Day v Tiuta International Ltd and others

In brief:

Judgement was given in the case of Day v Tiuta International Ltd and others: [2014] All ER (D) 06 (Oct); [2014] EWCA Civ 1246

The judge struck out the claimant's claim pleading set-off of his claim against the first defendant's (TIL) charge and entered summary judgment on TIL's counterclaims on the basis of subrogation of an earlier charge. The claimant appealed. The Court of Appeal, Civil Division, in dismissing the appeal, held that the judge had been entitled to approach the application for summary judgment on TIL's two alternate hypotheses. Further, the claimant's argument that TIL had not relied expressly on the earlier charge when appointing receivers over his property provided no defence and there were no equitable defences available to the claimant to defeat TIL's claim to be subrogated.

Summary

The claimant acquired the freehold of a substantial residential property and land. He subsequently borrowed funds in order to refinance the property (the SC loan) secured by a mortgage and charge (the SC charge). The claimant then entered into a loan facility agreement with the first defendant company (TIL) to enable him to refinance his existing borrowings in respect of the property and to redevelop the property (the TIL loan). He executed a charge in favour of TIL (the TIL charge) and received the first tranche of funds under the TIL loan, which was used to repay the sums due under the SC loan and SC charge, before he received further sums from TIL. TIL was placed in administration and the claimant was unable to continue with the development of the property because no further funds were released.

The claimant failed to repay the TIL loan and TIL appointed joint receivers of the property (the receivers). He issued proceedings against TIL and the second defendant administrators (the administrators), asserting an unliquidated claim for damages and contending that he could set that claim off against the TIL loan to release the property from the TIL charge and, thereby, invalidate the appointment of the receivers.

TIL and the administrators applied, under CPR 3.4(2)(a), to strike out the particulars of claim which raised the set-off argument and TIL sought summary judgment, under CPR 24.2, in respect of part of its counterclaim.

In response to the claimant's allegation that TIL had made fraudulent misrepresentations to investors to obtain the loaned funds, TIL argued that, even if the claimant was able to rescind the TIL charge for fraud, it would be subrogated to the SC charge in accordance with the doctrine of equitable subrogation, by virtue of the fact that it had paid funds in discharge of the SC loan and SC charge.

The judge struck out the relevant paragraphs in the particulars of claim where the set-off argument had been pleaded or relied on. He further held that, even if the TIL charge was to be rescinded or avoided on the grounds of fraudulent misrepresentation, TIL was entitled to be subrogated to the rights under the SC charge. Accordingly, the judge granted declarations that the receivers had been validly appointed and were entitled to market the property for sale, and an injunction to restrain the claimant from interfering with their possession of the property. The claimant appealed.

The claimant contended that:

(i) as TIL had contended that the TIL charge was valid, it had obtained all the rights for which it had bargained and could not have any rights of subrogation pursuant to the SC charge;

(ii) it had not been sufficient for TIL to have appointed the receivers by reference to the TIL charge and then to have sought to justify such appointment by reference to the SC charge or any new equitable charge created by reference to subrogation; and

(iii) he 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.

The appeal would be dismissed.

(1) TIL was not precluded from relying on the doctrine of subrogation on the alternative hypothesis that the TIL charge was voidable and, therefore, liable to be set aside or rescinded, merely because it had contended that the TIL charge was valid and enforceable. That was a fall-back argument relied on by TIL in the event that its contention that the TIL charge was valid and not liable to be avoided failed.

The judge had been entitled to approach the application for summary judgment on those two alternate hypotheses. Subrogation had not only arisen once the equity had been established at trial, once the court, having heard the evidence, had been in a position to make a decision as to the scope of the rights of subrogation.

Accordingly, it had not been inappropriate to determine the issue on an application for summary judgment. The judge had clearly been entitled to grant summary judgment (see [38], [40], [73], [84] of the judgment).

(2) The claimant's submission that it had not been sufficient for TIL to have appointed the receivers by reference to the TIL charge and then to have sought to justify such appointment by reference to the SC charge or any new equitable charge created by reference to subrogation would be rejected.

It was not supported by authority and was inconsistent with the concept of the equitable right of subrogation. Whilst TIL had not purported to rely on the SC charge when appointing the receivers and purported to rely only on the TIL charge to make the appointment, that had been immaterial. All that the application of the doctrine required was for TIL to show that, pursuant to the terms of its contractual arrangements with the claimant, it had either demanded payment of its indebtedness or that there had been a breach by the claimant of any of his obligations in the TIL loan or the TIL charge, or that there had been the occurrence of an event of default as defined in either of those instruments.

Accordingly, on the assumption that TIL had been exercising rights of subrogation, it had clearly been entitled to appoint the receivers to take possession and sell the property pursuant to such rights. The claimant's argument that TIL had not relied expressly on the SC charge when appointing the receivers provided no defence to TIL's claim for summary judgment (see [42], [44], [45], [48], [73], [84] of the judgment).

Halifax plc v Omar [2002] All ER (D) 271 (Feb) applied.

(3) There was no reason for concluding that, because TIL was exercising subrogated rights as a chargee or the equitable doctrine of subrogation was based on the concept of unjust enrichment, either of those factors provided 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.

Nor had TIL's insolvency and, therefore, its likely inability fully to meet its liability under the claimant's cross-claim, if and when established, provided any basis for regarding TIL as not 'doing equity' to the claimant and, thereby, affording an equitable defence to the existence of subrogation rights.

Even if the claimant had been able to establish at trial that TIL had obtained money from its investors by fraud, such fraud on third parties would not provide the claimant with a clean hands defence to a claim by TIL to subrogation. Accordingly, there were no equitable defences available to the claimant to defeat TIL's claim to be subrogated to secured rights. There was nothing unfair or inequitable in TIL, by its administrators, seeking to enforce such rights against the claimant (see [63], [64], [68], [73], [84] of the judgment).

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