Remblance v Octagon Assets Ltd

Under Rule 6.5 of the Insolvency Rules 1986 (the 1986 Rules) an application may be made to the court to set aside a statutory demand. The court has a discretion to grant the application on specified grounds.

“(4)

The court may grant the application if-

(a)

the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand; or

(b)

the debt is disputed on grounds which appear to the court to be substantial; or

(c)

it appears that the creditor holds some security in respect of the debt claimed by 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; or

(d)

the court is satisfied, on other grounds, that the demand ought to be set aside.”

If at least three weeks have elapsed since the statutory demand was served and the demand has neither been complied with nor set aside in accordance with the rules, then the creditor has grounds for presenting a bankruptcy petition under section 267(2) (c) of the Insolvency Act 1986 (appearance of inability to pay the debt). For the purposes of that provision the debtor appears to be unable to pay a debt if the debt is payable immediately and the statutory demand has been served but not complied with or set aside: section 268 (1)(a) of the 1986 Act, which defines “inability to pay.”

A statutory demand dated 24 August 2007 was served on the appellant, Mr John Remblance, by Octagon Assets Limited (Octagon), the respondent. On 12 September 2007 Mr Remblance issued an application under Rule 6.5 to set aside the demand. On 18 March 2008 District Judge Pearce set aside the demand. Octagon appealed from her decision. On 23 May 2008 Mann J made an order allowing the appeal against the decision of the District Judge to set aside the statutory demand. He dismissed the application by Mr Remblance to set aside the statutory demand and authorised Octagon to present a bankruptcy petition.

Mann J was asked for permission to appeal from his decision. He had no power to grant it, as it would be a second appeal. On 23 October Arden LJ gave permission to appeal. On 21 November I granted permission to file a respondent’s notice out of time.

The court received an application from Mr Remblance for permission to adduce fresh evidence on the appeal. It related to post-judgment events, such as the dire consequences of Octagon’s presentation of a bankruptcy petition against Mr Remblance. The fresh evidence was irrelevant to the grounds on which the order of Mann J is appealed. The application was refused.

The statutory demand for payment of £11,611.90 related to unpaid rent and insurance due pursuant to a Deed of Surrender and Re-grant of a Lease of 12 June 1997. The Deed is dated 2 March 2001. It was made between Octagon (the landlord), JBR Leisure Limited (the tenant) and Mr and Mrs Remblance (the guarantor). The demised premises are 4, 5, 6 and 7 Pier Hill, Southend-on-Sea. Mr Remblance is the sole executive director of and shareholder in JBR. In this judgment I will refer only to the guarantee liability of Mr Remblance. His wife has taken no separate part in the proceedings.

Under clause 2.1 of the Lease JBR covenanted with Octagon to pay the rents reserved “without deduction or set off.”

Under clause 6.1 Mr Remblance covenanted, as guarantor, with Octagon that

“…the Tenant [JBR] will at all times during the continuance of this demise pay the reserved rent and will also duly perform and observe the said covenants stipulations hereinbefore on its part herein contained and that the Guarantor [Mr Remblance] will pay and make good to the Landlord [Octagon] all losses costs and expenses sustained by the Landlord through the default of the Tenant in respect of any of the before mentioned matters.”

JBR is in arrears with the payment of rents due under the Lease. It is in dispute with Octagon about alleged breaches of the covenant for quiet enjoyment. It is alleged that about 2 or 3 years ago Octagon erected scaffolding around the building of which the leased premises form part. Although the scaffolding does not impede access to the premises, it materially affects the appearance of the building and has had a deleterious effect on JBR’s business. JBR closed its premises for business in November 2005. It has brought proceedings against Octagon for substantial damages. Octagon failed in its attempt to persuade the District Judge to strike the claim out. We were told that the case is due to be heard in the county court in 2009.

Mann J proceeded on the basis that the scaffolding claim is arguable and sounds in damages in a sum that at least matches and might exceed the amount of the unpaid rent. He has not been criticised for proceeding on that basis. It does not appear that any statutory demand for unpaid rent has been served by Octagon on JBR. Indeed, it seems to have been assumed on all sides that, if such a demand had been served, JBR could have successfully resisted insolvency proceedings. Instead, Octagon has moved against Mr Remblance personally. He has no cross claim for damages against Octagon nor has he any grounds for disputing his contractual liability to Octagon under the guarantee. Mr Remblance’s complaint is that, by means of threats of bankruptcy, Octagon is seeking to obtain indirectly from him, as guarantor, what they cannot at present obtain directly from the principal debtor, JBR. He says that this is unjust and that the court ought to exercise its discretion under Rule 6.5(4) to prevent an injustice by setting aside the statutory demand.

The first point taken by Mr Berry on behalf of Mr Remblance before the District Judge was that JBR’s cross claim for damages against Octagon was capable of giving rise to a right of set off. That would extinguish the liability for unpaid rent. There would not then be a debt for which Mr Remblance could be held secondarily liable on his guarantee. Both the District Judge and Mann J rightly rejected that submission. The right to set off was expressly excluded by the terms of clause 2.1 of the Lease: see Altonwood Limited v. Crystal Palace FC 2000 Limited [2005] EWHC 292.

Mr Remblance cannot invoke Rule 6.5(4)(a) as a ground for setting aside the statutory demand. The cross claim is JBR’s. Mr Remblance does not have a cross claim for damages against Octagon. It is not contended that grounds (4)(b) and (c) apply to this case. That leaves only the residual discretion in ground (d) available to Mr Remblance.

The main point pressed by Mr Berry on this appeal is that Mann J applied the wrong test and wrongly concluded that the statutory demand should not be set aside. The statutory demand should be set aside on the good ground that it was just to do so. The argument is that, if a statutory demand for the unpaid rent had been served on JBR, it would have been set aside by reason of JBR’s cross claim. Mr Remblance is only secondarily liable for the unpaid rent due to Octagon. It is just that he should have the same protection from bankruptcy and bankruptcy proceedings by the creditor as is allowed to the principal debtor, JBR.

Mann J thought that there was much to be said for this argument. He said

“22.

…that but for one point in this case I would have acceded to it. There is one point which in my opinion renders it non-applicable in this case. I am told by Mr Deacock [counsel for Octagon] that it was said that Mr Remblance can in fact pay this sum of money. There is therefore no risk that he will be made bankrupt in respect of this sum of money. That was not disputed by Mr Berry and I therefore assume that for these purposes that it is true.”

Mann J re-visited this point in his second judgment given on 11 June 2008. It is accepted that his two judgments should be read together. The second judgment was handed down following a letter sent to Mann J by Mr Berry, who drew his attention to an additional authority which, in his view, had an important bearing on his decision. The case was Chan v. Appasamy [2008] 1 BCLC 314, a decision on Rule 6.5(4)(a). Mr Berry asked the judge to reconsider his decision. He relied in particular on a passage in the judgement of HHJ Weeks QC in Chan (at page 317f) that the test for the exercise of the discretion to set aside a statutory demand is whether there are circumstances which would make it unjust for the statutory demand to give rise to insolvency consequences in the particular case.

Mann J concluded that this formulation did not help Mr Remblance. It was not inconsistent with taking into account the fact that Mr Remblance would have no problem in paying the debt.

“ 3. …If one asks the question; Would a bankruptcy be unjust in this particular case one would answer No because it would effectively be the choice of the debtor in not paying the debt which he could pay. That test does not therefore lead me to reconsider my decision.”

The judge added that the material submitted by Mr Berry reinforced his original decision and he declined to recall it. He cited the case of Budge v. AH Budge (Contractors) Ltd [1997] BPIR 366, which is referred to in Chan, on the point that it was appropriate, on an application to set aside a statutory demand, to consider the consequences of not setting it aside. Reliance has also been placed on a passage in the judgment of Peter Gibson LJ in Budge (at page 371 G) saying that, when exercising the discretion under Rule 6.5(4)(d), the real question is whether the applicant can show “a substantial reason comparable to the sort of reason one sees in paras (a),(b) and ( c) of r 6.5(4), why the demand ought to be set aside.” It is forcefully submitted that Mr Remblance’s position under paragraph (d) is “comparable” to JBR’s position under paragraph (a)

Mann J said this-

“4.

… On the facts of the present case, the debtor has no defence to a money judgment on the guarantee. He would, as far as I can see, have no grounds for resisting any form of execution against his property. Contrast the position of the tenant (principal debtor)-although the tenant has no right of set off against the creditor the existence of the cross claim might enable it to resist enforcement if not a judgment. There is no question of there being any bar to enforceability against the guarantor. That is presumably one of the reasons why the guarantee was taken in the first place. In those circumstances it would not seem to me to be particularly unjust to be able to rely on a statutory demand and a subsequent bankruptcy. That would mean that the ability to pay is of less relevance, but if there were doubt about the fairness of the statutory demand and bankruptcy proceedings against a guarantor who could not pay in circumstances when the principal debtor had a cross claim then those factors seem to me to disappear where there is a guarantor who can pay, particularly when the sums involved are relatively modest (though I accept that repeat claims might be made from time to time until the position of the tenant/principal debtor is finally sorted out).”

Mr Berry’s arguments on the appeal were, first, that Mann J wrongly substituted his discretion for that of the District Judge. She had correctly directed herself and rightly set the statutory demand aside.

Secondly, Mann J should have recognised that the liability of Mr Remblance, as guarantor, is secondary to that of JBR as principal debtor (tenant). His liability is no wider than the liability of the principal debtor. As guarantor, he should be allowed to take the benefit of the principal debtor’s cross claim. The judge had not taken that into account in reviewing and reversing the exercise of the District Judge’s discretion.

Thirdly, the circumstances of the case made it unjust for the statutory demand to give rise to insolvency consequences for Mr Remblance. It is accepted that JBR’s genuinely triable damages cross claim for breach of covenant protects it from insolvency consequences in respect of the same debt i.e. the unpaid rents. What was a good argument for JBR should also be a good argument for Mr Remblance as the guarantor of the same debt. The judge applied the wrong test.

Fourthly, drawing some comfort from the terms in which permission to appeal was granted, he advanced a new argument based on the construction of the precise wording of the guarantee in the Lease. He applied for permission to amend the grounds of appeal to argue that, on the wording of the guarantee, no debt arises for which Mr Remblance can be held liable. There is only one debt arising from non-payment of the rents. That debt is disputed by JBR. The liability of JBR and Mr Remblance is co-extensive. The cross claim makes it impossible for Octagon proceed in bankruptcy against JBR in respect of non-payment of that debt. It is equally impossible to proceed against Mr Remblance for the same debt. Octagon has suffered no “losses” within the meaning of the guarantee, which Mr Remblance has to make good

The issue on this appeal is not how this court would exercise the discretion of the judge. It is whether there was an error of legal principle in the judge‘s discretionary decision not to set aside the statutory demand, or whether, for some other reason, his decision was plainly wrong.

Of course, the judge was required to exercise his judicial discretion justly, taking account only of relevant factors. I agree with Mr Berry that the relevant factors include the fact that JBR could use its cross claim for damages to fend off Octagon’s insolvency proceedings against it as tenant and principal debtor. The secondary nature of Mr Remblance’s liability is also a relevant factor.

They are not, however, the only relevant factors nor, in my view, are they necessarily the determinative factors. The judge had to look at the entire situation in the round, considering all the relevant circumstances and weighing the consequences of exercising his discretion under Rule 6.5 against the consequences of his not doing so.

If the judge set aside the statutory demand, Mr Remblance would, as regards the threat of bankruptcy proceedings, be placed in a similar position to that of JBR as principal debtor. I can see the justice of the case that, until the cross claim is determined, neither of them should be at risk of bankruptcy for non-payment of the rents to Octagon. If it is just for the court to treat JBR in this way, then it can be said that it is also just to treat Mr Remblance, as JBR’s guarantor, similarly.

The judge considered other factors. He was entitled to do so. They included the probable consequences of not setting aside the statutory demand in the light of Mr Remblance’s ability to pay the debt. The judge concluded that, as it is not disputed by Mr Remblance that he is able to pay the unpaid rents, he in fact has a choice about what to do in the face of Octogan’s threat of bankruptcy proceedings. He can choose to avoid the threat of bankruptcy, as many debtors do, by satisfying the statutory demand. This choice will not prejudice him: he has a right to be fully indemnified by JBR. It will not prejudice JBR: it is able to pursue its claim against Octagon. As Octagon will be paid the guaranteed debt, it will not proceed down the insolvency route.

In my judgment, no grounds have been shown which would entitle this court to interfere with Mann J’s exercise of his discretion. It was in accordance with legal principle and cannot be described as plainly wrong. Mr Remblance entered into an absolute covenant that JBR would pay the rents. This is a common and prudent form of additional security taken by landlords on granting a lease to a company such as JBR. JBR has not paid the rents. As a matter of contract law Mr Remblance has no defence to a claim under the guarantee for the unpaid rents. He has no cross claim against Octagon. He is not the tenant. Rule 6.5 does not give him a defence to liability. It only gives him a right to apply to the court for it to exercise its discretion to set aside the demand.

Like Mann J I do not think that it is unjust to leave the statutory demand in place. Mr Remblance may think that it is unjust to him, but the function of the court is to do what is just to the parties in all the circumstances. Mr Remblance can choose to avoid insolvency and the dreaded consequences described by Mr Berry simply by paying to Octagon what is legally due from him to it. He is able to pay what he is liable to pay. If he pays it, he cannot be made bankrupt for not paying it and he can turn to JBR to be indemnified. The fact that JBR is his company and that he would rather not pay Octagon than seek payment from his own company has nothing to do with the justice of the case.

Mann J was entitled to take the view that there is nothing unjust in Octagon demanding payment of a debt owed by someone who is liable to pay it. Nor is it unjust for Octagon or the court to expect someone, who is able to pay an indisputable debt, to pay it. If Mr Remblance chooses not to pay a debt which he is able to pay and cannot dispute, Mann J was entitled to take the view that he has chosen to suffer the consequences of not complying with the demand. It is just that he should have to live with the consequences of his own decision. The judgments of Ward and Dyson LJJ, which I have read in draft, do not persuade me that this court has grounds for interfering with the exercise of discretion by this experienced judge. I would dismiss this appeal.

I would not grant Mr Remblance permission to amend the grounds of appeal. The so-called new ground is an unconvincing mixture (a) of existing grounds, which are rejected above and so adds nothing, and (b) of an untenable construction of the wording of the guarantee clause.

The only issue with which we are concerned is whether the judge exercised his discretion properly in refusing to set aside the statutory demand against Mr Remblance under rule 6.5(4)(d) of the Insolvency Rules 1986. The relevant facts have already been sufficiently stated by Mummery LJ.

The discretion to set aside a statutory demand under rule 6.5(4)(d) is a residual discretion which will normally be exercised in “circumstances which would make it unjust for the statutory demand to give rise to [bankruptcy] consequences in the particular case. The court’s intervention is called for to prevent that injustice”: see per Nicholls LJ in Re a Debtor [1989] 1 WLR 271, 276D. Nicholls LJ went on to say that 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). As he said (with reference to sub-paragraph (a)), it would normally be unjust that a person should be regarded as unable to pay a debt if he has a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt.

It was common ground before the judge (as it was before us) that JBR Leisure Ltd (“JBR”) would be likely to succeed in resisting insolvency proceedings based on a statutory demand for the arrears of rent if a demand was served on it, since it appears to have a counterclaim or cross claim which equals or exceeds the amount of the debt specified in the statutory demand.

On behalf of Mr Remblance, it was argued before the judge (and again before us) that it would be wrong to allow Octagon Assets Ltd (“Octagon”) to proceed against Mr Remblance by the insolvency route when that route was not open to Octagon against JBR: Mr Remblance should in substance have the same right to be able to resist insolvency proceedings as JBR. In his first judgment (given on 23 May 2008), the judge said that there was much to be said for this argument and, but for one point, he would have acceded to it. That point was the fact that Mr Remblance had the means to pay JBR’s debt to Octagon. In these circumstances, there was no risk that Mr Remblance would be made bankrupt in respect of this debt. In practice, he would not be put into bankruptcy if the statutory demand was not set aside.

After he had delivered his first judgment, the judge received a letter from Mr Berry, who was acting for Mr Remblance, which referred to the decision of HH Judge Weeks QC in Chan v Appasamy [2005] EWHC 3519 (Ch), [2008] 1 BCLC 3145, an authority not previously cited to him. He was invited to reconsider his earlier decision. In Chan, Judge Weeks referred to the earlier decision of Budge v A F Budge (Contractors) Ltd [1997] BPIR 366 and identified the correct test for an application under rule 6.5(4)(d) as being “whether there are circumstances which would make it unjust for the statutory demand to give rise to insolvency consequences in the particular case.”

Mann J said that it was not inconsistent with this test that he should take into account the fact that the debtor would have no problem in paying the debt. This test did not, therefore, lead him to reconsider his decision.

He went on to say that Chan reinforced his decision and he added the words quoted by Mummery LJ at [17] above.

In his first judgment, therefore, the reasoning of Mann J was that Mr Remblance’s ability to pay the debt was fatal to the application to set aside the statutory demand. In his second judgment, he said (or at least implied) that the ability of the guarantor to pay was not the decisive point. The point that he emphasised was that the position of JBR and Mr Remblance could be distinguished. Although neither of them would be able to resist a judgment in favour of Octagon, yet JBR might be able to obtain a stay of execution pending trial of its cross claim, whereas Mr Remblance would not be able to do so, presumably because it did not have a cross claim.

The judge then said that the ability to pay was of “less relevance”; but if there was any doubt about the fairness of the statutory demand, it was dispelled by the fact that Mr Remblance could pay and the sums involved were relatively modest. Reading the two judgments together, it seems to me that the judge regarded Mr Remblance’s ability to pay the debt as an important relevant factor.

In my judgment, the initial thoughts expressed by the judge in his first judgment were correct. It was unjust to allow Octagon to proceed against Mr Remblance by the insolvency route if it could not proceed against JBR 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. It was clearly articulated by Lord Diplock in Moschi v Lep Air Services [1973] AC 331, 348G-H. Mr Remblance’s liability depended on a default by JBR. Their obligations were co-extensive.

The question that arises on this appeal is how (if at all) the co-extensiveness principle should be reflected in the exercise of the discretion to set aside a statutory demand against a guarantor under rule 6.5(4)(d). In my view, it is material to the application of sub-paragraph (d) in relation to a statutory demand served on a guarantor to consider whether a statutory demand in respect of the principal debt would be set aside as against the principal debtor under sub-paragraph (a). The judge rightly recognised this.

As I have said, it is common ground that on the facts of the present case JBR would have been likely to succeed in an application under rule 6.5(4)(a) to set aside a statutory demand served on it for the arrears of rent. It would have been likely to succeed because JBR appears to have a bona fide cross demand for a sum which substantially exceeds the arrears of rent. In these circumstances, it would be unjust to JBR to require it to face the consequences of bankruptcy pending the determination of its cross demand.

Sub-paragraph (a) provides that, if one of the conditions specified in the sub-paragraph is met, then the court may set aside the demand. I accept that the court retains a discretion not to do so even if one of the conditions is satisfied. But it seems to me that, if one of the conditions is satisfied, then the demand will usually be set aside. That is because it will usually be unjust to require the principal debtor to face the consequences of bankruptcy if he appears to have a counterclaim, set-off or cross demand. There may be circumstances where the principal debtor’s ability to pay is a relevant factor. But as Nicholls LJ said, the theme running through rule 6.5(4) is that a statutory demand will be set aside where it is just to do so. In my judgment, it is difficult to see how it can be just not to set aside a demand where the principal debtor satisfies one of the conditions in sub-paragraph (a) merely because he can afford to pay the debt.

It has not been suggested (rightly in my view) that, even where the principal debtor appears to have a bona fide arguable counterclaim, set-off or cross demand, an application to set aside a statutory demand under sub-paragraph (a) should be dismissed because he has the means to pay the debt that he owes to the creditor. Were the position to be otherwise, it could always be said of a principal debtor who has the means to pay the debt that he has the ability to avoid the consequences of a bankruptcy and that his application to set aside the statutory demand should be dismissed for that reason. Ability to pay would always be a trump card in the hands of the creditor in answer to such an application. I would add that, if ability to pay were fatal to an application to set aside a statutory demand, one would have expected that to be spelt out in the rules.

If that is the position in relation to the principal debtor and sub-paragraph (a), then having regard to the co-extensiveness principle, it seems to me that the position should be the same in relation to a guarantor and sub-paragraph (d). The mere fact that the guarantor can afford to pay the debt should count for no more in relation to sub-paragraph (d) than should the fact that the principal debtor can afford to pay in relation to sub-paragraph (a). 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 co-extensiveness, 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.

Nor do I consider it relevant that the guarantor can recoup from the principal debtor any payment he makes to the creditor pursuant to the guarantee. I would accept the submission of Mr Berry that, if, as a condition of avoiding bankruptcy, the guarantor is required to pay the debt and he recoups the money from the principal debtor, the creditor will by means of a statutory demand on the guarantor obtain from the principal debtor indirectly what he cannot obtain from the principal debtor directly by means of a statutory demand on him. That seems to me to be unjust and wrong in principle.

I acknowledge that this appeal involves a challenge to the judge’s exercise of discretion and that such a challenge can only succeed if the judge’s decision was plainly wrong or he took into account irrelevant factors or failed to take into account relevant factors. I also acknowledge that the judge was careful to say that he was not laying down any general principle and was focusing on the facts of the particular case. Nevertheless, I would allow this appeal because, reading the two judgments together, it is clear that the judge considered that the fact that the guarantor had the means to pay the debt was an important factor which militated against setting aside the statutory demand. and in my judgment he was wrong to do so. Indeed, in his first judgment, he made it clear that this was the decisive point. I would not rule out the possibility that ability to pay may be a relevant factor in certain circumstances. But for the reasons that I have given, I find it difficult to conceive of circumstances where ability to pay can be the sole or principal reason for refusing to set aside a statutory demand. No such circumstances have been identified in the present case.

It follows that, if the first judgment had stood alone, I would have allowed the appeal on the grounds that the bare fact that Mr Remblance had the means to pay the debt was not a sufficient reason for dismissing the application to set aside the statutory demand.

In his second judgment, the judge identified two additional factors which, he said, confirmed his original decision. The first was that Mr Remblance (unlike JBR) would not be successful in an application to stay a judgment on the basis of JBR’s cross demand. It may well be that, in the light of The Fedora [1986] 2 Lloyds Rep 441, Mr Remblance would not have been able to obtain a stay of execution of a judgment pending the trial of JBR’s cross claim. But in my judgment that is immaterial to the question whether he should succeed in an application to set aside a statutory demand under rule 6.5(4)(d). The question whether execution of a judgment should be stayed is distinct from the question whether a statutory demand should be set aside. That is demonstrated by the fact that, as is conceded, JBR would be likely to succeed in an application to set aside a statutory demand by Octagon under rule 6.5(4)(a) in circumstances where it might well fail in an application to stay the execution of a judgment in favour of Octagon.

The second factor was that the “sums involved are relatively modest”. I assume that this is a reference to the fact that the debt was for £11,619.90. In my view, this is a neutral point. It can be said that it causes less hardship to a guarantor to pay a small sum than a larger one. But it can be said with equal force that it causes less hardship to the creditor to be kept out of a small sum than a larger one.

In my judgment, justice required the statutory demand to be set aside in this case. There are no good reasons for distinguishing between the position that obtains in this case from the position which would have obtained if an application had been made by JBR under rule 6.5(4)(a) to set aside a statutory demand made against it. Having regard to the principle of co-extensiveness, justice requires the two cases to be treated alike.

I am not deflected from this conclusion by the argument advanced by Mr Deacock in the Respondent’s Notice that what he describes as the “anomaly” relating to the principal debtor (enshrined in rule 6.5(4)(a)) should not be extended to a guarantor. He submits that the primary reason for the rule 6.5(4)(a) protection of a person who has a cross-claim (but no defence to the debt) is that bankruptcy might stifle the cross-claim. He points out, however, that this consideration does not apply where the debtor does not himself have the cross-claim. Mr Deacock submits that it is for this reason that there is a crucial distinction between the two cases and the “anomaly” relating to the principal debtor (rule 6.5(4)(a)) should not be extended to a guarantor.

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.

I would, therefore, allow this appeal and set aside the statutory demand against Mr Remblance. I should add that, for the reasons that he gives at [31], I agree with Mummery LJ that permission to amend the grounds of appeal should be refused.

I have read in draft the judgments of Mummery and Dyson L.JJ. and I gratefully adopt their recitation of the essential facts of the case. I propose to consider the general principles applicable in a case of this kind, then to analyse the judgments of Mann J. and finally to discuss whether the exercise of discretion can be upset for some error of principle or as being plainly wrong.

The Insolvency Act 1986 and the Insolvency Rules of 1986 introduced a new code and an early authoritative consideration of this new code was undertaken by Nicholls L.J. in In re: A Debtor (1 of 1987) [1989] 1 W.L.R. 271 when he held at p. 276:

“The question arising on this appeal concerns the exercise by the court of its power to set aside a statutory demand “on other grounds” within sub-paragraph (d) [of rule 6.5(4)]. 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 debt: sub-paragraph (a). Again, if the creditor is fully secured: sub-paragraph (c).”

I have added the emphasis above because that sentence encapsulates the general approach which will require a statutory demand to be set aside when the interests of justice require it.

That statement of principle was approved by this Court in Budge v A.F. Budge (Contractors) Ltd [1997] BPIR 366 where Peter Gibson L.J. added at p. 371:

“The language of para (d) does not on its face lend any support for the construction of limiting the application of that paragraph to instances referred to by Jacob J. [the statutory demand being defective to the point of being unfair to the debtor or evidence that the debt would paid immediately]. Indeed, it is quite impossible, I would have thought, to foresee all the circumstances which may arise and which may justify the proper application of that sub-paragraph. But, consistently with the views expressed by Nicholls LJ, it is appropriate when considering whether to set aside a statutory demand under that paragraph to consider the consequence if one does set it aside. … there is no point in setting aside a statutory demand and requiring a creditor to litigate his claim that he is owed money by the debtor if it cannot be foreseen that there will be any ground on which the creditor will be denied his claim were the matter to be litigated. That would only be to increase costs to no purpose whatsoever. …

The real question, as it seems to me, in this case is whether Mr Budge can show a substantial reason comparable to the sort of reason one sees in paras (a) (b) and (c) of r 6.5(4), why the demand ought to be set aside. [Emphasis added by me.]

…

[Moving to p. 372] All that the court is concerned with is whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand. The creditor must establish a debt. It is for the debtor to establish why he cannot do so, at any rate by the route of a statutory demand. Miss Heilbron points out that it is a short-cut route to establishing an inability to pay a debt. The longer route would be to go for judgment in court proceedings, but that raises, fairly and squarely, whether there would be any defence to a claim raised by Contractors which would have any prospect whatever of succeeding were the matter to be litigated.”

What one takes from this case is once again the need for justice to prevail, the search for comparability between the position of the debtor in (d) and the debtor in (a). The general purpose of the rule to be satisfied that were this short-cut not taken, the creditor would establish the debt, and by implication the liability immediately to pay the debt were the parties to resort to the longer route of litigation.

When referring to the judgment of the district judge he observed sympathetically that the relevant argument may have been “rather buried in the string of submissions which she had to entertain” and I suspect he laboured under a similar misfortune. So did we.

He analysed the position to be this:

“14.

… However the argument runs thus: it would be wrong to allow a creditor to proceed against the guarantor on the insolvency route, when that route would not be open to the creditor in relation to the principal debtor. If one applies the principles at one remove, or by analogy, the argument goes that the guarantor should in substance have the same right to be able to resist insolvency proceedings as the principal debtor has.

15.

There is, in my view, much to be said for this argument, at least on the facts of this case …

20.

In Garrow v Lloyds, [1999] BPIR 668, Mr Justice Jacob in the context of Lloyd’s Names litigation made the same point. In that particular case, as I understand it, Lloyds was seeking to base its claim against the Names on a ‘pay now, sue later’ clause. That would have the same effect, in substance, as a clause preventing set-off. He said this:

“The other point urged upon me was the ‘pay now sue later’ clause. Mr Garrow had agreed that if he was to bring a cross claim he would nonetheless pay the claim at once. This is of course true, and if he had the means then I have no doubt that he should be made to do so. But I am concerned with whether the draconian effect of the bankruptcy should be imposed when he may have a perfectly good cross claim. It seems to me that this would be disproportionate, given the fact that with the Commercial Court decision likely soon, there is no tangible benefit to be had”.

21.

There again, therefore, Lord Justice Jacob plainly had in mind the serious effect of bankruptcy as justifying not imposing bankruptcy proceedings when there was a bona fide cross-claim in the wind. Mr Remblance seeks to apply that in the present case. The argument runs that although the rule does not specifically provide for it, the guarantor should have the same protections from bankruptcy and bankruptcy proceedings as the principal debtor has. It would be odd if the bankrupt had a lesser protection. Suppose that it should turn out that the landlord is indeed liable for a significant sum to the tenant. That may not technically justify the non-payment of rent, but might make it very unfair that the guarantor should be bankrupted in the meanwhile or at all.

22.

There is as I have indicated, much to be said for that argument and but for one point in this case, I would have acceded to it. There is one point which in my view renders it non-applicable in this case. I am told by Mr Deacock [counsel for the creditor] that it was said that Mr Remblance can in fact pay this sum. There is therefore no risk that he will be made bankrupt in respect of this sum of money. This was not disputed by Mr Berry [Mr Remblance’s solicitor] and I therefore assume for these purposes that that is true.

23.

Looking at the dictum of Mr Justice Jacob in Garrow v Lloyds, with which I am in respectful agreement, it seems to me that the second sentence of the extract comes into play. In Garrow, there was an express ‘pay now, sue later’ clause. Had the Lloyd’s name been in a position to pay, then it is plain that Mr Justice Jacob would have expected the debtor to pay. I consider that the web of contractual provisions in this case provides the net same effect. This is not a case in which Mr Remblance will be, in practical terms, put into bankruptcy if the statutory demand is not set aside. He will have an opportunity to pay, and he will be able to pay it. It has not been said that he will not be able to pay. That seems to me to distinguish this case from the case which otherwise might arise in which it would be very unfortunate for the guarantor to be bankrupted where it later transpired there was a valid and substantial counter-claim going the other way. It may be that in those cases it would be appropriate, whether one uses the mechanism of analogy or otherwise, to exercise a discretion under insolvency rule 6.5(6), and say that there is another good reason for setting aside the statutory demand. In those circumstances it may well be that the balance of fairness lies in making the creditor wait until the issues have been decided. But for the reason I have given that particular consideration does not apply in this case.

24.

… since the debt is on any footing (in the absence of set-off) due, and since the purpose of protecting from insolvency proceedings that may turn out to be unfair does not apply in this case (because Mr Remblance can pay), I will not set aside the statutory demand.”

It is perfectly plain to me that the reason why the judge did not accede to the debtor’s argument was his being satisfied that the debtor could pay the debt and that fact swung the balance of fairness against making the creditor wait until the issues had been decided.

The second judgment was given after the case of Chan v Appasamy [2008] 1 BCLC 315 had been drawn to his attention, Judge Weeks Q.C. in that case having identified the correct test to be applied to be that set out in Budge, namely whether there are circumstances which would make it unjust for the statutory demand to give rise to insolvency consequences in the particular case. Mann J. held:

“3.

I do not think that the formulation [of the above test] helps [Mr Remblance]. It is not inconsistent with that test that I should take into account the fact that the debtor would have no problem in paying the debt. If one asks the question: Would a bankruptcy be unjust? – in this particular case one would answer No because it would effectively be the choice of the debtor in not paying the debt which he could pay. That test, therefore, does not lead me to reconsider my decision.

4.

In fact, the material submitted by Mr Berry reinforces my decision. … On the facts of the present case, the debtor has no defence to a money judgment on the guarantee. He would, as far as I can see, have no grounds for resisting any form of execution against his property. Contrast the position of the tenant (principal debtor) – although the tenant apparently has not right of set off against the creditor, the existence of the cross claim might enable it to resist the enforcement if not a judgment. There is no question of there being any bar to enforceability against the guarantor that is, presumably, one of the reasons why the guarantee was taken in the terms in which it was. In those circumstances it would not seem to me to be particularly unjust to be able to able to rely on a statutory demand and a possible subsequent bankruptcy. That would mean that the ability to pay is of less relevance, but if there were doubt about the fairness of statutory demands in bankruptcy proceedings against a guarantor who could not pay in circumstances where the principal debtor had a cross-claim, then those factors seem to me to disappear where there is a guarantor who can pay particularly when the sums involved are relatively modest (though I accept that repeat claims might be made from time to time until the position of the tenant/principal debtor is finally sorted out).”

As I understand that second judgment, the judge is giving two reasons for his decision. The first remains the fact that it is not unjust if it is the choice of the debtor not to pay the debt which he could pay. The second more important reason is that in contrast with the position of JBR which is able to pursue its cross claim, Mr Remblance would not be able to resist enforcement were judgment to be given against him.

As for the first of the reasons – the “can pay but won’t pay” argument: the source for the judge’s view was Jacob J.’s observations in Garrow. It seems to me, however, that Mann J. has overlooked these matters:

Thus it seems to me that Mann J. was in error in relying on Garrow as support for his conclusion that the statutory demand should not be set aside and in holding that the purpose of protecting Mr Remblance from insolvency proceedings that might turn out to be unfair did not apply because Mr Remblance could pay but would not do so.

As for the second reason given in the second judgment that Mr Remblance would not be able to resist enforcement of any judgment given against him for the arrears, my first impression was that he might be able successfully to seek a stay of execution of any judgment in respect of the arrears of rent. Mr Deacock has very properly drawn our attention to Continental Illinois National Bank & Trust Company of Chicago v Papanicolaou, (The Fedora) [1986] 2 Lloyd’s L.R. 441 which strongly militates against granting a stay where the lease is framed in terms that the rent has to paid without deduction or set-off.

Although there is a difference between the position of the tenant and the guarantor under the terms of the lease, it is, in my judgment, still necessary to bear in mind the nature of the guarantee given by Mr Remblance. It is, therefore, necessary to see whether the contractual promise by the guarantor to guarantee to the creditor that the debtor would perform his own obligations to the creditor to pay a sum of money to him was itself classified as giving rise to an obligation on the part of the guarantor to pay that sum of money to the creditor if the debtor did not do so, or as an obligation to see to it that the debtor did perform his own obligations to the creditor.

In Moschi v Lep Air Services Ltd [1973] A.C. 331, Lord Reid described the dichotomy in this way at p. 344-5:

“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 that 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.”

Lord Diplock put the matter in this way at p. 348-9:

“It follows from the legal nature of the obligation of the guarantor to which a contract of guarantee gives rise that it is not an obligation himself to pay a sum of money to the creditor, but an obligation to see to it that another person, the debtor, does something; and that the creditor's remedy for the guarantor's failure to perform it lies in damages for breach of contract only. That this was so, even where the debtor's own obligation that was the subject of the guarantee was to pay a sum of money, is clear from the fact that formerly the form of action against the guarantor which was available to the creditor was in special assumpsit and not in indebitatus assumpsit: Mines v Sculthorpe (1809) 2 Camp. 215.

The legal consequence of this is that whenever the debtor has failed voluntarily to perform an obligation which is the subject of the guarantee the creditor can recover from the guarantor as damages for breach of his contract of guarantee whatever sum the creditor could have recovered from the debtor himself as a consequence of that failure. The debtor's liability to the creditor is also the measure of the guarantor's.” [My emphasis added.]

In our case the guarantee in the lease is expressed in these terms:

“The Guarantor hereby covenants with the Landlord that the Tenant will at all times during the continuance of this demise pay the reserved rent and will also duly perform and observe and keep the said covenant stipulations hereinbefore on its part herein contained and that the Guarantor will pay and make good to the Landlord all losses costs and expenses sustained by the Landlord through the default of the Tenant in respect of any of the before mentioned matters.”

That, it seems to me, is quite clearly not the kind of conditional agreement of which Lord Reid spoke but rather the undertaking of the obligation to see that the Tenant performed his obligation. Thus the nature of the Landlord’s relief is a claim in damages. It is not challenged that the Tenant company, JBR, should be treated as having a cross-claim which exceeds the arrears of rent with the result that the landlord may not succeed in obtaining any judgment against the tenant at all.

In my judgment it is thus necessary to consider the co-extensive nature of the obligation given also the fact that the company is and was known to be to all intents and purposes the alter ego of Mr Remblance.

In view of the fact that JBR has a counterclaim which may exceed the arrears of rent, it is likely, assuming that the Insolvency Rules applied to it, that it would be able successfully to rely upon rule 6.5(4) (a) to set the statutory demand aside because it would be unjust not to do so. Having regard to the co-extensive nature of the guarantor’s liability, and the underlying need for comparable treatment being afforded under rule 6.5(4) (d), justice demands similar treatment for Mr Remblance.

Thus it seems to me that the judge has erred in material respects and an appeal against his order should be allowed. In the circumstances this Court should exercise the discretion afresh. I conclude, in agreement with Dyson L.J., that justice demands that Mr Remblance be placed in a comparable position with JBR and that since JBR would not be in peril of immediate payment of the arrears of rent, neither should Mr Remblance be required to pay these arrears under threat of bankrupcy. It is not just to differentiate between them. I accept that Mr Remblance can pay but will not pay. That in my judgment is not enough to rule against him on the facts of this case. Of course I accept that a debtor cannot escape bankruptcy by his blank refusal to pay the debt. That would stultify the whole process. It is, however, in my judgment, not enough baldly to state the fact that he will not pay without investigating the reasons why he will not pay. It is perfectly plain that the reason why Mr Remblance will not pay in this case is because he feels strongly that his company has suffered great damage by the breach of the landlord’s covenant of quiet enjoyment and he feels that it is unfair to require him to pay at this stage. That unfairness was recognised by the judge and it does not cease to be unfair when the debtor refuses to pay because he feels the unfairness so strongly. The failure to pay should not be held against him. It would be quite different if he had no good reason for his refusal. On analysis he has refused to pay because he has felt it is unjust to force him to do so. That same sense of injustice leads me to disagree – not without hesitation given their greater experience in this field – both with Mann J. and Mummery L.J.

Nothing in the Respondent’s Notice drives me to a different conclusion for the reasons given by Dyson L.J. I agree with Mummery L.J. that permission should not be granted to amend the grounds of appeal.

In my judgment the appeal should be allowed and the statutory demand set aside.