Archive for the ‘equitable subrogation’ Category

Equitable subrogation: Filby v Mortgage Express (No 2)

November 21, 2019


In Filby v Mortgage Express (No 2) Ltd ([2004] EWCA Civ 759) the English Court of Appeal (May LJ giving the judgment) explained the circumstances in which a lender who supplies funds to pay off earlier loans made by another creditor is subrogated to the rights of that creditor. It also decided that subrogation can apply to unsecured rights of the creditor whose loan has been repaid.


H and W were joint owners of a house. They granted a charge to Halifax BS and had an unsecured loan from the Midland Bank. H borrowed money from Mortgage Express. He purported to grant a charge over the property to Mortgage Express but forged his wife’s signature on the charge. It was not therefore binding on her.

The loan from Mortgage Express was partly used to pay off the Halifax loan and it was accepted that Mortgage Express was subrogated to the Halifax’s secured rights. The rest of the loan was used to reduce the couple’s unsecured loan indebtedness to the Midland Bank.

The question was whether Mortgage Express could be subrogated to Midland Bank’s unsecured rights against H and W.

The law

May LJ explained that A’s right to equitable subrogation arises:

  1.  to reverse what would otherwise be an unjust enrichment of B at A’s expense;
  2.  B is enriched if her financial position is materially improved (usually where, as here, B is relieved of a financial burden);
  3.  the enrichment is at A’s expense if A’s money has been used to relieve B of the financial burden;
  4. the enrichment is unjust if A does not get the security that they had bargained for;
  5.  B’s financial improvement is properly seen as a windfall;
  6.  it is enough that A’s money is in fact used to bring about the improvement (the intention of A or B or both as to how the money would be used is irrelevant). ([62])

Equitable subrogation does not give A more than they bargained for.

‘The essence of the remedy is that the court declares the claimant to have a right having characteristics and content identical to that enjoyed, in this instance, by Midland Bank (see Birks, at page 95), subject to any modification (for example as to rates of interest) necessary to ensure that the claimant does not get more than he bargained for. ‘ ([63])

The decision

Mortgage Express was entitled to be subrogated to the unsecured rights of the Midland Bank arising under the joint loan account ([64]).

Michael Lower



Equitable subrogation: one co-habitee charging interest to secured creditor of her partner

October 1, 2017

In Insol Funding Company Limited v Cowlam ([2017] EWHC 1822 (Ch)) Ms Cowlam and Mr Cowey were equitable tenants in common of their family home. Mr Cowey gave his creditors (Insol) an equitable charge over his 20% share in the property.

Insol brought proceedings to enforce the charge. Ms Cowlam sought to head these off to protect her own interests. She agreed to pay Insol GBP325,000 by 31st December 2015. If this payment were not made then the amount to be paid would rise to GBP330,000 and the property would be put up for sale. Ms Cowlam gave Insol an equitable charge over her own share in the property as security for this payment.

The parties agreed that this would, as far as Ms Cowey and the property were concerned, exonerate Mr Cowey’s liability. Insol would lose its right to enforce its equitable charge over Mr Cowey’s share and seek an order for sale.

The property was now to be sold. Ms Cowlam claimed to have a right to be equitably subrogated to Insol’s equitable charge over Mr Cowey’s share. This right would have priority over the charge that Ms Cowlam had granted to Insol. Insol would, in effect, be deprived of any right to receive any of the proceeds of sale.

The equitable subrogation claim failed. Master Bowles explained that there are two situations in which equitable subrogation may apply:

‘firstly, where a guarantor, or surety, pays the principal debtor’s debt and, secondly, where a lender, in the expectation of security in respect of his lending, advances money in payment of a debt, or towards the purchase of property, but where, for one reason, or another, the expected security does not arise.’ ([120])

Neither of these situations applied in the present case:

‘Ms Cowlam has simply promised to pay, in her own right, a sum of money, in part satisfaction of Mr Cowey’s indebtedness, and, where, in due course, and pursuant to her promise, such a payment will be made ([123]).

Master Bowles thought that the right approach to equitable subrogation was to test his conclusions by reference to the principles of unjust enrichment. In one sense, Insol was enriched by the agreement with Ms Cowlam but there was no unjust enrichment:

‘Insol entered into a valid contractual bargain with Ms Cowlam under which she agreed to pay the settlement sum. It is hard to see that payment to Insol of an amount agreed to be paid to Insol, under a contract which has not, in itself, been impugned, can be said to unjustly enrich Insol.’ ([132])

Rather, allowing Ms Cowlam’s claim to succeed would be unjust to Insol ([132]). It would be inconsistent with the intended effect of Ms Cowlam’s agreement with Insol ([135]).

Michael Lower



Subrogation to the unpaid vendor’s lien

November 26, 2015

In Bank of Cyprus UK Ltd v Menelaou ([2015] UKSC 66) PM and DM sold property which was subject to a charge in favour of Bank of Cyprus UK Ltd (‘the Bank’). They contracted to purchase a new house using the proceeds of sale. The Bank agreed to this on condition that they obtained a first charge over the new house. The purchase of the new house was in the name of PM and DM’s daughter (‘the daughter’). She knew nothing of the arrangement with the Bank or of its involvement. The purchase was completed without the creation of a valid charge in favour of the Bank. The Bank claimed to be entitled to be subrogated to the unpaid vendor’s lien in respect of the new house. The obstacle that it faced was that it could be argued that it was not the source of the funds used to pay for the purchase (the proceeds of sale of the old house had been used).

The Supreme Court was unanimous in finding that the Bank was subrogated to the unpaid vendor’s lien. The majority did so on the basis of unjust enrichment with equitable subrogation as the remedy. Lord Carnwath reached the conclusion on the more straightforward basis that the Bank was beneficially entitled to the proceeds of sale of the old house under a Quistclose trust and so was entitled to step into the shoes of the unpaid vendor. Lord Neuberger relied on unjust enrichment but expressed agreement with Lord Carnwath’s views.

An unjust enrichment claim requires four questions to be answered:

  1. has the defendant been enriched?
  2. was the enrichment at the claimant’s expense?
  3. was the enrichment unjust?
  4. are there any defences available to the defendant?

(Benedetti v Sawiris [2013] UKSC 50).

The daughter had been unjustly enriched at the bank’s expense. This was because ‘the value of the property to [the daughter] was considerably greater than it would have been but for the avoidance of the charge and the Bank was left without the security which was central to the whole arrangement.’ ([24] Lord Clarke). There was a sufficient causal link between the benefit to the daughter and the loss to the Bank ([27] Lord Clarke). Lord Neuberger commented that the daughter’s enrichment was unjust because she had received the house as a gift from her parents and that if she had been a bona fide purchaser for value without notice of the Bank’s rights then it may not have been possible to say that her enrichment was unjust ([70]). Lord Clarke thought that the fact that the daughter was a donee was relevant when considering whether any defences were available to the daughter.

Subrogation to the unpaid vendor’s lien was available as a remedy to reverse the daughter’s unjust enrichment ([49] Lord Clarke). Lord Neuberger thought that it would be ‘hard to identify a more appropriate remedy’ since subrogation would give the Bank a right similar to that which it should have had under the anticipated charge ([79]). Lord Neuberger stressed that the conclusion that the Bank should be subrogated to the unpaid Vendor’s lien needed to be supported by principle ([94]). He thought that the facts that the house could only have been acquired using funds that the Bank could have demanded, that the failure to grant a Charge was the result of the solicitors acting for the Bank and the daughter and that the use of the funds with the Bank’s agreement discharged the unpaid vendor’s lien ([95]).

Lord Neuberger pointed out that the subrogation claim would have been uncontroversial had the Bank insisted on receiving the proceeds of sale of the original house and then making a fresh loan. The fact that they agreed to allow the proceeds of sale to be retained by the solicitors and re-used for the acquisition by the daughter was ‘a small and practical change’. It would be pure formalism if this change were to defeat the Bank’s claim ([99]).

Lord Carnwath thought that the Bank’s subrogation claim could succeed ‘by a strict application of the traditional rules of subrogation, without any need to extend them beyond their traditional limits.’ ([107]). He thought that this was a case where equitable subrogation was available without any need for recourse to the law of unjust enrichment and that there was a distinction to be made between a claim to a property right (subrogation to a vendor’s lien) and one based on unjust enrichment ([108]). He was prepared to accept that subrogation might be an available remedy in an unjust enrichment case but he did not decide the case on the basis of unjust enrichment ([109] – [110]).

In Lord Carnwath’s view, the Bank had to establish that its money had been used towards the purchase price to allow it to be subrogated to the unpaid vendor’s lien ([128]). It must be possible to trace money belonging to the Bank into the money used to pay the purchase price; ‘a sufficient link could not be found in a looser test based on economic reality or simple causation’ ([132]). The Bank did have a sufficient interest in the funds used to pay the purchase price. The Quistclose principle could be applied; the solicitors acting for the daughter and the Bank held the proceeds of sale of the original property for the Bank but had the power to apply it to the purchase of the property on behalf of the daughter ([134] – [139]).  There was no difficulty ‘in finding the necessary “tracing link” between the Bank and the money used to purchase the new property.’

Michael Lower



Equitable subrogation

December 29, 2014

In Kingsway Finance Ltd v Wang Qingyi ([2014] HKEC 1969, CA) W owned property and had entered into the following transactions:

19/8/2010 – Granted all moneys charge to Oi Wah

30/5/2011 – Granted second all moneys charge to Kingsway (as security for ‘the Kingsway first loan’)

3/8/2011 – Granted third charge to Wing Wei

9/8/2011 – Took out ‘the Kingsway second loan’ to discharge the Oi Wah mortgage

16/11/2011 – Took out ‘the Kingsway third loan’ to discharge the Kingsway first and second loans.

W defaulted, the property was sold and the proceedings concerned the relative priorities of the interests of Kingsway and Wing Wei over the proceeds of sale. Kingsway argued that, so far as the Kingsway third loan was concerned, it was entitled to the same rights as those enjoyed by Oi Wah and those that it had enjoyed by virtue of the charge that it had been granted to it. Kingsway argued that it was entitled to equitable subrogation to those rights because it had supplied the funds to repay the loan provided by Oi Wah and to repay the Kingsway first and second loans. Kingsway was not entitled to tack the second and third loans to the charge granted at the time of the first loan because the conditions in section 45 of the Conveyancing and Property Ordinance were not satisfied. Was Kingsway entitled to equitable subrogation? This would determine the priority question. The Court of Appeal (Cheung CJHC giving the main judgment) held that Kingsway was entitled to equitable subrogation to the Oi Wah and Kingsway charges.

Equitable subrogation

This is ‘based on the doctrine of unjust enrichment, rather than the agreement or common intention of, the party enriched and the party deprived as such’ ([14]). Intention may be relevant to equitable subrogation but it is not central ([16]). In Filby v Mortgage Express (No 2) Ltd ([2004] EWCA Civ 759, [[62]) May LJ said:

‘Accordingly so far as is relevant to this appeal, the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden – see Peter Birks, An Introduction to The Law of Restitution page 93. The enrichment will be at the expense of the claimant if in reality it was the claimant’s money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant’s financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result.’

Did Kingsway get what it bargained for?

Wing Wei argued that Kingsway had got what it bargained for when it made the second and third loans, viz. the benefit of the security of the all moneys charge in favour of Kingsway; the fact that the inability to tack the advances to that charge meant that the later loans would not enjoy the priority conferred by the charge to Kingsway was, argued Wing Wei, irrelevant. This argument was dismissed:

‘[the argument adopted] a highly technical and unreal approach to determining Kingsway’s intention in requiring as a condition for the 3rd and 4th loans respectively a first mortgage over the property. When considered in the commercial context of the present case, there can be no doubt that what Kingsway intended to obtain, and what it actually bargained for, was first priority over the property as a secured creditor, just like Oi Wah under the Oi Wah mortgage, once that mortgage was discharged by means of the 3rd loan which Kingsway was advancing to Wang. ‘ ([28])

Even if Wing Wei were right on the question of intention, this would not be decisive. The ultimate question was whether, absent subrogation, Wing Wei would be unjustly enriched ([30]).

Unjust enrichment

On the facts, it was plain that Wing Wei would be unjustly enriched if its arguments succeeded ([34]). Even if the interest rate under the Kingsway third loan were higher than that payable under the Oi Wah and Kingsway charges, which had not been shown, this would be irrelevant. Equitable subrogation would not entitle Kingsway to a higher rate than that payable under the charges to which they were subrogated ([33]).

Subrogation upon subrogation?

The Kingsway third loan had been used partly to repay the Kingsway second loan and the latter had given Kingsway subrogated rights under the Oi Wah mortgage. Wing Wei argued that Kingsway’s third loan could not give rise to be subrogated to the rights enjoyed as a result of the Kingsway second loan. This argument failed, there was no rule that limited subrogation to a one-time application ([35]).

Contrary to public policy?

Allowing Kingsway to make use of equitable subrogation would not bypass the requirements of CPO, s. 45, ‘when there was, in reality, no additional money lent to the borrower, and the prior mortgage was not made to secure any additional indebtedness as such.’ ([43]).

Michael Lower