Two recent decisions have underlined the enduring significance of subrogation in legal practice. A person who has this right or remedy is known as the subrogatee. The subrogatee stands in the shoes of another person to enjoy the benefit of securities, claims and remedies available to that other person.
In Banque Fiancière de la Cité v Parc (Battersea) Ltd, February 26 1998, a bank was declared subrogated to a first-ranking charge taken as security for a loan being refinanced by the bank. Significantly, the bank had not required security for its loan and, by virtue of the subrogation, was ranked in priority to another secured creditor.
The case turned on the bank's requirement that all intra-group debt of the borrower should be subordinated to the loan. The bank received a letter of subordination, purportedly signed by a director on behalf of all the companies in the borrower's group, but given without the knowledge of a secured intra-group creditor of the borrower. The House of Lords concluded that to deny relief would "unjustly enrich" the intra-group creditor and deny the bank those rights for which it had bargained. The repayment of the debt secured by the first charge would benefit solely the second chargee. This windfall could properly be prevented by granting subrogation as a restitutory remedy.
Three weeks earlier, in Faircharm Investments Ltd v Citibank International plc, the Court of Appeal also used subrogation as an additional ground for holding Citibank liable to compensate Faircharm for the proceeds of a life assurance policy. Faircharm had agreed to redeem a loan owed to Citibank in return for its agreement to pay over the proceeds of the policy over which Citibank had a charge. In the event, Citibank allowed the borrower to recover the proceeds from the insurance company. The Court reasoned that in redeeming the loan Faircharm was subrogated to Citibank's interest in the policy. Citibank owed a duty not to destroy or prejudice the rights to which Faircharm, as a subrogatee, was entitled. In reaching this conclusion, the Court applied recognized principles of insurance law to the law of mortgages.