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.
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 and the security would fall with the loan agreement if he succeeded. T claimed that even if its own security was invalid it was subrogated to the security held by SC Bank and the appointment of receivers (though not referring to that security) was still capable of being made validly by them.
The Court of Appeal held that T's appointment of receivers was valid even if its own security failed. Even though T did not mention the SC Bank security when it appointed the receivers 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 created new security rights in T's hands and did not effect an assignment of the SC Bank security.
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 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.