Where a party discharges a secured debt, the doctrine of subrogation permits the paying party to "stand in the shoes" of the secured creditor and require payment as if had the benefit of an existing security. But to what extent can this doctrine be used to impact the rights of third parties?

In Sev.en Global Investments Pty Ltd v Global Loan Agency Services Australia Nominees Pty Ltd & Ors [2024] WASC 424 (Sev.en v GLAS), the Supreme Court of Western Australia examined whether subrogation could be used to force parties to a security trust deed to amend the security trust deed for the purpose of formally including the subrogating creditor as a beneficiary to the security trust deed.

The Court held that while Sev.en Global Investments Pty Ltd (7GI) was entitled to be subrogated to the security held by the security trustee, 7GI was not entitled to a legal assignment of the lender's position under the security trust deed and financing agreement. The court should do the minimum necessary to achieve equity between the parties, and that did not require that 7GI succeed to all the lender's contractual rights.

What is equitable subrogation?

In the context of a third party discharging a secured debt owed by a borrower, subrogation is an equitable remedy that enables the third party payor to assume and enforce rights under the security (up to the amount paid) and without assignment or agreement from the original secured party.

For equitable subrogation to be available, payment by the third party payor to the original secured party must satisfy certain conditions:

(1) payment must be made with the debtor's authority, which can be given either before or after the date of payment;

(2) the payor must intend to preserve the security, and there is rebuttable presumption that such an intention exists;

(3) the tender of the payment must be unconditional. The payor cannot both rely on subrogation and attempt to dictate terms that negatively impact the rights of the payee; and

(4) the payor must discharge the entirety of the debt owed to the original secured party, but need not discharge all debts secured by the security.

What happened in the case?

Piper Preston Pty Ltd (Piper Preston) owned several mining assets and water rights within the Lake Way Project, situated in the Goldfields region, Western Australia.

In October 2021, voluntary administrators were appointed to Piper Preston which ultimately resulted in the execution of a deed of company arrangement and a separate restructure deed. As part of a restructure, Piper Preston entering into a facility agreement with Sequoia IDF Asset Holdings SA (Sequoia) under which it could borrow up to $15million. This loan was to be repaid in instalments and was secured by all asset security in favour of a security trustee (GLAS). The same security also secured debts owed to other entities, including under separate financing arrangements and certain royalty deeds.

On 30 April 2024, Piper Preston defaulted on the loan. At that time, Sequoia was owed $7million under the facility agreement.

In August 2024, acting on Piper Preston's request, 7IG paid $8.5 million to settle the loan, with $8.5million being the estimated maximum amount owing. Following this payment, 7GI requested written confirmation that all parties involved (that is, not only Sequoia) would take the necessary steps for 7GI to become a beneficiary under the security trust deed and a lender under the facility agreement.

In response, the solicitors for the security agent and security trustee were instructed not to apply the payment to the outstanding loan amount, or execute new documents.

On 21 August 2024, 7GI and Piper Preston issued proceedings seeking orders which (among other things) included a declaration that 7GI’s was entitled to be subrogated to the security held by GLAS and the execution of documents to legally transfer Sequoia's interests under the facility agreement and the security trust deed.

In line with the general principles outlined above, the Honourable Justice Hill relevantly held:

• the $8.5 million transfer by 7GI to GLAS on 7 August 2024, was not an unconditional payment of Piper Preston's debt under the Facility Agreement due to 7GI's request for legal assignment of Sequoia's interest under the security trust deed and facility agreement and for all parties to execute documents so it could be a named beneficiary under the security trust deed and a named lender under the facility agreement. This meant that the defendants were entitled to seek instructions on the payment and not accept it;
• in affidavit material filed in the Proceeding, 7GI later clarified that the payment was unconditional and not contingent on the Court granting relief, satisfying Piper Preston's obligations under the Facility Agreement. This meant that from the date the affidavit was filed, the loan was discharged and interest on the loan ceased to run;
• on the evidence, 7GI intended to be subrogated to the relevant securities, and accordingly from 23 August 2024 7GI was entitled to be subrogated to Sequoia's security to the extent of the amount paid by 7GI;
• subrogation is fundamentally different from assignment. Subrogation involves rights that have been discharged being revived by operation of law rather than transferred. A subrogated creditor exercises rights in the name of the person whose rights have been subrogated, rather than in its own name, and can have no rights greater than the payment made which gave rise to the subrogation;
• the remedy of subrogation was available because the relevant debt owed to a creditor had been discharged in full, even though other liabilities secured by the relevant securities owed to other creditors were not discharged by 7GI;
• 7GI should be placed in the same position as the original lender in relation to its security for payment of debt;
• however, 7GI was not automatically entitled to a legal assignment of Sequoia's position under the facility agreement or the security trust deed, or to be subrogated to all of the rights under the security trust deed and no orders would be made to require the execution of documents to legally assign Sequoia's interests or require execution and registration of further documents. Further, given the interests of the other secured creditors, the Court was not persuaded that further orders were necessary or appropriate.

Why does this matter?

Equitable subrogation is a helpful mechanism for third-party lenders, offering reassurance to those who have paid off another's debt that they can effectively "step into the shoes" of the original secured party and rely on an existing security interest. While a court may in appropriate cases require the execution and registration of new securities, it will only do so in cases having regard to the interests of third parties, and as a general position a subrogated creditor is not entitled to enjoy all of the contractual rights enjoyed by the original secured party.

In this case, 7GI effectively sought to impose itself into various existing commercial agreements. Equity will only do the minimum necessary to protect a subrogated creditor's right to repayment, and the court will be loath to re-write existing arrangements or adversely affect the interests of other secured creditors, unless such an approach is necessary and appropriate.

Other matters to note about the decision

The decision highlights three distinctions relevant to equitable subrogation.

First, an entitlement to seek subrogation arises upon the discharge of the relevant debt, rather than the discharge of the relevant security. Relying on the High Court's decision in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269, Justice Hill held that the foundation for the remedy of subrogation is the liability of the debtor to the third party who has paid the debt, and this liability arises upon payment of the debt and not the discharge of security.

Secondly, subrogation is a remedy and not a cause of action or a right. There is no right to subrogation, and the remedy will be fashioned to the facts of the case.

Third, equitable subrogation and is conceptually different from a legal assignment. A legal assignment can facilitate a transfer of all of the rights the original lender held, including rights against third parties. The remedy of equitable subrogation will generally be weaker than a legal assignment, and involves discharged rights being revived by operation of law to provide a remedy that is 'necessary' to do equity between the parties. On the right facts, it could be necessary for a court to order a remedy which extends beyond what was granted in the present case, including ordering that new documents are executed.

Minter Ellison's Insolvency & Restructuring team regularly advise and act for both lenders and creditors in respect of various security arrangements.
If you need legal assistance, or would like to discuss the implications of equitable subrogation in respect of your security arrangements, please contact us.