Rosling King LLP recently acted on behalf of Norwich and Peterborough Building Society (the “Society”) in connection with its successful opposition to a second appeal by its personal guarantor (the “Guarantor”) against a Bankruptcy Order made in response to the Society’s bankruptcy petition.

Background 

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”).  The Society’s borrower had failed to make the monthly instalments due in respect of his mortgage and 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 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.

The First Appeal

The Guarantor’s first 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. Mr Justice Briggs rejected the Guarantor’s argument that the Society’s Petition was not based upon a liquidated sum and held that the Guarantee gave rise to a liability in debt. Mr Justice Briggs commented that he believed that to force a creditor to obtain Judgment before presenting a bankruptcy petition in circumstances where the amount payable by a guarantor was readily quantifiable seemed artificial, albeit this had been the position in previous cases.

The Guarantor applied for permission to appeal against the Judgment of Mr Justice Briggs and permission was granted by Lord Justice Patten. The Borrower’s second appeal was heard by the Court of Appeal, consisting of Lord Justice Ward, Lord Justice Moses and Lord Justice Patten, on 28 and 29 September 2011.

The Second Appeal

The Guarantor sought to argue that a claim in damages under a personal guarantee cannot be a claim for a liquidated sum and therefore found a bankruptcy petition even if the amount of the alleged liability is readily quantifiable by reference to the principle debtor’s debt. It followed, he said, that the Society’s Petition should fail as the Guarantee only gave rise to a claim in damages. The Guarantor sought to rely upon the decision of Mr Justice Rimer (as he then was) in the case of Hope –v- Premierpace (Europe) Ltd [1999], the basis of which had been questioned by Mr Justice Briggs in the appeal below.

The Court of Appeal delved into the history of personal insolvency and the practice of the bankruptcy court and even referred to a decision from 1622 as part of a detailed analysis of what constitutes a ‘liquidated sum’ for the purposes of founding a bankruptcy petition. The Court of Appeal concluded that, even if the calculation of a claim for damages is straightforward and obvious, as it was in the Hope case, the unliquidated nature of the claim excludes it from being a debt upon which a bankruptcy petition can be based.

It followed that, in the case of a personal guarantee that provides that the guarantor would ‘see to it’ that the principle debtor would pay, even though the amount of the guarantor’s liability was readily quantifiable (i.e. the debt owed by the principle debtor) it did not constitute a debt for a liquidated sum and could not found a bankruptcy petition in the absence of a prior Judgment unless the amount payable was fixed by the guarantee itself. In his Judgment, Patten LJ concluded that the decision of Rimer J (as he then was) in Hope was correct, answering the questioned posed by Briggs J in the appeal below. The upshot of this was that the Petition filed by the Society would only be valid if it gave rise to a claim in debt and not merely a liability for the Guarantor to ‘see to it’ that his brother’s debt was paid.

The Court then considered the construction of the Guarantee in order to establish whether it gave rise to a claim in debt. Patten LJ held that key to the construction of the Guarantee was that the sums due under the Guarantee were payable on demand. He also decided that the Guarantor’s liability to pay was concurrent with his brother’s liability to pay under the mortgage. Consequently, the Court of Appeal held unanimously that the Guarantee gave rise to a claim in debt against the Guarantor and that the appeal should be dismissed.

Comment

The Judgment of the Court of Appeal in this case represents a detailed authority regarding the claims upon which a bankruptcy petition may be founded and will be a useful academic reference. If the wording of a guarantee, on its true construction, gives rise to a claim in damages, unless the amount payable can be determined by reference to the guarantee itself (i.e. without reference to a separate contract), a creditor may not file a bankruptcy petition against the guarantor unless it has first obtained Judgment.

If a guarantor has failed to pay, a lender must think carefully before filing a bankruptcy petition as this action could unravel if the guarantee does not give rise to a claim in debt. It would therefore be wise for lenders to review the wording of their standard form personal guarantees, which of course have been brought into play more frequently in the current economic environment, in order to ensure that they have every recovery option available to them on default.

For further information please contact Georgina Squire or the Partner with whom you usually deal.