Banque Financiere V. Parc Notes

Banque Financiere v. Parc

Facts

Parc is an English company owning development land in Battersea and O.O.L. is registered in the British Virgin Islands. They belonged to the Omni Group, based in Switzerland, where the ultimate holding company, Omni Holding A.G., was incorporated.

Parc acquired the Battersea land in 1988 with the aid of a 30m. bridging loan from Royal Trust Bank (Switzerland) ("R.T.B."), secured by a first charge, and additional finance from O.O.L., in respect of which it subsequently obtained a second charge. The R.T.B. loan was partially repaid in 1989 but 20m. was extended until 28 September 1990. Parc was unable to refinance its borrowing on the London market and turned to Mr. Herzig for help. He approached B.F.C. which had previously lent to the Omni Group. On 14 September 1990 it agreed in principle to advance DM30m. for two months and the necessary arrangements were concluded in haste.

A difficulty was that a further loan to a member of the Omni Group would have had to be reported to the Swiss banking authorities. To avoid this, B.F.C. agreed to make the loan to Mr. Herzig personally on the basis that he would pass it on to Parc, which would issue him with a promissory note which he would assign to B.F.C. as security. The principal security was to be the pledge of 35,000 bearer shares in Holding, which B.F.C. valued at DM40m. and, in addition, B.F.C. required the "postponement letter" in respect of the claims of other group companies. This read as follows:

“This is to confirm that we and all companies of our group will not demand any repayment of loans granted to Parc (Battersea) Ltd., London, until the full repayment of your loan of DM30m. granted to Mr. M. Herzig, which is secured by a deep discount promissory note amounting to 10m. issued by Parc (Battersea) Ltd.”

Mr. Herzig defaulted on repayment of the loan and in April 1991 the Omni Group collapsed. B.F.C. had realised some of the pledged shares before they became worthless and repaid itself about DM5m. but the rest of the advance remains unpaid.

Holding

Lord Hoffmann

Distinction between contractual subrogation and subrogation in restitution

…it is often said that subrogation may arise either from the express or implied agreement of the parties or by operation of law in a number of different situations.

Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the parties. But the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract and the other part of the law of restitution. Unless this distinction is borne clearly in mind, there is a danger that the contractual requirement of mutual consent will be imported into the conditions for the grant of the restitutionary remedy or that the absence of such a requirement will be disguised by references to a presumed intention which is wholly fictitious.

In this case there was plainly no common intention as between O.O.L., the party enriched, and B.F.C., the party deprived. O.O.L. had no knowledge of the postponement letter or reason to believe that the advance to Parc of the money provided by B.F.C. was otherwise than unsecured. But why should this necessarily exclude subrogation as a restitutionary remedy?

Lord Hoffmann relied on five...

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