PME Cake Limited v June Penny Craig (a Protected Party by her Litigation Friend Barry Woods) & Ors

A winding-up petition should be restrained where the alleged debt is disputed on genuine and substantial grounds, or where a genuine and substantial cross-claim would make the petition an abuse of process. A Tomlin order settles the underlying dispute and creates a new relationship between its parties, but it does not necessarily release a non-party guarantor. The question is the proper construction of the guarantee. A broadly drafted guarantee may cover sums agreed in settlement where they represent loss flowing from the principal debtor’s breach of the guaranteed covenant. Claims against a principal debtor and guarantor are ordinarily cumulative, not alternative.

PME Cake Limited applied to restrain three landlords from presenting a winding-up petition based on a statutory demand. The demand concerned sums which the landlords claimed under a guarantee given by the company in respect of a lease granted to PME Harrow Limited. The underlying dilapidations proceedings against PME Harrow were settled by a Tomlin order, followed by an enforcement order when the settlement sum and costs were not paid.

The company argued that the settlement released or materially varied the guaranteed obligations, that the guarantee’s liability period had expired, and that the landlords had elected to pursue the principal debtor. The central issue was whether those arguments disclosed a genuine and substantial dispute as to the guaranteed debt.

1. Application dismissed. The alleged debt was not disputed on substantial grounds, so presentation of a winding-up petition was not shown to be an abuse of process.
2. The principles governing restraint of a winding-up petition, summarised in Sell Your Car with us Limited v Anil Sareen [2019] EWHC 2332 (Ch), were applied. A genuine and substantial dispute, or a genuine and substantial cross-claim which would make the petition bound to fail, is required. A mere cloud of objections is insufficient.
3. A Tomlin order is a contract between its parties and settles the disputes on the terms of the order and schedule. It creates a new legal relationship and ordinarily prevents the original disputes being reopened. It may nevertheless be enforced in the original proceedings. A person who is not privy to the settlement is not bound by its terms.
4. The settlement did not, on its proper construction, release the company from the guarantee. The sum payable under the Tomlin order represented satisfaction of PME Harrow’s liability for breach of the repairing and yielding-up covenant. The guarantee was sufficiently wide to require the company to indemnify the landlords for losses resulting from PME Harrow’s failure to pay that sum.
5. The rule in Holme v Brunskill (1878) L.R. 3 Q.B.D. 495 did not assist the company. The Tomlin order did not vary the lease; it settled the secondary liability arising from breach of its terms.
6. The guaranteed liability arose from a breach occurring during the Liability Period. The subsequent settlement and enforcement orders did not create wholly new liabilities disconnected from that breach.
7. The doctrine of election did not bar the claim. Remedies against a principal debtor and a surety are cumulative. Obtaining judgment against the principal debtor does not prevent the creditor pursuing the guarantor.