Fagg v Rushton

This is an appeal from the order of Deputy District Judge Austin, sitting in the Maidstone County Court, in which he set aside a statutory demand served by the Appellant, Mr Fagg, on the Respondent, Mr Rushton, in the following circumstances.

In August 1992, Mr Fagg lent to Francis Properties SARL (“Francis”), a company registered in France, the sum of £100,000. In July 1993, he lent a further sum of £100,000 to Francis. Those loans were secured by a charge on four properties in France. They were also secured by the guarantee of the Respondent, who was a director of the company. That company held half the issued shares of Francis. The other half of the issued shares were held by the Appellant, Mr Fagg. The purpose of Francis was to develop and sell French property near Aix La Chapelle.

A period of time went by and it appears that relations between Mr Fagg and Mr Rushton became strained because Mr Rushton became concerned about the investment he had made. He required repayment, issued proceedings to recover repayment and those proceedings were launched against Mr Rushton as guarantor. On 30th June 1998, he obtained judgment in this division of the High Court for the sum of £322,630-odd. He did not immediately enforce that judgment and, on 18th November 1999, a compromise agreement was entered into to which Mr Fagg and Mr Rushton were parties. Also party was the company Francis and that company’s parent company, Franthom Holdings Limited. The terms of the agreement were that the judgment debt and interest in the sum of £322,000-odd would be released upon payment of £200,000, together with a transfer by Mr Fagg to Franthom Holdings of his holding of 50% of the shares in Francis. The sum of £200,000 was to be left outstanding, £100,000 of it interest free, the other £100,000 carrying interest. Mr Fagg was also to receive a share of any profits resulting from the development at Aix. No specific time for payment of the sum of £200,000 was provided for, but what was provided for was that that sum would become payable if Mr Fagg were to serve notice under the agreement that any of a number of events had occurred, the most important being that it had become obvious that the development was not going to be completed within a period of five years. The next event was that, on 30th August, one of the plots comprising the security was sold and the sum of £27,863 was paid by Francis to Mr Fagg.

In May 2004, Mr Fagg served a notice pursuant to the agreement of 1999 on two of the relevant grounds, that no progress reports pursuant to the agreement had been delivered to him and there was not going to be completion within five years time. That triggered a meeting between himself and Mr Rushton at which they discussed how their future relationship should continue. There is an issue as to whether a binding agreement came into existence as a result of that meeting, but it appears that there were indications by Mr Rushton that he would be in the position to raise the sum of £170,000 fairly quickly and that that sum would be applied in paying the balance of the outstanding debt. However, no such sum was immediately raised and, on 22nd August 2005, Mr Fagg served on Mr Rushton a statutory demand for the sum of £483,080, that being the judgment debt and accumulated interest to date.

On 9th September 2005, Mr Fagg applied to set aside the statutory demand and provision was made for the service of evidence leading to a hearing of that application to set aside. However, shortly after the application to set aside was made, the equity of redemption on the three outstanding plots which Francis had given to Mr Fagg as security for the £200,000 due under the 1999 agreement were transferred by the company to Mr Rushton. The significance of that transfer will shortly appear. Thereafter, it appears that Mr Rushton did raise the sum of £170,000, but he did not apply the whole of that sum in reduction of the debt. Rather, he paid over £83,387.21 to Mr Fagg. It is accepted that, having regard to a valuation which has been obtained from a French valuer of the remaining three plots, the totality of the indebtedness unsecured amounted as at June 2006 to £83,387.21.

Accordingly, before the Deputy District Judge when the matter came to be heard on 26th June 2006, it was contended by the debtor, Mr Rushton, that the entirety of the balance of the indebtedness after that payment of £83,387 was fully secured. That valuation is not necessarily accepted, but counsel for the Appellant says that, for the purposes of today’s appeal, I am to proceed on the basis that that is indeed the case, that the three plots were valued at a sum sufficient to leave £83,000-odd due and that the £83,000 paid therefore discharged the unsecured balance of the debt.

Section 383 of the Insolvency Act 1986 defines the word “creditor” for the purpose of Part XI of the Act. Subsection (2) of that section provides as follows:-

“Subject to the next two subsections and any provision of the rules requiring a creditor to give up his security for the purpose of proving the debt,” [and we are not concerned with that], “a debt is secured for the purposes of this Group of Parts to the extent that the person to whom the debt is owed holds any security for the debt (whether a mortgage, charge, lien or other security) over any property of the person by whom the debt is owed.”

The position, therefore, before the transfer on 26th January 2006 was that the security for the debt was not security over the property of Mr Rushton but was security over the property of the company. On the authority of a decision of Mr Justice Knox in Re: A Debtor No. 310 (1988) [1989] 1 WLR 452, it was not security for the purpose of rule 6.1(v) of the Insolvency Rules. Rule 6.5 deals with the hearing of applications to set aside bankruptcy demands. Rule 6.5(iv) provides that on the hearing of an application to set aside a statutory demand:-

“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 or debts 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(v) 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 ...”

Then there is a further provision in (d) which I do not need to refer to.

It is contended by the Appellant that, because the security in the present case was security for the indebtedness of the company Francis, albeit that it is a security which would inure to the benefit of the Respondent Mr Rushton (since if it was realised and its proceeds applied as they would have to be in the reduction of the company’s indebtedness to Mr Fagg, that would have the effect of reducing pro tanto the amount of the claim that could be made against Mr Rushton under his guarantee), nonetheless it is not a security for the debt of Mr Rushton for the purposes of section 383(2). Therefore, he submits that it is not to be taken into account in deciding whether the application to set aside the statutory demand should be acceded to on the grounds set out in rule 6.5(iv)(c).

I asked counsel for the Appellant whether there was any authority which would lead inevitably to that conclusion. It is a conclusion which seems on the face of it to be counter-intuitive of the purpose of rule 6.5, which is that a debtor is entitled to take advantage of the value of any security over his property in the calculation of the sum for which a statutory demand can be served on him. Undoubtedly, the value of this security, albeit given by the company over a debt which he has guaranteed, would inure to his benefit in the event that he had applied the whole of the £170,000 which he had available to him so that if the entirety of the £200,000 had been paid he would have been entitled to be subrogated to that security as against the company and to have recouped himself from the company’s assets pro tanto.

Counsel for the Appellant accepted that the decision of Mr Justice Knox in Re: A Debtor No 310 (1988) was not such authority. It seems to me that, unless driven to the conclusion for which counsel contends by authority, because his submissions appear to be counter-intuitive to the purpose of rule 6.5(iv), I should hold that the securities in question are security for the purposes of section 383(2) of the Act. It seems to me that the present position is that Mr Rushton is indebted to Mr Fagg but that the whole of his indebtedness is covered by a security and, accordingly, the conclusion of the Deputy District Judge in paragraph 74 of his judgment is correct and this appeal must be dismissed.

My attention is drawn to the fact that there is also an appeal against the Deputy District Judge’s order as to costs at the hearing on Monday 14th July 2006. The order for costs that he made was that Mr Rushton should be paid his costs of the application to set aside the statutory demand.

The argument placed before me on behalf of Mr Fagg is that the service of the demand had produced a payment of £83,000 and that, accordingly, it could not be said that his proceedings were pointless. An analogy is drawn between the normal order as to costs on, for instance, a bankruptcy petition, where the debtor pays at the last minute at the door of the court and the petition is dismissed but the debtor is made to pay the costs of the petition because the presentation of the petition.

The counter-argument to that which is advanced on behalf of Mr Rushton is that on the facts of this case a large amount of the costs would have been saved had the creditor, Mr Fagg, not elected to proceed with his arguments before the Deputy District Judge, but rather had accepted the £83,000 that he knew had come in at least by five o’clock on the Friday before the Monday hearing. It is said that, in those circumstances, counsel would not have recovered the whole of their brief fees and the costs of the attendance of solicitors before the Deputy District Judge would have been avoided.

It seems to me that the appropriate order for me to make is that the order for costs below of Deputy District Judge Austin should be varied so that Mr Fagg should receive payment of half his costs below and otherwise no order. The order for costs before me is that the costs of this appeal are Mr Rushton’s in the sum of £6,362, which is shown on his schedule of costs and which are inclusive of VAT.