White v Davenham Trust Ltd

Bankruptcy is a collective remedy. Security given by one debtor does not prevent a creditor from serving a statutory demand on another debtor, including a guarantor who has given no security over his own assets. The co-extensiveness principle may benefit a guarantor where the principal debtor has a qualifying crossclaim or substantial dispute under rule 6.5(4)(a) or (b). It does not extend by analogy to security falling within rule 6.5(4)(c), because third-party security has no effect on the guarantor’s bankruptcy estate. A creditor may choose between available remedies and need not realise the principal debtor’s security first, subject to avoiding double recovery. An arguable dispute limited to default interest did not justify setting aside the demand where the principal debt and basic interest were undisputed.

Mr White had guaranteed the liabilities of St George’s Property Services (London) Ltd to Davenham Trust Ltd. The company entered administration and had charged property as security. Davenham served a statutory demand on Mr White after he failed to pay under the guarantee.

Deputy Registrar Schaffer set aside the demand. Mr Justice Floyd allowed Davenham’s appeal in the Chancery Division: [2010] EWHC 2748 (Ch), [2011] BPIR 280. Mr White brought a second appeal. The central issue was whether security given by the principal debtor required the statutory demand against the guarantor to be set aside under rule 6.5(4)(d), by analogy with rule 6.5(4)(c).

1. Disposition. The Court of Appeal unanimously dismissed the appeal. Lloyd LJ gave the leading judgment, with Elias LJ and Maurice Kay LJ agreeing.
2. Bankruptcy proceedings are designed for the collective realisation and distribution of a debtor’s assets. Under the Insolvency Act 1986 and the Insolvency Rules 1986, a creditor fully secured over the particular debtor’s assets cannot present a bankruptcy petition unless it surrenders the security or claims only the unsecured shortfall. The statutory-demand procedure cannot be used as a preliminary step towards proceedings which the creditor could not invoke.
3. The co-extensiveness principle recognised in Remblance v Octagon Assets, [2009] EWCA Civ 581, [2010] 1 BCLC 10, applies where the principal debtor has a qualifying crossclaim or substantial dispute under rule 6.5(4)(a) or (b). In that situation, the guarantor may take the benefit of the issue for bankruptcy purposes.
4. The position under rule 6.5(4)(c) is different. That provision concerns the effect of security on the estate of the debtor against whom the demand is served. Security given by a third party, including the principal debtor, has no effect on the guarantor’s estate. It therefore provides no reason to set aside a demand against a guarantor who has given no security over his own assets. The court rejected the proposed analogy with paragraph (c).
5. A creditor with several remedies may choose which remedy to enforce, and when and in what order, subject only to the prohibition on recovering more than the debt, interest and costs. The guarantor could not require Davenham to pursue the company or realise its security first. The reasoning in China and South Sea Bank v Tan, [1990] AC 536, supported that conclusion.
6. The arguable issue concerning default interest affected only the additional interest, not the principal or basic interest. It did not justify setting aside the demand. The guarantee provisions preserving other securities did not alter the result. The court noted that conditional payment might address difficulties caused by a partly disputed debt, but the point was immaterial because no part of the debt had been tendered.

1. Court of Appeal (Civil Division) dismissed Mr White’s second appeal.
2. High Court, Chancery Division Mr Justice Floyd allowed Davenham’s appeal from the Deputy Registrar’s order: [2010] EWHC 2748 (Ch), reported at [2011] BPIR 280.
3. Chancery Division Deputy Registrar Schaffer had set aside Davenham’s statutory demand.