Michael Leon v Kensington Mortgage Company Limited & Anor.

Where a co-debtor pays a secured debt in full, equitable subrogation and Mercantile Law Amendment Law 1856 may entitle that person to the creditor’s surviving security, even though the other co-debtor has been dissolved. The security remains available to secure the payer’s recoverable contribution. A lease vested in a mortgagee may itself constitute substituted security. Subrogation places the payer in the creditor’s shoes. It does not confer a better entitlement to any surplus, and the payer remains subject to equivalent accounting obligations.

The claimant and Frinton Limited were jointly and severally liable under a loan secured by a charge over a lease. Frinton was dissolved, the Crown disclaimed the lease, and the claimant subsequently obtained no vesting order. On appeal, the lease was vested in the mortgagee, subject to an obligation to account for any surplus under section 105 of the Law of Property Act 1925.

The claimant sought declarations that, if he repaid the loan, he would be entitled to assignment of the mortgagee’s charge and the lease. The defendants disputed whether subrogation survived Frinton’s dissolution and whether the lease formed part of the mortgagee’s security.

1. If the claimant repaid the loan in full, he would be entitled to be subrogated to the security held by the first defendant, including the lease, and to its assignment. He would remain bound to account to the person next entitled under section 105 of the Law of Property Act 1925.

2. Dissolution removed Frinton’s legal existence and personal liability. It also prevented the claimant from obtaining an in personam contribution or indemnity from Frinton. Those consequences did not extinguish the mortgagee’s proprietary security. Third-party derivative interests survived the disclaimer of the lease.

3. The purpose of subrogation was sufficiently broad to preserve the payer’s access to security for the amount which would have been recoverable from the dissolved co-debtor. A purposive reading of section 5 of the Mercantile Law Amendment Law 1856 treated the position, for subrogation purposes, as if the dissolved company continued to exist and remained a co-debtor.

4. The lease vested in the mortgagee pursuant to the earlier vesting order was substituted security. The order had been made to preserve and enable enforcement of the mortgagee’s security. A lease could, in an appropriate case, constitute security.

5. No injunction compelling a sale was necessary or appropriate. The unresolved destination of any surplus remained open. Counsel were directed to agree and file a draft order, including costs provisions, or provide submissions on any disagreement.