Tim Polli explains how a recent Supreme Court decision may make subrogation a more readily available remedy for lenders with defective security
In Menelaou v Bank of Cyprus UK plc [2015] UKSC 66; [2015] PLSCS 310, the Supreme Court considered the fundamental nature and extent of the doctrine of subrogation. The claimant’s parents had granted the bank two charges over their family home, Rush Green Hall, securing debts of at least £2.2m. They arranged to sell the property for £1.9m and to purchase Great Oak Court for £875,000 in the name of their daughter, Melissa. They sought the bank’s consent to the sale, which was granted on condition that the bank received £750,000 from the proceeds of sale of Rush Green Hall and a charge over Great Oak Court to secure the remaining liabilities of the parents. The sale and purchase completed but the charge over Great Oak Court was void. Melissa sought its removal from the registered title. The bank counterclaimed to be subrogated to an unpaid vendor’s lien over Great Oak Court. The bank’s counterclaim failed at trial but succeeded in the Court of Appeal.
What is subrogation?
Walton J’s summary in Burston Finance v Speirway [1974] 1 WLR 1648 is frequently cited in the authorities:
“What is the basis of the doctrine of subrogation? It is simply that, where A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor…”
There is no actual assignment – the rights of the earlier creditor have been discharged in whole or in part – but the disappointed lender is treated as though there had been an assignment of some or all of those rights. Lenders often rely on subrogation when, for some reason, they find that they do not have the security they expected. In such circumstances, subrogated rights can make the difference between some recovery and none at all.
Vindication and restitution
Dicta such as that of Walton J in Burston Finance and Millett LJ’s references to tracing in Boscawen v Bajwa [1996] 1 WLR 328 had led to suggestions that subrogation was fundamentally about the vindication of existing property rights; that a lender needed to show that it could trace its money into the discharge of the prior security. In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, however, the House of Lords permitted subrogation to a security even though it was not clear that the lender retained any proprietary interest in the money advanced.
Their Lordships in Banque Financière dismissed a submission that subrogation ought not to be available because the bank could not show title to the money, by explaining that subrogation was a restitutionary remedy awarded in unjust enrichment; but also, somewhat confusingly, by maintaining that the money could still be traced. Although the House of Lords explained in Foskett v McKeown and others [2001] 1 AC 102 that tracing was a process, and not a claim or a remedy, it remained unclear whether a continuing property interest in the money used to discharge the prior security was required.
Unjust enrichment
The issue came to a head in Menelaou because Melissa argued that Rush Green Hall had belonged to her parents and so did the proceeds of its sale. As the bank had no relevant property rights, it could not claim subrogation to the lien. To put it another way, Melissa had not been enriched at the bank’s expense, but at the expense of her parents.
The bank’s primary case, based on Banque Financière, was that subrogation to a prior discharged security was not founded on the vindication of existing property rights, but rather on the reversal of unjust enrichment. While an existing property right in the money with which the lien was discharged would have been sufficient to show that Melissa’s unjust enrichment was at its expense, such a right was not required.
In the alternative, the bank argued that it did have a proprietary interest in the proceeds of sale of Rush Green Hall: pursuant to the proposition that security in an asset carries through to its proceeds, for which Barclays Bank plc v Buhr and others [2001] EWCA Civ 1223; [2001] PLSCS 182 might be regarded as authority; and/or as a consequence of the agreement that the proceeds of sale could be applied to the purchase of Great Oak Court on condition that it received a charge over the same.
The Supreme Court decides
The Supreme Court confirmed by four to one that the bank was correct to have brought its claim in unjust enrichment and that it was entitled to subrogation as a restitutionary remedy quite irrespective of any proprietary interest that it might have in the proceeds of sale of Rush Green Hall. That sale, the release of the bank’s charges and the acquisition of Great Oak Court were essentially one transaction. Melissa had been unjustly enriched at the bank’s expense.
Although he agreed with the result, Lord Carnwath disagreed with that reasoning. He considered that the bank was only entitled to subrogation as a proprietary remedy because it could trace its proprietary interest in the proceeds of sale of Rush Green Hall into the discharge of the unpaid vendor’s lien. The decision in Barclays was hardly mentioned in the judgments. Just as the Court of Appeal had, the Supreme Court decided to leave that question for another occasion.
It is now clear that a proprietary interest in the money with which a prior security was discharged is not required in order to be subrogated to that prior security. That ought to make it more widely available. Subrogation should now be a lender’s first consideration in all cases of defective security.
Tim Polli is a barrister at Tanfield Chambers
