Marshalling is an equitable doctrine designed to protect second registered mortgagees from not being paid because of the arbitrary or capricious realisation of a security property by a prior mortgagee. In certain circumstances, a second registered mortgagee may be able to access surplus proceeds of sale from a property which it did not hold a mortgage in priority of other creditors.
Courts will permit marshalling by a second mortgagee in circumstances where:
In such a case, the second mortgagee can look to the other property to satisfy the debt owed to it. If a court did not permit marshalling, the second mortgagee, who did not obtain the benefit of the proceeds of sale of the common property, would lose the benefit of its security and be required to prove its debt as an unsecured creditor.
The case of Burness v Hill  VSCA 94 examines the equitable doctrine of marshalling. The facts of the case illustrate circumstances where a court will permit a second mortgagee to access the surplus proceeds of sale from a property which it did not hold a mortgage in priority of other creditors.
Mr Hill was the solicitor of Mr Love in respect of the compulsory acquisition of a number of properties owned by Mr Love. We will call these Property A, B and C.
Each of the properties had registered mortgages by the Commonwealth Bank of Australia (CBA).
Around August 2009, Mr Hill took a second registered mortgage over Property A in respect of his unpaid legal fees.
In 2011, CBA sold Property A as mortgagee for the sum of approximately $10.3 million. The proceeds of the sale were not sufficient to repay the whole of Love’s debts to CBA.
In 2012, Mr Hill commenced proceedings in the County Court to recover unpaid legal costs of approximately $4.15 million. The parties attended mediation in 2013, where it was agreed that Mr Love would pay Mr Hill the sum of $2.2 million and would consent to judgment against him in the County Court proceeding for that amount.
CBA later took possession of Property B and the proceeds were again insufficient to repay the debt owed Mr Hill. Mr Hill subsequently lodged a caveat over Property C, claiming an interest as an equitable mortgagee, and commenced proceedings in the Victorian Supreme Court. Relying on the doctrine of marshalling, Mr Hill claimed that his second mortgage gave him the right to stand in the shoes of CBA as first mortgagee of Property C and be paid the amount secured by the second mortgage.
Mr Love was made bankrupt by a sequestration order made in February 2016.
CBA later sold Property C in November 2016, which returned a surplus of approximately $5.8 million and was paid into court.
The bankruptcy trustees argued that:
The Court of Appeal held that:
Entering into a consent judgment did not extinguish the secured debt. Rather, the debt merged and continued to be secured and was able to support a claim for marshalling.
Marshalling can be a useful tool to improve a subordinate mortgagee’s prospects of recovery in instances where the mortgagor has become insolvent. In such circumstances, a subordinate mortgagee, who would have otherwise lost the value of their security, will trump the rights of other unsecured creditors.
 National Crime Agency v Szepietowski  AC 338.
 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589