Stimpson v Smith
| Jurisdiction | England & Wales |
| Judge | Peter Gibson L.J.,Judge LJ,Tuckey L.J. |
| Judgment Date | 11 March 1999 |
| Judgment citation (vLex) | [1999] EWCA Civ J0311-17 |
| Docket Number | CCRTF 98/0213/2 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 March 1999 |
[1999] EWCA Civ J0311-17
Lord Justice Peter Gibson
Lord Justice Judge
Lord Justice Tuckey
CCRTF 98/0213/2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BRIGHTON COUNTY COURT
(Mr. Recorder Hall)
Royal Courts of Justice
MR. L. CAUN (instructed by Messrs Dzimitrowicz York, Croydon) appeared on behalf of the Appellant.
MR. C. DARTON (instructed by Messrs Edward Harte & Co., Brighton) appeared on behalf of the Respondent.
This appeal raises the question whether one co-guarantor of a debt owed by a debtor to a creditor can recover a contribution from another co-guarantor where the first co-guarantor has paid the creditor part of that debt in securing the release of the guarantee without any formal demand being made on either co-guarantor by the creditor although service of a written demand is provided for under the guarantee.
That question arises in the following circumstances. The debtor, Test Electronics Ltd. ("Test"), was incorporated in 1989 and carried on business as an assembler of printed circuit boards. The Plaintiff, Michael Stimpson, and the Defendant, John Smith, were throughout directors and shareholders of Test. Test's bank initially was National Westminster Bank ("the Bank"), which granted Test a facility. On 18 October 1990 Mr. Stimpson and Mr. Smith entered into the guarantee in question. By it they jointly and severally guaranteed payment to the Bank on demand of (a) all liabilities of Test to the Bank up to a maximum of £25,000 and (b) interest. By cl. 13 of the guarantee a demand had to be in writing signed by an officer or agent of the Bank and could be served by hand or post.
Test did not prosper. In the 13-month accounting period ended 30 April 1991 it incurred a loss of over £100,000 and worse was to follow. Relations between Mr. Stimpson and Mr. Smith became strained. In March 1991 Mr. Smith was excluded from Test, though he retained his shares and remained a director. Thereafter he knew nothing of what was going on in Test. In December 1991 Test's overdraft limit with the Bank was £100,000. The Bank for some two months previously had been returning Test's cheques when the limit was exceeded and it told Mr. Stimpson and Test that it required a reduction to £80,000 in the overdraft facility. The Bank had threatened that it would put in a Receiver. Mr. Stimpson negotiated with the Bank an oral agreement, the terms of which appear from correspondence between him and the Bank, that some shares of his deposited with the Bank should be sold by the Bank, that £20,000 would be transferred to Test's current account in permanent reduction of Test's overdraft borrowing, that Test's overdraft would be reduced to £80,000 and that the guarantee given by him and Mr. Smith would be released. All this was done with a view to a transfer of Test's account to the Bank of Scotland. On 2 January 1992 the guarantee was cancelled, as the Bank confirmed by letter dated 20 January 1992 to Mr. Stimpson. Both co-guarantors were thereby released from liability under the guarantee. Test's account with the Bank was closed in March 1992 and a new account opened with the Bank of Scotland which re-financed Test. Thus the remaining overdraft was extinguished by fresh borrowings from that bank.
About March 1992 Mr. Stimpson wrote a letter to Mr. Smith. In it Mr. Stimpson said that he himself had paid off the guarantee in the sum of £20,000 but that Test had insufficient money to repay him, that while Test continued to trade, he would not look to Mr. Smith for £10,000 but that should Test go into liquidation he would seek reimbursement from Mr. Smith of £10,000 plus interest. Although that letter was sent, it was never received by Mr. Smith. On 27 July 1994 Test was compulsorily wound up, heavily insolvent. There has been no distribution to creditors and Test was dissolved in 1996.
On 30 May 1995 Mr. Stimpson, by his solicitors, claimed a contribution from Mr. Smith. But no payment was made and proceedings against Mr. Smith were commenced in the Brighton County Court on 9 April 1995 for a contribution of £10,000 and interest. Mr. Stimpson averred in his Particulars of Claim an oral agreement between him and the Bank that in consideration of the Bank releasing him and Mr. Smith from liability under the guarantee, he would discharge £20,000 of Test's overdraft from his own monies. Mr.Smith by his Defence claimed that without a demand made to Test and the co-guarantors by the Bank for payment, he was not liable under the guarantee and that as he was not a party to the oral agreement he was not bound by the terms of the release. By a counterclaim Mr. Smith claimed a contribution from Mr. Stimpson in respect of another guarantee liability.
The case was heard by Mr. Recorder Hall. In his judgment delivered on 29 January 1998 he found that in 1991 both Mr. Stimpson and Mr. Smith were well aware that Test was in a delicate trading position and that at any time during this period it could have gone under and been wound up by the Bank. He also found that there was at all times a legal liability both on Mr. Stimpson and Mr. Smith to the Bank under the terms of the guarantee. He further found that had Mr. Stimpson not arranged for his shares to be sold and £20,000 to be transferred to Test's account, it was likely that the Bank would have taken steps against Test and the co-guarantors; the payment to the Bank was in response to a requirement made of Mr. Stimpson by the Bank and so it was not made on a voluntary basis. He also said that the Bank could have demanded payment from both or either of the co-guarantors at any time. Turning to what he regarded as the difficult issue in the case, viz. whether liability to make a contribution could have arisen when the Bank had made no formal written demand, he held that, while under the guarantee a written demand was required to be made by the Bank to the guarantors for liability to arise, in equity Mr. Stimpson was entitled to recover a contribution from Mr. Smith "having regard to the fairness and justice of this case as between the parties". He upheld Mr. Smith's Counterclaim, allowing a partial set-off against Mr. Stimpson's claim.
Mr. Smith now appeals. Mr. Caun for him submits that no liability had arisen under the guarantee and the payment was made not under legal compulsion but by voluntary agreement between Mr. Stimpson and the Bank. Without such liability, he says, there can be no liability on a co-guarantor to contribute. He says that a demand was a prerequisite for legal liability under the guarantee to arise and that demand under the guarantee had to be in writing signed by an officer or agent of the Bank; that did not happen here. Further he challenges the findings made by the Recorder as to Test's financial position.
Mr. Stimpson by a Respondent's Notice contends that the Recorder was wrong to hold that the guarantee required the service of a written demand. Mr. Darton for Mr. Stimpson submits that on the true construction of the guarantee the co-guarantors were made liable as if they were the principal debtor. That, he says, means that no demand was necessary for liability to arise under the guarantee. He further submits that the Recorder was correct for the reasons given in his judgment to hold that Mr. Stimpson was entitled to receive a contribution from Mr. Smith.
I start with the factual position in 1991 in view of Mr. Caun's challenge to the findings of the Recorder. Mr. Caun points to the facts that no bank account statements of Test were in evidence, that there is no documentary evidence of the Bank threatening action or requiring payment, that Mr. Stimpson accepted in oral evidence that the account fluctuated with money being paid in as well as drawn out, that the Bank of Scotland was prepared to provide additional finance to Test, that Mr. Stimpson accepted that there were grounds for optimism at the time, and that Test continued to trade for another two years. Mr. Caun said that the Recorder's findings were therefore not supportable. I have no hesitation in rejecting that submission. The absence of bank statements of Test, which has never been a party to the litigation, is, we were told, attributable to the fact that Mr. Stimpson had no documents of Test : they had been handed to the Official Receiver when Test was wound up. There was clear evidence not only from Mr. Stimpson but also from Mr. Smith as to the precarious state of Test's finances. As Mr. Smith accepted in cross-examination, at the time he left Test, the accounts of Test would have shown that any capital in Test had been lost. He was owed salary by Test, but at a meeting with Mr. Stimpson and others on 11 July 1991, he was told that Test was not in a position to pay him anything and that there was no point in winding it up. The Recorder was entitled to find on the evidence of Mr. Stimpson, who dealt with the Bank for Test, that the Bank was saying to him and Test that it was not happy with the trading account, that unless the account was put in order, the Bank would appoint a Receiver and that the overdraft had to be reduced. The fact that the Bank of Scotland was prepared to lend Test further monies on additional security (Mr. Stimpson charged his home to it) in no way detracts from the fact that in December 1991 Test could not repay its debt to the Bank which required the overdraft to be reduced. That debt, though fluctuating, was ascertained or ascertainable simply by looking at the actual amount of the overdraft. It seems plain to me that Test had been required by the Bank in December 1991 to make immediate payment of at...
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