Johnson v Davies

An individual voluntary arrangement under Insolvency Act 1986 Part VIII binds notified creditors as if they were parties to it. Its effect on co-debtors and sureties therefore depends on the proper construction of its terms under the general law.

A release expressed to occur only after the debtor has performed the arrangement is not an immediate release. A term restraining creditors from enforcing their debts against the debtor during compliance may be implied where necessary to make the arrangement work. A corresponding restraint against co-debtors will not be implied unless necessary for that purpose.

The respondents had guaranteed a company’s lease obligations. The appellants, together with a third purchaser, covenanted jointly to indemnify them against liabilities arising under the lease. After the third purchaser entered an individual voluntary arrangement, the respondents paid rent, insurance and dilapidations and sought indemnification from the appellants.

The voluntary arrangement provided that the debtor would be released only when the monies due under the proposals had been realised and distributed. The county court held that the appellants were released. Jacob J allowed the respondents’ appeal and gave judgment for them, subject to credit for payments received under the arrangement: [1997] 1 All ER 921.

The central issue was whether the arrangement released or otherwise protected the appellants as joint co-debtors.

1. Appeal dismissed. Chadwick LJ, with whom Ward and Kennedy LJJ agreed, held that the arrangement did not release the appellants or preclude enforcement of the respondents’ claim against them.
2. The purchasers’ covenant was joint, not joint and several. There were no words of severance. Section 81 of the Law of Property Act 1925 enabled a joint covenantee to enforce the benefit of a covenant, but did not alter the covenantors’ obligation.
3. The proper question, consistently with Watts v Lord Aldington, was the meaning and effect of the arrangement in its commercial setting. Paragraphs 4 and 19 did not effect an immediate or absolute release. They made release conditional on the debtor first making the promised income payments and transferring any windfall assets over the five-year period. A default could lead to bankruptcy, in which creditors would expect to prove for their full debts.
4. A term preventing bound creditors from enforcing debts against the debtor while he complied with the arrangement was necessary to give it efficacy. It was neither necessary nor appropriate to imply a wider term preventing enforcement against co-debtors. The arrangement therefore did not bar the respondents’ claim.
5. Chadwick LJ further held that, under section 260(2) of the Insolvency Act 1986, a voluntary arrangement must be construed as a consensual arrangement between the debtor and creditors bound as if they had consented. There is no general rule that a statutory voluntary arrangement can never release a co-debtor or surety. Its consequences depend on its terms, subject to a prejudiced creditor’s remedy under section 262. This wider analysis was not necessary to the dismissal but resolved an issue of general importance.

The appeal was dismissed with costs.

• Court of Appeal: dismissed the appellants’ appeal from Jacob J.
• Chancery Division: Jacob J allowed the respondents’ appeal from the deputy district judge, set aside the earlier order and entered judgment for the respondents, subject to credit for sums received under the voluntary arrangement: [1997] 1 All ER 921.
• Brighton District Registry: Deputy District Judge Radcliffe had held that the appellants were released from the indemnity covenant.