White v Davenham Trust Ltd

The Court of Appeal dismissed the appeal and rejected the submission that the residual discretion in Insolvency Rule 6.5(4)(d) should be applied by analogy with rule 6.5(4)(c) where the creditor holds security over assets of a different person. The court held that third-party security is irrelevant to a statutory demand served on a separate guarantor because rule 6.5(4)(c) is concerned with security over the particular debtor's assets. The court accepted that a guarantor may rely on substantial disputes about the debt and on cross-claims by the principal debtor (applying the co-extensiveness principle as explained in Remblance v Octagon Assets) but concluded that that principle does not extend to protect a guarantor where the creditor's security is over a third party's assets.

The court also considered issues about default interest and whether parts of the interest claimed might be unenforceable (s.244 Insolvency Act 1986 or common law penalty), but held that any arguable challenge affected only the additional interest and did not justify setting aside the statutory demand. The judge below (Floyd J) was held to have been correct to refuse to set the demand aside on these grounds.

Background and procedural history

• The appellant, Mr Mark White, had given a personal guarantee to Davenham Trust Ltd (DTL) for the liabilities of St George's Property Services (London) Limited (SGPS). SGPS granted security over property and assets. SGPS went into administration. DTL demanded payment from Mr White and, after non-payment, served a statutory demand. The deputy registrar set aside the statutory demand. DTL successfully appealed to Mr Justice Floyd, and Mr White obtained permission to appeal to the Court of Appeal.

Nature of the application

• Mr White applied to set aside the statutory demand. He relied on two principal points: (i) there was a triable issue that the rate of default interest was unenforceable (argued as an extortionate credit transaction under s.244 Insolvency Act 1986 or as a common law penalty), and (ii) DTL held security given by the principal debtor (SGPS), so that the statutory demand against the guarantor should be set aside under the court's residual discretion in rule 6.5(4)(d), by analogy with rule 6.5(4)(c) (fully secured creditor) and the co-extensiveness principle applied in Remblance v Octagon Assets.

Issues framed

1. Whether rule 6.5(4)(d) should be applied by analogy with rule 6.5(4)(c) so that third-party security held by the creditor for the principal debtor precluded a statutory demand against a separate guarantor.
2. Whether there was a triable issue that the default interest claimed was unenforceable and whether that justified setting aside the demand.

Court's reasoning and conclusions

• The court summarised the statutory framework: bankruptcy petitions require the debt to be unsecured in relation to the particular debtor (s.267 IA 1986), and rule 6.1(5) requires a statutory demand to state and value any security over the particular debtor's assets. Rule 6.5(4)(c) only applies to security over the assets of the debtor in question. Authorities going back to Re Plummer established that third-party security is irrelevant to the debtor's bankruptcy estate.
• The court accepted the co-extensiveness principle from Remblance as applying where the principal debtor has a cross-claim or set-off (rules 6.5(4)(a) and (b)) and thus a guarantor may benefit under rule 6.5(4)(d) by analogy in those circumstances. However, the court distinguished Remblance: the rationale of rule 6.5(4)(c) is different because it regulates entitlement to invoke collective insolvency remedies where the creditor is fully secured over the debtor's assets; that rationale does not extend to security over assets of a third party.
• Accordingly, third-party security did not provide a ground under rule 6.5(4)(d) to set aside the statutory demand served on Mr White. As to the challenge to default interest, any arguable point affected only additional interest and did not undermine the substantial undisputed debt; that did not justify setting aside the demand.

Disposition

• The Court of Appeal dismissed Mr White's appeal and upheld Floyd J's decision refusing to set aside the statutory demand.

This was an appeal against Mr Justice Floyd's order allowing DTL's appeal from the deputy registrar. The Court of Appeal dismissed the appeal. The court held that the co-extensiveness principle which allows a guarantor to rely on a principal debtor's cross-claim under rule 6.5(4)(d) does not extend to a situation where the creditor's security is over assets of a third party. Third-party security is irrelevant to a statutory demand served on a separate guarantor, because rule 6.5(4)(c) and rule 6.1(5) concern security over the particular debtor's assets. Any arguable challenge to additional default interest affected only that element of the debt and did not justify setting aside the demand.

The matter began with a statutory demand served by DTL on Mr White (October 2009). Deputy Registrar Schaffer set aside the statutory demand by order dated 18 May 2010. Davenham Trust Limited successfully appealed to Mr Justice Floyd: [2010] EWHC 2748 (Ch), who allowed DTL's appeal. Permission was given by Etherton LJ for Mr White to appeal to the Court of Appeal, which delivered judgment on 28 June 2011: [2011] EWCA Civ 747.