A bankruptcy order against a guarantor was set aside on the basis that the creditor had not proved that the guarantor had carried out a business or trade in England and Wales within the three years prior to presentation of the bankruptcy petition. As such, the bankruptcy petition was not brought in accordance with section 265(1)(c)(i) of the Insolvency Act 1986 (the “Act”).

The Facts

Mr Masters entered into a contract to purchase an aircraft and the contract was subsequently novated to Coldstream S.a.r.l (“Coldstream”), a company owned legally and beneficially by Mr Masters. Coldstream entered into a loan agreement with Barclays Bank Plc (the “Loan Agreement”).

Pursuant to the Loan Agreement, Coldstream borrowed 80% of the purchase price of the aircraft. Part of the security provided to Barclays Bank Plc (“Barclays”) was a personal guarantee by Mr Masters of all financial and other obligations entered into by Coldstream (the “Guarantee”). The Loan Agreement stated that Mr Masters’ principal residence was in Monte Carlo. Mr Masters apparently signed the Guarantee in Miami, having had the terms explained to him by a US Attorney.

The Guarantee was an unconditional guarantee of all of Coldstream’s obligations pursuant to the Loan Agreement and also declared that Mr Masters would be liable as if he were a principal and independent debtor. The Guarantee declared that Mr Masters was resident in England and, by a separate clause, he promised to maintain his residency in England.

Coldstream defaulted under the Loan Agreement and when they did not pay, Barclays called upon the Guarantee. Barclays obtained default judgment against Mr Masters in the sum of $16,945,705 plus costs on 11 May 2011 and Barclays served a statutory demand upon Mr Masters by substituted service in Leeds.

On 16 May 2012, Barclays presented a bankruptcy petition against Mr Masters in the Leeds County Court founded on the default judgment debt (the “Petition”). The Petition was presented to the Court in accordance with section 265(1)(c)(i) of the Act in that Mr Masters had carried on business in England and Wales within the last three years ending on the day on which the petition was presented and, as such, the Court had the jurisdiction to deal with the Petition.

Barclays therefore had the burden of establishing that Mr Masters had carried on business in England and Wales sometime after 16 May 2009. District Judge Jordan at first instance held that Barclays had discharged its evidentiary duty by establishing that Mr Masters had carried on business in England and Wales by operating a chartered plane between 16 May 2009 and 16 May 2012. His Honour found in favour of Barclays, granting a bankruptcy order against Mr Masters.

Mr Masters appealed the decision on the basis that the District Judge had erred because there was not sufficient evidence to confirm that he had carried out business in England and Wales for any of the three years prior to the presentation of the Petition.

The Appeal

The Loan Agreement and Guarantee both contained an English choice of law clause (no argument was raised in relation to the clauses regarding residence). Mr Justice Norris of the Chancery Division said that whilst this clause could tell one how particular obligations are to be ascertained and enforced, it does not tell one where the business is conducted. Instead, this is a matter of fact. In this case the evidence was overwhelmingly of business activity outside England. The court said that Barclays had fallen short of establishing that Mr Masters had independently and personally been conducting business in England after the critical date of 16 May 2009 and the bankruptcy order was set aside.

Points to Note

This case highlights the importance of selecting a suitable guarantor whose circumstances will allow easy enforceability of their guarantee, should the need arise.

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