John Remblance v Octagon Assets Ltd

The Court of Appeal considered an application to set aside a statutory demand under rule 6.5 of the Insolvency Rules 1986, particularly the residual discretion in rule 6.5(4)(d). The court held that the residual discretion is to be exercised to prevent injustice and, where a principal debtor has a bona fide cross-claim which would justify setting aside a demand under rule 6.5(4)(a), a guarantor in the same position should normally be treated comparably. The ability of a guarantor to pay the debt is not, of itself, a decisive reason to refuse relief; the co-extensiveness of guarantor and principal debtor liabilities and the risk of a creditor obtaining indirectly by a demand on the guarantor what it cannot obtain directly from the principal debtor are material considerations.

Background and nature of the application:

• The statutory demand for 11,611.90 was served on Mr John Remblance as guarantor under a deed of surrender and re-grant of a lease; the sum related to unpaid rent and insurance. Mr Remblance applied under rule 6.5 to set the demand aside. The tenant, JBR Leisure Ltd, has a cross claim against the landlord for damages arising from alleged breaches of the covenant for quiet enjoyment.

Procedural posture: The District Judge originally set aside the demand (18 March 2008). Octagon appealed and Mann J allowed the appeal, dismissed Mr Remblance's application and authorised presentation of a bankruptcy petition (23 May 2008). Permission to appeal to the Court of Appeal was granted by Arden LJ; this appeal was heard before Ward, Mummery and Dyson LJJ.

Issues framed:

• Whether the statutory demand served on a guarantor should be set aside under rule 6.5(4)(d) where the principal debtor appears to have a cross claim sufficient to defeat a demand under rule 6.5(4)(a).
• What weight should be given to the guarantor's ability to pay in exercising the residual discretion under rule 6.5(4)(d).
• Whether the co-extensive nature of the guarantor's liability means the guarantor should benefit from the same protection as the principal debtor.

Reasoning and subsidiary findings:

• The court accepted that rule 6.5(4)(d) is a residual discretion to prevent injustice (following Re a Debtor and Budge) and that the co-extensiveness principle of guarantees (as explained in Moschi v Lep Air Services) is relevant.
• Mann J considered the guarantor's ability to pay a material factor and concluded it was not unjust to leave the demand in place because Mr Remblance could pay and would simply choose not to do so; he therefore dismissed the application. Mummery LJ agreed with Mann J and would have dismissed the appeal.
• By contrast, Dyson LJ and Ward LJ concluded that the mere fact the guarantor can pay should not ordinarily defeat an application under rule 6.5(4)(d) where the principal debtor would be protected under rule 6.5(4)(a). They considered it unjust for a creditor to obtain by means of a demand on a guarantor what it cannot obtain from the principal debtor directly; on that basis they would allow the appeal and set aside the statutory demand.
• The Court refused permission to adduce fresh evidence about post-judgment events and refused permission to amend the grounds of appeal to raise a new construction point on the guarantee.

Appeal allowed. The majority concluded that the residual discretion under rule 6.5(4)(d) must be exercised to prevent injustice and, where the principal debtor would likely succeed in setting aside a demand under rule 6.5(4)(a) because of a bona fide cross-claim that equals or exceeds the debt, justice ordinarily requires comparable protection for the guarantor. The guarantor's mere ability to pay is not a decisive reason to refuse relief; allowing a demand on the guarantor in such circumstances risks the creditor obtaining indirectly what it cannot obtain directly from the principal debtor.

Application to set aside statutory demand originally granted by District Judge Pearce (18 March 2008). Octagon appealed; Mann J allowed Octagon's appeal and dismissed Mr Remblance's application, authorising presentation of a bankruptcy petition (23 May 2008). Permission to appeal to the Court of Appeal was granted by Arden LJ (23 October 2008). This Court heard the appeal and, by majority, allowed it and set aside the statutory demand (judgment 17 June 2009).