Promontoria (Chestnut) Ltd v Charles Phelan Bell
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 20 June 2019 |
| Neutral Citation | [2019] EWHC 1581 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH-2018-000338 & CH-2018-000339 |
| Date | 20 June 2019 |
[2019] EWHC 1581 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
THE HONOURABLE Mr Justice Zacaroli
Case No: CH-2018-000338 & CH-2018-000339
Jamie Riley QC (instructed by Addleshaw Goddard LLP) for the Appellant
Simon Hill (instructed by Direct Access) for the Respondents
Hearing dates: 16 May 2019
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.
This is an appeal brought with the permission of Arnold J dated 18 January 2019 against the orders of Deputy Insolvency and Companies Court Judge Prentis (as he then was) dated 3 December 2018. By those orders the deputy judge set aside statutory demands served under s.268 Insolvency Act 1986 (“ IA 1986”) by the appellant, Promontoria (Chestnut) Limited (the “Creditor”) against the respondents, Mr Charles Bell and Mrs Angela Bell (“Mr and Mrs Bell”).
It is common ground that the Insolvency Rules 1986 (“IR 1986”) continue to apply to this matter, notwithstanding the enactment of the Insolvency Rules 2016.
The facts
Mr and Mrs Bell were directors and shareholders of a company called 34 Julian Road Dev Limited (the “Company”). Pursuant to a facility letter dated 22 December 2011, Clydesdale bank (the “Bank”) advanced facilities to the Company (being a refinancing of earlier lending) in a sum not exceeding £783,000. The loans were due to be repaid in full on or before the final maturity date of 5 January 2014.
Mr and Mrs Bell had entered into a personal guarantee, dated 6 April 2009, in respect of the Company's present and future borrowing from the Bank, up to a limit of £170,000. The guarantee imposed secondary liability for the debts of the Company, although it included an indemnity if the Company's liabilities could not be recovered for any reason from Mr and Mrs Bell as guarantors. The guarantee contained standard provisions to the effect that the Bank could release or deal with any security or guarantee held by it without affecting the guarantors' liability, and that the guarantee was in addition to and was not affected by any other security held by the Bank in relation to the Company's liabilities.
In addition, on 29 July 2009 Mr Bell executed a third-party mortgage over a property owned by him, and Mr and Mrs Bell executed a third-party mortgage over a property owned jointly by them, in both cases to secure the Company's lending to the Bank. Each of the mortgages contained a clause negating any personal liability on the part of the mortgagor to pay to the Bank any of the Company's liabilities. The Bank's lending to the Company was also secured over property of the Company.
By a deed of assignment dated 28 November 2014 the Creditor acquired the Bank's rights under the facility, the guarantee and the mortgages.
The Company had not repaid the facilities by 5 January 2014. On 19 March 2015 the Creditor demanded repayment from the Company in the sum of £597,699.77. The Company failed to pay and on 8 April 2015 the Creditor sent letters of demand to each of Mr and Mrs Bell under the guarantee.
On 24 March 2015 the Creditor appointed receivers over the Company's property. On 14 April 2015 the Creditor appointed receivers over the properties owned by Mr and Mrs Bell. By December 2016 the receivers had realised assets of the Company so as to reduce the outstanding balance on the facilities to £185,000 odd.
On 5 January 2017 the Creditor issued demand letters to Mr and Mrs Bell demanding payment of £170,000 under the guarantee. In the absence of payment, the Creditor served the statutory demands against Mr and Mrs Bell dated 10 February 2017.
Mr and Mrs Bell applied to set aside the statutory demands. Numerous grounds of objection were advanced, but at the hearing before the deputy Judge only one was pursued, namely that the Creditor held security over their property.
The Statutory provisions
The rights of secured creditors in the bankruptcy of a debtor are relevant at, at least, three stages: the statutory demand, the petition and the proof of debt.
Statutory demand
Rule 6.5(4)(c) of IR 1986 entitles the court to set aside a statutory demand if “it appears that the creditor holds some security in respect of the debt claimed in 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”.
Rule 6.1(5) provides that if a creditor holds security for the debt then there shall be specified in the statutory demand the nature of the security and the value which the creditor puts upon it as at the date of the demand. The amount which may be claimed is then the full amount of the debt less the amount specified as the value of the security.
Bankruptcy petition
By s.267(2)(b) of the Insolvency Act 1986 (“ IA 1986”), subject to s.269, a creditor's petition can be presented in respect of a debt only if the debt is unsecured.
By s.269 IA 1986, a debt upon which a bankruptcy petition is presented need not be unsecured only if the petition contains a statement that the petitioner is willing, if a bankruptcy order is made, to give up the security for the benefit of the bankrupt's estate or the petition is expressed not to be made in respect of the secured part of the debt and contains a statement by the person of the estimated value as at the date of the petition of the security for the secured part of the debt.
By s.383, a debt is secured “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.” By s.385(1), “secured” and related expressions are to be construed in accordance with s.383.
Proof of debt
A secured creditor is entitled to prove only in respect of the unsecured part (if any) of the debt. By Rule 6.98 of IR 1986, the proof of debt must give particulars of any security held, and the value which the creditor puts upon it. Failure to do so will result in the security being surrendered for the general benefit of creditors (Rule 6.116) unless the court grants relief from the effect of the rule.
The underlying principle
Those Rules reflect a long-standing principle in bankruptcy that secured creditors can only participate in the bankruptcy to the extent of any unsecured part of their debt unless they are willing to give up their security for the benefit of the general body of creditors: see White v Davenham Trust Ltd [2011] EWCA Civ 747 where, at [36], Lloyd LJ referred to the following authorities which explain the rationale for this principle.
First, in Re Plummer (1841) 1 Ph 56, 59, Lord Lyndurst said:
“For the principle of the bankrupt laws is, that all creditors are to be put on an equal footing, and, therefore, if a creditor chooses to prove under the commission, he must sell or surrender whatever property he holds belonging to the bankrupt.”
Second, in Ex p West Riding Union Banking Co (1881) 19 Ch D 105, Jessel MR said:
“The principles of the bankruptcy law are plain enough. A man is not allowed to prove against a bankrupt's estate and to retain a security which, if given up, would go to augment the estate against which he proves. That is the principle of the whole thing. The only question is whether, if the security were given up, it would augment the estate?”
In Davenham v White itself, Lloyd LJ said, at [9] (having referred to the statutory prohibitions on a secured creditor presenting a petition for bankruptcy, and the two exceptions contained in s.269 IA 1986):
“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 section 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.”
In interpreting the Insolvency Rules referred to above, it is necessary to have regard to the fact that their purpose is to give effect to that underlying principle.
The judgment of the deputy Judge
The Creditor argued before the deputy judge that the security, in the form of third-party charges, was held in respect of the Company's indebtedness and not that of Mr and Mrs Bell. There was therefore no security for the debt claimed in the statutory demands. Moreover by reason of the terms of the guarantee there was no obligation on the Creditor to enforce the legal charges first as opposed to pursuing Mr and Mrs Bell under the guarantee.
The deputy Judge rejected that submission, holding that the Creditor had “some security in respect of the debt claimed by the demand” within Rule 6.5(4)(c) IR 1986. Accordingly, he set aside the statutory demand on the basis that Rule 6.1(5) had not been complied with.
He reasoned that the underlying purpose of the provisions precluding secured...
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...of Appeal in Octagon Assets Ltd v Remblance [2010] Bus LR 119 and the decision of Zacaroli J in Promontoria (Chestnut) Ltd v Bell [2019] EWHC 1581 (Ch), where the debtor’s obligation were merely secondary to the primary debtor’s obligation. 37. It seems to me, therefore, that in the present......