Introduction
Subrogation is a convenient way of describing a transfer of rights from one person to another, without assignment or assent from the first person and takes place by operation of law in a variety of circumstances. Broadly speaking, there are two categories of subrogation, namely, contractual subrogation and equitable subrogation. While contractual subrogation is highly dependent on the agreement or common intention of the parties concerned, equitable subrogation is based on the doctrine of unjust enrichment. Kingsway Finance Ltd v Wang Qingyi & Anor CACV 189/2013 illustrates the application of the doctrine of equitable subrogation in the context of successive mortgages and discharges.

Background
The 1st Defendant, Wang Qingyi (“Wang”), was the registered owner of a property in Park Island, Ma Wan (the “Property”). She entered into successive mortgages with the Plaintiff, Kingsway Finance Limited (“Kingsway”) and the 2nd Defendant, Wing Wui Finance Limited (“Wing Wui”). The chronology of events is as follows:-

Thereafter, Wang failed to repay her indebtedness to Kingsway and Wing Wui respectively. Judgments were entered against her in favour of Kingsway and Wing Wui. The Property was sold pursuant to a court order and the net proceeds of the sale were paid into court, pending the adjudication of priority between Kingsway and Wing Wui to the proceeds.

First Instance Decision
The Court of First Instance decided the question of priority in Kingsway’s favour. Accordingly, in respect of the net sale proceeds of the Property, judgment was given to Kingsway in priority over Wing Wui.

Wing Wui appealed to the Court of Appeal on the question of subrogation; i.e. (i) whether Kingsway was subrogated to the rights of Oi Wah under the Oi Wah Mortgage in respect of Kingsway’s 3rd Loan; and (ii) as regards Kingsway’s 4th Loan, whether Kingsway was subrogated to the rights under the 2nd Mortgage following the repayment of Kingsway’s 1st Loan and to that under the Oi Wah Mortgage after the repayment of Kingsway’s 3rd Loan.

Court of Appeal Decision

Equitable subrogation
The most common type of situation where the doctrine of equitable subrogation was invoked was that where A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor.

According to Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 A.C. 221, in determining whether the doctrine of equitable subrogation applies, the relevant questions to ask are:-

1.         whether the defendant would be enriched at the plaintiff’s expense;

2.         whether such enrichment would be unjust; and

3.         whether there are nevertheless reasons of policy for denying a remedy.

With regards to the three questions mentioned above, it is further explained in Filby v Mortgage Express (No. 2) Ltd [2004] EWCA Civ 759 that:-

1.         the defendant is enriched if his financial position is materially improved;

2.         the enrichment will be at the expense of the plaintiff if in reality it was the plaintiff’s money which effected the improvement;

3.         subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the plaintiff did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant’s financial improvement is properly seen as a windfall. 

Did Kingsway receive what it bargained for?
Wing Wui argued that what Kingsway bargained for when advancing its 3rd and 4th Loans was a first mortgage over the Property in its favour. Kingsway did obtain what it had bargained for following the discharge of the Oi Wah Mortgage because the 2nd Mortgage automatically became the first mortgage over the Property. It was an “all monies” mortgage and therefore was good enough to cover and secure Kingsway’s 3rd Loan (in addition to Kingway’s 1st Loan). However, in terms of priority, Wing Wui contended that it was not good against the 3rd Charge because Kingsway’s 3rd and 4th Loans could not be “tacked” to the 2nd Mortgage as the requirement in section 45 of the Conveyancing and Property Ordinance (Cap. 219) (“CPO”) for tacking were not satisfied. Given that Kingsway had obtained what it had bargained for (i.e. a first mortgage) in relation to its 3rd and 4th Loans, Wing Wui argued that there was no place to invoke subrogation.

The Court of Appeal rejected Wing Wui’s arguments and held that:-

1.         when considered in the commercial context, there could be no doubt that what Kingsway intended to obtain, and what it actually bargained for, was first priority over the Property as a secured creditor, just like Oi Wah under the Oi Wah Mortgage, once the Oi Wah Mortgage was discharged by means of Kingsway’s 3rd Loan. Whatever instrument or security document which Kingsway intended or had to execute in order to achieve that purpose was just a means to an end;

2.         in the present case, even assuming that all that Kingsway bargained for was its 2nd Mortgage becoming the first mortgage after the discharge of the Oi Wah Mortgage, the ultimate question is: whether it was unjust for Wing Wui’s 3rd Charge to have priority over Kingsway’s 3rd Loan (which was used to discharge the Oi Wah Mortgage, which had priority over the 3rd Charge)?

Was the enrichment “unjust”?
Wing Wui argued that there was no unjust enrichment in the present case as Kingsway charged a higher interest rate under its 3rd and 4th Loans than that charged under the Oi Wah Mortgage. Such argument was rejected by the Court of Appeal as it was not supported by evidence. In any event, subrogation would not give Kingsway any right under the Oi Wah Mortgage (or the 2nd Mortgage) to a higher rate of interest as a secured creditor. The Court of Appeal was of the view that in the absence of subrogation, Wing Wui would be unjustly enriched by Kingsway’s making of its 3rd Loan to discharge the Oi Wah Mortgage and its making of the 4th Loan to discharge the 1st and 3rd Loans.

Subrogation upon subrogation
Wing Wui contended that Kingsway enjoyed subrogated rights under the Oi Wah Mortgage which Kingsway’s 3rd Loan had discharged. However, if one were to allow that part of Kingway’s 4th Loan which discharged Kingsway‘s 3rd Loan to enjoy the benefits of the Oi Wah Mortgage again by subrogation, that would be subrogation upon subrogation, something which Wing Wui argued was contrary to principle.

The Court of Appeal rejected this argument on the basis that the remedy of equitable subrogation is flexible and adaptable to produce a just result.

Contrary to public policy?
On the issue of whether it would be contrary to public policy to allow the remedy of equitable subrogation, Wing Wui contended that as a matter of policy, Kingsway, a mere licensed money lender, should not be allowed to bypass the statutory requirements for tacking laid down in section 45 of CPO, via subrogation.

Under section 45 of CPO, a mortgagee under prior mortgage (“Mortgage X”) may make a further advance or re-advance to rank in the same priority over a subsequent mortgage as the original advance under Mortgage X:-

1.         if the subsequent mortgagee so consents; or

2.         where the further advance or re-advance does not exceed, with any other outstanding advance or re-advance, the specified maximum amount secured under Mortgage X; or

3.         where Mortgage X is in favour of an authorized institution (i.e. bank, restricted licenced bank or deposit taking company) and is expressed to be an “all monies” mortgage.

Wing Wui argued that Kingsway’s 3rd and 4th Loans did not qualify for tacking under section 45 of CPO because: (i) no consent of the subsequent mortgagee, i.e. Wing Wui, was obtained, (ii) the 2nd Mortgage was an “all monies” mortgage, and (iii) Kingsway was not an authorised institution.

While the Court of Appeal agreed with Wing Wui that Kingsway’s 3rd and 4th Loans did not qualify for tacking under section 45 of CPO, there was no bar for Kingsway to achieve the same result by another lawful route. Subrogation in the present case did not undermine the objective behind section 45 of CPO when there was no additional money lent to the borrower, and the prior mortgage was not made to secure any additional indebtedness as such.

Therefore, the Court of Appeal dismissed Wing Wui’s appeal. In order words, the 2nd Mortgage in favour of Kingsway was held to secure Kingsway’s 4th Loan advanced to Wang by equitable subrogation, in priority to the 3rd Charge in favour of Wing Wui.

Conclusion
While the Court of Appeal in the Kingsway Finance case considered that the non-availability of tacking was no bar to the application of doctrine of equitable subrogation, it must be borne in mind that the doctrine is an equitable remedy, the application of which is subject to the court’s discretion. As such, where possible, one should endeavour to seek statutory protection of priority of a loan by way of tacking under section 45 of CPO.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.