Summary

A party who brings about a reduction in the indebtedness to a creditor of a debtor by refinancing and payment of a sum to the creditor is entitled to recover that sum from the creditor on the principle that otherwise there will have been an unjust enrichment of the creditor.

Facts

Plaintiff Swiss Bank's appeal against the decision of the Court of Appeal. The appellant provided refinance of part of an existing loan from Royal Trust Bank (Switzerland) ('RTB') to Parc, the first respondent, for the purpose of buying redevelopment land at Battersea Wharf, London. Parc was part of the Omni Group of companies controlled by Mr Rey, a Swiss national. The ultimate holding company was Omni Holding AG ('OH'). At the request of the appellant a signed letter ("the postponement letter") from OH was given to the appellant which confirmed that all companies of the Omni Group would not demand any repayment loans to Parc until the full repayment of the appellant's loan of DM30m which was secured by a deep discount promissory note amounting to GBP10m by Parc. In April 1991 the Omni Group collapsed and Parc was insolvent. The appellant obtained judgment for #12m against Parc representing the sum due on the note with interest. RTB and Omnicorp Overseas Ltd ('OOL') a company incorporated in the British Virgin Islands, had first and second charges over the Battersea Wharf Property. OOL was a member of the Omni Group and the second charge related to an intra-group debt. OOL obtained a judgment for #30m against Parc. Parc and OOL contended that the debt owed to OOL took priority over the debt owed to the appellant by reason of OOL's second charge. The appellant asserted that by reason of the letter of postponement and its utilisation to obtain the refinancing, the rights of the appellant took priority over the rights of OOL. Parc and OOL had been unaware of the letter of postponement. The judge upheld the appellant's contention while the Court of Appeal disagreed and allowed the appeal.

Held

The basis for the appellant's claim was to be found in the principle of unjust enrichment. The refinancing by the appellant (and effected through the medium of Mr Herzig in order to avoid disclosure under Swiss Banking law) was to discharge part of the debt owed by Parc to RTB. The appellant would not have made the advance to Parc without the letter of postponement. Although it was not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit by right of subrogation, the claim which the appellant eventually came to make was not for a share in the charge over the Battersea Wharf in favour of RTB so as to give it a preference over all creditors of Parc, but only a personal right to rank in priority to OOL, effective only as between RTB and OOL and open to be defeated by any further transactions by Parc, which in the event had not occurred. The difference between these two positions which was critical in the case, was readily obscured by use of the term "subrogation". OOL was enriched by the repayment of some #10m of the RTB loan. The structural arrangements made with Mr Herzig in order to avoid a breach of Swiss banking regulations did not prevent recognition of the granting of funds by the appellant to RTB for Parc's account. The appellant was well aware that the money was required for partial reduction of an existing bank loan. Parc then incurred a direct liability to the appellant through the promissory note which Parc supplied and the appellant certainly must have come to expect through the letter of postponement, that it would enjoy a priority to OOL in the enforcing of its own claim against Parc. It did not matter that neither Parc nor OOL knew anything about the letter nor that the letter was ineffective to achieve what the appellant expected. In these circumstances the appeal must be allowed so as to remedy the unjust enrichment of OOL at the expense of the appellant.

Appeal allowed.