Conquest v McGinnis & Anor

A surety’s right of subrogation may be excluded by agreement, including where the right arises under statute. Clear language is ordinarily required. Where money is provided as an advance towards a share purchase, with the agreed consequence that it remains with the company if the transaction fails, the arrangement is incompatible with any intention to create a secured debt or subrogation right. Even if repayment is implied, an agreement for an unsecured loan does not support subrogation. Restitutionary subrogation also requires enrichment at the claimant’s expense, an unjust enrichment, and no overriding policy reason to deny relief.

The liquidator of Rusjon Limited applied under section 112 of the Insolvency Act 1986 for directions concerning a £100,000 sum paid to the company’s bank as additional security for its overdraft. The payment had been made on behalf of Brian McGinnis, who had agreed with the company’s directors to provide financial support as part of a proposed acquisition of shares.

The proposed share transfer never occurred. The liquidator sought a declaration whether either respondent was subrogated to the bank’s fixed charge or otherwise beneficially entitled to the receivership surplus.

1. Disposition. The court declared that neither respondent had any beneficial entitlement to the surplus funds, whether by subrogation or otherwise.
2. The payment was made by Brian McGinnis as part of his financial commitment towards the proposed acquisition of shares. The parties intended that it was not a repayable loan. If the performance criteria were not met and the share sale failed, money already provided to meet the company’s financial requirements was to remain the company’s property.
3. A payment by a surety towards a secured debt prima facie engages subrogation. Section 5 of the Mercantile Law Amendment Act 1856 gives the surety rights against the principal debtor and in the creditor’s securities. Those rights may nevertheless be excluded by agreement, and clear and explicit language will normally be required.
4. On the contractual analysis, the parties’ arrangement was incompatible with any intention that McGinnis should become a secured creditor by subrogation. The money was an advance towards the purchase price of shares and was used, with the vendors’ agreement, to reduce the company’s indebtedness. The same result would follow if the money had been paid directly to the company.
5. Even if an obligation to repay could be implied, it would be no more than an obligation to repay an unsecured loan. Applying the principle in Paul v Speirway Limited [1976] Ch 220, approved in Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221, subrogation has no application where the parties intended only an unsecured loan.
6. The restitutionary analysis led to the same conclusion. Although the company was enriched at McGinnis’s expense, the enrichment was not unjust because it reflected the parties’ intention if the targets were not met and the share sale did not proceed. The alternative issue of acquiescence and the question of Berkeley Applegate relief therefore did not arise.

This was a first-instance application in the High Court. The application was initially listed in the Applications Court and was subsequently directed by Rimer J to proceed as an application by order.