Day v Tiuta International Ltd & Anor

This is an appeal by the claimant and appellant, Spencer Day (“Mr Day” or “the Appellant”) against the order of Mr Justice Sales dated 6 September 2013 (“the Order”) whereby he:

The appeal raises issues as to the exercise of the right of subrogation of a chargee in circumstances where the chargor has an unliquidated cross-claim for damages.

Mr Day is a businessman and developer. In March 2008 he acquired the freehold of a substantial residential property comprising about eight acres and known as The Long Barn, Dog Kennel Green, Ranmore Common, Dorking, Surrey, RH5 6SU and land adjacent thereto (“the Property”). On 28 August 2009, Mr Day borrowed £3,000,000 from Standard Chartered (Jersey) Limited (“Standard Chartered”) in order to refinance the Property. This loan (“the SC Loan”) was secured by a mortgage and legal charge in favour of Standard Chartered (“the SC Charge”). On 15 October 2010 Mr Day obtained planning permission which allowed him to demolish the existing house on the site and to redevelop it as a substantial, high-quality residence. However he needed substantial additional finance to fund the necessary redevelopment.

On 7 June 2011, Mr Day entered into a loan facility agreement with TIL ("the TIL Loan Agreement"), pursuant to which TIL agreed to lend Mr Day £6,600,000 to enable him to refinance his existing borrowings in respect of the Property (including the SC Charge) and a further £6 million to be drawn down in tranches, against architects' certificates, to enable him to redevelop the Property (“the TIL Loan”). On 13 June 2011 Mr Day executed a first legal charge in favour of TIL to secure the facility (“the TIL Charge”) and received the first £6,600,000 tranche of the TIL Loan. £3,000,000 (or thereabouts) of that sum was used to repay the sums due to Standard Chartered under the SC Loan and to discharge the SC Charge. Thereafter additional sums were advanced to Mr Day amounting in total (together with the original tranche) to a sum of £7,866,782.70.

In his evidence on the summary judgment application Mr Day maintained that each payment made by TIL under the TIL Loan Agreement was persistently and systematically late, resulting in the risk of work by contractors ceasing and delays in the conduct of the development works. Mr Day also complained that, as a result, various contractors ceased working and had to be changed. He asserted that, completely to his surprise, on 5 July 2012, TIL was placed in administration and that, thereafter, no further funds were released to him in order to enable him to continue with the development of the Property. That meant that the Property was left in a half built state, exposed to the elements and incapable of completion, since Mr Day did not have other means of funding the development.

Pursuant to the terms of the TIL Loan Agreement, Mr Day's debt to TIL became repayable on 9 November 2012. However, Mr Day failed to repay the TIL Loan. He accepted before the judge and before us that he lacks the financial means to do so. As a result of his non-payment, on 28 January 2013, TIL appointed Joseph Anthony Pitt and Benedict James Nicholas Moon as joint receivers in respect of the Property under the Law of Property Act 1925 ("the Receivers"), with a view to its marketing and sale, and the subsequent application of the sale proceeds in reduction of the TIL Loan. The Receivers in turn appointed estate agents Savills to market the Property.

Mr Day took steps to oust the Receivers from possession. The Receivers re-entered the property and changed the locks, but Mr Day ousted them from possession again and resumed possession of it himself.

On 4 April 2013, Mr Day issued proceedings against TIL, Sarah Helen Bell and Geoffrey Wayne Bouchier, the administrators of TIL (“the Administrators”), as second defendants (who are the second respondents to this appeal), the Receivers, as third defendants, and others asserting an unliquidated claim for damages and contending (inter alia) that he could set this claim off against the TIL Loan to release the Property from the TIL Charge and thereby invalidate the appointment of the Receivers (“the set-off argument”). He also sought orders seeking declarations that the appointment of the Receivers was void and injunctions that all marketing of the Property should cease until such time as the court should order otherwise.

In response, by its defence and counterclaim dated by June 2013, TIL counterclaimed inter alia:

TIL and the Administrators applied under CPR 3.4(2)(a) to strike out those paragraphs in the Particulars of Claim which raised the set-off argument, on the basis that such argument was contrary to a long line of binding decisions of the Court of Appeal, including Samuel Keller (Holdings) Ltd v Martins Bank Ltd [1971] 1 WLR 43; Mobil Oil Ltd v Rawlinson [1981] P.&C.R. 221, at 226; Barclays Bank plc v Tennet (unreported, 6 June 1984) and National Westminster Bank plc v Skelton [1993] 1 All ER 242.

The well-known principle articulated in these cases can be summarised for present purposes (but subject to discussion as set out below) as follows: a mortgagor cannot unilaterally appropriate the amount of a cross-claim which is unliquidated and not admitted (whether a mere counterclaim, or a cross-claim for unliquidated damages which, if established, would give rise to a right of equitable set-off) in the discharge of the mortgage debt. It follows that, even where the quantum of the asserted, unliquidated cross-claim exceeds the amount of the mortgage debt, the mortgagee cannot be restrained from exercising his right to take possession of, and sell, the mortgaged property or, if appropriate, appointing receivers to sell the property, and applying the proceeds of sale in payment of his mortgage debt. (I refer to a “mortgage” debt, a “mortgagor” and a “mortgagee”, but similar principles apply to a debt secured by a charge, and a chargor and a chargee, so the former references should, in this judgment, be taken to include the latter.)

In addition TIL sought summary judgment under CPR 24.2 in relation to the relief claimed under paragraphs (b), (c), (d) and (f) of the prayer to its counterclaim. TIL accepted before the judge, for the purposes of its summary judgment application, that Mr Day had arguable claims for unliquidated damages for breach of the TIL Loan Agreement in sums which might exceed the amount of the TIL Loan which was outstanding and which was outstanding at the time that the Receivers were appointed. It therefore did not seek summary judgment in respect of any outstanding part of the TIL Loan.

At the hearing of TIL’s application on 6 September 2012, Mr Day, in addition to his first defence based on his set-off argument, sought to rely on a new (and previously unpleaded) allegation, that he had been induced to enter into the TIL Mortgage by fraudulent misrepresentations made on behalf of TIL, as to TIL's financial status and its ability to comply with the terms of the TIL Loan Agreement. This was based on the allegations set out in his witness statement dated 19 August 2013. Accordingly, Mr Day contended that, he was entitled to rescind the TIL Charge and that such rescission would operate so as to invalidate the appointment of the Receivers (“the rescission argument”).

In response to the second defence, TIL contended before the judge that, even if Mr Day were able to rescind the TIL Charge for fraud, TIL would in any event be subrogated to the SC Charge, in accordance with the doctrine of equitable subrogation, by virtue of the fact that TIL had paid approximately £3,000,000 to Standard Chartered in discharge of the SC Loan and the SC Charge. TIL also sought to argue that there was no evidence of fraud to give rise to what could be regarded as a good arguable claim that fraud had been committed.

In relation to Mr Day's first defence, namely his set-off argument, the judge held against Mr Day, concluding that binding Court of Appeal authority (including Samuel Keller (Holdings) supra, Barclays Bank plc v Tennet supra and National Westminster Bank plc v Skelton supra) rendered Mr Day’s claim to equitable set-off incapable of defeating TIL’s right to enforce the TIL Charge; see paragraphs 14 - 25 of the judgment. Accordingly he struck out the relevant paragraphs in the Particulars of Claim where the set-off argument had been pleaded or relied upon: see paragraphs 1, 2 and 3 of the Order.

In relation to Mr Day's second defence, namely that the TIL Loan Agreement was entered into on the basis of fraudulent misrepresentations by TIL, as to its solvency and ability to comply with the terms of the loan agreement going forward, and as a result Mr Day had rescinded, or was entitled to rescind, the TIL Loan Agreement, the judge held as follows:

Accordingly, the judge granted summary judgment in favour of TIL in respect of TIL’s counterclaims made: under paragraph (c) of the prayer (for a declaration that the Receivers had been validly appointed as joint receivers of the Property); under paragraph (d) of the prayer (for a declaration that the Receivers were entitled to market the Property for sale); and under paragraph (f) of the prayer (for an injunction to restrain Mr Day from interfering with the Receivers’ possession of the Property): see paragraphs 4, 5 6 and 7 of the Order. He also ordered that any proceeds of sale of the Property in excess of £3,002,225.51 should be paid into Court pending further order. This left TIL free to apply the proceeds of sale of the Property in discharge of the debt owed to it in the sum of £3,002,225.51, being the figure which it had paid Standard Chartered to discharge the SC Loan and the SC Charge.

By his notice of appeal filed on 12 September 2013 Mr Day sought to appeal against the whole order of Sales J dated 6 September 2013. In his grounds of appeal dated 11 September 2013 Mr Day contended as follows:

By a respondents’ notice dated 25 September 2013, TIL and the Administrators stated that at the hearing of the appeal they would seek to persuade the Court of Appeal to uphold the Order on different or additional grounds, namely that:

Kitchin LJ granted Mr Day permission to appeal on the papers.

In summary, Mr Mark Warwick QC, who appeared on behalf of Mr Day, presented the following arguments in his written and oral submissions to support Mr Day's three live grounds of appeal, whilst preserving the fourth ground in the event that the case reaches the Supreme Court.

First, in relation to both the first and second grounds of appeal, Mr Warwick argued that a party seeking subrogation could not exercise rights of subrogation, or act under subrogation, if he had not accepted that the charge which he had actually obtained was invalid, void or otherwise defective, and therefore that he had not obtained the security for which he had bargained. He further submitted that, until the court determined whether the TIL Charge was voidable, TIL had effectively obtained that for which it had bargained and therefore could not rely on the doctrine of subrogation.

Second, he submitted that the party purporting to exercise subrogated rights, in this case the appointment of receivers and sale of the charged property, had to do so pursuant to the powers contained in the subrogated security; it was not sufficient to make the appointment pursuant to the original charge and then seek to deem such appointment an appointment under the terms of the original security; there had to be a demand for payment of the "Secured Liabilities" as defined in the SC Charge, or a breach of the SC Charge, or an "Event of Default" as likewise so defined. None of those pre-conditions had been satisfied in the present case. TIL had appointed the Receivers by reference to the TIL Charge; it therefore could not seek to justify such appointment by reference to the SC Charge or by reference to any new equitable charge created by reference to the equitable doctrine of subrogation. Sales J had wrongly sought to short circuit the process.

Third, Mr Warwick submitted that subrogation only arose on well settled principles and that, only once the equity was established, was the court in a position to make any decision as to the scope of the rights of subrogation in the particular case. Accordingly, in the circumstances of this case, it was inappropriate for any decision as to whether subrogation rights arose to be determined on a summary judgment application.

Mr Warwick sought to support these arguments (and, indeed, those he put forward in relation to the third ground of appeal) by reference to various authorities relating to the doctrine of subrogation. These included:

In relation to the third ground of appeal, Mr Warwick, in reliance on paragraph [44] of the judgment in Cheltenham & Gloucester plc, supra and passages in Subrogation, Law and Practice, supra at 7.119 – 7.123, submitted that Mr Day had every prospect of establishing at trial that TIL would not have been entitled to any rights of subrogation or the creation of a new equitable charge in its favour, as any claim to such rights would be defeated by the application of equitable defences.

Mr Warwick submitted that the first relevant principle was the principle that "he who seeks equity must do equity". If TIL sought to rely upon its payment of £3 million to Standard Chartered as entitling it to be subrogated to be SC Charge, TIL would not be "doing equity", as it would not be giving credit for the damages which it owed him, which far exceeded £3 million. Since subrogation was now regarded as part of the law of unjust enrichment, it could not be said that TIL had been unjustly enriched, if in fact it owed Mr Day sums in excess of the money which it had paid to Standard Chartered, namely the damages which Mr Day claimed for breach of the TIL Loan Agreement and/or the damages for fraudulent misrepresentation, which he claimed for having been induced to enter into the TIL Loan Agreement. The principle recognised in the line of authorities including National Westminster Bank v Skelton that a mortgagee/chargee had the right to enforce the mortgage/charge, notwithstanding the assertion of an unliquidated cross-claim by the mortgage/chargor, did not apply in the context of equitable subrogation, which was based on the requirement to show unjust enrichment. Moreover in circumstances where TIL was insolvent, a court would not regard TIL as "doing equity" towards Mr Day, if that involved TIL taking possession of Mr Day's property and leaving him with no adequate remedy as against an insolvent TIL.

Mr Warwick submitted that the second relevant principle was the principle "he who seeks equity must come with clean hands.” TIL did not come to the court with "clean hands". The money which it paid to Standard Chartered was obtained by its own fraudulent misrepresentation. Moreover, as stated above, Mr Day was owed damages for breach of the TIL Loan Agreement and/or damages for misrepresentation, for having been fraudulently induced to enter into the TIL Loan Agreement, which far exceeded the sum in respect of which TIL claimed to be subrogated.

In those circumstances it was highly questionable whether TIL would be entitled to subrogation rights. That was an issue which required determination at trial. Accordingly, given that the judge had held that Mr Day had put forward a sufficient evidential basis to support his submission that he had a good arguable case that TIL had obtained the TIL Loan Agreement argument and the TIL Charge by means of fraudulent misrepresentation, it followed that the judge should not have granted summary judgment to TIL but should have allowed the case to proceed to trial.

Mr Stephen Robins, counsel for TIL, submitted that the judge's conclusion should be upheld for the reasons given by the judge. Since as appears below, I largely accept Mr Robins’ submissions in this respect, I do not separately rehearse his arguments on these points at this stage of the judgment.

However, at the outset of his oral arguments, Mr Robins also submitted, as a preliminary point, that the Order should be maintained for the reasons set out (or foreshadowed) in ground one of TIL’s respondent' s notice, namely:

In amplification of the submission referred to at iii) above, Mr Robins submitted as follows:

Mr Robins also submitted, in support of the second ground set out in TIL’s respondent’s notice, that, since rescission would not be granted without counter-restitution, and since Mr Day did not have the financial ability to repay the sum of £7,866,782.70 to TIL, Mr Day would not be granted the relief of rescission of the TIL Loan Agreement or the TIL Charge.

On those grounds, additional to those upon which the judge relied, Mr Robins submitted that Mr Day had no real prospect of succeeding in his claim to rescission.

The preliminary points taken in TIL’s respondent’s notice to the effect that Mr Day should not have been permitted to run his new case based on fraudulent misrepresentation

I have some sympathy with Mr Robins’ first submission that, in circumstances where Mr Day had pleaded his case fully in his Particulars of Claim and in his "Response", i.e. Reply, to Defence and Counterclaim, the judge should not have permitted Mr Day effectively to run a totally new case in opposition to TIL’s summary judgment application - at least without requiring Mr Day first to plead his case based on fraudulent misrepresentation in full and affording TIL an opportunity to reply. However, in my judgment in all the circumstances it was within the reasonable ambit of the judge's discretion to proceed on the basis which he did, notwithstanding the unsatisfactory position on the pleadings and the lack of clarity as to Mr Day's precise case based on fraudulent misrepresentation. By the date of the hearing on 5 September 2014 TIL had had an opportunity to file evidence in response to Mr Day's new fraud allegations, or, if it considered it needed further time, to seek an adjournment of the hearing in order to do so. No such adjournment was sought. Accordingly I do not accept this ground as an additional ground for upholding the judge's decision.

So far as Mr Robins' second submission is concerned (namely the argument that Mr Day's evidence did not demonstrate that TIL, to the knowledge of its directors, would have been unable, in mid-June 2011, because of its insolvency, properly to advance the full amount which it had agreed to advance under the TIL Loan Agreement), I consider that, for the purposes of TIL’s summary judgment application, the judge was entitled to take the view, as set out in paragraph 28 of his judgment, that, in the absence of any evidence from TIL to the contrary, the evidence was sufficient to demonstrate a case in fraudulent misrepresentation that Mr Day was entitled to take to trial. I should make it clear that, in so stating, I am not in any way prejudging any further application for strike out, or for summary judgment, that might be made by TIL, once Mr Day has amended his pleadings to allege fraudulent misrepresentation and, possibly, TIL has filed evidence to rebut such allegations. Accordingly, likewise, I do not accept this ground as an additional reason for upholding the judge's decision.

Mr Day’s first ground of appeal

I turn next to consider Mr Day's first ground of appeal against the decision of the judge, as set out in paragraphs 30 and 31 of his judgment, to the effect that, even if the TIL Charge were to be rescinded or avoided on the grounds of fraudulent misrepresentation, TIL was entitled to be subrogated to the rights of Standard Chartered under the SC Charge. As described above, Mr Day's case under this head is that a right of subrogation will not arise in circumstances where the lender has obtained everything for which he bargained.

I do not accept Mr Warwick's submission that, merely because TIL contends that the TIL Charge is valid and enforceable, that precludes TIL's reliance on the doctrine of subrogation on the alternative hypothesis that the TIL Charge is voidable and therefore liable to be set aside or rescinded. As the judge made clear, this was a fallback argument relied upon by TIL, in the event that at trial its contention that the TIL Charge was valid, and not liable to be avoided, failed, and Mr Day succeeded in setting aside the TIL Charge on the grounds of fraudulent misrepresentation; in that event clearly TIL would not have obtained everything for which it bargained - namely a valid first charge on the Property. As Mr Robins submitted, it is not improper for a litigant to rely on an alternative case which is inconsistent with his primary case, provided that he makes clear that it is truly an alternative case which will arise only if his primary case fails: see Clarke v Marlborough Fine Art (London) Ltd (Amendments) [2002] EWHC 11, per Patten J at paragraph 30; and Binks v Securicor Omega Express Ltd [2003] EWCA Civ 993, [2003] 1 WLR 2557 per Maurice Kay J at 2562. TIL’s alternative case, viz. the subrogation argument, is a genuine alternative to TIL’s primary case that no rescission arises and the TIL Charge is valid, either because, on the facts, there was no fraudulent misrepresentation or because Mr Day is unable to make restitution. So, in my judgment, the judge was entitled to approach the application for summary judgment on these two alternate hypotheses, namely that either Mr Day’s claim to rescission will fail, in which case TIL would have been entitled to have appointed the Receivers under the TIL Charge, or it will succeed, in which case TIL will have been subrogated to the SC Charge and (subject to Mr Day's other arguments) have been entitled to appoint receivers pursuant to its terms.

Nor do I accept Mr Warwick's oral development of the submission (to the extent that it was formulated in these terms) that, until a court had set aside the TIL Charge, the charge TIL had obtained was good, and what it bargained for. The fact that a security is voidable from inception (as opposed to void) does not preclude the operation of the doctrine of subrogation on that ground. As Jonathan Parker LJ said in UCB Group Ltd v Hedworth [2003] EWCA Civ 1717 at paragraphs 130-132, the doctrine of subrogation applies to such a security:

“130.

I turn next to the submission made by Mr Zelin in his written skeleton argument (and adopted by Mrs Hedworth) that there is no room for subrogation where, as Mr Zelin puts it, "the claimant actually gets a valid security that is subsequently rendered ineffective", and that "a voidable transaction is good until it is set aside.”

131.

In my judgment, however, a security which is voidable ab initio – that is to say which is, from its inception, liable to be set aside – cannot sensibly be described as "a valid security that is subsequently rendered ineffective". A security which is voidable ab initio is, by definition, unenforceable from its inception as against the party having the right to set it aside. Hence it is, from its inception, ineffective as a security. In my judgment, nothing that was said by Walton J in Burston Finance v. Speirway, or by Harman J in Capital Finance v. Stokes casts any doubt on these (to my mind) uncontentious propositions. Indeed, the passages in those judgments on which Mr Zelin relies seem to me positively to endorse them. Thus, Walton J's reference in Burston Finance v. Speirway (at p.1652H-1653A) to "a security which is, from its inception, either wholly void or otherwise completely unenforceable" seems to me plainly to include voidable, as well as void, securities. Likewise, when saying in Capital Finance v. Stokes (at p.279E) that the vendor had "obtained all that he bargained for" since he had been granted "the stipulated legal charge", Harman LJ was referring to a legal charge which was void against a liquidator or creditors for non-registration: that is to say a charge which was fully enforceable when made. At p.279G Harman LJ said:

"It was argued for the vendor that what he contracted to get was a valid legal charge, and that he has not received because the company in default of its obligation under section 95 [of the Companies Act 1948] did not register the charge with the result that it became ineffective on winding up. I do not accept this argument. The charge was effective when made and, although it was the purchaser's duty to register, it was open to the vendor himself to remedy the defect at the purchaser's expense.”

132.

In my judgment, there is a clear distinction for present purposes between a charge which is voidable from its inception and one which is valid (i.e. fully enforceable) when made but which may become void at some future date unless registered. The charge in Capital Finance v. Stokes was in the latter category. Plainly, a lender who has bargained for a valid security and has received only a security which is voidable from its inception has not obtained all that he bargained for. By contrast, as Harman LJ held, where such a lender receives a security which is valid (i.e. fully enforceable) when made and will remain so if registered, he has obtained all that he bargained for.”

It follows that I reject Mr Warwick’s submissions that:

Mr Day’s second ground of appeal

As I have already mentioned, Mr Day's second ground of appeal was that a party purporting to exercise subrogated rights had to do so pursuant to the powers contained in the subrogated security; therefore it was not sufficient for TIL to have appointed the Receivers by reference to the TIL Charge and then have sought to justify such appointment by reference to the SC Charge, or by reference to any new equitable charge created by reference to the equitable doctrine of subrogation; TIL needed to appoint the Receivers again, but this time in express reliance on the SC Charge.

I reject this submission. It is not supported by any authority and is inconsistent with the concept of the equitable right of subrogation. As Jonathan Parker LJ pointed out in Halifax plc v Omar [2002] P. & C.R. 26, 377 at paragraphs 79 to 82, in a case such as the present the remedy of subrogation afforded by the court gives effect to a pre-existing equitable proprietary right (i.e. the right to be regarded as the chargee of the property in question), which exists in equity from the time at which the chargee with the invalid or deficient security paid off the secured debt of the previous lender. Jonathan Parker LJ (with whom the other members of the court agreed) said in that case

“79.

In the course of his judgment [in Burston Finance Ltd v. Speirway Ltd [1974] 1 WLR 1648], Walton J said this with reference to the doctrine of subrogation (at p.1652):

“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 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.”

This formulation was not, I think, seriously in issue between the parties to this summons.”

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 already exists in equity: i.e. the right to be regarded as chargee of the property in question. As Millett LJ said in Boscawen v. Bajwa (at p.335E):

“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.”

83.

On that approach, the issue in the instant case becomes a straightforward issue of priority as between competing equitable interests in real property. So formulated, the issue is, on authority, capable of only one answer, viz. that where the equities are equal (as they must be assumed to be in the instant case) the earlier in time will prevail (see Snell’s Equity, 30th edition, at para 4-38).

84.

I add for completeness that although in his written skeleton argument Mr Hill-Smith advanced an argument that if it came to a question of priorities the equity of the respondent should be regarded as, in effect, a “mere equity” not susceptible of conferring priority over a subsequent purchaser of an equitable interest without notice, he did not develop that argument in his oral submissions. In my judgment he was right not to do so, since the argument is a bad one. 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 had that security: thus in a case such as the instant case, where the security takes the form of an unpaid vendor’s lien, he 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.”

However it is important to bear in mind that the correct analysis of the right of subrogation is that a party who discharges a creditor's security interest and who is regarded as having acquired that interest by subrogation, does not actually acquire the creditor's interest, but rather obtains a new and independent equitable security interest which prima facie replicates the creditor's old interest. Subrogation does not effect an actual assignment of the discharged creditor's rights to the subrogated creditor. What subrogation means in this context is that the subrogated creditor’s 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. This means that the claimant does not necessarily occupy exactly the same position as the discharged creditor in every respect. Whilst these new rights often mirror the characteristics and content of the rights which were previously held by the creditor, and cannot be greater than those rights, they need not resemble them in every respect. For example, the subrogated creditor does not need to enforce the rights by suing in the creditor's name or joining the former creditor as a party to the proceedings. (In other circumstances where the right of subrogation is exercised in respect of subsisting, as opposed to discharged, rights (for example where an insurer takes over an insured's claim against a third party) the position may well be different.) I gratefully adopt the above summary of the nature of the right of subrogation from the discussion contained in paragraphs 8.05 – 8.14 of Subrogation, Law and Practice, Mitchell and Watterson, to which we were referred in the course of argument. The analysis is based inter alia on the following authorities:

Thus whilst TIL did not purport to rely on the SC Charge when appointing the Receivers (and, indeed, had no reason to do so, since Mr Day’s claim to rescission had not yet been raised), and purported to rely only on the TIL Charge to make the appointment, that in my judgment was immaterial. As Lord Hoffmann emphasised in Banque Financière de la Cité v Parc (Battersea) Ltd (and similar statements of principle are contained in the speeches of Lord Clyde and Lord Hutton), subrogation is a means by which the court regulates the legal relationships between parties in order to avoid unjust enrichment and the precise manner in which it operates may vary according to the circumstances of the case. In the present case, on the hypothesis that the TIL Charge was voidable, the doctrine of subrogation, in conferring a new equitable proprietary right on TIL, would have operated to entitle TIL to the notional benefit of the SC Charge for the purposes of securing repayment of the TIL Loan made under the terms of the TIL Loan Facility. The SC Charge included - at clause 13.1 - the right to appoint receivers:

“at any time after the Lender shall have demanded payment of any of the Secured Liabilities or after any breach by the Chargor of any of the provisions of this Charge or the occurrence of an Event of Default… ”

Contrary to Mr Warwick's submissions, subrogation does not require that TIL has to demonstrate a demand for payment of the "Secured Liabilities" as defined in the SC Charge, or a breach of the provisions of the SC Charge or the occurrence of an Event of Default as likewise so defined. Such a requirement would be nonsensical since those “Secured Liabilities” had in fact been paid, so necessarily there could no longer have been any breach of the provisions of the SC Charge or the occurrence of an "Event of Default" thereunder. On the contrary, all that the application of the doctrine requires is for TIL to show that, pursuant to the terms of its contractual arrangements with Mr Day (whether contained in the TIL Loan Facility or in the TIL Charge), it has either demanded payment of its indebtedness, or that there has been a breach by Mr Day of any of his obligations in the TIL Loan Facility or the TIL Charge or that there has been the occurrence of an Event of Default as defined in either of those instruments. Whilst the evidence did not disclose any demand by TIL for repayment of its loan, there was not, and could not have been, any dispute that Mr Day was in breach of the provisions of the TIL Loan Facility and the TIL Charge in failing to repay the facility on 9 November 2012 and that such failure constituted an "Event of Default” as defined in both the TIL Loan Facility and the TIL Charge. Accordingly, on the assumption that TIL was exercising rights of subrogation, it was clearly entitled to appoint the Receivers to take possession and sell the Property pursuant to such rights.

Mr Robins also submitted that a person who performs an act in reliance on one justification, which is proved to be incorrect, may subsequently rely on a valid justification which existed at the time, even if it was not known to him at the date he performed the act: Mr Robins referred inter alia to the following examples which adequately demonstrate the principle:

I consider that, even without recourse to this principle, the equitable doctrine of subrogation is clearly flexible enough in circumstances such as the present, where the secured creditor is not aware that there is any challenge to his security, to deem an appointment purportedly pursuant to a voidable security as one having been made pursuant to subrogation rights. However the general principle applied in the cases relied upon by Mr Robins strongly supports such an approach. As Mr Robins submitted, the determinative question is not whether the justification on which a person purported to act was valid; but rather whether a lawful justification existed at the time of the act, whether the person knew of it or not.

Accordingly, in my judgment, Mr Day’s argument that TIL did not rely expressly on the SC Charge when appointing the Receivers provides no defence to TIL’s claim for summary judgment.

I comment that the Court was not referred to any authority where a similar situation had arisen in the context of the exercise of subrogated rights, although one would have thought, that in the nature of things, such a situation would have arisen frequently.

Mr Day’s third ground of appeal

The third ground of appeal is a new argument, which Mr Day did not advance before the judge. I have already summarised his submissions at paragraphs 26 to 29 above. In summary, Mr Day contends that he has every prospect of establishing at trial that TIL would not have been entitled to any rights of subrogation or the creation of a new equitable charge in its favour, as any claim to such rights would be defeated by the application of the equitable defences, namely: “he who seeks equity must do equity” and “he who seeks equity must come with clean hands”. In particular Mr Warwick submitted on Mr Day’s behalf that the principle recognised in the line of authorities including Samuel Keller (Holdings) Ltd, Barclays Bank plc v Tennet and National Westminster Bank plc v Skelton supra to the effect that a mortgagor was not entitled to claim to set off an unliquidated claim for damages against a debt, secured by a mortgagee, so as to prevent its enforcement, did not apply in the context of equitable subrogation, which was based on the requirement to show unjust enrichment.

It was common ground between the parties that equitable defences can be raised against a claim for subrogation: see paragraph [44] of the judgment of Neuberger LJ in Cheltenham & Gloucester plc, supra. However I do not accept Mr Warwick’s argument that, if TIL sought to rely upon its payment of £3 million to Standard Chartered as entitling it to be subrogated to the SC Charge, without setting off, or giving credit for Mr Day’s unliquidated damages claim (which, according to Mr Day, far exceeded £3 million), TIL would not be "doing equity".

As Mr Robins submitted, the maxim “he who seeks equity must do equity” simply means that “any plaintiff who wishes to avail himself of an equitable remedy can only do so on terms that he fulfils his own legal and equitable obligations arising out of the subject matter of the dispute”: see Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (Butterworths, 2002), para 3-055. But the rights conferred on TIL by equitable subrogation to Standard Chartered's rights as chargee under the SC Charge, included the rights, as secured creditor, to enforce the charge by appointing receivers to take possession of, and sell, the charged property, and to apply the proceeds of sale in discharge of that proportion of TIL's debt as was equivalent to the sums TIL paid to Standard Chartered, notwithstanding the assertion of an unliquidated cross-claim by Mr Day as chargor. In such circumstances, where TIL is deemed to be a secured creditor and the cross-claim is unliquidated (and indeed, in the present case, unpleaded), I see nothing inequitable in the application of the well-established rule articulated in cases such as Samuel Keller (Holdings) Ltd, Barclays Bank plc v Tennet and National Westminster Bank plc v Skelton supra to the effect that a mortgagor is not entitled to claim to set off an unliquidated claim for damages against a debt, secured by a mortgage, so as to prevent its enforcement and the application of the sale proceeds in discharge of the secured debt. If, as Mr Warwick submits, the rule did not apply to a secured creditor seeking to enforce by means of subrogation the secured rights enjoyed by the chargee whose loan the former discharged, in circumstances where the chargor was seeking to rescind the secured creditor's charge, the concept of equitable subrogation would be emasculated precisely where it was most needed. That is particularly so in a case such as the present where, effectively, TIL, as chargor, has refinanced Mr Day's initial acquisition cost of the Property.

In this context Mr Warwick sought to rely upon a passage at paragraphs 7.121-122 of Subrogation, Law and Practice which referred to the Australian case of Re Trivan Pty (1996) 134 FLR 368 (NSW Sup Ct (Eq Div) where subrogation was refused on the grounds that the subrogation claimant had failed to do equity. According to the authors of Subrogation, Law and Practice, the facts of that case were as follows: the decision arose on an appeal from a liquidator's rejection of a proof of debt; the company in liquidation was a builder, which had been constructing premises for the applicant; following the appointment of a provisional liquidator, the applicant terminated the building contract and paid various sums which the builder owed to sub-contractors; the applicant's proof of debt was based on a claim to be subrogated to the rights of these sub-contractors against the builder, because of those payments. Young J denied the claim on the basis that the applicant had not offered to "do equity, and in fact do equity". The applicant had refused to pay over $3.2 million which the architect had certified as being due to the builder. It had therefore failed to do equity and so was not entitled to the remedy of subrogation. It was no answer that the applicant was not legally obliged to pay the money to the builder, because the appropriate process for the money to become payable under the terms of the contract had not been complied with, since this was "a technical legal answer to a claim which equity does not allow to be said by a person seeking equitable relief". To succeed in its claim for subrogation, the applicant would have needed to provide evidence that the builder had no claim at all, or, if it had a claim, that the applicant was willing to set off that claim against the amount that could be proved against the builder.

We were not provided with a copy of the decision of Young J but the facts as stated above are clearly distinguishable from the situation in the present case: first, the subrogation claimant in Re Trivan was not asserting secured subrogation rights, which carried with them (in this jurisdiction at least) the benefit of the Samuel Keller (Holdings) Ltd, Barclays Bank plc v Tennet and National Westminster Bank plc v Skelton principle to the effect that a mortgagor was not entitled to claim to set off an unliquidated claim for damages against a debt, secured by a mortgage, so as to prevent its enforcement; all the subrogation creditor was claiming was a personal right to subrogation to the sub-contractors’ claims; second, the builder’s cross-claim for $3.2 million was a liquidated debt claim, which the architect had certified as being due to the builder. So I derive no support for Mr Warwick’s submissions from this case or the passage in Subrogation, Law and Practice.

Mr Warwick further submitted that, because of TIL's insolvency, the court should not regard TIL as "doing equity" towards Mr Day, if that involved TIL exercising its right to take possession of the Property, applying the proceeds of the sale in discharge of the TIL Loan, in so far as it related to the £3,002,225.51 paid to Standard Chartered, and leaving Mr Day to prove as an unsecured creditor in TIL's administration or liquidation, in respect of his counterclaim.

Mr Warwick did not develop this submission by reference to what was actually decided in Samuel Keller (Holdings) Ltd, Barclays Bank plc v Tennet and National Westminster Bank plc v Skelton. But upon consideration, it seems to me that his submission raises the issue as to whether, in circumstances where there were clearly question marks as to whether TIL, as chargee, was in a financial position to meet any liability under an unliquidated counterclaim, the principle as articulated or recognised in those cases went so far as to entitle an insolvent chargee to apply the proceeds of the realisation of its security in the discharge of the charged debt, without providing for payment of the possible counterclaim, even in circumstances where it was highly doubtful whether the chargee would be in a financial position to meet the claim.

I start with the judgment of Megarry J at first instance in Samuel Keller (Holdings) Ltd. He said at page 47:

“' Certainly the concept that the appropriation of an unliquidated claim to pay mortgage debt by the mortgagor will effect a discharge nisi of that debt seems both novel and awkward. Unless and until the mortgage in this case is discharged in the appropriate way on actual payment and acceptance of the sum due, I think that the mortgage remains a mortgage, and that the mortgagee is entitled to any surplus proceeds of sale in the hands of the bank up to the amount properly due under the mortgage. A doctrine of the discharge of a mortgage debt by the existence of unilateral appropriation of an unliquidated claim is one to which I gave no countenance; I regard it as neither convenient nor just. Even where there is a claim which is both liquidated and admitted, and it exceeds the mortgage debt in amount, it may be to the interest of one party or the other, or both, that the mortgage and the mortgage debt should continue in existence. The rate of interest may be attractively high or seductively low; there may be fiscal advantages in keeping the mortgage alive; there may be new projects to be financed which make liquid cash preferable to the satisfaction of mortgage debts; and so on. Nor have I heard any reason why it should be the mortgagor who is to have a unilateral power to discharge the mortgage debt by appropriation without payment.” [Emphasis supplied.]

In the Court of Appeal Russell LJ, with whom the other Lord Justices agreed, having quoted the above passage, said at page 51 G:

“I entirely agree with what he there says and, accordingly, I uphold the decision of the judge not to stay the action against the bank.”

However Russell LJ went on to say, obiter at 51H-52B:

“I would only add this, that on a motion asking for an order restricting Keller from dealing with the money when received from the bank a case might be made that the money, when in the hands of Keller, ought to be regarded as in jeopardy having regard to the strong prima facie case (if one was made out) first of all that Lawton had got a very substantial cross-claim, and, secondly, that if the money were treated by Keller as free to be expended by Keller in the course of his business Lawton's cross-claim would be in jeopardy. I do not say that this would be so and I do not want to be thought to be encouraging further litigation, but it does seem to me that that could not possibly be so unless there be strong evidence that Keller's financial situation is one which is such as to give rise to such a claim. Anyway, it seems to me that as regards such a point here the mortgagor never reached the launching pad, and I say nothing to indicate whether I think he could ever lift off. Accordingly, I, for my part, would dismiss the appeal."

The reality here is that Mr Day's cross-claim is in jeopardy since any attempt to enforce it against TIL will be met by the realities of TIL’s insolvency and administration, which will result in Mr Day having no remedy other than his submission of a proof of debt in TIL's insolvency, in respect of his cross-claim. Does this mean that, although TIL cannot be prevented from appointing the Receivers to take possession of the Property and sell it, nonetheless TIL arguably should be restrained from applying the proceeds of sale of the Property in discharge of the subrogated debt of £3,002,225.51 and that, accordingly, the order of Sales J was wrong in permitting it, implicitly, to do so? In particular, does Russell LJ’s obiter dictum raise the possibility that, in considering defences to a subrogation claim by TIL, the court should evaluate the merits of any claim by Mr Day that TIL should not be entitled to exercise its subrogated rights as chargee? I do not think so.

My reasons for this conclusion are as follows. The principle which the Court of Appeal approved in Samuel Keller (Holdings) Ltd was Megarry J's conclusion that, notwithstanding the existence of an unliquidated cross-claim, unless and until a mortgage was discharged in the appropriate way on actual payment and acceptance of the sum due, the mortgage remained a mortgage, and the mortgagee was not only entitled to exercise his remedies of possession and appointment of receivers, but was also entitled to apply any surplus proceeds of sale up to the amount properly due under the mortgage in its discharge: see page 47 of Megarry J's decision. Thus the obiter dictum of Russell LJ quoted above actually was inconsistent with what Megarry J had decided and what Russell LJ had apparently approved.

The subsequent case of Barclays Bank plc v Tennet, by which this court is bound, clearly recognised, and articulated, the principle stated in Samuel Keller (Holdings) Ltd as one which, in the context of an unliquidated counterclaim by the mortgagor, nonetheless entitled the mortgagee/chargee to take possession of, and sell the property and to receive the proceeds of sale in satisfaction of the debt secured by the mortgage/charge (my emphasis). Thus, for example, Eveleigh LJ said at page 4 of the transcript:

“If there had been no mortgage, and if the bank had brought proceedings under order 14 for summary judgment in respect of monies due on an overdraft and then a counterclaim such as in this case had been pleaded, it seems to me that the court would have been fully entitled to give judgment in the figure claimed; and I see no reason why that should not have been done in the present case. When that happens the court is usually asked to grant a stay of execution pending trial of the counterclaim. It may or may not do so: it is a matter within the judge's discretion. But in this case, as the Sun claimed is one that is secured by mortgage, it is clear from the decision in Keller's case [1970] 3 All ER 950, [1971] 1 WLR 43 that the mortgagee is entitled to sell the property and to receive the proceeds of sale in satisfaction of that debt secured by the mortgage.” [My emphasis.]

Likewise, Fox LJ said:

“The second question is this. The appellant asserts the existence of a cross-claim for an unliquidated sum alleged to be far in excess of the £501,254.49 for which judgment was given. The question is, does that affect the bank's is right to judgment for the judgment sum?

In my opinion the answer is plainly no. That was decided by this Court in the case of Samuel Keller (Holdings) Lt v Martin's Bank [1970] 3 All ER 950, [1971] 1 WLR 43 to which my Lord has referred, which held that, until the mortgage debt was discharged by actual payment and acceptance of the sum due, it remained in existence notwithstanding that the mortgage or was asserting an unliquidated claim for an amount in excess of the mortgage debt. It seems to me, therefore, that on the authorities the appellant demonstrates no reason why this court should interfere with the judgment for the money sum."

At page 5, Slade LJ said:

“I agree. Two principal points have arisen for our decision as matters of law; namely (1) whether the order of the payment was rightly made by the learned judge, and (2) whether the order of the possession was rightly made.

As to the first, it is to be observed that the effect of the judgment was that the money judgment could only be enforced for practical purposes by way of execution under the legal charge, unless and until a further order of the court was obtained. The bank had called evidence before the judge by which it had mathematically proved its right to payment of the sum of £501,254.49. I see no reason whatever to suppose that the finding by the judge that that sum was due was erroneous. The only question in this context is whether the existence of the appellants' cross-claim for unliquidated damages made it wrong for him to make the order for payment. The judge did not hear the cross-claims. So we have to assume that they may be well founded. Indeed I am prepared to assume in the appellants' favour (though I have grave doubts whether this assumption is well justified) that the cross-claims might be found to exceed the amount of the mortgage debt. Nevertheless the decision in Samuel Keller (Holdings) Ltd v Martins Bank Ltd [1970] 3 All ER 950, [1971] 1 WLR 43 shows quite clearly that the bank is entitled to payment of the mortgage debt out of the proceeds of the property, regardless of the existence of the cross-claims, even if they exceed the amount of the mortgage debt; and we are bound by that decision. I would merely draw attention to a short passage from Lord Justice Russell's judgment in the Keller case (at page 51):

"However, speaking for myself, it seems to me clear that where the parties use a system of payment under a contract which involves in fact notional payment in full and a lending on mortgage of a sum, it could lead to abuse if the mortgagee was to be kept out of his undoubted rights, expressly provided for, by allegations of some connected cross-claim which may prove to be without foundation."

A fortiori it seems to me that these comments apply in a case such as the present, where there have been actual monetary advances by the mortgagee to the mortgagor. ” [My emphasis.]

The ratio of that case is binding on this court. In any event it seems to me that Megarry J's analysis of the rights of a mortgagee in Samuel Keller (Holdings) Ltd, as approved by this Court in the subsequent cases, would be wholly undermined if such rights were nonetheless subject to the possibility that a mortgagor could restrain the application by the mortgagee of the proceeds of sale of the mortgaged property in discharge of the secured debt. As I said, Mr Warwick did not argue his case by reference to, or in reliance on, the obiter dictum of Russell LJ, nor refer us to any authority which gave support for such a proposition.

Accordingly I see no reason for concluding that, because TIL is exercising subrogated rights as a chargee, or that the equitable doctrine of subrogation is based on the concept of unjust enrichment, either of those factors provide any basis for restraining the application of the proceeds of the sale of the Property in the discharge of TIL's secured debt to the extent of the quantum of the SC Loan. If a chargor attempting to exercise subrogation rights in circumstances such as the present, were to be kept out of its rights as a subrogated secured creditor, by allegations of some connected cross-claim which might prove to be without foundation, it would lead to precisely the same type of potential abuse as that referred to by Russell LJ in Samuel Keller (Holdings) Ltd and the other Lord Justices in Barclays Bank Plc v Tennet.

Nor can I accept the proposition that TIL’s insolvency (and therefore its likely inability fully to meet its liability under Mr Day’s cross-claim, if and when established) provides any basis for regarding TIL as not “doing equity” to Mr Day and thereby affording an equitable defence to the exercise of subrogation rights. As Mr Robins submitted, TIL’s insolvency is irrelevant; it means no more than that TIL’s assets must now be realised and distributed pari passu among its creditors in accordance with statutory scheme laid down by the Insolvency Act 1986 and the Insolvency Rules 1986. Under that scheme, the rights of secured creditors are preserved. It does not provide any, or any additional, reason for saying that TIL has not “done equity” to Mr Day or that TIL should not enjoy subrogated rights as a secured creditor.

Mr Warwick’s second argument under Mr Day’s third ground of appeal was to rely on the maxim “He who seeks equity must come with clean hands”. He submitted that TIL did not come “with clean hands” because it had obtained the money which it had paid to Standard Chartered to discharge the SC Loan, by fraudulent misrepresentation.

I reject this submission. It provides no defence to TIL’s entitlement to exercise subrogation rights as a secured creditor. As Mr Robins submitted:

“For the defence of unclean hands to operate at all, the impropriety complained of “must have an immediate and necessary relation to the equity sued for”. If the relationship to the cause of action relied on by the plaintiff is indirect, it is irrelevant. Mere general depravity is not enough.”;

see Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (Butterworths, 2002), paragraph 3-130, citing Dewhurst v Edwards [1983] 1 NSWLR 35 at page 51. I accept that statement as a correct articulation of the law and Mr Warwick did not seek to suggest otherwise.

In the present case, even if Mr Day were able to establish at trial that TIL had obtained money from its investors by fraud, such a fraud on third parties would not provide Mr Day with a ‘clean hands’ defence to a claim by TIL to subrogation. Such impropriety would not have “an immediate and necessary relation to the equity sued for”. Mr Day was not the victim of the alleged fraud on TIL’s investors; on the contrary, he benefited from it, since approximately £3,000,000 of the sum which he received was paid to Standard Chartered – with his consent and to his knowledge - to discharge his liabilities to the latter under the SC Loan. Likewise, even if Mr Day were able to establish at trial that TIL had misrepresented its financial position to him, that fact would likewise not provide “an immediate and necessary relation to the equity sued for”. TIL’s claim to subrogation arises from the fact that TIL paid approximately £3,000,000 to Standard Chartered in discharge of the SC Charge. The connection between the alleged misrepresentation as to TIL’s financial position and the basis for the claim to subrogation is tenuous to say the least, and can hardly be characterised as “direct”.

It follows that I conclude that there are no equitable defences available to Mr Day to defeat TIL’s claim to be subrogated to Standard Chartered’s secured rights. There is nothing in my judgment unfair or inequitable in TIL, by its administrators, seeking to enforce such rights against Mr Day.

For the above reasons I would dismiss Mr Day’s appeal on all grounds

As I have said, this was a new point taken by TIL before this Court by way of respondent's notice. Although we heard argument on the issue, I do not think that it is necessary or appropriate to decide it and I decline to do so. There was no cross-appeal by TIL against the judge’s decision to limit TIL’s recovery out of the proceeds of sale of the Property to the sums paid by it to Standard Chartered to discharge the SC Loan and the SC Loan. Therefore the issue as to counter-restitution would only become relevant in the present appeal in circumstances where the Court held that the existence of Mr Day’s unliquidated counter-claim, and his notional ability to set that off against the TIL Loan, prevented TIL from asserting secured subrogation rights. But on the basis of that hypothetical scenario, it would seem unlikely that the Court would rule out the possibility that counter-restitution could be effected by means of set off of Mr Day’s unliquidated claim for damages.

The issue potentially has wide ramifications for a case where the creditor, against which rescission is sought, is not secured. In all those circumstances, and particularly where the point was not taken below, I do not think that is appropriate to determine the question on this appeal.

Accordingly, I would dismiss Mr Day’s appeal.

I agree with Gloster LJ’s judgment and with the result she proposes, except in relation to the final point raised by TIL as to counter-restitution. I will, therefore, add a few words of my own in deference to the arguments that were addressed to us.

First, I do not think that Mr Robins was right to submit that the judge reversed the burden of proof in relation to the question of whether there was a good arguable case that TIL obtained the loan agreement and the TIL charge by means of a fraudulent misrepresentation. The judge simply took into account that the administrators had not, despite having had the opportunity, rebutted what he saw as the vital piece of evidence from the chief executive of TIL, Mr Patellis, who was appointed in January 2011, namely that he had raised very serious concerns about the solvency of TIL at that time and then resigned when those concerns were not addressed. That was 6 months before the loan agreement and TIL charge were entered into. In my judgment, the judge was justified on the material before him in finding that the there was a good arguable case that TIL had obtained the loan agreement and the TIL charge by means of an implied fraudulent misrepresentation made to Mr Day, to the effect that TIL was solvent and was financially capable of making the loans that it had promised in the loan agreement.

In those circumstances, I think Mr Robins was right to submit that, logically, the next point was as to the effect of the alleged fraudulent representation, if proven. Mr Robins submitted that there could be no rescission of the TIL charge unless Mr Day repaid the monies that he had borrowed under the loan agreement, because the equitable remedy of rescission was barred unless restitutio in integrum could be achieved or, put another way, there was counter-restitution. Mr Warwick relied in response on Halpern v. Halpern [2008] Q.B. 195 where Carnwath LJ pointed out at paragraph 75 that the essential point was that the representee should not be unjustly enriched at the representor’s expense, so that the primary objective did not always have to be to restore both parties to their previous positions. He relied also on the Alberta Supreme Court decision in Keatley v. Churchman 65 D.L.R. 357 at pages 359-361 per Clarke JA to a similar effect.

It is worth noting that Mr Day has never actually purported to rescind the loan agreement and the TIL charge on the basis of the alleged fraudulent misrepresentations. But even assuming he had, he could not, I think, have validly done so without repaying the loan that TIL had provided to him. If he were to be permitted to rescind without paying back the monies loaned, he would indeed be unjustly enriched, certainly at a time when his claims for damages for fraudulent misrepresentation are just that – claims.

Moreover, it is no answer to this obstacle for Mr Day to suggest that he has a good cross-claim for damages for fraudulent misrepresentation that will over-top the loan, because that is precisely the point of the line of authority to which Gloster LJ and the judge have referred culminating in National Westminster Bank plc v. Skelton [1993] 1 All E.R. 242. Thus, for Mr Day to get over the hurdle of the need to make restitution of his loan he must either succeed in his claim for damages or persuade the Supreme Court that the Skelton case should be the subject of an exception in a case of this kind. As was realistically accepted by Mr Warwick, it is not open to this court to depart from the Skelton line of authority, by which we are clearly bound.

This, in my judgment, provides one answer to the appeal, because if Mr Day is not presently entitled to rescind the TIL loan agreement without making counter-restitution, then the administrators do not need to rely on subrogation at all.

If, however, I were wrong about that, and the administrators were to need to rely on the doctrine of subrogation so as to be subrogated to SCB’s rights under the SCB charge, a similar problem awaits Mr Day, as the judge found. As Neuberger LJ said in giving the judgment of the court in Cheltenham & Gloucester plc v. Appleyard [2004] EWCA Civ 291 at paragraph 33, “subrogation is a remedy principally aimed at preventing unjust enrichment” (see Lord Diplock in Orakpo v. Manson Investments Ltd [1978] A.C. 95 at page 104C-D, and Millett LJ in Boscawen v. Bajwa [1996] 1 W.L.R. 328 at 338G-339C, and Lord Hoffmann in Banque Financiere de la Cite v. Parc (Battersea) Limited [1999] 1 A.C. 221 at page 236E-F). Where there is an equitable remedy against a party that would otherwise be unjustly enriched, one objection to its utilisation may obviously be that the party in question would not be unjustly enriched were it to be denied.

In this case, however, for the reasons I have already given, Mr Day would be unjustly enriched if the TIL charge were rescinded. The same applies if the TIL charge were rescinded and the administrators were denied the right to enforce the SCB charge as if the benefit of that charge had been assigned to TIL, because the monies advanced by TIL to Mr Day were used by Mr Day to discharge his debt to SCB. In that situation, Mr Day would take the property free and clear of both the TIL charge and any rights arising from the putative assignment of the benefit of the SCB charge to TIL.

Mr Warwick sought, once again, to answer this point by saying that Mr Day would not be unjustly enriched because of his cross-claim for damages for fraudulent misrepresentation which overtops the SCB loan. But that defence is blocked off by the line of authorities culminating in Skelton. Mr Warwick said that was not so, because Nourse LJ in Ashley Guarantee v. Zacaria [1993] 1 W.L.R. 62 at page 66B-H had stated the principle as being that a “legal mortgagee’s right to possession of the mortgaged property cannot be defeated by a cross-claim on the part of the mortgagor, even if it is both liquidated and admitted and even if it exceeds the amount of the mortgage arrears”. He pointed to the reference to the “legal mortgagee’s right” and said that it could, or should, not apply to an equitable chargee’s right. As it seems to me, however, the principles of unjust enrichment that underlie the principle of equitable subrogation lead to the same result. The remedy will only be denied if it can be shown that Mr Day would not be unjustly enriched if it were denied. But if the remedy were to be denied to the administrators, Mr Day would take an unencumbered property, which he would never otherwise have obtained without paying off the loan. He would, therefore, be unjustly enriched, unless an arguable claim to damages for fraudulent misrepresentation were sufficient to outweigh that injustice. I do not think it is.

The position, absent the deprivation of the administrators’ right of subrogation, is that they will recover the value of the property now, but both their claims for the balance of the TIL loan, and Mr Day’s claim for damages will be dealt with in the normal way through the courts or in TIL’s insolvency. Neither party can claim to be disadvantaged by the operation of the statutory insolvency scheme that provides for the pari passu distribution of the assets of both TIL and, if insolvency supervenes as a result of these events, Mr Day. The statutory insolvency scheme is designed to be as just as the limited funds of the insolvent debtor allow.

For these reasons too, I would dismiss Mr Day’s appeal.

I agree with both judgments.