Payment Of Another Debt – The Entitlement By Payer To Equitable Compensation
Introduction
Where a person, “A” the Debtor, owes a financial obligation to “B” the Creditor and “P” satisfies that financial obligation, either at the request of “A”; or where “P” has guaranteed “A”’s debt and the creditor calls upon “P” to satisfy the financial obligation; or where “P” is compelled at law to satisfy the financial obligation the law is that the debtor remains ultimately responsible for the financial obligation, although the creditor has been paid out.
After satisfaction of the debt a financial obligation of another type is now owed by “A” but to “P” and not to the creditor. “A” owes an indemnity to “P” on the basis that it would be unconscionable for “A’ not to compensate “P”. Intent has no part to play, the principle is entirely based in Equity.
In one case a Judgment Debtor asked her brother in law to satisfy the Judgement Debt which he did with any agreement and he was entitled to an award of Equitable Compensation.
The guarantee situation
The case law here establishes the equitable principle of “Indemnification”. The Debtor owes an indemnity to the guarantor from the time the guarantee is entered into although that entitlement may not manifest it’s self until the guarantor has paid out under the guarantee and the creditors rights against the debtor have been wholly satisfied.
Satisfaction by legal compulsion
One example is where a receiver appointed by a security holder pays employee entitlements pursuant to S433 of the Corporations Act 2001(Cth), the affect being that the value of the security holder’s interest is reduced by the amount paid by the receiver to the employees.
Employees are entitled to be paid in priority to unsecured creditors and the receiver is compelled to make the payment. If the security holder was not able to compensation for the amount paid this would advantage the unsecured creditors as the amount available to them would not be reduced by the amount paid by the receiver. Under the principle the secured interest holder is entitled to recoup the amount paid to employees out of the amount available to the unsecured creditors (the free assets).
Another example is where a purchaser of real estate has paid a deposit and the administrator of a Fidelity Fund is compelled to pay compensation where the deposit has been stolen or misappropriated. Here there is a financial obligation owed by the holder of the deposit to the purchaser which is satisfied by the administrator of the fund.
The position of the Creditor
Where any of the circumstances above arise the rights of the Creditor are paramount and “P” may not call on the indemnity until the financial obligation owed by “A” to the Creditor has been wholly satisfied. “B” takes action in it’s own name and there is no question of the Creditor being a party to the application.
The topic is said to be confusing and there has been a lot of talk in case law and in commentary of “P” stepping into the shoes of the creditor so that “P” somehow succeeds to the rights of the Creditor, notwithstanding the rights of the Creditor have been extinguished. This is a misconception and fuel for the confusion.
Common law Principles do not apply
Here Equity is a powerful legal tool and any bias toward common law principles of intent or assignment of rights have no part to play.
This article was prepared and contributed by:
Hope Legal Pty Ltd
T: +61 7 3059 6001 | F: +61 7 3059 6002
Address: 1e/24 Macquarie Street, Teneriffe QLD 4005
W: www.hopelegal.com.au