In this appeal court case first and second mortgages over the development property were bolstered by first and second mortgages over the guarantors’ home. When the development went bad the guarantors voluntarily sold their home and the whole proceeds were paid to the first mortgagee.
The first mortgagee sold the development property and after it had been paid out there remained a significant surplus. This case was a dispute between the second mortgagee and the guarantors over who was entitled to the surplus.
The guarantors claimed the money by virtue of the principle of subrogation. The court approved the statement of Powell J in McColl’s Wholesale Pty Ltd v State Bank of New South Wales (1984) 3 NSWLR 365:
The ultimate purpose of subrogation is not to put the surety in the identical position in which the creditor formerly stood, but to enable the surety to enforce his right to an indemnity by resort to the securities formerly held by the creditor.
The appeal was dismissed with the court holding the guarantors were not entitled to be subrogated because it would not be unconscionable for the first mortgagee to hold those assets for the benefit of the second mortgagee or for the second mortgagee to claim them in priority to the guarantors. This reflects the origin of the rule which is a rule against the conscience of the first mortgagee.