Insight,

The limits of equitable subrogation: confirmation that a third party payer cannot force its way into a multi party security trust deed

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Security trust deed arrangements are common in Australian financial transactions. These arrangements preserve the securities and priority rights for the benefit of multiple parties, so it would cause havoc if uninvited third parties could force their way into these agreements through the remedy of equitable subrogation.

On 15 November 2024, Justice Hill delivered judgment 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 fundamental issue in this case was whether a third party payer of a debt could use equitable subrogation as a basis to accede as a beneficiary to a security trust arrangement which secured the debts of other beneficiaries and gave those other beneficiaries additional contractual rights.

Justice Hill refused to make an order compelling the other parties to the security trust deed to execute new documents to reflect the third party payer’s right of equitable subrogation, because such an order was not necessary to give effect to the minimum equity required to avoid injustice. In doing so, Justice Hill helpfully clarified that equitable subrogation is a remedy, not a cause of action, and that the Court will do the minimum equity required to give effect to it. Importantly, her Honour recognised the important distinction between subrogation and assignment, and ultimately found that subrogation cannot be used to compel third parties in a security trust context to execute and enter into new agreements.

Sev.en v GLAS is the first decision to consider how subrogation might operate with respect to a security trust deed executed by multiple parties securing multiple debts. This decision provides useful reassurance that the Court will not allow the doctrine of equitable subrogation to be used by third party payers to obtain rights equivalent to an assignment in circumstances where other beneficiaries to a security trust arrangement have not agreed to the accession of that third party payer as a beneficiary.

Facts

Sev.en Global Investments Pty Ltd (7GI), was the parent company of Piper Preston Pty Ltd (Piper Preston).

Piper Preston was restructured in 2022.[1] As part of the restructure, Piper Preston became party to a facility agreement where Sequoia IDF Asset Holdings SA (Sequoia) advanced $15 million to Piper Preston for repayment in tranches.[2]

Piper Preston’s debt to Sequoia was secured by a separate security trust deed, and a security trustee was appointed under this deed to hold the security on behalf of the beneficiaries.[3] This security trust deed also secured the debts of other parties, being royalty holders over a potash mine held by Piper Preston (royalty holders).[4] Given the complexity of this arrangement, the security trustee held and managed the security, and Sequoia and the royalty holders were classified as ‘beneficiaries’ under the deed. Each beneficiary under the deed had certain powers, including the right to instruct the security trustee on the operation of its duties.

In April 2024, Piper Preston defaulted on its outstanding $7 million instalment under the facility agreement with Sequoia (being one of the debts secured under the security trust deed).[5] In August 2024, 7GI paid $8.5 million to the security trustee and requested the payment be applied to Piper Preston’s debt owed to Sequoia.[6] In return, 7GI requested the security trustee and Sequoia ‘take all necessary steps to give effect to the subrogation right’ by allowing 7GI to accede as a beneficiary under the security trust deed and facility agreement and executing new documents to reflect this.[7]

Sequoia instructed the security trustee not to apply the payment and to refuse to execute the new documents on the basis that 7GI’s right of subrogation did not extend to requiring the execution of new documents akin to an assignment.[8]

On 21 August 2024, 7GI and Piper Preston commenced proceedings, requesting the Court (amongst other things) declare that an unconditional payment had been made by 7GI in satisfaction of Piper Preston’s debt to Sequoia and thereby require the parties to execute relevant documents to accede 7GI as a beneficiary under the new security trust deed to give effect to 7GI’s remedy of subrogation.

Sequoia and the royalty holders maintained that no unconditional payment had been made because 7GI’s payment relied on Sequoia and the security trustee accepting 7GI’s demand to execute new documents. Sequoia did not dispute that 7GI was entitled to be treated ‘as if it had the benefit’ of Sequoia’s security (assuming the payment was unconditional) but disputed that this entitlement extended to requiring the parties to execute new documents.

Remedy of equitable subrogation

Subrogation not available until an unconditional payment has been made

As a threshold question, 7GI’s payment of Sequoia’s debt had to be ‘unconditional’ for the debt to properly have been paid.[9] It is only once an unconditional payment has been made that the remedy of equitable subrogation can be enlivened.

When the proceedings were commenced in August 2024, Justice Hill found that no unconditional payment had been made because the payment was stated to be conditional on Sequoia and the security trustee taking steps to accede 7GI as a beneficiary to the security trust deed.[10] Her Honour found that it was not until after the proceeding had been commenced that the payment became unconditional on 23 September 2024 due to a concession made on behalf of 7GI during the course of the proceeding in furtherance of the subrogation relief 7GI sought.[11]

Subrogation available to avoid an injustice but not equivalent to an assignment

Subrogation is an equitable remedy where ‘a party can enforce the rights and claims of another without there being an assignment’ or agreement.[12] It can arise where a third party pays out another party’s secured debt, with the intention of obtaining the benefit of the security such that it would be unconscionable to deny that third party’s interest.[13] The rationale underpinning subrogation is that it would be unconscionable for a debtor to have its debt satisfied and its property free of security in circumstances where the payer clearly intended to obtain the benefit of the security.[14]

Importantly, her Honour recognised that subrogation is different from assignment. Unlike a legal assignment, a subrogated third party can only enforce the security for an amount equal to the payment it made, and it does so in the name of the original debtor, rather than in its own name.[15]

Justice Hill ultimately formed the view that 7GI had a basis to claim a remedy of subrogation because 7GI had paid Piper Preston’s debt with the intention of being subrogated and the security being kept alive.[16]

Subrogation does not extend to compel the execution of new agreements by other beneficiaries

Having recognised that the remedy of subrogation should respond, the fundamental question for her Honour was whether the Court can or should require the parties to execute new documents and accede 7GI into the security trust arrangement. This was a novel question.

Justice Hill reinforced that the Court will only do the minimum equity required to avoid injustice.[17] The minimum equity with respect to subrogation will place the subrogated party in the same position as the original lender ‘in so far as that extends to the capacity to obtain security for payment of the debt and, ultimately, recover their debt’.[18]

In some cases, the minimum equity might require an order allowing the third party to ‘stand in the shoes’ of the creditor. The Court had previously made orders requiring parties to execute a registrable mortgage in favour of the subrogated party.[19] This was done because the Torrens title system requires registration for a mortgage to become effective - the discharge of the debt would result in the discharge of the registered mortgage, absent an order requiring the execution of another mortgage.[20] These authorities, therefore, were not on point in this case.[21]

Here, her Honour found that the minimum equity did not require 7GI to accede to the security trust arrangement and obtain all rights under those agreements. To require the parties to do this would grant 7GI rights beyond the right to repayment, which would be equivalent, in essence, to a legal assignment.[22] Subrogation only puts 7GI in the position of Sequoia ‘in so far as that extends to the capacity to obtain security for payment of their debt’ – no further.[23] 7GI was not entitled to be treated as an actual assignee and obtain all rights under the security trust deed.[24]

Further, her Honour recognised that the making of such an order would give 7GI much broader powers beyond simply being repaid the debt the subject of the security. This risked impairing the rights of the other beneficiaries (e.g.  the existing royalty holders) under the security trust deed. Justice Hill accepted that this was an undesirable possibility.[25]

On the critical issue, Justice Hill therefore refused to make the orders sought by 7GI compelling the execution of new documents to accede 7GI as a beneficiary to the security trust arrangements. Instead, her Honour simply made a generic declaration that 7GI was entitled to be subrogated to the benefit of Sequoia’s security to the extent of the $7 million debt which 7GI had repaid on behalf of Piper Preston.[26] Nothing more.

Takeaways

The decision in Sev.en v GLAS will come as a welcome relief to lawyers and parties to security trust arrangements alike.

Sev.en v GLAS confirms the commonly understood position that the operation of existing multiparty security trust agreements cannot be altered by third party debt payers using equitable subrogation to unilaterally force themselves to become a party to those agreements absent a formal assignment or the consent of the parties.

Where a third party pays a secured party’s debt with the intent of subrogation, the key practical takeaways are:

  • the third party payer will be subrogated as a matter of law to the extent of the original secured party’s security, but no further;
  • the third party payer can only rely upon the remedy of subrogation to obtain the minimum equity required to avoid injustice, which will typically involve obtaining the benefit of the security so as to recover the debt; and
  • subrogation is not the same as an assignment and will not typically require the execution of additional agreements - particularly where multi-party security trust agreements are involved and accession could disturb the rights and powers of the other parties.

Sev.en Global Investments Pty Ltd v Global Loan Agency Services Australia Nominees Pty Ltd & Ors [2024] WASC 424, [40].

[42].

[40]-[41].

[40]-[41].

[47]-[48], [53], [60].

[67]-[68].

[68], [128]-[130].

[72].

[109], [124].

[128]-[139].

[141].

[165].

[165]-[173].

[172].

[171].

[176]-[177].

[214].

[237].

[228].

[228].

[229].

[236], [238].

[237]-[238].

[236]-[237].

[238].

[207], [240].    

Reference

  • [1]

    Sev.en Global Investments Pty Ltd v Global Loan Agency Services Australia Nominees Pty Ltd & Ors [2024] WASC 424, [40].

  • [2]

    [42].

  • [3]

    [40]-[41].

  • [4]

    [40]-[41].

  • [5]

    [47]-[48], [53], [60].

  • [6]

    [67]-[68].

  • [7]

    [68], [128]-[130].

  • [8]

    [72].

  • [9]

    [109], [124].

  • [10]

    [128]-[139].

  • [11]

    [141].

  • [12]

    [165].

  • [13]

    [165]-[173].

  • [14]

    [172].

  • [15]

    [171].

  • [16]

    [176]-[177].

  • [17]

    [214].

  • [18]

    [237].

  • [19]

    [228].

  • [20]

    [228].

  • [21]

    [229].

  • [22]

    [236], [238].

  • [23]

    [237]-[238].

  • [24]

    [236]-[237].

  • [25]

    [238].

  • [26]

    [207], [240].    

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