The decision in Dowling v Promontoria (Arrow) Ltd  Lexis Citation 292,  All ER (D) 82 (Sep), which resulted from an application to set aside a statutory demand, demonstrates that assignees of debt need to exercise care if they are to enforce their claim by the summary bankruptcy route.
The decision highlights practical points that assignees should bear in mind, as well as the impact of the purview doctrine in relation to guarantees.
The Bankruptcy High Court set aside a statutory demand, which had been served on the applicant guarantor, where the respondent, having had its title put in issue, had failed properly to prove its status as assignee in respect of the debt forming the subject matter of the statutory demand. The court further held that the applicant had raised a strongly arguable case that a second facility, which the respondent relied on in respect of the statutory demand, was not within the purview of the first guarantee and, further, that any rights which the respondent might have had to enforce the applicant’s obligations under the first guarantee appeared to be statute barred.
What are the practical implications of this case?
Creditors who are the assignee of a debt should ensure that:
- they are able to establish a chain of title, entitling them to pursue the debt
- the dates on which the applicable limitation period commences and expires are noted, and that action is taken by the assignee before the latter date to prevent being statute barred.
Further, where a lender grants further facilities to a borrower and the borrower’s pre-existing liabilities are guaranteed, to ensure that either the further facilities are covered by that existing guarantee, or that a fresh guarantee is obtained.
What was the background to this case?
The applicant, Mr Dowling, was an Irish property developer. He had granted an unlimited personal guarantee on 6 December 2006 (the first guarantee) in favour of Anglo Irish Bank Corporation Plc (the bank) for the debts of a company called Danum Developments Limited (Danum). A facility had been extended by the bank to Danum by a facility letter dated 31 October 2006 (the first facility letter). Danum had used the facility to purchase a development site in Ireland for about €5m. Almost incredibly, when receivers came to sell it in 2017, the site realised just €172,000.
A subsequent facility letter was entered into between the bank and Danum dated 19 November 2007 (the second facility letter). It was not expressed to be an amendment of the first facility letter and made no reference to it. A document was appended to the second facility letter that was headed ‘Guarantee’ (the second guarantee). It referred to the second facility letter (which it defined as ‘the Agreement’) and recorded that the signatories (including Mr Dowling) were ‘guaranteeing the performance by the principal [ie Danum] of its obligations under the Agreement to the Bank’. The liabilities under the second facility letter fell due for repayment on 31 March 2008 unless demanded before then.
The respondent, Promontoria, was a subsidiary of an American fund and claimed to have taken an indirect assignment of the bank’s rights against Mr Dowling, via the Irish state residuary body National Asset Loan Management Limited (NALM) that had taken over the bank’s book on an emergency basis when the bank failed. Promontoria made demand on Danum on 11 April 2016 in the sum of €6,301,667.64. Demand was made on Mr Dowling, as guarantor, for €6,307,507.95 on 3 June 2016. A statutory demand was served on him dated 7 September 2016. The statutory demand particularised the principal debt as arising under the second facility letter, and Mr Dowling’s liability as guarantor arising under the first guarantee.
Mr Dowling applied to set the statutory demand aside.
What were the legal issues that the court had to decide?
Mr Dowling raised the following arguments:
- firstly, that there was no full suite of documents evidencing Promontoria’s status as assignee and accordingly it could not prove its title to the debt (the first issue)
- secondly, a technical argument was raised that the second facility letter was not within the ‘purview’ of the first guarantee and, accordingly, Promontoria had not shown that Mr Dowling was a guarantor (the second issue)
- thirdly, that the bank’s cause of action against Danum had accrued on 31 March 2008 and had thus become statute barred before demand was made on 11 April 2016 (the third issue)
- fourthly, it was contended that Promontoria’s position was not saved by any concurrent obligation created by the first guarantee; in fact the obligation was an indemnity, which was a damages liability and thus not a liquidated sum for the purposes of the bankruptcy regime (the fourth issue).
What did the court decide, and why?
Mr Dowling succeeded on all the points he had raised.
The first issue
On the first issue, Registrar Barber agreed that Promontoria had not proved its status as assignee, despite Mr Dowling having put the point in issue within a few days of having been served with the statutory demand. Certain key documents, including the loan sale agreement between NALM and Promontoria’s predecessor in title, and the deed of novation by which Promontoria claimed to have acquired its rights, were not in evidence. The first guarantee had expressly provided that it was to be construed in accordance with the laws of Ireland. Mr Dowling cited the Irish case of English v Promontoria (Aran) Limited  IEHC 662 that had involved a sister company of Promontoria, and which showed that the Irish courts were reluctant to allow assignees to enforce debts without fully evidencing their title to do so. This conclusion, of itself, meant that the statutory demand had to be set aside.
The second issue
As to the second issue, Mr Dowling relied on the doctrine of purview, which says that, while a guarantor is not discharged by any variation of the principal contract to which he consents, he remains only liable for the contract as varied where it remains within the ‘general purview’ of the original guarantee. Where the changes are such that the principal contract can no longer be regarded as the same contract (or, in other words, where a new contract governs the principal debtor’s liability), a fresh guarantee must be obtained.
Promontoria emphasised the breadth of wording contained in the first guarantee, which appeared to be drafted to catch as much as possible. Mr Dowling contended that the general purview of the first guarantee was clear from its recitals, which specifically referred to the first facility letter. Furthermore, the second facility letter did not amend the first facility letter, but was clearly an entirely new facility. Moreover, the existence of the second guarantee appeared to indicate that the bank had itself considered that a fresh guarantee was necessary when the second facility letter was entered into. Promontoria had not, however, taken an assignment (even on its own case) of the first facility letter or the second guarantee.
The third issue
Turning to the third issue, Registrar Barber was satisfied that the cause of action against Danum had accrued when it failed to repay on the due date on 31 March 2008. There was no evidence that there had been anything to stop limitation expiring six years later in 2014. Yet demand was not made until 2016. Promontoria sought to contend that the fact that the first guarantee stated that Mr Dowling’s obligation was to ‘pay on demand’ meant that limitation only ran from the date of demand on Mr Dowling, which had been 3 June 2016. Registrar Barber rejected this on the basis of the line of cases leading up to TS & S Global v Fithian-Franks  1 BCLC 277, which provided in essence that, in most cases, there is no need to make demand under a guarantee, even if a demand is referred to.
The fourth issue
In relation to the fourth issue, Mr Dowling contended that Promontoria’s position was not saved by any concurrent obligation created by the first guarantee; in fact the obligation was an indemnity, which was a damages liability and thus not a liquidated sum for the purposes of the bankruptcy regime. It was common ground that the first guarantee created two kinds of liability. It was also common ground that the first of those liabilities was a ‘conditional payment obligation’, as that term was used by the Court of Appeal in McGuinness v Norwich and Peterborough Building Society  2 All ER (Comm) 265, at page 270. For anything to be due under that liability, there would first have to be a principal debt due from Danum. For the reasons dealt with above, there was a strongly arguable case that the principal indebtedness was statute barred.
There was disagreement about the second liability. Mr Dowling contended that it was an indemnity, which sounded in damages (again, as explained in the McGuinness case), rather than debt, and was accordingly not a ‘liquidated sum’ as required by section 267(2) of the Insolvency Act 1986 and accordingly not a petitionable debt. Promontoria contended that the obligation Mr Dowling had characterised as an indemnity was, on a proper construction of the first guarantee, in fact a concurrent liability on the part of Mr Dowling for Danum’s borrowing. On that basis, limitation did not start to run on Mr Dowling’s concurrent liability until demand had been made on him on 3 June 2016.
Registrar Barber agreed with Mr Dowling on the point of construction of the first guarantee—the obligation was an indemnity not a concurrent liability. This conclusion was derived from the use of the phrase ‘on a full indemnity basis’. Mr Dowling submitted, and Registrar Barber accepted, that the use of the word ‘indemnity’ implied a loss; if there is no loss, then there is nothing in respect of which the lender can be indemnified. The concept of ‘indemnifying’ was antithetical to a concurrent liabilities.
To what extent is the judgment helpful in clarifying the law in this area?
The case provides a lucid explanation of the often misunderstood purview doctrine and explains how it can become significant where (as is often the case) there have been repeated renewals of facilities but no new guarantee.
But the real significance of this case is that it provides a clear warning to assignees of the hazards of trying to pursue an assigned debt by means of the summary bankruptcy process, without thinking things through properly. While it is possible to succeed summarily, it is crucially important to make sure that the paperwork is in order and that both the chain of title is evidenced and that the paperwork setting out the liabilities hangs together coherently. Assignees are inevitably at a disadvantage in enforcing old bank debts, because it is difficult to get hold of information when the bank has stopped trading. In those cases where witnesses to the relevant events, such as relationship managers, are required, this disadvantage often becomes acute because the staff have long since moved on and are themselves aggrieved and in no mood to assist the assignee; not infrequently they have sympathy for the debtors. In this case, the assignee made things even more difficult for itself than they ordinarily would be. It does not seem to have occurred to whoever prepared the assignment documentation that anything other than the final facility letter applicable to each connection (in this case, the second facility letter) needed to be assigned. Moreover, the limitation point seems to have been entirely overlooked at every stage.
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This is an abridged version on that first published on LexisPSL Restructuring and Insolvency