Subrogation of Loans – Don’t be your own lawyer

Subrogation of Loans – Don’t be your own lawyer

By Michael Robson, Solicitor on 07/07/2022 [SOURCE]

The case dealt with the right of a co-surety or co-contributor to recover from the parties with whom they shared the mutual obligation. The underlying loan was taken for a failed property development project and the consequences flowing from the inability of the project entity, Blue Chip Properties (Queensland) Pty Ltd (BCP), to obtain construction funding.

This decision has emphasized the need to properly particularize in pleadings the allegations and the material facts upon which one relies. As part of that, it draws to the forefront the fact that a solicitor ought to be wary of acting for themselves.

Facts of the case

A guarantor of a loan for the BCP entity, was called upon following a demand issued by the Bank after default by BCP. Consequently, the deposit of $3m paid by the Plaintiff was appropriated by the bank. This discharged the obligations of the other guarantors, as the limit of their guarantee was
$3m collectively.

The Plaintiffs claim against the Defendant’s was dismissed through a Summary Judgment Application by the Defendants. The Caveat’s which has been lodged against properties of the Defendant’s were also removed.

The Plaintiff was ultimately unsuccessful because:

They did not properly plead the material facts upon which he relied to substantiate the allegations and causes of actions which he sought remedy for.

They did not establish that the other parties were under a mutual obligation.

They were not entitled to subrogation as the entire debt had not been discharged, only a part.

There were limitation issues in respect of the causes of action.
While it did not solely cause their demise, the Plaintiff acting as their own lawyer contributed significantly to the action.

It is relevant to remind oneself of the key elements to subrogation of a loan being as follows:
One must discharge the whole of the debt to permit subrogation in the hands of the guarantor.

One must have a mutual obligation for which you have paid the others share.

One only retains security where the security is not released by the original Mortgagee. This means that if you are discharging a liability as Guarantor, in a situation where the Mortgagee is insolvent or likely to become insolvent, ensure that security is not released.

If these problems arise, a more creative approach might be for the creditor, if it is willing, to restructure the debt into portions including an assignable portion which is assigned to the co-surety for an assignment fee paid to the creditor by the co-surety or, alternatively conferring participation rights in the co-surety in consideration of the payment of a participation fee to the creditor by the co-surety.

Otherwise, the tritest, but nonetheless significant takeaway is: “don’t be your own lawyer”.

This publication is provided for information purposes only and is not (and should not be relied upon as) legal advice. Each individual circumstances differ. Please contact us if we may help you with your circumstances.

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