Downing LLP v Sanguine Hospitality Ltd

The Petitioner and Appellant, Downing LLP (“Downing”), seeks an Order for the winding-up of Sanguine Hospitality Limited (“Sanguine”). Downing’s Petition is based on a debt said to be owing under a Corporate Guarantee & Indemnity given by Sanguine dated 18 March 2013 (the “Guarantee”).

At a contested hearing of Downing’s Petition on 19 March 2020, ICC Judge Burton dismissed the Petition and made ancillary orders including an Order for the payment of costs by Downing on the indemnity basis. She thought that the debt allegedly due under the Guarantee was disputed by Sanguine on grounds which appeared to be substantial. Permission having been given by Falk J. on 5 June 2020, Downing now appeals the decision of ICC Judge Burton.

I will set out some background before summarising the reasoning of ICC Judge Burton. This borrows from the witness statements served by Mr Colin Corbally for Downing and by Mr Matthews-Williams for Sanguine.

Downing and Sanguine have had a business relationship stretching back over a number of years in connection with a number of property developments.

On 18 March 2013, Downing, Sanguine, and seven companies associated with Downing (referred to as “the Lenders”) entered into a Facility Agreement (“the Facility”) under which the Lenders agreed to advance loan funding to two companies involved in ongoing property developments, namely Dominions House Limited and London City Shopping Centre Limited (“Dominions” and “LCSC” respectively).

The Lenders – I will refer to them in this Judgment as the “Original Lenders”, for reasons which will appear below – were defined in the Facility as “… the lenders set out in Schedule 2 … (Lenders and Lender means any of them as the context requires).” Schedule 2 listed the seven relevant companies by name, all of them venture capital trusts associated with Downing.

As to the borrowers, Dominions was a company associated with a property development in Cardiff, and LCSC a company associated with a shopping centre development in London, which the parties have referred to as the “Barbican project”.

Under the Facility, the seven Original Lenders agreed to advance a total of £1.25m, split as to £890,000 for Dominions and £360,000 for LCSC. Each Lender advanced a discrete amount in relation to each project. Under the Facility these sums were repayable on the “Final Repayment Date”, defined to mean:

“ … the earlier to occur of:

(a)

the date falling 18 months after the date of this agreement; and

(b)

the date falling 4 weeks after Planning Permission is granted and any judicial review period has expired.”

Under (a), the relevant date 18 months after the date of the Facility was 18 September 2014.

It is clear from a review of the Facility document that it was part of an overall package of commercial arrangements entered into at about the same time, including a series of security documents.

Among these security documents was the Guarantee. The Guarantee was executed between Sanguine on the one hand, and Downing as “Security Trustee” on behalf of the Original Lenders on the other.

Clause 2 of the Guarantee set out Sanguine’s principal undertaking, as follows:

“In consideration of the Security Trustee and the Lenders entering into the Facility Agreement, advancing monies or giving credit or affording other banking facilities to the Borrowers, or continuing to do so, or otherwise giving effect to the Facility Agreement, and subject always to clause 8.1, the Guarantor irrevocably and unconditionally guarantees to and agrees with the Security Trustee and the Lenders to pay to the Security Trustee within 10 Business Days of demand in writing all the Liabilities together with all costs, fees and expenses due or incurred by the Security Trustee resulting from a breach of the Guarantor’s obligations under this guarantee.”

“Liabilities” was defined broadly to mean: “… all monies and liabilities which from time to time … are due and owing or incurred from the Borrower to the Security Trustee and the Lenders … .”

I should also mention clause 6.1.1 of the Guarantee which provides:

“The liability of the Guarantor under this Guarantee will not be discharged or otherwise affected by … any arrangement, including any extension, modification or renewal of the Facility Agreement or change in the Liabilities which the Security Trustee or Lenders may make with either of the Borrowers or with any other person … ”

The Guarantee also had an unusual feature, and in order to understand it, it is necessary to mention a further property development which Downing and Sanguine were involved in at the time, i.e., in 2013.

This was a development in West Bar, an area of Sheffield, known as the “Hampton by

The reason for mentioning WBD is that the extent of Sanguine’s commitment under the Guarantee was fixed by reference to the value of its interests in WDB.

This limitation was expressed in a number of provisions of the Guarantee, referred to in the Judgment of ICC Judge Burton. They start with clause 8:

“8.1

The liability of the Guarantor to make payments to the Security Trustee accordance with clauses 2 and 3 of this guarantee shall be limited in respect of each demand to the Maximum Limit on the relevant Demand Date as determined by the Security Trustee.

8.2

Within 5 Business Days of a Demand Date, the

Security Trustee shall notify the Guarantor in writing of the Maximum Limit .”

I have already explained that Downing was the Security Trustee referred to in clause

“Member’s Interests” was defined to mean: “ … all the member’s interests and any other rights, title and interests that the Guarantor may from time to time have

Clause 16 of the Guarantee provided as follows:

“ … any … notifications given by the Security Trustee … under this guarantee will be conclusive and binding as to the items stated in it, except in the case of manifest error.”

Finally, I should mention that in addition to the Guarantee, it is common ground that on 18 March 2013, Sanguine also entered into a “Charge Over Member’s Interest” (the “Charge”), by which it charged to Downing its interests in WBD. The Charge was registered at Companies House on 23 March 2013.

That was the original position in early 2013, but some changes came to be made in 2014. The background has not been fully examined, but these seem to have been prompted by at least two factors. One was the decision by Mr Bolton, one of the original participants, to retire; the other was slower than expected progress in relation to the Cardiff and Barbican projects.

Thus, the Facility was the subject of an “Amendment and Restatement” in August 2014. A number of changes were effected:

What happened next is rather obscure. It seems that at some point the loan to Dominions in respect of the Cardiff development was repaid. At any rate there is nothing to suggest that anything is presently due and owing.

As regards LCSC, Mr Matthews-Williams in his Witness Statement says that planning permission was eventually obtained in relation to the Barbican development, but only much later, in November 2017.

Under the terms of the LCSC Facility on their face, the sums due from LCSC should therefore have been repayable to the New Lenders in September 2015, i.e., the amended Final Repayment Date.

Payment to the New Lenders did not happen at that point, however. Despite that, no action was taken either by the New Lenders or by Downing. Some limited information has been given about this, because an email has been produced from Mr Corbally to Mr Matthews-Williams dated 2 February 2016, in which Mr Corbally said:

“Further to our conversation, I am happy to confirm that we are happy for the loans to remain outstanding until the end of this year. This is subject to continuing satisfactory progress and no significant issues arising in the meantime.”

Mr Matthews-Williams also said the following in his evidence:

“Furthermore, CC (who is Head of Investment Strategy at [Downing]) verbally confirmed on a number of occasions that [Downing] was happy for the Barbican Loan to remain outstanding and would not just be called in without a reasonable period of notice being provided.”

The detail of what happened during 2017 and 2018 is not at all clear on the evidence, however. This time-period is not really dealt with by either side. What we do know, however, from the Skeleton Argument of Sanguine’s counsel, Mr Watson, is that two of the six New Lenders were dissolved during the Autumn of 2017, and a third was placed into liquidation. Mr Matthews- Williams’s evidence is that he was also told at one stage that the loan to LCSC had been written off. Mr Corbally says he cannot recall that but in any event, the fact that the loan may have been written off in the books of (presumably) the New Lenders does not remove LCSC’s obligation to pay.

After that long period of inactivity, the next relevant event according to Mr MatthewsWilliams was that on 1 March 2019, Sanguine’s solicitors wrote to Downing to set out a number of queries relating to a separate development, namely the Doubletree

Shortly thereafter, on 22 March 2019, Fladgate, solicitors for Downing and “the Lenders”, sent a “Letter of Demand” to LCSC. Mr Matthews-Williams says that this letter came completely out of the blue. The implication is that it was sent in retaliation for Sanguine’s letter in relation to Hoole Hall of 1 March.

The Lenders referred in Fladgate’s letter were identified in a Schedule as the seven Original Lenders. Consistent with this, the Letter of Demand referred to the original 2013 Facility, and so referred to an overall amount of £1.25m split between the Cardiff and Barbican developments. It also specified the relevant Final Repayment Date as having been the original repayment date of 18 September 2014. It demanded payment from LCSC, however, of £550,000 (i.e., the loan amount due under the LCSC Facility), together with accumulated interest of £256,190.

This was followed on 25 March 2020 by a letter from Downing to Sanguine, headed

“Corporate Guarantee and Indemnity -Letter of Demand”. This referred to the Guarantee and again to the original Facility, and also to the seven Original Lenders. It referenced the letter sent by Fladgate to LCSC on 22 March 2019, and said that the sum demanded by that letter - £806,190 – had not been paid. It thus made a demand of Sanguine itself under Clause 2 of the Guarantee, up to the Maximum Limit. It said that Downing would notify Sanguine of the Maximum Limit within five business days, as required under Clause 8.2 of the Guarantee.

On 27 March 2019 Downing, in its capacity as holder of a floating charge, proceeded to appoint Administrators over the business and operations of LCSC.

On 29 March 2019, Downing sent a letter to Sanguine notifying it of the Maximum Limit. The relevant part of the letter is as follows:

“In accordance with clause 2 of the Guarantee, we calculate the Maximum Limit (as defined in the Guarantee), being the value, determined by Downing on the Demand Date (as defined in the Guarantee), of the interests of Sanguine in WB Developments LLP, less any payments received by Sanguine under the Guarantee, as being £660,025.”

Downing served a statutory demand on 12 April 2019, and issued its Winding-Up Petition on 25 May 2019.

Before turning to the Judgment of ICC Judge Burton, it is useful to explain the particular controversy which has arisen between the parties in relation to the calculation of Maximum Limit.

No calculation is set out in Downing’s letter of 29 March 2019, but there is one in Mr Corbally’s Witness Statement dated 4 September 2019. That is based on the net asset value of WBD as at March 2019. The overall net asset figure given is £1,980,273. Included in this overall figure as assets of WBD are amounts totalling £4,180,776, payable to WDB from two related companies, namely West Bar BPRA LLP and West Bar Hotel Ltd.

On the footing that Sanguine has a 33.3% ownership interest in WBD, the Maximum Limit is calculated as 33.3% of £1,980,273, or £660,091 (this is in fact slightly different to the figure in the 29 March 2019 letter). Thus, Downing assesses the value of Sanguine’s Member’s Interests as corresponding to 1/3 of the net asset value of

Faced with this, Sanguine points out that the WBD net asset figure used by Mr Corbally – roughly £1.98m – is in fact very far in excess of the net asset figure for WBD contained in its accounts for the period to 31 March 2019. Those accounts are unaudited but have been prepared by accountants and filed at Companies House.

WBD’s balance sheet in its accounts shows net assets not of £1.98m, but of only £427,950. Moreover, according to note 8, WBD’s assets include sums due from West Bar BPRA LLP and West Bar Hotel Ltd not of £4,180,776 (the figure relied on by Mr Corbally), but of only £2,632,975, made up as to £1,186,999 in respect of “Trade debtors” and as to £1,445,971 in respect of “Development loans”.

Sanguine’s case is that these discrepancies are surprising and are not properly explained. If the net asset figure in the accounts is used rather than Mr Corbally’s figure, then the value of Sanguine’s Member’s Interests, even using Downing’s methodology, would be only £142,650, not £660,091.

However, that is not the end of it, say Sanguine:

Downing say that this all rests on a misunderstanding. They submitted as follows:

The main part of the Judgment of Judge Burton is headed “Calculation of Maximum Limit”, and it is clear that against the background of the controversy mentioned above, she was addressed on a number of issues concerning the proper meaning of clause 8 of the Guarantee and the associated definitions.

Clause 8 is an example of a familiar provision, under which a contract confers a decision-making power or discretion on one of the parties. Such clauses are not without difficulty, however.

In argument I was referred to two key authorities, namely Socimer International Bank Ltd v. Standard Bank London Ltd [2008] EWCA Civ. 116, [2008] Bus LR 1304, and Braganza v. BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661.

In Socimer, a contractual provision gave a bank the authority to determine the “value” of certain securities. It was accepted (see at [94] and [119]) that “value” meant “market value”, and the question was whether the bank was subject to an implied duty to identify the “true” market value (i.e., a purely objective standard); or an implied duty to take reasonable care (i.e., a negligence standard); or subject only to a more limited duty to act reasonably (in the Wednesbury sense) in the decision-making process. As a matter of construction, including in light of the fact that the agreement gave the bank sole discretion to provide a certificate of deficiency unchallengeable save in case of manifest error, the Court of Appeal thought the latter. In his judgment at [66], Rix LJ explained the content of the duty as follows:

“It is plain from the authorities that a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.”

In Braganza, this formulation was quoted with apparent approval by Lady Hale in her speech at [22], although [24] she went on to explain that the test of reasonableness derived from Associated Provincial Picture Houses Limited v. Wednesbury Corpn [1948] 1 KB 223, 233-234 in fact has two limbs. The first limb focuses on the decision-making process – whether the right matters have been taken into account in reaching the decision. The second limb focuses on the outcome – whether, even though the right things have been taken into account, the decision reached is so outrageous that no reasonable decision-maker could have reached it. Sometimes the second limb is used as a shorthand for the Wednesbury principle, but that should not lead one to overlook the former. Baroness Hale then said at [29], using the more modern term “rationality” instead of “reasonableness”:

“If it is part of a rational decision-making process to exclude extraneous considerations, it is in my view also part of a rational decision-making process to take into account those considerations which are obviously relevant to the decision in question.”

She then said:

“30.

It is clear, however, that unless the court can imply a term that the outcome will be objectively reasonable – for example, a reasonable price or a reasonable term – the court will only imply a term that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose …

31.

But whatever term may be implied will depend on the terms and the context of the particular contract involved. ”

In this case, Sanguine submitted before Judge Burton, and before me, that Downing’s obligation in exercising its decision-making power was to arrive at the “proper” or “correct” determination of value of its Member’s Interests in WBD, or alternatively at a “reasonable” determination (which I understood to mean, a determination arrived at applying reasonable care).

Downing’s argument was that the relevant provisions of clause 8 should be construed as conferring full decision-making power on Downing, subject only to a limitation that the power be exercised rationally and lawfully, in the public law sense. This was said to follow from the proper construction of the Guarantee as a whole including the provision in Clause 16 (see [21] above) which makes any notification given by Downing conclusive, save in the case of manifest error.

Downing’s submission, recorded by ICC Judge Burton at [14] of her Judgment, was that applying such a Wednesbury-type test afforded it wide latitude in determining the value of Sanguine’s Member’s Interests, in the sense that its overall decision could be impugned only if it was a decision which no reasonable decision-maker could have made. The overall figure arrived at could not be characterised in that way, even accepting that it used figures for the “Development loans” different to those in the statutory accounts, because they were figures representing the actual amounts due, and it was rational to use those figures.

The Judge’s conclusions on these critical points are set out at [18] and [19] of her Judgment, as follows:

“18.

The guarantee failed to provide any machinery or principles on which the value of the Members’ Interest should be determined. This was not a requirement merely to provide a figure in respect of outstanding indebtedness. Instead, the amount due depended upon calculating the value of a member’s interest in an LLP. These courts are full of disputes between shareholders regarding the value of one another’s interests in a limited company or enterprise and usually involve the provision of detailed, expert evidence. In my judgement, the absence of any machinery for such a clause is extraordinary, and immediately rendered any reliance upon the figure to be provided, speculative. The petitioner relies on its conclusive evidence clause and neither counsel referred me today to authorities where the courts have considered the efficacy of such clauses. The submissions before me relied, instead, on the application of Wednesbury principles to contractual decisionmaking provisions.

19.

The parties’ positions could not be further apart. I do not know immediately whether it was reasonable on a Wednesbury principle approach for the petitioner to rely on the full value of its loan assets or whether in doing so, it committed a manifest error and can be shown consequently to have arrived at the figure demanded other than in good faith. It seems to me, particularly as a specialist in insolvency proceedings, that there are good reasons why accounting standards should apply some element of discount and that would be relevant for valuing a member’s interest. But that is not the question I have to consider. The question before me is whether the debt is bona fide disputed on genuine and substantial grounds. The valuation of a member’s interest in an LLP requires the application of accounting principles. In the absence of any principles or mechanics for valuation in the guarantee I am unable to determine whether the approach taken by the petitioner was so manifestly flawed that it failed on the Wednesbury principles and, as contended by the debtor, the correct figure should have been nil.”

The Judge was also influenced by the fact that the original Facility had been subject to the amendments made in August 2014. It seems that this point was undeveloped in submissions before her, but Mr Watson had more to say about it in his submissions before me. I will come back to that below. For now I record the Judge’s observation at [22] of the Judgment that:

“ … the demand was based on a guarantee of a facility agreement that was substantially amended. It is unclear to me whether those changes were within the purview of the original guarantee.”

Sanguine also submitted that it had the benefit of an estoppel argument. This was based on assurances said to have been given on behalf of Downing and (presumably) the New Lenders, that they would not insist upon payment of outstanding amounts by LCSC. In support of that argument, Sanguine relied on the email from Mr Corbally referred to at [28] above. Sanguine argued that, in reliance on such assurances, it had undertaken work and incurred costs in seeking and indeed eventually obtaining planning permission for the Barbican project.

The Judge set out her conclusions in relation to the estoppel argument at [23] of her Judgment, as follows:

“Having decided that the debt is disputed on substantial grounds, the debtor’s reliance upon estoppel might equally give rise to further grounds on which to dispute the petition debt which can appropriately be decided by the court in Part 7 proceedings where the judge would have the benefit of cross examining witnesses, rather than being required summarily to determine the issues as I would be required to do today. Such a claim lies outside the terms of the guarantee and it will be for the trial judge to determine whether the clauses relied upon within the guarantee nevertheless override, or are capable of overriding, the alleged estoppel.”

At [24], the Judge declined to express any view on the alleged cross-claim arising out of the Hoole Hall/Doubletree Chester matter.

In her submissions before me, Ms Hitchens for Downing sought to challenge the conclusions of the Judge on (1) the Maximum Limit point, and (2) estoppel. Mr Watson submitted that the Judge’s reasoning was correct on (1) and (2), and by means of his Respondent’s Notice, also sought to uphold her overall conclusion on the grounds that (3) the Amendment and Restatement of the original Facility August 2014 had the effect of discharging the Guarantee, and (4) Sanguine had a valuable crossclaim arising out of the Hoole Hall/Doubletree Chester matter.

The parties were in agreement that the Judge applied the correct legal test, namely:

It is convenient to deal first with the Judge’s conclusion on the Maximum Limit point; then to consider the argument that the Guarantee was discharged; then then to look at the estoppel argument; and finally to consider the Hoole Hall/Doubletree Chester claim.

Before me, Ms Hitchens sought to challenge the Judge’s reasoning on the Maximum Limit issue. Broadly, she made two points:

I do not accept these criticisms of the Judge’s reasoning. I say that for the following reasons.

First, Ms Hitchens’ starting point is that the contractual discretion afforded to Downing gave it complete decision-making authority, subject only to it acting rationally in the public law sense. But there is an anterior question, which is whether that is the correct construction of the Guarantee. I accept that there is a good case for saying that it is, and indeed that was the result in Socimer. However, I do not feel that at this stage I can discount Mr Watson’s contrary argument that properly construed, the Guarantee required something more, i.e. the identification of the proper value, or a value arrived at using reasonable care. In making this point, Mr Watson referred to the fact that in addition to the Guarantee, Downing had the benefit of security over Sanguine’s interests in WBD (I have mentioned above at [22] the Charge entered into by Sanguine at the same time as the Guarantee), and said it was important that the “value” calculated under the mechanism in the Guarantee corresponded to the “value” over which Downing had security, because the commercial purpose overall was to ensure that Sanguine had no exposure to Downing over and above the secured amounts. This line of argument rather illustrates the fact that the proper construction of the wording of the Guarantee requires one to have regard to the overall factual matrix, including the commercial purpose and intent of the package of arrangements which Sanguine and others entered into on 18 March 2013. Here, I think ICC Judge Burton was correct to be cautious about forming a judgment as to the content of the decision-making duty without the benefit of such background, which it was not possible to examine fully in the context of the application before her. I remind myself of the direction given by Lady Hale in Braganza at [31], namely that “ … whatever term may be implied will depend on the terms and the context of the particular contract involved.”

Second, there is a related and indeed overlapping point, as follows. Even assuming that the decision-making power of Downing was limited only by the requirement to be rational in the public law sense, what was the decision it was required to make? It was required to determine the “value” of Sanguine’s Member’s Interests, but what does that mean, and does it (for example) mean the value obtainable on the basis of a hypothetical arms-length sale to a third party (i.e., market value), or something else? Although perhaps expressed in rather compressed form, it seems to me this is the point the Judge had in mind when at [18] she said that “ … [t]he courts are full of disputes between shareholders regarding the value of one another’s interests in a limited company or enterprise … ”, and when at [19] she observed that “ … there are good reasons why accounting standards should apply some element of discount and that would be relevant for valuing a member’s interest.” Mr Corbally’s approach to

Third, it follows from these points that I do not accept Ms Hitchens’ first challenge summarised at [63(i)], namely that Downing’s assessment must stand since it cannot be said it was so extreme that no reasonable person could have reached it. I do not agree. This looks only at limb 2 of the Wednesbury reasonableness test (above at [50]), and ignores limb 1. One must look not only at the outcome, but also at the decision-making process, i.e. whether the decision-maker took the right matters into account or not. The difficulty is that one cannot properly assess limb 1 without being clear about the question to be addressed, because the nature of the question will define the inputs required to provide an answer. In the present case, the Judge said – and I agree – that there was a basic lack of clarity about the target the decision-maker was required to aim at. This makes it impossible to say whether the correct matters were taken into account or not. Arguably they were not, for the reasons already given above. If (for example) the correct question for Downing to have asked was as to the current market value of Sanguine’s Member’s Interests, then the valuation carried out arguably was irrational, since it took into account matters which were irrelevant (the face value of the loan assets rather than their current value), and failed to take account of other matters which were relevant (such as the fact that Sanguine’s Member’s Interest is a minority stake). I think the difficulty with Ms Hitchens’ point is that it requires one to accept the overall outcome reached in this case as unquestionably rational (Wednesbury limb 2), but in circumstances where there is scope for argument about the nature of the decision to be made, and therefore about the decision-making process (Wednesbury limb 1). I think this is the point the Judge had in mind at the end of her paragraph [19], when she said: “In the absence of any principles or mechanics for valuation in the guarantee I am unable to determine whether the approach taken by the petitioner was so manifestly flawed that it failed on the Wednesbury principles …”. By this she meant that there was no identifiable framework within which the rationality of the decision could reliably be tested. I think she was entirely correct to express that concern, and therefore to conclude that there was a substantial dispute about the debt.

Fourth, neither do I think one can shortcut matters and say that whichever approach is adopted must inevitably result in a “value” for Member’s Interests which is above the relevant £750 limit, in particular because in order to arrive at a nil value one would

I have mentioned above the Judge’s point that the demand made of Sanguine under the Guarantee was based on the original Facility, which had been substantially amended. She said it was unclear to her whether those amendments were “within the purview of the original guarantee.”

Mr Watson developed this point before me. His basic submission was that the Guarantee was discharged when the Amendment and Restatement was entered into. That is because it represented an entirely new arrangement: looking at the substance of it, there was a new set of obligations on the part of LCSC and an entirely new loan facility, i.e. the LCSC Facility. Mr Watson relied on the doctrine in Holme v. Brunskill (1878) 3 QBD 495, to the effect that absent the surety’s consent, any material variation in the underlying contract to which the principal is party will discharge the surety from liability under his guarantee.

Mr Watson said this conclusion was unaffected by clause 6.1.1 of the Guarantee – I will call that the anti-discharge provision – which (as noted above at [14]) provided that Sanguine’s liability under the Guarantee would not be “discharged or otherwise affected by … any arrangement, including any extension, modification or renewal of the Facility Agreement or any change in the Liabilities …”. That in turn was because, however wide the language of that clause was, it could not capture the effect of new events which were outside “the purview” of the Guarantee, and the Amendment and Restatement was such an event.

In developing this point, Mr Watson relied on the so-called “purview doctrine”. This derives from certain observations made by Lord Atkin in Trade Indemnity Co. Ltd v. Workington Harbour and Dock Board [1937] AC 1. I will explain the context below. The relevant passage in Lord Atkin’s speech is at p. 21, where in discussing the language of an anti-discharge provision in that case, he said the following:

“The words ‘any arrangement … for any alteration in or to the said works or the contract’ are very wide. Probably they would have to be cut down so as not to include such changes as have been suggested as substituting a cathedral for a dock, or the construction of a dock elsewhere, or possibly such an enlargement of the works as would double the financial liability. An author of great authority [Rowlatt on Principaland Surety, 2^nd Edn. (1926), p. 118], happily still with us, suggests that such words only relate to alterations ‘within the general purview of the original guarantee.’”

For her part, Ms Hitchens’ submitted that the changes to the Facility effected by the Amendment and Restatement were not sufficiently material to lead to discharge of the Guarantee, even without having regard to the anti-discharge provision in clause 6.1.1, and certainly if one did have regard to it. That was because the addition of a new Lender had no material impact on Sanguine’s position under the Guarantee, and neither did the fact that the overall amount of LCSC’s liability increased. The important point was that Sanguine’s liability was effectively the same: it continued to be capped, by reference to the value of its Member’s Interests in WBD. Moreover, the sole director of Sanguine, Mr Matthews-Williams, was also a director of LCSC at the time of the Amendment and Restatement and was thus aware of its provisions.

In any event, Ms Hitchens said that even if the new arrangements introduced by the Amendment and Restatement did fall outside the purview of the Guarantee, that would only mean that the Guarantee was unenforceable as regards the new obligations of LCSC undertaken by means of the LCSC Facility. Downing would still be entitled to enforce the Guarantee in respect of the obligations owed by LCSC under the original Facility, which exceed the minimum limit for a winding-up Petition. In making this point, Ms Hitchens relied on the Trade Indemnity decision, as interpreted by the Court of Appeal in Hackney Empire Ltd v. Aviva Insurance Ltd [2013] 1 WLR 3400.

Against the background of those submissions, I approach the matter as follows.

It is clear that the meaning and effect of the purview doctrine, and its interrelationship with the doctrine in Holme v. Brunskill, is a difficult and controversial one. That is apparent from Rix LJ’s analysis in CIMC Raffles Offshore (Singapore) Limited v. Schahin Holding SA [2013] 2 All ER (Comm.) 760, [2013] 2 Lloyd’s Rep.

Where a guarantee is entered into in respect of specified obligations owed by a principal obligor to a co-contracting party, and then further arrangements are entered into between the principal obligor and that contracting party, a number of questions will typically arise.

One question is whetherthose further arrangements in fact fall within the scope of the guaranteed obligations. If they do not, then no claim can be made under the guarantee in respect of them. An example is The Nefeli [1986] 1 Lloyd’s Rep. 339, in which Bingham J. found that an extension to a charterparty was an entirely new and extraneous matter which fell outside the scope of the disputed guarantee. Thus, there was no claim against the guarantor in relation to the extension: he had provided no guarantee in connection with it.

A related and overlapping question is not so much about the guarantee, but about the relationship between the new and the old arrangements.

One possibility is that because the new arrangements are entirely separate from the old (as in The Nefeli), the old arrangements simply continue as before. The obligations owed under them by the principal obligor are unaffected; and the guarantee continues to operate vis-à-vis those obligations, which are obviously within its scope (or purview, if that is something different).

This was in fact the result in the Trade Indemnity case, as explained by Jackson LJ in Hackney Empire Ltd v. Aviva Insurance Ltd [2013] 1 WLR 3400, at [72]-[77]. In Trade Indemnity, a guarantee was given in favour of an employer, to secure performance by a constructor of works under a construction contract. At some later point, the employer also advanced funds to the constructor, which was in financial difficulty, by way of loan. When the constructor became insolvent, the employer made claims under the guarantee, including in respect of the loan. The claim in respect of the loan failed, because the arrangement relating to the loan was an entirely new and extraneous matter, falling outside the scope of the guarantee; but in all other respects, the guarantor’s liability under the guarantee remained (although in the event the claims against it failed because of what Jackson LJ in Hackney Empire called “procedural vicissitudes”: see at [77]).

Turning to the present case, it seems to me that the real nub of Mr Watson’s argument is that it represents a variant on the Trade Indemnity example. He says it is a case where, once the new arrangements came into effect (i.e., the Amendment and Restatement, including the LCSC Facility), they entirely superseded the old (reflected in the Facility). The consequence is that the old arrangements dissolved: they were overtaken by the new. Moreover, since the new fell outside the scope (or purview) of the Guarantee, the Guarantee simply fell away, or become otiose.

It seems to me that this approach reflects the correct analytical structure. For present purposes, I think the question I have to ask is whether the result Mr Watson contends for is an arguable one. If it is, that is a further reason why the Petition debt is validly disputed.

In my view, there is an arguable point as to whether the scope of the Guarantee extends far enough to encompass the new arrangements, i.e., the Amendment and Restatement. There are factors pointing in both directions. The critical language is perhaps not that in Clause 6.1.1, but instead that in Clause 2. By Clause 2, Sanguine guaranteed payment of “the Liabilities”, and this in turn was broadly defined to mean (my emphasis) “all monies and liabilities which from time to time … are due and owing or incurred from the Borrower [LCSC] to the Security Trustee [Downing] andthe Lenders.”

Thus, on the one hand, the Guarantee is expressed to be an all monies guarantee. This suggests it was intended to cover not only present but also future and increased liabilities of LCSC. On the other hand, however, the engagement in Clause 2 was with respect to all monies owed to Downing and the Lenders. At the time the Guarantee was executed, that was plainly a reference to the seven Original Lenders. The question is whether it was also intended to embrace obligations owed to any differently constituted group of “Lenders” which might emerge in the future, even if (as happened) it included some (but not all) of the original seven, plus an additional new one. Mr Watson says not, because the phrase “the Lenders” meant in context only the seven Original Lenders; and he says the correctness of that construction is emphasised by the opening words of Clause 2, which provide that the consideration for the Guarantee was the entry into of the Facility by Downing and “the Lenders”, meaning the original seven only and not the later group of six.

It seems to me this is an arguable point of construction, and moreover one where the Court is likely to be assisted by an understanding of the factual matrix as it stood when the Guarantee was entered into. The Guarantee was part of a wider package of financing and security arrangements, which were not in evidence before the Judge and which have not been properly explained. It may well be that that wider context will shed light on the question of construction I have identified. Certainly, I think the Court should be cautious about concluding that Ms Hitchens is right, and Mr Watson is wrong, without access to that wider story.

Incidentally, if the correct question at this stage is as to the scope of the Guarantee, then in my view it does not really matter what Mr Matthews-Williams knew or did not know at the time the Amendment and Restatement was entered into in August 2014 (Ms Hitchens’ point recorded at [73] above); that cannot affect that the question of the scope of the Guarantee, which involves looking at the factual matrix at the time when the Guarantee was entered into in March 2013.

That deals with the matter of the scope of the Guarantee.

For very similar reasons, I think it is also arguable that the effect of the Amendment and Restatement was to sweep away the original Facility, and to replace it with something new. It is true that one of the documents executed in August 2014 is the Amendment and Restatement Agreement, but I think Mr Watson is correct to submit that one must look at the substance not the form. Here again, the change in the configuration of the Lender group is arguably significant: it suggests a structure which in substance is new and different, rather than something which is merely a variation on the old.

Moreover, the change in the Lender group is only part of the picture. The changes effected in August 2014 were significant. Not only did they involve new, and separate, Facility Agreements being entered into by Dominions and LCSC, but also by that stage the commercial situation had changed materially. One of the original partners in the venture, Mr Bolton, had dropped out of the picture due to his retirement; the projects were delayed and further funding was needed; and the negotiations resulted in an agreement that LCSC would pay not only the substantial Renewal Fee but also the similarly substantial Redemption Fee. Among other changes, a new guarantee was given by Dominions, as to “the first £400,000 of the principal amount of the Barbican Loan (as amended).”

The upshot was an arrangement under which different overall sums were owed to a different group Lenders in respect of different liabilities, and with (it seems) modified security arrangements.

That being so, I think it at least arguable that after the entry into of the Amendment and Restatement, there was nothing left of the original Facility for the Guarantee to bite on. Indeed, it is more natural to think that the new arrangements were intended entirely to replace the old. In any event, I do not consider that that is a question which is properly capable of final determination on an application such as that before ICC Judge Burton. Again, it is a matter on which the Court is very likely to be assisted by a more detailed account of the commercial background as it stood in August 2014. At present the picture is sketchy and inconclusive.

To summarise, in my judgment ICC Judge Burton was again correct to be cautious on this point, and to regard it as a further reason why the Petition should be dismissed. I say that because in my view, it is arguable that the arrangements brought into effect by means of the Amendment and Restatement fell outside the scope of the Guarantee, but also had the effect of entirely replacing the original Facility, thus rendering the Guarantee otiose.

Sanguine’s estoppel argument was at the forefront of Ms Hitchens’ submissions. She challenged the Judge’s reliance on this point on the basis that (1) the Judge did not identify any clear promise or representation by Downing; (2) the Judge wrongly assumed it was arguable that Sanguine had changed its position but in fact it had not; and (3) put at its highest, Sanguine’s position was only that Downing would not call in the LSCS Facility and make a demand under the Guarantee without giving reasonable notice, and reasonable notice had been given.

The estoppel argument was very much a subsidiary aspect of the Judge’s reasoning. That is clear from the opening words of paragraph [23] of her Judgment: “Having decided that the debt is disputed on substantial grounds, [Sanguine’s] reliance upon estoppel might equally give rise to further grounds on which to dispute the petition debt …”. Nonetheless, to the extent she did so, I consider the Judge was justified in viewing the estoppel point as an independent basis for concluding that the Petition debt was disputed on substantial grounds:

Having reached the conclusions expressed earlier in her Judgment, the Judge did not feel it necessary for her to deal with the question of the alleged counterclaims arising in connection with the Hoole Hall/Doubletree Chester matter. In light of the conclusions already expressed above, I adopt the same approach. I was addressed

ICC Judge Burton was presented with a complex picture and had to conduct just the sort of evaluation contemplated by the Court of Appeal in Prescott v. Potamianos (see above at [61]). It is not for me to carry out that evaluation afresh, but only to try and assess whether there was some identifiable flaw in the Judge’s approach. I can detect no such flaw. On the contrary, in my view the Judge’s evaluation was entirely correct. In particular, she was correct given the obviously complex factual history to resist the temptation to short-cut a more detailed inquiry in favour of a summary determination. Her instinct was that the matters raised were better suited to resolution in Part 7 proceedings, and I agree. I therefore dismiss the appeal.