Johnson and Another v Davies and Another

JurisdictionEngland & Wales
JudgeLORD JUSTICE CHADWICK,Lord Justice Ward,Lord Justice Kennedy
Judgment Date18 March 1998
Judgment citation (vLex)[1998] EWCA Civ J0318-16
Date18 March 1998
CourtCourt of Appeal (Civil Division)
Johnson & Anr
and
Davies & Anr

[1998] EWCA Civ J0318-16

Before:

Lord Justice Kennedy

Lord Justice Ward

and

Lord Justice Chadwick

IN THE SUPREME COURT OF JUDICATURE

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM CHANCERY DIVISION

(JACOB J)

Royal Courts of Justice

Strand

London WC2

MR C DARTON (Instructed by Messrs Judge Sykes Frixou, London WC2) appeared on behalf of the Appellant

MR C WILSON (Instructed by Messrs Aldrich Crowther & Wood, Brighton BN1) appeared on behalf of the Respondent

LORD JUSTICE CHADWICK
1

These two appeals, from the order of Mr Justice Jacob made on 5 December 1996, raise the same question: whether or not the appellants were released from their obligation under a covenant to indemnify the respondents against claims arising under a lease by reason of the terms of an individual voluntary arrangement made under part VIII of the Insolvency Act 1986 by a co-obligee who was liable, jointly with the appellants, under the same covenant.

2

The facts may be stated shortly:

(1) At all material times until July 1989 or thereabouts Robert Arthur Johnson and his wife Anne Johnson (the plaintiffs in this action and the respondents to these appeals) were the owners of 98 out of the 100 issued shares of £1 each in PPM Plastics & Photographs Ltd ("the company"). The company was lessee of premises known as Cambridge Works, Cambridge Grove, Hove. Those premises were held under a lease dated 4 January 1984 for a term of twelve years from 29 September 1982. Mr and Mrs Johnson had joined in that lease as sureties for the obligations of the tenant.

(2) By an agreement dated 19 June 1989 Mr and Mrs Johnson agreed to sell their shares in the company to Nicholas Cole (the second defendant), his former wife Susan Cole (now Susan Davies, the first defendant) and Christopher Hopkins. Mr Cole, Mrs Davies and Mr Hopkins are, together, described in the agreement as "the Purchasers". Clause 3(d)(ii) of the agreement contains a covenant by the Purchasers to keep Mr and Mrs Johnson indemnified against all claims liabilities and costs arising under the lease of 4 January 1984.

(3) At or about the end of 1992 the company was placed in receivership. Mr and Mrs Johnson were called on to pay, and did pay, (i) the quarterly instalments of rent due under the lease in respect of the remaining twenty one months of the term, (ii) the cost of insuring the demised premises (payable as additional rent under the terms of the lease) and (iii) a sum in respect of dilapidations payable upon termination of the lease in September 1984.

(4) On 8 February 1994 an interim order under section 252 of the Insolvency Act 1986 was made in the Brighton County Court on the application of Mr Hopkins. The nominee's report on the debtor's proposals was submitted to the court, pursuant to section 256 of the Act, on 18 March 1994. A meeting of creditors was summoned for 12 April 1994. The decision of that meeting, approving the proposals, was reported to the court pursuant to section 259 of the Act on 21 March 1994. Mr and Mrs Johnson were given notice of the creditors' meeting. They were entitled to vote at that meeting; and they exercised that right by voting in favour of the voluntary arrangement.

(5) Under the voluntary arrangement approved on 12 April 1994 Mr Hopkins was to pay to the Supervisor 75% of his net income (in excess of reasonable living expenses but subject to a minimum monthly payment of £300) for a period of 5 years from the date of approval; and to transfer all "windfall" assets accruing to him during that period. Paragraph 4 of the voluntary arrangement was in these terms:

When all monies to be made available under these proposals have been realised and distributed to creditors in accordance with the terms herein, I will be released from any further liability to them in relating to claims in respect of which they were entitled to participate in this voluntary arrangement.

3

Paragraph 19 was in terms identical to paragraph 4. Paragraph 24 contained the usual provision for the issue of a certificate of default in respect of the matters referred to in section 276 (1) of the Insolvency Act 1986; and required the Supervisor, following the issue of a default certificate, to consult creditors as to the presentation of a bankruptcy petition.

4

The claim in this action is for repayment of the sums paid by Mr and Mrs Johnson under the covenant for indemnity, after giving credit for the net income received by them from a sub-letting or licence of the demised premises during part of the remainder of the leasehold term. The action was commenced by writ issued in the Queen's Bench Division, Brighton District Registry on 6 September 1994. In or about September 1995 the plaintiffs applied for the summary determination of two points of law, pursuant to order 14A of the Rules of the Supreme Court 1965, and for summary judgment in respect of the whole of their claim. Those applications were heard by Deputy District Judge Radcliffe. In the course of a long and careful reserved judgment delivered on 14 May 1996 he held (inter alia) that the defendants had been released from liability under their covenant for indemnity. The plaintiffs appealed from that decision. The appeal was heard by Mr Justice Jacob, sitting in the Chancery Division, on 29 November 1996. Mr Justice Jacob set aside the order of 14 May 1996 made in the Brighton District Registry and ordered that the defendants pay to the plaintiffs the sum of £19,663.90 (together with interest) on terms that the plaintiffs should give credit for all sums received by them under the terms of Mr Hopkin's voluntary arrangement. The defendants appeal to this Court with the leave of the Judge.

5

The Judge, following an earlier decision of his own in RA Securities v Mercantile Credit [1995] 3 All ER 581, took the view that the effect of an individual voluntary arrangement—or, at the least, the effect of this individual voluntary arrangement—was not such as to release solvent co-debtors under the rule of law that the release of one of two or more joint debtors has the effect of releasing the other or others. The short question on this appeal is whether the Judge was correct in that view.

6

An authoritative statement of the general rule of law as to the release of co-debtors—as it was understood before the recent decision of this Court in Watts v Lord Aldington (15 December 1993: unreported)—is found in the judgment of His Honour Judge Paul Baker QC, sitting as a Judge of the High Court, in Deanplan Limited v Mahmoud [1993] Ch 151. After a review of the nineteenth century authorities from Watters v Smith (1831) 2 B & Ad 889 and Nicholson v Revill (1836) 4 A & E 675 to In re E.W.A (a debtor) [1901] KB 642 His Honour Judge Baker QC expressed his conclusions in the following terms, at page 170 B-C:

First, a release of one joint contractor releases the others. There is only one obligation. A release may be under seal or by accord and satisfaction. A covenant not to sue is not a release. It is merely a contract between the creditor and the joint debtor which does not affect the liabilities of the other joint contractors or their rights of contribution and indemnity against their co-contractors. It is a question of the construction of the contract between the creditor and joint debtor in the light of the surrounding circumstances whether the contract amounts to a release or merely a contract not to sue.

7

His Honour Judge Baker QC went on to consider (ibid, page 170 D-F) whether the same principles applied to a contract between the creditor and one of joint and several debtors. Different considerations arise in such a case because the existence of several indebtedness negates a conclusion based on the premise that there is only one obligation. Nevertheless, for the reasons which he explained, His Honour Judge Baker QC reached the conclusion that if one joint and several covenantor is released by accord and satisfaction, all are released. He said this:

Some have seen this as illogical, and so it would be if the only reason for the rule that the release one of joint contractor is that there is only one obligation. Professor Glanville Williams sees the reason for the extended rule to have been an early uncertainty as to the nature of a joint and several obligation: see Joint Obligations, p.135, para.63. Two other reasons can be adduced. First, where the obligations are non-cumulative, i.e. the obligation of each is to perform in so far as it has not been performed by the other party, the acceptance of some other performance in lieu of the promised performance relieves the others. The covenantee cannot have both the promised performance and some other performance which he agrees to accept. Secondly, unless the co-covenantors were released following an accord and satisfaction, they could claim a right of contribution or indemnity. Thus, by suing the co-contractor, the creditor commits a breach of the contract with the released covenantor, for such an action will inevitably lead to the very claim from which the release has been purchased by accord and satisfaction.

8

The second of the two additional reasons identified in that passage has particular force in a case, such as the present, where the release (if any) is part of an arrangement between the debtor and a number of his creditors. In such a case the effect of allowing one creditor to sue the debtor's co- covenantor (who will not usually be party to that arrangement) is that enforcement by the co-covenantor against the debtor of the co-covenantor's right of contribution or indemnity (which will not itself be subject to the arrangement) may prejudice the other creditors who have entered into the arrangement on the basis that that debt will...

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