Greg Standing looks at bankruptcy proceedings against
surety.
Go deeper with GlobalData
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.
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By GlobalDataHe 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)
a debtor appears to have a counterclaim, set-off or cross-claim
which equals or exceeds the amount of the debt; or
(b)
the debt is disputed on grounds which appear to the court to be
substantial; or
(c)
it appears the creditor holds some security in respect of the debt
claimed by the demand and the court is satisfied the value of the
security equals or exceeds the full amount of the debt; or
(d)
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.
Greg Standing is a partner in
Wragge & Co’s finance litigation team
