McGuinness v Norwich and Peterborough Building Society
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Moses,Lord Justice Ward |
| Judgment Date | 09 November 2011 |
| Neutral Citation | [2011] EWCA Civ 1286 |
| Docket Number | Case No: A2/2010/2899 |
| Court | Court of Appeal (Civil Division) |
| Date | 09 November 2011 |
[2011] EWCA Civ 1286
Lord Justice Ward
Lord Justice Moses
and
Lord Justice Patten
Case No: A2/2010/2899
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE IN BANKRUPTCY
Mr Justice Briggs
CH/2010/APP/0109
RE: SPENCER ROBERT McGUINNESS
Royal Courts of Justice
Strand, London, WC2A 2LL
Peter Arden QC and Tim Calland (instructed by Moon Beever) for the Appellant
Angharad Start and Richard Hanke (instructed by Rosling King LLP) for the Respondent
Hearing dates : 28 th and 29 th September 2011
Approved Judgment
Introduction
On 24 th February 2010 a bankruptcy order was made against Mr McGuinness in the High Court on the petition of the Norwich and Peterborough Building Society ("the Society"). The petition was based on a debt of £1,223,883.26 (including interest) due under a guarantee which Mr McGuinness entered into on 10 th September 2008 in respect of a mortgage loan made by the Society to his brother, Mr Craig Ross McGuinness.
The background to the giving of the guarantee and its enforcement by the Society is not a matter of dispute. In April 2007 Mr Craig McGuinness obtained a mortgage for a term of 25 years from the Society to assist him in the purchase of a flat in the Docklands area of London. He subsequently acquired an adjoining flat (which is not charged to the Society) and amalgamated both premises into one flat. The Society did not consent to the works and when it discovered what had been done, it became concerned about the value and realisability of its security. It therefore threatened to call in the mortgage loan.
In order to avoid this Mr McGuinness provided a guarantee for his brother's mortgage liabilities. Mr Craig McGuinness failed to meet the monthly instalments of interest due from October 2008 onwards and therefore became liable under clause 13(a) of the mortgage conditions to repay the entirety of the loan and any accrued interest.
The flat was regarded as unsaleable and, instead of attempting to realise its security, the Society proceeded to enforce the guarantee not by action but by serving on Mr McGuinness a statutory demand and then petitioning for his bankruptcy. The amount of the mortgage debt and interest as of the date of the demand (4 th March 2009) was £1,206,867.17. Again this is not in dispute.
No application was made by Mr McGuinness to set aside the statutory demand nor was the debt paid. Failure to comply with the statutory demand therefore established Mr McGuinness's inability to pay the debt which is one of the conditions required to be satisfied in the case of a creditor's petition under s.267(2)(c) of the Insolvency Act 1986: see s.268(1)(a). But at the hearing of the bankruptcy petition Mr McGuinness took the point that his liability to the Society under the guarantee was not a debt for a liquidated sum as it is required to be under s.267(2)(b) in order to found a creditor's petition. Counsel for Mr McGuinness (Mr Calland) submitted that on the authority of the decision of the House of Lords in Moschi v Lep Air Services Ltd [1973] AC 331 it was a liability in damages of an unliquidated kind. He relied on the decision of Rimer J (as he then was) in Hope v Premierpace (Europe) Ltd [1999] BPIR 695 to the effect that a claim in damages or for an account is not a claim for a liquidated sum even though the amount of the alleged liability is readily quantifiable. Therefore the Society could not proceed by way of bankruptcy petition unless and until it had obtained a judgment on its claim.
The Society does not accept this argument but its principal submission to the Deputy Registrar, which he accepted, was that, on the true construction of the guarantee, Mr McGuinness's liability to the Society was as a debtor rather than in damages. Mr McGuinness's appeal to Briggs J against the bankruptcy order was dismissed on the same grounds: see [2010] EWHC 2989 (Ch). I granted permission for a second appeal on the basis that the question whether a liability under a guarantee was a debt for a liquidated sum within the meaning of the Insolvency Act raised an issue of general importance for this court to consider particularly in the light of the doubts expressed by Briggs J about the correctness of Rimer J's decision in Hope. But in order to understand how the argument that the appellant's liability in this case did not fall within the provisions of s.267(2)(b) it is necessary to begin by analysing the nature of a guarantor's liability and how that impacts on the provisions of the guarantee in this case.
Liability under a guarantee
It is common ground that a guarantee of a loan may impose one or more of the following types of liability on the guarantor. These are:
(1) a "see to it" obligation: i.e. an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor;
(2) a conditional payment obligation: i.e. a promise by the guarantor to pay the instalments of principal and interest which fall due if the principal debtor fails to make those payments;
(3) an indemnity; and
(4) a concurrent liability with the debtor for what is due under the contract of loan.
The obligations in classes (2) and (4) create a liability in debt. But it is well established that an indemnity is enforceable by way of action for unliquidated damages: see Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1 at pages 33–36. The liability arises from the failure of the indemnifier to prevent the person indemnified from suffering the type of loss specified in the contract. A guarantee of the "see to it" type has also been held by the House of Lords to create a liability in damages. The obligation undertaken by the guarantor is not one to pay the debt but consists of a promise that the debt will be paid by the principal debtor: see Moschi v Lep Air Services Ltd [1973] AC 331.
Mr Moschi guaranteed the performance by a company of its obligation to discharge a pre-existing debt to the respondent at the rate of £6,000 per week subject to a cap on his liability of £40,000. When the company defaulted the creditor treated the contract as repudiated and proceeded to sue on the guarantee. Mr Moschi contended that as the contract had been brought to an end no further contractual instalments were payable and consequently there was no liability to make such payments under the guarantee. Lord Reid rejected this argument for the following reasons:
"To meet that argument I think that it is necessary to see what in fact the appellant did undertake to do. I would not proceed by saying this is a contract of guarantee and there is a general rule applicable to all guarantees. Parties are free to make any agreement they like and we must I think determine just what this agreement means.
With regard to making good to the creditor payments of instalments by the principal debtor there are at least two possible forms of agreement. A person might undertake no more than 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 undertook that he would do.
In my view, the appellant's contract is of the latter type. He "personally guaranteed the performance" by the company of its obligation to make the payments at the rate of £6,000 per week'. The rest of the clause does not alter that obligation. So he was in breach of his contract as soon as the company fell into arrears with its payment of the instalments. The guarantor, the appellant, then became liable to the creditor, the respondents, in damages. Those damages were the loss suffered by the respondents by reason of the company's breach. It is not and could not be suggested that by accepting the company's repudiation the respondents in any way increased their loss. The respondents lost more than the maximum which the appellant guaranteed and it appears to me that the whole loss was caused by the company having failed to carry out its contract. That being so, the appellant became liable to pay as damages for his breach of contract of guarantee the whole loss up to the maximum of £40,000."
Lord Diplock reached the same conclusion. In his speech he traces the historical treatment of guarantees by the courts of common law not as obligations to pay a sum of money but as obligations to see to it that the debtor performs his own obligations to the creditor. Prior to the Common Law Procedure Acts this had procedural consequences. For a claim in debt the appropriate form of action was indebitatusassumpsit. But an action for compensation for breach of other types of contractual obligations had to be brought by way of special assumpsit: see...
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