By Andrew Cooke and James Ballheimer (Herbert Smith Freehills Kramer)
In a recent decision, the High Court granted relief in favour of a judgment creditor who had brought two applications against the first-ranking secured creditor for (i) an equitable account, and (ii) the application of the equitable doctrine of marshalling (under which it would have access to the first-ranking creditor's broader package of security): Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd & Ors [2025] EWHC 1305 (Ch).
This decision is a useful reminder for lenders with higher-ranking security that they may be liable to account to other secured creditors interested in the equity of redemption, including for any personal advantage obtained by the lenders beyond that due under their charge.
In determining the scope of the account, the court will assess not only a lender's monetary gains from the charged property, but also the non-monetary ones, though it will exclude mere "collateral advantages". It will also consider whether the lender has committed a "wilful default" by not, for example, obtaining the best price reasonably obtainable on sale of the property. If wilful default is established, the court can order an account for the difference between the actual price and the price that should have been obtained, as assessed on the evidence available to it, including in relation to the negotiations that occurred between the parties to the sale.
The decision will offer additional reassurance to creditors with lower-ranking security as the court recognised that the lower-ranking creditor's position in this case could also be protected by the equitable doctrine of marshalling. Marshalling applies where there are two creditors of the same debtor, each owed a different debt. Where one creditor (A) can enforce its claim against more securities than the other creditor (B), the doctrine gives B the right to have the securities "marshalled", so that both A and B are paid so far as possible (see Szepietowski v The National Crime Agency (Rev 1) [2013] UKSC 65).
The case also offers insight into how the court will determine the lender's expenses that can be deducted from the proceeds of sale.
We consider the judgment in more detail below.
Background
In underlying High Court proceedings, Brooke Homes (Bicester) Ltd (Brooke), a property developer, obtained judgment for £13.4 million in damages against three companies, which are now in administration. These companies are defendants to the present claim, but not parties to the application to which this judgment relates.
Brooke's claims against another two defendants, Desiman Limited and Desiman 2 Limited (together, Desiman), which provided secured lending to the companies in respect of the development and were alleged to have incited their breach of contract, were dismissed.
Desiman's lending was secured by way of fixed and floating charges over six registered titles that comprised the development land. Brooke was granted security over three of those registered titles (the Charging Orders Land) under charging orders made by the court in its favour in December 2021. Brooke's security over the Charging Orders Land ranked behind that of Desiman.
In January 2023, contracts were exchanged with a third party (Cala) for the sale of part of the Charging Orders Land for £40 million. The sale was effected by Desiman as mortgagee.
While Desiman accepted that it must account to Brooke as a party interested in the equity of redemption in the Charging Orders Land, the parties disagreed about the scope of this equitable account: specifically, whether there should be a surcharge on the £40 million receipt by Desiman to reflect:
the difference of £2 million between the £40 million price that was realised by Desiman as mortgagee and the price of £42 million, which Brooke alleged Desiman could and should have obtained on the ground that, during negotiations, Cala had allegedly demonstrated willingness to complete the deal at this higher price; and
a £3 million benefit which Brooke alleged would flow to Desiman (being a holder of security over all of the development land, not only the Charging Orders Land) associated with an extension to the development land that Cala had agreed to undertake as part of the deal.
Desiman accepted that the doctrine of marshalling, whereby a second-ranking secured creditor may benefit from the wider security held by the first-ranking one, may apply in some capacity, though not to its detriment. By way of background, marshalling is an equitable doctrine that permits the court to do justice between two secured creditors of the same debtor, where the two creditors have differing security packages. Typically, a first creditor has taken security over assets that the second creditor has not taken security over. Here, Desiman had taken security over assets that Brooke had not taken security over. Where there is a realisation of the property over which both creditors have security, that can produce unfairness to the creditor with the more limited security package: its security is depleted for the first creditor's realisation, but the first creditor still has access to the wider secured assets. In those circumstances, the court can order that the proceeds of sale of the property over which only the first creditor had security must be made available to the second creditor.
Another key issue was the extent of Desiman's costs and expenses that could be deducted out of the receipts.
Brooke therefore brought two applications against Desiman for (a) an equitable account, and (b) application of the equitable doctrine of marshalling.
Decision
The High Court made an order for an equitable account reflecting part of the surcharge claimed by Brooke, subject to further submissions on the amount, and recorded that Brooke may have the benefit of the equitable doctrine of marshalling in due course.
Equitable account and doctrine of marshalling
The court started by setting out the legal principles which govern accounting for proceeds received by a secured lender on sale of the property over which their debt is secured. The fundamental principle derives from Union Bank of London v Ingram [1880] 16 ChD 53, in which Jessel MR stated that "whatever the mortgagee has received from the mortgaged property is charged against him". This is a strict duty in equity and requires that the secured lender, when exercising its powers, cannot make a personal profit or otherwise take any personal advantage from, or "by and out of", the property beyond that due under the security. Account must be given for the purchase money and any such profits or advantages, including those that are non-monetary in nature (in such cases, a value should be ascribed to the benefit and included in the account). However, this duty does not require the secured lender to account for mere "collateral advantages".
The court also noted that it may surcharge the account if it is satisfied that there was, on the balance of probabilities, "wilful default" by the mortgagee for the amount that they might have received "but for" the default. For example, if a mortgagee fails to obtain the best price reasonably obtainable on the sale, they must account to those interested in the equity of redemption for not merely the amount that was actually received, but rather the amount that should have been received (per the Court of Appeal in Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409).
In this case, the issue regarding the £2 million price difference was advanced as an issue of wilful default, whilst the question for the court regarding the £3 million extension was whether it was a non-monetary benefit whose value should be accounted for or a collateral advantage the value of which should be excluded.
(i) £2 million price difference
On the evidence regarding the parties' negotiations, the court could not safely conclude that Cala was willing, as Brooke had argued, to complete the purchase of the Charging Orders Land at a figure higher than £40 million, being £42 million. This was the price that Brooke submitted Desiman would have received if it had agreed to a condition that Cala had stipulated at the beginning of negotiations (which, for opaque reasons, it no longer stipulated towards the end) that Brooke be paid first out of the sale proceeds.
The court therefore could not conclude that Desiman had committed wilful default by failing to obtain the best price reasonably obtainable and therefore that its account should be surcharged to reflect the difference between £40 million and £42 million.
(ii) £3 million extension
The court did apply a surcharge for the extension to the development site that Cala had agreed to undertake following sale. The court decided on the evidence that it was, indeed, a non-monetary advantage for Desiman by and out of the mortgaged property: it was a "sweetener" that Cala had added to its offer in order to secure preferred bidder status, and one which would generate additional value to the Charging Orders Land which was secured to both Desiman and Brooke. The court noted that "[i]t could as easily have been expressed as an additional sum which Cala would agree to pay for the…extension".
Erring on the side of caution as to the value of the extension, the court set the surcharge at the lower end of the range of numbers attributed to it during the course of negotiations, being £2.4 million. The court noted that it would be willing to hear further submissions on whether this sum should, as Desiman argued, be reduced by a further amount (25%). This was the share of the benefit of the increase in value that Desiman submitted would go to the companies (two of which, acting by their administrators, were also party to the sale contract with Cala).
The court noted that Brooke's position may be protected by the equitable doctrine of marshalling. If Desiman were to be repaid before Brooke, Brooke would have recourse to Desiman's broader security, including the development land which did not comprise the Charging Orders Land. It would also gain the benefit of the increased value of the Charging Orders Land. The court therefore ordered the parties to "suitably" record, at least as a recital to an order, that Brooke may have the benefit of the doctrine. However, the court noted the desirability of making an immediate adjustment to the account for the extension so that Brooke would get paid earlier than it otherwise might have done.
Costs and expenses
The court also considered which of Desiman's costs and expenses of sale could be reimbursed from the sale proceeds. It took a three-stage approach: if each category of costs (i) fell or potentially fell within scope of the relevant contract(s); (ii) was reasonably incurred; and (iii) was reasonable in amount, it could be so reimbursed. Reimbursable expenditure included the fees incurred by Desiman for the companies' administrators, charged at 1% of realisations, whilst, for example, legal fees relating to a potentially abusive winding up petition against Brooke were excluded (subject to an account and further enquiry).
*The article was originally published by Herbert Smith Freehills Kramer.