Insolvency – Statutory demand – Guarantor – Statutory demand served on appellant as guarantor of debt – R 6.5(4)(d) of Insolvency Rules 1986 – Whether appellant entitled to have demand set aside where creditor holding security over assets of principal debtor – Appeal dismissed
The respondent extended credit facilities to a company of which the appellant was at the relevant time a director. The appellant gave a personal guarantee to the respondent for the liabilities of the company. The lending was additionally secured by a charge over land owned by the company and by a fixed and floating charge over its assets generally. The company went into administration and the respondent demanded payment from the appellant under his guarantee. When he did not pay, it served a statutory demand on him under r 6.5 of the Insolvency Rules 1986.
The appellant applied to set aside the demand under r 6.5(4) of the 1986 Rules. The district registrar allowed that application, not on any of the specific grounds in r 6.5(4)(a) to (c), but pursuant to the residual discretion to set aside on other grounds under r 6.5(4)(d). In doing so, he took into account the fact that the respondent held security over the company’s assets. The respondent’s appeal against that decision was allowed by a judge and the demand was reinstated.
The appellant appealed. He contended that a statutory demand against a guarantor should be set aside under r 6.5(4)(d) in circumstances where the creditor held security for the debt over the assets of the principal debtor, by analogy with the position that would have applied under r 6.5(4)(c) had the statutory demand been served on the principal debtor. He relied on the Court of Appeal decision in Remblance v Octagon Assets Ltd [2009] EWCA Civ 581 for the principle that the liability of a guarantor should be regarded as co-extensive with that of the principal debtor. Although Remblance dealt with the situation where a cross-claim or set-off was available to the principal debtor, within r 6.5(4)(a), the appellant contended that a similar result should follow in cases where r 6.5(4)(c) applied as between the creditor and the principal debtor.
Held: The appeal was dismissed.
The statutory demand procedure allowed a determination to be made at a preliminary stage of whether the creditor was entitled to invoke bankruptcy proceedings, before the presentation of a bankruptcy petition with the extensive consequences of that event. Rule 6.5(4) provided a preliminary filter in relation to bankruptcy proceedings. If the debtor had a counterclaim, set-off or cross-claim that equalled or exceeded the relevant debt, within r 6.5(4)(a), it could not use bankruptcy proceedings but had to issue civil proceedings to determine the true state of indebtedness. The same applied if the debt was disputed on apparently substantial grounds, within r 6.5(4)(b). In those circumstances, it made no difference whether the debtor’s liability was primary or the secondary liability of a guarantor. A guarantor was as entitled as the principal debtor to take the benefit of any cross-claim when ascertaining the state of account that was the subject of the guarantee, at least for the purpose of bankruptcy proceedings, and the guarantor of a disputed debt could not be made liable, any more than could the principal debtor, until the dispute was resolved: Remblance applied.
The position under r 6.5(4)(c) was different since it regulated the position as regards the debtor’s assets and liabilities. A creditor could not serve a statutory demand against a debtor that had given sufficient security, even if there was no possible defence to a claim on the personal covenant to pay, because the existence of the security meant that it had no interest in the debtor’s estate. It could not prove for its debt or invoke the collective realisation of assets that was the point of insolvency proceedings unless it was willing to give up its security. It could not even present a bankruptcy petition: see r 6.1(5) and section 267 of the Insolvency Act 1986. There was no justification for allowing such a creditor to serve a statutory demand as a preliminary step towards insolvency proceedings that it would not be allowed to invoke. If, on the other hand, the security was given not by the particular debtor but by a third party, that security was not an asset that could have any effect on the bankrupt estate of the particular debtor since it could not form part of that debtor’s assets divisible between its creditors. Therefore, the existence of that security was not a reason for the creditor not to proceed against the particular debtor and was accordingly irrelevant for the purposes of r 6.1(5) and r 6.5(4)(c). It followed that the existence of a security held over the assets of a third party, which would bring into play r 6.5(4)(c) in relation to that party, was irrelevant under r 6.5(4)(d) to a statutory demand served on a separate debtor that had provided no security, even if liable as guarantor for the same debt: Remblance distinguished.
A creditor that had several remedies could choose which to enforce, when, how and in what order, limited only by the proposition that it could not recover more than was due to it on the debt with interest and costs: China & South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536 applied. A guarantor could not argue that the creditor should pursue the principal debtor first or should first realise the security given by that principal debtor. Had the respondent issued proceedings against the appellant for payment, it would have obtained judgment on a summary basis and would have been entitled to enforce the judgment by normal procedures, after which, if the judgment were not satisfied in full, it could have presented a bankruptcy petition in reliance on section 268(1)(b) of the 1986 Act. In that situation, there was no reason why it should not invoke bankruptcy proceedings directly by serving a statutory demand.
Peter Arden QC and Kavan Gunaratna (instructed by Coyle White Devine) appeared for the appellant; Barry Isaacs QC (instructed by DWF LLP) appeared for the respondent.
Sally Dobson, barrister
