England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY

		8th February 2006

1. Introduction and facts
2. This is a contested bankruptcy petition presented by Eric Arthur Brook ("Mr Brook") against Stuart Andrew Green ("Mr Green"). It is based on a statutory demand in the sum of £1,208,178.20. The underlying debt is based on a personal guarantee (the "Guarantee") executed by Mr Green on 19^th February 2002 as the director of STE Homes Limited guaranteeing the repayment of monies loaned by Mr Brook to STE Homes Limited ("STE Homes").
3. Mr Green was the managing director and beneficial owner of STE Homes. There was one another director – Mr Ian Green.
4. On or about 11^th February 2002 Mr Brook instructed Baxter Caulfield to act for him in relation to the execution of the securities. Mr Green was unrepresented.
5. On 19^th February 2002 Mr Green executed the Guarantee. There is now no dispute as to its validity but there are a number of questions of construction and law that arise. It will be necessary to set out some of its terms later in this judgment. On the same day Mr Green executed a charge of land at Abbey Road Shepley and STE Homes executed a charge of other land at land at Abbey Road. Both charges were expressed to secure the liabilities of STE Homes to Mr Brook.
6. It is common ground that the charge executed by STE Homes was not registered under section 395 of the Companies Act 1985. It is common ground that in consequence the charge was void as against the liquidator of STE Homes.
7. The first loan by Mr Brook to STE Homes (of £110,000) after the execution of the guarantee^[1] was made on 20^th February 2002. It is common ground that it was expressly agreed that the loan would carry compound interest at 3% per month. It is not now suggested that that rate of interest was either exorbitant or unenforceable. It is also common ground that there was no express agreement as to the rate of interest in any of the later loans. Mr Brook asserts that he assumed that the same rate of interest would apply to the later loans as the earlier loan. He has based his calculations of interest on that assumption.
8. It is common ground that substantial further moneys were lent by Mr Brook to STE Homes. There is an issue as to the extent of the loans and as to whether the loans were from Mr Brook or a third party. In particular it is now common ground that £120,000 together with a further £71,527.11 was actually paid from the bank account of a company called Nortonthorpe Industrial Park Ltd ("Nortonthorpe"). Nortonthorpe is a company in respect of which Mr Brook is the sole director and 99% shareholder.
9. STE Homes is insolvent. It entered into creditors' voluntary liquidation on 16^th April 2003 following a judgment obtained by one of its creditors. The liquidator duly avoided the charge executed by STE Homes. Mr Brook was accordingly left to prove in the liquidation as an unsecured creditor.
10. On 8^th May 2003 Baxter Caulfield on behalf of Mr Brook gave Mr Green written notice of default under the guarantee. On 16^th May 2003 Mr Green's solicitors, McCormicks, gave a number of reasons why Mr Green was not liable under the guarantee. It is not necessary for me to consider those reasons.
11. On 16^th March 2004 Mr Brook issued proceedings for professional negligence against Baxter Caulfield. In the Particulars of Claim he alleged that Baxter Caulfield were instructed on 11^th February 2002 to register the charge at Companies House. In their defence Baxter Caulfield admit an implied duty to register the charge and that it was negligent in its failure so to do. In paragraph 20(5) however they contend that Mr Brook has failed to mitigate his loss by failing to enforce his rights against Mr Green. The professional negligence action is currently stayed pending the outcome of the bankruptcy petition.
12. In October 2004 the liquidator paid to Mr Brook the sum of £93,353.75. That sum represented the £71,527.11 referred to above together with interest. It is not necessary to set out precisely why that sum was paid. In the Statutory Demand it is said that it was accepted as a subrogated claim.
13. On 12^th January 2005 Mr Brook issued the Statutory Demand in the sum of £1,208,178.20. It is not necessary to set out in detail the Particulars of the Debt but the calculation of the debt was:

Moneys due in the Liquidation as at 30.4.03	698,066.19
Interest at 3% per month compounded to October 2004 when subrogated monies repaid	429,842.70
	1,127,908.80
Interest at 3% per month from October 2004 to 10 Jan 2005	80,269.40
	1,208,178.20

14. The Statutory Demand makes no mention of any security held by Mr Brook. It was served by substituted service on 15^th January 2005. No application was made to set aside the Statutory Demand although on 16^th February 2005 Mr Green wrote a letter of dispute to Mr Brook's solicitors.
15. Mr Brook could not immediately present a petition because of an outstanding petition by the Inland Revenue. The other petition was finally disposed of on 19^th May 2005.
16. On 25^th May 2005 Mr Brook presented the bankruptcy petition. It is almost in standard form alleging non payment with the Statutory Demand. It makes no mention of security or of the relevant EC regulation. The petition came before DJ Rhodes on 22^nd July 2005 and DJ Harrison on 10^th August 2005. Amongst other orders DJ Harrison transferred the matter to the High Court and directed Mr Green to file a Notice of Opposition. The matter came briefly before Judge Langan QC on 22^nd December 2005 when he made further directions in relation to evidence. It came on substantively before me on 31^st January 2006.
17. McCormicks, on behalf of Mr Green duly filed a Notice of Opposition in compliance with DJ Harrison's order. It makes it clear that Mr Green opposes the Petition on 4 grounds:

1. As a matter of law Mr Brook cannot claim those monies which would have been secured by charges granted by STE Homes.

2. Part of the money claimed is in relation to moneys loaned by third parties and not by Mr Brook.

3. The rate of interest claimed was not agreed or was otherwise extortionate

.4 Mr Brook is otherwise fully secured in relation to the claim.

18. Mr Brook contends that each of the grounds is demonstrably bad. He also contends that on any view there is at least £750 due to him and that a bankruptcy order ought to be made.
19. Representation
20. Mr Brook was represented by David Herbert instructed by Jacksons C & P L; Mr Green was represented by Mark Cooper instructed by McCormicks. Both Counsel produced full and extremely helpful skeleton arguments that set out clearly the issues and made succinct submissions on them. As the evidence in the case was voluminous they greatly reduced the time necessary for argument. I am most grateful to them.
21. Evidence
22. I have already noted that a large amount of evidence has been filed pursuant to various orders. The bundle extends to 410 pages. On any view there are 4 witness statements from Mr Green and 2 from Mr Brook. In addition the bundle includes a further unsigned witness statement from Mr Green which was adopted by him as true and a witness statement signed by Mr Brook in proceedings in the Companies Court commenced by the Liquidator of STE Homes.
23. I do not intend in this judgment to go into the evidence save in so far as it necessary to resolve the issues raised in the grounds of opposition. I am, as I have noted, extremely grateful to Counsel for directing me to the relevant parts of the evidence on each issue.
24. Technical Points
25. Before dealing with the grounds of opposition already referred to it is convenient to deal with 3 other points that were raised in the course of the hearing on behalf of Mr Green
26. 1. The amount of the Statutory Demand.
27. I have set out the calculation as it appears in the Statutory Demand above. Mr Cooper submits that there is an error on the face of the demand. In particular he says that it is clear that Mr Brook has not given credit for the £93,353.75 received by Mr Brook in October 2004. Whilst Mr Brook has reduced the capital sum on which the interest charged for the period after October 2004 to take account of the repayment he has not given credit for the repayment itself.
28. This is not a point capable of elaborate argument. The particulars do not on their face give credit for the receipt of £93,353.75. Furthermore a rough calculation of interest shows that the amount claimed from October 2004 to January 2005 is of the right order and cannot possibly take account of the reduction of the sum repaid.
29. It follows that I agree with Mr Cooper that the amount claimed in the Statutory Demand is overstated by £93,353.75.
30. 2. The lack of security.
31. It is common ground that Mr Brook did have the benefit of the security of the land at Abbey Road secured by the charge executed by Mr Green. Thus the Statutory Demand did not comply with IR 6.1(5) and the Petition did not comply with section 269(1)(b) of the Insolvency Act 1986. The evidence deals in some detail with the value of the land at Abbey Road and I shall return to it later in this judgment.
32. 3. The failure to disclose Mr Green's centre of main interest.
33. It is common ground that the petition did not comply with IR 6.7(1)(f) although it is equally common ground that Mr Green's centre of main interest is in the United Kingdom.
34. Mr Cooper very fairly did not suggest that any of these irregularities were fatal to the petition but he did draw them to my attention. Mr Herbert asked for permission to amend. That permission was granted. In my view a proper amended petition should be filed if only to emphasise the need to take care to see that the rules are complied with.
35. Ground 1
36. 1. Arguments
37. Mr Cooper's submissions are developed in paragraph 10 and 11 of his skeleton argument. The argument may be summarised in the following way:

1. Where a creditor has lost or given up to his debtor a security which he has in his hands, the surety is thereby discharged because of the rule that a surety is entitled to the benefit of all the securities which the creditor has against the principal debtor pro tanto.

2. Mr Brook's solicitors, although they admit that they were engaged to do so, failed to register Mr Brook's security over the company's property at Companies House to the value of £551,000 so that when the Company went into liquidation Mr Brook lost the security;

3. At the very least, R has a substantial dispute in relation to the discharge of the sum guaranteed of £551,000.

38. Mr Herbert seeks to answer this submission in paragraphs 19 to 34 of his skeleton argument. In summary he makes the following points:

1 The equitable right of Mr Green to be discharged in circumstances where security has not been perfected through registration of the Charge has been excluded by the deed of Guarantee.

2. While Mr Green asserts that it was Mr Brook's omission to register the Charge which has cost the him the opportunity to be subrogated to the security held over the Rear Land, in fact as Mr Green was the director of the company creating the charge the obligation to register the Charge lay on Mr Green himself. It is trite law that Mr Green cannot rely on his own act of default to establish the equitable right of discharge.

39. Mr Cooper sought to meet these arguments in 2 ways:

1. He contended that the right to be discharged had not been excluded by the Guarantee.

2. He noted a tension between the authorities relating to the discharge of guarantees and the supposed obligation on Mr Green to register the charge. He contended – in effect - that Mr Green was still entitled to be discharged.

40. 2. The Guarantee
41. It is convenient to set out the relevant terms of the Guarantee

1. I, as principal obligor, unconditionally and irrevocably guarantee to you the due payment …all its present and future indebtedness and other liabilities …

4. I shall not be discharged by time or any other indulgence given to the Principal or any third party by you, or by anything you may do or omit to do or by any other dealing, act or omission that but for this provision would discharge me as guarantor.

42. Mr Herbert submitted that the failure to register the charge plainly amounts to an omission which falls within the ambit of the clause. Accordingly, the clause plainly excludes from the terms of the Guarantee any equitable right of discharge following the omission to register the charge. He therefore submitted that by reason of the exclusion Ground 1 of the Notice of Opposition does not even get off the ground and can be dismissed without further argument or enquiry.
43. He made the point that the clause was in common form and that it was in the same form as that set out in the Encyclopaedia of Forms & Precedents, Volume 17(2), Form 8. He drew my attention to Chitty on Contracts, in the chapter dedicated to Suretyship^[2]:

"Moreover, it has become not infrequent for creditors to exclude a surety's "equitable rights" against the creditor, such as his right to be discharged if the creditor agrees to discharge the principal debtor or if the creditor varies the terms of the contract with the principal debtor to his prejudice. At common law, it is clear that these rights in the surety can be excluded by the contract of suretyship."

44. He drew my attention to a decision of Mr Gavin Kealey QC in Trade Credit Finance (No 1) Ltd v Dinc Bilgin & Ors^[3]. It is not necessary to consider the case in detail save to note that the terms of the guarantee were materially different to those that I am considering. It is right to note that the judge held that the terms of that guarantee were effective to preserve the right of recourse against the surety notwithstanding failures by the creditor.
45. In his skeleton argument Mr Cooper submitted that clause 4 did not on its true construction provide for negligent non-registration of security by Baxter Caulfield, nor does it prevent partial discharge of the guarantee to the extent of the lost security. A clause relating to prevention of discharge must, it is submitted, be specific.
46. In oral argument Mr Cooper developed this argument in a number of ways. First he referred me to clause 4. He made the point that that there was no express reference to the loss of the security. He accepted that Form 8 in the Encyclopaedia was in similar terms but made the point that a later Form – Form 10 – contained an express reference to loss of security. He referred me to the terms of the Guarantee in the Trade Credit case. It is set out in paragraph 24 of the judgment. It is plain that there is express reference to the failure by the creditor to perfect any securities.
47. He went on to submit that clause 4 on its true construction applies to cases where the continuing guarantee is discharged completely by some act or omission of the creditor not to cases such as this where there is only discharge pro tanto to the extent of the security that has been lost.
48. He submitted that different principles were involved between cases where the security has been altered or the contract varied and cases of the sort with which this is concerned. These cases are really cases governed by the duty of account. After the hearing he was good enough to send to me part of the judgment of Blackburn J in Polak v. Everett ^[4]

"… once concede the rule that where the creditor wilfully interferes with the rights of the surety and alters the equitable rights which he had acquired, alters them, even though it may be for the surety's benefit, -without the surety's assent, the surety is discharged. And it seems to me the principle must equally apply if he alters the surety's privilege of coming upon a security, being a security for the whole undivided debt, although of less value, as of he had altered a security of equal value with the whole debt. There are two or three distinctions to be taken notice of. For instance, there is Wulff v. Jay – and that case was perfectly rightly decided – where a person is a creditor with a pledge or surety he is in equity bound to account not only for the money he has actually made out of the pledge, but also for the moneys he might, ought, and should have made out of the pledge, and he must allow for that whether he made them or not, and if by laches he has diminished the value of the pledge he is bound to allow for the sum he ought to have made. But his laches does not discharge the surety, for it does not come within the principle which applies where the surety's rights have been changed or varied. His rights remain as before. The case seems to be like the case where the creditor does not choose to sue the debtor. That does not discharge the surety, for the surety's right remains untouched. So in the case where there is a failure to make the most he could of the pledge, that does not in the slightest degree discharge the surety, though the amount which ought to have been recovered by making a proper use of it is to be allowed in reduction of the debt

49. In his submissions in answer Mr Herbert made the point that if Mr Cooper is correct a creditor who would at common law have lost the whole of his security is apparently under clause 4 in a better position than one who only partially loses it. It is difficult objectively to see that that can have been the intention of the parties.
50. In his final written submissions Mr Herbert brings me squarely back to clause 4. In paragraphs 3 and 4 he says:
51. The relevant test is what was the objective intention of the parties in using the words 'discharged' and 'discharge' in clause 4? Did they intend those words to apply only to the absolute right of discharge but not to apply to the scenario where the right of 'discharge' pro tanto, or to the extent that the value of the security has been lost, arises by virtue of the assertion of a set-off, cross-claim or right to call for an account?
52. It is submitted that it is plain that the parties intended the use of the words 'discharged' and 'discharge' to refer to discharge absolutely and to discharge pro tanto.
53. Questions of construction are never easy. I have, however come to the clear conclusion that Mr Herbert's submissions are to be preferred. In particular it seems to me to be clear that the failure to register is an omission which would discharge the guarantee (but for clause 4). I do not think it necessary for the clause specifically to refer to securities. Nor for the reasons given by Mr Herbert do I think that it is restricted to omissions that totally discharge the security. The fact that Blackburn J may have analysed the position in terms of accounting does not to my mind prevent it from being a discharge. As is pointed out by Mr Herbert in paragraph 7 of his supplemental skeleton the word "discharge" is regularly used in this context to cover both the situations where there is total and partial loss of the rights of the creditor.
54. 3. Section 399
55. In my view therefore Ground 1 fails. However in case I am wrong and because the matter has been fully argued it is right I should express my views briefly on Mr Herbert's secondary argument.
56. Section 399 of the Companies Act 1985 provides as follows:

(1). It is a company's duty to send to the registrar of companies for registration the particulars of every charge created by the company and of the issues of debentures of a series requiring registration under sections 395 to 398; but registration of any such charge may be effected on the application of any person interested in it.

(2). Where registration is effected on the application of some person other than the company, that person is entitled to recover from the company the amount of any fees properly paid by him to the registrar on the registration.

(3). If a company fails to comply with subsection (1), then, unless the registration has been effected on the application of some other person, the company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine."

57. It is to be noted that the duty to register the charge fell on STE Homes. Mr Brook was entitled to register the charge but had no obligation so to do. If no one registered the charge within the prescribed period then STE Homes and every officer in default is liable to a fine for each contravention. Mr Green was intimately involved in the granting of the charge. It is difficult to see that he is not "an officer in default".
58. In those circumstances Mr Herbert points out that Mr Green is seeking to rely on his own criminal act to defeat his liability under the guarantee. He submits that on well–established principles he should not be entitled to do that. He has drawn to my attention a sentence in paragraph 9-042 of the Law of Guarantees by Andrews & Millett, "Where the loss of the securities is not attributable to the fault of the creditor, the surety will not be discharged."
59. Mr Cooper drew my attention to the circumstances in which the charges were executed. I was shown a file note dated 11^th February 2002 of a meeting between Mr Brook and Baxter Caulfield attended in part by Mr Green. That file note indicates that Mr Green was advised specifically to take independent advice. Following that meeting on 15^th February 2002 Baxter Caulfield sent to Mr Green the guarantee and 2 charges for execution. In the covering letter it repeated the advice that he should take independent advice. The documents were duly signed and returned to Baxter Caulfield.
60. He made the point that it is usual for the creditor to protect its security by affecting registration of a charge. That was recognised by Baxter Caulfield in their defence to the professional negligence claim. He made the point that Mr Green was ignorant of his obligation to register. He said that the point taken by Mr Herbert was not referred to in the text books or in the authorities. He referred me to the formulation of the rule by Cockburn CJ in Wulff and Billing v. Jay^[5]

"Cases have been cited and authorities have been referred to in Story's Equity Jurisprudence, which abundantly establish that which is a common and well-known proposition, that where a debt is secured by a surety, it is the business of the creditor, where he has security available for the payment and satisfaction of the debt, to do whatever is necessary to make that security properly available. He is bound, if the surety voluntarily proposes to pay the debt, to make over to the surety what securities he holds in respect of that debt, so that, being satisfied himself, he shall enable the surety to realise the securities and recoup himself the amount of the debt which he has had to pay. That is now a well-known proposition. Here, by registering the bill of sale, and by afterwards availing themselves of the power which they possessed to take possession, the plaintiffs might have secured the payment of the debt to themselves, or by protecting the securities and holding them in their hands they could have made them over to the surety when the surety was willing, or was called on, to pay; but by omitting to do what was necessary in order to place themselves in that position, and by allowing bankruptcy to supervene so as to enable the trustee under the bankruptcy to take possession of these goods adversely, it is clear that they have placed the surety in a position very detrimental and prejudicial to the surety; and for that the surety ought to have, according to the general doctrine, a remedy."

61. There are, of course, differences between this case and Wulff. In particular there is no suggestion that in Wulff that there was any obligation on the surety to ensure that the bill of sale was registered.
62. In my view there is nothing in the execution of the charge which affects the position. Mr Green cannot rely on his ignorance of the law or of his duty to register the charge especially where as here he was advised to take advice twice and declined to do so. Equally – as it seems to me - Mr Green cannot rely on his own illegal act so as to avoid the consequences of the guarantee. This seems to me to be well in accordance with established principle.
63. It follows that I agree with Mr Herbert's submissions on the point.
64. Ground 2 – the amounts loaned by Mr Brook
65. Mr Cooper makes 2 interrelated points. First he relies on the fact that the £120,000 and the £71,527.11 were paid to STE Homes direct from Nortonthorpe. He makes the point that it is only loans from Mr Brook that are within the terms of the Guarantee. It follows that these sums are not within the Guarantee. Secondly he has carried out an analysis of bank statements exhibited by Mr Brook. He contends that they only disclose payments of £466,000^[6] out of Mr Brook's personal or farm accounts. All other moneys allegedly loaned must have come from third parties and are not within the terms of the Guarantee. Alternatively he says that he has put Mr Brook to proof as to where the balance of the moneys come from and that Mr Brook has failed to establish that he made the loans.
66. Furthermore it is clear from Mr Brook's figures that there have been repayments of £502,463. That means that the repayments are more than the capital loaned. As the amount of interest is uncertain (see Ground 3) no sum is due.
67. In answer to this bold argument Mr Herbert first showed me various documents exhibited by Mr Brook. These included a 4 page statement (175 -178) comprising the ledger of capital, interest and repayments for the whole of the relationship. This shows loans of £904,862.64, interest of £295,666.55 and repayments of £502,463 leaving a balance of £698,065.19. Next he showed me a 4 page list of the creditors paid by Mr Brook. Then he showed a 2 page list giving details of the capital payments made adding up to the £904,862.64 already mentioned. To some extent it may be said that these are self serving documents but Mr Green has not produced any evidence to contradict these figures.
68. Mr Herbert then showed me various documents from a notebook kept by Mr Brook in which the amount of the debt was acknowledged. There are 11 such documents signed between February and May 2002. There is nothing in them to suggest that the loans were not made by Mr Brook.
69. Mr Herbert showed me paragraphs 29 to 37 of Mr Brook's second witness statement in which Mr Brook sets out his version of the events. He makes the point that no loan agreement was ever made between Nortonthorpe and STE Homes; all moneys were loaned by him. He had control over the Nortonthorpe bank account and from time to time he would use Nortonthorpe as a vehicle to make the loans. He furthermore made the point that no repayments were made to Nortonthorpe.
70. In paragraph 28 of his final statement Mr Green acknowledges that he did not know where any of the advances were coming from simply that they were made by Mr Brook or on his behalf. The source of the payments was not apparent to him.
71. In his skeleton argument Mr Herbert submits that there is a short answer to Mr Cooper's point. He submits that the source of the funds loaned to STE Homes is irrelevant. What matters is to whom the indebtedness or liability was owed following their payment. It is not alleged anywhere that the payments made through the Nortonthorpe bank account created an indebtedness or liability to Nortonthorpe itself rather than to the Petitioner. The only way it could have done so are (a) pursuant to an agreement between STE Homes and Nortonthorpe that Nortonthorpe would lend it certain sums, or (b) pursuant to some form of restitutionary recovery. There was plainly no agreement with Nortonthorpe or any other third party. He relies on the statement in paragraph 28 of Mr Green's statement and goes on to submit in paragraph 47:

Not only is it clear that there was no agreement between STE Homes and Nortonthorpe, it is clear that the payments which were received by STE Homes were payments which had been made "by the Petitioner or on his behalf". It is clear that in those circumstances Nortonthorpe could not claim restitution of those sums because they were made pursuant to the agreement made between the Petitioner and STE Homes, that the Petitioner would lend sums to STE Homes

72. In my judgment those submissions are plainly right and they apply just as much to the Nortonthorpe payments as to any payments (so far unidentified) by any other third party. The payments were all made pursuant to loan agreements between Mr Brook and STE Homes. In those circumstances Mr Brook is entitled to repayment and they are within the terms of the Guarantee.
73. Ground 3
74. This is a relatively short point and is not capable of much in the way of elaboration. It is common ground that the document (155) signed by Mr Green for the loan of £110,000 that was made on 20^th February 2002 contained an express reference to interest.

Interest to be calculated monthly at the rate of 3% … per month

75. Mr Cooper accepted that this meant it provided for compound interest at the rate of 3% per month.
76. It is further common ground that there was no other express reference to interest. Some of the documents signed by Mr Green contain a reference "plus interest". One contains a reference "plus some interest"
77. Mr Brook sets out the position in paragraph 5 of his second witness statement. He points out that in one of his witness statements [294] Mr Green accepted that in October 2001 STE Homes had been offered a loan of £130,000 with interest at 4% per month. Thus the interest Mr Brook was offering was commensurate with the rates being offered by rival lenders. He accepts that the rate of interest was not specifically mentioned in the loans after the loan on 20^th February 2002. He simply assumed that the rate would be the same as the earlier rate. All his calculations were on that basis.
78. In his final witness statement Mr Green says that it cannot be assumed that he agreed the same rate of interest.
79. Mr Herbert sets out his submissions in paragraph 59 of his skeleton argument. He makes the following points: In effect he submits that the new lending was on the same terms as the old. The nature of the lending was the same – to enable STE Homes to complete the development, the risk was commensurate with the earlier risk. In those circumstances if STE Homes wanted the lending to be on different terms they should have said so.
80. Mr Cooper accepted that interest was payable on the loans. He submitted that in the absence of agreement between the parties the rate was a reasonable rate which would be fixed by the court. Until it was so fixed the interest payable could not be regarded as a liquidated sum and thus could not be the subject of a Statutory Demand.
81. I agree with the submission of Mr Cooper that if it is necessary for the court to assess the interest at a reasonable rate then the interest element of the claim is not liquidated. This is supported by the commentary in Muir Hunter on Personal Insolvency to section 267 of the Act^[7].
82. However that is not a complete answer to the problem. Everyone agrees that it was the common intention of the parties that the loans would carry interest. Everyone agrees that there was no express agreement as to the rate of interest in relation to the loans after February 20^th 2002. It follows that there must be some implied term as to the rate of interest. In Chitty on Contracts^[8] the position is put thus:

A term may be implied …if it was so obviously a stipulation in the agreement that the parties must have intended it to form part of their contract.

…so that if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common "oh, of course."

83. Mr Cooper suggests that the term to be implied is that the parties would have agreed to pay interest at a reasonable rate. Mr Herbert suggests that the officious bystander would have said that the rate was the rate agreed in respect of the 20^th February contract. It was after all similar to the rate available on the open market, the nature of the risk was similar and there was no suggestion by either party that any different rate would apply. In my view Mr Herbert's submissions are to be preferred. This is not, in my view, a case of preferring Mr Brook's evidence to that of Mr Green in the absence of cross-examination. There is in fact no dispute of evidence as to what was said at the time of the contracts. The question was for the court to determine as a matter of law looking at the matter objectively what terms were to be implied as to the rate of interest.
84. The matter does not in fact end quite there. It will be recalled that the sum claimed to be due as at 30^th April 2003 was £698,066.19 calculated as follows:

Capital	904,862.64
Interest	295,666.55
Repayments	502,463.00
Net sum	698,066.19

85. If, contrary to my view, the rate of interest payable remained to be determined by the Court it does not follow that all of the repayments have to be treated as capital repayments. I would have been prepared to say that at least £150,000 of the repayments was "on account of interest". On that basis I would have been able to say that at least £550,000 was due. There was a further capital repayment of £71,000 in October 2004 with the result that at least £475,000 was due to Mr Brook in respect of capital as at the date of the Statutory Demand.
86. Ground 4 – Security
87. 1. 124 Abbey Road, Shepley
88. It is now common ground that Mr Brook holds security in the form of a third charge in respect of the Abbey Road property. It is also common ground that he has failed to comply with the rules by valuing it. The evidence discloses a sharp difference as to assertions as to the value of the security. The rival contentions may be summarised:

	Mr Brook	Mr Green
Value	640,000	640,000
Prior charge	360,000	360,000
Liquidator	149,630	100,000
Additional	100,000	0
Value	30,370	180,000

89. It will be seen that the main difference is as to the costs that the liquidator is entitled to deduct. Mr Green asserts that it is £100,000 at most. Mr Brook suggests that it is nearly £250,000.
90. I am not in a position to say that Mr Green is wrong. I note that Mr Brook is in breach of the relevant rules. I propose to value the security at £180,000.
91. 2. Transfer of Cottages
92. It is common ground that 3 cottages were transferred outright to Mr Brook in August and September 2002. It is Mr Brook's case that he bought each of them for £55,000; that they were each subject to mortgages of between £40,000 and £48,000 and that he incurred legal fees of £500 in respect of each transfer. Mr Brook points to the fact that in the statement he has credited STE Homes with repayments of £22,893 and £10,470 or £33,363.The entry makes specific reference to the houses.
93. Mr Green deals with the matter in paragraph 12 of his third witness statement. He says he does not believe that Mr Brook bought the properties for £55,000 each. He accepted that he had been given credit for £33,000 but contended further credit should be given on the basis that they had increased in value since 2002. He describes it as Mr Brook effectively obtaining further security. He asserts that there is a further equity of £100,000 and that Mr Brook should be treated to being fully secured as to this further amount.
94. Mr Herbert said that he did not understand the nature of Mr Green's case and thus was unable to deal with it. I find myself in the same position. There was – as Mr Cooper accepted – an outright transfer of the 3 properties. In those circumstances I do not see how any security could have arisen. There was nothing to comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989^[9].
95. Mr Cooper sought to meet this argument by asserting that there was a bona fide counterclaim that could be set off against the debt. Nowhere does he formulate the counterclaim. In my view it is not a genuine substantial counterclaim and I disregard it.
96. Conclusion
97. It will be seen that I agree with Mr Herbert's submission on grounds 1, 2 and 3 and part of ground 4. Even valuing the security at £180,000 there is very substantially more than £750 due to Mr Brook under the terms of the Guarantee. In those circumstances I will make a bankruptcy order.

Note 1   There was some limited lending before its execution but nothing turns on this.    [Back]

Note 2   at paragraph 44-130    [Back]

Note 3   [2004] EWHC 3732 (Comm    [Back]

Note 4   (1876) 1 QB 669, CA    [Back]

Note 5   (1872) QB 756. at 762:    [Back]

Note 6   In his skeleton he refers to a figure of £493,000 but it does not affect the argument    [Back]

Note 7   See paragraph 3-308    [Back]

Note 8   Paragraph 13-007    [Back]

Note 9   See United Bank of Kuwait v Sahib (1997) Ch 107     [Back]