Pearse v HM Revenue & Customs

A contractual restriction on bankruptcy enforcement must be construed according to the natural and ordinary meaning of the words used, read in their contractual and commercial context. A covenant preventing bankruptcy proceedings to enforce a defined contractual debt does not, without clear language, extend to bankruptcy proceedings based on a judgment obtained for that debt. Nor does a reference to a specified debt automatically include the judgment, interest or costs arising from its enforcement. A term will not be implied where the contract operates satisfactorily without it. A statutory demand may be set aside where the circumstances make it unjust for the demand to produce its usual insolvency consequences.

HMRC served a statutory demand on Martin John Pearse for a judgment debt arising from his guarantee of a time-to-pay arrangement entered into by Follett Stock LLP. The guarantee limited the guaranteed debt to £600,000 and provided that HMRC would not pursue the guarantors’ bankruptcy as a remedy for enforcing that debt.

An insolvency judge dismissed Mr Pearse’s application to set aside the demand. On appeal, the issues were whether the contractual restriction extended to a judgment obtained on the guaranteed debt, whether it covered interest and costs, and whether a corresponding term should be implied.

1. Appeal dismissed. The statutory demand was not required to be set aside under rule 6.5(4) of the Insolvency Rules 1986. The residual discretion under rule 6.5(4)(d) may be exercised where it would be unjust for the demand to produce the consequences associated with inability to pay, but no such injustice was established.
2. The contractual construction exercise required consideration of the natural and ordinary meaning of the language, the other provisions, the purpose of the clause and contract, the relevant circumstances known at the date of contracting, and commercial common sense, while disregarding subjective intentions. Commercial common sense could not be used retrospectively to rescue an imprudent bargain.
3. Clause 5(2) prevented HMRC from pursuing bankruptcy as a remedy for enforcing the £600,000 Part Debt under the guarantee. It did not prevent HMRC from enforcing a judgment obtained for payment of that debt. The wording was clear and did not extend to the judgment merely because the guarantee liability had merged into it.
4. Aman v Southern Railway Company [1926] 1 KB 59 did not establish that every contractual reference to a debt includes a judgment, interest and costs. That case concerned rights accepted in satisfaction of a pre-existing debt and was materially different.
5. Interest and costs were separately recoverable liabilities under clause 5(4), and were not included in the defined Part Debt. The interest exceeded the bankruptcy threshold and provided an independent basis for the statutory demand.
6. No term extending the bankruptcy restriction to the judgment debt could be implied. The contract operated satisfactorily as drafted, and the requirement of business efficacy was not met. The claim that HMRC should be contractually prevented from bankruptcy proceedings after judgment was therefore rejected.

1. High Court (Chancery Division): appeal from the order of Insolvency and Companies Court Judge Briggs dated 16 June 2017, dismissing the application to set aside the statutory demand. Appeal dismissed.