Promontoria (Chestnut) Ltd v Bell & Anor

A creditor holding security over a guarantor’s property for the principal debtor’s liabilities holds security for or in respect of the guarantor’s liability where enforcement of that security would discharge the guarantee debt. The security must therefore be valued in a statutory demand under rules 6.1(5) and 6.5(4)(c) of the Insolvency Rules 1986. This reflects the bankruptcy principle that a secured creditor cannot prove against the estate while retaining security which would augment that estate if surrendered. Where the guarantee is capped below the principal debt, the creditor may appropriate security to the unsecured part of the principal debt, but must value the balance of the security attributable to the guaranteed debt.

Promontoria appealed against orders setting aside statutory demands served on Charles and Angela Bell under section 268 of the Insolvency Act 1986. The Bells had guaranteed lending to their company and had also granted third-party charges over their properties securing the company’s liabilities. The creditor demanded payment under the guarantee after the company defaulted.

The deputy judge held that the charges constituted security in respect of the debt claimed in the statutory demands and that rule 6.1(5) had not been complied with. The appeal concerned whether security provided by guarantors over their own property for the principal debtor’s debt fell within rules 6.1(5) and 6.5(4)(c), and how the analysis applied where the guarantee was capped below the principal debt.

1. The appeal was dismissed. The third-party charges were security in respect of the debts claimed in the statutory demands. The demands were therefore properly set aside because the creditor had not complied with rule 6.1(5) of the Insolvency Rules 1986.
2. Rules 6.1(5) and 6.5(4)(c) must be interpreted consistently with the underlying bankruptcy principle that creditors proving in an estate should rank equally in relation to estate assets. A secured creditor cannot prove while retaining security which, if surrendered, would augment the estate for the benefit of creditors generally. The same concept of secured debt applies at the statutory-demand, petition and proof stages.
3. The fact that the guarantee and the principal debt were legally distinct did not alter the result. The guarantees and charges were both rooted in the company’s unpaid debt, and realisation of the charges would discharge the Bells’ guarantee liability pro rata. That was a powerful indication that the charges were security “for” or “in respect of” the guarantee debt.
4. The creditor’s contractual freedom to choose the order in which to enforce security, and the guarantee provisions making the guarantee additional to other security, could not override the mandatory bankruptcy rules.
5. Where the guarantee is capped below the principal debt, the creditor may appropriate security first to the part of the principal debt outside the guarantee. It may participate in the guarantors’ bankruptcy only for any resulting shortfall in the guaranteed debt. If the security covers the whole guaranteed debt, participation requires surrender of the security.

• High Court (Chancery Division): Appeal, permitted by Arnold J on 18 January 2019, dismissed. Orders of Deputy Insolvency and Companies Court Judge Prentis dated 3 December 2018 upheld.