Any way, any time, any order
24.10.11
This article was written by Greg Standing, partner in Wragge & Co LLP's Finance, Insolvency, Recoveries and Sales team and published in the October issue of Leasing Life.
The case of White v Davenham Trust Ltd has reaffirmed that a creditor can choose its own method of enforcing a debt which has been guaranteed by an individual even though it continues to hold security for that debt from the principal debtor.
In this case, White gave a personal guarantee to Davenham for the liabilities of his company of which he was the sole shareholder and a director. Davenham also obtained a legal charge over property owned by the company. The company went into administration.
Before the company's assets had been fully realised, Davenham demanded payment under the guarantee in respect of the sums due from the company to Davenham.
White failed to pay and Davenham issued a statutory demand. White sought to set aside the demand.
He argued that Davenham's security over the assets of the company (the principal debtor) made it unjust to pursue him (the surety) by way of statutory demand for the company's debt when Davenham would be unable to issue a demand against the company direct because it held that security.
Rule 6.5(4) of the Insolvency Rules 1986, provides that if:
- a debtor appears to have a counterclaim, set-off or cross-claim which equals or exceeds the amount of the debt; or
- the debt is disputed on grounds which appear to the court to be substantial; or
- it appears the creditor holds some security in respect of the debt claimed by the demand and ... the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or
- the court is satisfied, on other grounds, that the demand ought to be set aside,
then the court will set aside a statutory demand.
Where (a) and (b) above apply, a creditor should not use bankruptcy proceedings to try and obtain payment.
Rather, it should issue civil proceedings (albeit that they are more costly and slower) to determine the correct level of indebtedness.
Where (c) applies the creditor cannot pursue bankruptcy proceedings against that debtor because the existence of the security means that the creditor has no interest in the debtor's estate and therefore it would be unjust to allow him to use such proceedings.
The creditor would have to give up that security to do so.
White sought to argue that in relation to rule 6.5(4)(c), the security that Davenham had over the company's asset should be taken into account as his liability to Davenham was co-extensive with the company's.
The Court of Appeal held that the statutory demand against the guarantor was valid and dismissed White's appeal.
Rule 6.5(4)(c) only applies where the security is over assets of the particular debtor.
Where security is given to the creditor over the assets of a third party (the company here), that security does not form part of the debtor's estate or constitute any reason why the creditor cannot pursue that debtor.
The third party security was irrelevant even where the guarantor's liability was for the same debt.
If there was no underlying dispute to the debt, the creditor could proceed against the guarantor by way of personal claim or bankruptcy proceedings.
If civil proceedings were commenced, the creditor could get judgment and then enforce that judgment, perhaps by way of bankruptcy proceedings.
There was no reason why the bankruptcy procedure could not be invoked directly by way of service of a statutory demand without having to go through the civil procedure route.
Things to consider
The liability under the guarantee was undisputed.
Neither the court nor the guarantor could dictate in such circumstances, the creditor's strategy for recovering the sums due to it.
A creditor can enforce its debts in the way, time and order it chooses.
There was nothing unjust in pursuing the guarantor through the bankruptcy procedure for the outstanding debt.
For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Biddle on +44 (0)121 685 2708 or Amy Richards on +44 (0)121 260 9973
This published article may contain information of general interest about current legal issues, but does not give legal advice.
