Subrogation is defined as "the substitution of one
claim for another, especially the transfer of the right to receive
to payment of a debt to someone other than the original
Almost all readers of this e-Update would know that when a
guarantor pays out all of the debt of the lender that guarantor is
entitled to stand in the shoes of the lender. After payment in full
not only is the guarantor able to claim against the borrower but he
or she is also entitled to whatever security the lender held. All
of this happens by operation of law and needs no separate agreement
to be effective.
But quite regularly we come across situations when a third party
(that is a non guarantor) pays a debt on behalf of another, on the
assumption that by doing so they will automatically qualify to
claim against the original debtor. The true position is that in the
absence of a suitable agreement the payment by a non guarantor
third party gives no automatic right of subrogation.
Perhaps an example from a recent liquidation will help explain
the position better. In that liquidation:
The company owed $35,600 to a creditor and that claim had been
guaranteed by the sole director.
Before the liquidation the creditor was pressing hard for
payment. In an effort to keep the company afloat the director asked
his parents to pay the creditor, which they did.
When the company was placed into liquidation the director's
parents lodged a claim against the company, which we had to
As noted above subrogation happens automatically when a
guarantor pays out all of the debt of the lender. But the parents
had not guaranteed the debt so they were not entitled to automatic
The parents claim would have been allowed if either:
At the time of paying the debt the parents had obtained a
properly prepared and executed assignment of the claim from the
creditor. Of course it is too late for this to happen after payment
has been made, so they could not go back and ask for an assignment
The parents had been able to convincingly argue that the
payment was made at the request of the company and that the
transaction amounted to a loan by the parents to the company. The
information which the parents gave us unfortunately negated this
The lesson is that subrogation should not be assumed if the debt
is not paid as a guarantor.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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