Factual and Procedural Background
On 24th February 2010, a bankruptcy order was made against the Appellant in the High Court on the petition of Company A, based on a debt exceeding one million pounds due under a guarantee the Appellant entered into on 10th September 2008 regarding a mortgage loan made by Company A to the Appellant's brother. The Appellant's brother had obtained a mortgage in 2007 to purchase a flat and subsequently amalgamated an adjoining flat without Company A's consent, causing concern over the security's value. The Appellant provided a guarantee to avoid the loan being called in. When the brother defaulted on interest payments from October 2008, Company A served a statutory demand on the Appellant and petitioned for bankruptcy based on the guarantee liability.
The Appellant did not apply to set aside the statutory demand nor pay the debt but argued at the bankruptcy hearing that his liability under the guarantee was not a debt for a liquidated sum as required by the Insolvency Act 1986, but an unliquidated liability in damages. Company A contended the liability was a debt. The Deputy Registrar and Briggs J accepted Company A’s construction, and the Appellant’s appeal was dismissed. Permission was granted for a second appeal due to the general importance of the issue concerning the nature of liability under a guarantee for bankruptcy petition purposes.
Legal Issues Presented
- Whether a guarantor's liability under a guarantee constitutes a "debt for a liquidated sum" within the meaning of section 267(2)(b) of the Insolvency Act 1986, thereby enabling a creditor to petition for bankruptcy without first obtaining a judgment.
- The proper construction of the guarantee in question, specifically whether the guarantor’s liability was a conditional payment obligation, a concurrent liability as a principal debtor, or a "see to it" obligation sounding in damages.
- The relevance of historical practice and case law in interpreting the requirement for a debt to be liquidated for the purposes of creditor’s petitions.
Arguments of the Parties
Appellant's Arguments
- The liability under the guarantee was not a debt for a liquidated sum but an unliquidated liability in damages as established by the House of Lords decision in Moschi v Lep Air Services Ltd.
- Reliance on Hope v Premierpace (Europe) Ltd that claims in damages or for an account are not claims for liquidated sums, even if the amount is readily quantifiable.
- The guarantee imposed a "see to it" obligation, meaning the guarantor promised the principal debtor would perform, rather than a promise to pay a sum certain.
- The provisions of the guarantee, particularly clause 2.2, reflect a promise to ensure payment by the borrower, not a direct payment obligation by the guarantor.
- Clause 4.2 of the guarantee does not convert the guarantor’s liability into that of a principal debtor but only removes the need for demand under clause 2.3.
Company A's Arguments
- The guarantor’s liability under clauses 2.2 and 2.3 of the guarantee was a liability in debt, not merely damages, as it constituted a promise to pay the sums due if the borrower failed to do so.
- The liability was concurrent with that of the borrower, making the guarantor a principal debtor under clause 4.2, allowing Company A to petition for bankruptcy without first obtaining judgment.
- The statutory demand was properly served, and the failure to comply established inability to pay, satisfying the conditions for a creditor’s petition under the Insolvency Act 1986.
- Historical practice supports the view that liabilities under guarantees can found a petition if the liability is for a liquidated sum, as the guarantee here provides a clear formula for ascertaining the debt.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Moschi v Lep Air Services Ltd [1973] AC 331 |
Established that a "see to it" guarantee imposes a liability in damages, not a debt for a liquidated sum. |
Used to analyze the nature of the guarantor’s liability and to distinguish types of guarantees. |
| Hope v Premierpace (Europe) Ltd [1999] BPIR 695 |
Held that claims for damages or for an account are not claims for liquidated sums even if readily quantifiable. |
Relied on by the Appellant to argue the liability was unliquidated damages. |
| Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1 |
Indemnities are enforceable by way of action for unliquidated damages. |
Clarified that indemnity-type guarantees create liabilities in damages. |
| Mines v Sculthorpe |
Historical procedural distinction between claims in debt and claims for damages. |
Supported the principle that guarantor’s liability is generally for damages. |
| Ex p. Broadhurst (1832) 22 LJ Bank 21 |
Clarified that liabilities requiring further inquiry or jury determination are unliquidated and not suitable for creditor petitions. |
Used to illustrate the historical understanding of liquidated sums. |
| Owen v Routh (1854) LJCP 105 |
Claims for breach of undertaking to deliver shares were held to be unliquidated damages claims. |
Supported the distinction between liquidated debts and unliquidated damages. |
| Utterson v Vernon (1790) 3 Term Reports 539 |
Agreement to replace stock was a provable debt if the amount could be ascertained. |
Historical authority on provable debts and petitions. |
| Re Dummelow (1872-2) LR 8 Ch App 997 |
Defined "unliquidated debt" and distinguished contingent debts and debts not ascertained. |
Clarified when debts qualify for creditor petitions. |
| Ex parte Ward (1882) 22 Ch D 132 |
Held that liabilities fixed by contract rules constitute liquidated sums. |
Supported that contractual machinery can produce liquidated sums. |
| Re Miller (1901) 1 QB 51 |
Held that a sum was not liquidated when contingent on occurrence of specified event. |
Illustrated limits of liquidated sums for petitions. |
| Bridge v Campbell Discount Co Ltd (1962) 2 WLR 439 |
Judgment sums including penalties can be challenged as unliquidated damages. |
Used to assess the nature of judgment debts in petitions. |
| Truex v Toll [2009] EWHC 396 (Ch) |
Unassessed solicitor’s fees were not liquidated sums under s.267 of the Insolvency Act. |
Confirmed distinction between liquidated sums and claims requiring judicial assessment. |
| Wallis v Smith (1882) 21 Ch D 243 |
Defined liquidated damages as sums pre-assessed by contract. |
Supported understanding of liquidated sums in contracts. |
| Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 |
Explained when a demand is necessary for liability under a guarantee. |
Applied in interpreting clauses about demand and liability. |
| Rowe v Young [1820] 2 Bli 391 |
Distinguished guarantees of own debt from collateral promises requiring demand. |
Clarified the role of demand in guarantees. |
| MS Fashions Ltd v BCCI [1993] Ch 425 |
Principal debtor clauses can create primary liability removing contingency on demand. |
Supported construction of clause 4.2 imposing principal debtor status. |
| Esso Petroleum Co. Ltd. v. Alstonbridge Properties Ltd [1975] 1 W.L.R. 1474 |
Confirmed that principal debtor clauses affect liability and demand requirements. |
Reinforced the interpretation of principal debtor obligations. |
| Atwood v Partridge (1827) 4 Bing 209 |
Liability under guarantee was unliquidated damages, not a debt due from guarantor. |
Distinguished "see to it" liabilities from debts for liquidated sums. |
| Ex parte Myers, Re Sudell (1833) Mont & Bli 229 |
Guarantees creating contingent debts were provable and treated as debts. |
Supported that some guarantees create provable debts. |
| Ex parte Simpson, Re Sudell (1834) Mont & Bli 541 |
Confirmed that guarantees can create principal debtor liabilities. |
Supported practice of treating certain guarantees as debts. |
Court's Reasoning and Analysis
The court began by analyzing the nature of liabilities imposed by guarantees, distinguishing between "see to it" obligations, conditional payment obligations, indemnities, and concurrent liabilities. It acknowledged that "see to it" obligations impose liabilities in damages rather than debts for liquidated sums, as established in Moschi v Lep Air Services Ltd.
The court then examined the statutory framework, particularly section 267 of the Insolvency Act 1986, which requires a creditor’s petition to be based on a debt for a liquidated sum. Although the broader definition of "bankruptcy debt" in section 382 includes unliquidated liabilities, the petition requirements are narrower.
Historical authorities were reviewed, demonstrating that the concept of a "debt for a liquidated sum" has long been a prerequisite for creditor petitions, with unliquidated damages claims excluded. The court noted that the requirement is rooted in practice and legislative history, not merely statutory language.
Turning to the construction of the guarantee, the court analyzed the relevant clauses. Clause 2.2 was ambiguous but, when read with clause 2.4 (which creates an indemnity liability in damages) and clause 2.3 (providing for immediate payment on demand), the court found that clause 2.2 imposed a conditional payment or concurrent liability in debt rather than a mere "see to it" obligation. The obligation to pay on demand suggested a debt liability, not solely damages.
Clause 4.2, which states that the guarantor’s obligations are those of a principal debtor and removes the need for demand, was interpreted as confirming that the guarantor’s liability is concurrent with the borrower’s and not contingent. This provision was critical to the court’s conclusion that the guarantor was liable as a principal debtor.
The court rejected the Appellant’s argument that clause 4.2 only removed the need for demand without altering the nature of the liability. It found the clause’s wording indicative of a substantive change, converting the guarantor’s obligations into those of a principal debtor.
Consequently, the court held that the Appellant’s liability under the guarantee was a debt for a liquidated sum within the meaning of section 267(2)(b), enabling Company A to petition for bankruptcy without first obtaining judgment.
Holding and Implications
DISMISSED
The court dismissed the Appellant’s appeal, upholding the bankruptcy order. It held that the guarantee imposed a liability in debt for a liquidated sum, satisfying the requirements for a creditor’s petition under the Insolvency Act 1986. The decision clarifies that where a guarantee contains provisions creating a principal debtor liability and an obligation to pay on demand, such liability qualifies as a liquidated debt for bankruptcy petition purposes. No new precedent was set beyond confirming established principles and applying them to the guarantee’s construction in this case.