Kali & Burlay v Chawla & Ors

JUDGE HODGE QC: In a judgment delivered orally, and then handed down in writing, yesterday, I set out my findings of fact, and my reasons therefor, following the trial of this action on the 9^th through to 13^th July and 23^rd, 26^th and 27^th July. I indicated, in the final paragraph of my judgment (at paragraph 62), that the consequences of those findings of fact would be a matter for legal submissions, after which I would deliver a further judgment. This is that further extemporary judgment.

After I handed down my judgment yesterday, and as had originally been envisaged on the last day of the hearing (27^th July), I adjourned (at approximately 12.45 yesterday) for all parties to consider the legal implications and consequences of the judgment on issues of fact which I had handed down. This morning, I heard submissions, first from Mr Gillis for Kali and Burlay, then from Mr Williams for Mrs Advani, then from Ms John for the Bank. I was then briefly addressed by Mrs Chawla on her own behalf, who addressed me principally on matters of fact, taking issue with my findings of fact in my judgment of yesterday; and finally by Ms Chawla, who indicated that she was not able to deal with any matters of law and did not have anything to say, although she indicated that her father would in due course be asking me for permission to appeal.

Mr Gillis’s submissions embraced three areas: first, Mr Chawla’s breach of duty to Burlay whilst acting as a de facto director of that company; secondly, the beneficial ownership of the property in the light of the recent decision of the House of Lords in the case of Stack v Dowden (cited in my judgment of yesterday); and, thirdly, the effect, or lack of effect, of the transfer of the property executed by Mr Chawla, but not by Mrs Chawla, in favour of Mrs Advani, and, in particular, the application to that transfer of the provisions of Section 423 of the Insolvency Act 1986 and the doctrine of sham.

Mr Williams’s submissions embraced, first, the beneficial ownership of the property, where he endorsed what Mr Gillis had said entirely and, in addition, referred me to a further authority, the case of Heseltine v Heseltine [1971] 1 WLR 342. In particular, he took me to observations in the judgment of Lord Denning MR in that case, at page 347E, relating to four houses in Dittisham in Devon that had been purchased in the name of the husband in that case but had been paid for out of a joint account of both husband and wife, the moneys in which had been derived solely from the wife. It was held in that case that the husband, as legal owner, held the four properties on trust for the wife. I have not found any particular assistance from that case for the simple reason that that was a purchase in the sole name of a husband, albeit utilising his wife’s moneys, and we are here concerned with a purchase in the joint names of Mr and Mrs Chawla. As the House of Lords in Stack v Dowden indicated, very different principles apply to a purchase in joint names from those which apply to a purchase in the sole name of one spouse or cohabitee.

Mr Williams also addressed me on the issues of sham and of transactions in defraud of creditors. Whilst not endorsing what Mr Gillis had said on that issue, Mr Williams acknowledged that, in the light of my findings of fact, he would be unable to persuade me that I should not make a finding, as a matter of law, that the transfer to Mrs Advani was a sham and/or a transaction in defraud of creditors.

Mr Williams did seek to advance a claim against Mrs Chawla that Mrs Advani should be entitled to recover a sum to reflect Mrs Chawla’s occupation of the property since late May of last year. He sought to advance such a claim on the footing that Mrs Advani had been making the payments under the mortgage, and yet Mrs Chawla had been enjoying the beneficial occupation of the property; and, in those circumstances, Mrs Advani should be entitled to look to Mrs Chawla for reimbursement of the mortgage payments. He sought to put it on the basis of some form of subrogation to Mr Chawla’s claim as sole or principal beneficial owner of the property. I indicated that, since, as Mr Williams acknowledged, this was a claim that had not been formulated in that way in the pleadings, and no prior notice of it had been given, it would not be appropriate for me to allow that claim to be pursued at the present time, and in the present circumstances, particularly given Mrs Chawla’s status as a litigant in person.

It emerged that the real reason that Mr Williams wanted to advance the claim at this stage - albeit it had not been foreshadowed by any form of amended statement of case - was that Mrs Advani accepted, as she has throughout, that she is liable to account to Mrs Chawla for her one-half share of the proceeds of the endowment policy that had been paid by Scottish Widows to Mrs Advani in the total sum of £28,000-odd. Mrs Advani has always accepted, since the inception of the possession proceedings and Mrs Chawla’s defence thereto, that she is liable to account to Mrs Chawla for this one half sum. Mr Williams’ concern was that he did not want his client to find herself having to make that payment, and then find that, because Mrs Chawla was in India, she had no assets in this jurisdiction against which to enforce any claim his client might have against Mrs Chawla arising out of her occupation of the property. I indicated that the appropriate way to deal with that would be in the context of an application to stay enforcement of any judgment that might be entered in Mrs Chawla’s favour against Mrs Advani for the recovery of that sum of some £14,000, no doubt with interest. Mr Williams indicated that he was content to deal with the matter on that basis.

Ms John’s submissions were directed to the issue of subrogation of her client bank to the former Lloyds TSB charge over the property which had been created at the time of its original purchase and which, undoubtedly, was a valid legal charge entered into by both Mr and Mrs Chawla; and she also addressed me on the Bank’s claim against Mrs Advani in the way in which she had formulated it at paragraphs 19(1) and 19(2) of her original skeleton argument dated 16^th July 2007. Essentially, she claimed that the Bank had been under a mistake in advancing the sum of £102,000 to Mrs Advani under the misapprehension that she was acquiring a good title to the property as a result of the transfer to herself; and that, further, Mrs Advani was in breach of an implied obligation to give good title by way of security over the property to the Bank, which, in view of the invalidity of the transfer to Mrs Advani, was not something that she had done. To some extent, that basis of claim has been overtaken by events in that there are now, as I understand it, defaults in repayment by Mrs Advani of the monthly sums due under the mortgage such that, under the terms of the mortgage conditions incorporated within the legal charge, the full amount of the debt has now become due and owing in any event to the Bank from Mrs Advani.

In those circumstances, Ms John indicated that I should simply declare that, insofar as the principal sum of £102,000 originally advanced, together with any interest thereon, was not discharged out of the Bank’s existing security in the form of its subrogated rights to Lloyds TSB and its equitable charge ranking subsequent to the charge in favour of Kali, then Mrs Advani should be liable to the Bank for the balance of its advance. Mr Gillis indicated a concern on the part of Kali as regards the precise formulation of the declaration; but I am satisfied that that is a matter of drafting which should be capable of resolution between Mr Gillis and Ms John.

Mr Williams, responding to Ms John’s submissions, indicated that he could not resist the restitutionary or contractual claims; nor could he, on behalf of Mrs Advani, resist the claim by way of subrogation to the Lloyds TSB charge.

Against that background, I deal with the remaining legal matters. I take them in the order in which they were presented by Mr Gillis.

First, the issue of Mr Chawla’s position as regards the money that was paid to him by FNH. Mr Gillis submitted that, in giving the payment instruction of 20^th April 2001 at bundle B1 (1) page 85 - and which (contrary to Mr Chawla’s case) I have found was a genuine document - Mr Chawla was acting as a de facto director of Burlay; but, by giving that payment instruction, he was acting in breach of the duty which, as such de facto director, he owed to Burlay, at least as regards the half share of the net commission entitlement that was properly due, through Burlay, to the Saraf family trust. I accept that submission. It seems to me that it is fully supported by the findings of fact that I have already made in my judgment.

I further accept Mr Gillis’s submission that, in giving that payment instruction, Mr Chawla acted in breach of the duties which he owed to Burlay. I do not consider that it is strictly necessary to find whether he was acting as a de facto director, although my inclination is that in fact he was. The reality of the matter is that he was clearly acting, in the eyes of FNH and its representative, Monsieur Jean-Paul Demeure, as agent for and on behalf of Burlay in giving that payment instruction. In directing that payment to be made into an account in which, as I have found (and contrary to Mr Chawla’s evidence and case), only he had an interest, I have no doubt that he was acting in breach of the duties which he owed as an agent, if not a de facto director - as I am inclined to think he was - of Burlay. In so acting, he was clearly acting in a conflict of interest situation; and he was misappropriating money that was properly due to Burlay and for which, to his knowledge, Burlay was liable to account to the Saraf family trust. As Mr Gillis put it, no director (nor, I would add, agent) of a company is allowed to treat the company’s assets as his own. I am further satisfied that Mr Gillis was right to submit that, in consequence, Burlay has a good claim against Mr Chawla for the amount of the half share of the commission (less agreed expenses) that was properly payable to the Saraf family interests, through Burlay. I am satisfied that the appropriate amount, after allowing for the agreed allowance of €121,000, is the sum of €444,678. I am satisfied that Burlay was originally entitled to that sum; and that, by assignment, that liability is now enforceable by Kali.

The second of the issues upon which Mr Gillis addressed me related to the beneficial ownership of the property. In that regard I was taken to Stack v Dowden. I accept that it is necessary for me to make a finding as to the beneficial ownership of the property, principally for the purpose of the possession proceedings, but also because I am fully seised of all the relevant factual material, and because, in the course of enforcing the claimant’s unsecured claim (as I have found it to be) against Mr Chawla for the commission payable with interest, it may become relevant, in the context of a future application for a charging order against Mr Chawla’s interest in the property, to quantify the extent of that interest; and that, to that extent and in that sense, the issue of beneficial ownership is relevant also, albeit only for the purposes of enforcement, in the context of the debt action.

I was taken to a number of passages in Stack v Dowden. Mr Gillis began by making the point that that was a case concerning an unmarried couple, although a couple who had four children. There the female partner had provided the bulk of the finance but, except in relation to the property, they had kept their financial affairs strictly separate. The House of Lords, affirming the decision of the Court of Appeal, found that the female partner had a 65% beneficial interest in the property. I was taken to passages in the speech of Baroness Hale, who delivered the leading speech, at paragraphs 40, 56, 58, 59, 60 to 62, 68 to 70 and paragraph 92. I was also taken to the concurring speech of Lord Walker at paragraph 33.

In the light of the decision of the House of Lords (with Lord Neuberger dissenting) in that case, Mr Gillis accepted that the onus was upon the claimant to establish that the equitable interests of Mr and Mrs Chawla in the property were not held beneficially on an equal basis. He accepted that equity would follow the law, save in a very unusual case; and that the onus upon the claimant of displacing this presumption of equality was a heavy one. Nevertheless, he emphasised that the task of the court was to try to ascertain the parties’ shared intentions rather than imposing the court’s own view of what was fair. He placed particular reliance on paragraphs 62 and 70 as recognising that the parties’ common intentions might change over time, although recognising that at any one particular point in time those intentions of the parties must coincide and be the same. Mr Gillis submitted, and I accept, that the critical question here was, not what the interests of Mr and Mrs Chawla in the property were at the time of its purchase in 1989, but in 2005, by which time Mr and Mrs Chawla were divorced and had, for almost nine years, been leading separate physical and financial lives. He emphasised that one must focus upon the facts of the individual case.

Against that background, he submitted that the present was a very unusual case, and that everything pointed to Mrs Chawla having, by a date shortly after her divorce if not before, effectively abandoned and renounced any remaining interest in the property. He focused upon my findings of fact at paragraph 61 (11) of my judgment. He submitted, and I accept, that the fact that this was not a purchase of a matrimonial home for the permanent occupation of the parties made it easier to rebut the presumption of equality. Nevertheless, he conceded that, if one had concluded one’s focus at the time of the purchase of the property in 1989, it would have been difficult for him to argue that there was sufficient to rebut the presumption of equality resulting from equity following the law. However, he submitted that it was critical for the court to appreciate, and bear in mind, that the interests of the parties can change over time; and he submitted that all of the facts, and, in particular, the physical and financial separation which took place between Mr and Mrs Chawla from the end of 1996, showed that the common intention of the parties was that, thereafter, the property should be Mr Chawla’s alone. He drew my attention to my findings of fact at subparagraphs (v) onwards of paragraph 61 (11) of my judgment: the fact that the balance of the purchase price had been provided by Mr Chawla; that, after December 1996, Mr and Mrs Chawla had kept their financial affairs and dealings entirely separate; that even before 1998, Mr Chawla had paid all of the expenses and outgoings for the property; that from that date, even Mrs Chawla had acknowledged that she hade made no contribution to the expenses and outgoings of the property. Those factors, Mr Gillis submitted, fed through in relation to the property to produce my findings at subparagraphs (xii) and (xiii) that Mrs Chawla had not asked, or expected, her former husband to account to her for any of the rental income for the property; and that, as from the time of her divorce, if not before, Mrs Chawla had regarded herself as having no continuing interest in the property. Her own understanding was that she had no continuing interest in the property; and that understanding was physically manifested by the fact that she had last lived in the property in 1999, and had not even visited it between 2001 and May 2006. Mr Gillis also relied upon my finding at paragraph 61 (12) that Mr Chawla had not regarded his former wife as retaining any continuing interest in the property. That, combined with my finding that Mrs Chawla had regarded herself as having no continuing interest in the property, was sufficient to discharge the heavy burden that lay upon the claimant, pursuant to Stack v Dowden, of establishing that the property was beneficially Mr Chawla’s alone. Mr Gillis indicated that the only factor that Mrs Chawla could properly pray in aid in support of a continuing interest in the property was the fact that, in law, she had remained liable on the original mortgage to Lloyds TSB; but he submitted, and I accept, that that is not a factor which carries great, or indeed any real, weight, because all the parties knew and appreciated that there was a substantial equity in the property; and therefore Mrs Chawla’s personal liability as joint mortgagor was an unreal one because, in the event of default, the mortgage debt would be recovered through the sale of the property, and from the proceeds of that sale.

I therefore accept Mr Gillis’s submission, supported by that of Mr Williams, that there was a shared intention on the part of the parties, from the time of the divorce in February 2001, if not before, that Mrs Chawla should no longer have any beneficial interest in the property. In my judgment, that legal consequence flows from my findings of fact.

In the course of her brief address to me, Mrs Chawla made the points that she had never borrowed any money from Kali, nor had she signed any papers regarding the property; that the property had been selected by her, purchased by her and decorated by her; and that, after 1999, her understanding had been that the mortgage had been paid out of the rents from the property. She said that that was why she never came to the property until 2006, shortly before she understood the mortgage was to be repaid from the proceeds of the joint endowment policy.

I have already made my findings of fact; and in the light of those findings I am unable to accept Mrs Chawla’s submission as leading me to conclude anything other than that the shared intention of the parties was as I have indicated: That, at least from the date of the divorce, if not before, Mrs Chawla should no longer have any beneficial interest in the property.

On the issue of sham transaction and Section 423 of the Insolvency Act, I am satisfied, for the reasons given by Mr Gillis, that Mr Williams was entirely correct to acknowledge that, in the light of my findings of fact, he was in no position to persuade me that the sale to Mrs Advani was anything other than both a sham and a transaction in defraud of creditors.

Mr Gillis’s submissions on Section 423 were essentially set out at paragraphs 79 through to 88 of his original skeleton argument dated 4^th July 2007. It is quite clear, on the evidence, and in the light of my findings, that this was a transaction at a significant undervalue in the sense that, as required by Section 423 (1) (c) of the 1986 Act, the value of the consideration received was significantly less than the consideration provided. That follows from my findings of fact and, indeed, was acknowledged as such by Mrs Advani in the course of evidence when she accepted that the mortgage valuation in October 2003 was £165,000, whereas the purchase price was only £120,000. The unchallenged retrospective expert valuation evidence is that the extent of the undervalue was even greater, in that the expert valuer placed a retrospective value on the property in February 2004 of £200,000. Mr Williams conceded, in my judgment entirely correctly, that, given that there had been no antecedent binding contract of sale and purchase, the date of the transfer (February 2004) was the relevant date for the purpose of ascertaining any undervalue.

So far as the suggestion (that at one stage I canvassed) that one should only consider the effect of the transfer of Mr Chawla’s share, given that Mrs Chawla’s signature was, as I have found, forged on the transfer document to Mrs Advani, the answer is effectively twofold. First, as I have found, Mrs Chawla herself had no beneficial interest in the property, and therefore one is not considering a transfer simply of Mr Chawla’s half share since he had the entire beneficial interest. In any event, I accept Mr Gillis’s submission that one cannot look simply at the effect of fraud on one side of the transaction only. Mrs Advani was not paying £120,000 for only a half interest in the property. She was paying it for the whole property; and even if the transfer had been effective only as to a half interest, she would still have had a claim against Mr Chawla, as transferor, for the value of the half share of which, on this hypothesis, and contrary to fact, she had been denied.

I am satisfied that the statutory purpose identified in Section 423 (3) (a) is clearly satisfied here. On the authorities, it is clear that the statutory purpose need not be the dominant purpose as long as it is a real and substantial purpose of the transaction. In the present case, however, I am satisfied that the real purpose of the transaction was, in the light of my findings, to put this property beyond the reach of a person or persons, including Kali, who were making, or might at some time make, a claim against Mr Chawla. I am satisfied that Burlay and Kali are victims of the transaction within the meaning of Section 423 (5) in that they were persons who were, or who were capable of being, prejudiced by this transfer. In the light of my findings of fact, the factual requirements required to support a claim under Section 423 are clearly established.

So far as sham is concerned, that issue was addressed at paragraphs 89 to 93 of Mr Gillis’s original written skeleton argument. A sham, as all lawyers who have considered the judgment of Diplock LJ in the celebrated case of Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802 will appreciate, is any transaction that creates the appearance of rights which are in fact different from those which were intended by all the parties to the relevant transaction. Here I accept Mr Gillis’s submission that my findings of fact fully support - and indeed are consistent only with - a finding of sham. In this regard, Mr Gillis referred me back to the penultimate sentence of paragraph 61 (12) of my judgment, where I indicated that I was satisfied that the real reason for the omission on the part of Mrs Advani to pursue any legal proceedings against Mr Chawla was that this had never been a genuine sale and purchase transaction. I accept Mr Gillis’s submission that that conclusion - that this was never a genuine sale and purchase transaction - is fully supported by all the other attendant features of the transaction; and that it explains a number of matters, namely (1) why the known undervalue did not matter, namely it was never intended to be a real transfer; (2) why the monies payable to the purchaser on completion were in fact paid to the vendor, Mrs Advani; (3) why the completion figures were manipulated, so that nothing beyond the Bank’s mortgage advance was actually paid by Mrs Advani on completion; (4) why the purchase proceeded without the redemption of, or even any enquiry as to the amount secured by, the Kali charge; and (5) why Mrs Advani had taken no proceedings against Mr Chawla when she discovered the outstanding Kali charge.

I am satisfied, in the light of my findings of fact, and on the evidence, that the sale, purportedly by Mr and Mrs Chawla but in fact by Mr Chawla alone, to Mrs Advani only created the appearance of a sale; and that, in fact, both Mr Chawla and Mrs Advani never intended there to be any real transfer of his beneficial interest in the property to her. I am satisfied, as appears from paragraph 61 (15) of my judgment and my fifteenth finding of fact, that the Bank’s claim to be subrogated to the Lloyds TSB charge is fully justified; and, if it were necessary to do so, I would also be satisfied that the Bank is now entitled to recover the unsecured part of any indebtedness, without prejudice to its rights under the legal charge and the annexed mortgage conditions from Mrs Advani, on the footing that the Bank advanced its moneys under a fundamental misapprehension as to the nature of the transaction that was being entered into between herself and Mr Chawla, and in the belief (contrary to the fact) that Mrs Advani was actually acquiring the legal and beneficial ownership of the property in its entirety when this was not in fact the case.

I trust that I have made my decision clear on all the legal issues that have so far been argued before me.

I have already handed down a written judgment on the factual issues; and this morning I delivered an extemporary oral judgment on the legal consequences of those legal findings of fact. I have now to decide a question as between the claimants (Kali and Burlay) and the Bank of Scotland as to the extent to which the Bank is entitled to be subrogated to the rights conferred by the charge originally granted, on Mr and Mrs Chawla’s purchase of the property, in favour of Lloyds Bank plc, on 11^th January 1989.

As set out at paragraph 88 of Mr Gillis’s original skeleton argument dated 4^th July 2007 on behalf of the claimants, it was accepted that, if the Bank did not itself acquire a valid charge, it was entitled to be subrogated to the earlier Lloyds Bank charge. I quote:

“to the extent that the money it advanced was used to discharge that prior secured debt.”

In that written skeleton, it was made clear that Kali and Burlay did not oppose that claim to subrogation.

This afternoon, Mr Gillis has reiterated the claimants’ acceptance that the Bank has a right to be subrogated in relation to the moneys advanced to discharge the Lloyds Bank debt. In other words, a right to be subrogated in the sum of £80,367-odd. However, Mr Gillis disputes that that right of subrogation extends further than the principal debt. In particular, he disputes that it extends either to interest or to costs.

His starting point is that subrogation, as a remedy, is granted in order to prevent unjust enrichment. He submits that there would be no unjust enrichment here to Kali, as the person entitled to the equity of redemption after repayment of the principal sum used to discharge the Lloyds TSB mortgage advance. He accepts that, if the Bank was not subrogated to the sum of £80,367-odd, Kali, as the subsequent encumbrancer, would be unjustly enriched; but such unjust enrichment does not, in his submission, extend either to the interest which Mrs Advani should have been paying to the Bank but has not, nor to the costs which the Bank has incurred in relation to these proceedings. He submits that the Bank’s claim to be subrogated in respect of both interest and costs confuses the Bank’s contractual rights as against Mrs Advani, as a secured borrower, with its restitutionary claim for subrogation founded upon unjust enrichment. He makes the point that the Bank of Scotland, through its solicitors Penn Legal, should be taken as always having appreciated that its charge was a second charge, ranking subsequent to Kali’s unredeemed charge, and that the Bank’s entitlement to interest and costs was therefore subordinate to Kali’s charge. He submits that the Bank cannot elevate its claims to security for interest and costs, through subrogation, into any rights superior to those enjoyed by Kali pursuant to its legal charge. He submits that that position - that the Bank ranks subsequent to Kali for interest and costs - is not adversely affected by either the reversal of the transaction under Section 423 or the sham nature of the transfer. Both the Bank’s entitlement to interest, and its claim for costs, are founded on its contract with Mrs Advani, and are nothing to do with its restitutionary claim for subrogation to avoid unjust enrichment. He makes the further point: why should the burden of the Bank’s costs fall on Kali? The Bank, through these proceedings, has been seeking to challenge Kali’s entitlement to security over the property. To that extent, the Bank, through Ms John, was making common cause with Mr and Mrs Chawla against Kali. That is illustrated by my summary of Ms John’s legal submissions at paragraph 39 of my judgment. Having adopted that position, Mr Gillis submits that it cannot be right for the burden of the Bank’s costs of undertaking that exercise, which failed, to fall on Kali.

In summary, Mr Gillis accepts that the principal sum is subrogated to the Lloyds’ charge, but the claim for interest and costs should not be treated in the same way, and fails.

Ms John referred me to a number of authorities in addition to the passage from Fisher & Lightwood’s Law of Mortgage 12^th Ed at paragraph 43.1 upon which Mr Gillis had placed reliance. Mr Gillis had drawn my attention to the statement that the rights of the prior encumbrancer are transferred by operation of law; and that where the later encumbrancer is subrogated, the mortgage is not kept alive, but the party who has the right of subrogation has the same rights as it if had been kept alive and assigned to him. In that connection, Ms John relies upon the authorities referred to at footnote 4, where it is stated that “…it would seem that the subsequent lender cannot obtain a rate of interest greater than that he agreed to accept”. The authority cited is Halifax Mortgage Service Limited v Muirhead 76 PCR 418 at 427 per Evans LJ, cited with approval by Neuberger LJ in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 29 at paragraph 76.

Ms John took me to paragraphs 75 and 76 of Neuberger LJ’s judgment. She also took me to the 2007 edition of Subrogation - Law & Practice by Mitchell and Waterson, and in particular to paragraphs 9.116 and 9.117. Reference is there made to the analysis of May LJ in the case of Filby v Mortgage Express (No 2) Limited [2004] EWCA Civ 759 at paragraphs 62 to 67 The authors record, at paragraph 9.116 of Mitchell and Waterson, that May LJ there explained that subrogation involves the generation of new rights; but he also considered that those new rights were prima facie identical in their characteristics and content to those which were formerly held by the creditor; and he thought that the claimant’s new right to interest would mirror the right to interest previously held by the creditor. Answering the objection that it would be unduly harsh to make Mrs Filby pay interest, he replied that she had been liable for a debt upon which interest had been payable, and had therefore been enriched when relieved from the need to make interest payments which would otherwise have fallen due.

The authors go on, at paragraph 9.117, to state, in line with that analysis, that the courts have adopted the following general practice when making interest awards in lending cases: First, the prevailing assumption is that the right to interest is a necessary component of the remedy of subrogation. Secondly, the rate of interest charged is ordinarily the rate which was formerly charged by the creditor. Thirdly, the rate of interest charged may, nevertheless, be capped at the rate which the claimant agreed to accept for its advance. Fourthly, such interest is ordinarily charged from the time when the debt was paid off, or the later time when the claimant’s subrogation rights arose.

Ms John submitted, on the authority of those passages, that the Bank is entitled to what she described as a “derivative award of interest”. She formulated the relevant principle thus: that it would unjustly enrich the borrower, or in this case Kali, as the person entitled to the equity of redemption, if the later encumbrancer, in this case the Bank, was subrogated to the principal debt, but not to interest. She submitted that it should be regarded as uncontroversial that the Bank is entitled to subrogation in relation to its interest claim. She submitted that that was supported by the authorities and the academic text writers to which I have referred.

In reply to that submission, Mr Gillis repeated that subrogation operates by way of unjust enrichment; and there would be no unjust enrichment here if the Bank was denied its claim to subrogation for interest. He submits that Kali may be enriched, but there would be nothing unjust about it.

Ms John’s submission on costs was said by her to flow from the principles of the remedy of subrogation, which are to prevent unjust enrichment. She referred me to paragraph 62 of May LJ’s judgment in the Filby case, emphasising the flexibility of the remedy of subrogation. She made the point that the Bank was the most - later she said the only - truly innocent party, and was the most removed from the underlying transactions. She submitted that every step it had taken had been to protect itself as a bona fide purchaser for value without notice. She submitted that it would leave the Bank in a very poor position in relation to costs if it was not entitled to claim that its costs were subrogated to the prior Lloyds Bank TSB security. She acknowledged that the Bank may have legal remedies elsewhere, but she emphasised that the Bank had bargained for a first legal charge, securing principal, but also interest and costs. She drew my attention to the terms of clause 1(1) (iii) of the Lloyds Bank charge dated 11^th January 1989, which included a covenant, secured by the Bank’s charge, that the mortgagors would pay to the Bank on demand “the costs, expenses and liabilities incurred by the Bank in relation to the mortgage or in exercising any of its duties and/or rights and/or powers contained in the mortgage or in enforcing the security hereby constituted”. She submitted that the rights of Lloyd Bank plc, to which the Bank was subrogated, extended to that entitlement to costs, expenses and liabilities incurred by the Bank.

She conceded that her claim to subrogation in respect of costs would not extend to the costs of the personal claims against Mrs Advani advanced at paragraph 19 of her skeleton argument dated 6^th July 2007. However, subject to that limitation, she submitted that subrogation applied to the Bank’s costs generally. She emphasised the flexibility of the remedy by way of subrogation; and submitted that it would not be acceptable to leave it with any costs exposure. The Bank had been entitled to be represented in these proceedings. She had not taken any undue excess of time in making the points that she did, both in cross-examination and in submission; and she emphasised the point that Kali had not been entirely successful in these proceedings. She made the point that Kali had asserted a claim to security in respect of its entitlement to commission assigned to it by Burlay; and, insofar as it claimed to be a secured creditor in respect of that commission entitlement, its claim had failed. She submitted that, unless subrogated in relation to costs, the person entitled to the equity of redemption, Kali, would be unjustly enriched. She indicated that she had been unable to find any authority either way.

In reply on the issue of costs, Mr Gillis again emphasised the flexibility of subrogation as a remedy. Here, he submitted, the Bank had been seeking to protect its own interests. He made the point that the Bank undoubtedly had a claim in principle against Penn Legal for its failure to secure to it the first legal charge which it had believed that it was obtaining, and which firm had left the Bank in the position of a second, rather than a first, chargee. He submitted that the Bank had a claim against Penn Legal in respect of that state of affairs; but it would be difficult to see, in principle, that Kali would have had any similar claim against Penn Legal. Given the flexibility of the nature of the remedy by way of subrogation, it would be wholly unjust, in those circumstances, to substitute for the Bank’s claim against Penn Legal, a restitutionary remedy, by way of subrogation, so as to extend the Bank’s subrogated rights to cover the costs.

In my judgment, Ms John is right on the issue of interest and Mr Gillis is right on the issue of costs. In my judgment, on the authorities - which I consider to be correctly summarised in the passage at paragraph 9.117 of the current edition of Mitchell and Waterson, which I have already cited - Ms John is right, for the reasons that she has given, to say that the Bank’s entitlement to subrogation extends to the interest. As May LJ is said to have indicated in Filby, had the Lloyds Bank charge not been redeemed from the proceeds of the Bank’s mortgage advance, the owner of the property would have remained liable to pay interest to Lloyds Bank. To the extent that the owner of the property has been relieved from the need to make interest payments to Lloyds Bank which would otherwise have fallen due, it can be said that the person entitled to the equity of redemption has been enriched. Looking at the justice of the situation, it seems to me that if I were to decline to allow the Bank, which had advanced the money to pay off Lloyds Bank plc, to claim interest on the amount of that advance at a rate no greater than that previously chargeable by Lloyds Bank plc, and to claim subrogation in respect of that interest entitlement, my failure to allow such a subrogation claim would result in unjust enrichment to the person presently entitled to the equity of redemption. I am satisfied that Ms John is right to say that, on the authorities, she is entitled to assert a right to subrogation in respect of interest on behalf of her client bank.

The position, it seems to me, is different in relation to the costs. Here there is no question of any costs having been incurred in relation to asserting the former validity of the Lloyds Bank charge or the Bank’s entitlement to subrogation to that charge. Here the Bank’s entitlement to subrogation, at least as to principal, was admitted and accepted by the person entitled to the equity of redemption, Kali. Ms John, on behalf of the Bank, challenged Kali’s security altogether. She has been successful in part, as have the other parties who mounted such a challenge; but she has failed on behalf of her client to deny Kali’s entitlement to a measure of security. It would, in my judgment, be wrong to treat the costs of that challenge as corresponding to costs of the kind contemplated by clause 1(a) (iii) of the Lloyds Bank legal charge. As Ms John herself submitted and emphasised, subrogation is a flexible restitutionary remedy, and one must strive to do justice between all relevant parties. As Mr Gillis submitted, it would be wrong, in my judgment, to allow the Bank, having failed to deny Kali its security altogether, to then effectively subordinate Kali’s security to the costs of undertaking that exercise. Moreover, it is, in my judgment, relevant to bear in mind the existence of the Bank’s claim against Penn Legal, and the lack of any corresponding remedy on the part of Kali.

In those circumstances, it seems to me that the claim to costs can, to some extent, be treated in the same way as would a claim to interest by the Bank in a sum in excess of the cap imposed by the entitlement to interest of the original mortgagee, Lloyds Bank plc. Here, I do not see that the costs that the Bank is claiming are equivalent to the costs that would have been incurred by Lloyds Bank plc in relation to its own mortgage, or in exercising any of its remedies, or in enforcing the security conferred by the mortgage. In my judgment, the costs incurred by the Bank fall outside the scope of that entitlement to costs, as modified by the remedy of subrogation to which the Bank is entitled.

For those reasons, therefore, I will hold that the Bank’s remedy by way of subrogation extends to interest on its charge, capped at the level payable to Lloyds Bank plc under its former charge; but does not extend to the costs of these proceedings.