Day v Tiuta International Ltd & Anor

A chargor cannot use an unliquidated and unadmitted cross-claim, including one capable of equitable set-off if established, to discharge a secured debt unilaterally. The chargee may therefore enforce the security, appoint receivers and apply sale proceeds towards the secured debt.

Where a refinancing charge is voidable from inception, the lender has not obtained the valid security for which it bargained. It may rely, in the alternative, on equitable subrogation to the security discharged with its money. That remedy creates a new equitable security interest which generally replicates, but is not an assignment of, the discharged security. Equitable defences do not alter the rule concerning an unliquidated cross-claim, and alleged misconduct must have an immediate and necessary connection with the subrogation equity.

Mr Day borrowed from Tiuta International Ltd to refinance a property and to fund its redevelopment. Part of the first advance discharged an earlier loan secured by a charge in favour of Standard Chartered. When Tiuta later entered administration and Mr Day did not repay the facility, Tiuta appointed receivers under its charge.

Mr Day claimed damages for late advances and alleged fraudulent misrepresentation. He contended that his unliquidated damages claim released the property from Tiuta’s charge. Alternatively, if he could rescind Tiuta’s charge, he contended that Tiuta could not exercise subrogated rights under the discharged Standard Chartered charge.

Sales J struck out the set-off case and granted summary judgment on Tiuta’s counterclaim: [2014] EWHC 4583 (Ch). The central issue was whether equitable subrogation or the alleged cross-claim prevented enforcement of the security.

1. Appeal dismissed. The court upheld the strike-out of the set-off case and the summary judgment declaring that the receivers had been validly appointed, could market the property, and should not be obstructed.

2. The established rule applied. An unliquidated and unadmitted cross-claim does not discharge a mortgage or charge. It cannot prevent a secured creditor from taking possession, selling the property, and applying the proceeds towards the secured debt. The rule applies even if the cross-claim, if established, would exceed the debt. The court was bound by the line of authority culminating in [1993] 1 All ER 242.

3. Tiuta could advance subrogation as a genuine alternative to its primary case that its charge remained valid. A security voidable from inception is ineffective as security against the party entitled to avoid it. A lender receiving such security has not received everything for which it bargained. It was therefore appropriate to determine the alternative subrogation issue on summary judgment.

4. Subrogation did not revive or assign Standard Chartered’s discharged charge. It gave Tiuta a new equitable proprietary security interest, ordinarily matching the former charge to the extent that Tiuta’s money discharged the earlier secured debt. Tiuta was not required to make a fresh appointment of receivers under the former charge or to establish a default under liabilities that had already been repaid. Mr Day’s default under Tiuta’s facility was sufficient.

5. The equitable maxims did not assist Mr Day. A secured subrogated creditor was entitled to enforce its security despite his unliquidated cross-claim. Tiuta’s insolvency did not alter that conclusion. Further, alleged fraud on Tiuta’s investors, or a misrepresentation about Tiuta’s finances, lacked the immediate and necessary relationship to the equity asserted by subrogation.

6. Gloster LJ declined to determine whether rescission required counter-restitution. Vos LJ nevertheless held, as an additional basis for dismissing the appeal, that Mr Day could not rescind while retaining the loan advances merely by asserting an unestablished damages claim. Moses LJ agreed with both judgments.

• Court of Appeal (Civil Division): Dismissed Mr Day’s appeal and upheld the strike-out and summary judgment orders.
• High Court, Chancery Division: Sales J struck out the unliquidated set-off case and granted Tiuta summary judgment concerning the validity and enforcement of its security: [2014] EWHC 4583 (Ch).