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RIGHTS OF SUBROGATION
CONQUEST V MCGINNIS AND ANOTHER [2007] EWHC 2943 (CH) (HENDERSON J) (11 DECEMBER 2007)
^g
Background
Conclusion
The liquidator of a building company (the 'Company') sought a
direction as to whether either of the respondents were subrogated
or otherwise beneficially entitled to surplus funds in the
liquidator's hands remaining after realisation of a fixed charge in
favour of a bank lender to the Company (rhe 'Bank').
The Company had been looking for outside investors before
its liquidation. McGinnis and the directors of the Company had
drafted heads of agreement (the 'Agreement') for the sale of
50 per cent of the shares in che Company to McGinnis provided
that McGinnis met certain performance criteria during a trial
period by performing building contracts and by giving up to
£200,000 to the Company, If Mr McGinnis did not satisfy the
criteria, any money provided would remain the property of the
Company.
It was held that McGinnis had no beneficial entitlement to the surplus
funds in the hands of the liquidator. On the balance of probabilities,
McGinnis never expected to be repaid the money. He regarded it as a
payment on account for the purchase of shares in the Company pursuant
to the draft (but contractually binding) Agreement. McGinnis had
accepted the commercial risk his £100,000 may be lost and he did nor
demand repayment when the Company went into receivership.
The doctrine of subrogation was prima facie engaged. McGinnis
was a surety who had discharged part of the secured debt of the
principal debtor. However, under the Agreement, McGinnis's right of
subrogation had been bargained away. If the £100,000 was believed to
be repayable to the Company, such implied obligation could only be
to repay the money as an unsecured loan. Tlie doctrine of subrogation
does not apply to unsecured loans.
The share transfer did not take place. Tl:c performance targets
had not been met and the financial support not provided. However,
a sum of £100,000 was later deposited with the Bank as security
for rhe Company's overdraft facility pursuant to an irrevocable
undertaking to the Bank by a solicitor acting for McGinriis. Tbe
Bank appointed an administrative receiver. McGinnis did not
demand repaymenr uf the £100,000.
In addition to contractual contexts, subrogation is also an equitable
remedy to reverse or prevent unjust enrichment, 'ilie Company was
enriched, but not unjustly because this was what the parties always
intended to happen, even if the targets were not met and if the share
sale did not go ahead.
Jonathan Lawrence, K&L Gates
jonathan.lawrencei2)klgates.com, www.klgates.com
February 2008
Butterworths Journal of International Banking and Financial Law