Statutory demand cannot be used to enforce tenant’s guarantee

Out-Law Legal Update | 23 Jul 2019 | 10:30 am | 2 min. read

A landlord could not enforce a statutory demand on a tenant's guarantor in the same way as it could have on the tenant, the High Court in England has ruled.

  • A statutory demand based on a guarantee to make good losses was set aside
  • A guarantee to make good losses is not a liquidated sum
  • Davies v Revelan Estates (Wigston) Ltd [2019] EWHC 1766 (Ch)

The Court set aside a statutory demand which was based on a guarantee to "make good" any losses suffered by a landlord on the default of its tenant. A statutory demand can only be presented if the debt owed is ascertainable as a "liquidated sum" and the Court said that the term "make good" resembles an indemnity and so does not amount to a liquidated sum.

William Davies guaranteed the leasehold obligations of his company to its landlord, Revelan Estates Limited. The guarantee stated that if the tenant failed to meet its obligations under the lease that the guarantor "will make good to the landlord all loss, damage, costs and expenses arising out of such default". When the tenant company became insolvent, Revelan presented a statutory demand against Davies for around £15,000 in unpaid rent, service and insurance charges that were calculated by a mechanism found in the terms of the lease.

Given that a statutory demand can only be presented for a liquidated sum the court had to consider whether the amount demanded constituted a "liquidated sum" for the purposes of Rule 10.9(1)(g) of the Insolvency (England and Wales) Rules 2016. To be a liquidated sum, the debt must be a specific amount which has been fully and finally ascertained.

At the first hearing the court upheld the statutory demand on the basis that the amount demanded had been calculated by a mechanism present in the terms of the lease, and could therefore be considered to be a liquidated sum. The judge drew on the Court of Appeal judgment in Ex parte Ward (1882) 22 Ch D 132 which said that where the means of calculating the debt was included in the terms of the contract, the claim was for a liquidated sum as the contract provided the means of ascertaining the debt.

However, on appeal the High Court set aside the statutory demand. The appeal judge accepted that it was possible for clauses in an agreement to create liquidated obligations, where those clauses specify the express mechanism by which the amount owing is to be calculated. He suggested that with regards to the tenant's obligations the terms of the agreement were sufficient to establish a debt for a liquidated sum, owing to the various mechanisms for calculating the debt in the lease agreement.

But the judge drew a distinction between the obligations on the tenant company and obligations on the guarantor, ruling that while the tenant company was under an obligation to pay a liquidated sum, the guarantor was not bound by this obligation, but by his own covenant with the landlord under the guarantee.

The appeal judge ruled that on the face of the guarantor's covenant, the obligation to "make good any loss, damage, costs and expenses" is the language of an indemnity, which is only enforceable by way of an action for unliquidated damages, not by the payment of a liquidated debt or a statutory demand (Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1). The guarantor's promise to cover all loss and damages may mean that he would be liable to make good consequential losses which would not be an ascertainable amount. The judge ruled that even if the debt owed by the tenant company was considered to be a liquidated sum, the guarantee was not limited to that amount, and had the potential to involve costs outside the scope of that sum.

Following this case, debtors seeking to enforce a guarantee will need to closely review the terms of that guarantee to see whether they are entitled to present a statutory demand against the guarantor with a view to pursuing his bankruptcy.