Finance agreements with a debtor company are often
backed by personal guarantees from the directors of the company. If
insolvency proceedings are contemplated to enforce the guarantee,
you need to consider whether you could bring the same action
against the principal debtor. If you can not, your proceedings
against the guarantor might be scuppered.
This was the position in Remblance v Octagon Assets
Ltd, where the debtor’s and guarantor’s obligations were
co-extensive. The claimant, as sole director and shareholder,
guaranteed his company’s obligations under a lease with the
defendant. The company fell into arrears. However, there was a
dispute regarding the property and the company had a pending action
against the defendant for substantial damages. The defendant served
a statutory demand against the claimant as guarantor in relation to
the rent arrears. No demand had been served against the company. It
was common ground that the company could have resisted a demand
served upon it based on the rent arrears under the Insolvency Rules
1986 (IA) s 6.5(4)(a) because of its cross claim.
The claimant argued that it would be unjust to
allow the defendant to proceed against him as guarantor by the
insolvency route, when it could not pursue that route against the
principal debtor. The claimant claimed the same protection from
bankruptcy as was available to his company.
At first instance, the court had found that, as the
claimant could afford to pay off the debt, and therefore avoid the
consequences of bankruptcy, this was an important factor which
militated against setting aside the statutory demand. The court
considered that this swung the balance of fairness against making
the creditor wait until the debtor’s claim had been decided.
The Court of Appeal, allowing the claimant’s
appeal, held that it could exercise its residual discretion afresh
under s 6.5(4)(d) IA to set the statutory demand aside where
circumstances existed which would make it unjust for the statutory
demand to give rise to bankruptcy consequences.
The claimant’s and his company’s obligations were
co-extensive. The company had a bona fide cross claim for a sum in
excess of the arrears of rent and that would defeat a petition
against it. Justice required that the claimant should be treated in
the same way as the company. It would be unjust not to set the
statutory demand aside as against him.
The fact that the claimant could afford to pay the
debt was not sufficient reason to refuse to set aside the demand
where the principal debtor had good reason not to pay it.
This case shows that attempting to
avoid difficulties in pursuing a principal debtor under a finance
agreement by issuing bankruptcy proceedings against a guarantor is
not necessarily the quickest or most cost-effective route. Where
co-extensive obligations exist and the principal debtor could
defeat such proceedings, the courts will consider it only fair and
just that the guarantor, being only secondarily liable, be placed
in a comparable position.
Greg Standing is a
partner in Wragge & Co LLP’s Finance, Insolvency, Recoveries
and Sales team