Boscawen v Bajwa

Tracing is a process, not a remedy. It identifies what has happened to trust property and whether money used by a defendant represents that property. Subrogation is a proprietary remedy which may reverse unjust enrichment where misapplied trust money has discharged a mortgage over the recipient’s land.

The remedy does not depend on ratification or on a universal requirement that the claimant intended to preserve the discharged security. Where fiduciaries wrongly use their principal’s money to redeem a charge, equity may treat the security as continuing for the principal’s benefit. The equity arises when the charge is discharged. A debtor’s own payments towards redemption benefit the equity of redemption and rank behind the subrogated charge.

The appellants were judgment creditors of Mr Bajwa. They obtained a charging order over his registered property after a proposed sale had failed.

The purchasers’ mortgage lender, Abbey National plc, had advanced £140,000 to the purchasers’ solicitors for completion. £137,405 of that money was transferred to Mr Bajwa’s solicitors and was used, without a completed sale or replacement mortgage, towards discharging Halifax Building Society’s registered charge. Mr Bajwa later paid the balance needed to discharge that charge.

The deputy judge in the Chancery Division held that Abbey National was subrogated to Halifax’s charge and therefore had priority over the appellants’ charging order. The central issue on appeal was whether Abbey National could trace its money into the discharge and obtain a proprietary charge by subrogation.

Appeal dismissed unanimously. Lord Justice Millett gave the leading judgment, with which Lord Justice Waite and Lord Justice Stuart-Smith agreed.

1. A judgment creditor takes only the interest which the debtor has in the property. The decisive question was therefore whether Mr Bajwa’s interest remained subject in equity to a charge in Abbey National’s favour.

2. Abbey National could trace £137,405 of its trust money into the payment to Halifax. Tracing was the evidential and analytical process used to establish that application. It was unnecessary to invoke artificial rules for mixed funds because the solicitors’ records established an actual appropriation of that money.

3. Subrogation was available as the appropriate proprietary remedy. It was not a separate cause of action dependent upon an intention by Abbey National to become Mr Bajwa’s secured creditor. It prevented Mr Bajwa, through whom the appellants claimed, from retaining the benefit of the discharged charge at Abbey National’s expense.

4. The requirement of additional circumstances identified in unsecured-loan cases did not state a universal condition of subrogation. Here Abbey National had not intended to make an unsecured loan to anyone. The relevant payment was made by Hill Lawson as fiduciaries, and their intention was treated as an intention to preserve Halifax’s security for Abbey National pending completion.

5. Abbey National did not need to adopt or ratify the unauthorised payment. A beneficiary may elect to assert an interest in an asset acquired through a breach of trust without validating the transaction. Its equity arose immediately when its money discharged Halifax’s charge; the court’s order merely satisfied that pre-existing equity.

6. Mr Bajwa’s own payments of £2,595 and £1,342.41 did not rank equally with Abbey National’s subrogated charge. They enured for his equity of redemption and remained behind the charge to which Abbey National was subrogated. Abbey National was therefore entitled to the whole fund in court.

• Court of Appeal (Civil Division): Dismissed the judgment creditors’ appeal and upheld Abbey National’s priority by subrogation.
• High Court of Justice, Chancery Division: Mr E G Nugee QC, sitting as a deputy judge, declared on 27 May 1994 that Abbey National was entitled to a charge by subrogation to Halifax’s rights. The lower-court citation was not stated in the judgment.