Rosling King recently acted on behalf of Norwich and Peterborough Building Society (“the Society”) in connection with its successful opposition to an appeal by a personal guarantor (“the Guarantor”) against a Bankruptcy Order made in response to the Society’s Bankruptcy Petition.
In September 2008, the Guarantor entered into a personal guarantee in respect of his brother’s liability under a mortgage with the Society (“the Guarantee”). As the Society’s borrower had failed to make the monthly instalments due in respect of his mortgage, the Society sought to enforce the Guarantee and sent a demand for payment to the Guarantor. He failed to comply with the demand for payment and the Society subsequently filed a Bankruptcy Petition against the Guarantor in the High Court to recover the debt owed under the Guarantee.
Following a contested Hearing of the Bankruptcy Petition, the Deputy Registrar made a Bankruptcy Order and Guarantor was declared bankrupt. However, the Guarantor appealed against the Bankruptcy Order on the basis that the Guarantee had created a liability to the Society in damages and not a liability in debt. This, the Guarantor sought to argue, meant that the Society was prevented from issuing a Bankruptcy Petition as a Petition must be based upon a debt and cannot be based upon a claim for damages.
The Guarantor’s appeal was heard by Mr Justice Briggs on 16 November 2010 and Judgment was handed down on 23 November 2010. The Society successfully opposed the Guarantor’s appeal.
The Guarantor argued that the wording of the Guarantee had created an obligation that he should “see to it” that his brother paid the instalments due in respect of his mortgage with the Society. This form of guarantee had previously been considered in the case of Moschi –v- Lep Air Services Limited  AC331. In that case, the guarantee provided that the guarantor, Mr Moschi, would see to it that a company would comply with its obligations to make monthly payments. The Court decided that this sort of guarantee gave rise to a claim in damages.
In this case, the Guarantor argued that the Society’s claim was for damages on the basis that the Guarantee was the “see to it” type described in the case of Moschi and that it did not provide that he would be required to pay his brother’s debt on his behalf. He argued that the Bankruptcy Registrar had no jurisdiction to make a Bankruptcy Order and that the Society’s Petition should be dismissed and the Order should be set aside.
The Society contended that the Guarantee contained both a “see to it” provision (that the Guarantor would see to it that his brother paid his mortgage) and a provision that the Guarantor had made his brother’s debts his own, which gave rise to a claim for debt. Consequently, the Society argued that the Petition had been based upon a debt; that it had been properly filed and that the Bankruptcy Order should stand.
On examining the wording and construction of the Guarantee, Mr Justice Briggs decided that it gave rise to a claim in debt on the basis that Clause 4.2 of the Guarantee, on its proper construction, meant that the Guarantor had adopted his brother’s debt and had guaranteed that he would pay rather than seeing to it that this brother would pay the instalments as and when they fell due under the mortgage. Consequently, the Guarantor’s appeal was dismissed and the original Bankruptcy Order of the Deputy Registrar was affirmed.
Mr Justice Briggs commented during the Hearing that he was surprised that the challenge mounted by the Guarantor in this case had not been more widely used by those in his position. However, he also stated that he believed that to force a creditor in the Society’s position to obtain a Judgment before being able to enforce a personal guarantee by way of bankruptcy proceedings would be an absurd position, notwithstanding that this had effectively been held to be true in previous cases.
In the current economic climate, both residential and commercial borrowers are failing to repay their loans and if interest rates rise from their current artificial level, the position is likely to deteriorate further. As the value of lenders’ security has fallen across the board, they have been left with fewer options if they wish to avoid a shortfall. The enforcement of personal guarantees offered to support a borrower’s covenant is therefore becoming more widespread and the use of bankruptcy proceedings can be a fast and direct method of enforcement if a guarantor refuses to pay.
This case illustrates that the wording of a personal guarantee can be critical in terms of the avenues of recovery available to a lender. It serves as a reminder that lenders should review their standard documents to ensure that they are not prevented from pursuing a personal guarantor by way of bankruptcy proceedings or that once they have obtained a Bankruptcy Order; it is not open to challenge by an evasive guarantor.
For further information please contact Georgina Squire or the Partner with whom you usually deal.