Vol 13 (2016) - Issue 3

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Subrogation Based on Unjust Enrichment: Menelaou v Bank of Cyprus Plc

In many cases a claimant’s money might have been used to discharge another party’s debt. For example, a company director may misappropriate company assets and use them to pay his own creditors. In such a case the director has been enriched at the expense of the company. The law of unjust enrichment may give the company a direct personal restitutionary remedy against the director. However, in the case of an insolvent debtor, this remedy may be of little use.
In some circumstances, however, the claimant may have the right to be subrogated to the creditor’s extinguished rights. If the creditor’s debt was secured, or the creditor had a preferential ranking in the debtor’s insolvency, this remedy will offer a significant advantage to a personal claim: by stepping into the shoes of the creditor, the disenriched company will acquire its more valuable rights.
The starting point for an understanding of the law in this area is Lord Hoffmann’s speech in Banque Financière de la Cité v Parc [1999] 1 AC 221 (HL). Leaving to one side the insurance case:
'one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff ’s expense; secondly, whether such enrichment would be unjust; and, thirdly, whether there are nevertheless reasons of policy for denying a remedy.'

Lord Hoffmann recognised that the secured creditor’s rights have been discharged by the payment of the debt. They cannot, therefore, be ‘kept alive’ for the benefit of the subrogated claimant (the wording employed in previous authorities):
'[S]ubrogation is ... an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment.
When judges say that [a] charge is 'kept alive' for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not [otherwise] be unjustly enriched.'

The courts will treat the claimant as if he has acquired the discharged creditor’s rights, in order to prevent the debtor from being unjustly enriched at the claimant’s expense. To be able to claim this kind of subrogation as a remedy, a claimant must first make out a good claim in unjust enrichment.
A party wishing to be certain his claim is good before making it may be disappointed to hear that unjust enrichment has been described as 'a vague principle of justice with no practical value.' However, to some extent this is an outdated criticism. It is now established accepted that the law will respond in circumstances denoted by Lord Hoffmann in the passage cited above, namely if (1) the defendant has been enriched; (2) at the claimant’s expense; and (3) the enrichment was unjust; (4) if there are no defences available to the defendant.