Bankruptcy statutory demands and an explanation of creditor security

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In Promontoria (Chestnut) Ltd v Bell & Anor [2019] EWHC 1581 (Ch), the High Court held that the test for whether a creditor is a secured creditor in the context of the bankruptcy legislation (including statutory demands) should be whether their security would benefit the general bankruptcy estate if it was surrendered.

What were the facts?

Mr and Mrs Bell were directors and shareholders of a company which had borrowed money from a bank. The Bells entered into a personal guarantee (with an indemnity if the guarantee was unenforceable) in respect of the company’s borrowing, up to a limit of £170,000. The loan facility was also secured over company property. In addition, the respondents executed third-party mortgages over properties they owned to secure the facility. However, those securities expressly negated any personal liability on the respondents’ part to pay to the bank any of the company’s liabilities. The company failed to repay the loan facility and the bank assigned its rights under the facility, guarantee and mortgages to the creditor, Promontoria (Chestnut) Limited (Promontoria).

Promontoria appointed receivers over the company’s property and the Bells’ properties. The receivers realised assets of the company and reduced the outstanding balance on the loan facility from approximately £600,000 to £185,000. Promontoria sent letters to Mr and Mrs Bell demanding £170,000 under the personal guarantee that they had provided. When they failed to pay, Promontoria served them with statutory demands pursuant to section 268(1) of the Insolvency Act 1986. However, the demands were set aside on the basis that Promontoria held some security over Mr and Mrs Bells’ properties in respect of the debt and, contrary to the rule 6.1(5) of the Insolvency Rules 1986, it had failed to specify the nature of that security and its value in the statutory demands.

Promontoria appealed the setting aside of the statutory demands. It submitted that the security it held over Mr and Mrs Bells’ properties by way of the third-party mortgages was in respect of the company’s indebtedness and did not secure the personal debt the respondents owed under the guarantee. It therefore was not necessary to include the third-party mortgages in the demand as the security did not secure the personal debt of Mr and Mrs Bell against whom the demand was served.

What did the court decide?

Promontoria’s appeal was dismissed. The judge held that the third-party charges provided by Mr and Mrs Bell for the indebtedness of the company to Promontoria were security in respect of the debt upon which the statutory demands were based, within the meaning of rule 6.1(5) of the Insolvency Rules 1986 interpreted in accordance with its underlying rationale and purpose. The judge went on to say that they were two different debts, one owed by the Bells under the guarantee and one owed by the company. As such the Bells had guaranteed both, and provided a third-party charge for, the company’s debt.

On the facts of the case, it was clear that for every pound of value of the secured property released from the Bells’ mortgage security, one pound of value would augment to the assets available for distribution in the bankrupt estate for the benefit of the general body of creditors. Consequently, it was a security, the existence of which affected the creditor’s right to participate in the bankruptcy of Mr and Mrs Bell.

WM Comment

The judgment did not consider the application of the Insolvency Rules (England and Wales) 2016 and so the same decision would not necessarily be reached if the case was brought today. Furthermore, the case is unlikely to have application in the context of statutory demands served on companies but it will be interesting to see if it is used, nonetheless, to try to expand the definition of secured creditors.