Landlord and tenant — Sureties — Tenant company sold by sureties — Purchasing shareholders giving indemnification to sureties — Insolvency — Whether co-debtors to sureties released by insolvency voluntary arrangement of one of their number — Whether accord and satisfaction
The plaintiffs
were sureties under a lease of commercial premises granted to a company of
which the plaintiffs were originally the principal shareholders. In 1989 the
plaintiffs sold their shares in the company to three individuals, H and the two
defendants, and ceased to have any connection with the company. The company
having failed to pay the rent, the plaintiffs satisfied the landlord’s claim,
but sought reimbursement from the defendants under the terms of the
indemnification obligation in the share sale agreement. In April 1994 H entered
into an insolvency voluntary arrangement (‘IVA’); this followed a meeting of
H’s creditors at which the plaintiffs voted in favour of the IVA. In an appeal
by the plaintiffs from the decision of the deputy district judge, in proceedings
by them under Ords 14 and 14A of the RSC for summary judgment and the
determination of certain legal points, the defendants contended, inter alia,
that by the IVA entered into by H, they were released from their obligation to
indemnify the plaintiffs for any sums paid to the landlord.
a creditor votes for or against an IVA, he does nothing more than vote for or
against a statutory binding; the IVA binds only the persons entitled to vote
and an outsider can get no assistance from the terms of the IVA at all. The
creditor does not enter into a contract with the debtor or with his
co-creditors, and he does not purport to touch his rights against third
parties. An IVA does not have the effect of releasing perfectly solvent
co-debtors. Accord and satisfaction does not apply to an IVA; a co-debtor is
not released by the debtor’s IVA.
The following
cases are referred to in this report.
Bradley-Hole,
Re [1995] 1 WLR 1097; [1995] 4 All ER 865
Burford
Midland Properties Ltd v Marley Extrusions Ltd
[1994] BCC 604; [1995] 2 EGLR 15; [1995] 30 EG 89
Deanplan
Ltd v Mahmoud [1993] Ch 151; [1992] 3 WLR
467; [1992] 3 All ER 945; (1992) 64 P&CR 409; [1992] 1 EGLR 79; [1992] 16
EG 100
EWA Re, A
Debtor [1901] 2 KB 642; 70 LJKB 810; 85 LT 31; 49
WR 642, CA
March
Park Estates v Gunmark [1996] 2 EGLR 38;
[1996] 32 EG 75
Mytre
Investments Ltd v Reynolds [1995] 3 All ER
588; [1995] 2 EGLR 40; [1995] 43 EG 131
Pybus v Gibb (1856) 6 E&B 902
RA
Securities Ltd v Mercantile Credit Co Ltd
[1995] 3 All ER 581; [1994] 2 EGLR 70; [1994] 44 EG 242
Watts v Aldington unreported December 15 1993
This was an
appeal by the plaintiffs, Robert Arthur Johnson and Anne Johnson, from a
decision of Deputy District Judge Radcliffe, sitting in Brighton District
Registry, whereby he refused to give the plaintiffs the relief they claimed
under summonses issued under Ords 14 and 14A of the RSC against the defendants,
Suzanne Davies and Nicholas Cole.
Christopher
Wilson (instructed by Aldrich Crowther & Wood, of Brighton) appeared for
the plaintiffs; Clifford Darton (instructed by Judge Sykes & Harrison, for
the first defendant, and Edward Harte & Co, of Brighton, for the second
defendant) appeared for the defendants.
Giving
judgment, Jacob J said:
This is a plaintiffs’ appeal from the decision dated May 14 1996 of Deputy
District Judge Radcliffe sitting in Brighton District Registry. The application
was for summary judgment under the provisions of RSC Ord 14 and determination
of a number of points of law pursuant to Ord 14A. Although the sum involved is
comparatively small the appeal raises a question of general importance in
relation to the effect of an individual voluntary arrangement (‘IVA’) under the
provisions of the Insolvency Act 1986. It was extremely well argued by counsel
on both sides and I am grateful to them both.
The facts
The plaintiffs
are two individuals. Originally they owned practically all the shares in a
company. The company took a lease from a landlord, L. The plaintiffs were
sureties under that lease. In 1989 the plaintiffs sold their shares in the
company to three individuals, namely the two present defendants and a Mr
Hopkins. They also resigned their directorships and ceased to have any
connection with the company. The plaintiffs say that by virtue of the share
sale agreement the purchasers (namely the defendants and Mr Hopkins) agreed to
indemnify the plaintiffs against all claims arising out of the lease. The next
they heard was in 1993 when they were informed that the company had failed and
that a claim was being made against them on the indemnity they had given in the
lease. They had to meet that claim and accordingly seek to rely on the indemnity
from the defendants contained in the share sale agreement. The lease has now
come to an end, so there is no problem about any on-going liability for rent.
The plaintiffs claim from the defendants what they had to pay, after
appropriate adjustments with which I am not concerned.
On April 19
1994, following the relevant procedural steps pursuant to the Insolvency Act,
Mr Hopkins entered into an IVA with his creditors. The plaintiffs were given
notice of the meeting and voted for the IVA. As it happens if they had voted
against the proposal for an IVA it would not have got the necessary 75% in
value majority called for by r5.18 of the Insolvency Rules 1986 (SI 1986 no
1925). One of the defendants, but not the other, was also given notice of the
meeting. Under the IVA the creditors were to be paid 11p in the pound. Two
provisions of the IVA read as follows:
4. When all
monies to be made available under these proposals have been realised and
distributed to creditors in accordance with the terms herein I [ie Mr Hopkins]
will be released from any further liability to them relating to claims in
respect of which they were entitled to participate in this Voluntary
Arrangement …
15. When all
assets to be made available under these proposals have been realised and distributed
to the creditors in accordance with the terms herein, I will be released from
any further liability to them relating to claims in respect of which they were
entitled to participate in this Voluntary Arrangement.
In summarising
these facts I have omitted what is now agreed to be an immaterial complication,
namely that at one point L granted a
the defendants before the deputy district judge. He held against the defendants
on this point. Mr Clifford Darton, for the defendants, sensibly concluded that
the judge was right on this point and abandoned it. He likewise abandoned
another point about whether or not the 1989 agreement was a guarantee or an
indemnity.
The issues
That leaves
two issues to be determined. First, have the plaintiffs proved to the standard
of Ord 14 that the defendants gave the indemnity relied upon and second, does
the IVA with Mr Hopkins release the defendants?
Was there
an indemnity?
The problem is
this: the plaintiffs are unable to produce the original of the 1989 share sale
agreement. The best they can do is rely upon the following matters: that a
draft, signed by the first plaintiff for both plaintiffs was in the possession
of the defendants, that the shares in the company were undoubtedly paid for and
transferred to the defendants and Mr Hopkins, that the defendants and Mr
Hopkins took over the company, and that the plaintiff’s solicitor recalls that
the defendants did sign the agreement. Further there is contemporaneous
correspondence supporting the existence of a contract. The solicitor deposes
that he has been unable to find the signed agreement. The defendants do not say
there was no contract or that the draft contract produced in fact contains the
terms to which they agreed. They just say they do not remember.
The deputy
district judge took the view that the evidence of the plaintiffs’ solicitor was
not a firm enough foundation for Ord 14 and that his recollection may be
successfully challenged on cross-examination. However, the defendants are in
this difficulty: there plainly was an agreement of some sort. They are unable
to suggest any agreement other than that signed by the plaintiffs. It is wholly
improbable that the plaintiffs would not have taken an indemnity. And Mr Darton
fairly and sensibly accepted that the evidence (apart from a possible challenge
to the solicitor’s recollection) would not change at trial. I think in the
circumstances there is no realistic prospect of the plaintiffs being unable to
prove that there was indeed an indemnity.
The effect
of the IVA
This is a pure
point of law. The defendants say that the effect of the IVA with Mr Hopkins is
to extinguish their liability to the plaintiffs. They say first that any
co-debtor is released by operation of law when the debt is taken into account
in a debtor’s IVA. Recognising that this would include the case where the
creditor had voted against the IVA (producing the monstrous result that a
creditor would, against his will, lose a perfectly good claim against a solvent
co-debtor) they say alternatively that at least this is the case where the
creditor votes for the IVA.
The solution
to the problem depends, on one view, on the correct juridical analysis of an
IVA. Is the arrangement to be regarded as ‘quasi-contractual’ (as Mr Darton put
it) or is it an arrangement whose effect is simply provided for in the statute?
Section 260(2) provides that:
The approved
voluntary arrangement–
(a) …
(b)
binds every person who in accordance with the rules had notice of, and was
entitled to vote at, that meeting (whether or not he was present or represented
at it) as if he were a party to the arrangement.
In RA
Securities Ltd v Mercantile Credit Co Ltd [1995] 3 All ER 581* I had
to consider the effect of the corresponding parallel provision relating to
company voluntary arrangements in the 1986 Act, namely section 5. I said at
p585:
*Editor’s
note: Also reported at [1994] 2 EGLR 70
Turning back
to s 5, does ‘binds every person’ have any effect outside the voluntary
arrangement? I think not. The effect of the binding is solely as between the
parties bound, those entitled to vote, whether they did nor not. An outsider,
such as Tl, can get no assistance from the terms of the voluntary arrangement
as such. Of course if something is actually done as a result of the arrangement
(eg property transferred, or as might have but did not happen here, surrender
of a lease) then an outsider can rely upon that. But his right to rely upon it
must result from an actual act done, not the arrangement.
I remain of
that view. It is unnecessary to spell out of the statute anything more than
that. I see no reason to think that when a creditor votes for or against an IVA
he is doing anything more than just voting for or against a statutory binding.
He is not entering into a contract with the debtor or with his co-creditors and
he is not purporting (unless the document expressly says so) to touch his
rights against third parties. Either the IVA is approved, when it has the legal
consequences set out in the Act, or it is not, in which case the debtor will
probably go into bankruptcy. And I remain of the view that an IVA (or a company
voluntary arrangement) does not have the effect of releasing perfectly solvent
co-debtors. The Act does not say it does and I do not see why in principle it
should have that effect. As I said in RA Securities, at p584:
The purpose
of voluntary arrangements is to enable a company (or individual, for which case
provision is made in Pt VIII) to come to a composition with creditors so that
the more drastic step of liquidation or bankruptcy can be avoided, if possible.
It is better to keep the show on the road than close it down even if creditors
have to accept less than their nominal (but not achievable) entitlement. The
whole scheme is not for the benefit of solvent parties who happen to owe debts
also owed by the debtor. It would in my judgment be unfair if a solvent debtor
escaped liability as a sidewind of the voluntary arrangement system.
Mr Darton
accepted that an IVA did not constitute a contract. But, he said, that did not
matter. It still operated to extinguish the debt. He relied on the principle
that the release of one joint debtor (or covenantor) will release the other
joint debtors (or covenantors) unless the creditor’s (covenantee’s) rights
against the latter are reserved, referring to Re EWA, A Debtor [1901] 2
KB 642 and Deanplan Ltd v Mahmoud [1993] Ch 151*. In EWA
Collins LJ said:
*Editor’s
note: Also reported at [1992] 1 EGLR 79
If this legal
consequence had been pointed out to the bank at the time, they might have said
that that was not what they intended, but that is a factor common probably to
all cases in which a release is given to one of two joint debtors. The person
giving it may not realise the full legal consequences of it as regards the
release of the co-debtor; but that is not, in my opinion, a sufficient ground
for reading into the document something that is not expressed in it; and unless
you find in it something qualifying the general words, it appears to me that
the legal consequences of the general words of discharge must follow,
notwithstanding that those consequences may go beyond what the person giving
the document would have intended if they had been pointed out to him at the
time, and he had had an opportunity of addressing his mind to them.
And in Deanplan
three reasons for the rule were identified by Judge Paul Baker QC:
(1) There is
only one obligation;
(2) The
covenantee cannot have both the promised performance and some other performance
which he agrees to accept;
(3) Unless the
co-covenantors are also released they could claim a right of contribution or
indemnity from the covenantor who entered into the release.
Mr Darton said
that even if the arrangement was purely statutory, so reason (2) did not apply,
reasons (1) and (3) still did. As to reason (1) I do not think that an IVA
operates to destroy the obligation as such. It merely binds the creditor (by
virtue of section 260(2)) to an alternative. In practice that alternative is merely
payment of a sum less than that which is due. If he agreed to accept less
directly with the debtor, it is worth noticing that his agreement would have no
consideration and
releasing a co-debtor.
As to reason
(3) there is some force in what Mr Darton says. If a co-debtor is not released
then he may upset it by claiming contribution from the debtor. This may pose a
problem where he is not bound by the IVA (eg because he was not given notice or
had only a contingent claim). He could go against the debtor and possibly upset
the IVA, though the possibility of a further IVA varying the first would exist.
Mr Darton adds this would be particularly unfair on the co-debtor if, as Rimer
J held in Re Bradley-Hole [1995] 4 All ER 865, the assets the subject of
an IVA did not vest in a trustee in bankruptcy but remained in a trust of which
the trustee was the nominee of the IVA. (I was told that this decision has been
questioned on the basis that normally a debtor cannot put his assets beyond the
reach of creditors by putting them into a trust. I do not think it is necessary
for me to consider it further here.)
But although
there is some force in what Mr Darton says, I do not think it is sufficient to
hold that the accord and satisfaction rule applies to an IVA. Most
significantly the Act does not say it does. Further if the rule did apply no
creditor, sensibly advised, would ever vote for an IVA when he had a solvent
co-debtor to go against. This in practice could frustrate many a proposed IVA.
It is true that the co-debtor may attack the debtor if not himself bound, but
in practice there may be little point. And the creditor will often get more
recovery from the debtor via an IVA (thus indirectly benefiting the co-debtor)
than via a bankruptcy. Here, for instance, Mr Hopkins paid 11p in the £, which,
on the figures in the IVA proposal, is more than a bankruptcy would have been
likely to yield.
Mr Darton
suggested that the creditor could protect his right against co-debtors by
insisting upon an express reservation of his right at the meeting. If he did
not get it, then he could be protected by an appeal to the court under section
262. Implicit in this suggestion is that the court would never allow a creditor
to lose his right against a co-debtor, which is not an explicit limitation on
the court’s powers. In practice the consequence of such an insistence would be
that many an IVA would fail at the outset.
Before turning
to the second way the plaintiffs put their case I should touch upon certain
further matters concerning my decision in RA. First, I commented on a
passage in the 1992 edition of Andrews and Millett’s Law of Guarantees.
I said at pp586–587:
This does not
adopt the Chitty view, suggesting as a better analysis, the notion that
a voluntary arrangement is in effect a statutory variation of pre-existing
contractual rights. It follows, the authors argue, that the common law effect
of discharge of a surety by a consensual discharge of the debtor (without
reservation of a right against the surety) will apply in a voluntary
arrangement. This analysis to my mind turns a statutory binding into a consent
and is in error.
I remain of
that view. The authors, in their 2nd ed (1995) say at p244:
In RA
Jacob J disapproved this argument on the ground that a statutory binding cannot
be equated with a consent. However it is difficult to see why the fact that the
satisfaction of the debt under the voluntary arrangement is statutory rather
than consensual on a creditor by creditor basis should make any difference to
the result. Indeed in Finch v Jukes, it was held that a surety
for performance of obligations under a building contract was discharged when
the obligations of the principal were altered by an Act of Parliament.
The authors
then, in a footnote, cite Pybus v Gibb (1856) 6 E&B 902 and
observe that neither this case nor Finch were cited to me in RA.
That is true, but I do not think either case relevant. In both what happened
was that the defendant had agreed to act as surety for obligation X, but, by
Act of Parliament, that obligation had been varied to obligation Y. The court
asked in each case whether the position of the surety was so altered that he
must be treated as being discharged — the inquiry being the extent of the
difference between X and Y.
Next it may be
observed that RA has not been questioned in three subsequent cases,
namely Burford Midland Properties Ltd v Marley Extrusions Ltd
[1994] BCC 604*, Mytre Investments Ltd v Reynolds [1995] 3 All ER
588† and March Park Estates v Gunmark [1996] 32 EG 75‡. Now it is
true that in Burford Judge Cooke QC, sitting as a High Court judge, took
the contractual route, holding that on the construction of the IVA concerned,
third parties were not absolved. And in March Park Lightman J allowed
for the possibility that an IVA may affect third party rights. He said:
*Editor’s
note: Also reported at [1995] 2 EGLR 15
†Editor’s
note: Also reported at [1995] 2 EGLR 40
‡Editor’s
note: Also reported at [1996] 2 EGLR 38
A voluntary
arrangement may expressly or by necessary implication regulate the rights inter
se of a creditor of the company and of third parties liable for the same
debt: consider [Burford]. Exceptional circumstances may justify this
course. But if this is to be the case, the intention to regulate such rights
must be made plain on the face of the proposal. Of course notice of the meeting
must also be given to those affected. In this way, those affected will know
what is at stake, can make representations and vote at the meeting accordingly,
and if necessary can within the statutory 28-day period apply to the court
under section 6 of the Act (as to which see below) to revoke or suspend the approval
of the meeting if this provision in the proposal unfairly prejudices their
interests. But in the absence of either of these statutory safeguards to the
interests of those affected being complied with, any arrangement can only
affect the company alone, leaving unaffected the rights of the creditor against
third parties. The voluntary arrangement may statutorily absolve the company
from liability without absolving or releasing from liability any other party
and will ordinarily be construed as reserving all rights of creditors against
other parties: see RA Securities (supra) and [Mytre].
I do not think
this in any way conflicts with my view that an IVA is in itself a mere
statutory binding. If it expressly or by necessary implication deals with the
position as between a creditor and a co-debtor that binding may have an effect.
If the co-debtor is a party to the IVA he may be bound directly by statute. If
he is not a party then he cannot take advantage directly of the IVA. In some
cases there may be machinery which could operate to prevent the creditor from
going against the third party, for instance a plea of estoppel by convention
(which I have not investigated) or, by the third party turning on the debtor
who, by virtue of the IVA, would be able to prevent the creditor from
proceeding against the third party.
The
significance of the conclusion that an IVA operates to bind the parties to it
merely by statute as compared by contract is that it is for the statute to
spell out the consequences. It does not absolve solvent third party co-debtors:
it merely binds the parties to the IVA. This IVA only releases Mr Hopkins from
liability to the plaintiffs and does not seek to deal with the position between
the plaintiffs and third parties. It is not a necessary implication that it
goes any further.
Further,
however, even if an IVA is to be regarded as something like a contract it is a
question of construction as to whether it releases third parties. This IVA does
not say it does. Mr Wilson, for the plaintiffs, drew my attention to the
unreported Court of Appeal case of Watts v Aldington, unreported
December 15 1993. A large sum by way of damages and costs had been awarded to
Lord Aldington against Count Tolstoy and a Mr Watts. Lord Aldington entered
into a settlement with Mr Watts whereby a much lesser sum was accepted (along
with other matters providing a consideration). A term of the settlement
provided:
That Lord
Aldington undertakes to accept the said sum in full and final settlement of the
judgment and orders referred to above and any liability howsoever arising
before today’s date which could involve any payment directly or indirectly to
Lord Aldington.
Even though
that clause was a good deal more explicit than the clause here, the Court of
Appeal held that it did not absolve Mr Watt’s co-debtor, Count Tolstoy. Morritt
J’s solution to the problem — that the agreement was merely an agreement not to
sue (the well-settled escape route from the rule in EWA) — was rejected.
But each of the lord justices held that the rule in EWA (which they
accepted, reluctantly in the case of Steyn LJ, was binding) did not apply where
intention to be learned from the language used and the surrounding
circumstances. They were willing, in the circumstances of that case, to imply
such a term. I would do likewise in this case. In particular, since this is not
one of actual contract, one must focus on what was the intention of the
creditors. Clearly if they voted against the IVA they could not be consenting
to a release of the co-debtor. If they voted for the IVA I see no reason why,
unless that was expressly what was involved in what they were voting for, they
should be held to have voted for a release of a co-debtor. On the contrary, if
the voter was asked ‘are you voting for a release’ the answer would clearly be
a testy ‘no’.
In the result
the IVA defence fails. I am not sorry. I think it would be absurd if the two
sureties were better off because there was a third surety who failed (although
contributing something to payment of the debt), than if they had stood alone.
Similarly it would be very bizarre if the creditors were worse off because they
had a further surety in addition to the two defendants. The actual result means
that instead of shouldering a third of the liability, each of the defendants
will have to take on something like 45%. That does not seem particularly
unfair.
Accordingly
the appeal succeeds. I will hear counsel.
Appeal
allowed.
