Equitable remedies, which were established by the Court of Chancery, are discretionary in nature and their aim if to maintain fairness and justice. The role of equity is to essentially fill the gaps of the law to ensure that a fair outcome is reached when the law will not allow it. A distinction can therefore be drawn between legal remedies, which are available as of right, such as damages and equitable remedies, which are only granted if damages are not enough. The operation of equity is governed by a set of principles called the equitable maxims, which are also discretionary in nature and the courts can therefore decide whether to apply them in a particular case.
The equitable remedy of subrogation is used to prevent unjust enrichment by allowing one party to step into the shoes of another party and assume the benefit of any rights that such a party may have in respect of a liability. This can arise in a number of different situations such as insurance, which is a good starting point in understanding the way subrogation works. By way of an example, when an insurer pays out money to an insured client, subrogation allows the insurer to recover money from the third party that caused some or all of the loss. Therefore, the insurer can essentially step into the shoes of their insured client, using their name to proceed against the third party and also claim from the insured client any sums received by way of compensation from the third party. However, subrogated rights are wholly derivative which means that the insurer has no greater rights than the insured and can only proceed against a person that could have been pursued by the insured client themselves.
Subrogation and Lenders
Where a lender lends money to a borrower to discharge the borrower’s debt to a third party, or to the third party directly to discharge the debt, the lender may be entitled to be subrogated to the third party’s former rights against the borrower to the extent of the debt discharged, such as any security on which the original debt was secured.
The main principles in relation to lenders were set out by the House of Lords in the case of Banque Financiere de la Cite v Parc (Battersea) Ltd  UKHL 7. Lord Hoffmann held that the following questions must be answered:
- Was the Defendant enriched at the Claimant’s expense?
- Was the enrichment unjust?
- Are there any policy reasons to deny the claimant a remedy?
- Are there any defences?
The rights of subrogated lenders were re-visited by the Court of Appeal in the case of Day v Tiuta International Ltd & Anor  EWCA Civ 1246. The court was asked to answer two questions. The first question was whether a lender claiming subrogation on the basis that it did not get the security it anticipated must have a void security interest or whether a voidable security interest is sufficient. The court held that if a security interest is voidable, then it is not effective as a security interest at all and a lender that has bargained for a valid security interest but received a voidable one did not in fact receive what it bargained for and can therefore claim subrogation (UCB Group Ltd v Hedworth  EWCA Civ 1717). The second question was whether a lender that had already appointed receivers under its defective security can validate the appointment under whichever security is deemed to be effective or whether the lender should re-appoint. The court explained that if a lender has already appointed receivers under their existing defective security, then there is no need to re-appoint as subrogation gives the lender the right to be the chargee in equity from the point in time that the lender paid off the prior lender (Halifax plc v Omar  All ER (D) 271 (Feb)).
The case law on subrogation
Failure to register a legal charge
In Anfield (UK) Ltd v Bank of Scotland Plc & Ors  EWHC 2374, the High Court was asked to decide whether the Bank of Scotland could claim subrogation. Mr S, who was the registered proprietor of the property in question, took a loan with Halifax in 2000 which was registered at the Land Registry. The Defendant, lent money to Mr S in 2006 to redeem the Halifax charge and in turn took a charge over the property, with the intention of becoming a first charge holder. However, the Defendant’s charge was not registered at the Land Registry. The Claimant subsequently registered an equitable charge over the property created by an interim charging order. The Defendant, upon realising their error and the registration of the Claimant’s charge, in turn registered a unilateral notice in 2009. Mr S then became bankrupt and the Defendant successfully claimed subrogation in relation to the Halifax charge at first instance. The Claimant appealed but Mrs Justice Proudman sitting in the High Court dismissed the appeal. It was held that the Claimant was unjustly enriched as the Defendant repaid the Halifax charge on the assumption that it would obtain a legal charge but it did not in fact receive what it bargained for regardless of the Defendant’s failure to register the charge. Mrs Justice Proudman did however acknowledge that detriment to third parties may defeat a subrogation claim if for example such a party acts in the belief that a state of affairs exists, as per the register for example, but their belief is incorrect.
The recent Supreme Court decision in Bank of Cyprus UK Ltd v Menelaou  UKSC 66 has provided some guidance for lenders claiming subrogation in respect of a vendor’s lien. Mr and Mrs M sold their house, the Hall, to buy a property, the Oak, in the name of their daughter Melissa as a gift to her. The Claimant had a mortgage over the Hall which it agreed to release subject to it obtaining a mortgage over the Oak to secure the outstanding loan amount. However, it later transpired that Melissa’s signature on the Mortgage Deed charging the Oak had been forged and the charge was deemed to be void. The Claimant argued that it should be subrogated to the unpaid vendor’s lien over the Oak as Melissa would be unjustly enriched in acquiring a property free from the charge. A vendor’s lien comes into existence automatically by operation of law when a contract for sale of a property is entered into, with the seller automatically acquiring a lien over the property securing any unpaid purchase money. It should however be noted that to be subrogated to a vendor’s lien, a lender must have provided the funds used to purchase the property. The court held that the Claimant was entitled to be subrogated to the vendor’s lien, even if it did not fund the purchase directly, as the purchase of the Oak was made possible by the Claimant’s decision to release its charge over the Hall.
In the case of Bank of Scotland Plc v Joseph and Ors  EWCA Civ 28 the Court of Appeal was asked to decide on a similar scenario, this time in the context of a development. The Developer of a block of flats granted a lease of a flat to Mr S. Mr S in turn assigned the lease to Mr J, who took a loan from the Claimant to fund the purchase from Mr S. The Claimant registered a unilateral notice to protect its charge as there had been delays in the registration. However, in the meantime, Mr S had been registered as proprietor and had registered a charge in favour of W, before Mr J was given the chance to be registered as proprietor and before the Claimant could register its charge properly, as a legal charge. Mr J and the Claimant were eventually registered, but the Claimant’s charge now ranked behind W, that obtained possession and sold the property on. However, there had been evidence that the Claimant’s charge was forged and W argued that it was therefore invalid. The Claimant sought to be subrogated to the Developer’s unpaid vendor’s lien as it had provided the money to fund the purchase of the flat. W agreed to this but claimed that the Claimant’s subrogated rights ranked behind its own charge. The Court of Appeal held that the unilateral notice was effective to protect the Claimant’s interest and it did not matter that the unilateral notice did not refer to the unpaid vendor’s lien explicitly as the right relied on. In light of the above, it is highly recommended that lenders enter a unilateral charge to protect their interest, particularly when it comes to leases where the registration process can be lengthy and complicated.
In UCB Group Ltd v Hedworth  EWCA Civ 1717, Mr H and Mrs G, who were husband and wife, purchased properties from the executors of a deceased’s estate, taking a loan from Barclays. Mr H took a further loan from the Claimant, charged over one of the properties, the farm. H transferred the loan advance to Barclays, reducing the outstanding loan amount and agreeing with Barclays that it would release its charge over the farm. The Claimant started proceedings and a possession order was made. Mrs G managed to set aside the possession order against her, claiming that she signed the Barclays charge as a result of Mr H’s undue influence on her and/or misrepresentations he made to her. The Claimant argued that i) Mrs G and Mr H were in default under the charge and it was therefore entitled to possession of the farm and ii) it was entitled to possess by sub-subrogation to the unpaid lien of the executors, which Barclays would be entitled to be subrogated to. If Barclays’ charge was voidable at the instance of Mrs G, Barclays would have intended to retain any security rights to which it was entitled to in the absence of an effective security and therefore the Claimant was entitled to be subrogated to those rights, otherwise Mrs G would be unjustly enriched.
The High Court in Andrew Conquest v Patrick McGinnis and Brian McGinnis  EWHC 2943 (Ch) found that the right of subrogation will be considered to be waived if it is not within the intention of the parties. If the parties intend that one of them should be enriched at the expense of the other, because it will serve their commercial purposes, then it will not be unjust and subrogation will not apply. The facts of this case involved a contractor that owed money to a bank, which reached an agreement with its investor that the investor would complete remaining projects using sub-contractors. The nature of the transaction meant that subrogation was not consistent with the aims of the parties and it was not therefore intended.