The principle, first outlined in Octagon Assets Limited v Remblance [2009] EWCA Civ 581 can be simply stated. A tenant, who had fallen into rent arrears, brought an action against the landlord for breach of various covenants. The landlord served a statutory demand on the tenant’s guarantor for the rent arrears.

The guarantor pointed to the unfairness of the situation. The landlord could not have served a statutory demand for the rent arrears against the tenant. The tenant would have been able to rely on the cross-claim as a ground to set aside the demand (under IR r. 6.4(5)(a)). The guarantor, however, had no such cross claim and therefore appeared to be unable to set aside the statutory demand.

The Court of Appeal (reversing the judgment of Mann J) held that as the tenant’s obligations and the guarantor’s obligations were “co-extensive”, justice required that the guarantor be in an equivalent position to the tenant. Dyson LJ held:

“It was unjust to allow Octagon [the landlord] to proceed against Mr Remblance [the guarantor] by the insolvency route if it could not proceed against JBR [the tenant] by that route.

The doctrine has no application to grounds for setting aside under IR r. 6.4(5)(c) or (d) as:

• A creditor which has several remedies can choose which to enforce, at what time, in which order and in what way, being limited only by the proposition that it cannot recover more than is due to it on the debt with interest and costs by way of its several recovery procedures;

• Where a security (or partial security) exists over the debt BUT the security given to the creditor is over the assets of a different person, then the existence of that security does not constitute any reason why the particular creditor should not proceed against this other debtor, who has given no security over his assets, for an undoubted debt by way of a personal claim or by way of insolvency proceedings.

White v Davenham Trust Ltd [2011] EWCA Civ 747.

This was another tripartite relationship of creditor, principal debtor and guarantor. The guarantor was served with a statutory demand in relation to the debt owed by the principal debtor. The creditor had not proceeded against the principal debtor as the latter had given complete security for the debt. The ground under IR r. 6.4(5)(c) would have permitted the debtor to set aside any statutory demand served, unless the creditor gave up his security (which in this case it did not wish to do). The guarantor attempted to rely on the principle of co-extensive liability and the ground under IR r. 6.4(5)(c). As the creditor could not validly proceed against the debtor it was argued, in reliance on Octagon Assets v Remblance, that it should not be permitted to proceed against the guarantor.

This was unanimously rejected by the Court of Appeal. Giving the leading judgment, Lloyd LJ first summarised the policy considerations where secured creditors were concerned:

“The prohibition on a secured creditor presenting a petition is subject to two exceptions, under s.269. The first is if the creditor states that, if a bankruptcy order is made, he is willing to give up his security for the benefit of all creditors. In that case, therefore, the creditor is secured but if the bankruptcy process follows he will be treated as unsecured and the asset over which the security exists will form part of the bankruptcy estate available for distribution as between all the creditors. The second case is where the petition is expressed not to be made for the secured part of the debt and the estimated value of the security is stated. In that case there are deemed to be two separate debts, one secured (to the amount of the value of the security) and the other unsecured (for the balance) and the bankruptcy petition is only for the unsecured balance. By virtue of s.383 of the 1986 Act the only security which is relevant for this purpose is security over an asset or assets of the particular debtor in question. Lying behind these arrangements is the fact that bankruptcy proceedings are not intended as a means for a single creditor to enforce his debt against the debtor but rather as a method of collective realisation of the assets of a debtor who cannot pay his debts, to be distributed for the benefit of all creditors with claims on those assets. A creditor who is fully secured over assets of that debtor does not need to take bankruptcy proceedings, and should not do so, unless he is willing to give up the security, because the asset over which the security exists will not be part of the estate divisible for the benefit of the creditors generally. That is why a secured creditor cannot present a bankruptcy petition under s.267(2)(b) unless either he is willing to give up the security or his security is not adequate to cover the whole debt, in which case he ranks with the other unsecured creditors but only so far as the shortfall is concerned.”

([2011] EWCA Civ 747 at [8]-[9])

Lloyd LJ then explained how the ground under IR 6.4(5)(c) was, as a consequence of these policy considerations, different from those under IR 6.4(5)(a) and (b), which took it outside the scope of the principle outlined in Octagon Assets v Remblance:

“It is clear and common ground that a creditor which has several remedies can choose which to enforce, at what time, in which order and in what way, being limited only by the proposition that it cannot recover more than is due to it on the debt with interest and costs by way of its several recovery procedures: see China and South Sea Bank v. Tan [1990] AC 536 at 545.

……Thus it is not open to a guarantor to argue that the creditor should pursue the principal debtor first or should realise security given by the principal debtor first. Mr Arden did not argue that Mr White would have any defence to civil proceedings for the undisputed amount of the debt, on this basis or any other. In my judgment the co-extensiveness principle which was the basis of the decision in Remblance, and which applies by reference to each of rules 6.5(4)(a) and (b), does not apply to rule 6.5(4)(c) because the purpose of the latter provision is different.

As against a given debtor, if a creditor has security over that debtor’s assets which is more than sufficient, there is no reason to allow the creditor to pursue bankruptcy proceedings because the existence of the security means that the creditor has no interest in that debtor’s estate. He would not be able to prove for his debt, and there is no reason for him to be able to invoke the collective realisation of assets which is the point of insolvency proceedings, unless he is willing to give up his security. By virtue of s.267 of the 1986 Act he is not even entitled to present a bankruptcy petition. It follows that there is every reason why he should not be entitled to take the preliminary step of serving a statutory demand.

If, however, the security given to the creditor is over the assets of a different person, then the existence of that security does not constitute any reason why the particular creditor should not proceed against this other debtor, who has given no security over his assets, for an undoubted debt by way of a personal claim or by way of insolvency proceedings. There is no bar to the creditor presenting a bankruptcy petition in relation to such a debtor and there is therefore no reason why the creditor should not serve a statutory demand as a preliminary to the presentation of a petition if the demand is not satisfied….For those reasons in my judgment the existence of third party security, which on a statutory demand against the debtor who gave the security would bring into application rule 6.5(4)(c), is by itself entirely irrelevant under rule 6.5(4)(d) to a statutory demand served on a separate debtor even if liable as guarantor for the same debt but who has given no security himself.”

Thus, the Court of Appeal distinguished Octagon Assets v Remblance. The ‘co- extensiveness principle’ could only be relied upon when the party with whom the liability was co-extensive would have been able to rely upon the grounds in IR r. 6.4(5)(a) or (b) to set aside a statutory demand. The position of secured creditor was different; the broader insolvency regime expressly gave such creditors a choice as to how they recovered the debt, which affected the justice of the situation, and hence the exercise of the court’s discretion.

Trevor Berriman