Bankrupting personal guarantors: recent developments. Insolvency Intelligence 2012, 25(2), Joseph Curl

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1 Bankrupting personal guarantors: recent developments Insolvency Intelligence 2012, 25(2), Joseph Curl Reliance by creditors on personal guarantees has increased in recent years. The downturn has led to personal guarantors more frequently being called upon to answer for principal borrowers' debts, often in circumstances none of the parties to the relationship realistically expected to occur. From a lender's point of view, the great utility of the personal guarantee is that a creditor can serve a statutory demand and proceed to bankrupt a guarantor without first obtaining a judgment. That assumption by lenders has been challenged by debtors in three recent appeals to the Court of Appeal. Each of these cases has dealt with the distinctions to be drawn between the rights and liabilities of principal debtors and those of personal guarantors. To what extent can a personal guarantor rely on rights vested in the principal debtor? When will a lender have to obtain a judgment against a guarantor before serving a statutory demand? This article considers this recent run of decisions and seeks to identify the considerations that apply when a creditor wishes to serve a statutory demand on a personal guarantor. Cross-claim vested in the principal debtor Remblance v Octagon Assets Limited 1 explored the circumstances in which a personal guarantor may be able to benefit from a right of counterclaim, set-off or cross-claim vested in the principal debtor. In Remblance v Octagon, the Court of Appeal allowed 2 Mr Remblance's appeal against the decision of Mann J. 3 Their Lordships set aside a statutory demand presented in respect of a personal guarantee given by Mr Remblance for the debts of a company of which he was director. The company had entered into a deed of surrender and re-grant of a lease with its landlord (Octagon). Mr Remblance had executed a personal guarantee promising to make good all losses caused to Octagon through the company's default. The company fell into arrears with the rent and raised a dispute with Octagon alleging breach of its covenant for quiet enjoyment. Octagon served a statutory demand on Mr Remblance for the arrears. The debt of 11, was comparatively small and it was common ground that Mr Remblance could pay if he chose to. Mr Remblance made an 1 Remblance v Octagon Assets Limited [2009] EWCA Civ 581; [2010] Bus LR Remblance v Octagon Assets Limited [2009] EWCA Civ 581; [2010] Bus LR 119, Ward, Dyson L.JJ. (majority), Mummery L.J. (dissenting). 3 Mann J.'s decision was itself an appeal from the decision of District Judge Pearce in the Southend-on-Sea County Court. Mann J. had reversed DJ Pearce's decision to set aside the statutory demand. 1

2 application to set the statutory demand aside. For the purposes of the summary nature of the set aside application, it was assumed that the company's claim for breach of covenant against Octagon would sound in damages in a sum that might exceed the debt under the deed. It was further assumed that if Octagon had sought a winding-up order against the company, then the company could have resisted it on the basis that it had a cross-claim. Mr Remblance argued that Octagon was seeking to recover a debt from him as guarantor under threat of bankruptcy that it could not obtain from the principal debtor without first bringing a claim and that this was unjust. Section 267 of the Insolvency Act 1986 (Act) provides that a debtor may be made bankrupt on a debt for a liquidated sum exceeding 750. Section 268 of the Act requires that a statutory demand must be served on the debtor 21 days before a bankruptcy petition can be presented. Rule 6.5(4) of the Insolvency Rules 1986 (Rules) sets out four bases on which the debtor may apply to set aside the statutory demand. A demand may be set aside if: (a) (b) (c) (d) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or the debt is disputed on grounds which appear to the court to be substantial; or it appears that the creditor holds some security in respect of the debt claimed by the demand, and either r.6.1(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or the court is satisfied, on other grounds, that the demand ought to be set aside. Mr Remblance sought to rely on ground (d) and argued that it was unjust for Octagon to require him to answer for the principal debtor's liability on pain of bankruptcy in circumstances where the principal debtor could not be wound up on the basis of its debt. It is important to note that Mr Remblance had no prospect of asserting any argument based on the direct counterclaim, set-off or cross-claim ground in r.6.5(4)(a), because the cross-claim for breach of covenant was vested in the company rather than Mr Remblance. The ground in r.6.5(4)(d) is an unparticularised residual category that provides the court with 2

3 a discretion when justice requires it. Budge v AF Budge (Contractors) Ltd 4 is the leading case on the exercise of this discretion. Peter Gibson L.J. held that: it is quite impossible, I would have thought, to foresee all the circumstances which may arise and which may justify the proper application of that subparagraph. But it is appropriate when considering whether to set aside a statutory demand under that paragraph to consider the consequences if one does set it aside The real question, as it seems to me, in this case is whether Mr Budge can show a substantial reason, comparable to the sort of reason one sees in paras (a), (b) and (c) of r6.5(4), why the demand ought to be set aside. 5 In Remblance v Octagon all three members of the Court of Appeal gave reasoned judgments. Mummery L.J.'s dissent was based on the same reason that Mann J. had found against Mr Remblance below: Mr Remblance was in a position to pay the debt and avoid bankruptcy. If he paid, then he would have a right of indemnity from the principal debtor and the company would be free to pursue its claim against Octagon for breach of quiet enjoyment. Mummery L.J. reasoned that: Mr Remblance can choose to avoid insolvency and the dreaded consequences described by Mr Berry [his Counsel] simply by paying to Octagon what is legally due from him to it. He is able to pay what he is liable to pay. If he pays it, he cannot be made bankrupt for not paying it and he can turn to [the principal debtor] to be indemnified. The fact that [the principal debtor] is his company and that he would rather not pay Octagon than seek payment from his own company has nothing to do with the justice of the case. 6 For the majority, Ward L.J. analysed the precise nature of what Mr Remblance had promised to do. As with all guarantees, interpretation is a matter of contractual construction and depends on the words used in each particular instrument. Ward L.J. referred to Moschi v Lep Air Services Ltd, 7 where the House of Lords had drawn a distinction between two different categories of personal guarantee. In the first category, a guarantor might enter into a conditional obligation to pay the principal's debt if the principal did not. In the second category, a guarantor might promise to see to it that the principal performed its obligations under a contract of loan and make good any losses caused by the principal's failure to 4 Budge v AF Budge (Contractors) Ltd [1997] BPIR Budge v AF Budge (Contractors) Ltd [1997] BPIR 366, 371C-G. 6 Budge v AF Budge (Contractors) Ltd [2010] Bus LR 119, 126B-C. 7 Moschi v Lep Air Services Ltd [1973] AC 331; [1972] 2 W.L.R

4 perform. Lord Reid explained the distinction in Moschi v Lep Air Services Ltd: A person might undertake no more than that if the principal debtor fails to pay any instalment he will pay it. That would be a conditional agreement. There would be no prestable obligation unless and until the debtor failed to pay. There would then on the debtor's failure arise an obligation to pay. If for any reason the debtor ceased to have any obligation to pay the instalment on the due date then he could not fail to pay it on that date. The condition attached to the undertaking would never be purified and the subsidiary obligation would never arise. On the other hand, the guarantor's obligation might be of a different kind. He might undertake that the principal debtor will carry out his contract. Then if at any time and for any reason the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor underook that he would do. 8 Having considered the Moschi v Lep Air Services Ltd distinction, Ward L.J. concluded in Remblance v Octagon that the obligation of Mr Remblance: is quite clealy not the kind of conditional agreement of which Lord Reid spoke but rather the undertaking of the obligation to see to it that the tenant performed his obligation. Thus the nature of the landlord's relief is a claim in damages. 9 Ward and Dyson L.JJ. regarded it as significant for the purposes of the exercise of the discretion in r.6.5(4)(d) that Mr Remblance had given a guarantee of the see to it type. Although not spelt out explicitly by either of their Lordships, it appears from Remblance v Octagon that the discretion in r.6.5(4)(d) to set aside the statutory demand would probably not have been exercised in Mr Remblance's favour had he entered into a conditional obligation to pay the rent himself if Octagon did not, rather than promising to see to it that the company paid. Dyson L.J. held that: It was unjust to allow Octagon to proceed against Mr Remblance by the insolvency 8 Moschi v Lep Air Services Ltd [1973] AC 331, 344G-345B; [1972] 2 W.L.R Remblance v Octagon [2010] Bus LR 119, 136G. 4

5 route if it could not proceed against [the company] by that route. The reason for that is easy enough to see. Mr Remblance's obligation was not an obligation himself to pay the rent and discharge [the company]'s obligations under the lease. It was an obligation to see to it that [the company] discharged its obligations to Octagon and to make good to Octagon all losses sustained. 10 Ward L.J. was also influenced by the fact that the principal debtor was known to be to all intents and purposes the alter ego of Mr Remblance, 11 which meant that the cross-claim was likely to be pursued. Fixed charge security over the property of the principal debtor White v Davenham Trust Ltd 12 was a superficially similar case to Remblance v Octagon. In October 2007, Mr White had given Davenham an all monies personal guarantee for the debts of a company. The company was engaged in buying and refurbishing two properties in Fulham. Davenham held fixed security over these properties. In September 2009, Davenham appointed administrators over the company. Davenham served a statutory demand on Mr White under the guarantee for 958, This sum gave no credit for the security held by Davenham over the principal debtor company's properties. If Davenham had served a demand on the principal debtor, it would have had either to give up its security before making demand or value the security and demand only the balance. Had the security been owned by Mr White, then the statutory demand could have been set aside on the basis of r.6.5(4)(c) if its value equalled or exceeded the debt. However, Davenham did not have to give credit for the security given by the company when demanding from Mr White because security given by a principal debtor cannot be relied on by a personal guarantor for the purposes of seeking to set aside a statutory demand. This was put beyond doubt by Knox J. in In Re a Debtor (No 310 of 1988). 13 Knox J. considered that references to security in the Rules have the same meaning as in sections 383 and 385(1) of the Act. Section 383(2) provides that: a debt is secured for the purposes of this Group of Parts to the extent that the person to whom the debt is owed holds any security for the debt (whether a mortgage, charge, lien or other security) over any property of the person by whom the debt is owed [emphasis added]. 10 Remblance v Octagon [2010] Bus LR 119, 127H-128A. 11 Remblance v Octagon [2010] Bus LR 119, 136H. 12 White v Davenham Trust Ltd [2010] EWHC 2748 (Ch), [2011] BCC In Re a Debtor (No 310 of 1988) [1989] 1 WLR 452; [1989] 2 All E.R

6 The properties were owned by the principal debtor company, rather than by Mr White as guarantor and consequently could not be taken into account. Instead, Mr White's application to set aside was based on the residual ground in r.6.5(4)(d). Mr White argued that the company had various cross-claims and disputes with Davenham (alleging that the loan facility agreements were extortionate credit bargains and that the default interest rate was an unenforceable penalty) and had given Davenham the security over the properties. This meant that the company would have had grounds under subparas (a), (b) and (c) of r.6.5(4) to seek to challenge a statutory demand had one been served directly on it. Mr White's position was that given that Davenham could not proceed to wind up the company without taking into account the disputes and security, it would be unjust to allow it to bankrupt him. Deputy Registrar Schaffer allowed Mr White's application and set aside the statutory demand. The Deputy Registrar considered it significant that the company was in administration and that Mr White was unable to exercise any influence or control as to whether the properties belonging to the company were realised, which meant that there was injustice arising from the existence of the security: Mr White cannot influence any decision the administrators may make for St Georges in dealing with the property. Davenham could, had it so wished, have sought to enforce its security and sell the property If it had sold the property the ultimate balance to be discharged by Mr White would have been identified and Mr White would have known precisely what payments he had to make to meet the demand. 14 On appeal to Floyd J., Davenham argued that it was up to the creditor how and in what order it realised its security. It relied on the Privy Council authority (on appeal from Hong Kong) China and South Seas Bank Ltd v Tan, 15 which made clear that a creditor has a free election what security to realise. Lord Templeman gave the advice of the Privy Council in the following terms: The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all Unreported, cited in the judgment of Floyd J. White v Davenham Trust Ltd [2011] BCC 77, China and South Seas Bank Ltd v Tan [1990] 1 AC 536; [1990] 2 W.L.R China and South Seas Bank Ltd v Tan [1990] 1 AC 536, 543; [1990] 2 W.L.R

7 Davenham also produced other authorities to similar effect from Australia, 17 Hong Kong, 18 and Canada. 19 Floyd J. concluded that: I think the foreign cases relied on by Mr Isaacs [Counsel for Davenham] are some persuasive authority for the proposition that the mere existence of a secured remedy against another party is not a substantial ground for refusing to allow the creditor to pursue a remedy in bankruptcy against a surety Mr Isaacs submits, I think rightly, that the existence of the secured remedy against the principal debtor should not place the creditor in a worse position so far as bankruptcy proceedings against the surety are concerned than if he held no such secured remedy. 20 The proper solution for Mr White was identified by Floyd J.: It was open to [Mr White] to pay the amount of the statutory demand which represented principal and ordinary interest and dispute the amount of the balance on the ground that it was an irrecoverable penalty. He would then have been in a comparable position to the surety in Remblance v Octagon where the debt was subject to a cross-claim which would, if good, extinguish it. He has not taken this step, but chosen instead to seek to set aside the statutory demand in full. 21 Floyd J. concluded that: It is, I think, an odd result if the existence of security makes it more difficult for the guarantee to be enforced. 22 Mr White appealed once more. A unanimous Court of Appeal upheld Floyd J.'s decision. 23 Considerable weight was placed on Remblance v Octagon by Mr White. Mr White sought to draw an analogy between Mr Remblance's position (where the principal debtor could not be wound up because it had an arguable cross-claim) and Mr White's position (where the principal debtor could not be wound up because it had given security). Mr White argued that if the discretion in r.6.5(4)(d) was exercised in Mr Remblance's favour in the former case then it should also be exercised in Mr White's favour in the latter. He argued that 17 McCann [1985] 2 Qd R 381; Petratos v Provident Capital Ltd [2009] FMCA Re Chandra, Ex p United Overseas Bank Ltd HCB 3453/ Caisse Populaire Desjardins Saint-Jean Baptiste de Lasalle v Canada Inc 1999 CanLII 13771; Re Mastronardi (2000) 195 DLR (4th) White v Davenham Trust Ltd [2011] BCC 77, 85; [2011] Bus. L.R White v Davenham Trust Ltd [2011] BCC 77, 91; [2011] Bus. L.R White v Davenham Trust Ltd [2011] BCC 77, 91; [2011] Bus. L.R

8 Davenham's inability to pursue a statutory demand for the entire debt against the principal debtor owing to the existence of security under r.6.5(4)(c) should be treated in the same way that Octagon's inability to pursue the principal debtor by reason of the cross-claim under r.6.5(4)(a) had been treated. Lloyd L.J. did not accept this argument and elaborated on the important distinction between the treatment of a cross-claim and the treatment of security: It seems to me that the effect of r.6.5(4) as a preliminary filter in relation to bankruptcy proceedings against a debtor is broadly speaking as follows. If the debtor has a counterclaim, set-off or cross-claim which equals or exceeds the relevant debt, then the policy is that the creditor should not use bankruptcy proceedings but should issue civil proceedings as the proper way in which the true state of indebtedness between the creditor and the debtor may be determined Likewise, and even more so perhaps, if the debt is disputed on apparently substantial grounds the creditor may not use bankruptcy proceedings but must issue civil proceedings in which the dispute as to the debt may be resolved in the proper manner. This would apply whether the debtor's liability is primary or secondary, on the basis that the guarantor of a disputed debt cannot be made liable any more than can the principal debtor until the dispute is resolved This is the effect of the decision in Remblance as applied to the different rules. The position under r.6.5(4)(c) seems to me to be different. It is concerned with regulating the position as regards the debtor's assets and liabilities. The debtor may have no possible defence to a claim on the personal covenant to pay but in terms of bankruptcy proceedings the creditor is not to claim on a personal debt without bringing into account the security or releasing it If however the security which the creditor holds is given not by the particular debtor but by a third party, whoever that third party may be, that security is not over an asset which can have any effect on the bankruptcy estates of the particular debtor and it is accordingly irrelevant it is different from the case of security given by the debtor because security by a third party is of no relevance to the debtor's estate as such since the asset over which the security exists can never form part of the assets of the particular debtor divisible between his creditors White v Davenham Trust Ltd [2011] EWCA Civ 747, [2011] Bus LR White v Davenham Trust Ltd [2011] Bus LR 1443, 1453A-F. 8

9 Lloyd L.J. also referred with approval to the judgment of Harman L.J. in The Liverpool (No 2) 25 where his Lordship had held that: It is a well-known rule in bankruptcy that a creditor having a security against the estate of a debtor must either surrender his security and prove for the whole debt, or value his security and prove for the balance, but it has never been the law that a creditor having a security against a third party for his debt must give credit for that when proving in the bankruptcy. 26 The conclusion from White v Davenham is that the value of security held by a lender over a principal debtor's property is irrelevant to the lender's right to enforce a personal guarantee given by a third party. There is no obligation on the lender to realise such security before proceeding against a guarantor and there is nothing to stop a lender bankrupting a guarantor even where its security over the principal debtor's property exceeds the debt. Is a guarantee debt a liquidated sum? Section 267(2)(b) of the Act provides that a creditor's bankruptcy petition may only be presented in respect of a debt that is a liquidated sum. The case of McGuinness v Norwich and Peterborough Building Society 27 required the Court of Appeal to consider whether or a not a debtor's liability arising under a personal guarantee met this requirement. Craig McGuinness owned a flat in Docklands, which was mortgaged to Norwich and Peterborough Building Society. He subsequently acquired the flat next door (not mortgaged to Norwich and Peterborough) and knocked the two flats into one without the building society's permission. When the building society found out, it threatened to call in the loan. Craig McGuinness's brother, Spencer McGuinness, provided a personal guarantee for Craig's debt to prevent the building society calling it in. Craig defaulted and the building society served a statutory demand on Spencer under the guarantee. At the hearing of his bankruptcy petition, Spencer McGuinness argued that his obligation under the guarantee was a liability in damages rather than debt, which meant it was not a liquidated sum capable of grounding a statutory demand. Reliance was placed on two authorities which, when read together, seemed to support this analysis. The first was Moschi v Lep Air Services Ltd, 28 the House of Lords authority that was also of key importance to the Court of Appeal in Remblance v Octagon. It will be recalled that in Moschi v Lep Air Services Ltd, the House of Lords distinguished between two different kinds of guarantee obligations. Mr McGuinness argued that the nature 25 The Liverpool (No 2) [1963] P The Liverpool (No 2) [1963] P 62, McGuinness v Norwich and Peterborough Building Society [2011] EWCA Civ 1286; [2011] N.P.C

10 of his obligation under the guarantee was of the see to it type, and was therefore a damages liability. In support of his contention that his obligation was unliquidated, Mr McGuinness relied on Hope v Premierpace (Europe) Ltd. 29 In that case, an employee had misappropriated money. The misappropriation gave rise to a liability that could be put in various ways, including a claim to money had and received, breach of trust or deceit. Rimer J. held that none of these claims were claims for a liquidated sum. Mr McGuinness placed reliance on this passage of Rimer J.: Mr Rainey [Counsel for the debtor] submits that it follows that none of the company's claims for a remedy is in the nature of an order for payment of a liquidated sum. It is irrelevant that the company claims to be able to identify its claim down to the last penny. It is still faced with the difficulty that its range of alternative claims against the debtor are claims for damages or for an account and payment. A claim for damages is not a claim for a liquidated sum; and nor is a claim whose remedy is that of an account, even though it may be that the taking of the account so ordered could be dealt with in a summary way and a judgment there and then given for a specific sum. I accept that submission. I agree with Mr Rainey that the petition is not based on a debt for a liquidated sum. It follows that in my judgment no bankruptcy order could properly be made on it. 30 At first instance, Deputy Registrar Middleton did not agree that the guarantee gave rise only to an unliquidated obligation and made a bankruptcy order. Mr Justice Briggs upheld that decision on the basis that the guarantee was not of the see to it type but created instead a conditional payment obligation, which was a liquidated debt liability. Briggs J. considered it significant that the guarantee signed by Mr McGuinness contained a principal debtor clause by which Mr McGuinness made his brother's debts his own. Although it was unnecessary for Briggs J. to depart from Hope v Premierpace given the conclusion that this was not a see to it guarantee, Briggs J. nonetheless concluded his judgment with the following observation concerning any inability to present a bankruptcy petition for a liability sounding in damages arising from a see to it guarantee: it seems to me to risk an absurd waste of costs and delay to require the creditor first to issue a claim and obtain an inevitable summary judgment upon it, before 28 Moschi v Lep Air Services Ltd [1973] AC 331; [1972] 2 W.L.R Hope v Premierpace (Europe) Ltd [1999] BPIR Hope v Premierpace (Europe) Ltd [1999] BPIR 695,

11 beginning bankruptcy proceedings. I suspect that there have since Moschi's case been many unreported cases where a creditor under a see to it guarantee has succeeded in bankruptcy proceedings without obtaining a prior judgment. 31 On a second appeal by Mr McGuinness to the Court of Appeal, Patten L.J. acknowledged this point in a rather different way: If Mr Arden [Counsel for Mr McGuinness] is right and a see to it liability under a guarantee does not qualify as a petitionable debt under s.267(2)(b)the consequences are at first glance surprising. Assuming (as I do for the moment) that Mr McGuinness's liability is of this kind, it would mean that the court could make a bankruptcy order on the Society's petition against Mr McGuinness's brother as principal debtor but not against him as guarantor even though the liability of both would be identical in financial terms and as readily calculable in one case as in the other. But experience teaches one in this field as in many other areas of law that views about what might constitute a rational system of law often have to give way to an established practice which cannot be altered except by legislation. The answer to the question posed by s.267(2)(b), has, as I have said, to be found by examining the practice of the bankruptcy court both before and after the passing of the Bankruptcy Act 1869 when the requirement for a petition debt to be a liquidated sum first appears. 32 Patten L.J. proceeded to conduct this examination and reached a dramatic conclusion: The issue therefore in relation to guarantees is whether the liability of the guarantor can be treated as one which is reduced to a specified and agreed sum by the guarantee itself. Where the guarantee on its proper construction contains a promise by the guarantor to pay the principal sum due and interest in the event of the debtor failing to pay no difficulty arises. The claim is one in debt and as such is necessarily in a pre-agreed amount. But guarantees containing a see to it liability give rise on Lord Diplock's analysis in Moschi v Lep Air Services Ltd to a claim for unliquidated damages. Although the measure of the guarantor's liability is the amount of the debt, that is not the same as an obligation to pay a sum of money under the contract whether as a debt or agreed damages. 31 McGuinness v Norwich and Peterborough Building Society [2011] 1 All ER (Comm) 334, McGuinness v Norwich and Peterborough Building Society [2011] EWCA Civ 1286, para

12 Therefore, as a matter of general principle and ordinary language, Mr Arden is, I think, right in his submission that the liability under a guarantee of the see to it type would not constitute a debt for a liquidated sum. 33 Patten L.J.'s conclusion was that a see to it guarantee could not establish a liquidated sum and could not form the basis of a statutory demand. Therefore, the decisive question for Mr McGuinness's appeal was whether the guarantee he had signed was a conditional payment obligation in debt (as both Deputy Registrar Middleton and Briggs J. had decided) or a promise to see to it that his brother paid the mortgage. As with all guarantees, this question was one of construction and required a close analysis of the particular form of guarantee used by the building society. The key issue for Patten L.J. was who had to pay the mortgage. Was it merely Craig McGuinness as principal (with Spencer McGuinness merely ensuring that Craig did so) or did Spencer have to pay the mortgage himself if Craig did not? The former would be a see to it obligation sounding only in damages if Spencer breached his duty to ensure Craig paid, but the latter would be a conditional obligation that Spencer would pay the mortgage himself if Craig did not. Clause 2.2 of the guarantee dealt with payment of the mortgage liabilities but Patten L.J. considered that it was ambiguous 34 on the point of who was to pay them. However, clause 2.3 provided that any obligation under the guarantee was payable on demand. A requirement for a demand was regarded by Patten L.J. as more consistent with a direct promise to pay on the part of the guarantor as opposed to a damages liability, because a demand for payment is not a pre-requisite to the enforcement of a liability in damages but could be made a condition of payment and is a requirement where the guarantee is in the nature of a collateral promise to pay on demand if the principal debtor does not. 35 It was also significant that clause 2.4 provided as an expressly separate obligation that Mr McGuinness as guarantor would indemnify the building society for any shortfall in the mortgage debt recovered from his brother as the principal borrower. If clause 2.2 was no more than a covenant by Mr McGuinness to see to it that his brother paid the mortgage, then why was there a separate indemnity clause covering the same liability? Patten L.J. concluded that these features of clauses 2.3 and 2.4 tipped the balance towards a conditional payment obligation. The guarantee liability was consequently a debt and a liquidated sum. It was therefore strictly unnecessary for Patten L.J. to consider the principal debtor provision in clause 4.2 that had been emphasised by Briggs J., but Patten L.J. 33 McGuinness v Norwich and Peterborough Building Society [2011] EWCA Civ 1286, paras McGuinness v Norwich and Peterborough Building Society [2011] EWCA Civ 1286, para McGuinness v Norwich and Peterborough Building Society [2011] EWCA 1286, para

13 nonetheless considered that this clause meant that Mr McGuinness's obligation as guarantor was concurrent with that of the borrower and not contingent upon it. This bolstered the conclusion that the liability of Mr McGuinness was a direct personal payment obligation to pay any sum that his brother failed to pay. It was a debt, not damages, and was a liquidated sum. Conclusion The legal landscape following these three authorities is a favourable one for creditors. White v Davenham is a helpful authority for creditors that spells out that security granted by a principal debtor (or any other third party) for the principal's debt cannot assist a personal guarantor. This authority confirms in the clearest terms that the most frequently encountered argument raised by personal guarantors seeking to avoid bankruptcy is irrelevant. The conclusion in McGuinness v Norwich and Peterborough calls into question the continuing relevance of Remblance v Octagon. In the first place, Remblance v Octagon was decided on the exercise of the discretion contained in r.6.5(4)(d) rather than any of the particularised grounds contained elsewhere in r.6.5(4). Although the point was not made explicit, it seemed that Ward and Dyson L.JJ. only reached the conclusion that they did because Mr Remblance's obligation was of the see to it type rather than a conditional payment obligation. McGuinness v Norwich and Peterborough has subsequently decisively concluded that a see to it obligation cannot form the basis of a statutory demand in any event. It was also significant to the reasoning in Remblance v Octagon that Mr Remblance was the alter ego of his company and remained in control of it. This meant that there was a realistic possibility that the company's claim would in fact be litigated. In a great many personal guarantee cases the company is in an insolvency procedure or receivers are in control of the fixed security, making it less likely that any cross-claim will be brought. Where there is no realistic possibility of the principal debtor's claim being pursued, it is difficult to see a court exercising the discretion in r.6.5(4)(d) in favour of a debtor. It is submitted that given the narrow and fact-contingent application of the discretion in Remblance v Octagon and the clear decision on see to it guarantees in McGuinness v Norwich and Peterborough, Remblance v Octagon is probably now of limited application. McGuinness v Norwich and Peterborough demonstrates to lenders what they need to do in order to make their guarantees enforceable at the statutory demand stage. Most professionally drafted guarantees used by banks and other commercial lenders contain distinct provisions that are separately intended to impose a conditional payment obligation and a see to it obligation in the same document. In order to give maximum scope for 13

14 recovery, this remains the sensible approach. The potential difficulty in McGuinness v Norwich and Peterborough was that the building society's form of guarantee was not as clear as it might have been that the conditional payment obligation was a liability assumed directly by the guarantor as the paying party. This will no doubt be taken on board by draftsmen in the future. In order to establish a liquidated sum for the purposes of a bankruptcy petition, the guarantee must clearly show that in the event of default by the principal, payment is to come from the guarantor and that such payment represents payment of the debt obligation itself, rather than an indemnity 36 or the making good of losses caused by the principal's failure to perform its obligations. 36 Although the point was not directly in issue, Patten L.J. remarked at para.8 of McGuinness v Norwich and Peterborough that it is well established that an indemnity is enforceable by way of action for unliquidated damages, which must mean that such a liability would also fail to constitute a liquidated sum for the purposes of the bankruptcy regime. 14