A loan went into default. The borrower and lender entered into a settlement agreement pursuant to which the borrower paid a substantial amount in exchange for discharges of mortgage. The guarantor later paid a large sum to reduce the balance of the debt. The guarantor did not know the mortgages had been discharged.
The guarantor now sought to be subrogated to the rights of the lender (ie hold its security) for payments it made. It argued that the discharges did not affect their right to have recourse to the security.
The Court noted that:
After payment of the debt s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 operates as an implied assignment of the securities and places the surety in the position previously occupied by the creditor albeit for the purpose of enforcing the surety’s right to an indemnity.
The Court determined that this only applies to security that is in existence at the time of payment of the debt. It does not preserve security which has been discharged by way of an earlier payment.
However the court noted:
When the guarantor is called upon to pay and pays the debt for which he has become surety, he is to get the securities then existing; but, if any security has been abandoned by the creditor without his consent, the value of it should have been deducted from the debt at the time of the abandonment.
The guarantor did not seek relief under this rule however the court noted that it could be got around by a well drafted mortgage and this mortgage was well drafted including a provision to oust the application of this rule.
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