Shaw v Doleman

The Court of Appeal held that a guarantor's liability under an Authorised Guarantee Agreement (AGA) survived the liquidator's disclaimer of the assignee's lease. The court applied the deeming principle in section 178(4) of the Insolvency Act 1986 as explained in Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70, so that, for the purposes of the guarantor's obligations, the assignee is treated as still bound by the tenant covenants notwithstanding the disclaimer.

The AGA in question defined the "Liability Period" as the period during which the assignee is bound by the tenant covenants; the court concluded that that definition must be read in the statutory context and accordingly refers to the period in which the assignee is deemed to be bound under s.178(4)(b). The landlord's put option in clause 5 of the AGA (to require the guarantor to take a new lease after disclaimer) did not indicate that the parties intended the guarantee to terminate on disclaimer.

This was an appeal from a County Court judgment declaring the original tenant (the guarantor) liable under an Authorised Guarantee Agreement following the liquidation of the corporate assignee (Ceramic Café Limited) and the liquidator's disclaimer of the lease. The landlord (Mrs Doleman) sued for arrears of rent, insurance rent, costs and interest and obtained judgment at first instance for £16,921.87 and costs. Permission to appeal to the Court of Appeal was granted by Jacob LJ.

Facts and procedural posture:

• The Lease dated 5 May 2004 granted a 10 year tenancy to Ms Gabriella Shaw as tenant. On 9 August 2005 Ms Shaw assigned the lease to Ceramic Café Limited (CCL) and entered into an AGA in favour of the landlord as a condition of the licence to assign. CCL later went into liquidation and the liquidator disclaimed the lease on 31 October 2007.
• The landlord sought to hold Ms Shaw liable under the AGA for arrears left by CCL. Ms Shaw contended that her liability under the AGA ended when the assignee ceased to be bound by the tenant covenants on disclaimer, arguing that the defined "Liability Period" expired on disclaimer and that the Landlord and Tenant (Covenants) Act 1995 had released her as tenant on assignment.

Issues framed by the court:

• Whether the AGA's defined "Liability Period" ended on disclaimer of the lease by the liquidator;
• How section 178(4) of the Insolvency Act 1986 affects the meaning of the AGA and the continuing liability (if any) of the guarantor; and
• The effect of the Landlord and Tenant (Covenants) Act 1995 and the interaction with the AGA.

Court's reasoning and disposition:

The court concluded that the AGA must be construed in its statutory context. Applying the House of Lords' analysis in Hindcastle, the court held that while the disclaimer determines the lease as between the insolvent assignee and the landlord, section 178(4)(b) provides that the rights and liabilities of other persons (including guarantors) are not affected and are to be treated as continuing. Accordingly, the defined "Liability Period" in the AGA refers to the period during which the assignee is bound for the purposes of third-party liabilities, that is to say as deemed to be bound under s.178(4)(b). The court rejected the appellant's contention that the plain words of clause 1.4 brought the guarantee to an end on disclaimer in fact, and held that clause 5 (the put option) did not imply termination of the guarantee on disclaimer. The appeal was dismissed and the County Court judgment was upheld.

The court noted that AGAs are commonly used and that resolution of their construction in the insolvency context is of general interest given property market conditions.

Appeal dismissed. The Court of Appeal held that under section 178(4) of the Insolvency Act 1986 (as explained in Hindcastle) a liquidator's disclaimer determines the lease as between the insolvent assignee and the landlord but does not affect the rights or liabilities of third parties; therefore the guarantor's AGA liability continued because the assignee is treated as still bound for the purposes of third-party liabilities and the defined "Liability Period" must be read in that statutory context. The landlord's put-option clause did not indicate an intention to terminate the guarantee on disclaimer.

On appeal from Chichester County Court (HHJ Barratt QC), judgment for the landlord entered 20 August 2008 (sum £16,921.87 and costs). Permission to appeal to the Court of Appeal granted by Jacob LJ on 13 October 2008. This Court of Appeal judgment: [2009] EWCA Civ 279, 1 April 2009.