marshalling is evident when insolvency is considered. The exploration was to show how Marshalling attempts to avoid unreasonable prejudice to senior or junior creditors while binding the debtor (and all of those claiming under it, except transferees and secured creditors, as we will see) to no more than it should be taken to have agreed to. Unsecured creditors should have no better rights than the debtor itself, absent special statutory provision (there appears to be none in Australia). It follows that Marshalling

… prevails over the trustee in bankrupty, receiver or liquidator of the debtor and the debtor’s real and personal representatives.[18]

A further excursus: Marshalling by Apportionment

Another point of this exploration is that it helps to understand what is on its face a rather complex variation on the Marshalling theme. Again, an example is needed.

Assume the same basic facts as above. But now further assume that DR1 subsequent to the grant of security interests to SP1 over assets A and B grants a junior security interest over asset B to SP3.[19] SP1 realises by enforcement against asset A, as before. Can SP2 still marshall SP1’s interest?

The answer is a qualified yes. SP1 can marshall but only prior to SP3 for that portion of the senior security debt corresponding to the proportion that the value of asset B represents of the total of the values of assets A and B.[20] The reason for this is that, were SP2 able to marshall for the full amount,

… [t]he junior creditor [(SP2)] would … be inflicting upon the third party [(SP3)] the very thing that provides the impetus for the intervention of the doctrine of marshalling on the junior creditor’s behalf. … The iniquity of allowing the junior creditor an unmodified right to marshall becomes obvious when it is realised that the third party is in an equivalent position to the junior creditor qua the senior creditor [(SP1)].[21]

How Marshalling works: the post-realisation model

Note that Marshalling does not give the junior creditor – SP2 – the right to seek to compel the senior creditor – SP1 – to recover against the asset over which its claim is singular – asset B. Early in the history of Marshalling in England, there was indeed such a right[22] and it is the preferred version of Marshalling in the United States currently.[23] There are in recent English[24] and Australian[25] authority dicta that suggest a revival of support for such an approach. However, the better view appears to favour leaving the senior creditor unconstrained.[26]

That better view could be called the “post-realisation” one.[27] Under it, the junior creditor in the sort of circumstances described earlier, and subject to the limits to be returned to below, automatically acquires the benefit of the senior creditor’s security over an asset in respect of which the junior creditor itself had no security.[28] In effect, this means that the junior creditor can petition the court to enable it to enforce the senior security after the debt it secures has been paid out by realisation, or it can take steps itself to realise on the security.[29]

What sort of interest then does Marshalling represent?

The nature of the interest Marshalling rights represent: a sui generis interest

Marshalling rights, until the senior creditor moves to realise in the sort of circumstances I have described, is a “potential equity or a mere potentiality to marshall”.[30] It may not arise because the senior creditor does not realise in the prejudicial way the right addresses. As we will see shortly, it may also not arise because of certain sorts of action by the debtor.

Marshalling rights, once the conditions for them have been met, do not give the junior creditor a new proprietary interest in the asset over which the rights are asserted. Rather, the junior creditor acquires the right to resort to the senior security for its own debt but only up to the amount the senior security secured.[31] Marshalling rights are difficult to classify. But the best short description of them is “sui generis”,[32] and rather more helpfully

… an ‘inchoate equity’ (which whilst falling short of an equitable interest or estate is superior to a ‘mere equity’) …[33]

It is also useful to see what Marshalling is not. Start with the most obvious parallel to Marshalling, subrogation. Marshalling is not a form of subrogation, although it operates in much the same way, and is sometimes so described.[34] It is not a form of subrogation because, unlike the recognised cases of subrogation in our law, marshalling requires that in general the senior and junior creditors have a common debtor. Also, Marshalling does not involve any payment or other consideration having been provided by the junior creditor to the senior creditor.[35]

Relatedly, Marshalling is not a form of restitution for unjust enrichment in the terms our law appears to require for restitutionary analysis.[36] Although the junior creditor may been seen without marshalling to lose the benefit of its security, and the unsecured creditors of the debtor to be liable to be enriched thereby, neither the party whose rights form the basis of the suggested restitution (the senior creditor) nor the party against those rights are being asserted (the debtor) stands to be enriched (unjustly or not) otherwise.[37]

Even more obviously, Marshalling, despite some contrary suggestions,[38] is not a form of consolidation of mortgages. Among other things, as we will see it is not restricted to security interests in the form of mortgages.[39]

Again, Marshalling, despite some contrary suggestions,[40] is not a form of contribution. Among other things, it does not involve co-debtors, and it does not involve any principle of equal or proportionate burden sharing.[41]

Finally, Marshalling, despite some contrary suggestions,[42] cannot be a form of specific performance. Among other things, it does not involve a discretionary element nor any contractual relationship between the senior and junior creditors.[43]

The conditions for Marshalling rights to arise: the common debtor rule

There are said to be four such conditions, compendiously expressed as the “common debtor” rule. The four conditions are:[44]

1. The senior and junior creditors’ security interests must secure debts owed to both by the same debtor;
2. The assets in question must be owned by that debtor;
3. Those assets must exist at the time the marshalling rights arise; and
4. The senior creditor must have equal rights of recourse against the assets in question.

There is a further condition, however. It is that the senior and junior creditors’ security interests must be of the sort recognised as securities by our law. This would allow for marshalling not only mortgages and fixed and crystallised floating charges, but also pledges and possessory liens.[45]

However, this further condition would exclude marshalling rights of set-off (most obviously, because of the procedural character of the right: once exercised, it ceases).[46]

Rather less straightforwardly, the further condition would exclude marshalling title retention security. The explanation usually given is that the requirement in 2 above cannot be met, as the asset is owned by the senior creditor, not the debtor.[47]

The application is less straightforward as there is some authority that would accord to the debtor, under a title retention arrangement meant to secure an obligation, ownershiplike rights.[48] And for some such arrangements there is statutory conferral of such rights.[49]

In any event, in the world of personal property security reform, if Australia ever enters it,[50] the analogisation of such devices to security interests would be virtually complete. Then Marshalling would become readily applicable to such devices.

There are two recognised exceptions to 1 and 2 above. One is to permit the junior creditor to marshall where the junior creditor’s debt is owed, not by the debtor over whose asset marshalling is sought, but rather by a surety for the senior debt who has also granted senior security for that suretyship obligation over that asset to the senior creditor.[51] Here the justice of Marshalling lies in the right of the surety to seek indemnity for the obligation from the debtor.[52] It follows, then, that marshalling is unavailable in the converse situation, where the debtor owes the relevant obligation to the junior creditor, and the senior creditor has realised on the debtor’s asset.[53]

The other recognised exception to 1 and 2 above is for transfers by the debtor of an asset to another who takes subject to the senior security the debtor had granted over it. In these circumstances, the junior creditor can marshall the senior security in the hands of the transferee.[54]

Requirement 4, that of the senior creditor’s equal recourse to the relevant assets, is on the face of it easy to understand in terms of the nature of Marshalling. If the senior creditor’s recourse is restricted, as by an agreement with the debtor to resort first to the senior security interest over the asset over which the junior security interest subsists, and the senior creditor is paid out thereby, then Marshalling has no place.[55] It would seem that this should also be the case where the senior creditor is left with a shortfall. Marshalling is only apposite where the senior creditor has a choice between two or more assets, over one of which the junior creditor’s security interest subsists, and chooses that asset.[56]

This brings us to the matter of the vulnerability of marshalling rights.

The loss or preclusion of Marshalling rights: herein of third party security holders. absolute disponees – and “covenants not to marshall”

Marshalling rights are particularly vulnerable to transactions by the debtor in assets over which these rights are intended to be asserted.[57]

We have already seen the position where the debtor creates security over the asset before Marshalling rights arise. This is the domain of Marshalling by Apportionment.

But what if the debtor creates a security interest over the asset subsequent to the Marshalling rights arising? If that security interest is taken free of the senior security – as in most cases it will be – it is hard to see, consistently with the nature of Marshalling, how Marshalling could then take place.[58]

What of transfers or other dispositions for value or otherwise before the senior creditor realises? The answer depends on whether or not the transferee or disponee took subject to the security interest. If they took subject to it, then Marshalling is possible, as has already been explained. If they took under a transfer or disposition that expressly provided for unencumbered title and that was in fact provided, then the authorities are clear that Marshalling rights cannot subsequently arise.[59] This is because the requirement 1 above of the common debtor rule cannot be met: recall that Marshalling does not confer a new security.[60] It follows that this applies to a third party disponee who is a volunteer.[61] But it should also follow that this position applies to a disponee who takes free of the senior security for some other reason than the agreement of debtor and senior creditor.[62] It should also follow that notice of the existence of the junior creditor and its security interest is irrelevant to any of this.[63]

Finally, it is worth considering the incidence and effects of covenants that might be seen as directed against marshalling. There appear to be four types in use or readily imaginable. One is a covenant by the debtor with the senior creditor not to create subsequent security interests without obtaining a waiver of any marshalling rights by the subsequent secured creditor. Another is a covenant with the senior creditor that denies the senior creditor equal recourse rights. The third is a covenant with the senior creditor constituting the agreement by the debtor that the former is not required to marshall its security. And the fourth is a covenant by the debtor with the junior creditor against marshalling by other junior creditors (that is, this covenant is directed against Marshalling by Apportionment).

The first and third types of covenant appear to be effective in accordance with their terms but on the analysis of Marshalling here they also appear to be “superfluous”.[64] The second also appears to be effective but only justifiable from the debtor’s standpoint.[65] The fourth would have a useful role to perform, but one dependent on the waiver of their marshalling rights by the other junior creditors[66]

Conclusion

This presentation has been about a doctrine that is singular, intuitively plausible and persistent. It is also I believe fundamentally sensible, at least in the post-realisation form in which Australia has it.

The doctrine of Marshalling is one that requires careful understanding if its complexities, which are formidable, are to be appreciated. This presentation was meant to assist with such an understanding.

Appendix

PROPOSED PERSONAL PROPERTY SECURITY REFORM FOR AUSTRALIA

A User’s Guide to

Australian Secured Transactions Law Reform

For the Seminar “Round-up of Current Law”

Financial Services Committee (Perth) of the Business Law Section

Law Council of Australia

7:30 – 9:30 am, Friday, 9 November 2001, Central Park Theatrette, Perth

Ralph Simmonds, Dean and Professor of Law, Murdoch University

What Reform?

Talking about law reform to an audience of practising lawyers, before we have a bill, let alone before reform has been enacted, has the appearance of hubris of the rankest sort. Talking about secured transactions law reform looks even worse. After all, it has been talked about for a long time. And there are many who consider a sufficient case has not been made for it. I look at the matter another way. For me, the persistence of the discussion of the case for reform1 suggests there is ground for a concern that will not go away.

Now we have new draft legislation, for a Personal Property Security Act for Australia2. It might be enacted as uniform state law, or as federal law under a suitable new referral of legislative power. It addresses the case for reform in the following ways:

(1) A Uniformity Principle: The draft legislation seeks to bring greater order to the chaos of secured transactions law that we have at present, by providing for modernised, simplified, largely uniform and much easier to apply rules for the creation, enforcement and priority position of consensual security interests. It would replace both the current legislative jungle of state3 and federal law4 and the varied and difficult to apply common law5. It does involve bringing under the legislation a number of transactions that our law largely – but not entirely – does not deal with as secured transactions. The major example in practice will be the retention of title transactions of the Romalpa sort6. But there are compensations.

(2) A Flexibility Principle:The draft legislation seeks to make the life of the drafter of secured transactions easier by making the enforceable effect of commercially realistic arrangements easier to predict. This should be of special interest to lawyers left uncertain about the effect of fixed and floating charge arrangements over such things as book debts7 and attempts to extend retention of title clauses into manufactured products and proceeds8.

Further, the draft legislation is firmly based on a successful model that has already been translated into the Personal Property Security Act 1999 (NZ)9. This model is the Canadian (provincial) Personal Property Security legislation, and particularly the latest forms of that legislation10. This model in turn gives direct access to a sizeable body of case-law and commentary, including case-law and commentary on forms of Article 9 of the Uniform Commercial Code in the US, on which the Canadian Acts themselves are based11. This North American model is influencing international conventions on secured financing law12.

What Would the Reform Look Like?

I will take the draft Australian legislation, and the corresponding provisions of the Personal Property Security Acts of Saskatchewan and of New Zealand, to give the flavour of this sort of law.

Scope of the Legislation

It applies to any transaction that in substance, regardless of its form, creates a security interest13. Such transactions are called security agreements. This includes such things as conditional sale agreements. There is also an extension to assignments of book debts, but only for the purposes of the priority rules.

Effect of security agreements

Generally, they are to take effect according to their terms, subject to contrary specified law14. Thus, the old precedents may continue to be used. But major issues in drafting are specifically addressed. Thus, security interests extend to identifiable proceeds without the need for a fiduciary relationship15. Security interests may extend to after-acquired property without specific appropriation by the debtor16, and they may secure further advances17, if the security agreement so provides. Security interests in raw materials that lose their identity upon incorporation into a product or mass continue in the product or mass in the same proportions as the obligations they secure18.

Enforcement of security agreements

The secured creditor has the rights and remedies provided for in the legislation as well as any provided for in the security agreement. Those rights and remedies are principally to take possession as the collateral permits19; to sell in a commercially reasonable manner20; or to foreclose21. There are, however, provisions to protect the interests of the debtor in respect of any equity it has left in the collateral22.

Priority of security interests under security agreements:

The base priority rule as between competing secured parties is the first to register or take possession, which applies unless another priority rule governs23. A security interest in any collateral may be registered24, and registration is by the filing of a notice of the security interest in a single computerised registry25. There are special priority rules for such matters as purchase money security interests, to protect such as the supplier of goods on Romalpa terms, but generally speaking only on the basis that such supplier has registered26. Security interests that have been registered are good against purchasers of the collateral subject to exceptions such as for purchasers of inventory27. The location or character of title, whether legal or equitable, is irrelevant to any of these rules. So too is notice. And in any event registration is not notice28.

Notes to Appendix

1 Even judicially: see my matching paper to this one, “A User’s Guide to Associated Alloys Pty Ltd v Metropolitan Engineering and Fabrications Pty Ltd” (2001).

2 This is the product ot the work of the Banking and Financial Services Law Association Personal Property Securities Committee, of which I am a member. Copies of it should become widely available shortly; also, we expect it to be the subject of a national conference in the first quarter of 2002.

3 Including the Bills of Sale Act 1899 (WA), the Hire Purchase Act 1957 (WA), and the Chattel Securities Act 1987 (WA).

4 At least Corporations Act 2001 (Cth) Part 2K, and probably also a range of other federal statutes, including the Air Navigation Act 1920 (Cth), the Designs Act 1906 (Cth), the Life Insurance Act 1995 (Cth), the Patents Act 1990, and the Trade Marks Act 1995. However, mortgages under the Shipping Registration Act 1981 (Cth) will not be covered.

5 Most notably, the rule in Dearle v Hall, which appears to have few friends.

6 For their regulation as a secured transaction notwithstanding their form, see the Chattel Securities Act 1987 (WA), and, when they are not used as a inventory financing devices, the Hire Purchase Act 1957 (WA). For similar suggestions in a common law context (none yet acted on), see Esanda Finance Corp Ltd v Plessnig [1989] HCA 7; (1989) 63 ALJR 238, at 246 per Brennan J (on the protection of something akin to an equity of redemption).

7 Thus, it is unclear whether or not the common law in Australia is as stated for common law New Zealand in Agnew v The Commissioner of Inland Revenue, decided 5 June 2001, http://www.privy-council.org.uk/files/other/agnew jud-rtf.rtf (PC NZ). See on this Nash, L and Collier, B “Fixed Charges over Book Debts after Agnew v Commissioner of Inland Revenue” (2001) 9 Insolvency Law Journal 116.

8 On those difficulties, see the paper in note 1 above.

9 Accessible at http://www.knowledge-basket.co.nz/ (accessed 7 November 2001): click on Databases, then on GP Legislation (not yet in force).

10 In particular, the Personal Property Security Act RSBC 1996, C 359 as amended, accessible at http://www.qp.gov.bc.ca/statreg/stat/P/96359_01.htm (accessed 7 November 2001); the Personal Property Security Act S.S. Ch P-6.2 (Saskatechewan) as amended, accessible at http://www.qp.gov.sk.ca/publications/index.cfm?fuseaction=details&c=1885&id=2 (accessed 7 November 2001); and the Personal Propety Security Act S.N.B. Ch P-7.1 (New Brunswick) as amended, accessible at http://www.gov.nb.ca/acts/acts/p-07-1.htm (accessed 7 November 2001).

11 For the principal source on Canadian law, see McLaren, R, Secured Transactions In Personal Property In Canada, 2nd ed, looseleaf (Toronto : Carswell, 1989 -).

12 See Cuming, R, “"Hot Issues" in the Development of the (Draft) Convention on International Interests in Mobile Equipment and the (Draft) Aircraft Equipment Protocol” (2000) 34 International Lawyer 1093.

13 Draft Aust. PPSA, note 2 above, s 8; Sask PPSA, note 10 above, s 3; and NZPPSA, note 9, s 17.

14 Draft Aust. PPSA, note 2 above, s 14; Sask PPSA, note 10 above, s 9 (1); and NZPPSA, note 9, s 35. There are some differences in the degree of specification here.

15 Draft Aust. PPSA, note 2 above, s 33; Sask PPSA, note 10 above, s 28; and NZPPSA, note 9, s 45.

16 Draft Aust. PPSA, note 2 above, s 18; Sask PPSA, note 10 above, s 13; and NZPPSA, note 9, ss 43, 44.

17 Draft Aust. PPSA, note 2 above, s 19; Sask. PPSA, note 10 above, s 14; and NZPPSA, note 9, ss 71 and 72.

18 Draft Aust. PPSA, note 2 above, s 45; Sask PPSA, note 10 above, s 39; and NZPPSA, note 9, ss 82 and 85.

19 See Draft Aust. PPSA, note 2 above, s 63; Sask PPSA, note 10 above, s 58; and NZPPSA, note 9, s 109.

20 Draft Aust. PPSA, note 2 above, s 64 read with s 70; Sask PPSA, note 10 above, s 58; and NZPPSA, note 9, s 109. There is some variation in the language here, and there are notice provisions and the like.

21 Draft Aust. PPSA, note 2 above, s 66; Sask PPSA, note 10 above, s 61; and NZPPSA, note 9, s 120. There are provisions for notice of course to permit other parties to intervene.

22 Draft Aust. PPSA, note 2 above, s 65; Sask PPSA, note 10 above, s 60; and NZPPSA, note 9, s 117.

23 Draft Aust. PPSA, note 2 above, s 40; Sask PPSA, note 10 above, s 35; and NZPPSA, note 9, s 66.

24 See Draft Aust. PPSA, note 2 above, s 30; Sask PPSA, note 10 above, s 25; and NZPPSA, note 9, s 141.

25 Draft Aust. PPSA, note 2 above, s 49; Sask PPSA, note 10 above, s 43; and NZPPSA, note 9, s 142.

26 Draft Aust. PPSA, note 2 above, s 39; Sask PPSA, note 10 above, s 34; and NZPPSA, note 9, ss 73 and 74.

27 Draft Aust. PPSA, note 2 above, s 35; Sask PPSA, note 10 above, ss 20 and 30; and NZPPSA, note 9, ss 52 and 53.

28 Draft Aust. PPSA, note 2 above, s 53; Sask PPSA, note 10 above, s 47; and NZPPSA, note 9, s 20.

---

Notes

[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] TASStRp 9; (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] HCA 7; (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.