White v Davenham Trust Ltd

Rule 6.5(4)(d) of the Insolvency Rules 1986 confers a broad residual discretion to set aside a statutory demand where substantial circumstances make it unjust for bankruptcy consequences to follow. The mere existence of security held against a principal debtor does not ordinarily prevent a creditor enforcing a guarantor’s liability. A guarantor’s liability is generally co-extensive with that of the principal debtor, unless the guarantee provides otherwise.

An arguable dispute about part of the debt does not ordinarily justify setting aside the whole demand where an undisputed debt exceeding the bankruptcy threshold remains. The debtor may pay the undisputed sum and dispute the balance. The court should also consider whether the debtor can avoid bankruptcy by payment or securing the debt.

Davenham Trust Ltd served a statutory demand on Mark White for £958,387.93 under his guarantee of loans made to St George’s Property Services (London) Ltd. A deputy registrar set the demand aside under rule 6.5(4)(d) of the Insolvency Rules 1986, considering the creditor’s security over the company’s property and the fact that the security had not been realised.

White supported the decision on the additional grounds that the loan transactions might be extortionate under section 244 of the Insolvency Act 1986, and that default interest might be an unenforceable penalty. The central issues were whether those matters, the existence of third-party security, or the circumstances of the guarantee made it unjust to allow the statutory demand to stand.

1. Appeal allowed. The statutory demand was reinstated. The deputy registrar had taken into account matters that were irrelevant or insufficient to the exercise of the discretion under rule 6.5(4)(d).
2. The rule gives the court a broad residual discretion, but the applicant must show a substantial reason comparable to the specific grounds in rule 6.5(4)(a)–(c), or circumstances making it unjust for bankruptcy consequences to follow. The existence of security held against a principal debtor is not, by itself, such a reason. The creditor is generally entitled to elect whether to pursue the principal debtor, the security or the guarantor.
3. The security was held over the company’s property, not White’s property, and could not be brought into account under rule 6.5(4)(c). It was also inappropriate to require Davenham to litigate for possession or sale when it had an alternative remedy against the guarantor. The evidence did not establish that the security would extinguish the debt, and interest continued to accrue.
4. There was no realistic prospect of a claim under section 244 of the Insolvency Act 1986. The test for an extortionate commercial credit transaction was stringent. The fact that interest rates were high did not establish that the transaction required grossly exorbitant payments or grossly contravened ordinary principles of fair dealing.
5. There was, however, a genuinely triable issue as to whether the increase in interest from 18% to 36% per annum, compounded monthly, was a penalty. The evidence before the court did not include the detailed evidence about the lender’s rationale that had been available in Davenham Trust plc v Homegold Ltd. Authorities supplied legal principles, not evidence.
6. That arguable defence concerned only part of the debt. White could have paid the principal and ordinary interest and disputed the default interest. He had not done so. His substantial assets also meant that he could avoid bankruptcy by payment or by securing the debt under section 271(3) of the Insolvency Act 1986. The demand therefore ought not to be set aside.

The appeal was brought with permission from the decision of Deputy Registrar Schaffer dated 27 April 2010. The deputy registrar had set aside the statutory demand. The High Court allowed Davenham’s appeal and reinstated the demand.