Businessman Requesting MoneyThe availability of the remedy of subrogation has been explored at length by the courts recently. The leading authority of Bank of Cyprus Limited v Melenaou is thought to be the first of its kind where a lender has been entitled to be subrogated to an unpaid vendor’s lien where the lender did not advance funds for the purchase of the property. The principles identified in that case were considered and applied in the case of TOC Investments Corporation v Beppler & Jacobson Ltd, where a third party funder was entitled to be subrogated to the provisional liquidator’s rights to receive payment of their fees.

TOC Investments Corporation v Beppler & Jacobson Ltd

Beppler & Jacobson Limited (the “Company”) was placed into provisional liquidation following presentation of a winding up petition by one of its shareholders who had proved to the courts satisfaction that there was a significant risk of dissipation of the Company assets pending the hearing of the winding up petition. Whilst the Company ultimately emerged from provisional liquidation following a number of hearings, a dispute subsequently arose as to the funding of the provisional liquidation.

TOC Investments Corporation (“TOC”) had funded the provisional liquidation and had advanced £2.685m to the Company on account of fees, costs and expenses to be incurred by the provisional liquidators. Whilst a funding agreement had been put in place, this agreement was silent in respect of repayment or reimbursement to TOC. TOC claimed that the sums advanced were by way of loans and it was entitled to either:

  1. be reimbursed from the assets of the Company; or
  2. be subrogated to the provisional liquidator’s right to be paid pursuant to the Insolvency Rules 1986;
  3. be repaid under the terms of a court order; or
  4. be repaid by reference to the principle in Ex Parte James.

As the agreement was silent as to repayment, the court was required to interpret the funding agreement. It was held that in advancing funds to cover the liquidators’ fees and costs, TOC was clearly not making a gift but intended to have recourse to the funds advanced. It was clear that the intention of the parties was that the costs and expenses of the liquidators should ultimately be borne by the Company. The funding arrangement was necessary to cover the liquidators’ costs and expenses in the short term but was subject to TOC’s right of recourse to the Company’s assets.

The Court also held that further or alternatively, TOC would be entitled to reimbursement on the basis of being subrogated, to the liquidators’ rights (under r.4.30(3) of the Insolvency Rules 1986) to payment of their fees out of the Company’s assets. The court considered the Court of Appeal decision in Bank of Cyprus Limited v Melenaou (subsequently upheld by the Supreme Court) and held that the remedy of subrogation should be available to TOC to ensure that the Company was not unjustly enriched.

By way of brief reminder, the Melenaou decision provided that subrogation over an unpaid vendor’s lien, was available to the Bank in this case notwithstanding the fact that it did not advance funds for the purchase of the property.  Instead, the Bank had released security over another property, which freed up funds to be used by the buyer for the purchase. The court held that there was a sufficient causal connection between the Bank’s agreement to release its security and the buyer’s enrichment, to justify subrogation.

Applying the reasoning of the Melenaou case, the Judge held that:

  1. There did not have to be a direct advance of funds between the party that has suffered the loss and the party that has been unjustly enriched. When assessing a claim for unjust enrichment, four key questions should be considered:
  1. has the defendant been unjustly enriched?
  2. was the enrichment at the claimant’s expense?
  3. was the enrichment unjust?
  4. are there any defences available to the defendant?

The key question was whether or not there was a sufficient causal connection between the loss suffered and the benefit received. TOC had advanced funds to the Company and the Company paid the provisional liquidators out of its general funds. Rule 4.30(3) provides that “the provisional liquidator’s remuneration […] shall be paid to him […] if a winding up order is not made, out of the property of the company”. TOC was therefore effectively discharging the Company’s debt to the liquidators at the request of the Company. On this basis, it was held that the mechanics of payment should not disrupt this position and that the court should look at the substance of the transaction rather than its pure form.

  1. The existence of a contract between the parties did not preclude the party that has suffered the loss from claiming the remedy of subrogation. It was held that the failure to make provision in the funding agreement for repayment was not inconsistent with affording TOC the remedy of subrogation.


The decision in TOC Investments Corporation v Beppler & Jacobson Ltd will be of significant interest to insolvency practitioners, particularly those that find themselves appointed on a case that is reliant upon third party funding. This decision, together with the leading judgment of Bank of Cyprus Limited v Melenaou, makes it clear that the courts will be willing to make the remedy of subrogation available to a claimant that has suffered loss via the unjust enrichment of a defendant – subject to there being a sufficiently close causal connection between the loss and enrichment of the respective parties. For insolvency practitioners, this could ultimately mean their rights to payment of fees are trumped by the right of a funder to be repaid. Clearly, parties entering into funding arrangements should be careful to ensure that that specific provisions are made in the documents governing such arrangements for repayment and repayment triggers, so that contractual interpretation of any agreement and the right of a funder to call upon the remedy of subrogation, do not have to be considered.