In Remblance v Octagon Assets Ltd, a tenant was in arrears under its lease. The tenant was in dispute with its landlord about alleged breaches of the landlord's covenant for quiet enjoyment. The tenant's obligations under the lease were however guaranteed by a director of the tenant company. The landlord served a statutory demand on the guarantor for payment of £11,611, representing the unpaid sums due under the lease.
The guarantor applied to the court to have the statutory demand set aside. Under Rule 6.5(4) of the Insolvency Rules 1986, the court has a discretion to set aside a statutory demand on specified grounds:
- the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt specified in the statutory demand; or
- the debt is disputed on grounds which appear to the court to be substantial; or
- it appears that the creditor holds some security in respect of the debt claimed by the demand, and either Rule 6.1(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or
- the court is satisfied, on other grounds, that the demand ought to be set aside.
Although under the lease the tenant covenanted to pay the rent "without deduction or set off", it was common ground that the tenant would be likely to succeed in an application to set aside a statutory demand served on it, under ground (a) above. This was because it would be unjust to the tenant to require it to face the consequences of bankruptcy pending the determination of its counterclaim against the landlord. However, the guarantor did not have a counterclaim against the landlord for the purposes of ground (a). The guarantor argued that the statutory demand served on it should, nonetheless, be set aside pursuant to the court's general discretion under ground (d).
The guarantor's obligation under the lease was not an obligation himself to pay the rent and discharge the tenant's obligations under the lease. It was an obligation to see to it that the tenant discharged its obligations and to make good to the landlord all losses sustained through the default of the tenant. The guarantor's liability therefore depended on a default by the tenant. Their obligations were co-extensive.
On that basis the court thought that if a statutory demand served on the tenant could be set aside under ground (a), then a statutory demand served on the guarantor should be set aside under ground (d). It was unjust to require the guarantor to face the consequences of bankruptcy in circumstances in which it would be unjust to require the tenant to face the consequences of bankruptcy. The fact that the guarantor could afford to pay the debt should count for no more in relation to ground (d) than should the fact that the tenant could afford to pay in relation to sub-paragraph (a). Although ability to pay may be a relevant factor in certain circumstances, the court found it difficult to conceive of circumstances where ability to pay could be the sole or principal reason for refusing to set aside a statutory demand.
The court therefore, by a majority of two to one, ordered the statutory demand to be set aside.
Things to consider
The decision in this case may be disappointing for landlords who are looking to enforce guarantors' obligations when a tenant defaults. Where the tenant has no grounds on which to resist payment and simply cannot afford to pay the rent, the case should not present a barrier to enforcement against a guarantor. However, where the tenant has a legitimate counterclaim, then a well-advised guarantor may simply refuse to pay under a statutory demand, safe in the knowledge that it will benefit from the same protection as the tenant.
Much however will turn on the wording of the particular guarantee in question. Many guarantees provide for the liability of the guarantor to be as "primary obligor" or "principal debtor". It may be that the presence of these words may be sufficient to prevent the principle of "co-extensiveness" from applying.