Litigation and debt recovery
- Winding up petition
- Electronic disclosure
- Oral variation
- Guarantee or performance bond?
- Guarantees as a debt
Procedure
Correct compliance with the procedural rules for any debt recovery action is essential to a successful
action.
Winding up petition
HMRC v Green Eye Events [2010] EWHC 1403 (Ch)
In this case HMRC served a petition on the defendant, but on the wrong address, which meant that the
petition did not come to the attention of the company until the day before it was advertised and the
company’s bank account frozen leaving the company with no opportunity to pay the petition sum. This
meant that the rule that a hostile petitioner must wait 7 days after service before advertising the
petition and the advertisement must be at least 7 days before the petition is to be heard was not met
This interval is to give the company either time to settle the debt or seek relief to restrain the
advertisement where the debt is disputed. Given the serious consequences of the failure to serve the
petition correctly and, the judge’s view that the company would have paid the debt if it had had time to
do so, the judge dismissed the petition.
Financiers should note that whilst it was recognised that HMRC was not directly responsible for the
service on the wrong address, as the correct address was on the documents, they were held to be
responsible for the act of the process agent and were penalised for failing to check that service had
been properly effected by the dismissal of the petition.
Part 36 offers
Gibbon v Manchester City Council; LG Blower Specialist Bricklayer Ltd v Reeve [2010] EWCA Civ 726
The Gibbon case is a useful reminder of the rules relating to offers to settle. The Court of Appeal
confirmed that the common law rules of contract relating to offer and acceptance did not apply to Part
36 offers. A Part 36 offer remains open may be accepted at any time unless the offeror has withdrawn it
by serving notice of withdrawal on the offeree. Parties therefore have an opportunity to settle matters
by reviewing all previous existing offers in the light of changing circumstances.
In this case, the defendant was able to accept the claimant’s original offer after the claimant had rejected
a subsequent offer made by the defendant. The Court of Appeal said that there was no reason why one
party could make more than one offer that could be open concurrently and leave it to the other party
to decide which to choose. Financiers may need to consider whether they should expressly withdraw
any particular offer, if they no longer consider it advantageous to them to keep open, when making a
subsequent offer to settle.
Electronic disclosure
October 2010 saw the implementation of a new Practice Direction (PD31B) relating to disclosure of
electronic documents. This has significantly increased the extent of the obligations to disclose
documents which only exist electronically and highlights the wide range of methods of electronically
storing information. The language of the PD31B is mandatory. To avoid penalties for taking an
unreasonable approach or being ordered to do more, more careful preparation of disclosure is now
required. The new rules provide:
- There is an agenda that parties must discuss before the first case management conference or, in complex cases, even before proceedings commence.
- Parties need to exchange information about their electronically stored information, on what media and in what format it is stored, how it is organised, volumes and the likelihood of duplication.
- Assessments on how far to extend the ‘reasonable search’ for electronic documents and which data storage locations are ‘reasonably accessible’ must be taken.
- Opposing parties are encouraged to reach agreement on reasonable measures to get to key information in a case proportionately.
Financiers pursuing creditors may have particular problems complying with disclosure requirements in
respect of information they do not control. However, they should ensure that their own electronic
documents are managed efficiently and effectively to minimise the cost of any disclosure exercise.
Guarantees
As challenging demands made to guarantors by financiers become more common, recent cases highlight
the continued need for clarity and care when drafting guarantees.
Oral variation
Investec Bank (UK) Ltd v Zulman [2010] EWCA Civ 536
In this case, the Court of Appeal was asked to consider whether there had been an effective oral
agreement to amend the terms of a personal guarantee. The guarantor had indicated his agreement to a
proposed amendment to his guarantee by telephone but an amended guarantee was never signed.
When a demand was subsequently made the guarantor argued that he was not liable because the
condition to the guarantee being payable contained in the original guarantee, had not occurred.
The Court of Appeal concluded, considering the terms of the draft amendment to the guarantee, that it
was not the intention of the parties that the amendment to the guarantee could take effect upon the
oral agreement of the guarantor. Accordingly the personal guarantor was not bound by the amended
guarantee as he had not signed it. This decision highlights once again the vulnerability of guarantees and
the need for financiers to take particular care when drafting and documenting amendments to
guarantees.
Guarantee or performance bond?
A recurring argument when seeking to claim against a guarantor is whether the guarantee is a primary
or secondary obligation.
Carey Value Added, S.L. v Grupo Urvasco, S.A. [2010] EWHC 1905 (Comm)
In this case, the beneficiary of the guarantee was seeking to recover payment on demand and a
certificate without first having to litigate defences under the primary documentation. The court
confirmed that there is no standard wording which would make a deed a demand bond; it is not a
matter of the label to be attached, but a question of the substance of the obligations. The mere
incorporation of a principal debtor clause will not usually suffice in itself to determine the nature of the
contract, nor will the use of words such as "on demand" in themselves have the effect of creating a
demand bond.
This case re-establishes the presumption that a market standard guarantee in a commercial transaction
is a secondary obligation and financiers will need to follow the contractual conditions for successfully
making a demand.
Guarantees as a debt
McGuinness v Norwich and Peterborough Building Society [2010] EWHC 2989 (Ch)
A guarantee that requires a guarantor to discharge its obligations as a principal obligor, rather than
simply as a surety, creates a debt in favour of the creditor with the benefit of the guarantee, rather than
the right to sue the guarantor for damages.
This decision endorses the standard practice of including an indemnity provision in the guarantee that
makes the guarantor liable as a principal debtor. If drafted in this way a creditor owed a debt by a
guarantor can pursue that debt by way of statutory demand and insolvency proceedings, without having
to first obtain a judgment against the guarantor.
Set off
It is important that financiers can rebut the argument that a debt being claimed is reduced by a claim in
set off.
Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667
The Court of Appeal has confirmed that equitable set off will apply where:
“cross claims…[are] so closely connected with [the plaintiff’s] demands that it would be manifestly unjust to
allow him to enforce payment without taking into account the cross claim”.
The Court emphasised that the test was based on legal principle rather than judicial discretion. The
legal principle involves the application of a test which has two elements:
- the requirement for a “close connection” between the claim and the counterclaim (the “formal” element) and
- secondly, the requirement whereby it needs to be unjust to enforce the claim without taking into account the counterclaim (the “functional” element).
The formal and the functional elements cannot be divorced from one another. Where the claim and
counterclaim both arise from the same contract, it is likely that both elements of the test will be
satisfied, although this may not always be the case. Where the claim and counterclaim arise from
different contracts, satisfying the test may prove more difficult. In any situation, it will be necessary to
apply this test to the facts in order to determine whether a financier’s claim may be successfully
reduced by a debtor’s cross claim against a customer.