England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE

(JACOB J)

Royal Courts of Justice

Strand

London WC2

Wednesday 18th March 1998

B e f o r e:

LORD JUSTICE KENNEDY

LORD JUSTICE WARD

and

LORD JUSTICE CHADWICK

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JOHNSON & Anr

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DAVIES & ANR

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(Handed-down judgment of Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR C DARTON (Instructed by Messrs Judge Sykes Frixou, London WC2) appeared on behalf of the Appellant

MR C WILSON (Instructed by Messrs Aldrich Crowther & Wood, Brighton BN1) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

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Crown Copyright

LORD JUSTICE CHADWICK: These two appeals, from the order of Mr Justice Jacob made on 5 December 1996, raise the same question: whether or not the appellants were released from their obligation under a covenant to indemnify the respondents against claims arising under a lease by reason of the terms of an individual voluntary arrangement made under part VIII of the Insolvency Act 1986 by a co-obligee who was liable, jointly with the appellants, under the same covenant.

The facts may be stated shortly:

(1) At all material times until July 1989 or thereabouts Robert Arthur Johnson and his wife Anne Johnson (the plaintiffs in this action and the respondents to these appeals) were the owners of 98 out of the 100 issued shares of £1 each in PPM Plastics & Photographs Ltd (“the company”). The company was lessee of premises known as Cambridge Works, Cambridge Grove, Hove. Those premises were held under a lease dated 4 January 1984 for a term of twelve years from 29 September 1982. Mr and Mrs Johnson had joined in that lease as sureties for the obligations of the tenant.

(2) By an agreement dated 19 June 1989 Mr and Mrs Johnson agreed to sell their shares in the company to Nicholas Cole (the second defendant), his former wife Susan Cole (now Susan Davies, the first defendant) and Christopher Hopkins. Mr Cole, Mrs Davies and Mr Hopkins are, together, described in the agreement as “the Purchasers”. Clause 3(d)(ii) of the agreement contains a covenant by the Purchasers to keep Mr and Mrs Johnson indemnified against all claims liabilities and costs arising under the lease of 4 January 1984.

(3) At or about the end of 1992 the company was placed in receivership. Mr and Mrs Johnson were called on to pay, and did pay, (i) the quarterly instalments of rent due under the lease in respect of the remaining twenty one months of the term, (ii) the cost of insuring the demised premises (payable as additional rent under the terms of the lease) and (iii) a sum in respect of dilapidations payable upon termination of the lease in September 1984.

(4) On 8 February 1994 an interim order under section 252 of the Insolvency Act 1986 was made in the Brighton County Court on the application of Mr Hopkins. The nominee’s report on the debtor’s proposals was submitted to the court, pursuant to section 256 of the Act, on 18 March 1994. A meeting of creditors was summoned for 12 April 1994. The decision of that meeting, approving the proposals, was reported to the court pursuant to section 259 of the Act on 21 March 1994. Mr and Mrs Johnson were given notice of the creditors’ meeting. They were entitled to vote at that meeting; and they exercised that right by voting in favour of the voluntary arrangement.

(5) Under the voluntary arrangement approved on 12 April 1994 Mr Hopkins was to pay to the Supervisor 75% of his net income (in excess of reasonable living expenses but subject to a minimum monthly payment of £300) for a period of 5 years from the date of approval; and to transfer all “windfall” assets accruing to him during that period. Paragraph 4 of the voluntary arrangement was in these terms:

When all monies to be made available under these proposals have been realised and distributed to creditors in accordance with the terms herein, I will be released from any further liability to them in relating to claims in respect of which they were entitled to participate in this voluntary arrangement.

Paragraph 19 was in terms identical to paragraph 4. Paragraph 24 contained the usual provision for the issue of a certificate of default in respect of the matters referred to in section 276 (1) of the Insolvency Act 1986; and required the Supervisor, following the issue of a default certificate, to consult creditors as to the presentation of a bankruptcy petition.

The claim in this action is for repayment of the sums paid by Mr and Mrs Johnson under the covenant for indemnity, after giving credit for the net income received by them from a sub-letting or licence of the demised premises during part of the remainder of the leasehold term. The action was commenced by writ issued in the Queen’s Bench Division, Brighton District Registry on 6 September 1994. In or about September 1995 the plaintiffs applied for the summary determination of two points of law, pursuant to order 14A of the Rules of the Supreme Court 1965, and for summary judgment in respect of the whole of their claim. Those applications were heard by Deputy District Judge Radcliffe. In the course of a long and careful reserved judgment delivered on 14 May 1996 he held (inter alia) that the defendants had been released from liability under their covenant for indemnity. The plaintiffs appealed from that decision. The appeal was heard by Mr Justice Jacob, sitting in the Chancery Division, on 29 November 1996. Mr Justice Jacob set aside the order of 14 May 1996 made in the Brighton District Registry and ordered that the defendants pay to the plaintiffs the sum of £19,663.90 (together with interest) on terms that the plaintiffs should give credit for all sums received by them under the terms of Mr Hopkin’s voluntary arrangement. The defendants appeal to this Court with the leave of the Judge.

The Judge, following an earlier decision of his own in RA Securities v Mercantile Credit [1995] 3 All ER 581, took the view that the effect of an individual voluntary arrangement - or, at the least, the effect of this individual voluntary arrangement - was not such as to release solvent co-debtors under the rule of law that the release of one of two or more joint debtors has the effect of releasing the other or others. The short question on this appeal is whether the Judge was correct in that view.

An authoritative statement of the general rule of law as to the release of co-debtors - as it was understood before the recent decision of this Court in Watts v Lord Aldington (15 December 1993: unreported) - is found in the judgment of His Honour Judge Paul Baker QC, sitting as a Judge of the High Court, in Deanplan Limited v Mahmoud [1993] Ch 151. After a review of the nineteenth century authorities from Watters v Smith (1831) 2 B & Ad 889 and Nicholson v Revill (1836) 4 A & E 675 to In re E.W.A (a debtor) [1901] KB 642 His Honour Judge Baker QC expressed his conclusions in the following terms, at page 170 B-C:

First, a release of one joint contractor releases the others. There is only one obligation. A release may be under seal or by accord and satisfaction. A covenant not to sue is not a release. It is merely a contract between the creditor and the joint debtor which does not affect the liabilities of the other joint contractors or their rights of contribution and indemnity against their co-contractors. It is a question of the construction of the contract between the creditor and joint debtor in the light of the surrounding circumstances whether the contract amounts to a release or merely a contract not to sue.

His Honour Judge Baker QC went on to consider ( ibid, page 170 D-F ) whether the same principles applied to a contract between the creditor and one of joint and several debtors. Different considerations arise in such a case because the existence of several indebtedness negates a conclusion based on the premise that there is only one obligation. Nevertheless, for the reasons which he explained, His Honour Judge Baker QC reached the conclusion that if one joint and several covenantor is released by accord and satisfaction, all are released. He said this:

Some have seen this as illogical, and so it would be if the only reason for the rule that the release one of joint contractor is that there is only one obligation. Professor Glanville Williams sees the reason for the extended rule to have been an early uncertainty as to the nature of a joint and several obligation: see Joint Obligations , p.135, para.63. Two other reasons can be adduced. First, where the obligations are non-cumulative, i.e. the obligation of each is to perform in so far as it has not been performed by the other party, the acceptance of some other performance in lieu of the promised performance relieves the others. The covenantee cannot have both the promised performance and some other performance which he agrees to accept. Secondly, unless the co-covenantors were released following an accord and satisfaction, they could claim a right of contribution or indemnity. Thus, by suing the co -contractor, the creditor commits a breach of the contract with the released covenantor, for such an action will inevitably lead to the very claim from which the release has been purchased by accord and satisfaction.

The second of the two additional reasons identified in that passage has particular force in a case, such as the present, where the release (if any) is part of an arrangement between the debtor and a number of his creditors. In such a case the effect of allowing one creditor to sue the debtor’s co-covenantor (who will not usually be party to that arrangement) is that enforcement by the co-covenantor against the debtor of the co-covenantor’s right of contribution or indemnity (which will not itself be subject to the arrangement) may prejudice the other creditors who have entered into the arrangement on the basis that that debt will stand in the same position as the debts which are owed to them.

The extent to which the statement of the general rule in Deanplan Ltd v Mahmoud ( supra) continues to represent the law, at least in this court, was considered by the Court of Appeal in Watts v Lord Aldington ( supra, CA Transcript 1578 of 1993). The question in that appeal arose out of the terms of settlement of proceedings for libel brought by Lord Aldington against Mr Nigel Watts and Count Nikolai Tolstoy. Lord Aldington had obtained judgment for substantial damages against both defendants following a trial. Bankruptcy orders were made against both Mr Watts and Count Tolstoy. By early 1991 Lord Aldington was faced with appeals or applications to appeal in four sets of proceedings - described by Lord Justice Neill on pages 3 to 6 of the Court of Appeal Transcript. There were negotiations for settlement between Mr Watts and Lord Aldington which led to a letter agreement dated 20 March 1991. It was a term of that letter that third parties should pay £10,000 to Lord Aldington on behalf of Mr Watts. Paragraph 6 of the letter was in these terms:

6. That Lord Aldington undertakes to accept the said sum in full and final settlement of the judgment and orders referred to above and any liability howsoever arising before today’s date which could involve any payment by you directly or indirectly to Lord Aldington.

Following that settlement a consent order was made annulling the bankruptcy order which had been made against Mr Watts.

Lord Aldington had sought to prove in the bankruptcy of Count Tolstoy. The trustee in that bankruptcy claimed contribution against Mr Watts under section 1 of the Civil Liability (Contribution) Act 1978. Mr Watts sought a declaration against Lord Aldington that the settlement of 20 March 1991 constituted a release of all rights which Lord Aldington had against himself and Count Tolstoy; and Count Tolstoy sought an order directing his trustee in bankruptcy to reject Lord Aldington’s proof in respect of the original judgment debt.

Those applications came before Mr Justice Morritt. The issue before him, so far as material, was whether paragraph 6 of the settlement letter of 20 March 1991 constituted a release of the judgment debt so relieving Count Tolstoy, as well as Mr Watts, from any further liability to pay that debt and so extinguishing the right of contribution which Count Tolstoy, through his trustee in bankruptcy, would otherwise have had against Mr Watts or whether the settlement should be construed merely as an agreement by Lord Aldington not to sue Mr Watts. The Judge held that the agreement of 20 March 1991 was an agreement not to sue on or enforce the original judgment debt, not an agreement for the discharge of the liability under it.

The Court of Appeal found difficulty in adopting the Judge’s view that, as a matter of construction, the letter of 20 March 1991 evidenced an agreement not to sue rather than a release. Two members of the court (Lord Justice Steyn and Lord Justice Simon Brown) held that paragraph 6 of that letter did contain a release of Lord Aldington’s claim against Mr Watts. Lord Justice Neill did not find it necessary to decide that point. But the view that the agreement contained a release of Lord Aldington’s claim against Mr Watts did not lead to the conclusion that there was a release Lord Aldington’s claim against Count Tolstoy. On the contrary, each member of the court held that the appeal should be dismissed. Lord Justice Neill rejected the traditional dichotomy between release and agreement not to sue. He said this (transcript, at page 17F-G):

I have come to the conclusion, however, that in trying to fit the agreement into a particular category one may lose sight of the true enquiry: what is the meaning and effect of the agreement having regard to the surrounding circumstances and taking into account not only the express words used in the document but also any terms which can properly be implied.

He was satisfied (transcript, at page 29F-G) that, on the facts in that case:

. . . the agreement of 20 March 1991 was plainly subject to an implied term that Lord Aldington’s rights against Count Tolstoy would be reserved. I consider that any other result would offend common sense.

Lord Justice Steyn, who had expressed the view that although the rule that the release of one of two joint and several tortfeasors was absurd and required re-examination nevertheless the court was bound to follow it, approached the matter in the same way. He said this (transcript, page 39B-C):

"In my judgment the right question is the following: is Lord Aldington reserving the right under his agreement [with Mr Watts] to sue Count Tolstoy? In my judgment the objective setting of the contract convincingly shows that the answer of both parties to that question would have been “Yes, of course”.

Lord Justice Simon Brown also rejected what he described as the “technicality and intrinsic artificiality” of the conventional approach to the rule as to the release of co-debtors - a rule which he described as a “juridical relic”. He defined the central question before the court as being “whether it is proper here to imply a reservation by Lord Aldington of his rights against Count Tolstoy”. That question admitted of only one answer (transcript, page 44B):

On the facts known to both parties it was perfectly obvious that Lord Aldington was not prepared to abandon his judgment against Count Tolstoy.

In Watts v Lord Aldington the liability of Mr Watts and Count Tolstoy as judgment debtors was, plainly, several as well as joint. In such a case, for the reasons explained in the judgments in this Court, the relevant question is not whether the agreement between the creditor, A, and one of the co-debtors, B, releases the debt which B owes to A. Even if it did, that would, in logic, have no effect on the several debt owed to A by the other co-debtor, C. The relevant question is whether the agreement between A and B precludes A from enforcing the debt owed by C. It is in B’s interest that the agreement should have that effect - because, if it does not, C will be in a position (if he pays the debt which he owes to A) to seek contribution from B. It is in A’s interest that the agreement should not have that effect - because, prima facie , A will wish to recover from C the balance of the indebtedness. Given the opposing interests of A and B, the question is what have they agreed. As Lord Justice Neill pointed out, that has to be determined . . . “having regard to the surrounding circumstances and taking into account not only the express words used in the document but also any terms which can properly be implied” .

The liability of the Purchasers, in the present case, under the covenant in clause 3(d)(ii) of the share sale agreement of 19 June 1989, is a joint liability. There are no words of severance sufficient to create several as well as joint liability - see White v Tyndall (1888) 13 App Cas 263 and The Argo Hellas [1984] 1 Lloyd’s Reports 296, 300. I am not persuaded that section 81 of the Law of Property Act 1925 - to which we were referred by counsel for the respondents - has the effect of imposing a joint and several liability on the covenantors. That section enables one of joint covenantees to enforce the benefit of the covenant; but it does not otherwise affect the obligation of the covenantors. It is necessary, therefore, to consider whether, and to what extent, the approach of this court in Watts v Lord Aldington ( supra) is applicable in a case where the only liability is joint - that is to say, in a case where the rule is firmly based on the unity of the cause of action. The answer is, I think, to be found in the judgment of Lord Justice Neill, where, after referring to Solly v Forbes (1820) 2 Brod & B 38, Watters v Smith (1831) 2 B & Ad 889 and North v Wakefield (1849) 13 QB 536, which are all cases of joint, but not joint and several, liability, he said this (transcript, page 22):

Accordingly, though the result may be the same, in my opinion it will often be more satisfactory to consider whether the relevant document is an absolute release or a release with a reservation rather than to consider whether the document can be fitted into the straight jacket of a covenant or agreement not to sue.

Approaching the matter on this basis, it seems to me plain that the words used in paragraphs 4 and 19 of the voluntary arrangement, construed in the light of the proposals as a whole, are inconsistent with any intention to effect an immediate or absolute release of the debts owed to creditors. The proposals are for the debtor to make income payments - and to transfer windfall assets - to the Supervisor over a period of five years. The words in paragraphs 4 and 19 . . . “When all monies to be made available under these proposals have been realised and distributed to creditors” . . . have to be read in that context. Failure by the debtor to make the income payments or to transfer windfall assets (if any) during the five year term would give rise to the issue of a certificate of default, under paragraph 23, and, potentially, to an order for bankruptcy - see paragraph 24 of the proposals and section 276 of the Insolvency Act 1986. In those circumstances it seems to me obvious that the creditors would wish to prove in the bankruptcy for the full amount of their debts; they would be appalled to find that those debts had been released and replaced by rights under the failed arrangement. It is for this reason, as it seems to me, that the further words in paragraphs 4 and 19 . . . “I will be released from any further liability to them relating to the claims in respect of which they were entitled to participate in the Voluntary Arrangement” . . . look to the future. When all monies . . . “to be made available . . . have been distributed . . . I will be released” . . . means just that. The release is not to take effect (if at all) until the debtor’s obligations under the proposals have been fulfilled.

I am satisfied, therefore, that this is not a case in which the bargain evidenced by the voluntary arrangement between Mr Hopkins and his creditors has led to a release by accord and satisfaction of the joint debt owed by Mr Hopkins and the appellants to the respondents; such that that debt can no longer be enforced against the appellants. But I do not think that that, necessarily, provides a complete answer to the issue raised on this appeal. It is plain that some term has to be implied into the arrangement if it is to work. This is because the arrangement does not, in terms, preclude any creditor from taking steps, outside the arrangement, to enforce his claim. Nor is there anything in Part VIII of the Insolvency Act 1986 which has that effect, other than the terms of the arrangement to which creditors are bound. Any interim order made under section 252 of the Act ceases to have effect once the approval of the creditors to the arrangement has been notified to the court - see section 260(4). But, plainly, the arrangement will not work as intended if creditors are under no restriction in relation to the enforcement of their claims. At the least, a term which must be implied in order to give efficacy to the arrangement is that creditors bound by the proposals will take no steps to enforce their debts against the debtor while the debtor is complying, or has complied, with his obligations thereunder. It is plain that the arrangement would work better, in the interests of the debtor and of creditors who have no claim against a co-debtor, if all creditors were bound to take no steps to enforce their debts not only against the debtor but also against any co-debtors . But, although that might be a convenient and tidy result, it does not seem to me it is necessary that that result should be achieved in order to give efficacy to the arrangement. And if it is not necessary the term should not be implied. It is, I think, pertinent, to keep in mind that compositions or arrangements between a debtor and his creditors which do not have the effect of releasing co-debtors have long been thought sufficiently beneficial to justify the imposition of their terms on dissenting creditors by order of the court - see, for example, section 16(20) of the Bankruptcy Act 1914.

For these reasons I am satisfied that the terms of the arrangement in the present case are not such as to preclude the respondents from enforcing their claims against the appellants, as co-debtors of Mr Hopkins.

The conclusion just expressed is sufficient to dispose of the present appeal. Nevertheless, it would not be satisfactory to leave the matter there. Mr Justice Jacob held, in R A Securities v Mercantile Credit Co Ltd [1995] 3 All ER 581 at page 586e-587b, that a term which, if contained in a consensual document, would have the effect of discharging a surety as a matter of law, will not have that effect if contained in a voluntary arrangement (whether individual or corporate) made under the provisions of the Insolvency Act 1986; at least where the creditor has not, in fact, consented to the arrangement. He distinguished actual consent from what he described as “a statutory binding”. He followed that decision in the present case - see [1997] 1 All ER 921 at page 924f- 928b. His general approach to the problem was endorsed by Mr Justice Lightman in March Estates Plc v Gunmark Ltd [1996] 2 EGLR 38, at page 39H; although that judge ( ibid, at 39K-L) accepted that a voluntary arrangement might expressly or by necessary implication regulate the rights of a creditor of the company and of third parties liable for the same debt. Mr Justice Lightman expressed the view that, for such to be the case, the intention to regulate such rights must be made plain on the face of the proposal . . . “The voluntary arrangement may statutorily absolve the company from liability without absolving or releasing from liability any other party and will ordinarily be construed as reserving all rights of creditors against other parties.” . . . Mr Justice Jacob’s view that proposals for compromise between a debtor and his creditors which are imposed by a “statutory binding” under the Insolvency Act 1986 have an effect on third party obligations which is in some way different from the effect which proposals in precisely the same terms would have if contained in a consensual document differs from the view expressed in Chitty on Contracts (27th edition, at para. 42-047); and is criticised by the authors of Andrews & Millett, The Law of Guarantees (2nd edition, at para 9-14). The point is of some general importance. It was argued strenuously before us on behalf of the respondents and it seems to me appropriate that we should consider it.

The effect of an individual voluntary arrangement which has been approved by creditors at a meeting summoned under section 257 of the Insolvency Act 1986 is prescribed by section 260(2) of that Act:

260(2) The approved arrangement -

(a) takes effect as if made by the debtor at the meeting, and

(b) binds every person who in accordance with the rules had notice of, and was entitled to vote at, the meeting (whether or not he was present or represented at it) as if he were a party to the arrangement.

There is nothing in that sub-section, or elsewhere, which saves a party who is bound . . . “as if he were a party to the arrangement” . . . from the consequences which would follow as a matter of law if he were indeed a party to the arrangement. The statutory hypothesis is that the person who has notice of and was entitled to vote at the meeting is party to an arrangement to which he has given his consent. It is important to keep in mind that, where B and C are co-debtors of A, the reason why C is released as a result of an arrangement or bargain between A and B is that the effect of that bargain is to extinguish the debt; alternatively, that the effect of that bargain is that A has agreed with B that A will not sue C on a debt which, if paid by C, will give C rights of contribution against B and so negate the release from any further liability in respect of that debt which is the basis of B’s arrangement with A. C is not released by reason of any arrangement or bargain between A and C inter se ; and it is no answer to point out, as is the case, that there is nothing in section 260(2) of the Act which purports to affect the rights of A and C inter se .

The need to save a creditor who is bound by a release under a composition or arrangement imposed upon him by statute from the consequences which would follow in relation to co-debtors or sureties in respect of the same debt had been recognised for more than one hundred years before the enactment of the Insolvency Act 1986. I have already referred to section 16(20) of the Bankruptcy Act 1914. Section 16 of the 1914 Act was a re-enactment of section 18 of the Bankruptcy Act 1883. Section 18(1) provided that creditors might, at a meeting after the making of a receiving order, resolve to entertain a proposal for a composition or a scheme of arrangement in relation to the debtor. If accepted by three fourths in value of the creditors at a subsequent meeting called for that purpose, and approved by the court, the composition or arrangement was binding on all creditors in respect of debts due to them from the debtor and provable in bankruptcy - section 18(8) of the 1883 Act. Section 18(15) provided that the acceptance by a creditor of a composition or arrangement should not release any person who under the 1883 Act would not be released by an order of discharge if the debtor had been adjudged bankrupt. The effect of an order of discharge is set out in section 30 of the 1883 Act. Section 30(2) provided that an order of discharge should release the bankrupt from all debts provable in bankruptcy, other than those specified in sub-section (1) - which are not material in this context. But section 30(4) was in these terms:

An order of discharge shall not release any person who at the date of the receiving order was a partner or co-trustee with the bankrupt or was jointly bound or had made any joint contract with him or any person who was a surety or in the nature of a surety for him.

So the position under the 1883 Act was that a creditor bound by a composition or arrangement in lieu of bankruptcy, which had been imposed on him by a majority and approved by the court under the statutory arrangements, was in the same position in relation to sureties and co-debtors of the debtor as he would have been if the bankruptcy proceedings had taken their course. His rights against sureties and co-debtors of the debtor, which under the general law would or might have been extinguished by any release of the debtor contained in the composition or arrangement, were expressly preserved. That continued to be the position under the Bankruptcy Act 1914. The comparable provisions in that Act are section 16(13) and (20) and section 28(2) and (4).

Consensual deeds of arrangement between a debtor and his creditors took effect under the general law; subject to the provisions of the Deeds of Arrangement Acts of 1887 and 1914. There is nothing in those Acts which preserves the rights of creditors against co-debtors of, or sureties for, the debtor with whom a consensual deed of arrangement has been made. The question whether or not co-debtors or sureties are released depends on the terms of the deed.

Under the bankruptcy code in force from 1883 and until the reforms enacted by the Insolvency Act 1985 - and subsequently upon consolidation in the Act of 1986 - the imposition of a composition or arrangement by resolution of the majority of creditors and the approval of the court followed the making of a receiving order. That, itself, followed (and required) an act of bankruptcy on the part of the debtor. The need for an act of bankruptcy, and the intermediate stage of a receiving order, ceased to be part of the bankruptcy code after the 1986 Act took effect. Accordingly there are no provisions in the 1986 Act directly comparable with those in section 18 of the 1883 Act and section 16 of the 1914 Act. But the provisions as to discharge and release following bankruptcy, formerly in section 30 of the 1883 Act and section 28 of the 1914 Act, have been re-enacted. They are now found in section 281 of the 1986 Act. In particular, section 281(7) of that Act preserves the creditor’s rights against co-debtors and sureties from the effect of the statutory release in terms which are virtually identical to those in the earlier legislation:

Discharge does not release any person other than the bankrupt from any liability (whether as partner or co-trustee of the bankrupt or otherwise) from which the bankrupt is released by the discharge, or from any liability as surety for the bankrupt or as a person in the nature of such a surety.

It seems clear, therefore, that when the 1986 Act was enacted the legislature was well aware of the problem: that is to say, that one consequence of releasing the debtor from debts owed to his creditors was that, under the general law, that release would or might have the effect of releasing co-debtors and sureties in respect of the same debts. In the context of a statutory release following bankruptcy that problem was dealt with in the same way as it had been in legislation for the past one hundred years. In the context of a release contained in a voluntary arrangement, which could be imposed on a dissenting creditor under Part VIII of the 1986 Act, the legislature did not adopt - or, at the least, did not adopt in express terms - the precedent which was offered by earlier legislation in relation to compositions or arrangements in bankruptcy proceedings. There is, to my mind, a strong inference that that was the result of a deliberate decision that, in this respect, voluntary arrangements should be treated as - and have the same consequences as - consensual deeds of arrangement; and not be regarded as a substitute for compositions or arrangements in bankruptcy proceedings. It is, perhaps, significant, in this context, that the recommendations of the Cork Committee (1982, Cmnd.8558) which led to the introduction of individual voluntary arrangements were based on the need to provide an alternative to bankruptcy proceedings; a need not then met in practice by consensual deeds of arrangement - see, in particular, at paragraph 359 . . . “a satisfactory form of proceedings for dealing with the insolvent debtor otherwise than directly through the machinery of the Bankruptcy Court . . . would fulfil an important social need.”

In support of the proposition that, notwithstanding the provision in section 260(2) of the Insolvency Act 1986 that those creditors who had notice of and were entitled to vote at the statutory meeting are bound by the arrangement . . . “as if they were parties”. . . and the absence of any express words which would preserve the rights of those creditors against co-debtors and sureties (if those rights would otherwise be affected under the general law by a consensual arrangement in the same terms), it would be contrary to authority to hold that the rights of creditors against co-debtors could be affected by anything in proposals for a voluntary arrangement which only took effect by reason of what Mr Justice Jacob had described as a “statutory binding” we were referred to decisions on section 125 (liquidations by arrangement) and section 126 (composition with creditors) of the Bankruptcy Act 1869. Those decisions illustrate that the question whether a statutory release was to have the effect of releasing co-debtors was occupying the courts before the enactment of the Bankruptcy Act 1883. Indeed, it might be said that that question was laid to rest by the 1883 Act; and has only now revived, one hundred years later, with the repeal of the code enacted by that Act.

Section 125 of the 1869 Act provided that a meeting of creditors, summoned for that purpose, might by special resolution declare that the affairs of a debtor be liquidated by arrangement and not in bankruptcy and appoint a trustee. The trustee had all the powers of a trustee in bankruptcy. On completion of the liquidation it was provided, by section 125(10), that:

125(10) The trustee shall report to the registrar the discharge of the debtor, and a certificate of such discharge given by the registrar shall have the same effect as an order of discharge given to a bankrupt under this Act.

An order of discharge given to a bankrupt did not have the effect of releasing any person . . . “who, at the date of the order of adjudication [in bankruptcy], was a partner with the bankrupt, or was jointly bound or had made a joint contract with him” . . . see section 50 of the 1869 Act. Section 126 provided for creditors, by extraordinary resolution, to resolve that a composition be accepted in satisfaction of the debts due to them from the debtor; and for a composition accepted by an extraordinary resolution to be binding on all creditors to whom proper notice of the meeting had been given; but it contained no provision comparable to that in section 125(10) of the Act. It did, however, provide for rules of court to be made in relation to proceedings on the occasion of the acceptance of a composition . . . “in the same manner and to the same extent and of the same authority as in respect of proceedings in bankruptcy” .

In Megrath v Gray (1874) LR 9 C P 216 it was held by the Court of Common Pleas (Lord Coleridge CJ, Keating, Brett and Denman JJ) that the provisions of section 50 of the 1869 Act applied both to a liquidation by arrangement under section 125 and to a composition with creditors under section 126. The basis on which the court reached that conclusion appears from the following passages in the judgment, at pages 227-231:

Now, that statute [the Bankruptcy Act 1869] is “An Act to consolidate and amend the law relating to bankruptcy”; that is to say, that, where it does not amend, it assumes only to consolidate the existing law. It, by new enactment, or repetition, gives power and sanction to three kinds of settlement between a debtor unable to pay his debts in full and his creditors, - first, by an adjudication of bankruptcy, ending in a division of assets, - secondly, by a liquidation by arrangement, ending also in a division of assets, but without the form of an adjudication of bankruptcy, - and thirdly, in a liquidation by arrangement, ending in an acceptance by the creditors of a composition in lieu of a division of assets, leaving the debtor in possession of his trade and goods and assets. . .

The first kind of settlement ends in a discharge of the debtor by order of discharge given according to s. 48. And so likewise do the other kinds of settlement end in an order of discharge: they do so by and according to the rules 302 and 303, and in the forms 123 and 124. And the first question for decision seems to be whether the enactments in ss. 49 and 50 apply only to a discharge given in a pure bankruptcy or to all the discharges given under and by virtue of and according to the statute and the rules. . . .

Now it has always been a cardinal point of bankruptcy law that a discharge under it of an insolvent debtor unable to pay his debts in full does not release his solvent co-debtor. This has been so ever since the declaratory Act, 10 Anne c.15. Each successive Bankruptcy Act has been in great measure a consolidation Act, and has incorporated this principle. It is a strong argument in favour of the defendant’s contention in this case that such a cardinal principle would hardly be cut away from any discharge of any insolvent debtor, without express terms. It is also a strong argument that a consolidation statute should be construed rather so as to maintain than to alter the existing law . . .

. . . In Ex parte Rumball LR 6 Ch App 842, the contention was that s. 72 in the Act of 1869 did not apply to disputes arising in proceedings under a deed of composition entered into in 1868, because, it was said, s. 72 is confined to “proceedings in bankruptcy”: but it was held that it was applicable. “The Act of 1869”, says Lord Justice James, “gives to the Court of Bankruptcy jurisdiction to determine all questions for the distribution of assets in bankruptcy, and extends to anything that might be fairly called a case in bankruptcy” . “I am of opinion”, he says, “that the Chief Judge was right in holding that he had jurisdiction in this case, as he would have in any ordinary case in bankruptcy” . That case seems to be an authority for holding that the earlier sections in the statute are not confined to cases of pure bankruptcy, and that the words “proceedings in bankruptcy” are not necessarily confined to proceedings in pure bankruptcy. The minds of the Lord Justices, who are peculiarly the interpreters of bankruptcy law, seem to be, as disclosed in that case, impressed with the view that all the three proceedings, though different in form, are proceedings in bankruptcy, subject to the control of the Bankruptcy Court, subject to the laws of bankruptcy, and intended for the relief of insolvent debtors, and that the more general enactments in the earlier sections are applicable to the proceedings under ss. 125 and 126. . . .

In the result, therefore, . . . we hold that all three forms of proceeding in the case of an insolvent debtor contained in the Bankruptcy Act 1869 are proceedings in bankruptcy, though different in form; that the general enactments in ss. 49 and 50 apply to the discharges under ss. 125 and 126 and the rules and forms relative to them; that the word “bankrupt” in ss. 49 and 50 is to be read as applicable to any debtor obtaining an order of discharge under the statute; and consequently that an order of discharge in all three cases releases only the debtor in whose favour it is given, and leaves his solvent co-debtor liable to be sued separately by a joint creditor who has been a party to the release of the insolvent debtor.

Later in the same year, the Court of Exchequer (Kelly CB, Cleasby and Amphlett BB) considered whether a surety was discharged following a liquidation by arrangement under section 125 of the 1869 Act. The question was stated by Cleasby B at page 17:

The general question is as to the effect of liquidation on the position of the surety of the person liquidating, and we have to consider whether a discharge under a liquidation is to be regarded as a voluntary act of the parties. We are not dealing with a composition or with a deed of arrangement under the previous bankruptcy law. The effect of a deed of arrangement has been much considered in the case of Bateson v Gosling (1871) LR 7 C P 9. In that case the debtor had made over the whole of his property to the trustee, but the deed of arrangement contained a clause of release reserving expressly the rights against the sureties; and the effect of the decision is, that if the deed of arrangement had resulted in an absolute discharge of the principal debtor, then, following the judgment of Vice-Chancellor Wood in Webb v Hewitt (1857) 3 K & J 438, it would have operated so as to discharge the surety altogether; but that, where the deed contains a clause reserving all the rights of the surety it has not that operation. However, we are not now dealing with the effect of a deed of arrangement, but with the question, whether a resolution in liquidation can be considered a voluntary act of the creditors as regards the principal debtor. We have to consider whether they can be regarded in the present case as having by their voluntary act altered the position of the surety or discharged the principal debtor.

Each member of the court reached the conclusion that discharge under section 125 of the 1869 Act was not the result of a voluntary act on the part of his creditors; rather it was the result of the bankruptcy proceedings initiated by the debtor having summoned his creditors to a meeting in proceedings which were under the control of the court of bankruptcy. That form of bankruptcy proceeding having been initiated the bankrupt was entitled to have his discharge if he complied with his obligations under the arrangement; the creditors were morally bound to release him. Kelly CB and Amphlett B placed reliance on the express provisions of section 125(10) and noted the distinction between that section and section 126 of the Act.

The question arose again in Ex parte Jacobs (1875) LR 10 Ch App 211. The headnote sets out the conclusion:

Where the acceptor of a bill of exchange presents a petition for liquidation or composition under the Bankruptcy Act 1869, and the creditors pass a resolution for liquidation or composition, the acceptor must be considered as discharged by operation of law, and the drawer is not thereby discharged from his liability. In such a case it makes no difference whether the bill-holder is present at the meeting or not, or whether he votes in favour of the resolution or against it.

Again, it is of importance to see how the question was put in the judgment of the Court (Lord Justice Mellish and Lord Justice James), at page 213:

The question to be determined is, whether Martin, by voting in favour of accepting a composition from Phillips, the acceptor, had discharged Jacobs, the drawer, and can no longer maintain an action against him on the bill. There can be no doubt that, if the holder of a bill, by becoming party to a deed or arrangement, independently of any bankruptcy Act, agrees to accept a composition from the acceptor, he thereby discharges the drawer; but, on the other hand, it is equally clear that if the acceptor is discharged from his liability by operation of law by becoming a bankrupt, the liability of the drawer to the holder is not thereby affected. We have now to consider whether the discharge of the acceptor under the 125th and 126th sections of the Bankruptcy Act 1869, when the holder of the bill votes in favour of liquidation or composition, is to be considered as a discharge by the voluntary act of the holder, or a discharge by operation of law.

The Court answered that question by following Megrath v Gray (1874) LR 9 C P 216. At page 216 Lord Justice James said this:

We entirely agree in the decision of the Court of Common Pleas, and the reasons they have given for it. We think that a discharge of a debtor under a liquidation or composition is really a discharge in bankruptcy by operation of law. Where a creditor voluntarily agrees to a composition by deed or arrangement with the acceptor, it is by his act alone that the acceptor is discharged and the position of the drawer altered. When, however, a debtor summons his creditors under the 125th and 126th sections of the Bankruptcy Act 1869, the proper majority of the creditors have power to assent to the terms by which the debtor is to be discharged, whether the holder of the bill chooses to attend or not or chooses to vote or not. The consequence of holding that the holder of a bill could not vote at a meeting of the acceptor’s creditors without discharging the drawer would be that in many cases a great number, and in some cases the majority, of creditors could not vote at the meeting. On the other hand, if resolutions for liquidation by arrangement or for composition were to contain a reserve of remedies by the creditors against any other person than the debtor, the consequence would be that the debtor would not, either by arrangement or composition, be completely discharged from any of his debts in respect of which the creditor had a remedy against any other person, which we think would be contrary to the intention of the Act.

It is of interest to note that the “complete discharge” of the debtor, as envisaged by the Court in the last sentence of that passage, requires that he is discharged not only from the debt which he owed to the creditor, but also from the rights of contribution exercisable by a co-debtor who is subsequently required to pay the creditor. The Court seems to be suggesting that the 1869 Act had that effect. But it is difficult to see how that could be so. Section 49 of the 1869 Act provided for the release of the bankrupt from . . . “debts provable under the bankruptcy” . . . The contingent right of a co-debtor to contribution when he, himself, has paid the debt was not a debt provable under the bankruptcy, because to allow such a claim to proof would contravene the rule against double proof - see In re Oriental Commercial Bank (1871) LR 7 Ch App 99, at page 103.

For the reasons which I have already explained the problem identified in those three authorities under the Bankruptcy Act 1869 was laid to rest, in relation to individual insolvencies, by the introduction of the code enacted by the Bankruptcy Act 1883. But the decision in Ex parte Jacobs (1875) LR 10 Ch App 211 was considered and applied in relation to corporate schemes of arrangement. In In re London Chartered Bank of Australia [1893] 3 Ch 540 the court was asked to sanction a scheme under section 2 of the Joint Stock Companies Arrangement Act 1870, following a winding up order. The question arose whether the scheme should contain an express reservation of rights against sureties. Mr Justice Vaughan Williams thought such a reservation unnecessary. At page 546 he pointed out that the discharge of the company (the debtor) was effected by operation of law under section 87 of the Companies Act 1862; and went on, at page 547:

It seems to me, then, that, the discharge being clearly by operation of law consequent upon the pending statutory liquidation, the principles laid down by Lord Justice Mellish in In re Jacobs (1875) LR 10 Ch App 211 apply, and that, therefore, there is no need, and it would not be right, to introduce a reservation of rights against sureties into the scheme of arrangement.

The Court of Appeal reached a similar conclusion in Dane v The Marine Insurance Corporation Limited [1894] 1 QB 54, where the compromise had been sanctioned by the Supreme Court of Victoria under the comparable legislation in the State of Victoria. Lord Justice Kay said this, at page 63:

It was decided in Ex parte Jacobs (1875) LR 10 Ch App 211 that a resolution for liquidation or composition, though binding on all the creditors, is a discharge of the debtor by operation of law, and does not discharge the surety.

In In re Garner’s Motors Limited [1937] Ch 594 Mr Justice Crossman applied the same principle to a scheme sanctioned under section 153 of the Companies Act 1929. He said, at page 599:

The scheme when sanctioned by the Court becomes something quite different from a mere agreement signed by the parties. It becomes a statutory scheme.

We were referred, also, to two decisions in the Supreme Court of New South Wales, Hill v Anderson Meat Industries Limited [1972] 2 NSWLR 704 and Commercial Banking Co of Sydney Ltd v Gaty [1978] 2 NSWLR 271, in which the principle was applied to arrangements under the Companies Act 1961 in the Australian legislation. In the former case Hope JA, at page 708 G-709 B, explained:

The provisions of Part VIII of the Companies Act 1961, and in particular the provisions of s. 181, seem to me to be consistent with a policy, as was stated by James LJ in Ex parte Jacobs (1875) LR 10 Ch App 211, of enabling creditors to vote in a way which they think best for the company, without standing to lose the benefit of a guarantee or other analogous remedy.

Hutley AJA agreed with the need to adapt new institutions (treating section 181 as such) to the existing doctrines of the law by analogy; but he pointed out, at page 709B-C:

This in my opinion is an example of a discharge by operation of law, and the rules in regard to accessory obligations, which have been laid down in relation to bankruptcy and where there has been a scheme in the course of winding up, have to be extended to a scheme adopted under s. 181 of the Companies Act 1961. It is that section which gives the scheme its operative effect and not the agreement of the parties.

I have set out these authorities at some length in order to do justice to the powerful arguments advanced before us in support of the proposition that, notwithstanding any express term in an arrangement which would or might otherwise have the effect of discharging co-debtors and sureties (if any) of the debtor from further liability, that will not be the effect if the arrangement is made under the provisions in Part VIII of the Insolvency Act 1986. At the end of the day, however, it is essential to keep in mind that it is those provisions which have to be applied. The Insolvency Act 1985 - subsequently consolidated in the Act of 1986 - was not, itself, a consolidating Act. There is no presumption that the provisions now in Part VIII of the 1986 Act were not intended to alter the existing law; or to depart from the position established by the authorities on different provisions in the 1869 Act.

There is an important - and, to my mind, crucial - distinction between the provisions in Part VIII of the 1986 Act and those in sections 125 and 126 of the 1869 Act. Under the 1869 Act the discharge of the debtor took effect by virtue of the statute and the rules made under it - see, Megrath v Gray (1874) LR 9 CP 216, at page 231, and Ex parte Jacobs (1875) LR 10 Ch App 211, at page 213. Under the various Companies Acts, considered in the authorities cited, the discharge takes place by virtue of a scheme which becomes operative when it is approved by the Court. Under Part VIII of the 1986 Act, the discharge of the debtor depends entirely on the terms of the arrangement. One must look at the arrangement, and nothing else, in order to find the terms (if any) under which the debtor is discharged. This is emphasised by the words in section 260(2) of the 1986 Act . . . “The approved arrangement - (b) binds every person . . . as if he were a party to the arrangement” . Unlike the earlier legislation, section 260(2) of the 1986 Act does not purport, directly, to impose the arrangement on a dissenting creditor whether or not he has agreed to its terms; rather, he is bound by the arrangement as the result of a statutory hypothesis. The statutory hypothesis requires him to be treated as if he had consented to the arrangement. The consequence, as it seems to me, is that the legislature must be taken to have intended that both the question whether the debtor is discharged by the arrangement and the question whether co-debtors and sureties are discharged by the arrangement were to be answered by treating the arrangement as consensual; that is to say, by construing its terms as if they were the terms of a consensual agreement between the debtor and all those creditors who, under the statutory hypothesis, must be treated as being consenting parties.

Whether or not to exclude co-debtors and sureties from the operation, under the general law, of the terms of a composition or arrangement between a debtor and his creditors is a matter of policy. There are, plainly, arguments of policy which point towards exclusion; in particular, that it is in the interest of the debtor and his other creditors that a creditor should not be dissuaded from voting in favour of a voluntary arrangement out of concern that he will lose his rights against co-debtors and sureties. But, equally, there are arguments which point towards allowing the general law to have effect; in particular, that it is in the interests of the debtor that he should be able to propose a scheme under which he will obtain a complete release from his liabilities, including the rights of contribution of co-debtors. It is also in the interests of other creditors, bound by the scheme, that it should not be frustrated by action by a co-debtor (not so bound) in enforcing rights of contribution. These arguments had been identified in the cases over the past one hundred years or more before the enactment of the Insolvency Act 1985 and its successor, the 1986 Act. In my view, by choosing to enact Part VIII - and, in particular, section 260(2) - of that Act in the form that it did, the legislature must be taken to have preferred the latter approach. The general law is to have effect. It is up to the debtor to propose, and for the creditors to accept or reject, proposals which either do or do not have the effect of releasing co-debtors or sureties. A creditor who is prejudiced by the decision of the majority to approve proposals which have the effect of releasing a co-debtor against whom he would otherwise have recourse can apply to the court, under section 262 of the 1986 Act, for the approval of the meeting to be revoked.

It follows that I would reject the submission that, as a matter of principle, no term in a voluntary arrangement can have the effect of releasing a co-debtor or surety. In my view the effect of a voluntary arrangement has to be determined by construing its terms. In the present case, the terms of Mr Hopkins’ voluntary arrangement did not have the effect of releasing or discharging the appellants from their liability as co-debtors. I would dismiss this appeal.

Lord Justice Ward: I agree.

Lord Justice Kennedy: I also agree.

ORDER: Dismissed, with costs; Legal Aid Taxation and section 18 with nil contribution.