Justice trumps ability to pay

23.07.09

 

This article was written by Greg Standing, partner in Wragge & Co LLP's finance, insolvency, recoveries and sales team and published in thethe July issue of Motor Finance.

Finance agreements with a debtor company are often backed by personal guarantees from the directors of the company. If insolvency proceedings are contemplated to enforce the guarantee, you need to consider whether you could bring the same action against the principal debtor. If you can't, your proceedings against the guarantor might be scuppered.

This was the position in Remblance v Octagon Assets Ltd where the debtor's and guarantor's obligations were co-extensive. The claimant, as sole director and shareholder, guaranteed his company's obligations under a lease with the defendant. The company fell into arrears. However, there was a dispute regarding the property and the company had a pending action against the defendant for substantial damages. The defendant served a statutory demand against the claimant as guarantor in relation to the rent arrears. No demand had been served against the company. It was common ground that the company could have resisted a demand served upon it based on the rent arrears under the Insolvency Rules 1986 (IA) s 6.5(4)(a) because of its cross claim. The claimant argued that it would be unjust to allow the defendant to proceed against him as guarantor by the insolvency route, when it could not pursue that route against the principal debtor. The claimant claimed the same protection from bankruptcy as was available to his company.

At first instance, the court had found that, as the claimant could afford to pay off the debt, and therefore avoid the consequences of bankruptcy, this was an important factor which militated against setting aside the statutory demand. The court considered that this swung the balance of fairness against making the creditor wait until the debtor's claim had been decided.

The Court of Appeal, allowing the claimant's appeal, held that it could exercise its residual discretion afresh under s 6.5(4)(d) IA to set the statutory demand aside where circumstances existed which would make it unjust for the statutory demand to give rise to bankruptcy consequences. The claimant's and his company's obligations were co-extensive. The company had a bona fide cross claim for a sum in excess of the arrears of rent and that would defeat a petition against it. Justice required that the claimant should be treated in the same way as the company. It would be unjust not to set the statutory demand aside as against him.

The fact that the claimant could afford to pay the debt was not sufficient reason to refuse to set aside the demand where the principal debtor had good reason not to pay it.

Comment

This case shows that attempting to avoid difficulties in pursuing a principal debtor under a finance agreement by issuing bankruptcy proceedings against a guarantor is not necessarily the quickest or most cost-effective route. Where co-extensive obligations exist and the principal debtor could defeat such proceedings, the courts will consider it only fair and just that the guarantor, being only secondarily liable, be placed in a comparable position.

For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Amie Ryalls on +44 (0)121 213 2360 or Rebecca Davies on +44 (0)121 213 2396

This published article may contain information of general interest about current legal issues, but does not give legal advice.