In the recent case of Jones v City Electrical Factors Ltd [2025] EWHC 414 (Ch) the High Court delved into the nature of guarantee obligations in the context of bankruptcy petitions.
HHJ Keyser KC examined whether the obligations owed under personal guarantees, provided by Mr. Jones for the debts of Selectrical (Bangor) Limited, constituted “a liquidated sum” as required under section 267(2)(b) of the Insolvency Act 1986 (IA 1986), and were therefore sufficient to found a bankruptcy petition.
Background
On 31 October 2023, City Electrical Factors Limited (the Creditor) presented a creditor's bankruptcy petition against Mr. Gareth Wyn Jones (the Guarantor) for a debt of £190,449.97, arising from personal guarantees he had given for the debts of Selectrical (Bangor) Limited (the Company). The petition followed a statutory demand served on the Guarantor by the Creditor that had not been complied with or set aside.
The Company, an electrical contractor, entered into credit agreements with the Creditor to obtain necessary equipment. As the business grew, credit limits were increased. However, due to adverse trading conditions, including in part Covid lockdowns, the Company could no longer service its borrowing and entered creditors' voluntary liquidation in February 2023. The Creditor sought payment from the Guarantor under his obligations contained within the guarantees, and when payment was not made, petitioned for the Guarantor’s bankruptcy. The Guarantor had given two guarantees, and whilst in due course, the Creditor conceded that the first did not meet the criteria sufficient to found a petition, it argued that the second did.
Legal issues
Section 267 IA 1986 provides:
“(2) …a creditor’s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented- …(b) the debt…is for a liquidated sum payable to the petitioning creditor…”
The primary legal question was whether any of the obligations under the guarantees constituted a liquidated sum. The court distinguished between "see to it" obligations, which found an action in damages, and conditional payment obligations, which create a debt. A claim for damages cannot form the basis of a petition under section 267(2)(b) IA 1986 unless those damages are quantified and have crystallised or become a liquidated debt capable of enforcement.
The Creditor argued the obligations under the second guarantee did constitute a liquidated sum on the basis that the guarantee contained a conditional payment obligation. It argued that in distinguishing between a “see to it” obligation” and a conditional payment obligation, the question ought to be, “Upon whom does the guarantee impose the payment obligation?”. The Creditor’s view was that when the contract was read as a whole, the construction of the relevant clause demonstrated a distinct and specific payment obligation on the Guarantor.
The court’s analysis of guarantee clauses
The court determined that the operative provision in the guarantee contained three distinct parts. Drawing on the Court of Appeal’s reasoning in McGuiness v Norwich and Peterborough Building Society [2011] EWCA Civ 1286, the court analysed each part:
- Part (i): "We hereby unconditionally guarantee the due and punctual performance and discharge of all the [Company’s] obligations under or pursuant to the Customer Agreement."
The court concluded this was a "see to it" obligation, being only a promise by the Guarantor to ensure that the principal debtor performed its contractual obligations. This created liability in damages and was not a liquidated sum.
- Part (ii): "We hereby unconditionally guarantee … the due and punctual payment on demand of all sums now or subsequently payable (including any interest or late payment charges upon such sums) by the [Company] to the [Creditor] under or pursuant to the Customer Agreement or otherwise."
HHJ Keyser KC concluded this provision guaranteed payment to the Creditor by the Guarantor, creating a conditional payment obligation. A demand under such a provision therefore resulted in a liquidated sum due from the Guarantor to the Creditor. It was acknowledged as part of the Judge’s analysis that the distinct nature of this part of the clause, together with the requirement that payment be made “on demand”, were key supporting indicators.
- Part (iii): "We agree to indemnify the [Creditor] against all losses, damages, costs and expenses which the [Creditor] may incur through any breach by the [Company] of such obligations."
This part is an indemnity obligation, creating a secondary obligation triggered by the Company’s non-payment. Accordingly the court concluded that, in line with the prevailing view from Firma C – Trade SA v Newcastle P & I Association (The Fanti) [1991] 2 AC1, this part of the guarantee would be enforceable only by way of action for unliquidated damages, not as a debt. It was not a provision which created a direct claim to a liquidated sum.
Judgment
The court ruled that the amounts owed under the conditional payment obligation in the second guarantee constituted a liquidated sum, and was sufficient to found the bankruptcy petition.
Practical implications
Not only does this judgment reinforce the need for clear and precise drafting in guarantees, it highlights the need to include a distinct conditional payment obligation to ensure the requirements for a bankruptcy petition are clearly met, without the need for further recourse to the courts. Failing to create an action for debt within the guarantee itself commits petitioners to have to first sue for damages, adding costs and delay. Guarantees can be horribly wordy, but each provision has its own specific purpose. A well-drafted guarantee will typically include each of the three elements discussed above: a see to it obligation, a conditional payment undertaking, and a fallback indemnity. This case provides a useful reminder of the importance of having that second element when pursuing bankruptcy proceedings against an individual guarantor.
Matthew Padian
Laura Van Eyken