Insolvency — Voluntary arrangement — Co-debtors — Joint liability — Indemnification of liability under lease — Whether co-debtors released by terms of voluntary arrangement — Whether liability of co-debtors ever effected by voluntary arrangements
By a lease
dated January 1984, premises were let to a company for a term of 12 years. The
plaintiffs, who owned 98 of the 100 shares in the company, were sureties under
the lease for the company’s obligations as tenant. By an agreement dated June 19
1989, the plaintiffs agreed to sell their shares to the defendants and to H.
Clause 3 of the agreement contained a covenant by the three purchasers to keep
the plaintiffs indemnified against all claims, liabilities and costs arising
under the lease. In 1992 the company was placed in receivership. The plaintiffs
were called on to pay, and did pay, rent due under the lease, insurance and
dilapidations. In 1994 a voluntary arrangement was approved in relation to H
under the Insolvency Act 1986; para 4 of the voluntary arrangement released H
from any further liability in respect of claims by his creditors when he had
paid all moneys under the arrangement. The plaintiffs voted in favour of the
arrangement. Allowing an appeal from the deputy district judge, Jacob J decided
that the effect of H’s individual voluntary arrangement was not to release the
defendants, who were solvent co-debtors to the plaintiffs under the 1989
agreement. The defendants appealed.
agreement between A and B precludes A from enforcing a debt owed by C. Given
the opposing interests of A and B, the question is therefore one of what they
have agreed. Liability under clause 3 of the 1989 agreement was joint. The
words used in the voluntary arrangement, construed in the light of the
proposals as a whole, are inconsistent with an intention to effect an immediate
or absolute release of the debts owed to the creditors; the release was not to
take effect (if at all) until H’s obligations under the arrangement had been
fulfilled. The principle that no term in a voluntary arrangement can have the
effect of releasing a co-debtor or surety is wrong. The effect of a voluntary
arrangement has to be determined by construing its terms. H’s voluntary
arrangement did not have the effect of releasing or discharging the defendants
from their liability as co-debtors.
The following
cases are referred to in this report.
Adler
(Richard) (t/a Argo Rederei) v Soutos (Hellas)
Maritime Corpn, Argo Hellas, The [1984] 1 Lloyd’s Rep 296
Commercial
Banking Co of Sydney Ltd v Gaty [1978] 2
NSWLR 271
Dane v Mortgage Insurance Corporation [1894] 1 QB 54; 63 LJQB
144; 70 LT 83; 42 WR 227
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, In
re (A Debtor) [1901] 2 KB 642; 70 LJKB 810; 85 LT
31; 49 WR 642, CA
Ex parte
Jacobs (1875) LR 10 Ch App 211; 31 LT 745
Garner’s
Motors Ltd, In re [1937] Ch 594
Hill v Anderson Meat Industries Ltd [1972] 2 NSWLR 704
London
Chartered Bank of Australia, In re [1893] 3 Ch 540
March
Estates plc v Gunmark Ltd [1996] 2 EGLR 38;
[1996] 32 EG 75; [1996] 2 BCC 1
Megrath v Gray (1874) LR 9 CP 216
Nicholson v Revill (1836) 4 A&E 675; [1835–42] All ER Rep 148; 6
Nev & MKB 192; 1 Har & W 756; 5 LJKB 129
North v Wakefield (1849) 13 QB 536
Oriental
Commercial Bank, Re, ex parte European Bank
(1871) LR 7 Ch App 99; 41 LJCh 217; 25 LT 648; 20 WR 82
RA
Securities Ltd v Mercantile Credit Co Ltd
[1995] 3 All ER 581; [1994] 2 EGLR 70; [1994] 44 EG 242
Solly v Forbes (1820) 2 B&B 38; 22 RR 641
Watters v Smith (1831) 2 B&A 889
Watts v Aldington (Lord) unreported December 15 1993
White v Tyndall (1888) 13 App Cas 263; 58 LT 741; 52 JP 675; 4 TLR
411, HL
This was an
appeal by the defendants, Susan Davies and Nicholas Cole, from a decision of
Jacob J, who had allowed an appeal by the plaintiffs, Robert Arthur Johnson and
Anne Johnson, from a decision of the deputy district judge dismissing
applications by the plaintiffs under Ords 14 and 14A RSC in Brighton District
Registry.
Clifford
Darton (instructed by Judge Sykes Frixou and by Edward Harte & Co, of
Brighton) appeared for the appellants; Christopher Wilson (instructed by
Aldrich Crowther & Wood, of Brighton) represented the respondents.
Giving the
judgment of the court, CHADWICK LJ
said: These two appeals, from the order of Jacob J made on December 5 1996,
raise the same question: whether or not the appellants were released from their
obligation under a covenant to indemnify the respondents against claims arising
under a lease by reason of the terms of an individual voluntary arrangement
made under Part VIII of the Insolvency Act 1986 by a co-obligee who was liable,
jointly with the appellants, under the same covenant.
The facts may
be stated shortly:
1. At all
material times until July 1989 or thereabouts Robert Arthur Johnson and his
wife Anne Johnson (the plaintiffs in this action and
shares of £1 each in PPM Plastics & Photographs Ltd (the company). The
company was the lessee of premises known as Cambridge Works, Cambridge Grove,
Hove. Those premises were held under a lease dated January 4 1984 for a term of
12 years from September 29 1982. Mr and Mrs Johnson had joined in that lease as
sureties for the obligations of the tenant.
2. By an
agreement dated June 19 1989 Mr and Mrs Johnson agreed to sell their shares in
the company to Nicholas Cole (the second defendant), his former wife Susan Cole
(now Susan Davies, the first defendant) and Christopher Hopkins. Mr Cole, Mrs
Davies and Mr Hopkins are, together, described in the agreement as ‘the
Purchasers’. Clause 3(d)(ii) of the agreement contains a covenant by the
purchasers to keep Mr and Mrs Johnson indemnified against all claims,
liabilities and costs arising under the lease of January 4 1984.
3. At or about
the end of 1992 the company was placed in receivership. Mr and Mrs Johnson were
called on to pay, and did pay: (i) the quarterly instalments of rent due under
the lease in respect of the remaining 21 months of the term; (ii) the cost of
insuring the demised premises (payable as additional rent under the terms of
the lease); and (iii) a sum in respect of dilapidations payable upon
termination of the lease in September 1984.
4. On February
8 1994 an interim order under section 252 of the Insolvency Act 1986 was made
in Brighton County Court on the application of Mr Hopkins. The nominee’s report
on the debtor’s proposals was submitted to the court, pursuant to section 256
of the Act, on March 18 1994. A meeting of creditors was summoned for April 12
1994. The decision of that meeting, approving the proposals, was reported to
the court pursuant to section 259 of the Act on March 21 1994. Mr and Mrs
Johnson were given notice of the creditors’ meeting. They were entitled to vote
at that meeting, and they exercised that right by voting in favour of the
voluntary arrangement.
5. Under the
voluntary arrangement approved on April 12 1994 Mr Hopkins was to pay to the
supervisor 75% of his net income (in excess of reasonable living expenses but
subject to a minimum monthly payment of £300) for a period of five years from
the date of approval and to transfer all ‘windfall’ assets accruing to him
during that period. Para 4 of the voluntary arrangement was in these terms:
When all
monies to be made available under these proposals have been realised and
distributed to creditors in accordance with the terms herein, I will be
released from any further liability to them in relation to claims in respect of
which they were entitled to participate in this voluntary arrangement.
Para 19 was in
terms identical to para 4. Para 24 contained the usual provision for the issue
of a certificate of default in respect of the matters referred to in section
276(1) of the Insolvency Act 1986 and required the supervisor, following the
issue of a default certificate, to consult creditors as to the presentation of
a bankruptcy petition.
The claim in
this action is for repayment of the sums paid by Mr and Mrs Johnson under the
covenant for indemnity, after giving credit for the net income received by them
from a subletting or licence of the demised premises during part of the
remainder of the leasehold term. The action was commenced by writ issued in the
Queen’s Bench Division, Brighton District Registry, on September 6 1994. In or
about September 1995 the plaintiffs applied for the summary determination of
two points of law, pursuant to Ord 14A of the Rules of the Supreme Court 1965,
and for summary judgment in respect of the whole of their claim. Those
applications were heard by Deputy District Judge Radcliffe. In the course of a
long and careful reserved judgment delivered on May 14 1996, he held, inter
alia, that the defendants had been released from liability under their
covenant for indemnity. The plaintiffs appealed from that decision. The appeal
was heard by JacobJ, sitting in the Chancery Division, on November 29 1996.
JacobJ set aside the order of May 14 1996 made in Brighton District Registry
and ordered that the defendants pay to the plaintiffs the sum of £19,663.90
(together with interest) on terms that the plaintiffs should give credit for
all sums received by them under the terms of Mr Hopkin’s voluntary arrangement.
The defendants appeal to this court with the leave of the judge.
The judge,
following an earlier decision of his own in RA Securities Ltd v Mercantile
Credit Co Ltd [1995] 3 All ER 581*, took the view that the effect of an
individual voluntary arrangement — or, at the least, the effect of this
individual voluntary arrangement — was not such as to release solvent
co-debtors under the rule of law that the release of one of two or more joint
debtors has the effect of releasing the other or others. The short question on
this appeal is whether the judge was correct in that view.
*Editor’s
note: Also reported at [1994] 2 EGLR 70
An
authoritative statement of the general rule of law as to the release of
co-debtors — as it was understood before the recent decision of this court in Watts
v Lord Aldington (unreported December 15 1993) — is found in the
judgment of Judge Paul Baker QC, sitting as a judge of the High Court, in Deanplan
Ltd v Mahmoud [1993] Ch 151*. After a review of the 19th-century
authorities from Watters v Smith (1831) 2 B&A 889 and Nicholson
v Revill (1836) 4 A&E 675 to In re EWA (a debtor) [1901] 2 KB
642, Judge Baker expressed his conclusions in the following terms at p170B–C:
*Editor’s
note: Also reported at [1992] 1 EGLR 79
First, a
release of one joint contractor releases the others. There is only one
obligation. A release may be under seal or by accord and satisfaction. A
covenant not to sue is not a release. It is merely a contract between the
creditor and the joint debtor which does not affect the liabilities of the
other joint contractors or their rights of contribution and indemnity against
their co-contractors. It is a question of the construction of the contract
between the creditor and joint debtor in the light of the surrounding
circumstances whether the contract amounts to a release or merely a contract
not to sue.
Judge Baker
went on to consider (ibid, p170D–F) whether the same principles applied
to a contract between the creditor and one of joint and several debtors.
Different considerations arise in such a case because the existence of several
indebtedness negates a conclusion based on the premise that there is only one
obligation. Nevertheless, for the reasons that he explained, Judge Baker
reached the conclusion that if one joint and several covenantor is released by
accord and satisfaction, all are released. He said:
Some have
seen this as illogical, and so it would be if the only reason for the rule that
the release of one joint contractor releases the other is that there is only
one obligation. Professor Glanville Williams sees the reason for the extended
rule to have been an early uncertainty as to the nature of a joint and several
obligation: see Joint Obligations, p135, para 63. Two other reasons can
be adduced. First, where the obligations are non-cumulative, ie the obligation
of each is to perform in so far as it has not been performed by the other
party, the acceptance of some other performance in lieu of the promised
performance relieves the others. The covenantee cannot have both the promised
performance and some other performance that he agrees to accept. Secondly,
unless the co-covenantors were released following an accord and satisfaction,
they could claim a right of contribution or indemnity. Thus, by suing the
co-contractor, the creditor commits a breach of the contract with the released
covenantor, for such an action will inevitably lead to the very claim from
which the release has been purchased by accord and satisfaction.
The second of
the two additional reasons identified in that passage has particular force in a
case, such as the present, where the release (if any) is part of an arrangement
between the debtor and a number of his creditors. In such a case the effect of
allowing one creditor to sue the debtor’s co-covenantor (who will not usually
be party to that arrangement) is that enforcement by the co-covenantor against
the debtor of the co-covenantor’s right of contribution or indemnity (which
will not itself be subject to the arrangement) may prejudice the other
creditors, who have entered into the arrangement on the basis that that debt
will stand in the same position as the debts that are owed to them.
The extent to
which the statement of the general rule in Deanplan Ltd v Mahmoud
(supra) continues to represent the law, at least in this court, was
considered by the Court of Appeal in Watts v Lord
appeal arose out of the terms of settlement of proceedings for libel brought by
Lord Aldington against Mr Nigel Watts and Count Nikolai Tolstoy. Lord Aldington
had obtained judgment for substantial damages against both defendants following
a trial. Bankruptcy orders were made against both Mr Watts and Count Tolstoy.
By early 1991 Lord Aldington was faced with appeals or applications to appeal
in four sets of proceedings — described by Neill LJ on pp3–6 of the Court of
Appeal transcript. There were negotiations for settlement between Mr Watts and
Lord Aldington, which led to a letter agreement dated March 20 1991. It was a
term of that letter that third parties should pay £10,000 to Lord Aldington on
behalf of Mr Watts. Para 6 of the letter was in these terms:
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 by you directly or
indirectly to Lord Aldington.
Following that
settlement a consent order was made annulling the bankruptcy order that had
been made against Mr Watts.
Lord Aldington
had sought to prove in the bankruptcy of Count Tolstoy. The trustee in that
bankruptcy claimed contribution against Mr Watts under section 1 of the Civil
Liability (Contribution) Act 1978. Mr Watts sought a declaration against Lord
Aldington that the settlement of March 20 1991 constituted a release of all
rights that Lord Aldington had against himself and Count Tolstoy; and
Count Tolstoy sought an order directing his trustee in bankruptcy to reject
Lord Aldington’s proof in respect of the original judgment debt.
Those
applications came before Morritt J. The issue before him, so far as material,
was whether para 6 of the settlement letter of March 20 1991 constituted a
release of the judgment debt, so relieving Count Tolstoy, as well as Mr Watts,
from any further liability to pay that debt and so extinguishing the right of
contribution that Count Tolstoy, through his trustee in bankruptcy, would
otherwise have had against Mr Watts, or whether the settlement should be
construed merely as an agreement by Lord Aldington not to sue Mr Watts. The
judge held that the agreement of March 20 1991 was an agreement not to sue on
or enforce the original judgment debt, not an agreement for the discharge of
the liability under it.
The Court of
Appeal found difficulty in adopting the judge’s view that, as a matter of
construction, the letter of March 20 1991 evidenced an agreement not to sue
rather than a release. Two members of the court (Steyn and Simon Brown LJJ)
held that para 6 of that letter did contain a release of Lord Aldington’s claim
against Mr Watts. Neill LJ did not find it necessary to decide that point. But
the view that the agreement contained a release of Lord Aldington’s claim
against Mr Watts did not lead to the conclusion that there was a release of
Lord Aldington’s claim against Count Tolstoy. On the contrary, each member of
the court held that the appeal should be dismissed. Neill LJ rejected the
traditional dichotomy between release and agreement not to sue. He said (at
p17F–G of the transcript):
I have come
to the conclusion, however, that in trying to fit the agreement into a
particular category one may lose sight of the true enquiry: what is the meaning
and effect of the agreement, having regard to the surrounding circumstances and
taking into account not only the express words used in the document but also
any terms which can properly be implied.
He was
satisfied (p29F–G) that, on the facts in that case:
the agreement
of March 20 1991 was plainly subject to an implied term that Lord Aldington’s
rights against Count Tolstoy would be reserved. I consider that any other
result would offend common sense.
Steyn LJ, who
had expressed the view that, although the rule that the release of one of two
joint and several tortfeasors was absurd and required re-examination, nevertheless
the court was bound to follow it, approached the matter in the same way. He
said at p39B–C:
In my
judgment, the right question is the following: is Lord Aldington reserving the
right under his agreement [with Mr Watts] to sue Count Tolstoy? In my judgment,
the objective setting of the contract convincingly shows that the answer of
both parties to that question would have been ‘Yes, of course’.
Simon Brown LJ
also rejected what he described as the ‘technicality and intrinsic
artificiality’ of the conventional approach to the rule as to the release of
co-debtors — a rule that he described as a ‘juridical relic’. He defined the
central question before the court as being ‘whether it is proper here to imply
a reservation by Lord Aldington of his rights against Count Tolstoy’. That
question admitted of only one answer (p44B):
On the facts
known to both parties it was perfectly obvious that Lord Aldington was not
prepared to abandon his judgment against Count Tolstoy.
In Watts
v Lord Aldington the liability of Mr Watts and Count Tolstoy as judgment
debtors was, plainly, several as well as joint. In such a case, for the reasons
explained in the judgments in this court, the relevant question is not whether
the agreement between the creditor, A, and one of the co-debtors, B, releases
the debt that B owes to A. Even if it did, that would, in logic, have no effect
on the several debt owed to A by the other co-debtor, C. The relevant question
is whether the agreement between A and B precludes A from enforcing the debt
owed by C. It is in B’s interest that the agreement should have that effect —
because, if it does not, C will be in a position (if he pays the debt that he
owes to A) to seek contribution from B. It is in A’s interest that the
agreement should not have that effect — because, prima facie, A will
wish to recover from C the balance of the indebtedness. Given the opposing
interests of A and B, the question is what have they agreed. As Neill LJ
pointed out, that has to be determined ‘having regard to the surrounding
circumstances and taking into account not only the express words used in the
document but also any terms which can properly be implied’.
The liability
of the purchasers, in the present case, under the covenant in clause 3(d)(ii)
of the share sale agreement of June 19 1989, is a joint liability. There are no
words of severance sufficient to create several as well as joint liability: see
White v Tyndall (1888) 13 App Cas 263 and The Argo Hellas*
[1984] 1 Lloyd’s Rep 296 at p300. I am not persuaded that section 81 of the Law
of Property Act 1925 — to which we were referred by counsel for the respondents
— has the effect of imposing a joint and several liability on the covenantors.
That section enables one of joint covenantees to enforce the benefit of the
covenant; but it does not otherwise affect the obligation of the covenantors.
It is necessary, therefore, to consider whether, and to what extent, the
approach of this court in Watts v Lord Aldington (supra)
is applicable in a case where the only liability is joint — that is to say, in
a case where the rule is firmly based on the unity of the cause of action. The
answer is, I think, to be found in the judgment of Neill LJ, where, after
referring to Solly v Forbes (1820) 2 B&B 38, Watters v
Smith (1831) 2 B&A 889 and North v Wakefield (1849) 13
QB 536, which are all cases of joint, but not joint and several, liability, he
said at p22 of the transcript:
*Editor’s
note: See Adler (Richard) (t/a Argo Rederei) v Soutos (Hellas) Maritime Corpn
Accordingly,
though the result may be the same, in my opinion it will often be more
satisfactory to consider whether the relevant document is an absolute release
or a release with a reservation rather than to consider whether the document
can be fitted into the straight jacket of a covenant or agreement not to sue.
Approaching
the matter on this basis, it seems to me plain that the words used in paras 4
and 19 of the voluntary arrangement, construed in the light of the proposals as
a whole, are inconsistent with any intention to effect an immediate or absolute
release of the debts owed to creditors. The proposals are for the debtor to
make income payments — and to transfer windfall assets — to the supervisor over
a period of five years. The words in paras 4 and 19 … ‘When all monies to be
made available under these proposals have been realised and distributed to
creditors’ … have to be read in that context. Failure by
during the five-year term would give rise to the issue of a certificate of
default, under para 23, and, potentially, to an order for bankruptcy: see para
24 of the proposals and section 276 of the Insolvency Act 1986. In those
circumstances, it seems to me obvious that the creditors would wish to prove in
the bankruptcy for the full amount of their debts; they would be appalled to
find that those debts had been released and replaced by rights under the failed
arrangement. It is for this reason, as it seems to me, that the further words
in paras 4 and 19… ‘I will be released from any further liability to them
relating to the claims in respect of which they were entitled to participate in
the Voluntary Arrangement’… look to the future. ‘When all monies… to be made
available… have been distributed… I will be released’… means just that. The
release is not to take effect (if at all) until the debtor’s obligations under
the proposals have been fulfilled.
I am
satisfied, therefore, that this is not a case in which the bargain evidenced by
the voluntary arrangement between Mr Hopkins and his creditors has led to a
release by accord and satisfaction of the joint debt owed by Mr Hopkins and the
appellants to the respondents; such that that debt can no longer be enforced
against the appellants. But I do not think that that necessarily provides a
complete answer to the issue raised on this appeal. It is plain that some term
has to be implied into the arrangement if it is to work. This is because the
arrangement does not, in terms, preclude any creditor from taking steps,
outside the arrangement, to enforce his claim. Nor is there anything in Part
VIII of the Insolvency Act 1986 that has that effect, other than the terms of
the arrangement to which creditors are bound. Any interim order made under
section 252 of the Act ceases to have effect once the approval of the creditors
to the arrangement has been notified to the court: see section 260(4). But,
plainly, the arrangement will not work as intended if creditors are under no
restriction in relation to the enforcement of their claims. At the least, a
term which must be implied in order to give efficacy to the arrangement is that
creditors bound by the proposals will take no steps to enforce their debts
against the debtor while the debtor is complying, or has complied, with his
obligations thereunder. It is plain that the arrangement would work better, in
the interests of the debtor and of creditors who have no claim against a
co-debtor, if all creditors were bound to take no steps to enforce their debts
not only against the debtor but also against any co-debtors. But, although that
might be a convenient and tidy result, it does not seem to me it is necessary
that that result should be achieved in order to give efficacy to the
arrangement. And if it is not necessary the term should not be implied. It is,
I think, pertinent to keep in mind that compositions or arrangements between a
debtor and his creditors that do not have the effect of releasing co-debtors
have long been thought sufficiently beneficial to justify the imposition of
their terms on dissenting creditors by order of the court: see, for example,
section 16(20) of the Bankruptcy Act 1914.
For these
reasons I am satisfied that the terms of the arrangement in the present case
are not such as to preclude the respondents from enforcing their claims against
the appellants, as co-debtors of Mr Hopkins.
The conclusion
just expressed is sufficient to dispose of the present appeal. Nevertheless, it
would not be satisfactory to leave the matter there. Jacob J held, in RA
Securities Ltd v Mercantile Credit Co Ltd [1995] 3 All ER 581 at
pp586e–587b, that a term that, if contained in a consensual document, would
have the effect of discharging a surety as a matter of law, will not have that
effect if contained in a voluntary arrangement (whether individual or
corporate) made under the provisions of the Insolvency Act 1986; at least where
the creditor has not, in fact, consented to the arrangement. He distinguished
actual consent from what he described as ‘a statutory binding’. He followed
that decision in the present case: see [1997] 1 All ER 921 at pp924f–928b. His
general approach to the problem was endorsed by LightmanJ in March Estates
plc v Gunmark Ltd [1996] 2 EGLR 38 at p39H; although that judge (ibid,
at p39K–L) accepted that a voluntary arrangement might expressly or by
necessary implication regulate the rights of a creditor of the company and of
third parties liable for the same debt. Lightman J expressed the view that, for
such to be the case, the intention to regulate such rights must be made plain
on the face of the proposal:
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.
Jacob J’s view
that proposals for compromise between a debtor and his creditors that are
imposed by a ‘statutory binding’ under the Insolvency Act 1986 have an effect
on third-party obligations that is in some way different from the effect that
proposals in precisely the same terms would have if contained in a consensual
document differs from the view expressed in Chitty on Contracts (27th
ed, at para 42-047); and is criticised by the authors of Andrews &
Millett, The Law of Guarantees (2nd ed, at para 9-14). The point is of some
general importance. It was argued strenuously before us on behalf of the
respondents and it seems to me appropriate that we should consider it.
The effect of
an individual voluntary arrangement which has been approved by creditors at a
meeting summoned under section 257 of the Insolvency Act 1986 is prescribed by section
260(2) of that Act:
260(2) The
approved arrangement —
(a) takes
effect as if made by the debtor at the meeting, and
(b) binds
every person who in accordance with the rules had notice of, and was entitled
to vote at, the meeting (whether or not he was present or represented at it) as
if he were a party to the arrangement.
There is
nothing in that subsection, or elsewhere, that saves a party who is bound ‘as
if he were a party to the arrangement’ from the consequences that would follow
as a matter of law if he were indeed a party to the arrangement. The statutory
hypothesis is that the person who has notice of and was entitled to vote at the
meeting is party to an arrangement to which he has given his consent. It is
important to keep in mind that, where B and C are co-debtors of A, the reason
why C is released as a result of an arrangement or bargain between A and B is
that the effect of that bargain is to extinguish the debt; alternatively, that
the effect of that bargain is that A has agreed with B that A will not sue C on
a debt which, if paid by C, will give C rights of contribution against B and so
negate the release from any further liability in respect of that debt which is
the basis of B’s arrangement with A. C is not released by reason of any arrangement
or bargain between A and C inter se; and it is no answer to point out,
as is the case, that there is nothing in section 260(2) of the Act which
purports to affect the rights of A and C inter se.
The need to
save a creditor who is bound by a release under a composition or arrangement
imposed upon him by statute from the consequences that would follow in relation
to co-debtors or sureties in respect of the same debt had been recognised for
more than 100 years before the enactment of the Insolvency Act 1986. I have
already referred to section 16(20) of the Bankruptcy Act 1914. Section 16 of
the 1914 Act was a re-enactment of section 18 of the Bankruptcy Act 1883.
Section 18(1) provided that creditors might, at a meeting after the making of a
receiving order, resolve to entertain a proposal for a composition or a scheme
of arrangement in relation to the debtor. If accepted by three-fourths in value
of the creditors at a subsequent meeting called for that purpose, and approved
by the court, the composition or arrangement was binding on all creditors in
respect of debts due to them from the debtor and provable in bankruptcy:
section 18(8) of the 1883 Act. Section 18(15) provided that the acceptance by a
creditor of a composition or arrangement should not release any person who
under the 1883 Act would not be released by an order of discharge if the debtor
had been adjudged bankrupt. The effect of an order of discharge is set out in
section 30 of the 1883 Act. Section 30(2) provided that an order of discharge
should release the bankrupt from all debts provable in bankruptcy, other than
those specified in subsection (1), which are not material in this context. But
section 30(4) was in these terms:
An order of
discharge shall not release any person who at the date of the receiving order
was a partner or co-trustee with the bankrupt or was jointly
in the nature of a surety for him.
So the
position under the 1883 Act was that a creditor bound by a composition or
arrangement in lieu of bankruptcy, which had been imposed on him by a majority
and approved by the court under the statutory arrangements, was in the same
position in relation to sureties and co-debtors of the debtor as he would have
been if the bankruptcy proceedings had taken their course. His rights against
sureties and co-debtors of the debtor, which under the general law would or
might have been extinguished by any release of the debtor contained in the
composition or arrangement, were expressly preserved. That continued to be the
position under the Bankruptcy Act 1914. The comparable provisions in that Act
are section 16(13) and (20) and section 28(2) and (4).
Consensual
deeds of arrangement between a debtor and his creditors took effect under the
general law, subject to the provisions of the Deeds of Arrangement Acts of 1887
and 1914. There is nothing in those Acts that preserves the rights of creditors
against co-debtors of, or sureties for, the debtor with whom a consensual deed
of arrangement has been made. The question whether or not co-debtors or
sureties are released depends on the terms of the deed.
Under the
bankruptcy code in force from 1883 and until the reforms enacted by the
Insolvency Act 1985 — and subsequently upon consolidation in the Act of 1986 —
the imposition of a composition or arrangement by resolution of the majority of
creditors and the approval of the court followed the making of a receiving
order. That itself followed (and required) an act of bankruptcy on the part of
the debtor. The need for an act of bankruptcy, and the intermediate stage of a
receiving order, ceased to be part of the bankruptcy code after the 1986 Act
took effect. Accordingly, there are no provisions in the 1986 Act directly comparable
with those in section 18 of the 1883 Act and section 16 of the 1914 Act. But
the provisions as to discharge and release following bankruptcy, formerly in
section 30 of the 1883 Act and section 28 of the 1914 Act, have been
re-enacted. They are now found in section 281 of the 1986 Act. In particular,
section 281(7) of that Act preserves the creditor’s rights against co-debtors
and sureties from the effect of the statutory release in terms that are
virtually identical to those in the earlier legislation:
Discharge
does not release any person other than the bankrupt from any liability (whether
as partner or co-trustee of the bankrupt or otherwise) from which the bankrupt
is released by the discharge, or from any liability as surety for the bankrupt
or as a person in the nature of such a surety.
It seems
clear, therefore, that when the 1986 Act was enacted the legislature was well
aware of the problem: that is to say, that one consequence of releasing the
debtor from debts owed to his creditors was that, under the general law, that
release would, or might, have the effect of releasing co-debtors and sureties
in respect of the same debts. In the context of a statutory release following
bankruptcy, that problem was dealt with in the same way as it had been in legislation
for the past 100 years. In the context of a release contained in a voluntary
arrangement, which could be imposed on a dissenting creditor under Part VIII of
the 1986 Act, the legislature did not adopt — or, at the least, did not adopt
in express terms — the precedent that was offered by earlier legislation in
relation to compositions or arrangements in bankruptcy proceedings. There is,
to my mind, a strong inference that that was the result of a deliberate
decision that, in this respect, voluntary arrangements should be treated as —
and have the same consequences as — consensual deeds of arrangement; and not be
regarded as a substitute for compositions or arrangements in bankruptcy
proceedings. It is, perhaps, significant, in this context, that the
recommendations of the Cork Committee (1982, Cmnd 8558), which led to the
introduction of individual voluntary arrangements, were based on the need to
provide an alternative to bankruptcy proceedings; a need not then met in
practice by consensual deeds of arrangement: see, in particular, at para 359:
‘a satisfactory form of proceedings for dealing with the insolvent debtor
otherwise than directly through the machinery of the Bankruptcy Court… would
fulfil an important social need’.
In support of
the proposition that, notwithstanding the provision in section 260(2) of the
Insolvency Act 1986 that those creditors who had notice of and were entitled to
vote at the statutory meeting are bound by the arrangement ‘as if they were
parties’ and the absence of any express words that would preserve the rights of
those creditors against co-debtors and sureties (if those rights would
otherwise be affected under the general law by a consensual arrangement in the
same terms), it would be contrary to authority to hold that the rights of
creditors against co-debtors could be affected by anything in proposals for a
voluntary arrangement that only took effect by reason of what Jacob J had
described as a ‘statutory binding’, we were referred to decisions on section
125 (liquidations by arrangement) and section 126 (composition with creditors)
of the Bankruptcy Act 1869. Those decisions illustrate that the question of
whether a statutory release was to have the effect of releasing co-debtors was
occupying the courts before the enactment of the Bankruptcy Act 1883. Indeed,
it might be said that that question was laid to rest by the 1883 Act, and has
only now revived, 100 years later, with the repeal of the code enacted by that
Act.
Section 125 of
the 1869 Act provided that a meeting of creditors, summoned for that purpose,
might, by special resolution, declare that the affairs of a debtor be
liquidated by arrangement, and not in bankruptcy, and appoint a trustee. The
trustee had all the powers of a trustee in bankruptcy. On completion of the
liquidation it was provided, by section 125(10), that:
The trustee
shall report to the registrar the discharge of the debtor, and a certificate of
such discharge given by the registrar shall have the same effect as an order of
discharge given to a bankrupt under this Act.
An order of
discharge given to a bankrupt did not have the effect of releasing any person
‘who, at the date of the order of adjudication [in bankruptcy], was a partner
with the bankrupt, or was jointly bound or had made a joint contract with him’:
see section 50 of the 1869 Act. Section 126 provided for creditors, by
extraordinary resolution, to resolve that a composition be accepted in
satisfaction of the debts due to them from the debtor; and for a composition
accepted by an extraordinary resolution to be binding on all creditors to whom
proper notice of the meeting had been given; but it contained no provision
comparable to that in section 125(10) of the Act. It did, however, provide for
rules of court to be made in relation to proceedings on the occasion of the
acceptance of a composition ‘in the same manner and to the same extent and of
the same authority as in respect of proceedings in bankruptcy’.
In Megrath
v Gray (1874) LR 9 CP 216 it was held by the Court of Common Pleas (Lord
Coleridge CJ, Keating, Brett and Denman JJ) that the provisions of section 50
of the 1869 Act applied both to a liquidation by arrangement under section 125
and to a composition with creditors under section 126. The basis on which the
court reached that conclusion appears from the following passages in the
judgment at pp227–231:
Now, that
statute [the Bankruptcy Act 1869] is ‘An Act to consolidate and amend the law
relating to bankruptcy’; that is to say, that, where it does not amend, it
assumes only to consolidate the existing law. It, by new enactment, or
repetition, gives power and sanction to three kinds of settlement between a
debtor unable to pay his debts in full and his creditors, — first, by an
adjudication of bankruptcy, ending in a division of assets, — secondly, by a
liquidation by arrangement, ending also in a division of assets, but without
the form of an adjudication of bankruptcy, — and thirdly, in a liquidation by
arrangement, ending in an acceptance by the creditors of a composition in lieu
of a division of assets, leaving the debtor in possession of his trade and
goods and assets …
The first
kind of settlement ends in a discharge of the debtor by order of discharge
given according to s 48. And so likewise do the other kinds of settlement end
in an order of discharge: they do so by and according to the rules 302 and 303,
and in the forms 123 and 124. And the first question for decision seems to be
whether the enactments in ss 49 and 50 apply only to a
by virtue of and according to the statute and the rules…
Now it has
always been a cardinal point of bankruptcy law that a discharge under it of an
insolvent debtor unable to pay his debts in full does not release his solvent
co-debtor. This has been so ever since the declaratory Act, 10 Anne c15. Each
successive Bankruptcy Act has been in great measure a consolidation Act, and
has incorporated this principle. It is a strong argument in favour of the
defendant’s contention in this case that such a cardinal principle would hardly
be cut away from any discharge of any insolvent debtor, without express terms.
It is also a strong argument that a consolidation statute should be construed
rather so as to maintain than to alter the existing law …
In Ex
parte Rumball LR 6 Ch App 842, the contention was that s 72 in the Act of
1869 did not apply to disputes arising in proceedings under a deed of
composition entered into in 1868, because, it was said, s 72 is confined to
‘proceedings in bankruptcy’; but it was held that it was applicable. ‘The Act
of 1869’, says Lord Justice James, ‘gives to the Court of Bankruptcy
jurisdiction to determine all questions for the distribution of assets in
bankruptcy, and extends to anything that might be fairly called a case in
bankruptcy’. ‘I am of opinion’, he says, ‘that the Chief Judge was right in
holding that he had jurisdiction in this case, as he would have in any ordinary
case in bankruptcy’. That case seems to be an authority for holding that the
earlier sections in the statute are not confined to cases of pure bankruptcy,
and that the words ‘proceedings in bankruptcy’ are not necessarily confined to
proceedings in pure bankruptcy. The minds of the Lord Justices, who are
peculiarly the interpreters of bankruptcy law, seem to be, as disclosed in that
case, impressed with the view that all the three proceedings, though different
in form, are proceedings in bankruptcy, subject to the control of the
Bankruptcy Court, subject to the laws of bankruptcy, and intended for the
relief of insolvent debtors, and that the more general enactments in the
earlier sections are applicable to the proceedings under ss 125 and 126…
In the
result, therefore,… we hold that all three forms of proceeding in the case of
an insolvent debtor contained in the Bankruptcy Act 1869 are proceedings in
bankruptcy, though different in form; that the general enactments in ss 49 and
50 apply to the discharges under ss 125 and 126 and the rules and forms
relative to them; that the word ‘bankrupt’ in ss 49 and 50 is to be read as
applicable to any debtor obtaining an order of discharge under the statute; and
consequently that an order of discharge in all three cases releases only the
debtor in whose favour it is given, and leaves his solvent co-debtor liable to
be sued separately by a joint creditor who has been a party to the release of
the insolvent debtor.
Later in the
same year, the Court of Exchequer (Kelly CB, Cleasby and Amphlett BB)
considered whether a surety was discharged following a liquidation by
arrangement under section 125 of the 1869 Act. The question was stated by
Cleasby B at p17:
The general
question is as to the effect of liquidation on the position of the surety of
the person liquidating, and we have to consider whether a discharge under a
liquidation is to be regarded as a voluntary act of the parties. We are not
dealing with a composition or with a deed of arrangement under the previous
bankruptcy law. The effect of a deed of arrangement has been much considered in
the case of Bateson v Gosling (1871) LR 7 CP 9. In that case the
debtor had made over the whole of his property to the trustee, but the deed of
arrangement contained a clause of release reserving expressly the rights
against the sureties; and the effect of the decision is, that if the deed of
arrangement had resulted in an absolute discharge of the principal debtor,
then, following the judgment of Vice-Chancellor Wood in Webb v Hewitt
(1857) 3 K&J 438, it would have operated so as to discharge the surety
altogether; but that, where the deed contains a clause reserving all the rights
of the surety it has not that operation. However, we are not now dealing with
the effect of a deed of arrangement, but with the question, whether a
resolution in liquidation can be considered a voluntary act of the creditors as
regards the principal debtor. We have to consider whether they can be regarded
in the present case as having by their voluntary act altered the position of
the surety or discharged the principal debtor.
Each member of
the court reached the conclusion that discharge under section 125 of the 1869
Act was not the result of a voluntary act on the part of his creditors; rather
it was the result of the bankruptcy proceedings initiated by the debtor having
summoned his creditors to a meeting in proceedings that were under the control
of the court of bankruptcy. That form of bankruptcy proceeding having been
initiated, the bankrupt was entitled to have his discharge if he complied with
his obligations under the arrangement; the creditors were morally bound to
release him. Kelly CB and Amphlett B placed reliance on the express provisions
of section 125(10) and noted the distinction between that section and section
126 of the Act.
The question
arose again in Ex parte Jacobs (1875) LR 10 Ch App 211. The headnote
sets out the conclusion:
Where the
acceptor of a bill of exchange presents a petition for liquidation or
composition under the Bankruptcy Act 1869, and the creditors pass a resolution
for liquidation or composition, the acceptor must be considered as discharged
by operation of law, and the drawer is not thereby discharged from his
liability. In such a case it makes no difference whether the bill-holder is
present at the meeting or not, or whether he votes in favour of the resolution
or against it.
Again, it is
of importance to see how the question was put in the judgment of the court
(Mellish and James LJJ) at p213:
The question
to be determined is, whether Martin, by voting in favour of accepting a
composition from Phillips, the acceptor, had discharged Jacobs, the drawer, and
can no longer maintain an action against him on the bill. There can be no doubt
that, if the holder of a bill, by becoming party to a deed or arrangement,
independently of any bankruptcy Act, agrees to accept a composition from the
acceptor, he thereby discharges the drawer; but, on the other hand, it is
equally clear that if the acceptor is discharged from his liability by
operation of law by becoming a bankrupt, the liability of the drawer to the
holder is not thereby affected. We have now to consider whether the discharge
of the acceptor under the 125th and 126th sections of the Bankruptcy Act 1869,
when the holder of the bill votes in favour of liquidation or composition, is
to be considered as a discharge by the voluntary act of the holder, or a
discharge by operation of law.
The court
answered that question by following Megrath v Gray (1874) LR 9 CP
216. At p216 James LJ said:
We entirely
agree in the decision of the Court of Common Pleas, and the reasons they have
given for it. We think that a discharge of a debtor under a liquidation or
composition is really a discharge in bankruptcy by operation of law. Where a
creditor voluntarily agrees to a composition by deed or arrangement with the
acceptor, it is by his act alone that the acceptor is discharged and the
position of the drawer altered. When, however, a debtor summons his creditors
under the 125th and 126th sections of the Bankruptcy Act 1869, the proper
majority of the creditors have power to assent to the terms by which the debtor
is to be discharged, whether the holder of the bill chooses to attend or not or
chooses to vote or not. The consequence of holding that the holder of a bill
could not vote at a meeting of the acceptor’s creditors without discharging the
drawer would be that in many cases a great number, and in some cases the
majority, of creditors could not vote at the meeting. On the other hand, if
resolutions for liquidation by arrangement or for composition were to contain a
reserve of remedies by the creditors against any other person than the debtor,
the consequence would be that the debtor would not, either by arrangement or
composition, be completely discharged from any of his debts in respect of which
the creditor had a remedy against any other person, which we think would be
contrary to the intention of the Act.
It is of
interest to note that the ‘complete discharge’ of the debtor, as envisaged by
the court in the last sentence of that passage, requires that he is discharged
not only from the debt that he owed to the creditor, but also from the rights
of contribution exercisable by a co-debtor who is subsequently required to pay
the creditor. The court seems to be suggesting that the 1869 Act had that
effect. But it is difficult to see how that could be so. Section 49 of the 1869
Act provided for the release of the bankrupt from ‘debts provable under the
bankruptcy’. The contingent right of a co-debtor to contribution when he,
himself, has paid the debt was not a debt provable under the bankruptcy,
because to allow such a claim to proof would contravene the rule against double
proof: see Re Oriental Commercial Bank, ex parte European Bank (1871) LR
7 Ch App 99 at p103.
For the
reasons that I have already explained, the problem identified in those three
authorities under the Bankruptcy Act 1869 was laid to rest, in relation to
individual insolvencies, by the introduction of the code enacted by the
Bankruptcy Act 1883. But the decision in Ex parte Jacobs (1875) LR 10 Ch
App 211 was considered and applied in relation to corporate schemes of
arrangement. In In re London Chartered Bank of Australia [1893] 3 Ch 540
the court was
Arrangement Act 1870, following a winding-up order. The question arose whether
the scheme should contain an express reservation of rights against sureties.
Vaughan Williams J thought such a reservation unnecessary. At p546 he pointed
out that the discharge of the company (the debtor) was effected by operation of
law under section 87 of the Companies Act 1862, and went on at p547:
It seems to
me, then, that, the discharge being clearly by operation of law consequent upon
the pending statutory liquidation, the principles laid down by Lord Justice
Mellish in Ex parte Jacobs (1875) LR 10 Ch App 211 apply, and that,
therefore, there is no need, and it would not be right, to introduce a
reservation of rights against sureties into the scheme of arrangement.
The Court of
Appeal reached a similar conclusion in Dane v Mortgage Insurance
Corporation [1894] 1 QB 54, where the compromise had been sanctioned by the
Supreme Court of Victoria under the comparable legislation in the State of
Victoria. Kay LJ said at p63:
It was
decided in Ex parte Jacobs (1875) LR 10 Ch App 211 that a resolution for
liquidation or composition, though binding on all the creditors, is a discharge
of the debtor by operation of law, and does not discharge the surety.
In In re
Garner’s Motors Ltd [1937] Ch 594 Crossman J applied the same principle to
a scheme sanctioned under section 153 of the Companies Act 1929. He said at
p599:
The scheme
when sanctioned by the Court becomes something quite different from a mere
agreement signed by the parties. It becomes a statutory scheme.
We were
referred, also, to two decisions in the Supreme Court of New South Wales, Hill
v Anderson Meat Industries Ltd [1972] 2 NSWLR 704 and Commercial
Banking Co of Sydney Ltd v Gaty [1978] 2 NSWLR 271, in which the
principle was applied to arrangements under the Companies Act 1961 in the
Australian legislation. In the former case Hope JA at pp708G–709B explained:
The
provisions of Part VIII of the Companies Act 1961, and in particular the
provisions of s 181, seem to me to be consistent with a policy, as was stated
by James LJ in Ex parte Jacobs (1875) LR 10 Ch App 211, of enabling
creditors to vote in a way which they think best for the company, without
standing to lose the benefit of a guarantee or other analogous remedy.
Hutley AJA
agreed with the need to adapt new institutions (treating section 181 as such)
to the existing doctrines of the law by analogy; but he pointed out at p709B–C:
This in my
opinion is an example of a discharge by operation of law, and the rules in
regard to accessory obligations, which have been laid down in relation to
bankruptcy and where there has been a scheme in the course of winding up, have
to be extended to a scheme adopted under s 181 of the Companies Act 1961. It is
that section which gives the scheme its operative effect and not the agreement
of the parties.
I have set out
these authorities at some length in order to do justice to the powerful
arguments advanced before us in support of the proposition that,
notwithstanding any express term in an arrangement that would or might
otherwise have the effect of discharging co-debtors and sureties (if any) of
the debtor from further liability, that will not be the effect if the
arrangement is made under the provisions in Part VIII of the Insolvency Act
1986. At the end of the day, however, it is essential to keep in mind that it
is those provisions which have to be applied. The Insolvency Act 1985 —
subsequently consolidated in the Act of 1986 — was not, itself, a consolidating
Act. There is no presumption that the provisions now in Part VIII of the 1986
Act were not intended to alter the existing law; or to depart from the position
established by the authorities on different provisions in the 1869 Act.
There is an
important — and, to my mind, crucial — distinction between the provisions in
Part VIII of the 1986 Act and those in sections 125 and 126 of the 1869 Act.
Under the 1869 Act the discharge of the debtor took effect by virtue of the
statute and the rules made under it: see Megrath v Gray (1874) LR
9 CP 216 at p231, and Ex parte Jacobs (1875) LR 10 Ch App 211 at p213.
Under the various Companies Acts, considered in the authorities cited, the
discharge takes place by virtue of a scheme that becomes operative when it is
approved by the court. Under Part VIII of the 1986 Act, the discharge of the
debtor depends entirely on the terms of the arrangement. One must look at the
arrangement, and nothing else, in order to find the terms (if any) under which
the debtor is discharged. This is emphasised by the words in section 260(2) of
the 1986 Act: ‘The approved arrangement — (b) binds every person… as if he were
a party to the arrangement’. Unlike the earlier legislation, section 260(2) of
the 1986 Act does not purport, directly, to impose the arrangement on a
dissenting creditor whether or not he has agreed to its terms; rather, he is
bound by the arrangement as the result of a statutory hypothesis. The statutory
hypothesis requires him to be treated as if he had consented to the
arrangement. The consequence, as it seems to me, is that the legislature must
be taken to have intended that both the question whether the debtor is
discharged by the arrangement and the question whether co-debtors and sureties
are discharged by the arrangement were to be answered by treating the arrangement
as consensual; that is to say, by construing its terms as if they were the
terms of a consensual agreement between the debtor and all those creditors who,
under the statutory hypothesis, must be treated as being consenting parties.
Whether or not
to exclude co-debtors and sureties from the operation, under the general law,
of the terms of a composition or arrangement between a debtor and his creditors
is a matter of policy. There are, plainly, arguments of policy that point
towards exclusion; in particular, that it is in the interest of the debtor and
his other creditors that a creditor should not be dissuaded from voting in
favour of a voluntary arrangement out of concern that he will lose his rights
against co-debtors and sureties. But, equally, there are arguments that point
towards allowing the general law to have effect; in particular, that it is in
the interests of the debtor that he should be able to propose a scheme under
which he will obtain a complete release from his liabilities, including the
rights of contribution of co-debtors. It is also in the interests of other
creditors, bound by the scheme, that it should not be frustrated by action by a
co-debtor (not so bound) in enforcing rights of contribution. These arguments
had been identified in the cases over the past 100 years or more, before the
enactment of the Insolvency Act 1985 and its successor, the 1986 Act. In my
view, by choosing to enact Part VIII — and, in particular, section 260(2) — of
that Act in the form that it did, the legislature must be taken to have
preferred the latter approach. The general law is to have effect. It is up to
the debtor to propose, and for the creditors to accept or reject, proposals
that either do or do not have the effect of releasing co-debtors or sureties. A
creditor who is prejudiced by the decision of the majority to approve proposals
that have the effect of releasing a co-debtor against whom he would otherwise
have recourse can apply to the court, under section 262 of the 1986 Act, for
the approval of the meeting to be revoked.
It follows
that I would reject the submission that, as a matter of principle, no term in a
voluntary arrangement can have the effect of releasing a co-debtor or surety.
In my view, the effect of a voluntary arrangement has to be determined by
construing its terms. In the present case, the terms of Mr Hopkins’ voluntary
arrangement did not have the effect of releasing or discharging the appellants
from their liability as co-debtors. I would dismiss this appeal.
WARD and KENNEDY LJJ agreed and did not add
anything.
Appeal
dismissed.
