This week's TGIF considers the case of Bowesco
Pty Ltd v Westpoint Management Ltd  WASCA 184, which
considered whether a guarantor had a right of subrogation enabling
it to be repaid in advance of the second ranking
The first lender advanced funds to the company for the purposes
of a construction project. Pursuant to the first loan agreement,
the first lender received a first-ranking charge over the
company's assets and the guarantor guaranteed the obligations
of the company to the first lender.
The company also entered into a loan agreement with the second
lender secured by a second-ranking charge.
The company subsequently experienced financial difficulty and
the guarantor advanced funds to it in order to ensure the
completion of the project.
The first lender appointed receivers to the company's assets
and the receivers exercised their right of sale in respect of those
assets. The amount received from the sale discharged the debt owed
to the first lender in full and the surplus proceeds of sale were
paid to the second lender.
The guarantor argued that as it had provided funds to the
company in its capacity as guarantor under the first loan
agreement, it had a right to be subrogated to the position of the
first lender. The guarantor contended that this meant it had a
right to be repaid in advance of the second lender.
In dismissing the appeal, the Court relied on the High
Court's decision of Bofinger v Kingsway Group Ltd, in
which the High Court emphasised that in order to benefit from the
right of subrogation, the guarantor must establish that the funds
were advanced pursuant to the guarantee and resulted in the
reduction or discharge of the principal debtor's liability to
In this case, while the company had an obligation to complete
the project, the terms of the guarantee did not require the
guarantor itself to perform that obligation or see to it that the
company performed its obligations to the first lender. Rather, the
guarantee required the guarantor to pay any debt or damages arising
from the company defaulting on its obligations.
Accordingly, by advancing funds to the company to enable it to
complete the construction project, the guarantor had not acted
pursuant to the guarantee and had not, in substance or effect,
reduced the company's indebtedness to the first lender at any
time. The guarantor was therefore unable to benefit from the right
of subrogation and did not have a right to be paid the surplus
funds ahead of the second lender.
This case confirms that the right of subrogation in respect of a
guarantee is conditional upon the reduction or discharge of the
principal debtor's liability to the creditor, by the
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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