Menelaou v Bank of Cyprus UK Ltd

Equitable subrogation may reverse unjust enrichment where a lender provides value by agreeing to release existing security, even though it neither owns nor directly advances the purchase money. The defendant’s enrichment must be sufficiently closely connected with the lender’s loss to constitute a transfer of value.

The court examines the substance of the transaction. A proprietary interest in the money used to complete the purchase is unnecessary where the lender’s binding agreement released that money and enabled the purchase. Subrogation to the unpaid vendor’s lien may then secure the value transferred, provided that the enrichment is unjust and no policy consideration requires refusal of the remedy.

The Bank held charges over the parents’ property, which was sold for less than their secured indebtedness. It agreed to release those charges in return for part-payment and a new charge over a replacement home bought in their daughter’s name. The new charge was invalid, but the purchase was completed using proceeds released by the Bank’s agreement.

The daughter obtained removal of the invalid charge. The Bank counterclaimed for an equitable charge by subrogation to the unpaid vendors’ lien. A deputy High Court judge dismissed the counterclaim in [2012] EWHC 1991 (Ch), holding that the purchase money neither belonged to nor was provided by the Bank and that the enrichment was therefore not at its expense.

The central issues were whether the Bank’s release of its existing security constituted a sufficiently closely connected transfer of value and, if so, whether subrogation was an appropriate remedy.

1. Appeal allowed unanimously. Floyd LJ, with whom Tomlinson and Moses LJJ agreed, held that the daughter had been unjustly enriched at the Bank’s expense. The Bank was entitled to the declaration sought, giving it an equitable charge by subrogation to the unpaid vendors’ lien.

2. Subrogation is an equitable remedy for reversing unjust enrichment, rather than an independent cause of action. The correct approach was first to ask whether the defendant was enriched at the claimant’s expense, whether the enrichment was unjust and whether policy nevertheless required refusal of relief. If those requirements were met, the court then had to determine whether subrogation was appropriate in the relevant class of case.

3. The daughter’s acquisition of the property free from the intended charge was an unjust and uncovenanted windfall. No policy reason required refusal of relief. The disputed question was whether that enrichment was at the Bank’s expense.

4. The necessary transfer of value began when the Bank became bound to release its existing charges. That agreement made the sale proceeds available to complete the replacement purchase. The later administrative release of the charges did not break the connection or mean that the enrichment had already occurred independently. There was a sufficiently close causal connection between the surrender of the Bank’s security and the daughter’s acquisition.

5. The Bank did not need a beneficial or proprietary interest in the particular money used for the purchase. It provided value by surrendering its security and was, in the substance of the transaction, the source of the money made available. Tomlinson LJ emphasised that the Bank controlled whether the proceeds could be used. Moses LJ considered the binding release agreement, rather than an imprecise appeal to economic reality, sufficient to establish the causal connection.

6. Bankers Trust Co v Namdar was distinguishable. There the provision of a guarantee did not make the bank the provider or controller of the funds used to discharge the secured debt. Here the purchase could not have proceeded without the Bank’s binding agreement to release its charges.

7. The deposit required no separate treatment. It was an earnest for performance and became part of the purchase price applied in satisfaction of the purchaser’s obligation on completion.

1. Court of Appeal (Civil Division): Allowed the Bank’s appeal unanimously and granted the declaration sought, reversing the dismissal of its subrogation counterclaim: [2013] EWCA Civ 1960.
2. High Court, Chancery Division: Mr David Donaldson QC, sitting as a deputy High Court judge, dismissed the Bank’s counterclaim because the purchase money neither belonged to nor was provided by the Bank and the enrichment was therefore not at its expense: [2012] EWHC 1991 (Ch).