Spencer Day v Tiuta International

The Court of Appeal dismissed Mr Day's appeal against Sales J's order which struck out parts of the particulars of claim and granted summary judgment to Tiuta (in administration) on parts of its counterclaim. The appeal raised whether a chargor's unliquidated cross-claim or an allegation of fraudulent inducement could prevent a chargee from enforcing security or prevent a chargee from being subrogated to an earlier charge that it had paid off. The court affirmed the established principle (as in Samuel Keller and related authorities) that a mortgagor/chargor cannot unilaterally appropriate an unliquidated, unadmitted cross-claim to defeat a mortgagee/chargee's right to take possession and to realise security. The court also held that equitable subrogation can operate where a lender's charge is voidable: if the later lender paid off an earlier secured creditor, the later lender may be subrogated to the earlier security to the extent of the sums paid. The appellant's equitable defences (including "he who seeks equity must do equity" and "unclean hands") were held not to prevent subrogation in the circumstances of this case. The Court declined to decide the separate point on counter-restitution raised for the first time on the respondents' notice.

Background and parties:

• Spencer Day (the appellant) obtained a loan from Tiuta International Limited (TIL) secured by a first legal charge over his property. TIL paid off an earlier lender (Standard Chartered) and took a charge. After delay and alleged late payments, TIL went into administration and further advances ceased. Receivers were appointed under the TIL security when Day defaulted.
• Day issued proceedings asserting unliquidated damages (including for alleged fraudulent misrepresentation inducing entry into the TIL facility) and contending that his cross-claims could be set off so as to release the property from the TIL charge; he also sought declarations and injunctive relief to prevent marketing and sale.

Procedural posture:

• Before Sales J, TIL applied to strike out the pleaded set-off argument under CPR 3.4(2)(a) and for summary judgment under CPR 24.2 on parts of its counterclaim (validity of the charge, validity of receivers' appointment, and entitlement to market the property and to an injunction restraining interference).
• The judge struck out the paragraphs pleading the unliquidated set-off and granted summary judgment on the specified parts of the counterclaim, accepting TIL's alternative case that, even if the TIL charge were rescinded for fraud, TIL would be equitably subrogated to Standard Chartered's earlier charge for the sums it had paid.

Issues framed on appeal:

(i) Whether subrogation can be invoked by a creditor who contends it obtained the charge bargained for (i.e. whether an asserted validity of the creditor's charge precludes relying on subrogation as an alternative); (ii) whether, to exercise subrogated rights, the creditor must re‑appoint receivers expressly under the subrogated security; (iii) whether equitable defences ("do equity" and "clean hands") or the mortgagor's unliquidated cross-claim can defeat subrogation; (iv) whether the judge erred in permitting an unpleaded fraud/rescission case to be run at the summary hearing.

Court's reasoning and disposition:

• The Court of Appeal held that it was legitimate for TIL to advance an alternative case of subrogation if the primary contention (that the TIL charge was valid) failed; a charge voidable ab initio does not preclude subrogation.
• Subrogation gives rise to an equitable proprietary right (a new equitable security) from the time the later lender pays the earlier secured creditor; the subrogated creditor need not enforce by acting in the name of the discharged creditor and need not repeat the appointment of receivers under the earlier security to rely on subrogated rights.
• The established authorities that a mortgagor cannot defeat enforcement by asserting an unliquidated cross-claim were applicable to subrogation claims of this nature; allowing the chargor to defeat the subrogated secured creditor would risk abuse and would emasculate subrogation where it is most needed.
• Equitable defences pleaded by Day were rejected: the maxim "do equity" did not require TIL to provide set-off for an unliquidated claim in these circumstances and the "unclean hands" doctrine did not have the necessary direct and immediate relation to the subrogation equity.
• The court accepted that Sales J was within his discretion to consider the newly advanced fraud allegations at the summary hearing but declined to decide the separate counter‑restitution point raised on the respondents' notice.

Result: the appeal was dismissed and Sales J's order was upheld.

Appeal dismissed. The Court of Appeal upheld Sales J's orders striking out the pleaded equitable set-off and granting summary judgment on key parts of TIL's counterclaim. The court held that (1) subrogation can arise where a security is voidable ab initio and may be relied on as an alternative to a primary contention that the later charge is valid; (2) a party subrogated to an earlier charge obtains an equitable proprietary security from the time it paid off the earlier creditor and need not re‑appoint receivers under the earlier instrument to exercise rights; and (3) established authorities preventing a mortgagor from unilaterally appropriating an unliquidated cross-claim to defeat enforcement apply in this context, and equitable defences relied upon by the appellant did not prevent subrogation in the circumstances of the case.

Appeal from the High Court, Chancery Division (Sales J) [2014] EWHC 4583 (Ch) to the Court of Appeal, neutral citation [2014] EWCA Civ 1246 (appeal dismissed).