Is a guarantee liability a liquidated sum?

Is a creditor entitled to bring bankruptcy proceedings in respect of a guarantee and indemnity? 

In this case , the question the court asked was whether a guarantee liability, is a liability for a liquidated sum within the meaning of section 267 (2) (b) of the Insolvency Act 1986 or only a liability to pay unliquidated damages. 

In accordance with 267(2) of the Insolvency Act 1986, a bankruptcy petition must be founded on a liquidated sum.

So was the guarantee liability a liquidated sum?  If it was not then the creditor would need first to obtain a judgment for the payment of a specific sum and then commence bankruptcy proceedings.  This would be the case even if the guarantor’s liability was identical to the amount of the principal’s debtor’s unpaid debt.

The court held, having considered the construction of the guarantee, that it included a debt obligation by reason of the principal debtor provision and therefore the creditor was entitled to bring bankruptcy proceedings. 

By comparison, in respect of “a see to it” obligation where the guarantor’s liability is to see that another person does something, the creditor’s remedy against the guarantor lies in damages for a breach of contract. 

The court accepted that there is a valid distinction between claims on the one hand where the sum needs to be quantified and an account taken and those, on the other, where a specific sum can be identified. Although not in issue, the court here expressed doubt whether distinctions based on different causes of action satisfactorily addressed  the purpose behind section 267 (2). 

In this case, this was not a “see to it” guarantee and so included a liquidated debt but, in any event as the Judge noted there was likely to have been other “see to it” guarantees where bankruptcy has been granted without the need to first obtain judgment.

This is a useful decision for lenders as it confirms that where there is a principal debtor obligation that this amounts to a liquidated debt sufficient to bring bankruptcy proceedings.  It is also interesting as it may enable more bankruptcy proceedings to be issued if the claim is in damages but can be quantified.  Previously this may have been regarded as not suitable for bankruptcy. It will be interesting to see how this issue develops.

McGuiness v Norwich and Peterborough Building Society  [2010] EWHC 2989