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Restructuring & Insolvency analysis: Ashfords LLP, examines a High Court judge’s dismissal of an appeal against a deputy registrar’s refusal to set aside a statutory demand made on the appellant, which was based on a personal guarantee he had given the respondent.
Wagner v White  EWHC 2882 (Ch),  All ER (D) 16 (Nov)
What are the practical implications of this case?
The case is a useful authority for statutory demands founded on personal guarantees.
The standard of proof for a set-aside application is essentially the same as for a summary judgment—there must be a substantial dispute of the debt in question, the essence of which must stand a real prospect of success at trial. This threshold can sometimes put creditors off pursuing demands which do not have a court judgment to support them. Many opt instead for conventional proceedings first, which does not involve the same threshold test but is significantly more time-consuming and can be more expensive to pursue. A common tactic for debtors in receipt of statutory demands is to make a set-aside application that ‘throws the kitchen sink’ at creditors in the hope of persuading the court that a dispute exists when in fact it does not.
The appellant took many legal and evidential points but ultimately was unsuccessful before both the deputy registrar and on appeal to a High Court judge. It is heartening to see the court engage thoroughly with the issues at hand, rather than simply conclude that a dispute exists on the number of issues and volume of evidence raised alone.
The case will also be helpful in considering a director’s duty to creditors when a company is on the verge of insolvency. While the judge did not make a direct finding on this point, the facts of the case and overall outcome support for the growing list of authorities that a director’s duty in such circumstances extends to creditors above all else.
What was the background?
In around 2012, the appellant incorporated a company which developed a ‘fintech’ mobile app. The company generated significant hype—it had offices all over the world, had an exciting joint venture agreement to launch the app in China on the horizon and had received pre-revenue valuations of over $1bn. The appellant himself was even feted as a shining example of British entrepreneurial spirit by then-Prime Minister, David Cameron.
However, by 2015 the company had serious financial issues. Among other debts, it owed approximately $200m to an American institutional fund manager. In search of urgent bridging finance, the appellant approached the respondent, a highly successful technology entrepreneur. Excited by its potential, the respondent and his contacts loaned a total of $6m to the company, part of which was supported by personal guarantees from the appellant. The respondent was also briefly appointed as a director of the company.
After his appointment, it became clear that the company’s financial malaise was irredeemable. By early 2016, it was under serious creditor pressure—the Chinese joint venture had collapsed and further investment was not forthcoming. The company entered administration in February 2016 and after some weeks of trading, administrators sold some, but by no means all, of its assets to a new entity founded by the respondent and backed by the institutional fund manager.
Shortly after the company’s administration, the lenders served statutory demands against the appellant under their personal guarantees for the monies loaned to the company. The appellant applied to have the demands set aside on the grounds that there was a substantial dispute over the debts claimed.
At first instance, he raised several grounds of dispute. Among other allegations, he maintained that he had been induced to enter into the personal guarantees because of misrepresentations made by the lenders that they would invest a minimum of $10m in the company and that he had only agreed to the personal guarantees on that basis. He also maintained that these promises amounted to collateral contracts which had been breached and, as a result, the personal guarantees were unenforceable.
The appellant also claimed that the company's demise had been brought about by a conspiracy between the fund manager, the respondent and the other lenders, so that they could benefit by subsequently purchasing the company's assets out of administration. Such conspiring, he claimed, was a breach of the duties owed to the company.
The deputy registrar heard the applications at first instance and dismissed all of the appellant’s main assertions as ‘fanciful’, with no reasonable prospect of success at trial.
The appellant appealed against that decision. The misrepresentation aspect of his claim was dropped, with the appellant arguing only that the deputy registrar had failed to properly consider his conspiracy and breach of duty claims. On appeal, the appellant ran the argument that, but for the apparently misfeasant interventions by the respondent and other lenders, the fund manager would have opted for a consensual restructuring rather than an insolvency process.
What did the court decide?
After a two-day hearing, Nugee J dismissed the appeal.
The decision was straightforward, succinct and largely based on the facts. Nugee J held that the fund manager was only prepared to consider a consensual restructuring on the condition that significant third-party investment would be made. Without such investment, an insolvency process was inevitable. Nugee J held that the facts demonstrated that such investment was not forthcoming and, as such, there was simply no prospect of the appellant’s claim succeeding at trial. As a result, the appellant’s allegations were irrelevant and did not need to be considered further.
The appellant’s application for permission to appeal against the decision at the Court of Appeal has been refused.
Interviewed by Robert Matthews.
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