Remblance v Octagon Assets Ltd

Where a principal debtor would ordinarily obtain an order setting aside a statutory demand because it has a bona fide cross-claim equal to or exceeding the debt, it will prima facie be unjust to permit the creditor to use bankruptcy proceedings against a guarantor for that same debt. The co-extensive nature of a guarantee requires comparable treatment under rule 6.5(4)(d) of the Insolvency Rules 1986.

The guarantor’s ability to pay, and a right to recover payment from the principal debtor, do not ordinarily justify a different result. The court must assess justice in the whole circumstances. A statutory demand is not a means by which the creditor may obtain indirectly from the principal debtor what it cannot obtain directly.

The respondent landlord served a statutory demand on the appellant, who had guaranteed a company tenant’s obligations to pay rent. The tenant was in rent arrears but had an arguable and substantial damages claim against the landlord for breach of the covenant for quiet enjoyment. It was accepted that the tenant would probably resist a statutory demand by relying on that cross-claim.

A district judge set aside the demand. Mann J allowed the landlord’s appeal, dismissed the guarantor’s application under rule 6.5(4)(d) of the Insolvency Rules 1986, and authorised presentation of a bankruptcy petition. He treated the guarantor’s ability to pay as material. The guarantor brought a second appeal.

The central issue was whether justice required the guarantor to receive protection comparable to that which the principal debtor would receive under rule 6.5(4)(a).

1. By a majority (Dyson and Ward LJJ; Mummery LJ dissenting), the appeal was allowed and the statutory demand was set aside. Mann J had erred in treating the guarantor’s ability to pay as an important reason to refuse relief.

2. The residual discretion in rule 6.5(4)(d) is ordinarily exercised where allowing a demand to produce bankruptcy consequences would be unjust. That approach accords with the specified grounds in rule 6.5(4)(a) to (c), and requires an assessment of the relevant circumstances and consequences.

3. The guarantee was an undertaking that the tenant would perform its obligations and that the guarantor would make good the landlord’s loss caused by the tenant’s default. The guarantor’s liability was therefore co-extensive with the tenant’s liability. Since the tenant’s bona fide cross-claim would ordinarily justify setting aside a demand for the rent under rule 6.5(4)(a), justice prima facie required equivalent protection for the guarantor under rule 6.5(4)(d).

4. The guarantor’s means to pay did not supply a sufficient distinction. Treating ability to pay as decisive would make it a creditor’s answer whenever a debtor with a qualifying cross-claim could meet the demand. Nor did the guarantor’s right to indemnity from the tenant justify relief being refused: it would enable the creditor to obtain from the tenant indirectly what it could not obtain directly through a statutory demand.

5. The guarantor’s inability to obtain a stay of execution, and the relatively modest amount demanded, did not alter that conclusion. Permission to advance a new construction of the guarantee was refused.

• Court of Appeal (Civil Division): Allowed the guarantor’s second appeal by majority and set aside the statutory demand: [2009] EWCA Civ 581.

• High Court, Chancery Division (Bankruptcy Court), Mann J: Allowed the landlord’s appeal from the district judge, dismissed the application to set aside the statutory demand, and authorised presentation of a bankruptcy petition.

• Southend-on-Sea County Court, District Judge Pearce: Set aside the statutory demand.