Problems and pitfalls in disputing statutory demands: the recent case law

Transcription

1 Problems and pitfalls in disputing statutory demands: the recent case law A. Introduction 1. This is an edited version of a paper given to the District Judges Chancery Meeting held at the Rolls Buildings, London, on 20 March It is intended to give a quick overview of the procedure for setting aside statutory demands in bankruptcy proceedings, and then comment on some trends in the recent case law. 2. In particular, it focuses on issues and developments arising out of the recent authorities on two of the most commonly relied upon grounds for setting aside a statutory demand. It ends with discussion of the application of the co-extensive principle, a novel application of the law that emerged from cases where guarantors sought to set aside statutory demands served upon them. B. The general framework Grounds for a bankruptcy petition 3. The statutory demand is an integral part of the bankruptcy system. The grounds for presenting a bankruptcy petition are as follows:...a creditor s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented (a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the bankruptcy level [which is presently 750], (b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured, (c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay, and (d) there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt or any of the debts. (s. 267(2) IA 1986) 4. From the creditor s perspective, it can be seen that the statutory demand plays a positive and negative role in this scheme. 1

2 5. As to its positive role, it provides one of two ways in which a creditor can establish that the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay within the meaning of s. 267(2) IA (a) (b) A creditor may serve a statutory demand in the prescribed form 1 on the debtor requiring him to pay, secure or compound the debt. The debtor s failure to comply with the demand or to set it aside within three weeks means that the he is deemed unable to pay the debt: s. 268(1)(a) and s. 268(2) IA Alternatively, a creditor may rely on the fact that execution or process issued in respect of the debt on a judgment or order of the court has been returned unsatisfied in whole or in part: s. 268(1)(b) IA Of these, the service of a statutory demand is by far the most common. It provides for a simple a straightforward method of establishing a debtor s indebtedness. 7. However, it also has a negative role, in the sense that an outstanding application to set aside a statutory demand prevents the creditor from successfully obtaining a bankruptcy order: see s. 276(2)(d) above. 8. Although an outstanding application to set aside a statutory demand ought to prevent a creditor from obtaining a bankruptcy order, in exceptional circumstances the courts have had an eye to practical justice. 9. In Regis Direct v Hakeem [2012] EWHC 4328, an outstanding application to set aside a statutory demand 2 when the bankruptcy order was made provided good grounds for an appeal. However, the fact that the Chief Registrar dismissed that application (summarily as having no merit) three days after the making of the bankruptcy order, meant that the appropriate order on the appeal was to affirm the bankruptcy order. The mechanics of an application to set aside a statutory demand 10. Therefore, a debtor served with a statutory demand must apply to have it set aside to avoid the prospect of bankruptcy. 11. Such applications are governed by Part 6 of the Insolvency Rules. The application must be made within 18 days from its service: IR r. 6.4(2). It must be in the prescribed form (Form 6.4) and be supported by a witness statement: IR r. 6.4(1) and (4). 12. Upon the making of the application the court has the following options: 1 Form 6.1, Form 6.2 or Form 6.3 depending on the circumstances in which the debt arises. 2 There was a problem with the listing of the application at the court office, and the debtor had problems paying the court fee. Nevertheless, the appeal court found he had made no real effort to progress the application, although he had technically made it. 2

3 (a) (b) It may, if satisfied that no sufficient cause is shown for it, dismiss the application without giving notice to the creditor: IR r. 6.5(1) Otherwise, it may fix a hearing date and serve the application on the creditor (giving at least 5 business days notice to both parties). On that hearing the court may: (i) (ii) Consider the available evidence and summarily determine the application: IR r. 6.5(2) and (3); or Alternatively, at that first hearing it may adjourn the application and give such directions as it thinks appropriate for the filing of evidence and a further hearing: IR r. 6.5(3). 13. Where an application to set aside a statutory demand is dismissed following a hearing, the court will often order that the creditor has liberty to present a bankruptcy petition either: (1) as soon as reasonably practicable; or (2) on a specified date: IR r. 6.5(6). 14. However, where an application is dismissed summarily prior to any hearing (and without notice to the creditor), time will continue to run on the statutory demand (it have been suspended when the application was made) IR r. 6.3(3) and r. 6.5(1). The debtor therefore may still have time to deal with the statutory demand. C. Grounds for setting aside the statutory demand 15. IR r. 6.5(4) provides four grounds upon which the court is entitled to set aside a statutory demand: (a) (b) (c) (d) 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 The debt is disputed on grounds which appear to the court to be substantial; It appears that the creditor holds some security in respect of the debt claimed by the demand, and either IR r. 6.1(5) 3 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 The court is satisfied on other grounds, that the demand ought to be set aside. 3 This rule provides that where the creditor has security, he must specify in the demand the nature of that security and its value at the date of the demand. The amount of which payment is claimed in the demand must be the full value of the debt, less the value of the security. 3

4 D. The ground under IR r 6.5(4)(b): the debt disputed on grounds which appear substantial 16. This is the most commonly relied upon ground. It most closely reflects the policy reasons behind the statutory demand system. The statutory demand serves to identify, at a preliminary stage, whether the debtor has grounds to challenge the debt. If not, then the creditor is generally entitled to present a bankruptcy petition. Otherwise, where there is a dispute as to the existence of the debt, the appropriate course for the creditor is to bring ordinary proceedings to establish the debt. 17. This rationale was recently summarised by Norris J in Macpherson v Wise [2011] EWHC 141 (Ch) who held: The issue which the district judge had to decide arose under Insolvency Rule 6.54(b), namely whether he should grant the application to set aside the statutory demand because the debt was disputed on grounds which appeared to the court to be substantial. It was not on that occasion for the district judge to undertake some form of trial. As was said in Re a Debtor [1995] Ch 66 at page 70e: The scheme of the bankruptcy legislation is that substantial disputes about indebtedness are not matters to be resolved by the bankruptcy courts as part and parcel of the bankruptcy process. The bankruptcy courts are not intended to be the forum for resolving such disputes. Where such a dispute exists, the creditor should pursue his claim in the ordinary way outside the bankruptcy courts. If he does so and he succeeds in establishing his claim and the judgment he obtains is not satisfied, he may then use that judgment as the basis for initiating and pursuing bankruptcy proceedings against the debtor. ([2011] EWHC 141 (Ch) at [18]) 18. This gives guidance on the general nature of the application under IR r. 6.5(4)(b). It should not be a mini-trial of the debtor s liability to the creditor. Instead, its function is to identify whether such a trial should take place. Implicit in this is that the onus is placed squarely on the creditor to ensure that he makes the correct selection between pursuing the debtor in bankruptcy, or in ordinary proceedings. The correct test to apply 19. There has been a degree of confusion as to what the debtor needs to show in order to establish that the debt is disputed on grounds which appear substantial. This is complicated by the existence of a second test, reproduced in the Insolvency Practice Direction 2012 (IPD 2012), which provides that: Where the debtor (a) claims to have a counterclaim, set-off or cross demand (whether or not he could have raised it in the action in which the judgment or 4

5 order was obtained) which equals or exceeds the amount of the debt or debts specified in the statutory demand or (b) disputes the debt (not being a debt subject to a judgment, order, liability order, costs certificate or tax assessment) the court will normally set aside the statutory demand if, in its opinion, on the evidence there is a genuine triable issue. 5 (Paragraph , emphasis added) 20. This provides an alternative wording to the disputed on substantial grounds test in IR r. 6.4(5)(b). The meaning of genuine triable issue has caused confusion. Under the CPR, the courts have an established (and much commented upon language) to describe hopelessly weak cases; the concept of a real prospect of success. 21. Considerable confusion arose following the decision in Kellar v BBR Graphic Engineers (Yorks) Ltd [2002] BPIR 544. Mr Roger Kaye QC (sitting as a deputy High Court Judge) held that it was easier to show a genuine triable issue than a real prospect of success. He pointed to the origin of the genuine triable issue test, and the serious consequences facing a debtor who fails to set aside a statutory demand. 22. This produced the odd result. A debtor sued in ordinary Part 7 proceedings might fail to resist an application for summary judgment by the creditor, but would succeed on an application to set aside a statutory demand served upon him for the same debt. 23. Nevertheless, in recent years more guidance on the meaning of genuine triable issue has removed the need for concern about the meaning of these terms and clarified any confusion. In Abernethy v Hotbed Limited [2011] EWHC 1476 (Ch), Newey J rejected a submission that genuine triable issue was a lower threshold than real prospect of success. 24. Summarising the effect of two recent Court of Appeal decisions, he held (at [8]): For his part, Mr Tiran Nersessian, who appears for Hotbed, contended that there was no practical difference between the two tests. In support of this submission, Mr Nersessian referred me to the decision of the Court of Appeal in Ashworth v Newnote Ltd [2007] BPIR 1012, where Lawrence Collins LJ said this in paragraph 33: It seems to me that a debate (see e.g. Kellar v BBR Graphic Engineers (Yorks) Ltd [2002] BPIR 544, at 551) as to whether there is a distinction between the genuine triable issue test for cross-claims and real prospect of succeeding on the claim (i.e. on the cross-claims) involves a sterile and largely verbal question, and that there is no practical difference between genuine triable issue and real prospect of success and certainly not in this case. Mr Poole suggested that Lawrence Collins LJ s comments related only to crossclaim cases, but in Collier v P & MJ Wright (Holdings) Ltd [2008] 1 WLR 643 Arden LJ expressed the view in paragraph 21, in the context of a disputed

6 debt case, that the passage from Kellar on which Mr Poole relied should not be followed. In the circumstances, I do not consider that the genuine triable issue test can be taken to be less stringent than that applied for summary judgment. 25. Two points are worth noting: (Emphasis added) (a) (b) Two Court of Appeal decisions insist that there is no difference of substance between a genuine triable issue and a real prospect of success. This should put to rest any doubt as to whether there is a distinction between the two tests. The same approach is applicable when dealing with applications to set aside on IR r. 6.4(5)(a) where the debtor asserts that he has the benefit of a counterclaim, setoff or cross demand. Thus, the debtor does not need to prove (as he would at trial) his counterclaim, set-off or cross demand. The debtor succeeds if the court is satisfied that he has a real prospect of successfully establishing those defences. 26. It is in this light that it is apt to return to the IPD It could, given that it was issued after the above judgments, have clarified the situation by expressly equating grounds which appear to the court to substantial with a real prospect of success and abandoning the genuine triable issue test altogether. In the author s view, there is little justification for retaining different formulations of what the higher courts accept is, in substance, the same test. 27. It is worth adding by way of post-script, that the IPD 2012 has also clarified the correct approach that should be taken where the debt upon which the statutory demand is based upon a judgment or order. Paragraph states: Where the debt claimed in the statutory demand is based on a judgment, order, liability order, costs certificate, tax assessment or decision of a tribunal, the court will not at this stage inquire into the validity of the debt nor, as a general rule, will it adjourn the application [to set aside the statutory demand] to await the result of an application to set aside the judgment, order decision, costs certificate or any appeal. 28. This is an exception to the usual procedure of enquiring whether the debtor s challenge to the debt has merit. Instead, the proper course is simply to proceed on the assumption that the order or judgment is valid. Disputes of evidence and oral evidence 29. Courts are often stuck between the rock of the desire to avoid conducting mini-trials and the hard place of wishing to do justice to debtors who genuinely dispute the debt. One particularly vexed area is where the debtor raises either: (1) an issue that requires oral 6

7 evidence, or (2) an otherwise complex issue of fact. This is often a common feature of attempts to set aside statutory demands under ground IR r. 6.4(5)(b). It is often not difficult to find some evidence upon which to assert that some oral collateral contract exists which prevents enforcement of the debt. 30. In such circumstances, there has been a tendency for courts to conclude that the existence of oral disputes of fact, or otherwise complex factual issues, necessarily make a debt genuinely disputed. 31. Nevertheless, it is submitted that in recent years the steer from the higher courts has been that judges should grab the bull by the horns and make findings about the debtor s prospects of success notwithstanding that oral evidence would be required to finally determine an issue. 32. As Patten J held in Portsmouth v Alldays Franchising Ltd [2005] EWHC 1006 (Ch) at [12]: The mere fact that a party in proceedings not involving oral evidence or crossexamination asserts that certain things did or did not occur is not sufficient in itself to raise a triable issue. That evidence inevitably has to be considered against the background of all the other admissible evidence and material in order to judge whether it is an allegation of any substance. Once the court considers that the evidence is reliable in that sense and not some attempt to obfuscate the real issues by raising a series of hopeless allegations, then it does of course become necessary to consider what the legal consequences of it are. The application of these principles can be particularly acutely difficult where the debtor asserts an oral agreement with his creditor that his creditor has legally postponed the due date for payment. But in such cases the question is not whether there are substantial grounds for thinking that some sort of agreement was reached. The question is always whether there are substantial grounds for thinking that the agreement asserted by the debtor was reached. 33. More recently, in Abernerthy v Hotbed [2011] EWHC 1476 (Ch) Newey J reiterated these points. He rejected a submission that: Whether an oral agreement was entered into in the manner and terms described by [the debtor] is a matter for witness evidence and is unsuitable for summary determination in the context of statutory demand proceedings. 34. He continued: the fact that a witness has asserted something will not invariable mean that there is a triable issue as to that point : see [13]-[14]. Courts are entitled to (and should) test the debtor s contentions against the available evidence at the hearing. In Abernethy, Newey J examined the debtor s written evidence (and ultimately rejected it) by considering against: (a) the available documentary evidence which was inconsistent with its contents; 7

8 (b) (c) a previous affidavit provided by the witness, whose contents was inconsistent with that of the witness statement relied upon in the statutory demand application; and the inherent probabilities or improbabilities of the case advanced. 35. Norris J made a similar point in Macpherson v Wise [2011] EWHC 141 (Ch) at [19]: A consideration of whether there are substantial grounds for disputing the debt does not mean that the court is simply bound to accept that, if in respect of any issue, there is a dispute on the evidence, then the matter must go to trial 36. There is thus an increasing recognition that even where a dispute, to be finally determined, would require the hearing of oral evidence, the courts can still conclude that the debtor has not shown that the debt is disputed on substantial grounds. Courts are likely to become increasingly robust with arguments which are without merit, when viewed in the context of the whole case and the available documentary evidence. E. The ground under IR r 6.5(4)(d): Setting aside the statutory demand on other grounds 37. This is an apparently wide ground. The classic starting point is the judgment of Nicholls LJ in Re A Debtor (No. 1 of 1987) [1989] 1 WLR 271 at 276: The question arising on this appeal concerns the exercise by the within subparagraph (d). In my view, the right approach to paragraph (4) of rule 6.5 is this. Under the Act, a statutory demand which is not complied with founds the consequence that the debtor is regarded as being unable to pay the debt in question or, if the debt is not immediately payable, as having no reasonable prospect of being able to pay the debt when it becomes due. That consequence, in turn, founds the ability of the creditor to present a bankruptcy petition because, under section 268(1), in the absence of an unsatisfied return to execution or other process, a debtor's inability to pay the debt in question is established if, but only if, the appropriate statutory demand has been served and not complied with. 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 8

9 debt: sub-paragraph (a). Again, if the creditor is fully secured: sub-paragraph (c). Defective statutory demands 38. One common circumstance in which debtors rely upon IR r.6.5(4)(d) is where the statutory demand is formally defective. The courts have been generally reluctant to set down categorical guidance on where a defect becomes sufficiently serious or unjust for the debtor s application to set aside the demand to succeed. 39. These questions were considered recently by Newey J in Agilo Limited v William Henry [2010] EWHC 2717 (Ch). In drawing the line on the spectrum of defects he said, after a review of the authorities: The result, as I see it, is that a distinction is to be drawn between, on the one hand, cases where creditors have served defective statutory demands and, on the other, cases where creditors have not served (or arguably have not served) statutory demands at all. If a creditor has served something that can sensibly be regarded as a statutory demand (as was the case in In re A Debtor (No.1 of 1987) see Nicholls LJ s judgment at the top of page 278), the court will exercise its discretion on whether or not to set aside the demand having regard to all the circumstances, and, if the demand is not set aside, it will be open to the creditor to present a bankruptcy petition. In contrast, a creditor who has not served anything that can be described as a statutory demand will not be entitled to petition. That will be so both (a) where no document at all has been served and (b) where a statutory demand has been served on behalf of someone else. ([2010] EWHC 2717 (Ch) at [16]) 40. Thus, where there are defects, the first question that ought to be asked is: Can this document sensibly be regarded as a statutory demand at all? This involves two considerations: (a) (b) An analysis of the form of the document actually served (if any). For instance it may not bear any of the requirements of a statutory demand; and An analysis of the party actually serving the document, as only a petitioning creditor to whom the debt is actually owed has standing to serve a statutory demand 4. This is most likely to arise where groups of companies seek to recover debts. In such circumstances, care should be taken to correctly identify the correct creditor. 4 This is inherent in the wording the petitioning creditor to whom the debt is owed in s. 268(1) and (2) IA 1986 which defines those with standing to bring a bankruptcy petition. 9

10 41. If an analysis of either of these finds that the document served cannot properly be called a statutory demand then the court will in most cases exercise its discretion to set aside the demand. If the document served is, broadly, a statutory demand, but is still defective then the court should consider the wider circumstances when deciding whether to exercise its discretion to waive the technical defects. 42. The question then is what factors can be considered when deciding whether to set aside a statutory demand under the discretionary ground. Some recent dicta suggests that the courts will take a narrow view. 43. In Turner v Turner [2006] EWHC 2023 (Ch) Smith J addressed the situation in which the circumstances relied upon by the debtor as reasons for exercising the discretion to set aside a statutory demand related to separate probate proceedings in which the debtor proposed to act in a representative capacity. He held: I do not see that that has any connection of any sufficient nature to the selfcontained liability to pay costs out of the aborted application for an injunction. I do not accept that there is that similarity as identified in the case of Popely v Popely [2004] EWCA Civ 463, [2004] All ER (D) 346 (Apr), also referred to by the learned district judge. There the court held that an order for costs arising out of an investigation by the Customs and Excise was connected to proceedings brought in respect of the underlying claim which that cost order was connected to. There was an identity of issue between the two and the Court of Appeal decision was inevitable on the basis of the deputy judge's findings in that case. Here there is a different position because the respondent would be seeking to assert something in a different capacity; a point which did not arise in the Popely decision. ([2006] EWHC 2023 (Ch) at [27]) 44. Thus, it seems not every factor or circumstance is relevant to the exercise of the discretion. Only those that have a connection of a sufficient nature to the subject matter of the debt. Courts are therefore entitled to discount factors or circumstances which have no connection with the debt. Again, this would seem to be part of a trend in the authorities to narrow the circumstances in which IR r. 6.4(5)(d) can be successfully relied upon. F. The principle of co-extensive liability 45. Notwithstanding the above, recently there has been an interesting development in the circumstances in which IR r. 6.4(5)(d) can be relied upon. This has arisen in relation to guarantors and the interplay between the discretionary ground and the other grounds under IR r. 6.4(5). 10

11 46. These issues have been considered twice in the Court of Appeal. First in Octagon Assets Limited v Remblance [2009] EWCA Civ 581 (in which Dyson and Ward LJJ were in the majority with Mummary LJ dissenting) and again in White v Davenham Trust Limited [2011] EWCA Civ 747 (a unanimous decision of Elias, Lloyd and Maurice Kay LJJ). The principle outlined 47. The facts in Octagon Assets v Remblance can be simply stated. A tenant, who had fallen into rent arrears, brought an action against the landlord for breach of various covenants. The landlord served a statutory demand on the tenant s guarantor for the rent arrears. 48. The guarantor pointed to the unfairness of the situation. The landlord could not have served a statutory demand for the rent arrears against the tenant. The tenant would have been able to rely on the cross-claim as a ground to set aside the demand (under IR r. 6.4(5)(a)). The guarantor, however, had no such cross claim and therefore appeared to be unable to set aside the statutory demand. 49. The Court of Appeal (reversing the judgment of Mann J) held that as the tenant s obligations and the guarantor s obligations were co-extensive, justice required that the guarantor be in an equivalent position to the tenant. Dyson LJ held: It was unjust to allow Octagon [the landlord] to proceed against Mr Remblance [the guarantor] by the insolvency route if it could not proceed against JBR [the tenant] by that route. The reason for that is easy enough to see. Mr Remblance s obligation was not an obligation himself to pay the rent and discharge JBR s obligations under the lease. It was an obligation to see to it that JBR discharged its obligations to Octagon and to make good to Octagon all losses sustained through the default of the tenant in respect of any of the before mentioned matters. The distinction between the two types of obligation is well established. Their obligations were co-extensive. Justice requires that the two cases should be treated in the same way. Prima facie, it is unjust to require the principal debtor to face the consequences of bankruptcy where he appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand. Having regard to the principle of coextensiveness, it is equally unjust in such circumstances to require the guarantor to face the consequences of bankruptcy. It is as unjust to the guarantor to require him to pay the debt as a condition of avoiding the consequences of bankruptcy as it is unjust to the principal debtor to require him to pay the debt as a condition of avoiding the consequences of bankruptcy. 11

12 I do not accept that rule 6.5(4)(a) should be regarded as anomalous. It is a rule which reflects the interests of justice. So too is rule 6.5(4)(d). I do not see why the fact that the guarantor does not have the counterclaim, set-off or cross-claim should of itself mean that he does not have the benefit of the co-extensiveness principle and is not in the same position as the debtor so far as rule 6.5(4)(d) is concerned. ([2009] EWCA Civ 581 at [41],[46], and[54]) 50. Accordingly, under ground IR r. 6.4(5)(d) the guarantor could rely upon the existence of a cross claim between the tenant and the landlord as a ground for setting aside the statutory demand served upon him. This novel approach expands the use to which ground under IR r. 6.4(5)(d) can be put and opens the possibility that in tripartite situations, a person served with a statutory demand might be able to rely on other grounds, which would ordinarily be unavailable to him, using IR r. 6.4(5) (d) as a backdoor. 51. Mummary LJ s dissent should be noted. He could not see that there was any inherent unfairness to the guarantor in these circumstances. The guarantor had an indemnity from the tenant, which he could pursue if the creditor required the guarantor to make a payment under the guarantee. Further, although the liability might be described as coextensive it was, on one view, a distinct liability arising under the guarantee. Mummary LJ did not think there was anything in the circumstances that meant it was unjust for the creditor to enforce that liability. The principle confined 52. What appears to have been a wide extension of the court s jurisdiction was explored again by the Court of Appeal in White v Davenham Trust Ltd [2011] EWCA Civ Here again, there was a tripartite relationship of creditor, principal debtor and guarantor. The guarantor was served with a statutory demand in relation to the debt owed by the principal debtor. The creditor had not proceeded against the principal debtor as the latter had given complete security for the debt. The ground under IR r. 6.4(5)(c) would have permitted the debtor to set aside any statutory demand served, unless the creditor gave up his security (which in this case it did not wish to do). 54. The guarantor attempted to rely on the principle of co-extensive liability and the ground under IR r. 6.4(5)(c). As the creditor could not validly proceed against the debtor it was argued, in reliance on Octagon Assets v Remblance, that it should not be permitted to proceed against the guarantor. 12

13 55. This was unanimously rejected by the Court of Appeal. Giving the leading judgment, Lloyd LJ first summarised the policy considerations where secured creditors were concerned: 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. ([2011] EWCA Civ 747 at [8]-[9]) 56. Lloyd LJ then explained how the ground under IR 6.4(5)(c) was, as a consequence of these policy considerations, different from those under IR 6.4(5)(a) and (b), which took it outside the scope of the principle outlined in Octagon Assets v Remblance: It is clear and common ground that a creditor which has several remedies can choose which to enforce, at what time, in which order and in what way, being limited only by the proposition that it cannot recover more than is due to it on the debt with interest and costs by way of its several recovery procedures: see China and South Sea Bank v. Tan [1990] AC 536 at 545. Thus it is not open to a guarantor to argue that the creditor should pursue the principal debtor first or should realise security given by the principal debtor first. Mr Arden did not argue that Mr White would have any defence to civil proceedings for the undisputed amount of the debt, on this basis or any other. 13

14 In my judgment the co-extensiveness principle which was the basis of the decision in Remblance, and which applies by reference to each of rules 6.5(4)(a) and (b), does not apply to rule 6.5(4)(c) because the purpose of the latter provision is different. As against a given debtor, if a creditor has security over that debtor s assets which is more than sufficient, there is no reason to allow the creditor to pursue bankruptcy proceedings because the existence of the security means that the creditor has no interest in that debtor s estate. He would not be able to prove for his debt, and there is no reason for him to be able to invoke the collective realisation of assets which is the point of insolvency proceedings, unless he is willing to give up his security. By virtue of s.267 of the 1986 Act he is not even entitled to present a bankruptcy petition. It follows that there is every reason why he should not be entitled to take the preliminary step of serving a statutory demand. If, however, the security given to the creditor is over the assets of a different person, then the existence of that security does not constitute any reason why the particular creditor should not proceed against this other debtor, who has given no security over his assets, for an undoubted debt by way of a personal claim or by way of insolvency proceedings. There is no bar to the creditor presenting a bankruptcy petition in relation to such a debtor and there is therefore no reason why the creditor should not serve a statutory demand as a preliminary to the presentation of a petition if the demand is not satisfied. For those reasons in my judgment the existence of third party security, which on a statutory demand against the debtor who gave the security would bring into application rule 6.5(4)(c), is by itself entirely irrelevant under rule 6.5(4)(d) to a statutory demand served on a separate debtor even if liable as guarantor for the same debt but who has given no security himself. 57. Thus, the Court of Appeal distinguished Octagon Assets v Remblance. The coextensiveness principle could only be relied upon when the party with whom the liability was co-extensive would have been able to rely upon the grounds in IR r. 6.4(5)(a) or (b) to set aside a statutory demand. The position of secured creditor was different; the broader insolvency regime expressly gave such creditors a choice as to how they recovered the debt, which affected the justice of the situation, and hence the exercise of the court s discretion. 58. Nevertheless, it must be said that it is difficult, in practical terms, to see the distinction between the grounds under IR r. 6.4(5)(a) and (b) and that under IR r. 6.4(5)(c). The reasoning in Octagon Assets v Remblance proceeded from the general unfairness of the situation where a guarantor could be pursued through the bankruptcy process, but the debtor could not. It is certainly not clear why the special position of secured creditor necessarily renders what was otherwise unfair, fair. It is suggested that these two decisions are not wholly coherent. 14

15 The latest word 59. However, they are also not the last word on the subject. The co-extensiveness principle was prayed in aid of in Inbakumar v United Trust Bank Limited [2012] EWHC 845. The guarantor relied upon Octagon Assets v Remblance to make two arguments: (a) (b) First, that where a single guarantor had been served with a statutory demand in circumstances where there were other guarantors also liable on the same debt, the single guarantor should be able to rely on their co-extensive liability as grounds to set aside a single demand against a particular guarantor. Vos J had no difficulty in disregarding that as a factor. The co-guarantors liability was not for the full amount of the debt. The guarantor served with a demand still owed an amount (a proportion of the whole debt) which was above the bankruptcy limit. The statutory demand was therefore correctly served. Second, the guarantor relied upon the existence of a forthcoming trial against third parties. This trial was on issues intimately connected with the debt, and which (if successfully) would have permitted the guarantor to repay the entire debt. He attempted to draw an analogy with Octagon Assets v Remblance, contending that under IR r. 6.4(5)(d) he should be regarded as having a cross claim falling with IR r. 6.4(5)(a). Vos J called the issues finely balanced, but held: As it seems to me, Mr Gale is right to submit that the claim against the valuers [the third party] is a claim against a third party of a different character from the claims mentioned in Rule 6.5(4)(a) and (b). The claim is not truly comparable to those claims in the way envisaged in the authorities that I have mentioned. Those claims essentially affect the existence of the debt, but this claim is a claim that a third party should indemnify the debtor against the debt which is conceptually a different matter. Mr Gale, it seems to me, is right to say that if a claim against a third party were sufficient to set aside a statutory demand, statutory demands would cease to serve any useful purpose. ([2012] EWHC 845 (Ch) at [39]) Conclusion 60. Given the frequency with which statutory demands are served against guarantors (or where there are other closely connected third parties), it can be expected that these arguments will continue to be run. 61. Octagon Assets v Remblance has opened the door to more creative arguments under IR r. 6.4(5), in which grounds that would be relied upon had the statutory demand been served on other connected parties, can be relied upon by the party against whom it is actually served. 15

16 62. However, given the tendency in the recent case law to distinguish Octagon Assets v Remblance, it remains to be seen how widely the co-extensiveness principle will be cast. MATTHEW WATSON XXIV Old Buildings Lincoln s Inn 3 April