Waiver of marshalling: Overview, definition, and example
What is a waiver of marshalling?
A waiver of marshalling is a legal concept where a party agrees to give up its right to require a creditor to use other available assets before seizing a specific asset in the event of default or liquidation. Marshalling refers to the process of a creditor being required to exhaust all other avenues for payment before going after a particular asset, typically when there are multiple creditors or assets involved. When a waiver of marshalling is in place, the creditor can pursue the designated asset immediately, without needing to go through the other assets first.
For example, in a loan agreement, a borrower might waive the right to require a lender to pursue other collateral (like equipment or property) before going after the borrower’s primary asset in the event of a default.
Why is a waiver of marshalling important?
A waiver of marshalling is important because it simplifies and expedites the creditor’s ability to collect on a debt. Without this waiver, a creditor may need to go through additional steps, such as liquidating other assets, before being able to seize the main asset that is pledged as collateral. By waiving marshalling, the borrower or debtor makes it easier for the creditor to recover owed amounts quickly.
For businesses, agreeing to a waiver of marshalling can make borrowing more attractive by providing creditors with greater certainty and speed in recovering debts, while also potentially leading to more favorable loan terms. For creditors, the waiver reduces the complexity of the debt recovery process.
Understanding waiver of marshalling through an example
Imagine a company takes out a loan secured by both its primary factory and some office equipment. If the company defaults on the loan, and there is a waiver of marshalling, the lender can immediately seize the factory (which is the primary collateral) without first having to go through the office equipment.
In another scenario, a business owner borrows money from a lender and agrees to a waiver of marshalling, giving the lender the right to seize the property pledged as collateral (e.g., a building) without the lender needing to exhaust other assets first, such as inventory or accounts receivable, in case of default.
Example of waiver of marshalling clause
Here’s how a waiver of marshalling clause might look in a loan agreement:
“The Borrower waives any right to require the Lender to proceed with the marshalling of any other assets of the Borrower before proceeding to enforce its rights against the collateral described herein.”
Conclusion
A waiver of marshalling is a legal provision that allows a creditor to go directly after a specific asset pledged as collateral, bypassing other assets that might also be available for recovery. This waiver simplifies the creditor's ability to collect on a debt and provides more security for lenders. For borrowers, it is important to understand that agreeing to a waiver of marshalling could lead to quicker enforcement of claims on the pledged assets.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.