The Honourable Mr Justice David Richards:
Introduction
- This is an appeal against an order of District Judge Robinson in the Scunthorpe County Court setting aside statutory demands served under section 268 of the Insolvency Act 1986. The appeal is brought with permission granted by the district judge.
- The statutory demands were served by TS & S Global Limited (TS & S) on five individuals (the guarantors) who were shareholders in Trak-2-U Limited (Trak) and who by an agreement in writing dated 21 November 2005 (the guarantee) guaranteed the liabilities of Trak under a supply contract with TS & S.
- The statutory demands were served on 22 December 2006 and 4 January 2007. The guarantors applied on 5 January 2007 to set aside the demands on grounds which effectively disputed any liability of Trak to TS & S under the supply contract. Of those grounds the guarantors now rely on only one, to which I will later refer. The skeleton argument of counsel for the guarantors, served the evening before the hearing before the district judge of their application to set aside the demands, raised for the first time a point arising under the guarantee. It was said, correctly, that there had been no demand under the guarantees served prior to service of the statutory demands. It was submitted that the liability under the guarantee was not immediately payable when the statutory demands were served, with the result that the demands could not be relied on for the purposes of establishing that the guarantors were unable to pay their debts under sections 267 and 268 of the Insolvency Act. This involved the submissions that (a) before the statutory demand could be served for the purposes of sections 267 and 268 the relevant debt had to be immediately payable, (b) under the guarantees a demand was required before the guarantee liabilities were immediately payable, (c) the statutory demand could not itself also be a demand under the guarantee and, therefore, (d) the statutory demands should be set aside under rule 6.5(4) of the Insolvency Rules 1986. The district judge accepted these submissions, expressly or by necessary implication. His short ex-tempore judgment was directed principally at the point that a statutory demand could not also be a demand under the guarantee.
- TS & S appeals against the order on the grounds, first, that the guarantors' liability under the guarantee was immediately payable before service of the statutory demand, without the need for any prior demand for payment. Although the guarantee requires the guarantors to pay on demand, it also provides that they are liable as primary obligors and TS & S relies on the decision of the Court of Appeal in MS Fashions Ltd v. Bank of Credit and Commerce International SA [1993] Ch 425 to establish that a demand is not therefore necessary to make the liability under this guarantee immediately payable. Alternatively, the statutory demands could serve the two purposes of being demands under the guarantee and demands for the purposes of sections 267 and 268. Alternatively, even if those submissions were wrong, the failure to serve a separate demand under the guarantee caused the guarantors no prejudice or injustice, and the district judge should have refused to set aside the statutory demand, applying the approach of the Court of Appeal in In re A Debtor (No 1 of 1987) [1989] 1 WLR 271.
- The guarantors resist the appeal, relying on the reason given by the district judge and rejecting each of the submissions summarised above. They also seek to uphold the order on one of the original grounds that no debt was due from Trak to TS & S. This was not dealt with by the district judge but it was not necessary for him to do so in view of his decision on the guarantee point.
Facts
- In 2004 TS & S was approached with a proposal that it should assemble and supply to Trak a vehicle and marine tracking device, based on a global positioning system, and associated remote control fobs. The devices and fobs would be manufactured by TS & S to a specification provided by a consultant engaged by Trak. The evidence indicates a concern on the part of Trak that, because the product was new, it would wish to be satisfied that it would operate to the anticipated standard. It also indicates a concern on the part of TS & S that the proposal would require it to buy substantial quantities of components for which it might not be paid if Trak, a new company, either failed or did not place orders for the devices and fobs in significant quantities.
- Following negotiations, TS & S submitted a quotation to Trak on 21 November 2005. Paragraph 2.1 stated:
"Tracking device to be supplied in batches as follows:
x 6
x 94
x 1,000 – to be called off in batches as requested by Trak-2-U
Minimum number of units per batch x 200.
All x 1,100 units to be called off within a 12 month period."
The supply of the remote fobs was linked to the supply of the tracking devices. Paragraph 2.1 continued:
"Please refer to time plan for further details as to the agreements for delivery dates of the above batches. The dates specified on the time plan are subject to the assumptions detailed on the plan."
The guarantors rely on this part of paragraph 2.1 in support of their submission that there is a genuine dispute as to whether any amount is due from Trak to TS & S and I will return to this point later. Unit costs are given on the basis of 1,100 tracking devices and 700 remote fobs.
- Expected shipping dates were given for the first and second batches of 6 devices and 94 devices (by 16 December 2005 and 6 March 2006) and for "an estimated batch of 1,000" (by 11 April 2006). These dates are stated to be subject to a number of assumptions, including that all software supplied by Trak performs as expected and that test process time does not exceed the allocated time. TS & S would be entitled to invoice Trak upon completion of each manufactured batch, payable within 30 days.
- Paragraph 3.3 of the quotation is as follows:
"3.3 Guarantee
Guarantee for material for 1,100 units was agreed on 21/11/2005. If finished product has been invoiced (which includes the material element) any outstanding amounts relating to material will be agreed on a pro rata basis.
For example:
x 500 units manufactured, invoiced and settled at £178.58 each.
If NO further units are manufactured, the outstanding material element (= 600/1100 x £130,000 = £70,909) will be due on 21/11/200 [sic], payable within 30 days."
- The guarantee referred to in paragraph 3.3 of the quotation was the guarantee relevant to this appeal. It is dated 21 November 2005 and made between the guarantors and TS & S. Clauses 1 and 2 provide as follows:
"1. Guarantee
In consideration of the Beneficiary agreeing to purchase components from their suppliers with a value up to a maximum of £130,000 (one hundred and thirty thousand pounds) ("the Facility") for manufacture of a product for trak 2 u limited (Company number 4206424) whose Registered Office is situated at 19 Leeds Road, Selby, North Yorkshire, YO8 4HX (the "Company") the guarantors, as primary obligors, hereby unconditionally and irrevocably guarantee to the Beneficiary, the due payment and discharge by the Company of such amount as is due and owing by the Company to the Beneficiary as at the first anniversary of the date hereof and which is attributable to the Facility (whether or not the Facility has been discharged prior to such date in whole or part by the Beneficiary), such payment to be made within 30 days of the first anniversary date hereof.
2. Demand
2.1 If the Company defaults in payment of the Facility in 1 above when due the guarantor shall pay to the Beneficiary on demand, without set off or other deduction, an amount equal to the amount so unpaid together with all reasonable costs and expenses incurred by the Beneficiary in implementing and enforcing the terms of this guarantee.
2.2 A demand shall be sufficiently served on the guarantor if made to it at its address set out above by letter, telex or facsimile and shall be effective on receipt."
- By a letter dated 1 December 2005 to TS & S, Trak wrote:
"I refer to your email requesting a Purchase Order for the trak 2 u units which TS & S Global Ltd are manufacturing for us during 2006 and confirm below that order with you on behalf of this Company.
Trak 2 u limited – Purchase Order
Referring to the TS & S Global Limited proposals and terms dated 21 November 2005, I confirm the order for the manufacture of 1,100 tracking devices and 700 remote fobs at a cost each of £178.58 and £22.66 respectively, excluding £16,500 set up costs, but including boxing and all services up to the point of despatch to the end user from your premises during 2006."
It is TS & S's case that by this letter Trak accepted the offer contained in the quotation and placed a firm order for 1,100 tracking devices and 700 remote fobs.
- TS & S purchased the components required for 1,100 tracking devices and 700 fobs. Trak drew down and TS & S supplied two batches totalling 26 tracking devices and 9 fobs, but did not draw down any more. Following attempts by TS & S between July and October 2006 to discover whether Trak would draw down any further tracking devices or fobs, Trak explained in a letter dated 6 October 2006 that it had encountered significant difficulties in its marketing of the products.
- On 28 November 2006 TS & S delivered to Trak an invoice for £122,249.56 (£104,042.16 plus VAT) in respect of the unused components. It provided a full stock list and copies of the supplier's invoices and on 5 December 2006 two of the guarantors visited TS & S's premises to inspect the components.
- Subject to the guarantors' argument that Trak had not authorised the purchase by TS & S of the unused components, payment for the unused components was due within 30 days after 21 November 2006 (paragraph 3.3. of the quotation). The liability of the guarantors arose, or could on demand arise, after 21 December 2006. On 21 December 2006 Mr Fithian-Franks, the managing director of Trak and one of the guarantors, emailed to TS & S:
"Along with my fellow shareholders I am aware of the date and the guarantee between us and TS & S Ltd. I was hoping to be in a position to let you know that our prospective manufacturer was willing to take up the components you have for our products…..Can I ask you to bear with us just a little longer so that we can resolve all outstanding matters between our companies amicably and with the least possible delay."
- The statutory demands were dated 21 December 2006. They were served on two guarantors on 22 December 2006 and on the others on 4 January 2007. The demands followed the form prescribed under the Insolvency Rules, stating that:
"The creditor claims that you owe the sum of £104,042.18, full particulars of which are set out on page 2, and that it is payable immediately and, to the extent of the sum demanded, is unsecured."
Was a demand under the guarantee necessary?
- If the submission for TS & S that no demand under the guarantee was needed to make the amounts due from the guarantors immediately payable is well-founded, the guarantors fail on the issues raised by them as regards the guarantee and statutory demand, leaving only the issue as to whether any debt was due from Trak to TS & S.
- The guarantors rely on the terms of clause 2 of the guarantee that "the guarantor shall pay to the beneficiary on demand" the amount unpaid by Trak, coupled with clause 2.2 providing for the means of service. TS & S relies on clause 1 which provides that the guarantors "as primary obligors" guarantee the due payment of the amount outstanding from Trak in respect of components.
- A series of authorities leading up to the decision of the Court of Appeal in Bradford Old Bank Ltd v Sutcliffe [1918] 2KB 833 established that a demand is unnecessary to make a present debt immediately payable, even if it is expressed to be payable on demand, unless it is a collateral debt. The position was stated by Chitty J in In re J. Brown's Estate [1893] 2 Ch 300 at 304-305:
"….it is plain that a distinction has been taken and maintained in law, the result of which is that where there is a present debt and a promise to pay on demand, the demand is not considered to be a condition precedent to the bringing of an action. But it is otherwise on a promise to pay a collateral sum on request, for then the request ought to be made before action brought."
- The effect of these principles in a case where the covenant by a guarantor is given expressly as principal debtor or primary obligor, arose for consideration in MS Fashions Ltd v BCCI. The case concerned a variety or transactions between BCCI and three separate companies and their directors or others as sureties. In each case the sureties had deposited sums with BCCI as security for the amounts due from the companies to BCCI and in each case some of the agreements with the sureties either described them as "principal debtor" or contained personal covenants by them as "principal debtor".
- It is helpful to refer to two of the transactions. As security for the borrowings of High Street Services Limited and two associated companies, Mr Ahmed signed a document headed "cash deposit security terms – third party" which entitled BCCI, at any time and without notice, to set off monies deposited by Mr Ahmed against amounts due from the companies. In the same document Mr Ahmed also agreed to guarantee to pay to BCCI upon written demand all liabilities of the companies to BCCI and further declared "as a separate and independent obligation hereunder" that the company's liabilities "shall be recoverable by you from me as principal debtor and/or by way of indemnity and shall be repaid by me on demand made in writing by you or on your behalf whether or not demand has been made on the [company]".
- As security for the borrowings of Impexbond Limited, Mr Amir signed a letter of charge by which he charged the credit balances on certain of his accounts with BCCI and agreed that "the liabilities hereunder shall be as that of principal debtor". In contrast to the arrangement involving Mr Ahmed, Mr Amir did not give an express personal covenant to be liable to BCCI but the letter was taken to have that effect in an amount not more than the amount of his deposits (see p.431 D-E).
- A principal issue was whether BCCI's liability on the sureties' deposits should be set off under rule 4.90 of the Insolvency Rules against their liabilities to BCCI as sureties. As the law then stood, there could be no set-off involving a contingent due debt to a company in liquidation unless and until the contingency occurred. BCCI argued that the sureties' liabilities were contingent on demands made by it, which it might well never make.
- The Court of Appeal, affirming the decision of Hoffman LJ at first instance, held that as the sureties had covenanted to pay as principal debtors, a demand was unnecessary and there should therefore be a set-off under rule 4.10.
- Dillon LJ dealt with the issue at pp 447-448. He recorded BCCI's acceptance that the liabilities of the companies to BCCI were at all times presently enforceable without any need for a demand before the issue of a writ, even if expressed to be repayable on demand. He referred to the line of authorities leading up to Bradford Old Bank v Sutcliffe. Having referred to the terms of the arrangements with Mr Amir and Mr Ahmed, he continued:
"The effect of that must be to dispense with any need for a demand in the case of Mr Amir since he has made the companies' debts to BCCI his own debts and thus immediately payable out of the deposit without demand. In the case of Mr Ahmed there must be immediate liability even though the word 'demand' was used, because he accepted liability as a principal debtor and his deposit can be appropriated without further notice."
- Mr Rose on behalf of the guarantors in this case submitted that MS Fashions Ltd v BCCI was distinguishable because the issue was whether a liability had arisen for the purposes of set-off under rule 4.90, not whether a demand was necessary before the liability became immediately payable.
- In my judgement, the decision in MS Fashions v BCCI cannot be distinguished on this basis. It is clear, I think, from the judgment of Dillon LJ that because Mr Amir and Mr Ahmed had covenanted to pay as principal debtors, their position was equated with that of a primary debtor, who is under an immediate obligation to pay without the need for a demand even though the contract provides for payment on demand. Dillon LJ was not saying that the equation existed for the purposes of set-off only. That would have been inadequate to achieve a set-off; the sureties' obligation to make payment to BCCI would have remained contingent on a demand by BCCI which might never be made and such an obligation to the insolvent company could not be the subject of a set-off, as the law then stood: see the comments of Lord Hoffmann in In re Bank of Credit and Commerce International SA (No 8) [1998] AC 214 at 224-225. That is no longer the case, following the substitution of a new rule 4.90 in 2005.
- A second submission by Mr Rose was that, while clause 1 of the guarantee created an accrued as opposed to a contingent liability, clause 2 made a demand a necessary pre-condition to the obligation to pay. Until a demand was made, the debt was not therefore immediately payable and could not be the subject of a statutory demand. The difficulty with this submission is that it is the proposition rejected in the line of authorities culminating in Old Bradford Bank v Sutcliffe. I have some sympathy with commercial parties to a guarantee in the present form who could reasonably read clauses 1 and 2 as having precisely the effect for which Mr Rose contends. That result could perhaps be achieved by clear terms; all the authorities stress that the nature, extent and conditions of a surety's liability are a question of construction of the contract. But, in the light of the authorities, I do not consider that the words "on demand" in clause 2.1 and the terms of clause 2.2 are sufficient for this purpose. They are not substantially different from the terms of Mr Ahmed's contract in MS Fashions v BCCI.
- Mr Rose relied on observations in the judgments of Peter Gibson LJ and Tuckey LJ in Stimpson v Smith [1999] Ch 340. The issue in that case was whether a guarantor who had made a payment discharging the guarantee without a formal demand but following negotiations with the creditor, and in circumstances where otherwise the creditor would probably have made a demand, could claim contribution in equity from the co-guarantor. The court rejected the argument that contribution was not available where no demand had been made and the guarantee debt had not therefore become payable. It would appear that the guarantee did not contain a provision to the effect that the guarantors were liable as primary obligors. Tuckey LJ said at p.354:
"The point at issue is a short one. Does a surety have a right to contribution from a co-surety where the creditor has not made a formal demand for payment under the guarantee?
In order to answer this question I think it is important to distinguish between the legal rights of the creditor and surety which arise under the contract of guarantee and the equitable rights which exist between sureties in the absence of any contract between them. Where the guarantee requires a formal demand to be made upon the surety this is not a condition precedent to his liability under the contract. It simply marks the time from which that liability can be enforced. It is a provision in the contract for the surety's benefit which he may waive. If he does so and pays an ascertained liability of the debtor which he has guaranteed, I can see no reason in logic or law why his waiver should affect his separate right to contribution from his co-surety." (emphasis added)
Mr Rose relied on the italicised sentences in the above passage, but the reference there to "liability" is to the contingent liability of the guarantor under the guarantee. It was a sufficient common liability to bring the equitable principle of contribution into play, if one guarantor waived the requirement for notice to be given by the creditor. It is not a reference to the liability which arises where a guarantor agrees as primary obligor to guarantee payment of a specific debt by a specific date.
- I therefore accept the submissions of Mr Robins for TS & S that the guarantors' liability under the guarantee was immediately payable by them, without the need for a demand, before service of the statutory demands. It follows that the further submissions made as to whether the statutory demand could be relied on, if a demand under the guarantee was required, do not arise. They were, however, fully argued and I shall state my conclusions on them.
Could the statutory demand stand also as a demand under the guarantee?
- Mr Robins' first alternative submission was that a statutory demand could also constitute a demand under the guarantee, so that the debt became immediately payable on service of the demand. He pointed out that in section 267 of the Insolvency Act 1986 the words "immediately payable" referred to the time at which the bankruptcy petition is presented. While he did not suggest that a demand under section 268(1)(a), which deals with demands for immediately payable debts, could be served in respect of a debt which was not payable until a later date, the statutory demand will trigger the payment obligation for a debt payable on demand and there would be no doubt that the debt was immediately payable by the date of the petition.
- Mr Robins was able to point to instances which demonstrated that the service of a separate demand under the guarantee would serve no real purpose or be of any benefit to the guarantors. For example, a demand under the guarantee could be sent by fax at 9 o'clock in the morning and a statutory demand served in the afternoon. It would have made no significant difference to the course of events in this case.
- I can see considerable force in these submissions on the facts of this case, but in my view section 268 of the Insolvency Act, the Insolvency Rules and the terms of the prescribed form proceed on the basis that the debt in question is already immediately payable by the time that the statutory demand is served. The purpose of a statutory demand is to establish the presumption that the debtor is unable to pay his debts and thereby entitle the creditor to present a bankruptcy petition. It is not intended as a means of fulfilling contractual pre-conditions to making a debt immediately payable.
Rule 6.5(4)(d)
- It does not necessarily follow that the statutory demand should be set aside. Mr Robins' second alternative submission was that, even if he had failed on his previous submissions, the facts of this case made it inappropriate to set aside the demand. Rule 6.5(4) provides that the court may grant the application to set aside the demand on one of four grounds. The first three are the existence of a cross claim or set-off in excess of the demand, a dispute of the liability on substantial grounds, and security held for the debt by the creditor. None of these is applicable on this point. The last ground is if "the court is satisfied, on other grounds, that the demand ought to be set aside". This was considered by the Court of Appeal in In re A Debtor (No 1 of 1987) [1989] 1 WLR 271. A statutory demand was made using the wrong form, for an amount which was greater than actually due and supported by calculations which were confusing and wrong. The Court of Appeal, affirming the decisions below, refused to set aside the demand. Nicholls LJ stated that, as the statutory effect of an unsatisfied demand was to create a presumption of insolvency and entitle the creditor to present a bankruptcy petition, the correct approach to the exercise of the residual discretion under rule 6.5(4)(d) was as follows (p.276):
"….the circumstances which normally will be required before a court can be satisfied that the demand 'ought' to be set aside are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court's intervention is called for to prevent that injustice."
- At page 279, Nicholls LJ expanded further on this approach:
"The court will exercise its discretion on whether or not to set aside a statutory demand having regard to all the circumstances. That must require the court to have regard to all the circumstances as they are at the time of the hearing before the court. There may be cases where the terms of the statutory demand are so confusing or misleading that, having regard to all the circumstances, justice requires that the demand should not be allowed to stand. There will be other cases where, despite such defects in the contents of the statutory demand, those defects have not prejudiced and will not prejudice the debtor in any way, and to set aside the demand in such a case would serve no useful purpose. For example, a debtor may be wholly unable to pay a debt which is immediately payable, either out of his own resources or with financial assistance from others. In such a case the only practical consequence of setting aside a statutory demand would be that the creditor would promptly serve a revised statutory demand, which also and inevitably would not be complied with. In such a case the need for a further statutory demand would serve only to increase costs. Such a course would not be in the interests of anyone."
In the case before the court, Nicholls LJ found that the errors in the demand had not resulted in any prejudice to the debtor. There was nothing to suggest that if it had been correct the debtor would have paid or secured the debt.
- Those observations are applicable to the present case. If the statutory demand had been preceded by a demand under the guarantee, there can be no suggestion that the guarantor would have paid or secured the debt or behaved in any way differently from their actual reaction. They would still have refused to pay, on the grounds originally given to them. There is no injustice to them which requires to be cured by setting aside the demand.
- There is this difference from the facts of In re A Debtor. While the contents of the demand were correct in this case, it was served prematurely, in the absence of an earlier demand under the guarantee. In that sense, it was a demand which ought not to have been served. But the consequence is not that it is void as a statutory demand but that the court has the discretion to set it aside under rule 6.5(4). Applying the approach stated by Nicholls LJ, I would have held that the facts of this case made it inappropriate to set aside the demand. There was no consideration by the district judge of this discretion in his judgment, so that on this appeal it would have arisen for exercise by this court.
Dispute as to debt due from Trak to TS & S
- The guarantors seek to uphold the district judge's order on one of the original grounds for their applications to set aside the statutory demands. This was not in the event considered by the district judge, but the parties were content that I should deal with it, rather than remitting it for consideration by the court below.
- The guarantors submit that the existence of any debt from Trak to TS & S, and hence of any liability of the guarantors, is disputed on substantial grounds. Accordingly, the statutory demands should in any event have been set aside under rule 6.5(4)(b) of the Insolvency Rules. The submission is that under the contract TS & S were only to purchase components when authorised to do so by Trak. This was to allow field testing on initial items and confirmation that the units worked. TS & S were authorised to purchase components for only a small number of units, said to be 6 in November 2005 and 40 in June 2006. Reliance is placed on a time plan prepared on 8 September 2005 which envisaged initial orders for 10 and then 90 units, to be followed in each case by evaluations and tests, with orders for volume production and for the necessary components being placed some two or three months later. It was accepted that the actual figures in this time plan were later varied, and the varied time plan has not been produced in evidence, but it is said that it clearly shows the intentions of the parties. Reliance was placed on those parts of TS & S's quotation dated 21 November 2005 which refer to a time plan for further details as to delivery dates and to the assumptions listed in paragraph 2.4 regarding the delivery dates in paragraph 2.3.
- In my judgment, there is no substance in these submissions. First, the purchase order placed by Trak in its letter dated 1 December 2005 was a firm order for 1,100 tracking devices and 700 fobs. Secondly, TS & S's quotation was for 1,100 tracking devices and associated fobs and was coupled with the guarantee in respect of the components to be ordered by TS & S for those units. The effect of the guarantee was spelt out in paragraph 3.3 of the quotation. It was only delivery dates which were expressed to be subject to adjustment. Thirdly, a reading of all the pre-contract correspondence in evidence does not substantiate the alleged intention of the parties, which could not in any case survive the terms of the quotation and Trak's order.
- Accordingly, the order of the district judge cannot be upheld on this alternative ground. I therefore allow the appeal.
