McGuiness v Norwich and Peterborough Building Society

The Court of Appeal considered whether a creditor could present a bankruptcy petition under section 267(2)(b) of the Insolvency Act 1986 where the creditor's claim against a guarantor arose under a guarantee that might be a "see to it" liability sounding in damages rather than a debt for a liquidated sum. The court analysed the different forms a guarantee can take (see-to-it; conditional payment; indemnity; concurrent liability) and reviewed the historical practice and authorities on what constitutes a "debt for a liquidated sum" for petition purposes.

On construction of the particular guarantee, the court held that clause 2.2, read with clause 4.2 (a principal-debtor clause), imposed a liability in debt: the guarantor undertook a direct obligation to pay sums which were quantifiable and immediately payable on demand. Clause 4.2 rendered the guarantor's obligations those of a principal debtor, allowing enforcement without first exhausting remedies against the borrower. Because the guarantor's liability was a debt in a liquidated sum, the Society was entitled to present a creditor's petition and the bankruptcy order was properly made.

Background and parties. The Society presented a creditor's petition that resulted in a bankruptcy order against Mr Spencer McGuinness. The petition related to a guarantee executed by Mr McGuinness in respect of his brother's mortgage; the outstanding sum was over £1.2m. The guarantor did not set aside the statutory demand or pay, and the Society petitioned for bankruptcy.

Nature of the dispute. Mr McGuinness contended that his liability under the guarantee was not a debt for a liquidated sum within section 267(2)(b) Insolvency Act 1986 but a see-to-it obligation enforceable only as damages (unliquidated). If so, the petition was defective and the bankruptcy order should not have been made. The Society argued the guarantee created a liability in debt, notably because clause 2.2 and clause 4.2 together imposed concurrent, immediately payable obligations.

Procedural posture. A bankruptcy order was made on 24 February 2010; Briggs J dismissed Mr McGuinness's appeal against that order ([2010] EWHC 2989 (Ch)). The Court of Appeal granted permission to appeal and heard argument on the construction of the guarantee and the legal question whether a see-to-it guarantor's liability can found a petition.

Issues framed by the court.

• Whether a see-to-it guarantor's liability (liability in damages) can be treated as a "debt for a liquidated sum" for the purposes of section 267(2)(b) IA 1986.
• On the true construction of the guarantee in this case, whether the guarantor's obligation was a conditional payment or concurrent principal-debtor liability (i.e. a petitionable debt).

Reasoning and holdings on issues. The court reviewed authorities (including Moschi v Lep Air Services Ltd) and the historical practice distinguishing petitionable and provable debts. It accepted that a see-to-it obligation normally gives rise to damages (unliquidated) and so generally would not satisfy section 267(2)(b). However, the court emphasised statutory history and contract construction: where a guarantee, by its terms, imposes a direct obligation to pay a quantifiable sum (or adopts contractual machinery fixing the sum) and contains a clause making the guarantor a principal debtor, the obligation is a debt in a liquidated sum and is petitionable. Applying that test to the guarantee before the court, the combination of clause 2.2 (obligation that sums "will be paid and satisfied when due"), clause 2.3 (payment on demand), clause 2.4 (separate indemnity) and clause 4.2 ("Your obligations under this Guarantee are those of principal, not just as surety") led the court to conclude the guarantor had a concurrent obligation as principal debtor. That construction meant the petition met the section 267 requirement and the bankruptcy order was properly made.

Wider comment. The court noted the general rule that indemnities and see-to-it guarantees attract damages remedies, but held that parties may draft guarantees to create petitionable, liquidated debts and the court will give effect to clear contractual language to that effect.

Appeal dismissed. The Court of Appeal held that on proper construction the guarantee created a liability in debt for a liquidated sum: clause 2.2 (payment and satisfaction when due), read with clause 2.3 and the principal-debtor clause 4.2, imposed concurrent primary liability on the guarantor so that the Society's petition satisfied section 267(2)(b) IA 1986. Although see-to-it guarantees ordinarily give rise to damages, the particular drafting converted the guarantor's obligation into a petitionable debt.

Bankruptcy order made on petition by Norwich and Peterborough Building Society (Deputy Registrar) 24 February 2010; appeal to Mr Justice Briggs dismissed ([2010] EWHC 2989 (Ch)); second appeal to Court of Appeal dismissed ([2011] EWCA Civ 1286).