Mahon & Anor v FBN Bank (UK) Ltd

An application to set aside a statutory demand is a summary process. The court considers the evidence available but does not make binding findings of fact or finally determine the merits. Under rule 6.5(4)(d) of the Insolvency Rules 1986, the court may consider the cumulative effect of several substantial issues and set aside a demand where it would be unjust to allow the creditor to present a bankruptcy petition. In a wife’s guarantee of her husband’s business borrowing, the bank is ordinarily put on inquiry. A credible case of trust and confidence, coupled with a transaction calling for explanation, may suffice at the summary stage. The court must then assess whether the bank complied with the core safeguards identified in RBS v Etridge (No 2). A genuinely triable claim of undue influence or misrepresentation may make insolvency proceedings inappropriate.

John and Claire Mahon appealed orders of District Judge Crowley in the Walsall County Court dismissing their applications to set aside statutory demands served by FBN Bank (UK) Ltd. The demands arose from guarantees supporting borrowing by a company operated by John Mahon. The appeals also concerned bankruptcy notices, charging orders and costs.

Claire relied principally on undue influence in relation to the guarantee. John relied on alleged misrepresentation concerning FBN’s experience and intended banking relationship with property developers, undue influence, interest overcharges, rent and security valuation. The central issues were whether the debts were disputed on substantial grounds and whether, considered individually or cumulatively, the statutory demands ought to be set aside.

1. Nature of the process. An application under rule 6.5 of the Insolvency Rules 1986 is not a trial. The court may evaluate the available evidence, but has no jurisdiction to make binding findings of fact or finally determine substantive issues. Fresh evidence may be admitted up to and during the hearing, subject to the overriding objective.
2. Undue influence and guarantees. Applying RBS v Etridge (No 2), a bank is ordinarily put on inquiry whenever a wife offers to stand surety for her husband’s debts. A wife’s shareholding or company office is not decisive; the substance of her involvement is what matters. At the summary stage, credible evidence that the wife placed trust and confidence in her husband, together with a transaction calling for explanation and a genuinely triable allegation of impropriety, will ordinarily suffice to raise the evidential presumption.
3. The bank must take reasonable steps to ensure that the wife receives a meaningful explanation of the transaction. The core safeguards include a private meeting, explanation of the nature and practical consequences of the documents, the extent of liability and risks, discussion of financial circumstances, and confirmation that the decision is hers alone. FBN had neither required a separate meeting with Claire nor obtained adequate confirmation that those safeguards had been observed. Her case therefore raised substantial grounds for disputing liability under the guarantee.
4. John Mahon’s appeal. The alleged representations that FBN was experienced in and intended to develop banking relationships with residential property developers were arguably representations with legal effect, rather than mere promotional statements. The alleged misrepresentation, interest calculation, rent and security issues each raised arguable matters. Although none alone necessarily required setting aside the demand, their cumulative effect engaged rule 6.5(4)(d). It would be unjust and inappropriate to use insolvency proceedings to resolve those disputes.
5. Both appeals were allowed. The statutory demands against John and Claire were set aside. Their related appeals concerning bankruptcy notices, charging orders and costs succeeded. Costs were reserved pending submissions on the precise form of order.

High Court (Chancery Division): appeals from orders made by District Judge Crowley in the Walsall County Court on 7 May 2010. The High Court allowed both appeals and set aside the statutory demands.