Fagg v Rushton

For the purposes of a statutory demand, security given by the principal debtor may constitute security for a guarantor’s debt where realising that security would reduce the guarantor’s liability. The court should apply the substance and benefit of the security, rather than treat the guarantor’s obligation in isolation. Where the value of the security equals or exceeds the debt, the statutory demand may be set aside under rule 6.5(iv)(c) of the Insolvency Rules.

The claimant had guaranteed loans made to a company and obtained judgment against him for the guaranteed debt. Following a compromise, security over the company’s French properties supported the outstanding liability. The claimant later served a statutory demand for the judgment debt.

The Deputy District Judge set aside the demand, accepting that the debt was fully secured by the company’s property. The claimant appealed, arguing that section 383(2) of the Insolvency Act 1986 recognised security only over the guarantor’s own property. The central issue was whether security granted by the principal debtor could be taken into account in assessing the guarantor’s indebtedness for statutory-demand purposes.

1. Appeal on the statutory demand. The appeal was dismissed. The security over the company’s properties was security for the purposes of section 383(2) of the Insolvency Act 1986 and rule 6.5(iv)(c) of the Insolvency Rules.
2. Section 383(2) provides that a debt is secured where the creditor holds security over property of the person by whom the debt is owed. The provision had to be applied consistently with the purpose of the statutory-demand procedure. The relevant consideration was that the security would benefit the guarantor by reducing the amount recoverable from him under the guarantee.
3. The company’s security therefore counted even though it was not security over property owned by the guarantor. If the guarantor had paid the full outstanding sum, he would have been subrogated to the security and could have recovered against the company’s assets. On the assumed valuation, the whole of the guarantor’s remaining indebtedness was covered by the security.
4. The decision in Re: A Debtor No. 310 (1988) [1989] 1 WLR 452 did not compel the contrary conclusion. It concerned the application of rule 6.1(v) and was not authority requiring the company’s security to be disregarded for the present statutory-demand question.
5. Costs. The order below was varied so that the claimant recovered half his costs below, with no further order as to the balance. The respondent was awarded the costs of the appeal, assessed at £6,362 inclusive of VAT, with the sums set off and the claimant’s costs below subject to detailed assessment if not agreed.

• Maidstone County Court: Deputy District Judge Austin set aside the statutory demand.
• High Court (Chancery Division): The appeal was dismissed, but the order for costs below was varied.