HMRC has a Statutory Demand against a guarantor upheld despite the guarantee prohibiting HMRC from issuing Bankruptcy Proceedings

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Have you been asked to provide a personal guarantee to secure the debts of your business in the event the company defaults on payments? We look at a recent case which highlights the importance of ensuring you understand the contractual relationship you are entering into and the implications for you.

The recent case of Pearse v Revenue and Customs Commissioners [2018] EWHC 3422 (Ch) saw the court look at the underlying contract behind the judgment debt when considering a guarantors application to set aside a Statutory Demand.

In this case, Follett Stock LLP, a firm of solicitors owed HMRC in the region of £1.2m in tax.  The firm was unable to make payment in full and requested HMRC enter a time to pay arrangement (TTPA).  Agreement was reached that the debt would be paid by monthly instalments of £25,000.00 over a 24 month period.  The TTPA was granted on the basis that the two partners of the firm provided a personal guarantee which they duly gave. The guarantee was limited to £600,000.00 and was referred to as the “Part Debt” in the guarantee.  One of the partners was Martin John Pearse.

Follett Stock LLP honoured only one instalment of £25,000.00 before the company entered liquidation.  HMRC sought to rely on the personal guarantees provided and issued proceedings against Pearse to recover the Part Debt.  HMRC obtained Judgment in default against Pearce who unsuccessfully sought to set the Judgment aside.  Pearce responded by submitting a proposal for an Individual Voluntary Arrangement (IVA) but the proposal was rejected by HMRC.

HMRC proceeded to issue a Statutory Demand against Pearce who responded with an application to set aside the Statutory Demand on the basis the underlying contract contained the following clause:-

(5) “(1) Upon any default by Follett Stock LLP under the Primary Obligations HMRC will at its option immediately call in the security under this Guarantee. Failure to settle the secondary obligations under this Guarantee in respect of the Part Debt (or part thereof) will result in enforcement action being taken against the Guarantors, subject to the maximum liability of the Part Debt (£600,000) which shall become payable on demand.

(2) In consideration for the giving of this Guarantee HMRC agrees not to pursue the bankruptcy of the guarantors as a remedy for enforcement of the Part Debt or of the indemnity is provided for in sub-paragraphs (3) and (4) below. Such agreement is strictly without prejudice to HMRC’s other rights and remedies (legal or otherwise) outside the terms of the Guarantee, including for the avoidance of doubt any enforcement remedies (other than bankruptcy) in respect of the Part Debt or the indemnities in sub- paragraphs (3) and (4) below”

Pearse was unsuccessful in setting aside the Statutory Demand at the first hearing so he appealed to the High Court.  The High Court agreed to look behind the Judgment debt at the underlying agreement.

The court agreed with Pearse that the guarantee did indeed prohibit HMRC from commencing Bankruptcy Proceedings for the Part Debt under the guarantee.  However, HMRC had obtained a Judgment and they were two difference debts.

Pearse challenged this on the basis that the clause in the guarantee was included as he would be unable to act as a lawyer if a bankruptcy order was obtained against him which would result in him losing his livelihood.  The Judge disagreed with Pearse and found the guarantee to be clear in its meaning.  The Judge noted that both parties were legally advised and the clause in the guarantee could have been extended to include prohibiting enforcement if a Judgment was obtained but it did not.

Secondly, the court looked at the separate liability of Pearse for the costs and interest.  The costs were below the bankruptcy threshold, however the interest was not and therefore HMRC were correct in arguing these form a separate basis on which they could issue a statutory demand and they are not prohibited on commencing bankruptcy proceedings for those liabilities.

Thirdly, the court considered Pearse’s argument that a term be implied to extend the clause to prevent HMRC from pursing the judgment debt by issuing Bankruptcy proceedings. The Judge did not agree there was any basis for implying such a term finding “the contract works perfectly well as it is”.

Personal Guarantees are common in business and step in where a company defaults on repayments. We would always recommend that you seek independent legal advice to ensure you are fully understand what you are signing and to obtain advice on the terms included and the implications. Please contact Penny Daisley at ped@debenhamsottaway.co.uk or 01727 837161 if you have any questions or would like to discuss further how we can assist you.