Michael Leon v Kensington Mortgage Company Limited & Anor.

This case determines whether a co-debtor who pays off a joint debt is entitled to be subrogated to the creditor's security where the other co-debtor company was dissolved and the Crown disclaimed the relevant lease. The court held that the claimant (Mr Leon) is entitled, upon full repayment of the loan, to be subrogated to whatever security Kensington Mortgage Company Limited (KMC) holds for that debt, including the lease vested in KMC by earlier vesting order, pursuant to the equitable doctrine of subrogation and section 5 of the Mercantile Law Amendment Act 1856.

The judge concluded that the dissolution of the company (Frinton) and the Crown disclaimer did not extinguish KMC's proprietary security and did not preclude subrogation; although Mr Leon has no in personam claim against the dissolved company, that practical impediment does not defeat a subrogation claim. The subrogation is subject to the limitation that Mr Leon, if subrogated, stands in the shoes of KMC and must account to the person next entitled for any surplus on sale pursuant to section 105 of the Law of Property Act 1925; the court refused injunctive relief.

Background and procedural posture

• Frinton Limited and Mr Leon were joint and several debtors under a 2002 loan secured by a mortgage. Frinton held a lease that was substituted as security for the mortgage in 2007. Frinton was dissolved in 2009 and the lease vested as bona vacantia in the Crown, which later disclaimed the lease. KMC acquired the mortgagee's charge and obtained a court vesting order vesting the lease in KMC; that order required KMC to account as mortgagee to the person next entitled under s.105 of the Law of Property Act 1925. The identity of the person entitled to any surplus on sale remained undetermined.
• Mr Leon brought Part 8 proceedings seeking declarations and related relief that, on redemption of the mortgage (if he repaid the loan), he would be entitled under s.5 of the Mercantile Law Amendment Act 1856 and in equity to be subrogated to KMC's rights and to obtain assignment of the lease and charge.

Issues framed

1. Whether subrogation (in equity and under s.5 of the 1856 Act) is available where the principal/co-debtor has been dissolved and the Crown has disclaimed the asset said to constitute the security.
2. If subrogation is available, whether the security to which the claimant would be subrogated includes the lease vested in KMC by the prior vesting order or is limited to the registered charge only.
3. What limitations (if any) attach to any subrogation, in particular as to entitlement to any surplus on sale.

Reasoning and decision

• The court analysed the equitable doctrine of subrogation and s.5 of the 1856 Act, and considered the effects of company dissolution and disclaimer under the Companies Act 2006 (including ss.1012-1017 and s.1024) and relevant authorities. The judge accepted that Mr Leon has no in personam right of indemnity or contribution against the dissolved company but held that this does not prevent subrogation. The court regarded the creditor's proprietary security as surviving dissolution and disclaimer for the purpose of protecting a paying co-debtor or surety.
• The judge concluded that, if Mr Leon repays the loan in full, he will be entitled to be subrogated to KMC's interest in the security (including the lease vested in KMC by the earlier vesting order) and to an assignment of that security, but that he will stand in KMC's shoes and must account to the person next entitled under s.105 of the 1925 Act. The court declined to order injunctive relief and invited the parties to agree an order giving effect to the declaration and addressing costs.

Subsidiary findings: the court left unresolved the identity of the person entitled to any surplus on sale; the quantification of any contribution recoverable by Mr Leon from the estate that would formerly have belonged to Frinton was also not determined.

First instance: The claimant's application succeeds in part. The court declared that if the claimant repays the loan in full he is entitled to be subrogated to KMC's security (including the lease vested in KMC) and to an assignment of that security; such subrogation is available despite the dissolution of the co-debtor and the Crown disclaimer. The claimant will stand in the shoes of KMC and must account to the person next entitled under section 105 of the Law of Property Act 1925. No injunction was granted.

Previous proceedings: Chief Master Marsh granted a vesting order in favour of Mr Leon at first instance [2017] EWHC 3148 (Ch). Arnold J set aside that vesting order and directed that the lease vest in KMC by order sealed 7.12.2018; Arnold J's judgment is reported at [2018] EWHC 3026 (Ch). The Court of Appeal dismissed Mr Leon's appeal on 22.11.2019, reported at [2019] EWCA Civ 2047, leaving the vesting order in KMC's favour in place. The present proceedings are first instance determination of the claimant's subrogation claim arising from those events.