Two lenders making successive advances secured on borrower’s land – Second lender an associated company of borrowing company – Appellant bank making third loan for purpose of reducing borrower’s indebtedness to first lender – Appellant taking no security but acting on strength of “postponement letter” issued on behalf of second lender and others – Borrower defaulting – Whether appellant partly subrogated to position of first lender – Whether second lender would otherwise be unjustly enriched at expense of appellant
The first respondent (Parc) was one of a group of companies held by Omni Holdings AG, of which H was the chief financial officer. In 1988 Parc acquired land in Battersea with the aid of a £30m loan (the first loan) from Royal Trust Bank (Switzerland) (the first lender), and a second loan from another company (the second lender) in the same group as Parc. Both loans were secured on the land, the charge in favour of the first lender ranking first in order of priority. In September 1990, when the amount still owing on the first loan stood at £20m, a third lender, the appellant bank, advanced to H the sum of £11.775m, of which some £10.1m was applied, at the direction of H, to reduce the outstanding borrowings of Parc from the first lender. The appellant did not take a charge over the land, being satisfied that it was sufficiently protected by a letter (the postponement letter) written by H and another which purported to confirm that no company in the Omni Group would demand payment of loans granted by such a company to Parc until the appellant had been repaid in full. Following a default on the part of H and the collapse of the Omni Group in 1991, the appellant claimed priority over the second lender to the extent that its loan had been applied in reduction of the first loan. That claim was upheld by the trial judge, but his ruling was overturned by the Court of Appeal primarily on the ground that the agreement preceding the third loan never contemplated the taking of a security as such. The appellant appealed to the House of Lords.
Held The appeal was allowed.
1. While the doctrine of subgrogation, as applicable in insurance cases, rested upon a contractual basis and was accordingly based on the common intention of the parties, such an intention was not required where, as in the present case, the claim was founded on the law of restitution. The underlying purpose of that branch of the law was to reverse or prevent unjust enrichment arising out of circumstances which need not include the presence of a common intention. If the doctrine were not applied, the second lender would be unjustly enriched at the expense of the appellant as the latter, in allowing its funds to go in reduction of the first loan, had done so in the belief that it would be protected under the terms of a postponement letter which, on its proper construction, was binding upon the second lender.
2. Given that the appellant’s claim was solely directed at the unjust enrichment of the second lender, it could not be contended that the appellant would be acquiring greater rights than it had bargained for. No conceptual problem was posed by the fact that the first lender and the appellant appeared to be sharing the same security as the charge was only being “kept alive” for the purpose of providing an equitable restitutionary remedy.
David Oliver QC and Mark Cunningham (instructed by Forsyte Saunders Kerman) appeared for the appellant; Leslie Kosmin QC and Andrew Thompson (instructed by Cameron McKenna) appeared for the respondents.
