The Royal Courts of Justice
The Strand
London
Thursday 25 April 2002
Before:
(Vice President of the Court of Appeal, Civil Division)
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Between:
and
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MR C BAKER (instructed by JR Jones, 56A The Mall, Ealing Broadway, London
W5) appeared on behalf of the Appellant
MR N CLAYTON (instructed by Bretherton Price Elgoods, 123 Promenade, Cheltenham)
appeared on behalf of the Defendant
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1. This is an appeal against the order of His Honour Judge Wakefield, sitting in the Central London County Court, dated 22 October 2001. By the judge's order it was declared that Mr and Mrs Karasiewicz were entitled beneficially in equal shares to 50 Mount Pleasant Road, Ealing Common, London W5 ("the property"). The order also provided for the proceeds of sale of the property to be applied in repaying the amount due to the respondent in this appeal, Eagle Star Insurance Company Ltd ("Eagle Star") by way of subrogation to Berkeley Bridging Plc ("Berkeley"), assuming an initial advance of £158,290.50 and the addition of interest not exceeding the lower of the rates charged from time to time by Berkeley and Eagle Star, so that the total came to £311,934.88 as at 12 October 2001. The appellant, Mrs Karasiewicz, does not appeal against the declaration of beneficial interest but appeals against the second order which entitled Eagle Star to become a secured creditor over the property by way of subrogation to Berkeley.
2. Since the appeal is limited to the second point, it is not necessary for me to summarise the facts that occurred as they were found by the judge in his extensive judgment. Briefly, Mr and Mrs Karasiewicz moved into the property in 1990. The property was built on the garden of another property at Woodfield Road, of which the judge found that Mr and Mrs Karasiewicz were joint beneficial owners in equal shares. On 4 August 1989 the property was charged in favour of Berkeley. There was an issue as to whether Mrs Karasiewicz signed that charge. The judge held that she signed it but that her signature was equivocal and worthless. She was therefore not personally liable on the Berkeley charge. Moreover, the judge held that Eagle Star did not rely in any way on her signature to that charge, and no question of estoppel arose by reason of it in favour of Eagle Star.
3. In March 1990 the property was charged in favour of Eagle Star to secure the sum of £165,000. That document of charge was executed by Mr and Mrs Karasiewicz in favour of Eagle Star. In 1992 Mr Karasiewicz left the property but Mrs Karasiewicz has continued to live there. At the time of the Berkeley charge Mrs Karasiewicz was not in occupation of the property and accordingly the Berkeley charge bound her beneficial interest because it was not at that point in time an overriding interest for the purpose of section 70(1)(g) of the Land Registration Act 1925, but by the date of execution of the Eagle Star charge she was in occupation of the property and accordingly she had an overriding interest pursuant to section 70(1)(g) of the 1925 Act.
4. The judge held that Mrs Karasiewicz was not bound by the Eagle Star charge because she did not consent to it, and there is no appeal on that count. The judge in his judgment then turned to subrogation. The judge found that Eagle Star had advised the solicitors to Mr Karasiewicz that a form of consent was necessary, to which Mrs Karasiewicz's signature should be obtained. However, that form was never sent and never executed. The judge said that it must have been overlooked. Nonetheless, Eagle Star proceed to advance the principal sum of £165,000, of which £158,290 went to redeem the Berkeley charge.
5. The judge held that if Eagle Star were unable to rely on subrogation, Mrs Karasiewicz would have received a substantial benefit at Eagle Star's expense since Eagle Star had paid off the Berkeley loan. Accordingly her share of the property would be free from that loan and enhanced in value at the expense of Eagle Star. Eagle Star would be limited to its security on Mr Karasiewicz's half share. The judge held that Eagle Star was entitled to be subrogated in Berkeley in reliance on a passage from the speech of Lord Hoffmann in Banque Financiere v. Parc (Battersea) Ltd [1999] 1 AC 221 at 234. Lord Hoffmann held that the test for subrogation was, first, whether the defendant would be enriched at the plaintiff's expense, second, whether such enrichment would be unjust and, third, whether there were nonetheless reasons of policy for denying a remedy. The judge held that Mrs Karasiewicz would be enriched at Eagle Star's expense and it would be most unjust if this were the case. There was no reason of policy for denying subrogation and in his judgment the conditions for subrogation were met. Accordingly he held that Eagle Star was subrogated to the rights of Berkeley although, as the terms of the order make clear, he did not consider that Eagle Star could be better off than Berkeley. On the footing of subrogation he made an order for possession of the property.
6. Mrs Karasiewicz appeals to this court with permission of Mantell LJ. Mr Christopher Baker on her behalf makes a number of submissions. He submits primarily that Eagle Star did not expect to obtain a charge unless Mrs Karasiewicz gave her consent. It knew full well that it would not obtain a charge unless that happened. Therefore it was unjust for it to obtain a remedy by subrogation. Mr Baker distinguishes cases where subrogation has been allowed in which the lender was defeated by circumstances of which he was unaware.
7. Mr Baker submits that there is no distinction between this case and the case of Banque Financiere, on which the judge relied, and the case where a creditor advances money to repay a secured creditor. The juridical basis, he submits, remains the same in both situations. He took us to the Banque Financiere case. The facts of that case are complex. Very shortly summarised, the position was that a lender had lent money through an intermediary from whom it took an assignment of the unsecured debt due to the ultimate borrower. The lending was on an unsecured basis. It was on the footing that another group company of the borrower would not seek repayment of its debt in priority to the lender. The loan was in fact used to pay a secured debt. The House of Lords held that the lender was entitled to be subrogated to the security of the lender repaid as against the group company in question, which was also itself a secured creditor. So it was a very special situation, where there was a very limited form of remedy granted in order to reverse unjust enrichment as between the group company and the new lender.
8. Mr Baker submits that there is, as I have said, no distinction between that case and the case where a creditor advances money to pay a secured creditor. The juridical basis, he submits, remains the same. It must be shown that any enrichment is unjust and moreover the benefit which (in this case) Eagle Star obtains by subrogation enables the protection given to Mrs Karasiewicz's overriding interest by the law to be circumvented. In this regard, in the course of his submission at the court's request Mr Baker took the court to a decision which was not available to the judge, namely a decision of this court in Halifax Plc v. Omar [2002] EWCA Civ 121, 20 February 2002. I will need to deal with that decision in a moment. 9. We have not called upon the respondent. Mr Nigel Clayton for the respondent has, however, in his written submissions relied on the judge's judgment. He submits that the tests set out by Lord Hoffmann are met in this case and that any other result would be unjust since the appellant would receive her share in the property free from the Berkeley charge.
10. I now turn to my conclusions.
11. In my judgment the appeal fails. The judge relied, as I have explained, on the three tests set out by Lord Hoffmann in the Banque Financiere case. Accordingly, on the basis of those tests the first question is whether the appellant would be enriched at the respondent's expense if there was no subrogation. The answer to that -- and I think this is common ground -- is yes for the reasons which the judge gave.
12. The second test is to ask whether such enrichment would be unjust. This is a matter on which Mr Baker has challenged the judge's conclusion. But in my judgment the judge was right. Mrs Karasiewicz would receive a windfall if she received her share free from the Berkeley charge to which Eagle Star is subrogated. The fact that Eagle Star expected to receive Mrs Karasiewicz's consent before they received a valid charge in their favour is not, as I see it, an objection to subrogation to the Berkeley charge. That is a different security and one which at that stage Eagle Star did not consider they were getting in return for the advance. It is something to which they are entitled as result of the failure to obtain Mrs Karasiewicz's consent. If Eagle Star's expectation that it would receive a valid charge in its favour had been fulfilled, it would, of course, have secured more than the amount secured by the Berkeley charge. It would have secured the full amount of the principal monies which Eagle Star advanced and, in addition, interest at the contractual date. In my judgment, there is no reason of policy for denying a remedy. Subrogation puts them into the shoes of Berkeley. As has often been said in the cases, it gave them in effect an assignment over Berkeley's charge and no reason has been forward to suggest that if the charge had in fact been assigned by contract, it would have been affected by Mrs Karasiewicz's interest in the property.
13. In reaching those conclusions I have approached the case on the basis on which the judge approached it. However, a further and deeper question has been exposed by Mr Baker's submissions on the recent case of Halifax Plc v. Omar. The House of Lords in Banque Financiere were not dealing with what might be described as the usual case of subrogation, where money is lent by a creditor to pay off a secured debt. That is an issue which is brought out in the Halifax case. The facts again are complex but, very briefly, it concerned a contest between a lender who had advanced money for the purchase of a property and a subsequent innocent purchaser of the property who was unaware of the interest of the building society. It was therefore a contest between two equitable interests. The Court of Appeal analysed and referred at length to the Banque Financiere case. I can then, I think, turn to the conclusions in the case.
14. Jonathan Parker LJ, with whom Simon Brown and Laws LJJ agreed, held at paragraph 70 that the key to the decision in that case lay in the distinction emphasised by Lord Hoffmann in the Banque Financiere case between, on the one hand, subrogation to a security and subrogation merely to indebtedness itself. Jonathan Parker LJ continued:
The former category includes rights in rem; the latter is limited to rights in personam. The instant case falls within the former category; the BFC Case within the latter. In the instant case, the respondent claims to be subrogated to the security rights of Mrs Garcia as an unpaid vendor. In the BFC Case a similar claim by BFC to be subrogated to the security rights of RTB failed in the Court of Appeal and would also have failed in the House of Lords on the ground that to regard BFC in equity as standing in the shoes of RTB as chargee would be to place it in a better position than that for which it had contracted and that a restitutionary remedy which would have that effect was accordingly inappropriate. BFC succeeded in the House of Lords on the more limited claim (referred to by Lord Steyn at p 226G as an 'attenuated' submission) to be subrogated to RTB not in its capacity as chargee (with accompanying rights and remedies) but merely in its capacity as debtor having priority over OOL. As Lord Hoffmann makes clear, the remedy granted in the BFC Case gave the BFC no more than rights in personam against OOL: in so doing, the remedy directly reflected and matched the attenuation of BFC's claim to which Lord Steyn referred.
15. Later in his conclusions, Jonathan Parker LJ referred to the case of Burston Finance Ltd v. Speirway [1974] 1 WLR 1648, in which a financier had advanced monies to a company on the basis that it was to obtain security and unfortunately the security was not duly registered under the Companies Act and was void. The case was heard by Walton J, who held that there could be no subrogation on the particular facts of the case because by taking the legal charge the lender had in fact lost the benefit of the unpaid vendor's lien to which it sought to be subrogated. But in the course of his judgment, Walton J explained the doctrine of subrogation in these circumstances. Jonathan Parker LJ sets out the relevant passage, which is as follows:
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 person advances money on the understanding that he is to have certain security for the money he has advanced, and, for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the relevant 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.
This formulation was not, I think, seriously in issue between the parties to this summons.
16. I pause to say that the situation described by Walton J is the situation in which Eagle Star finds itself, namely that it has advanced money on the understanding that it is to have security but it has not, for one reason or another, received the security and its monies have been used, to the extent of £158,000-odd, to discharge the monies due to that secured creditor.
17. Jonathan Parker LJ continued:
80. In my judgment, the correctness of that statement of the law by Walton J is not in any way affected by the reasoning or the decision of the House of Lords in the BFC Case. As Walton J makes clear, he is addressing the 'ordinary and typical' case where the claimant seeks to be subrogated to security rights: in other words, a case within the Boscawen v. Bajwa category, into which category the instant case also falls.
81. In such a case, the remedy of subrogation gives effect to a property right which also exists in equity: ie the right to be regarded as chargee of the property in question. As Millett LJ said in Boscawen v. Bajwa (at p 334E):
Once the equity is established, the court satisfies it by declaring that the property in question is subject to a charge by way of subrogation ...
82. See also p 342C, where Millett LJ said:
The order merely satisfied a pre-existing equity.
18. At paragraph 84 Jonathan Parker LJ referred to the fact that counsel had indicated in written submissions that he intended to argue that the right of the building society was a mere equity, but Jonathan Parker LJ expressed the view that it would not have been right to advance that submission. He added:
As the authorities to which I have referred make clear, a claimant who is subrogated to a security right is treated in equity as if [he] had that security: thus in a case such as the instant case, where the security takes the form of an unpaid vendor's lien it is, as the judge correctly concluded, an equitable chargee to the extent that his money was used to pay the purchase price for the property.
19. In my judgment the Halifax decision has important implications for this case. It explains that what might be described as the more usual case of subrogation is where money is lent to pay off a secured claim. The effect of the Halifax decision is that in that situation the creditor who seeks to be subrogated is given the remedy by way of satisfaction of a pre-existing equitable proprietary right which is vindicated by the order for subrogation. Of course I recognise that there may be factors which would lead the court to the conclusion that subrogation was not the appropriate relief: see, for example, in Burston v. Speirway, above, where there was waiver of the security; or where parties have agreed not to take any security; or where it is clear that the party advancing money intended to do so on an unsecured basis. But apart from those exceptional situations, in my judgment it must be right that where a creditor has advanced money intending to take security, and the money has been used to pay off a secured debt and he does not receive the security he expected to receive, he should in general be subrogated to the rights of a secured creditor whom he has paid off.
20. Accordingly, on that basis and applying that principle, in my judgment the judge was correct to come to his conclusion that the claim for subrogation by Eagle Star should succeed. Accordingly, this appeal should be dismissed.
21. I agree.
22. I also agree.
ORDER: Appeal dismissed with costs. Stay lifted. The judge's order affirmed. Eagle Claimant's costs of the appeal be recovered out of the First Defendant's share of the proceeds of sale. Detailed taxation of the Second Defendant's costs in accordance with the Community Legal Service (Costs) Regulations 2000.