Barclays Bank Plc v Kingston
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE STANLEY BURNTON,Mr Justice Stanley Burnton |
| Judgment Date | 17 March 2006 |
| Neutral Citation | [2006] EWHC 533 (QB) |
| Docket Number | Case No: HQ03X02698 |
| Court | Queen's Bench Division |
| Date | 17 March 2006 |
[2006] EWHC 533 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Mr Justice Stanley Burnton
Case No: HQ03X02698
Adam Zellick (instructed by Matthew Arnold & Baldwin) for the Claimant
Thomas Roe (instructed by Manches LLP) for the Defendants
Hearing dates: 17 January 2006
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
In these proceedings, the Claimant ("the Bank") seeks to enforce the alleged liability of the Defendants under a guarantee ("the Guarantee") dated 11 December 2000 by which the Defendants each personally guaranteed the liabilities to the Bank of Kingstonian Football Club Limited ("KFC"), of which they were directors. The Guarantee was limited to £100,000 plus interest and costs.
This is the trial of a preliminary issue agreed by the parties and ordered by Master Tennant on 6 July 2005, namely:
"Whether notwithstanding the Defendants' Re-Re-Amended Defence alleging sale of the Kingsmeadow Stadium at an undervalue, the express terms, in particular clauses 1, 3, 5 and 6, of the guarantee entered into by the Defendants are effective to make the Defendants liable under that guarantee."
Background
KFC borrowed a total of £627,500 from the Bank. In addition to the Guarantee, KFC's borrowings were secured by a legal charge over KFC's football ground, Kingsmeadow Stadium ("the Property").
By October 2001, KFC was in very serious financial difficulties. The Defendants, as directors, applied to the High Court for an Administration Order. By an order dated 24 October 2001, joint administrators were appointed of KFC. Thereafter KFC was in the hands of its Administrators.
On 24 October 2001, the Claimant served demand under the Guarantee on all the Defendants.
On 22 April 2002, the Administrators sold the Property with other fixed and floating charge assets for £445,000. Of this recovery, the Claimant received £300,000. A new company called "Kingstonian FC Limited" continued the football club.
KFC was eventually wound up on 29 July 2003. The distribution to creditors was 0.013 pence in the pound. After the liquidation, KFC's unsatisfied indebtedness to the Claimant was £136,000 and so the Claimant invoked the Guarantee to its limit of £100,000.
The Defendants' Re-Re-Amended Defence raises only one defence, which is that the Property was sold at an undervalue. The defence is based on an equitable duty of care to obtain a proper price for the Property. The Defendants' case is that the Bank "caused or permitted" the sale by the Administrators at an undervalue; that in consequence there was a breach of the equitable duty of care, with the effect that the value of the Guarantee was reduced by the same amount as the value wrongly lost from the Property. The Defendants believe that the value lost in the sale of the Property was greater than the £100,000 value of the Guarantee such that no value remains in the Guarantee at all.
The preliminary issue is whether, even if the Defendants' above defence might otherwise succeed, the express terms of the Guarantee are nevertheless effective to make the Defendants liable to the Bank for the entire amount outstanding.
As mentioned above, the Property was sold by the Administrators as an asset of KFC, rather than by the Bank under the powers conferred by its charge. Both parties have argued their respective cases on the basis that if the Bank interfered with the sale by the Administrators, the respective rights and liabilities of the Bank and the Defendants were the same as they would have been if the Property had been sold by the Bank's agents under a power of sale.
There is a point to be made about the preliminary issue. Care is always required in deciding whether a preliminary issue will result in a saving of costs and in its drafting. In theory, there are three possible results in a case such as the present. The first is that the guarantors are liable to the creditor irrespective of any defect in the sale of a security, and the creditor has no liability to them for any undersale: i.e., a sale at an undervalue does not affect their liability or rights. The second is that their liability is reduced by the amount of the undersale: i.e., they are entitled to credit not merely for the sum realised by the creditor, but for the sum that the creditor should have realised by the sale of the security. The third is that the guarantors are required to pay on demand the sum demanded by the creditor (i.e. the liabilities of the debtor less the sum actually realised on the sale of the security), but the debtor and the guarantors may pursue their claim against the creditor for the difference between the sum actually realised and the sum that should have been realised. That was the effect of the guarantee considered by the Court of Appeal in The Fedora [1986] 1 Lloyd's Rep 441. In such a case, the provisions of the guarantee go to timing and cash flow rather than liability. The preliminary issue as drafted does not address this possible result. If, on its true construction the Guarantee in this case has a similar effect to that in The Fedora, the Defendants would be required to pay the Bank's claim, but, provided they remain solvent, they would be free to pursue their claims against the Bank to trial. In that event, the preliminary issue would not have resulted in any saving of costs.
The contentions of the parties
For the purposes of the preliminary issue, it is to be assumed that the Bank was responsible for the sale of the Property at an undervalue, and that if due care had been taken in its sale the liability of KFC as the principal debtor, and in consequence that of the Guarantors, would have been extinguished. The administrators were not the agents of the Bank, and it seems to me that it is to be assumed that the Bank caused the sale at an undervalue, if such there was, rather than it merely permitted a sale at such a value.
For the Bank, Mr Zellick's principal submission was that the express terms of the Guarantee, viewed individually and in the context of the instrument as a whole, made it clear that the guarantors are liable to the Bank notwithstanding any careless realisation of a security given by the principal debtor. He also suggested that the Bank owed no duty to the guarantors, who had paid nothing in satisfaction of their liabilities to the Bank. For that purpose, he relied on the judgment of Lightman J in Burgess v Auger [1998] 2 BCLC 478.
Mr Roe submitted that the Bank owed a duty to the Defendants to take reasonable steps to obtain a proper price for the Property; that the terms of the guarantee relied on by the Bank should be narrowly construed, as purporting to exclude its common law liabilities; and that the terms relied upon were insufficient to exclude its duty to the Defendants.
Discussion: (a) General principles
The duties of mortgagees to mortgagors are largely the product of equity rather than the common law. In relation to a security such as a mortgage of a property, the duties of the creditor and the rights of the guarantor will vary with the circumstances of the case. If the taking of the security unless and until it is realised by the creditor is a term of the contract between the creditor and the principal debtor whose performance the guarantor has guaranteed, the guarantor will be wholly discharged if the creditor releases the security without the consent of the guarantor. Any variation of the principal contract without the consent of the guarantor will discharge him, unless the variation is obviously insignificant or is clearly only capable of being beneficial to the guarantor: Holme v Brunskill (1878) 3 QBD 495. In that famous case, Cotton LJ, with whose judgment Thesiger LJ agreed, said, at 505–6:
The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.
The creditor is normally under no duty to the principal debtor or to any sureties to realise any securities. He cannot be compelled to realise a security at any particular time or at all. But if he does realise a security he must do so prudently, with reasonable care, so as to seek to obtain a proper price. The duty to take reasonable care to obtain a proper price is owed to the principal debtor (assuming it is he whose asset constitutes the security), since his liability to the creditor should have been reduced by the full value of the security: Cuckmere Brick Co v Mutual Finance [1971] Ch 949.
A guarantor of the principal debtor's...
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