Mark Eugene White (Claimant Appellant) v Davenham Trust Ltd (Defendant Respondent)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lloyd,Lord Justice Elias,Lord Justice Maurice Kay |
| Judgment Date | 28 June 2011 |
| Neutral Citation | [2011] EWCA Civ 747 |
| Docket Number | Case No: A2/2010/2721 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 June 2011 |
[2011] EWCA Civ 747
Lord Justice Maurice Kay, VICE PRESIDENT OF THE COURT OF APPEAL CIVIL DIVISION
Lord Justice Lloyd
and
Lord Justice Elias
Case No: A2/2010/2721
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE FLOYD
Royal Courts of Justice
Strand, London, WC2A 2LL
Peter Arden QC and Kavan Gunaratna (instructed by Coyle White Divine) for the Appellant
Barry Isaacs QC (instructed by DWF LLP) for the Respondent
Hearing date: 18 May 2011
This appeal is from an order of Mr Justice Floyd made on 1 st November 2010. He allowed an appeal against an order dated 18 th May 2010 of Deputy Registrar Schaffer setting aside a statutory demand served by Davenham Trust Limited (DTL) on Mr Mark White. Lord Justice Etherton gave permission for this second appeal to be brought.
Mr White gave a personal guarantee to DTL for the liabilities of a company, St George's Property Services (London) Limited (SGPS) of which he was a director at the time. SGPS was not only personally liable to DTL for the repayment of the relevant credit facilities; it also gave security by a charge on land as well as a fixed and floating charge on its assets generally. Mr White's fellow director also gave a personal guarantee.
SGPS is now in administration. DTL still has security by way of a charge over one property. It demanded payment by Mr White under his guarantee in September 2009. When he did not pay, it served a statutory demand on him in October 2009. He applied to set the statutory demand aside and the deputy registrar granted that application. However, as already mentioned, Mr Justice Floyd allowed DTL's appeal. His judgment is at [2010] EWHC 2748 (Ch), [2011] BPIR 280. We have to decide whether he was right to allow the appeal.
Floyd J held one issue to be properly arguable, as to whether DTL is entitled to the full amount of the interest which it claims by way of default interest. However, there is no dispute as to Mr White's liability to repay the principal or to pay interest at the lower (but not that low) rate applicable apart from any default. On any basis a large sum is due to DTL from SGPS and is the subject of Mr White's guarantee. At the time of the service of the demand the undisputed debt was about £750,000. With interest accrued since then, even at the lower rate, it is said to be over £1 million by now.
The question is whether, and if so how, the existence of the security given by SGPS affects DTL's ability to take steps against Mr White by way of or towards bankruptcy proceedings.
A creditor who seeks to enforce his debt against an individual debtor may commence an action against him in a relevant court. Alternatively he may wish to take bankruptcy proceedings immediately. If there is a genuine dispute about the entire debt, or a cross claim which would equal or exceed the debt, he is precluded from invoking the bankruptcy system, by virtue of provisions which I will mention. In order to start bankruptcy proceedings the creditor must satisfy the provisions of ss.267 and 268 of the Insolvency Act 1986. I need not read those but among the requirements is that the debt must be unsecured – s.267(2)(b) – and it must be one which (so far as relevant) the debtor appears to be unable to pay: s.267(2)(c).
Under s.268(1) the debtor appears to be unable to pay the debt, for this purpose, if and only if one of two conditions is satisfied. The first is that a statutory demand has been served on the debtor, at least three weeks have elapsed since then, and the demand has been neither complied with nor set aside. The second is that execution or other process on a judgment for the debt has been returned unsatisfied in whole or in part.
The prohibition on a secured creditor presenting a petition is subject to two exceptions, under s.269. The first is if the creditor states that, if a bankruptcy order is made, he is willing to give up his security for the benefit of all creditors. In that case, therefore, the creditor is secured but if the bankruptcy process follows he will be treated as unsecured and the asset over which the security exists will form part of the bankruptcy estate available for distribution as between all the creditors. The second case is where the petition is expressed not to be made for the secured part of the debt and the estimated value of the security is stated. In that case there are deemed to be two separate debts, one secured (to the amount of the value of the security) and the other unsecured (for the balance) and the bankruptcy petition is only for the unsecured balance. By virtue of s.383 of the 1986 Act the only security which is relevant for this purpose is security over an asset or assets of the particular debtor in question.
Lying behind these arrangements is the fact that bankruptcy proceedings are not intended as a means for a single creditor to enforce his debt against the debtor but rather as a method of collective realisation of the assets of a debtor who cannot pay his debts, to be distributed for the benefit of all creditors with claims on those assets. A creditor who is fully secured over assets of that debtor does not need to take bankruptcy proceedings, and should not do so, unless he is willing to give up the security, because the asset over which the security exists will not be part of the estate divisible for the benefit of the creditors generally. That is why a secured creditor cannot present a bankruptcy petition under s.267(2)(b) unless either he is willing to give up the security or his security is not adequate to cover the whole debt, in which case he ranks with the other unsecured creditors but only so far as the shortfall is concerned.
That summary goes back to first principles of bankruptcy law as set out in the Insolvency Act 1986 and the related rules, but it is worthwhile to bear it in mind when considering the provision on which this appeal turns. That is Insolvency Rule 6.5 which is in Chapter I of Part 6 of the Insolvency Rules 1986, dealing with statutory demands. Rule 6.1 deals with the form and content of the statutory demand. I need only note that by rule 6.1(5), if the creditor holds security for the debt, the full amount of the debt is to be specified but the nature of the security must be specified in the demand as well as the value which the creditor puts on it at the date of the demand. The amount of which payment is claimed by the demand is to be the full amount of the debt less the amount specified as the value of the security. Thus, consistently with the provisions of the Act, the statutory demand applies only to the shortfall where the security is inadequate.
Rule 6.4 deals with the application to set aside a statutory demand and rule 6.5 with the hearing of such an application. I can go straight to rule 6.5(4) which specifies the grounds on which the court may grant the application.
"(4) The court may grant the application if—
(a) 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
(b) the debt is disputed on grounds which appear to the court to be substantial; or
(c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 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
(d) the court is satisfied, on other grounds, that the demand ought to be set aside."
The procedure by way of a statutory demand was one of the new features of bankruptcy law introduced in 1986 as a result of the recommendations of the Cork Committee. It allows the question to be determined at a preliminary stage whether the creditor is entitled to invoke bankruptcy proceedings, before the presentation of the bankruptcy petition itself, with the extensive consequences of that event. It was not long before the court had to consider the ambit of rule 6.5(4)(d). We were shown a decision of this court in Re A Debtor (No. 1 of 1987) [1989] 1 WLR 271, the judgment being given by Nicholls LJ. Having said what I have already about the structure of the bankruptcy legislation I can go directly to the presently most relevant passage which is at p.276 D – F.
"When therefore the rules provide, as does rule 6.5(4)(d), for the court to have a residual discretion to set aside a statutory demand, the circumstances which normally will be required before a court can be satisfied that the demand "ought" to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court's intervention is called for to prevent that injustice.
This approach to sub-paragraph (d) is in line with the particular grounds specified in sub-paragraphs (a) to (c) of rule 6.5(4). Normally it would be unjust that an individual should be regarded as unable to pay a debt if the debt is disputed on substantial grounds: sub-paragraph (b). Likewise, if the debtor has a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt: sub-paragraph (a). Again, if the creditor is fully secured: sub-paragraph (c)."
I should add that, consistently with what I have already said about secured creditors, it is clear, and common ground, that rule 6.5(4)(c) only applies where the security is over assets of the particular debtor. That was held to be the case by Knox J in Re A Debtor (No. 31 of 1988) [1989] 1 WLR 452 as regards rule 6.1(5), which I have mentioned. It is agreed that the same applies under rule 6.5(4)(c).
Mr White relied on rule 6.5(4)(d) by...
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