Subrogation. If you are a creditor of an insolvent company or a bankruptcy, Oliver Elliot can help you address your claim and concerns arising from the insolvency.
“… the mere fact that you provide the money which goes to pay off somebody else’s debt does not entitle you to be subrogated to the creditor whose debt is paid. There must, I think, be something more…where a court, on a review of the facts, comes to the conclusion that what was intended between the parties was really an unsecured borrowing, there is no room for the doctrine of subrogation. That really is analogous to the situation envisaged in the judgment which I have just read, because to apply the doctrine of subrogation in such a case would in fact be putting the lender in a better position than he is bargaining to be put in when he advances money.”
Paul v Speirway Ltd (in liquidation)  2 All ER 587
By this originating summons the plaintiff claims against the defendant, a company in creditors’ voluntary liquidation, a declaration that he is entitled to a lien on moneys representing the proceeds of sale of certain properties known as 22-27 Nevern Square, Earl’s Court. The present case is a sequel to the case of Burston Finance Ltd v Speirway Ltd which was decided by Walton J in 1974 and the facts can be fairly shortly stated.
 2 All ER 587 at 589
At all material times the freehold interest in 22-27 Nevern Square was owned by a company called Craftsman Securities Ltd, to which I will refer as ‘Securities’, the issued capital of which was held, I think, by Burston Finance Ltd, a Mr Thomas Speir and a Mr Orelle. Mr Speir was the controlling shareholder in, and the moving spirit behind, a company called Craftsman Developments Ltd, to which I will refer as ‘Developments’. In the latter part of 1972 discussions took place, so it appears, between Mr Speir and the plaintiff about the pos-sibilities of the plaintiff’s investing substantial sums of money in property development and in particular in the development, or proposed development, of the properties at 22-27 Nevern Square. On 18 October Mr Speir wrote to the plaintiff a letter on Developments’ notepaper in which he mentioned the Nevern Square project and said this, so far as is material for present purposes:
‘Might I suggest that if you are interested in the type of project that I outlined to you i.e. Joint Equity participa-tion on, say, 20-25% of the project with the remainder of the money being supplied by a Joint Stock Bank with a prior charge on the assets, then I suggest you start liquidating the assets necessary for that purpose in your own time, in order to have them available when required.
‘As soon as a suitable investment opportunity comes up, I will present it to you for examination and will try and give you a reasonable period of time to make up your mind. However time is always at a premium.’
Some six days later, on 24 October, he wrote again, this time specifically about the Nevern Square project. The letter was again on Developments’ notepaper and was headed ’22-27 Nevern Square, SW5′: ‘In view of our last telephone conversation, may I suggest that you join my Company [and that I think must have been a reference to Developments] by putting up £55,000 towards the development of the above site.’ He then went on to stress the profitability of the enterprise, and he continued in the fifth paragraph:
‘In basic form I suggest that the scheme should work as follows:–
‘At this stage it is hoped to get 51 flats into the site area by converting the existing structures. This is likely to be better than a demolition and rebuild due to density limitations. The project will take around two years to complete and the flats should sell, on today’s values, at around £24,000 average a piece. Burston Finance Limited have agreed in principle to put up 80% of the valuation of the purchase price and building costs. They will require a first charge on the property and will make payments against architect signed certificates. We therefore, will be responsible for funding the remainder of the expenses as outlined below. If you put up £55,000, you will be granted a second charge on the assets for the extent of your investment and the availa-bility of this cover will be identified by the Bank valuer in order to assess the 80% element.
‘In return for your loan, my Company will grant you 25% of the net profit of the project in addition to the re-payment of your loan and will guarantee to repay the loan from the proceeds of the sale of the flats.’
Then he goes into how the profit is to be calculated and the exact price of the site. Then finally, on 31 Oc-tober, he wrote again, saying: ‘I am very glad to hear from you that you have now agreed to come in with me on the development of Nevern Square.’ He then went on in the next two paragraphs to stress the need for speed and I do not think I need read that; and then he wrote:
‘I hope that it will be possible for your Solicitors to agree on the formula with mine as soon as possible, so as not to hold up the conveyance.
‘I repeat that the basis should be a loan of £55,000 to Craftsmen Developments Limited secured initially by me personally until such time as the conveyance of the block of property is completed, when a second charge should be applied on
 2 All ER 587 at 590
your behalf on the said block. The loan, plus 25% of the profit will then be repaid from the proceeds of the sale.’
At this stage, therefore, taking the correspondence at its face value, the project was one under which the plaintiff would become a secured creditor for his stake in the venture and entitled to receive 25 per cent of the profit from Developments. By the time the matter came to be completed, however, it is evident that there had been a certain amount of restructuring, no doubt as a result of the solicitors getting together, as had been suggested in the letter of 31 October, to agree a formula. The plaintiff’s evidence is that by mid-November a draft agreement was in being providing, not as originally contemplated, for a loan to De-velopments, but for the purchase to be made and the developments to be carried out by a company which would be jointly owned by Developments and by the plaintiff in the proportions of 74 and 26 per cent re-spectively. In the event, that company was the present defendant, which had been incorporated in the spring of 1972 and had, I think, been dormant since then. Contracts for the purchase by the defendant from Securi-ties at a price of £525,000 were exchanged at the beginning of February 1973 and a deposit of £52,500 was paid by Mr Speir out of his own account.
On 21 February 1973 two things happened. The first was that the plaintiff paid a sum of £55,000 to Mr Speir, who received it, according to the plaintiff’s evidence, on behalf of the defendant which then had no bank account. The second was that a formal agreement was executed by Developments and the plaintiff regulat-ing their respective participations in the defendant company. I had better, I think, read the material terms of that agreement. It is, as I said, dated 21 February 1973 and is made between Developments of the one part and the plaintiff of the other part, whereby it is mutually agreed as follows:
1. THE parties hereto shall become Shareholders upon the terms of this Agreement in a private limited com-pany called SPEIRWAY LIMITED (hereinafter referred to as “the Company”) registered under the Companies Act 1948 to 1967 for the principal purpose of acquiring and redevelopment of the property described in the Schedule hereto and any subsequent property transactions as agreed between the parties hereto’.
Nothing turns on the schedule, which merely describes the property in Nevern Square.
‘2. The issued share capital of the Company shall be One hundred Pounds (£100) divided into One hundred (100) Ordinary Shares of One Pound (£1·4300) each. The Memorandum and Articles of Association of the Company shall be in the form a copy of which has been signed on behalf of the parties hereto.
‘3. UNLESS and until the parties hereto otherwise agree in writing: (a) The issued share capital of the Com-pany shall be One hundred Pounds (£100) only divided into One hundred (100) Ordinary Shares of One Pound (£1·4300) each and on or before the signature hereof [Developments] shall subscribe and pay in cash at par for Seventy four (74) Ordinary Shares and [the plaintiff] shall subscribe and pay in cash at par for Twenty six (26) Ordinary Shares PROVIDED however that so long as [the plaintiff] shall hold Twenty six (26) shares (or Twenty six per centum (26%) of the equity capital) his entitlement to the capital or profits of the Company shall not exceed Twenty five per centum (25%).’
The intention there, I think, clearly was to enable the plaintiff to hold up, if he wanted to, a special resolution. Then there is a provision about the parties being offered further shares in capital as it is issued, and I do not think I need read that. Sub-clause 3(c) reads:
‘The Board of Directors shall consist of up to six Directors of whom [Developments] shall have the right to appoint four and [the plaintiff] shall have the right
 2 All ER 587 at 591
to appoint two and each party shall also have the right to remove and replace any persons so appointed by such party … ‘
Then there are machinery provisions as to how that is to be done. The next three sub-clauses I do not think matter for present purposes. Sub-clause 3(g) reads:
‘Notwithstanding any provisions to the contrary that may be contained in the Articles of Association of the Company the quorum necessary before any Board or General Meeting of the Company may proceed to busi-ness shall be two of whom in each case one shall be (in the case of a Board Meeting) a Director appointed by or (in the case of a General Meeting) a Shareholder of each of the parties
‘(h) Notwithstanding any of the foregoing provisions no action shall be taken by the Company or its officers without the prior consent of at least one Director appointed by each of the parties in relation to any of the following matters: (i) The Borrowing or raising of any monies whether or not on the security of any property or assets of the Company (other than those arranged by [Developments] prior to this Agreement and particu-lars of which have been given to [the plaintiff] … ‘
And then there are various other matters such as undertaking litigation, giving guarantees, creation of new shares, and so on. Pausing there for a moment, the evident intention of this clause is to produce a possible deadlock situation so that the plaintiff would have a substantial control over the company’s affairs.
‘4. THE distribution policy shall be agreed between the parties at the end of each year and failing agreement all the profits of the Company as shall be certified by the Auditors as being available for distribution will be distributed to the parties either by way of dividend or in such other manner as the parties may agree in pro-portion to their shareholdings … ‘
Clause 5 gives Developments a management fee, and I do not think I need trouble with that. Clause 6 is important.
‘6. [The plaintiff] having advanced the sum of Fifty Five Thousand Pounds (£55,000) to the Company in re-spect of the purchase of the freehold property specified in the Schedule hereto to enable the purchase of the said property to be completed by the Company shall be recorded as a Loan Creditor of the Company but shall not charge nor be paid any interest on such sum
‘7. IT IS FURTHER AGREED that [Developments] will finance or procure such finance that may be required by the company on the best terms available and [the plaintiff] will act as guarantor in respect of the payment of Twenty Five per centum (25%) of any such finance
‘AT the date referred to in sub-clause (4) hereof the value of the property described in the Schedule hereto as at that date shall be ascertained and [the plaintiff] paid Twenty five per centum (25%) thereof … ‘
Then there are various definitions for the purposes of the profit distribution; the ‘full development value’ is defined, the ‘cost price’ is defined, and the ‘full market value’ is defined as meaning–
‘the value of the Property at the current date on the assumption that the Mortgage were redeemed and if the development has been completed so as to comply in every respect with the requirements of the Local Plan-ning and other competent authorities such value in default of agreement to be estimated and fixed conclu-sively by a person to be jointly nominated by the parties or if they cannot agree upon one then by a person to be nominated by the President for the time being of the Royal Institution of Chartered Surveyors.’
 2 All ER 587 at 592
Then there is a definition of the ‘fixed date’. There are three possible dates specified therefor, and the ‘fixed date’ is the earliest of the three, and one of the dates so specified is ‘the date upon which the lender lawfully [demands] repayment of the moneys secured by any Mortgage’. Then clause 9(a) reads:
‘IN pursuance of the said agreement and in consideration of the loan made by [the plaintiff] hereinbefore re-ferred to the parties shall procure the Company covenant to pay to [the plaintiff] a sum equal to Twenty five per centum (25%) of the amount by which at the fixed date the full development value of the property exceeds the cost price on account of any profits on dividends to which [the plaintiff] shall be entitled in respect of his shareholding.’
Pending completion of the purchase, Mr Speir provided a personal security for the amount advanced by the plaintiff in the shape of a deposit of the loan certificates of two properties in Acton which were owned by his brothers. The purchase was completed on 28 February 1973 and the plaintiff’s solicitors were told of it on 6 March. They then arranged for the notices of deposit to be cancelled and the loan certificates relating to the Acton properties were returned. No charge, however, was entered into with the plaintiff by Speirway securing the money which he had advanced, and it will have been observed that, of course, the agreement between the parties does not in fact provide for any such charge to be entered into. The purchase price of the property and the costs were found as to just under £414,000 from Burston Finance Ltd, who were se-cured by first legal charge on the property purchased, as to £52,500 by the deposit already paid and as to the balance by moneys drawn by Mr Speir out of his own personal account which had, of course, been fed in the interim by the £55,000 paid by the plaintiff.
It is not in dispute that that sum of £55,000 was provided by the plaintiff for the specific purpose of being invested in the purchase of the property by Speirway, nor is it disputed that in one way or another it was so applied.
Burston Finance Ltd failed to register their charge under s 95 of the Companies Act 1948, and on the de-fendant company’s going into voluntary liquidation, which they did in December 1973, that charge was avoided. They claimed, in the proceedings to which I have already referred, to be subrogated to the ven-dors’ lien on the property, but that claim was rejected by Walton Ja in 1974. The plaintiff now asserts a simi-lar claim in respect of the money advanced by him and this has been rejected by the liquidator. The property has been sold at a substantial loss and the bulk of the proceeds remains in the liquidator’s hands. It is on those proceeds that the plaintiff now seeks a security.
a Burston Finance Ltd v Speirway Ltd  3 All ER 735,  1 WLR 1648
Counsel, on behalf of the plaintiff, advanced four propositions. Two are common ground. First, he says that on an exchange of contracts an unpaid vendor’s lien arises in favour of the vendor, unless there is some-thing to exclude it in the contract, or, I suppose, in the surrounding circumstances. Secondly, he says that there was nothing in the contract between Securities and the defendant company which did exclude such a lien.
The first substantial dispute which arises here is on counsel for the plaintiff’s third proposition. As originally expressed, it was in these terms. If one person advances money in payment for land which another is under contract to purchase, he is entitled by subrogation to the same lien as the vendor would have had if the price had remained unpaid. This is the formulation in fact of the doctrine of subrogation as regards a ven-dors’ lien in Coote on Mortgagesb. Counsel was, I think, however, disposed to regard that as possibly put-ting the matter too widely and in his reply he modified it to this extent: the alternative proposition that he put forward was that when the payer of the money provides it for the specific purpose of paying off a
b Treatise on the Law of Mortgages (9th Edn, 1927), vol 2, p 1377
 2 All ER 587 at 593
person with a prior charge, so that the application of the money in another way would be a breach of trust, or where the payer pays it direct to the person with the prior charge in circumstances where it has the effect of discharging the charge, then prima facie the payer is subrogated to the rights of the chargee, unless it is shown that there are circumstances which negative any such subrogation. There are numerous illustrations of the principle in the authorities to which I will refer in a moment.
Counsel for the plaintiff’s fourth proposition, which again is in issue, is simply that the plaintiff is a third party who has advanced money for the purchase of land which Speirway was under contract to purchase and he is, therefore, in accordance with the third proposition, subrogated to the unpaid vendor’s lien. As I have said, there are numerous illustrations of the principle in the authorities. The case cited in Cootec in support of the wide proposition to which I have referred is Thurstan v Nottingham Permanent Benefit Building Society, which was reported from the Court of Appeal. It was subsequently affirmed in the Lords ( AC 6), but for present purposes the relevant report is that in the Court of Appeal. There the defendants had agreed to grant mortgage facilities to a lady who was in fact at the material time an infant, and on her pur-chase of the plot of land they had paid direct to the vendor a sum of £250 for which they were secured by a mortgage. The mortgage was held to be void under s 1 of the Infants Relief Act 1874, but the Court of Ap-peal held that the defendants were entitled to assert the vendor’s lien. Vaughan Williams LJ said ( 1 Ch at 9, 10):
c Treatise on the Law of Mortgages (9th Edn, 1927) vol 2, p 1377
‘I thought during the argument that the only security which the building society held for the 25ol. which they had paid for purchase-money was a lien upon and a right to retain the title-deeds and conveyance until the money had been repaid; but I am satisfied now, after discussing the matter with my brethren, that the society, having paid off the vendor, have a right to the remedies of the vendor–have a right, that is, to enforce the vendor’s lien. It is true that the society were not the vendors, but, having paid off the vendor, the society, as against the purchaser, stand in the place of the vendor.’
So there it is expressed, perfectly generally. The advance was paid off with the defendants’ money, so they are entitled to a lien. But it is clear–and I mention this in the light of counsel’s submissions on behalf of the defendant–that the case was one where the defendants were in fact advancing only on the footing of an express agreement, albeit an unenforceable one, that there should be a charge on the property.
Another illustration is Butler v Rice where the husband of the owner of some mortgaged property borrowed from the plaintiff some money to pay off the mortgage, on an undertaking to procure that part of the money borrowed should be secured by a fresh mortgage. The money was advanced to the husband, who paid off the mortgage; but his wife, who, as I have said, was the owner of the property, refused to execute a fresh mortgage and the question arose whether the lender was entitled to keep the previous security alive. War-rington J said ( 2 Ch at 282):
‘The statement of claim proceeds on the well-known equitable doctrine that if a stranger pays off a mortgage on an estate he presumably does not intend to discharge that mortgage, but to keep it alive for his own bene-fit. The statement of claim asks for a declaration that the plaintiff is entitled to a charge on the Manor Road property for 45ol. and interest at 5 per cent. The charge referred to is the bank’s charge, which the plaintiff says was kept on foot in his favour, and the question is whether his position is well founded. In the first place I find from the
 2 All ER 587 at 594
facts I have stated that it was not the intention of the plaintiff, nor indeed is it possible to suppose that any sensible man would have such an intention, to discharge the property from the debt.’
So, it is worth noting that Warrington J seems to have considered that the intention was of critical im-portance. He went on to say ( 2 Ch at 283):
‘Then does the fact that the plaintiff intended, if the transaction was carried out, to have a legal mortgage on the Manor Road property only a guarantee for the remaining 15ol., prevent the application of the doctrine? Plainly not. His meaning was that he should have a further security; but that is no evidence that he intended in the meantime to give up such security as a transfer of the deeds to him would give him. The evidence which he gives, which I find to be true, as to what he said at the second interview supports this, namely, that the deeds were to be taken by the solicitor and held by him for the plaintiff. Such security as that gave would be superseded by the better security to be given afterwards.’
Clearly, the existence of the agreement for the grant of a mortgage was treated as evidence that there was no intention to give up the alternative security provided by keeping the existing charge alive, but it would I think be reading into Warrington J’s judgment altogether too much, to suggest that it imports necessarily the view that the existence of such an agreement for security is essential.
Warrington J also decided at first instance Re Connolly Brothers Ltd (No 2), which was affirmed by the Court of Appeal on an alternative ground. That was a case where a company, which had issued debentures pre-cluding it from creating charges ranking in priority, desired to borrow money to acquire a property, and it borrowed from a lady the sum of £1,000 on terms that she would have a charge on the property. After the purchase, the company did indeed execute a memorandum of deposit. The question was whether her secu-rity was subject to the prior charge created by the debentures, and it was held that it was not, because the property, when it became subject to the charge in the debentures, was already charged in her favour; and that was really the principal ground of the decision. But Warrington J put it also in a different way. He said ( 2 Ch at 28):
‘The case of Mrs. O’Reilly may be put in two ways, in either of which I think she was entitled to succeed. It may be put, as it has been, on her behalf, that by virtue of the doctrine of subrogation she stands in the place of the vendor, and therefore has the benefit of the vendor’s lien. The facts, I think, are quite clear and she did not agree to advance this money unconditionally;’
Pausing there for a moment, it seems to be implicit in that that if she had agreed to advance it uncondition-ally, Warrington J would not have thought that she had a lien. He then went on ( 2 Ch at 28):
‘but that she agreed to make this advance for the purpose and the sole purpose of paying off this pur-chase-money, and under a contemporaneous agreement that she was to have a charge upon the property so purchased. It is quite true that there was no direct agreement between the vendor and Mrs. O’Reilly that the vendor’s lien should be transferred to her, but I think that the case comes substantially so far as its facts are concerned within the final decision of the Vice-Chancellor in Meux v. Smith, and also substantially within the decision of Farwell J.
 2 All ER 587 at 595
in Bird v. Philpott. On the principle of those two cases I think the present case might be decided in favour of Mrs. O’Reilly.’
He then went on to deal with other alternative grounds. Again, I do not read this as suggesting that the ex-istence of an agreement for security is necessarily an essential before the doctrine of subrogation can be invoked but obviously it is a circumstance of the utmost materiality.
In the Privy Council case of Ghana Commercial Bank v Chandiram ( 2 All ER 865 at 871,  AC 732 at 745)the principle was expressed in broad terms by Lord Jenkins in delivering the judgment of the Board:
‘It is not open to doubt that, where a third party pays off a mortgage, he is presumed, unless the contrary in-tention appears, to intend that the mortgage shall be kept alive for his own benefit.’
Counsel for the defendant company’s submission, however, is that there are three entirely distinct catego-ries of case. The first is where A, without any agreement to advance money, pays off a charge on C’s prop-erty which is held by B. In those circumstances–and the example which springs to mind is the tenant for life paying off a mortgage on the settled land–there is, he says, an assumption that the payer is subrogated to B’s rights unless there is evidence of an intention to the contrary. The second category is where, pursuant to an agreement to lend money to C, A provides money which is used for the purpose of paying off B’s charge and the agreement provides that A is to have security for his loan. Then, says counsel for the de-fendant company, it is presumed that A is to be subrogated to B’s security, unless it is replaced by an ef-fective security as promised in the agreement. These two categories, says counsel, are the only categories where subrogation applies. The third category of case which he postulates is the same as the second cate-gory, with the crucial omission of any provision in the agreement that A is to have security for his loan. Here, says counsel, there will be no subrogation. It is not sufficient, he says, to show simply that A’s money has been used, whether directly or indirectly, to discharge C’s liability to B.
Counsel for the defendant company points out that in all the cases to which I have referred, this feature, ie the agreement for security, was in fact present. It was present, too, in Congresbury Motors Ltd v Anglo-Belge Finance Co Ltd where the Court of Appeal followed Thurstan’s case. And it would, says counsel, be a curi-ous consequence, if the mere fact that a purchaser of land had, for instance, by arrangement with his bank, increased his overdraft for the express purpose of buying a house and had applied the money so drawn in the purchase, resulted in the bank without more ado having a charge on the land by subrogation. He refers me to Wylie v Carlyon where Eve J held that the mere fact that moneys which had been borrowed on club debentures conferring no charge, had been used (as indeed it was intended they should be) to discharge a mortgage on the club property did not entitle the debenture holders by subrogation to the security provided by the mortgage. I should perhaps mention that the rules of the club provided, by r 63:
‘The Committee shall have power to issue from time to time debentures to such an amount as shall be neces-sary for the purchase of the freehold site and for the erection of the permanent buildings, such debentures to be held only by members of the Club, and to bear interest at a rate not exceeding 5l per cent. per annum.’
Counsel for the plaintiff points out that, in the light of that rule, it would of course
 2 All ER 587 at 596
have been open to the committee to apply moneys raised under the rule for purposes other than the acqui-sition of club premises, for instance, the building or furnishing of a club in addition to the purchase of the land. Eve J said ( 1 Ch at 63):
‘The second claim is in the nature of an alternative one. It is said that if the debenture holders have no charge by virtue of the contract between them and the club they are nevertheless, by reason of the fact that their moneys were used to pay off the mortgagee, entitled under the doctrine of subrogation to be placed in his shoes at least to the extent to which their moneys were applied in the redemption of the mortgage and to that extent they claim to be entitled to a charge on the property comprised in the Montagu mortgage. That is the way in which the claim is put forward in the pleading, but in my opinion that does not disclose a state of things to which the doctrine of subrogation has any application at all. An individual who advances money to another for the purpose of enabling that other to pay specific debts does not in the absence of a special bar-gain thereby acquire the rights of the persons whose debts are discharged out of his moneys against the property of the debtor. No case has been cited to show that even in circumstances in which the doctrine of subrogation is properly applicable the subrogated lender has been held to be entitled to the benefit of the se-curity held by the creditor to whose rights he is subrogated, and even assuming it to be established that the moneys raised upon some of these debentures were in fact applied in the discharge pro tanto of the mort-gage debt I am quite unable to adopt the view that the debenture holders were by subrogation or otherwise placed in the position of mortgagees to the extent of the sums so applied.’
I am not quite sure that I understand that last sentence, because one of the cases which have been cited in argument is Butler v Rice. There, of course, the subrogated lender was entitled to the benefit of the security held by the creditor. But what I think Eve J was saying was that the mere fact that you provide the money which goes to pay off somebody else’s debt does not entitle you to be subrogated to the creditor whose debt is paid. There must, I think, be something more.
Nor, indeed, I think, does counsel for the plaintiff really so contend. It is, he says, essential that you should be able to identify the money as the payer’s money, either because it was impressed in the hands of the debtor with a trust to use it for a particular purpose, or because it was paid direct to the creditor, as in Thurstan’s case and in the Congresbury case. In the latter, certainly, it is fair to say that some emphasis seems to have been placed in the Court of Appeal on the circumstance that the payment was made direct by the third party to the creditor.
I think in the ultimate analysis the contest between counsel for the plaintiff and counsel for the defendant company really comes down to one of burden of proof, counsel for the defendant company’s contention being that before subrogation takes effect there must be some positive indication of intention, as by an agreement for security; and counsel for the plaintiff’s contention being that, given the circumstance either of an express trust for payment or of direct payment, the presumption will be in favour of subrogation, unless there are positive circumstances to rebut it. Certainly the doctrine has been stated in wide terms, which seems to suggest that the legal (or rather equitable) result follows simply from the circumstance that A’s money has been employed to pay off B’s claim against C. I have already referred to the statement in Cooted and to the very wide general statement of Lord Jenkins in the Ghana Commercial Bank case ( 2 All ER at 871,  AC at 745). Counsel for the plaintiff has also referred me to the passage
d Treatise on the Law of Mortgages (9th Edn, 1927), vol 2, p 1377
 2 All ER 587 at 597
in Snelle regarding the transfer of a lien, and to the statement of the basis of the doctrine of subrogation in the judgment of Walton J in Burston Finance Ltd v Speirway Ltd. The passage in Snell is a short one and reads as follows: ‘A third party who provides some or all of the purchase money on behalf of the purchase is subrogated to the position of the vendor.’ Then reference is made to Thurstan’s case and to the Con-gresbury case.
e Snell’s Principles of Equity (27th Edn, 1973), p 446
In Walton J’s judgment in Burston Finance Ltd v Speirway Ltd ( 3 All ER at 738,  1 WLR at 1652)he said:
‘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 are other cases of subrogation where B is not secured, but the ordinary and typical example is as I have stated. It finds one of its chief uses in the situation where one per-son advances money on the understanding that he is to have certain security for the money he has ad-vanced, and, for one reason or another, he does not receive the promised security. In such a case he is nev-ertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged, in whole or in part, by the money so provided by him, but of course only to the extent to which his money has, in fact, discharged their claims.’
It is to be noted that neither of these statements places any stress on the intention of the parties or on the actual mechanics of the transaction. On the other hand, I think it is clear that in Wylie v Carlyon Eve J, at least, regarded the parties’ intention as a matter of critical importance, as indeed did Warrington J in Butler v Rice to which I have previously referred. I do not find it, I am bound to say, altogether easy to deduce from these authorities any clear rule of general application. It may well be that the effect of the cases is as coun-sel for the defendant company suggests, but I find some difficulty in accepting his formulation as neces-sarily an exhaustive one. Equally, I am not sure that counsel for the plaintiff’s revised formulation is not perhaps unduly restrictive of the cases in which subrogation can take place. I think respectfully that the wide general formulation in Cootef and in the Ghana case is the right one, and that where the given circumstances exist subrogation applies unless the contrary appears. The real divergence here, as it seems to me, is on the strength of the evidence which is required to demonstrate a contrary intention. It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say that where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be suffi-cient to dispose of any question of subrogation. That really, as it seems to me, is to say no more than that the question of subrogation or no subrogation cannot be divorced from a review of the rights proved or presumed to be intended to be created between the payer of the money and the person requiring its pay-ment. It is interesting to see that in Re Wrexham, Mold and Connah’s Quay Railway Co, which is a case con-cerned with the ultra vires borrowing of a company–a matter which is sometimes referred to as an
f Treatise on the Law of Mortgages (9th Edn, 1927), vol 2, p 1377
 2 All ER 587 at 598
example of subrogation–the principle was put by the Court of Appeal in a very different way, where Lindley MR said ( 1 Ch at 447):
‘So far as the money has been applied in discharging debts or liabilities which could be enforced against the company, the prohibition against borrowing does not apply to it, and the Courts have so decided. The sub-rogation theory has been had recourse to in order to account for the decisions ultimately arrived at; but that theory was really not wanted in order to justify them. It was, however, adequate for the purposes for which it was used, and as applied to the cases before the Courts it led to just results. But, if logically followed out in other cases, it leads to consequences not only not foreseen by those who had recourse to it, but to results so startling that I cannot accept the theory as sound. There is no decision yet in which it has been applied so as to defeat any innocent person, nor so as to place the lender in a better position than that in which he would have been if his loan had not been prohibited.’
Rigby LJ said ( 1 Ch at 455):
‘I think that the great preponderance of authority shews that the doctrine of subrogation has very little, if any-thing at all, to do with the equity really enforced in the cases, and that there is, at any rate, no authority for any subrogation to the securities or priorities of the creditor paid off. Dealing with this case independently of the authorities, I see no reason why the parties to an illegal lending should have anything more than bare justice dealt out to them; and this they get if they are allowed, as they have hitherto been allowed, to have that portion of the advance actually expended in payment of debts of the company treated as a valid advance.’
As it seems to me, where a court, on a review of the facts, comes to the conclusion that what was intended between the parties was really an unsecured borrowing, there is no room for the doctrine of subrogation. That really is analogous to the situation envisaged in the judgment which I have just read, because to apply the doctrine of subrogation in such a case would in fact be putting the lender in a better position than he is bargaining to be put in when he advances money.
In the instant case, counsel for the plaintiff says that the intention here was not that of an unsecured bor-rowing, and he relies, of course, on the letters in October 1972 which I have read, and also on the fact that, when the money was advanced, at least the first part of what was contemplated in October was carried out, that is to say, the provision by Mr Speir of a personal security pending completion.
Counsel for the defendant company, on the other hand, says that the October correspondence amounted to no more than a preliminary negotiation, the matter then being approached on the footing that the plaintiff was to have no equity participation in Developments, then thought of as the company which was going to make the purchase and do the developing, but merely to be paid a proportion of the profits made by De-velopments out of the project. In that situation, of course, it made sense for the money advanced by the plaintiff to Developments to be secured on the assets acquired with it. But, says counsel, it is quite clear that these were proposals in principle only, and, indeed, the letter of 31 October expressly says, ‘I hope that it will be possible for your solicitor to agree on the formula with mine as soon as possible.’ And that indeed was done and the agreement of 21 February 1973, between really the same parties as the parties between whom the correspondence had been conducted, was concluded. This involved restructuring the transaction through the medium of a jointly owned company, and the need for security disappeared, since the plaintiff then had an indirect equity interest in the land through his shareholding. This agreement, says counsel for the defendant company, was one which made no
 2 All ER 587 at 599
mention of any security and it constituted the final, conclusive and exclusive agreement by which the parties regulated their relationship in the joint venture.
Well, now, I do not find this altogether an easy question, but I think that counsel for the defendant company must be right and that the agreement represents the totality of the arrangements as they affected Develop-ments, the defendant company and the plaintiff. Tested by the question, Could the plaintiff, immediately after signature of the agreement, have insisted on Speirway securing his loan? I should have thought that the answer must be No. Prima facie, therefore, the circumstances seem to me to suggest nothing more than a perfectly ordinary unsecured borrowing.
I have looked therefore to see whether this prima facie inference is affected in any way by the plaintiff’s own evidence. All that is said by the plaintiff is in paras 9 and 10 of his affidavit:
‘9. In order to protect my position pending the completion of the purchase of the properties by Speirway I was given notice of deposit of the land certificates of two flats at Grosvenor Court, Acton which were owned by Mr. Speir’s two brothers, Mr. A. J. Speir and Mr. R. G. Speir. My solicitors, Messrs. Brecher & Co., held these notices of deposit and they inform me and I believe that on the 6th March 1973 they were told by Mr Orelle that completion of the purchase of the properties by Speirway had taken place and that they then cancelled these notices of deposit of land certificates and returned the certificates to Mr. Orelle.
’10. Although the original intention had been that my advance of £55,000 should be secured by a second charge on the properties no such charge was entered into.’
He offers no explanation of why no security is given or asked for, and he does not suggest for a moment that in the intervening ten months between the date of the advance and the liquidation of the company he ever asked for any or pursued the matter at all. I find the inference almost irresistible that the transaction was entered into on the footing that the plaintiff was making a simple, out-and-out, unsecured advance to the defendant company. The situation here seems to me to be not at all dissimilar from that in Wylie v Car-lyon.
A somewhat similar question arose for decision in Capital Finance v Stokes. That was a case where the vendor of property received a security for part of the outstanding purchase price and the question which arose for decision was whether there was in addition to that a vendor’s lien on which he was entitled to rely for the balance. Of course, the question was not quite the same as that with which one is concerned here, because there the question was whether the contractual arrangements between the parties to the sale ex-cluded the lien, whereas here, it being accepted that there was a lien, the question is whether that lien was transferred to the person whose moneys were utilised towards the purchase of the property. But it was held by the Court of Appeal that the vendor had no lien, on the ground that the vendor, taking the limited security which had been provided for expressly between the parties, obtained all that he had bargained for.
And so here, too, as it seems to me, if I am right in the inference which I draw from the facts before me, the plaintiff obtained all that he bargained for and it would not, I think, be equitable that he should now assert some further right for which he did not bargain.
In the circumstances I must, I think, refuse the declaration which he seeks.
Banque Financiere De La Cite v. Parc (Battersea) Ltd and Others  UKHL 7
This appeal raises, in unusual circumstances, a question on the scope of the equitable remedy of subrogation. The appellant, the Banque Financiere de la Cité (“BFC”) made an advance of DM30m. for the purpose of enabling Parc (Battersea) Ltd. (“Parc”) to repay part of a loan from another bank secured by a first charge upon its property. The transaction did not contemplate that Parc would provide any security. It was however an express condition of the advance that other companies in the group to which Parc belonged would not demand repayment of their loans until BFC had been repaid. One such company was Omnicorp Overseas Ltd (“OOL”) which was owed £26.25m. secured by a second charge over the property. Unfortunately the persons who negotiated the transaction had no authority to commit OOL to such an undertaking and it was not binding upon it. Parc is insolvent and if BFC has no priority over OOL’s second charge, it is unlikely to be repaid. The question is whether, as against OOL, BFC is entitled to be subrogated to the first charge to the extent that its money was used to repay the debt which it secured. The judge, Robert Walker J., decided that the remedy was available. The Court of Appeal, in a judgment delivered by Morritt L.J. decided that it was not. Against that decision BFC appeals to your Lordships’ House.
The striking feature of this case, which distinguishes it from familiar cases on subrogation to which it bears a partial resemblance such as Butler v. Rice  2 Ch. 278 and Ghana Commercial Bank v. Chandiram  AC 732 is that BFC did not contemplate that Parc would provide it with any security at all. As against Parc, it was content to be an unsecured creditor. What was contemplated was a negative form of protection from certain of Parc’s other creditors, namely the other companies in the group, in the form of an undertaking that they would not enforce any claims they might have against Parc in priority to BFC. It is this distinction which is principally relied upon by the respondents for their submission, which found favour in the Court of Appeal, that subrogation is not available. To allow BFC to be subrogated to the first charge would mean, it is said, giving it far greater security than it ever bargained for. But there are also other distinctions and for this purpose it is necessary to set out the facts in rather more detail.
Parc is an English company owning development land in Battersea and OOL is registered in the British Virgin Islands. They belonged to the Omni Group, based in Switzerland, where the ultimate holding company, Omni Holdings AG (“Holdings”), was incorporated. The principal officers of Holdings were its founder and principal shareholder Mr. Werner Rey and its chief financial officer Mr. Markus Herzig. Parc acquired the Battersea land in 1988 with the aid of a £30m. bridging loan from Royal Trust Bank (Switzerland) (“RTB”), secured by a first charge, and additional finance from OOL, in respect of which it subsequently obtained a second charge. The RTB loan was partially repaid in 1989 but £20m. was extended until 28 September 1990. Parc was unable to refinance its borrowing on the London market and turned to Mr. Herzig for help. He approached BFC, which had previously lent to the Omni Group. On 14 September 1990 it agreed in principle to advance DM30m. for two months and the necessary arrangements were concluded in haste. A difficulty was that a further loan to a member of the Omni Group would have had to be reported to the Swiss banking authorities. To avoid this, BFC agreed to make the loan to Mr. Herzig personally on the basis that he would pass it on to Parc, which would issue him with a promissory note which he would assign to BFC as security. The principal security was to be the pledge of 35,000 bearer shares in Holdings, which BFC valued at DM40m and, in addition, BFC required the “postponement letter” in respect of the claims of other group companies. This read as follows:
“This is to confirm that we and all companies of our group will not demand any repayment of loans granted to Parc (Battersea) Ltd, London, until the full repayment of your loan of DM 30,000,000.- granted to Mr. M. Herzig, which is secured by a deep discount promissory note amounting to GBP 10,000,000.- issued by Parc (Battersea) Ltd.”
Completion took place on 28 September 1990, when Mr. Herzig handed over the pledged shares and postponement letter, signed by himself and another officer of Holdings, and BFC, at the direction of Mr. Herzig, paid DM30m. to RTB for the account of Parc, which was credited with £10.097m. The promissory note was issued by Parc to Mr. Herzig on 8 November 1990 and duly assigned by him to BFC. Its terms were quite different from those of BFC’s loan to Mr. Herzig: it was for £11.775m. payable on 28 September 1991, representing an advance of £10m and interest at a fixed rate of 17.75 per cent, and unsecured. BFC’s loan was DM30m for two months, secured as I have described and bearing interest at 1.25 per cent over 2 months LIBOR from time to time.
Mr. Herzig defaulted on repayment of the loan and in April 1991 the Omni Group collapsed. BFC had realised some of the pledged shares before they became worthless and repaid itself about DM5m. but the rest of the advance remains unpaid. Parc still owns the land in Battersea but is in receivership and has no other assets. Mr. Herzig is unable personally to repay.
The first issue at the trial before Robert Walker J. concerned the purported effect of the postponement letter. He rejected a submission that it was not intended to have legal effect and this point has not been pursued. He also dealt with a point of construction: were Holdings purporting to contract on behalf of the other group companies or were they merely warranting on their own behalf that they would take whatever steps were necessary to ensure that the other group companies did not make claims in priority to BFC? He declared himself “narrowly persuaded” that the former construction was correct. The main question at the trial then became whether OOL was bound by the postponement letter, either because Holdings (or Mr. Herzig) had authority to contract on its behalf or because it was estopped from denying this. The judge held that OOL (which, like Parc, was administered from London) had not given the necessary authority and had no knowledge of the postponement letter at any time which could have raised an estoppel. There was no appeal against these findings of fact.
On the question of subrogation, the judge held that although Parc, like OOL, knew nothing of the postponement letter, it knew enough to permit the presumption of whatever mutual intention was needed to activate the remedy of subrogation. Your Lordships may think this summary of his reasoning somewhat cryptic but I shall in due course expand upon the issues which it raises. He went on to say that BFC did not get all it expected to get in the way of a binding postponement letter and the effect of its failure to bind OOL would, in the absence of subrogation, result in OOL being enriched at BFC’s expense. This, he held, would “in the technical sense” be unjust and therefore brought subrogation into play.
In the Court of Appeal, Morritt L.J. (with whom Mummery and Beldam L.JJ. agreed) disagreed. He accepted that OOL would be enriched at the expense of BFC but said that such enrichment would not be unjust or unconscionable. His reasons were as follows:
(1) The loan was structured to avoid disclosure under Swiss banking regulations. As a result, the loan by BFC was to Mr. Herzig on different terms from the loan by Mr. Herzig to Parc and the idea of a second charge in favour of the Bank over the Battersea property had been considered and for similar reasons rejected.
(2) The reason why BFC did not get a binding postponement letter was its own failure to take the elementary precaution of checking that Holdings had the necessary authority.
(3) There had been no misrepresentation or sharp practice on the part of the recipient of the enrichment, OOL.
(4) There was a conceptual problem about the subrogation of BFC to part of the debt secured by the charge in favour of RTB, which would have prejudiced the security of RTB in respect of the rest of its debt. It was also said to be contrary to a Priority Agreement executed on 13 February 1990 which had confirmed RTB’s priority over OOL’s second charge.
(5) Subrogation would give BFC the rights of a first mortgagee over the Battersea land. This would give it rights for which it had never bargained–indeed, the possibility of even a second charge had been considered and rejected–and would place it in a more favourable position than if the postponement letter had been binding.
My Lords, the subject of subrogation is bedeviled by problems of terminology and classification which are calculated to cause confusion. For example, it is often said that subrogation may arise either from the express or implied agreement of the parties or by operation of law in a number of different situations: see, for example, Lord Keith of Kinkel in Orakpo v. Manson Investments Ltd.  A.C. 95, 119. As a matter of current terminology, this is true. Lord Diplock, for example, was of the view that the doctrine of subrogation in contracts of insurance operated entirely by virtue of an implied term of the contract of insurance (Hobbs v. Marlowe  A.C. 16, 39) and although in Lord Napier and Ettrick v. Hunter  A.C. 713 your Lordships rejected the exclusivity of this claim for the common law and assigned a larger role to equitable principles, there was no dispute that the doctrine of subrogation in insurance rests upon the common intention of the parties and gives effect to the principle of indemnity embodied in the contract. Furthermore, your Lordships drew attention to the fact that it is customary for the assured, on payment of the loss, to provide the insurer with a letter of subrogation, being no more nor less than an express assignment of his rights of recovery against any third party. Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the parties. But the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract and the other part of the law of restitution. Unless this distinction is borne clearly in mind, there is a danger that the contractual requirement of mutual consent will be imported into the conditions for the grant of the restitutionary remedy or that the absence of such a requirement will be disguised by references to a presumed intention which is wholly fictitious. There is an obvious parallel with the confusion caused by classifying certain restitutionary remedies as quasi-contractual and importing into them features of the law of contract.
In this case there was plainly no common intention as between OOL, the party enriched, and BFC, the party deprived. OOL had no knowledge of the postponement letter or reason to believe that the advance to Parc of the money provided by BFC was otherwise than unsecured. But why should this necessarily exclude subrogation as a restitutionary remedy? I shall refer to five authorities which in my view demonstrate the contrary.
In Chetwynd v. Allen  1 Ch 353 one Terrell had in 1891 lent Mr. Chetwynd £2,000 secured upon mortgages over two properties: a house called Cedars, which belonged to his wife, and a riding school, which was his own. Mrs. Chetwynd had consented to the mortgage over her property. In 1892 Mr. Chetwynd borrowed £1,200 from one Mynors, saying that it was to pay off Terrell’s mortgage on Cedars and promising him a transfer of that mortgage. He did not disclose that Cedars belonged to his wife or that Terrell’s mortgage was for a larger sum and was over the riding school as well. Mr. Chewynd applied £1,000 of Mynor’s money in part repayment to Terrell. Mrs. Chetwynd, who had known nothing of the transaction with Mynors, claimed that she was entitled to Cedars with the benefit of the part repayment to Terrell but free of any claim by Mynors. Romer J. held, at p. 357 that the charge over Cedars and the riding school was, to the extent of £1,000, “kept alive in equity in favour of Mynors.” I shall have to return to the question of what that expression means, but the case shows that the remedy of subrogation does not depend upon any common intention between the plaintiff and the party enriched.
In Butler v. Rice  2 Ch 277, Mrs. Rice owned properties in Bristol and Cardiff which were equitably mortgaged to a bank (by deposit of title deeds) to secure a loan of £450. Mr. Rice asked Mr. Butler to lend him £450 to pay off the mortgage on the Bristol property, not mentioning the Cardiff property or the fact that both belonged to his wife. Mr. Butler agreed to lend on a mortgage for £300 over the Bristol property and a guarantee for the rest from Mr. Rice’s solicitor. The money was used to pay off the bank but Mrs. Rice refused to execute a mortgage over the Bristol property. She too had known nothing about the transaction before the bank’s mortgage was paid off. Warrington J. said, at p. 282 that the question was whether the bank’s charge had been “paid off or kept alive” and on that question “the concurrence of the mortgagor is immaterial.” He followed Chetwynd v. Allen  1 Ch 353 in holding that Mr. Butler was entitled to the benefit of the mortgage over the Bristol property to secure the £450 he had advanced.
In Ghana Commercial Bank v. Chandiram  AC 732 the bank made an advance to the owner of property in Accra which was used to pay off his indebtedness to Barclays (D.C. & O.) Ltd, secured by an equitable mortgage. The owner executed a legal mortgage in favour of the Ghana Bank, but this was invalidated by a previous attachment of the property by a creditor. The Privy Council, following Butler v. Rice and Chetwynd v. Allen held that the Ghana Bank was entitled to be subrogated to the equitable mortgage which had been paid off. Lord Jenkins said, at p. 745:
“It is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit. . .”
In Paul v. Speirway Ltd.  Ch. 220 the plaintiff made a loan to a company in which he had a joint interest in order to enable it to pay the price due under a contract for the purchase of development land. When the company failed, he claimed to be a secured creditor by subrogation to the vendor’s lien. Oliver J. found on the facts that the advance to the company was intended to be an unsecured loan and held that this excluded any remedy by way of subrogation, which would give the plaintiff more than he had bargained for. The learned judge rejected the proposition, advanced by counsel for the company, that the remedy of subrogation was available only when the common intention of the parties was (as in the three earlier cases to which I have referred) that the plaintiff should have some security which, for one reason or another, he did not get. He confined himself to the much narrower proposition, at p. 232 that:
“. . . where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation.”
In formulating this proposition, the learned judge was clearly confining himself to cases in which the claim was to subrogation to security and not referring to subrogation to a mere debt, as in cases of ultra vires borrowings.
The wisdom of the caution shown by Oliver J. was demonstrated by the facts in Boscawen v. Bajwa  1 WLR 328, which contains a valuable and illuminating analysis of the remedy of subrogation by Millett L.J. The Abbey National Building Society agreed to make an advance on mortgage to a purchaser of property and paid the money to the solicitors acting for them and the purchaser to hold on behalf of the Abbey National until paid over against a first legal charge on the property. The solicitors paid it over to the vendor’s solicitors to hold to their order pending completion but the latter used the money in advance of completion to pay off the vendor’s mortgage to the Halifax Building Society. In fact completion never took place: the vendor failed to convey to the purchaser and the Abbey National accordingly obtained no legal charge or other security. It claimed to be subrogated to the Halifax mortgage. It will be seen at once that there was no common intention that the vendor, whose mortgage had been paid off, should grant any security to the Abbey National. As Millett L.J. pointed out, at p. 339, the Abbey National expected to obtain a charge from the purchaser as legal owner after completion of the sale, and, in the event which happened of there being no such completion, did not intend its money to be used at all. This meant that:
“[t]he factual context in which the claim to subrogation arises is a novel one which does not appear to have arisen before but the justice of its claim cannot be denied.”
These cases seem to me to show is that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v. Manson Investments Ltd.  A.C. 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.
This does not of course mean that questions of intention may not be highly relevant to the question of whether or not enrichment has been unjust. I would certainly not wish to question the proposition of Oliver J. in Paul v. Speirway Ltd.  Ch. 220 that, as against a borrower, subrogation to security will not be available where the transaction was intended merely to create an unsecured loan. I do not express a view on the question of where the burden of proof lies in these matters. Oliver J., following the dictum of Lord Jenkins in Ghana Commercial Bank v. Chandiram  AC 732, 745 which I have quoted, held that if the plaintiff’s money was used to discharge a secured liability, he was presumed to “intend that the mortgage shall be kept alive for his own benefit” and this presumption was applied by Nicholls J. in Boodle Hatfield & Co. v. British Films Ltd.  P.C.C. 176. However, if it is recognised that the use of the plaintiff’s money to pay off a secured debt and the intentions of the parties about whether or not the plaintiff should have security are only materials upon which a court may decide that the defendant’s enrichment would be unjust, it could be argued that on general principles it is for the plaintiff to make out a case of unjust enrichment. In this case, I think that in the absence of subrogation, OOL would be enriched at BFC’s expense and that prima facie such enrichment would be unjust. The bank advanced the DM30m. upon the mistaken assumption that it was obtaining a postponement letter which would be effective to give it priority over any intra-group indebtedness. It would not otherwise have done so. On the construction of the letter adopted by Robert Walker J., namely that Holdings was purporting to contract on behalf of all companies in the Omni group, the payment was made under a mistake as to Holdings’s authority. On the construction adopted by the Court of Appeal the mistake was as to the power of Holdings to ensure that other group companies would postpone their claims. For my part, I prefer the construction adopted by judge. But I do not think that for present purposes it matters which view one takes. In either case, BFC failed to obtain that priority over intra-group indebtedness which was an essential part of the transaction under which it paid the money. It may have attached more importance to the pledge of the shares but the provision of the postponement letter was a condition of completion. The result of the transaction is that BFC’s DM30m. has been used to reduce the debt secured by RTB’s first charge and that this reduction will, by reason of OOL’s second charge, enure wholly to the latter’s advantage. I turn, therefore, to the grounds upon which the Court of Appeal decided that the enrichment of OOL would not be unjust. The first four seem to me to carry little weight. It is true that the transaction was structured to pass the money through the hands of Mr. Herzig in order to avoid disclosure under Swiss banking law. But there is no difficulty in tracing BFC’s money into the discharge of the debt due to RTB: the payment to RTB was direct. In this respect, the case is stronger than in Boscawen v. Bajwa  1 WLR 328. Since the money can be traced, the differences in the terms of the loans by BFC to Mr. Herzig and by Mr. Herzig to Parc do not seem to me to matter, although of course on the principle of Paul v. Speirway Ltd.  Ch. 220, BFC could not, on the basis of any terms agreed between Mr. Herzig and Parc, assert by way of subrogation greater rights than they bargained for. As for the avoidance of Swiss banking law, it seems to me that there was no evidence that this amounted to an illegality which would disqualify BFC from obtaining equitable relief and I do not think that Morritt L.J. suggested this to be the case.
The second ground was that BFC did not take proper precautions to ensure that Mr. Herzig had authority to execute the postponement letter. But there is, so far as I know, no case in which it has been held that carelessness is a ground for holding that a consequent enrichment is not unjust. No doubt Mr. Mynors (in Chetwynd v. Allen  1 Ch 353) and Mr. Butler (in Butler v. Rice  2 Ch 277) were careless in parting with their money without bothering to inspect the borrower’s title deeds. They relied upon Mr. Chetwynd and Mr. Rice as BFC relied upon Mr. Herzig. But that did not entitle Mrs. Chetwynd or Mrs. Rice to be enriched as a result of their mistakes. As a third ground, Morritt L.J. said that there had been no misrepresentation or sharp practice on the part of the recipient of the enrichment. But neither had there been on the part of Mrs. Chetwynd or Mrs. Rice. Both were found to have known nothing about the transactions which resulted in their indebtedness being paid off. All that could be said against them was that they, in common with OOL, wanted to retain the benefit of their enrichment.
Fourthly, there is the “conceptual problem” about BFC and RTB appearing to share the same security. In my view this is not a real problem. BFC does not claim any priority over RTB. It accepts that RTB was entitled to rely upon its first charge, in priority to BFC, in respect of the whole of its outstanding indebtedness. BFC claims only to be able to rely upon that security against OOL after RTB has been paid. In this respect the case is in my view no different from Chetwynd v. Allen  1 Ch 353, 357 in which Romer J. said that the unpaid balance of Terrell’s debt would take priority over Mynors’s claim by way of subrogation to his security. Morritt L.J. regarded this authority as of no assistance because “Romer J. made it plain that his decision was not based on any principle of subrogation.” It is true that Romer J., following the submissions of counsel, appeared to distinguish between “keeping the charge alive,” or what would now be called subrogation to the security, and “subrogation,” by which he seems to have meant subrogation to the debt (and, presumably, the security). But subrogation to the security is precisely the remedy sought in this case and Chetwynd v. Allen therefore seems to me very much in point. In any case, the priority of RTB over BFC can be explained on a wider ground which I shall in due course discuss.
This brings me to the fifth reason relied upon by the Court of Appeal and what I regard as the main question in the case, namely the fact that “keeping the charge alive” for the benefit of BFC would give it more than it was entitled to expect. The transaction contemplated that BFC would be an unsecured creditor of Parc; “keeping the charge alive” would give it the benefit of a first charge. This makes it necessary, as I earlier foreshadowed, to examine more closely what is involved in subrogation to a security.
In my view, the phrase “keeping the charge alive” needs to be handled with some care. It is not a literal truth but rather a metaphor or analogy: see Professor Birks’s An Introduction to the Law of Restitution, (1985) pp. 93-97. In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist. In a case like the present, in which part of the secured debt is repaid, the charge remains alive only to secure the remainder of the debt for the benefit of the original chargee. Nothing can affect his rights and there is no question of competition between him and the party claiming subrogation. It is important to remember that, as Millett L.J. pointed out in Boscawen v. Bajwa  1 WLR 328, 335, subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say that the charge is “kept alive” for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched.
This, I interpose, is the real reason why there is no “conceptual problem” about treating BFC as subrogated to part of the RTB secured debt. The equitable remedy is available only against OOL, which is the only party which would be unjustly enriched. As between RTB and BFC, subrogation has no part to play. RTB is entitled to its security and BFC is no more than an unsecured creditor. The same is true as between BFC and any secured or unsecured creditor of Parc other than the members of the Omni group. The transaction contemplated that as against non-group creditors, BFC would incur no more than an unsecured liability, evidenced by the promissory note issued to Mr. Herzig and assigned by him to BFC. As against such creditors, therefore, the remedy of subrogation is not available. Nor is it available against Parc itself, so as to give BFC the rights of sale, foreclosure etc. which would normally follow from BFC being treated as if it were an assignee of the RTB charge.
It follows that subrogation as against OOL, which is all that BFC claims in the action, would not give it greater rights than it bargained for. All that would happen is that OOL would be prevented from being able to enrich itself to the extent that BFC’s money paid off the RTB charge. This is fully within the scope of the equitable remedy. I would therefore allow the appeal. Robert Walker J. made a declaration that BFC “is and has since the 28th day of September 1990 been entitled to the benefit of” the RTB charge and the Priority Agreement of 13 February 1990. I think that this declaration goes further than is justified. As against Parc, BFC is not entitled to such a declaration. I would therefore insert after the words “entitled to” the words “be treated as against OOL as if it had.” Subject to that amendment, I would restore the declaration made by the judge.
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