Mortgage – Subrogation – Insolvency – Appellant defaulting on loan repayments to first appellant lender – First respondent going into administration – Administrators appointing receivers of appellant’s property – Appellant alleging that appointment invalid and impugning validity of charge – Whether first respondent entitled to be subrogated to rights of earlier lender under charge paid off out of its funds – Whether entitled to rely on subrogated rights at same time as arguing for validity of own charge – Whether any equitable defence available to subrogation claim – Appeal dismissed
Pursuant to a loan facility agreement of June 201, the first respondent lent more than £7.8m to the appellant by way of mortgage loan in order to finance the redevelopment of a residential property, over which the loan was secured by a legal charge. Part of the loan funds were used to refinance the appellant’s £3m borrowing from another lender so as to discharge that lender’s pre-existing charge.
The first respondent subsequently went into administration and the second and third respondents were appointed as administrators. The appellant failed to repay the loan when it fell due in November 2012 and receivers were appointed in respect of the property pursuant to the Law of Property Act 1925.
The appellant brought proceedings against the respondents with a view to establishing that the appointment of the receivers was invalid. The court struck out the appellant’s particulars of claim so far as they asserted a claim for unliquidated damages against the first respondent to be set off against the loan amount; the judge held that such a claim was contrary to the principle that a mortgagor could not unilaterally appropriate the amount of a cross-claim, which was unliquidated and was not admitted by the mortgagee, in the discharge of the mortgage debt.
The appellant further asserted that he was entitled to rescind the charge on the grounds of fraudulent misrepresentation by the first respondent as to its solvency and ability to comply with the terms of the facility agreement. The judge held that, even if the appellant were correct on that point, the first respondent could still validly appoint receivers since it was entitled to be subrogated to the rights of the earlier lender, whose charge had been discharged out of its funds. He gave summary judgment for the first respondent for declarations as to the validity of the charge and of the appointment of the receivers.
The appellant appealed. He contended that: (i) a party could not exercise rights of subrogation if it had not accepted that the charge which it had actually obtained was invalid or otherwise defective such that it had not obtained the security for which it bargained; and (ii) until the court determined whether the first respondent’s charge was voidable, the first respondent had effectively obtained the bargained-for security and could not rely on the doctrine of subrogation.
Held: The appeal was dismissed.
(1) The first respondent’s contention that its own charge was valid and enforceable did not preclude it from relying on the doctrine of subrogation, on the alternative hypothesis that its charge was voidable and therefore liable to be set aside or rescinded. That was a fallback argument on which the first respondent relied in the event that, at trial, the validity of its own charge was not established and the appellant succeeded in showing that the charge should be set aside for fraudulent misrepresentation. In that event, the first respondent would not have obtained everything for which it bargained, namely a valid first charge on the property. It was not improper for a litigant to rely on an alternative case that was inconsistent with his primary case, provided that it made clear that it was truly an alternative case which would arise only if its primary case failed: Clarke v Marlborough Fine Art (London) Ltd (Amendments) [2002] EWHC 11 (Ch) and Binks v Securicor Omega Express Ltd [2003] EWCA Civ 993; [2003] 1 WLR 2557 applied. The first respondent’s subrogation argument was a genuine alternative to its primary case that no rescission arose and its charge was valid. The judge had therefore been entitled to approach the application for summary judgment on the two alternate hypotheses that either the appellant’s claim to rescission would fail, in which case the first respondent had validly appointed receivers under its own charge, or that it would fail, in which case the first respondent would have been subrogated to the earlier lender’s charge and entitled to appoint receivers pursuant to its terms.
(2) It was not the case that, until a court had set aside the first respondent’s charge, that charge was good and gave the first respondent what it had bargained for. The fact that a security was voidable from inception, as opposed to void, did not, preclude the operation of the doctrine of subrogation on that ground: UCB Group Ltd v Hedworth [2003] EWCA Civ 1717; [2003] PLSCS 271 applied. The appellant’s argument that subrogation arose only once the equity was established at trial, and that it was therefore inappropriate to determine the issue in the instant case on an application for summary judgment, was rejected accordingly.
(3) The fact that the first respondent had appointed the receivers by reference to its own charge, and then sought to justify that appointment by reference to the subrogated charge, did not invalidate the original appointment. The remedy of subrogation gave effect to a pre-existing equitable proprietary right, namely the right to be regarded as the chargee of the property in question, which existed in equity from the time when the chargee with the invalid or deficient security paid off the secured debt of the previous lender: Halifax plc v Omar [2002] EWCA Civ 121; [2002] P&CR 26; [2002] PLSCS 44 applied. The doctrine of subrogation simply regulated the first respondent’s relations with a borrower, who would otherwise be unjustly enriched, as if the benefit of the charge had been assigned to it. The first respondent did not obtain an actual assignment of the earlier lender’s interest but instead obtained a new and independent equitable security interest and it would not necessarily occupy exactly the same position as the discharged creditor in every respect. The precise manner in which doctrine of subrogation operated could vary according to the circumstances of the case. The equitable doctrine was flexible enough, in circumstances such as the present where the secured creditor was not aware of any challenge to its security at the time when it appointed receivers, to deem an appointment purportedly made pursuant to a voidable security as having been made pursuant to subrogation rights: Banque Financière de la Citè v Parc (Battersea) Ltd [1999] 1 AC 221; [1998] PLSCS 72 and Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2003] EWHC 1032; [2004] EWCA Civ 487 applied.
(4) Although equitable defences could be raised against a claim for subrogation, that did not oblige the first respondent to set off or give credit for the appellant’s unliquidated damages claim. The maxim that “he who seeks equity must do equity” simply meant that a claimant that sought to avail itself of an equitable remedy could do so only on terms that it fulfilled its own legal and equitable obligations arising out of the subject matter of the dispute. On an application of the well-established rule, unless and until a mortgage was discharged in the appropriate way on actual payment and acceptance of the sum due, the mortgagee was not only entitled to exercise its remedies of possession and appointment of receivers but was also entitled to receive the proceeds of sale in satisfaction of the debt secured by the mortgage or charge, notwithstanding the existence of any unliquidated cross-claim by the mortgagor. That rule was not disapplied in cases where the mortgagee relied on subrogated rights: Samuel Keller (Holdings) Ltd v Martins Bank Ltd [1971] 1 WLR 43, Barclays Bank plc v Tennet unreported 6 June 1984 and National Westminster Bank plc v Skelton [1993] 1 All ER 242 applied.
Nor did the fact of the first respondent’s insolvency, which left the appellant to prove as an unsecured creditor in respect of his damages claim, alter that position or mean that the first respondent was not “doing equity” in enforcing its subrogated rights. The first respondent’s insolvency was irrelevant and meant no more than that the first respondent’s assets now had to be realised and distributed pari passu among its creditors in accordance with statutory scheme laid down by the Insolvency Act 1986 and the Insolvency Rules 1986. Under that scheme, the rights of secured creditors were preserved. It provided no reason for saying that the first respondent had not “done equity” to the appellant or that it should not enjoy subrogated rights as a secured creditor.
The appellant was also unable to rely on any fraudulent misrepresentation by the first respondent to support a defence that it did not come to equity with clean hands. The alleged misrepresentation had no immediate and necessary relation to the equity sued for; the connection between the alleged misrepresentation and the basis for the claim to subrogation was tenuous. Consequently, no equitable defences were available to the appellant to defeat the first respondent’s claim to be subrogated to the earlier lender’s secured rights.
Mark Warwick QC (instructed by direct access) appeared for the appellant; Stephen Robins (instructed by Watson, Farley & Williams LLP) appeared for the respondent.
Sally Dobson, barrister
