Subrogation under English law is a doctrine which allows one creditor in certain circumstances (usually where some form of payment to another creditor of the same debtor is made) to acquire rights against a debtor which may significantly improve its position as against that debtor. It is a common mistake to assume that this occurs by transferring those rights from one creditor to another. In fact subrogation operates not by assigning the benefit of the relevant third party's security but by creating new security rights in the hands of the subrogated creditor similar to those held by that third party. As the following case shows this can be an important distinction in some circumstances.
T had lent money to D and had taken security in relation to the loan. The loan had been used to pay off D's secured creditor SC Bank. T and D fell out and T purported to appoint receivers under its own security. D claimed the receivers were not validly appointed as he had grounds for rescinding the loan agreement based upon the fraudulent misrepresentations of T. If D succeeded in this argument the security D gave T would be invalid as there would be no indebtedness to secure under the loan agreement. It would follow that the appointment of the receivers under that security would be a nullity.
T claimed that even if its own security was invalid for the reasons put forward by D it was in any event subrogated to the security held by SC Bank because the money advanced by it to D was used to pay off SC Bank. Ingeniously T submitted that the appointment of receivers was still capable of being made validly by them under that security. D argued that the appointment document did not refer to T having the benefit of the SC Bank security and so could not have been effective under that security.
The Court of Appeal held that T's appointment of receivers was valid even if it assumed (without deciding the point) that the security D gave to T was invalid for the reasons D put forward. T did not mention the SC Bank security when it appointed the receivers but the Court of Appeal decided this was not necessary. D's argument that the appointment should have been made pursuant to the SC Bank security was wrong in principle. Subrogation did not transfer the SC Bank security to T – making it essential to mention that security as underlying the appointment of the receivers. Subrogation operated not by transfer or assignment but by creating wholly new security rights in T's hands – it was simply that the new security was on the same terms as the SC Bank security. The appointment of receivers by T was widely enough drawn to encompass any right which T might have to make the appointment and this included not only the express security D gave T but the new security rights T acquired by way of subrogation when SC Bank was paid off.
The decision shows just how flexible English law equitable principles can be in assisting a creditor. It is a common misconception that subrogation effects some kind of transfer of security rights from one creditor (usually the one who is paid off) to the subrogated creditor. That is not the case. Equity confers on the subrogated creditor new rights albeit ones co-extensive in many respects with the original security held by the relevant third party. A small but critical distinction in this case which saved the potential complications of dealing with the fallout from an invalid appointment of a receiver.