McGuinness v Norwich and Peterborough Building Society

On 24^th February 2010 Deputy Registrar Middleton made a bankruptcy order against the Appellant Spencer Robert McGuinness on a petition by the Respondent building society in respect of a sum of £1,223,883.26 alleged to be due under a guarantee and indemnity (“the Guarantee”) given by the Appellant in relation to his brother’s borrowing liabilities. This appeal, brought with the permission of the Deputy Registrar, raises two interesting points about the nature of a guarantor’s liability to the creditor, and the consequences in terms of the creditor’s ability to present a bankruptcy petition. In short, is it a liability “for a liquidated sum” within the meaning of section 267(2)(b) of the Insolvency Act 1986 or only a liability to pay unliquidated damages? If the latter, is the creditor disabled from presenting a bankruptcy petition without first obtaining judgment for a specific sum, even in a case where the liability is admitted, and the amount of the damages can be identified with mathematical precision?

It is common ground that the answer to the first question turns on the true construction of the Guarantee. A negative answer to the second question would require this court to conclude that the decision of Rimer J in Hope v. Premierpace (Europe) Limited [1999] BPIR 695, to the effect that claims for damages or for an account were not claims for a liquidated sum, even if the claimant could identify his claim down to the last penny, was wrongly decided.

The Guarantee, dated 10^th September 2008 and made on the Respondent’s standard form, contained the following relevant provisions:

“2.

GUARANTEE AND INDEMNITY

2.1

In return for our lending, agreeing to lend or continuing to lend money, or granting credit facilities, to the Borrower you accept the liabilities set out below. These liabilities are unconditional and you cannot withdraw from them, except as set out in Clause 5.

2.2

You guarantee that all money and liabilities owing, or becoming owing to us in the future, by the Borrower (whether actual or contingent, whether incurred alone or jointly with another and whether as principal or surety) will be paid and satisfied when due.

2.3

Any amount claimed under the Guarantee is payable by you immediately on demand by us.

2.4

As a separate obligation you agree to make good (in full) any losses or expenses that we may incur if the Borrower fails to pay any money owed to us, or fails to satisfy any other liabilities to us, or if we are unable to enforce any of the Borrower’s obligations to us or they are not legally binding on the borrower (whatever the reason).

2.5

You will also make good any losses or expenses which we may incur if we take steps to enforce this Guarantee or if we try to do so.

…

4.2

Your obligations under this Guarantee are those of principal, not just as surety. We will not be obliged to make any demand on, or take any steps against, the Borrower or any other person before enforcing this Guarantee.”

The Appellant’s brother Craig McGuinness (the Borrower referred to in the Guarantee) defaulted on his obligations and the Respondent thereafter demanded payment by the Appellant of the sum identified in the petition, pursuant to clause 2.3 of the Guarantee. It is common ground that the liability of the Borrower in respect of which the demand was made was a liquidated sum, rather than, by contrast, a liability to pay damages at large for some breach of the borrowing facility. It is not disputed that the Borrower was liable to the Respondent as claimed, and the Appellant has advanced no defence to liability under the Guarantee.

The requirement that a bankruptcy petition must be founded on a liquidated sum dates back at least to 1869. It is currently to be found in section 267(2) of the Insolvency Act 1986, as follows:

“Subject to the next three sections, 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)

…

(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,

…”

“Debt” is broadly defined. Section 382(3) provides that:

“For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; …”

In Hope v. Premierpace (Europe) Limited (supra) the creditor served a statutory demand in respect of £17,329.58 alleged to have been misappropriated by its employee, the Appellant. After procedural mishaps, a bankruptcy order was made based upon that demand. On appeal, Rimer J analysed the possible basis of a claim for recovery of the stolen money as being: (i) a claim for money had and received; (ii) a claim against the debtor as a constructive trustee; (iii) a claim in deceit; (iv) a claim for breach of an implied term in his contract of employment; and (v) money paid under a mistake of fact. He concluded that (i), (ii) and (v) were all claims for an account and payment, and that (iii) and (iv) were claims for damages. He continued:

“Mr Rainey submits that it follows that none of the company’s claims for a remedy is in the nature of an order for payment of a liquidated sum. It is irrelevant that the company claims to be able to identify its claim down to the last penny. It is still faced with the difficulty that its range of alternative claims against the debtor are claims for damages or for an account and payment. A claim for damages is not a claim for a liquidated sum; and nor is a claim whose remedy is that of an account, even though it may be that the taking of the account so ordered could be dealt with in a summary way and a judgment there and then given for a specific sum.

I accept that submission. I agree with Mr Rainey that the petition is not based on a debt for a liquidated sum. It follows that in my judgment no bankruptcy order could properly be made on it. I will therefore not merely discharge that order. I will also dismiss the petition.”

Rimer J re-iterated that analysis in Navier v Leicester [2002] EWHC 2596 (Ch).

In Moschi v. Lep Air Services Limited [1973] AC 331 the appellant was the managing director and guarantor of the debtor company, which had agreed to pay the respondent creditor £40,000 in instalments. The appellant’s guarantee was in the following terms:

“(XIII) In further consideration of the above Mr Moschi has personally guaranteed the performance by Roloswin Investments Limited of its obligation to make the payments at the rate of £6,000 per week together with the final payment of £4,000 and hereinbefore set out so however that Mr Moschi’s total obligation under this guarantee shall not exceed the total sum of £40,000 of which approximately £3820 has already been paid as aforesaid.”

The debtor defaulted in making the instalment payments, whereupon the creditor accepted that default as a wrongful repudiation of the contract and sued the Appellant for the £40,000 less payments to date of £10,069. The Official Referee concluded that the guarantee extended only to instalments payable until the date of the discharge of the contract by accepted repudiation. Both the Court of Appeal and the House of Lords concluded, for different reasons, that the guarantee extended to the whole of the debtor’s liability.

Lord Reid, giving the leading speech, said this at pages 344-345, (referring to counsel for the appellant):

“His next argument is more formidable. He says, look at clause (XIII). It merely guarantees that each instalment of £6,000 shall be duly paid. But by reason of the accepted repudiation the contract was brought to an end before the later instalments became payable. So they never did become payable. All that remained after the contract was terminated was a claim for damages. But I never guaranteed to pay damages. If the creditor chooses to act so that future instalments are not payable by the debtor he cannot recover them from me.

To meet that argument I think that it is necessary to see what in fact the appellant did undertake to do. I would not proceed by saying this is a contract of guarantee and there is a general rule applicable to all guarantees. Parties are free to make any agreement they like and we must I think determine just what this agreement means.

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 would 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 of 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.

In my view, the appellant’s contract is of the latter type. He “personally guaranteed the performance” by the company “of its obligation to make the payments at the rate of £6,000 per week.” The rest of the clause does not alter that obligation. So he was in breach of his contract as soon as the company fell into arrears with its payment of the instalments. The guarantor, the appellant, then became liable to the creditor, the respondents, in damages. Those damages were the loss suffered by the creditor by reason of the company’s breach. It is not and could not be suggested that by accepting the company’s repudiation the creditor in any way increased his loss. The creditor lost more than the maximum which the appellant guaranteed and it appears to me that the whole loss was caused by the debtor having failed to carry out his contract. That being so, the appellant became liable to pay as damages for his breach of contract of guarantee the whole loss up to the maximum of £40,000.”

Lord Diplock put the matter even more starkly, at page 348, as follows:

“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.

Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends upon the words in which the parties have expressed the promise. Even the use of the word “guarantee” is not in itself conclusive. It is often used loosely in commercial dealings to mean an ordinary warranty. It is sometimes used to mis-describe what is in law a contract of indemnity and not of guarantee. Where the contractual promise can be correctly classified as a guarantee it is open to the parties expressly to exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee. Every case must depend upon the true construction of the actual words in which the promise is expressed.”

Mr Peter Arden QC for the Appellant submits that, putting those two decisions together, a creditor having the benefit of a guarantee of the type identified in Moschi v. Lep Air (a “see to it” guarantee) can never present a bankruptcy petition based upon the guarantor’s liability, without first obtaining a judgment for payment of a specific sum, because the guarantor’s obligation lies in damages only. This is so, he submits, even where (as envisaged by Lord Diplock at page 349B) it is obvious that the measure of the guarantor’s liability is identical to the amount of the principal debtor’s unpaid debt. In Rimer J’s words, it is irrelevant that the creditor is able to identify his claim down to the last penny.

Mr Arden submitted that the Guarantee in the present case is of the “see to it” type, that the Respondent’s claim has always been for unliquidated damages rather than for a liquidated sum, and that accordingly the Deputy Registrar had no jurisdiction to make a bankruptcy order.

When it is borne in mind how frequently guarantee liabilities are relied upon in bankruptcy proceedings, it is perhaps surprising that the researches of counsel could not identify any case in which the combined effect of Moschi v. Lep Air and Hope v. Premierpace had been relied upon, as a means of defending a petition or setting aside a statutory demand. Nonetheless, in Hampton v. Minns [2002] 1 WLR 1, it fell to Kevin Garnett QC sitting as a Deputy High Court judge to decide whether the guarantee in that case gave rise to a claim in damages or in debt, for the purposes of section 1 of the Civil Liability (Contribution) Act 1978. The guarantee was in the following terms:

“In consideration of your giving time credit and/or banking facilities and accommodation to [Banonbury Homes] (hereinafter called ‘the principal’ I/we the undersigned hereby guarantee the payment or discharge to you and undertake that the undersigned will on demand in writing made on the undersigned pay or discharge to you all monies and liabilities which shall for the time being be due owing or incurred by the Principal to you…”

He concluded that the guarantee created a liability in debt which arose upon demand by the creditor, holding in particular that the phrase “pay or discharge to” the creditor all monies which were due and owing were appropriate for the creation of a debt. He continued:

“This construction seems to me not only to be the natural construction of the agreement but also what I would expect persons of business to understand the obligation to be. I would expect that if such a person were called upon to pay damages under the guarantee he or she would respond: “I only agreed to pay whatever it was that the company owed, not to pay you damages.””

Mr Garnett was considerably influenced by the fact that the guarantee in that case provided for payment on demand, and he relied in particular upon the dictum of Evans LJ in Romain v. Scuba TV Limited [1997] QB 887 at 895, to the effect that such a provision meant that no cause of action arose until the demand was made. On the face of it, if liability under a guarantee is only triggered upon demand by the creditor, it is hard to see how it can be of the “see to it” type identified in Moschi v. Lep Air, where the House of Lords held that the guarantor was in breach of his obligation under the guarantee from the moment when the debtor defaulted on his payment obligation.

It is not every guarantee in which an express provision for the guarantor to make payment on demand is a pre-condition to liability. In MS Fashions Limited v. BCCI [1993] Ch 425, the relevant guarantees included provision that a Mr Amir should be liable as principal debtor and that, in relation to a Mr Ahmed, the debtor’s liabilities “shall be recoverable by you from me as principal debtor and/or by way of indemnity and shall be repaid by me on demand made in writing by you or on your behalf whether or not demand has been made on the [debtor]”. At page 447-8 Dillon LJ held that the true principle was that, whereas demand was a prerequisite of the liability of a mere surety, it was not so where the liability was that of principal debtor. He said:

“The effect of that must be to dispense with any need for a demand in the case of Mr Amir since he has made the companies’ debts to BCCI his own debts and thus immediately payable out of the deposit without demand. In the case of Mr Ahmed there must be immediate liability even though the word “demand” was used, because he accepted liability as a principal debtor and his deposit can be appropriated without further notice.”

In TS&S Global Limited v. Fithian Franks and ors [2007] EWHC 1401 (Ch) David Richards J followed Dillon LJ’s analysis, in relation to a guarantee which contained both provision that the guarantor’s liability was to be as principal debtor, and provision for payment on demand. Accordingly, bankruptcy proceedings were properly constituted even though no demand had been made pursuant to clause 2 of the guarantee.

In TS&S Global clause 1 of the guarantee contained a promise of the “see to it” type (namely the due payment and discharge by the debtor of its liabilities), although clause 2.1 provided, upon default by the principal debtor, for the guarantor to pay, on demand, “without setoff or other deduction, an amount equal to the amount so unpaid” together with all reasonable costs and expenses incurred by the creditor. No point was taken for the guarantor that his liability lay merely in damages.

The Guarantee in the present case contains both provision for payment by the guarantor on demand (at clause 2.3) and a provision that the guarantor’s obligations are those of principal debtor, not merely those of a surety, at clause 4.2. By contrast with the guarantee in Moschi v. Lep Air, clause 2.2 does not state in terms that the guarantor’s obligation is to see to it that the principal debtor himself pays all amounts due. Rather, it is neutral on the question by whom the guarantor promises that those debts will be paid. Conversely, by contrast with clause 2 of the guarantee in TS&S Global, clause 2.3 of the Guarantee does not speak in terms of payment of the outstanding debts of the debtor, but rather of payment of any amount claimed under the Guarantee by the creditor. It is therefore silent as to whether the creditor’s claim is to be for damages or for a liquidated sum, although the phrase “any amount” may point slightly in favour of the latter.

The Deputy Registrar’s conclusion was that clause 2.2 of the Guarantee created a debt rather than a damages liability. For that purpose he found it unnecessary to have recourse to the principal debtor provision of clause 4.2.

For my part, I doubt whether the issue is necessarily an either/or question as between debt and damages. Some guarantees, and in particular that which was the subject of the TS&S Global case, may create both. For present purposes, the critical question is whether the Guarantee includes, rather than necessarily consists of, a debt obligation.

In my judgment the Guarantee does include a debt obligation. My main reason for that conclusion is that, by the principal debtor provision in the first sentence of clause 4.2 of the Guarantee, the Appellant thereby made his brother’s debts his own, as occurred in MS Fashions v. BCCI. Mr Arden sought to persuade me to attribute a different meaning to that provision, by reading the whole of clause 4.2 of the Guarantee together, so that the principal debtor provision was designed (he said) to do no more than to enable the creditor to enforce the Guarantee without prior demand against the principal debtor. I disagree. It is evident from Moschi v. Lep Air that, where a guarantee sounds in damages rather than debt, the creditor may enforce against a mere surety without prior demand on the debtor, precisely because the debtor’s default gives rise to a simultaneous breach of the surety’s obligations. The effect of a principal debtor provision is not therefore to enable the creditor to proceed without first claiming against the principal debtor, but (among other things) that any debt due is immediately payable by the guarantor without prior demand upon him: see MS Fashions v. BCCI.

Like the Deputy Registrar, I derive some assistance from the treatment in clause 2.4 of the Guarantee of the Appellant’s obligation to make good any losses or expenses incurred by the creditor if the Borrower fails to pay as a separate obligation. If clause 2.2 had been intended to give rise to a damages liability, clause 2.4 would give rise to no separate obligation at all. On the contrary it would, save perhaps for the last line, be otiose.

My conclusion that the Guarantee at least includes an obligation on the Appellant in debt is sufficient to dispose of this appeal. The Respondent was entitled to demand payment of the very debt which, by clause 4.2, the Appellant had made his own. It was a liquidated sum within the meaning of section 267(2)(b) of the Act. It is therefore unnecessary for me to decide whether, as Ms Start submitted, I should depart from the decision in Hope v. Premierpace. Nonetheless, and in case the issue should arise again, I will make the following observations about it.

The first is that it does seem remarkable that a person from whom £1,000 has simply been stolen should be unable to present a bankruptcy petition (following a statutory demand), whereas a person with a £1,000 contract debt may do so, always assuming that there is not a bona fide defence to either claim on reasonable grounds. As Proudman J said in Truex v. Toll [2009] 1 WLR 2121, at 2129, the question whether a sum is liquidated and whether there is a defence of the claim are entirely separate issues.

Secondly, I have real doubt whether distinctions based on different causes of action (i.e. debt, account and payment, damages) satisfactorily address the purpose behind section 267(2)(b) of the Act, which seems to me to distinguish between cases where there is no issue as to the amount of a liability, and cases where some process of assessment by the court is necessary, before the amount can be identified. I can well understand that a claim for an account which depends upon the defendant providing disclosure as to the amount of an alleged secret profit cannot possibly be a claim for a liquidated sum. By contrast, a claim to recover stolen money, where the precise amount stolen is known by the claimant, seems to me in principle to be a claim for a liquidated sum, even though the form of action is one for account and payment.

Finally, even in cases involving guarantees of the “see to it” type, it is frequently the case that, although the form of action may be a claim for damages against the guarantor, the quantum of the claim may involve no uncertainty or need for the application of the court’s opinion. Moschi v. Lep Air was genuinely a case where (subject to the guarantee limit of £40,000) damages were at least in theory at large, because of the accepted repudiation of the contract between the creditor and the principal debtor. But a case like the present, where there is a debt rather than damages owed by the principal debtor, and where, on any view, the guarantor’s obligation is to pay a sum identical to that debt, it seems to me to risk an absurd waste of costs and delay to require the creditor first to issue a claim and obtain an inevitable summary judgment upon it, before beginning bankruptcy proceedings. I suspect that there have since Moschi v Lep Air been many unreported cases where a creditor under a “see to it” guarantee has succeeded in bankruptcy proceedings without obtaining a prior judgment.

Nonetheless it is because the Guarantee included a liability in debt that this appeal must be dismissed.