England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION
Mr Edward Bartley Jones QC
Sitting as a Deputy High Court Judge of
The Chancery Division
[2003] EWHC 2028 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th April 2004

Lord Justice Jonathan Parker :

INTRODUCTION

1. This appeal raises questions as to the true meaning and effect of r.6.5(4)(a) of the Insolvency Rules 1986 (SI 1986/1925) ("the Rules"), which confers a discretion on the court to set aside a statutory demand based on an undisputed debt where the debtor 'appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt …. specified in the statutory demand'; and as to the approach which the court should adopt in deciding how to exercise that discretion where (a) the 'cross demand' relied upon is a claim made in a pending action brought by the debtor against the creditor, and (b) the debt on which the statutory demand is based arises under a costs order made in proceedings closely associated with that action. It also raises a question as to the consequences of the failure of a district judge to give reasons when dismissing an application to set aside a statutory demand under the summary procedure prescribed by r.6.5(1) of the Rules.
2. The appeal is brought by Ronald Albert Popely ("Ronald") against an order made by Mr Edward Bartley Jones QC, sitting as a Deputy High Court Judge of the Chancery Division, on 25 July 2003. The deputy judge allowed an appeal by Ronald's brother John Henry Popely ("John") against an order made by Deputy District Judge Murphy ("the district judge") in the Canterbury County Court (in Bankruptcy) on 16 May 2003 dismissing John's application to set aside a statutory demand dated 23 April 2003 served on him by Ronald. By his order, the deputy judge set aside the statutory demand.
3. The statutory demand is based on John's liability under a costs order made by His Honour Judge Dean QC in the Wood Green Crown Court on 12 April 2002.
4. The proceedings in the Wood Green Crown Court concerned documents which had been seized by H.M. Customs & Excise with a view to criminal proceedings being brought against, among others, John and Ronald. In the Crown Court proceedings John sought permission to make use of certain of those documents in an action which he had commenced against Ronald in the Chancery Division on 13 August 2001 ("the First Action").
5. John's application in the Crown Court proceedings was dismissed and an order for costs was made against him. Following a detailed assessment, the costs payable under the order were certified in the sum of £41,617.
6. John subsequently commenced a second action against Ronald in the Chancery Division ("the Second Action") claiming the same relief as that claimed in the First Action. The First Action and the Second Action have since been consolidated.
7. John having made no payment under the costs order, Ronald issued the statutory demand as a preliminary to the presentation of a bankruptcy petition against John. John applied to set aside the statutory demand. His application was dismissed by the district judge under the summary procedure prescribed by r.6.5(1) (as to which, see paragraph 38 below). The district judge gave no reasons. John's appeal to the High Court was allowed by the deputy judge.
8. John contends that his claim in the consolidated action ("the Underlying Claim") is a 'cross demand' within the meaning of r.6.5(4)(a); and that, absent special circumstances (and he contends that there are none in the instant case), the court should exercise its discretion under the rule by setting aside the statutory demand.
9. Ronald contends that for the purposes of r.6.5(4)(a) the costs order made in the Crown Court proceedings falls to be treated in the same way as if it were an interlocutory costs order made in the consolidated action. On that footing, he contends that where an interlocutory order provides for the immediate payment of costs by a claimant or (as the case may be) by a defendant who is advancing a counterclaim, the paying party's claim in the action in which the costs order was made is not a 'cross demand' within the meaning of the rule. Alternatively, he contends that if and to the extent that in such circumstances the court has a discretion whether to set the statutory demand aside, it should not exercise such discretion by setting the statutory demand aside since to do so would be to subvert the interlocutory costs order in so far as it provided for the immediate payment of costs.
10. Thus the particular questions which fall for decision on this appeal are: firstly, whether, as a matter of construction of r.6.5(4)(a) and in the particular circumstances of the instant case, the Underlying Claim is a 'cross demand' within the meaning of the rule (for if it is not, the rule does not apply); and secondly, if so, what approach the court should adopt to the exercise of its discretion.
11. Permission for a second appeal was granted by Peter Gibson LJ on the papers on 29 October 2003.

THE FACTUAL BACKGROUND

12. Prior to 1999 John and Ronald carried on various property ventures together, in England and abroad. In early 1999 differences arose between them and discussions took place with a view to a sale of their jointly-owned assets, which included properties in England, in Northern Cyprus and in France. John claims that in the course of those discussions a concluded agreement was reached which Ronald has breached by realising the jointly-owned assets for his own benefit, to the exclusion of John. That is the Underlying Claim, which John values at more than £1.8 million.
13. On 13 August 2001 John commenced the First Action, advancing the Underlying Claim and seeking relief in the form of accounts and inquiries as to the sale of the jointly-owned assets, a declaration that he is entitled to a one third share in the net proceeds of sale of such assets, and, further or alternatively, damages for breach of contract.
14. On 20 August 2001 the Claim Form and the Particulars of Claim in the First Action were served on Ronald by first-class post, at his last known address in England. On 19 September 2001 Ronald issued an application contesting the jurisdiction of the English courts, on the grounds that he was neither present in the jurisdiction on 20 August 2001, nor resident or domiciled in the jurisdiction at that time, and that accordingly the purported service of the proceedings on him was bad. Further or alternatively, he contended that the High Court was not the appropriate forum for the adjudication of the Underlying Claim.
15. In February 1998 a number of documents had been seized by H. M. Customs & Excise in connection with criminal proceedings which were at that time contemplated against, among others, John and Ronald (in the event the contemplated criminal proceedings were never brought to trial). On 28 November 2001 John issued an application in the Wood Green Crown Court for an order that he be permitted to use certain of those documents in the First Action and in another action which he had commenced in the Bromley County Court (the latter action is not material for present purposes). A further application to similar effect was issued on 13 March 2002.
16. John's applications, which were opposed by Ronald, were heard by His Honour Judge Dean QC on 12 April 2002. He dismissed the applications with costs, to be the subject of a detailed assessment.
17. In the meantime, Ronald applied for security for costs in the First Action. On 14 January 2002 Master Winegarten made no order on the application, and no order as to costs. Ronald appealed against the Master's order, and on 17 June 2002 Mr Peter Leaver QC, sitting as a Deputy High Court Judge, allowed the appeal. He directed that John provide security in the sum of £75,000, and that the First Action be stayed in the meantime. He further ordered that John pay Ronald's costs of the appeal, which he summarily assessed in the sum of £35,000. John applied to the Court of Appeal for permission for a second appeal.
18. On 10 July 2002 Ronald applied for a detailed assessment of the costs payable by John under the order made in the Crown Court proceedings.
19. John made no payment under the costs order made by Mr Leaver QC, and on 29 July 2002 Ronald issued a statutory demand in respect of such costs, in the sum of £35,000 plus interest. The statutory demand was served on 2 August 2002. John applied to Canterbury County Court to set aside the statutory demand. On 19 September 2002 the district judge dismissed that application, with costs.
20. In paragraph 22 of his judgment in the instant case, the deputy judge quoted a passage from the transcript of the proceedings before the district judge, describing it as containing the crux of the district judge's reasoning. In the passage in question the district judge said this:

"It does not seem to me that the proceedings [i.e. the First Action] which are currently stayed, amount to, in themselves, a counterclaim or set-off or cross demand. This depends on whether your application to the Court of Appeal [i.e. for permission to appeal] is successful. It is for the High Court to determine the merits of your claim. Obviously, if you are successful, and an award of damages is made in your favour, you will be entitled to pursue it against your brother in the same way that he has pursued this debt against you. This is what we call an 'interlocutory order' for costs. That means it is an order which is made as part of proceedings, it not being a final order, and it seems to me that the creditor, Mr [Ronald] Popely, is entitled to issue a statutory demand against you in respect of this order [i.e. the costs order made by Mr Leaver QC]."

21. There was no appeal against the district judge's decision.
22. On 3 October 2002 John's application for permission to appeal against the order made by Mr Leaver QC was dismissed by Brooke LJ.
23. In due course Ronald presented a bankruptcy petition against John, based on the statutory demand. The petition came on for hearing in the Canterbury County Court on December 2002 and was dismissed by consent, the petition debt having by then been paid.
24. On 24 February 2003 the costs payable by John under the order made in the Crown Court proceedings were certified at £41,617.
25. On 14 March 2003, in an attempt to outflank Ronald's challenge to the jurisdiction of the court in the First Action, John commenced the Second Action. The Second Action advances the Underlying Claim once again, seeking substantially the same relief as that sought in the First Action. On 17 April 2003 Master Bragge granted John permission to serve the Claim Form and Particulars of Claim in the Second Action on Ronald in Cyprus, and, as an alternative method, on Ronald's solicitors, Herbert Smith, in England.
26. On 23 April 2003 Ronald issued the statutory demand which is the subject of this appeal, based on the costs of £41,617 payable under the order made in the Crown Court proceedings, plus interest. The statutory demand was served on John the following day.
27. On 8 May 2003 Herbert Smith wrote to Whitehead Monckton, John's solicitors, declining to withdraw the statutory demand. In the course of their letter, Herbert Smith said this:

"It is not possible to distinguish between the two applications and therefore the decision made by District Judge Murphy in respect of the Previous Statutory Demand would apply in this case. The District Judge ordered that your client's application to set aside the Previous Statutory Demand be dismissed. In making his judgment District Judge Murphy concluded that under [paragraph 12.4 of the 1999 Practice Direction: as to which, see paragraph 40 below] the [Underlying Claim] did not amount to a Counterclaim. The same order would be made in the event that your client made an application to set aside the Current Statutory Demand given that both statutory demands arise out of costs orders made as a consequence of [the pending actions].

The application in the Wood Green Crown Court arose because your client wanted to use documents which had been seized by Customs and Excise in the course of criminal proceedings, in the [pending actions].

It is therefore circular, illogical and inequitable for your client to argue that [the Underlying Claim] is a 'counterclaim, set-off or cross demand' to the claim for payment of the costs order which arose because of your client's wish to use certain documents in the [pending actions]."

28. On 9 May 2003 John applied once again in the Canterbury County Court to set aside the statutory demand. On 16 May 2003 the district judge dismissed the application without notice to Ronald. As already noted, he gave no reasons. It would appear (although in the absence of reasons one cannot be certain) that he regarded the application as in all material respects indistinguishable from John's application to set aside the earlier statutory demand.
29. On 29 May 2003 Ronald issued an application in the Second Action challenging the jurisdiction of the court on grounds similar to those which he had advanced in the First Action. He also contended that the Second Action should be struck out as an abuse of process.
30. John appealed from the district judge's dismissal of his application to set aside the statutory demand, and on 25 July 2003 the deputy judge allowed John's appeal and set the statutory demand aside.
31. On 29 September 2003 Master Moncaster dismissed, with costs, Ronald's application to strike out the Second Action as an abuse of process. The Master directed that Ronald's applications challenging the jurisdiction in the First Action and the Second Action respectively be heard together.
32. On 15 October 2003 Deputy Master Nurse made an order by consent that John pay a further sum of £87,500 into court by way of security for costs of the First Action and the Second Action. That sum was duly paid on 21 October 2003.
33. On 29 October 2003 Peter Gibson LJ granted Ronald permission to appeal against the deputy judge's order.
34. On 11 November 2003 Evans-Lombe J dismissed with costs Ronald's applications challenging the jurisdiction of the court. He ordered that there be an immediate detailed assessment of the costs, and that Ronald make a payment on account within 14 days of the order. He further directed that the sum of £162,500 paid by John by way of security for costs be paid out to him forthwith, with accrued interest, and that the First Action and the Second Action be consolidated.
35. As at 1 December 2003 the state of account as between John and Ronald as regards the outstanding liability of each to the other under costs orders thus far made in the First Action and the Second Action (and bringing into account for this purpose the costs order made in the Crown Court proceedings) was that Ronald was a net debtor, owing John a sum in excess of £52,000. It appears that that situation has not substantially changed.

THE LEGISLATIVE REGIME

36. I begin with the relevant provisions of the Insolvency Act 1986 ("the 1986 Act") and of the Rules.
37. The relevant provisions of the 1986 Act are as follows:

"264 Who may present a bankruptcy petition

(1) A petition for a bankruptcy order to be made against an individual may be presented to the court in accordance with the following provisions of this Part –

(a) by one of the individual's creditors…..

….

267 Grounds of creditor's petition

(1) A creditor's petition must be in respect of one or more debts owed by the debtor, and the petitioning creditor …. must be a person to whom the debt …. is owed.

(2) Subject to the next three sections, a creditor's petition may be presented to the court in respect of a debt …. only if, at the time the petition is presented –

(a) the amount of the debt …. is equal to or exceeds the bankruptcy level [currently £750],

(b) the debt …. is for a liquidated sum payable to the petitioning creditor …. either immediately or at some certain, future time, and is unsecured,

(c) the debt …. is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay, and

(d) there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt …."

….

268 Definition of "inability to pay", etc; the statutory demand

(1) For the purposes of section 267(2)(c), the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either –

(a) the petitioning creditor to whom the debt is owed has served on the debtor a demand (known as "the statutory demand") in the prescribed form requiring him to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least 3 weeks have elapsed since the demand was served and the demand has neither complied with nor set aside in accordance with the rules, or

(b) execution or other process issued in respect of the debt on a judgment or order of any court in favour of the petitioning creditor …. has been returned unsatisfied in whole or in part.

(2) ….

….

271 Proceedings on creditor's petition

(1) The court shall not make a bankruptcy order on a creditor's petition unless it is satisfied that the debt …. in respect of which the petition was presented is either –

(a) a debt which, having been payable at the date of the petition or having since become payable, has neither been paid nor secured or compounded for, or

(b) ….

(2) ….

(3) The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts ….

and, in determining for the purposes of this subsection whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities.

…."

38. The relevant provisions of the Rules are rr.6.4 and 6.5, which are contained in the Second Group of Parts, relating to individual insolvency (bankruptcy). They provide as follows (so far as material):

"6.4 Application to set aside a statutory demand

(1) The debtor may, within the period allowed by this Rule, apply to the appropriate court for an order setting the statutory demand aside.

….

6.5 Hearing of application to set aside

(1) On receipt of an application under Rule 6.4, the court may, if satisfied that no sufficient cause is shown for it, dismiss it without giving notice to the creditor. …. [NOTE: This was the course taken by the district judge when dismissing the application to set aside the statutory demand in the instant case.]

(2) If the application is not dismissed under paragraph (1), the court shall fix a venue for it to be heard ….

(3) On the hearing of the application, the court shall consider the evidence then available to it, and may either summarily determine the application or adjourn it, giving such directions as it thinks appropriate.

(4) The court may grant the application if –

(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt …. specified in the statutory demand; or

(b) the debt is disputed on grounds which appear to the court to be substantial; or

(c) ….

(d) the court is satisfied, on other grounds, that the demand ought to be set aside.

….

6.25 Decision on the hearing [of the petition]

(1) On the hearing of the petition, the court may make a bankruptcy order if it is satisfied that the statements in the petition are true, and that the debt on which is it founded has not been paid, or secured or compounded for.

…."

39. Also relevant for present purposes is paragraph 12 of the Practice Direction: Insolvency Proceedings, which took effect on 26 April 1999 ("the 1999 Practice Direction"). The 1999 Practice Direction replaced a previous direction in similar terms which came into effect in 1987. It has force of law by virtue of section 1 of the Civil Procedure Act 1997.
40. Part 3 of the 1999 Practice Direction relates to bankruptcy proceedings. Paragraph 12 in Part 3 is headed 'Setting Aside a Statutory Demand'. Subparagraphs 12.3 and 12.4 are in the following terms:

"12.3 Where the statutory demand is based on a judgment or order, the Court will not at this stage go behind the judgment or order and inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment or order.

12.4 Where the debtor (a) claims to have a counterclaim, set off or cross demand (whether or not he could have raised it in the action in which the judgment or order was obtained) which equals or exceeds the amount of the debt or debts specified in the statutory demand or (b) disputes the debt (not being a debt subject to a judgment or order) the Court will normally set aside the statutory demand if, in its opinion, on the evidence there is a genuine triable issue."

THE AUTHORITIES

41. Of the authorities cited to us, the only direct authority on the issues which arise on this appeal is the decision of His Honour Judge Hegarty QC, sitting as a judge of the High Court, Chancery Division, in Barnes v. Uttlesford District Council (unreported, judgment delivered 15 May 1998).
42. In Barnes, the claimant disputed his liability for council tax. In October 1994 the magistrates granted liability orders to the Council in the sum of £1,166.57 in respect of unpaid council tax. No payment having been made, in April 1995 the bailiffs distrained on the claimant's car. In May 1995 the claimant commenced an action for damages for unlawful seizure of the car, claiming some £4,000 plus interest. He applied in the action for a mandatory order for the return of the car. Buxton J dismissed that application and ordered the claimant to pay the costs of it forthwith. The costs so payable were subsequently certified in the sum of £4,712.28. In July 1997 the Council served a statutory demand in respect of those costs. The claimant applied to set the statutory demand aside, relying on his claim in the action as a 'cross demand' exceeding the amount of the debt on which the statutory demand was based or at least reducing it below the bankruptcy level. The district judge dismissed the claimant's application. The claimant's appeal was dismissed by Judge Hegarty QC.
43. Judge Hegarty QC began his judgment by expressing doubts as to whether, even if Mr Barnes' claim for damages were to succeed, the damages recovered would reduce the debt below the bankruptcy level. He then turned to the judgment of the district judge, saying this (at p.15 of the transcript):

"However, the principal matter which appears to have led her to her view on this aspect of Mr Barnes' application is that the order of Buxton J was never appealed and was an order for payment of costs forthwith. She does not develop that in detail but I do not consider that it would have been necessary for her to do so. In my judgment, the very point of an order directing payment of costs forthwith on an interlocutory basis is to ensure that there can be no set-off against any cross orders as to costs or any claim for damages which may ultimately result in a judgment in those self-same proceedings and indeed to ensure that there can be no stay upon any such order as to costs; certainly no stay had been asked for as far as I am aware.

If one were to accept that the possibility that the plaintiff might recover monies in this action were something which could properly be set off against the amount of the taxed costs, that would, in my judgment, subvert the whole purpose of the forthwith order. I bear in mind that under r.6.5(4) the power of the court is ultimately a discretionary one; but whether or not one has to enter into the field of discretion, I take the view that the reality is that the possibility of Mr Barnes obtaining judgment for a sum which I doubt will reduce the amount in any event to less than £750 cannot be regarded as a proper basis from preventing the Council from pursuing by every means available to it an order which was specifically made as a forthwith order. In those circumstances I consider that the district judge was entirely correct."

44. Judge Hegarty QC having refused permission to appeal, Mr Barnes applied for such permission to the Court of Appeal. At an oral hearing, the Court of Appeal (Simon Brown and Mummery LJJ) dismissed the application. Mr Barnes was represented at that hearing by counsel. However, counsel had been instructed only an hour or so before the hearing, and his instructions were to apply for an adjournment. He accordingly applied for an adjournment, but he also made submissions on the merits of the application. The first judgment was given by Mummery LJ. In the course of it, Mummery LJ said this:

"As to the cross claim, the position is quite simply this. The court has a discretion whether or not to grant an application [i.e. to set aside a statutory demand] where the debtor appears to have a counterclaim, set off or cross demand. In the exercise of the discretion the court is entitled to take account of the fact that the statutory demand is for a sum which the court has ordered should be paid, and to be paid forthwith. Judge Hegarty was entitled to take that into account. For the purposes of his submissions, [counsel] had to take the point that it was incorrect for the judge to take into account that matter. In my view that submission cannot possibly be correct. It would not succeed on an appeal to this court. For that reason alone I would refuse this application."

45. Simon Brown LJ agreed with Mummery LJ. In the course of his judgment, echoing the passage in Judge Hegarty QC's judgment quoted in paragraph 45 above, Simon Brown LJ said this:

"The critical reason why this application was doomed to inevitable failure is because the judge exercised his undoubted discretion on the perfectly proper ground that this demand is founded on a forthwith costs order and the whole purpose of such an order would be subverted were set offs of this character to be allowed."

46. It is pertinent at this point to note the observations of Lord Woolf MR in Clark v. University of Lincolnshire and Humberside [2000] 1 WLR 1988 at 1998 as to the weight to be given to judgments on applications for permission to appeal. In paragraphs 42 and 43 of his judgment in that case, Lord Woolf MR said this:

"42. Until recently it would be unusual for any judgment on an application for permission to appeal to be reported. However, as a result of the development of specialist reports, even in relation to applications for permission, judgments are now commonly reported. However, the fact that they are reported does not alter the consideration which the judge can give to the terms in which his judgment is couched. Furthermore the judge is not usually referred to reports of other cases, or if he is referred to reports, he will have them drawn to his attention in a much more summary manner than would be the case on the hearing of an appeal.

43. Even if [counsel] had been right, when he submitted [that] there is no decision which directly deals with the status of judgments of this court on applications for permission to appeal, it is well established that the court does not regard them as binding authorities. …. The court does not therefore have to follow the decisions given on applications for permission to appeal. They are at best only of persuasive weight. The court does not encourage reference to judgments given on applications for permission. …."

47. Returning to the issues which arise on this appeal, although there are significant differences between the legislative regime which applies to bankruptcy and that which applies to corporate insolvency (companies winding up) – in particular, the Rules make no specific provision for the setting aside of a statutory demand in the context of companies winding up – it is nevertheless instructive for present purposes to consider the practice of the Companies Court in this respect.
48. In Re Bayoil [1999] 1 WLR 147 Nourse LJ identified and explained the current practice of the Companies Court where a winding up petition based on an undisputed debt is resisted on the ground that the company has a cross-claim which exceeds the amount of the debt on which the petition is based.
49. The facts in Bayoil were, in summary, as follows. Bayoil SA ("Bayoil"), a Swiss company, chartered a tanker from Seawind Tankers Corporation (Seawind"), a Liberian company, to carry crude oil from Iraq to the United States. Due to the failure of one of its engines, the tanker had to be diverted via South Africa. Seawind claimed freight charges and diversion expenses; Bayoil counterclaimed for damages for breach of the charterparty, alleging misrepresentation and breach of warranty. The dispute was submitted to arbitration in London. In due course, an interim final award was made in favour of Seawind in respect of freight charges. No stay of the interim award was sought or granted. Seawind served a statutory demand on Bayoil, based on the interim award. Bayoil having failed to make any payment under the statutory demand, Seawind presented a winding up petition against Bayoil based on the statutory demand.
50. At the hearing of the petition, Bayoil did not dispute the debt on which the petition was based; rather, it contended that the petition ought to be stayed or dismissed on the ground that it had a counterclaim which exceeded the amount of the petition debt. The judge at first instance held that he had a discretion which was at large, and that in the circumstances of the case that discretion ought to be exercised by making a winding up order. Bayoil's appeal was allowed by the Court of Appeal.
51. In the Court of Appeal the first judgment was given by Nourse LJ. Ward LJ delivered a concurring judgment, and Mantell LJ agreed with Nourse LJ.
52. In the course of his judgment, Nourse LJ analysed the decision of the Court of Appeal in Re Portman Provincial Cinemas Ltd. Although Portman was decided in 1964, the case is reported, in a note, at [1999] 1 WLR 157. Nourse LJ concluded (at p.152G) that the decision in Portman is clear authority for the proposition that a winding up petition ought to be dismissed in what he described as "cross claim cases", save in special circumstances.
53. Nourse LJ then turned to the decision of the Court of Appeal in In re LHF Wools Ltd [1970] Ch 27, in which Portman was considered. He concluded (at p.154C) that in LHF Wools the Court of Appeal "recognised and affirmed" the existence of the practice in cross claim cases established by the Court of Appeal in Portman.
54. Nourse LJ went on to refer to two first instance decisions in cross claim cases: In re FSA Business Software Ltd [1990] BCLC 825 (a decision of Warner J), and In re a Company (No. 006273 of 1992) [1993] BCLC 131 (a decision of Millett J). The judgment in each of those cases contains observations to contrary effect. Nourse LJ concluded that since the judges in those cases did not have before them a transcript of the judgments in Portman, weight should not be given to their views on this question. Nourse LJ went on to find support for his interpretation of the judgments in Portman and LHF Wools in the Privy Council case of Malayan Plant (PTE) Ltd v. Moscow Narodny Bank Ltd [1980] MLJ 53 (a disputed debt case), where Lord Edmund-Davies, delivering the judgment of the Board, said this:

"There is no distinction in principle between a cross-claim of substance (such as in the [LHF Wools] case) and a serious dispute regarding indebtedness imputed against a company, which has long been held to constitute a proper ground on which to reject a winding up petition."

55. After referring to the approach taken by the judge at first instance in Bayoil, Nourse LJ continued (at p.155B):

"Having held that [Bayoil] had a serious and general counterclaim in the arbitration, which it had been unable to litigate, in an amount exceeding the amount of Seawind's debt, the judge ought to have asked himself whether there were special circumstances which made it inappropriate for the petition to be dismissed or stayed." (Emphasis supplied)

56. Nourse LJ then turned to the various matters relied on by Seawind as constituting special circumstances for this purpose. Those matters included the fact that the interim award was both final and unappealable; the fact that security for Bayoil's counterclaim had been provided by Seawind's P & I club; and the fact that there was concern as to Bayoil's solvency and its ability to meet any award. Nourse LJ continued (at p.155D):

"In my judgment those matters do not amount to special circumstances. Indeed, with the exception of security for the company's counterclaim, they are likely to be found in many cross-claim cases. [Counsel for Seawind] has also sought to rely on the fact that no stay of the interim award was sought or granted. This adds nothing to his other points. The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up. Moreover, an order that a company can be wound up, unlike a bankruptcy order, is often a death knell. Nor can it be certain that a liquidator, even with security behind him, will prosecute the company's claims with the diligence and efficiency of its directors. These, I believe, are considerations which go to justify the practice in cross-claim cases. I emphasise that the cross-claim must be genuine and serious or, if you prefer, one of substance; that it must be one which the company has been unable to litigate; and that it must be in an amount exceeding the petitioner's debt. All those requirements are satisfied in this case."

57. I shall return below to Nourse LJ's inclusion of the requirement that the cross-claim "must be one which the company has been unable to litigate".
58. In his concurring judgment, Ward LJ gave four reasons for his conclusion that the appeal should be allowed. First, he noted that the discretion given to the court by section 125 of the 1986 Act to dismiss a winding up petition, or to adjourn it, or to make any other order that it thinks fit, is one which must be exercised judicially, having regard to such guidance as the courts, and in particular the Court of Appeal, may have seen fit to give. However, he went on to stress that although judicial guidance may establish a general rule, special circumstances will always justify a departure from that general rule. Secondly, he agreed with Nourse LJ that, on the authority of Portman and LHF Wools, the practice of the court is "not to allow the winding up where there is a genuine cross-claim except in special circumstances". Thirdly, citing the passage from the judgment of the Privy Council in Malayan Plant quoted by Nourse LJ (see paragraph 56 above), he took the view that there was little practical difference between a disputed debt case and a cross-claim case. Fourthly, he considered that since a winding up order is, as he described it, a draconian order, the court should proceed cautiously. He continued (at p.156G):

"Very similar considerations inform the court's approach to the granting of a stay of execution, where the court does not lightly deprive the successful litigant of the fruits of his judgment, but will do so where an appeal would otherwise be rendered nugatory. I appreciate that this analogy cannot be taken too far. Winding up is not a form of execution, and stays may not be granted on a judgment for a dishonoured cheque, which is treated as cash, just as freight has a similar unique characterisation. None the less, the principles underlying that approach seem to me to be of relevance when dealing with a company winding up."

59. I must refer at this point to LHF Wools, not only because it was considered by Nourse LJ in Bayoil but also because, as will appear, Ronald relies on certain observations of Harman LJ in that case in relation to the relevance, on the hearing of a winding up petition, of the prospect of delay in the adjudication of a cross-claim.
60. In LHF Wools, the company bought wool from a Belgian merchant. It paid for the wool by accepting a bill of exchange drawn by the merchant on a Belgian bank and payable to the bank. The merchant failed to deliver the wool, and the bill was dishonoured on presentation. The merchant was made bankrupt and convicted for fraud. The bank brought an action against the company in England, based on the dishonoured bill. The company counterclaimed for damages against the bank under the Belgian civil code (the counterclaim did not give rise to a cause of action under English law). At trial, the company abandoned its counterclaim and submitted to judgment, on the basis that it would be cheaper and easier to prosecute its claim against the bank in Belgium. The judge refused to stay the judgment. The bank presented a winding up petition against the company, which had no assets apart from its claim against the bank. Following presentation of the winding up petition, the company commenced an action against the bank in Belgium. The Belgian action could not proceed until after an appeal by the merchant against his conviction had been finally concluded. On the hearing of the winding up petition, the company sought to have the petition stayed or dismissed, relying on its cross-claim against the bank in the Belgian action. At first instance, Plowman J made a winding up order. The company appealed.
61. The Court of Appeal allowed the company's appeal, holding that Plowman J had erred in principle in exercising his discretion, in that (among other things) he had given insufficient weight to the modern practice that where a company has a genuine and serious cross-claim against the petitioning creditor which it had not reasonably been able to litigate, the petition should usually be dismissed or stayed. The first judgment was given by Harman LJ. In the course of it, he referred to a passage in the judgment of Plowman J where the judge attached significant weight to the delays which were likely to occur if the company were to pursue its claim in Belgium. Harman LJ continued:

"I am far from saying that in the ordinary case that is not a most weighty consideration. If the company is trading, or even if it is not trading, if it has assets, these are things which may melt away while the matter is delayed, and the petitioning creditor is not to be put off and see the only security for the debt vanish into thin air, either in litigation, good, bad or indifferent, or in some other way. But here is a company which it has never been suggested has any assets at all except this one claim. It does no business: it does not trade; there is nothing to dwindle away by delay. It does not seem to me that delay matters much. …. Therefore, I do not think that delay is a matter to which I should have given much weight."

62. I will return to the above passage when considering Ronald's submissions in relation to delay.
63. I must now return, however, to Nourse LJ's reference to a requirement that for the purposes of r.6.5(4)(a) a cross-claim must be "one which the company has been unable to litigate".
64. In Re a Debtor (No. 87 of 1999) (unreported, judgment delivered on 17 January 2000), a bankruptcy case, Rimer J confessed to some uncertainty as to the nature of that apparent requirement; and in particular as to whether, on the hearing of a bankruptcy petition, delay in prosecuting the cross-claim should, by itself, operate as a bar to the dismissal of the petition. It was a feature of the case that the debtor could have litigated his cross-claim to a conclusion before the statutory demand was served on him, but had not done so. Rimer J held that this fact did not, in itself, preclude the debtor from relying on the cross claim as a ground for setting aside the statutory demand. He continued (at p.11 of the transcript at line 3):

"Whilst, I recognise, with some concern, that this conclusion might not appear to lie easily with Nourse LJ's statement of the relevant criteria, I consider it does reflect an approach which is consistent with the actual decision in Portman, which Nourse LJ regarded as establishing the correct view."

65. Rimer J's uncertainty in this respect was shared by Park J in Montgomery v. Wanda Modes Ltd [2002] 1 BCLC 289 (a companies winding up case). In the course of his judgment, Park J said this:

"31. The requirement that the debtor must not have been able to litigate his …. cross-claim was not part of the ratio decidendi of Bayoil: in that case there was no dispute that, because (I infer) the whole dispute between the two parties was governed by an arbitration clause, the debtor had not been able to litigate its cross-claim. Therefore there was no issue on this particular point. So where does the proposition stated by Nourse LJ come from? I respectfully agree with Rimer J that there is no other case which establishes it. The wider principle enunciated in Bayoil was that a cross-claim could be a ground for dismissing a winding-up petition based on an undisputed debt. The court derived that principle largely from the decision of the same court in [Portman] …. [Portman] certainly did not decide that a debtor company could not rely on a cross-claim after all if it could have litigated it earlier but had not done so. If that had been the view of the court it would almost certainly have acceded to the winding up petition instead of dismissing it: ….

32. There has been only one other directly relevant Court of Appeal case after Portman and before Bayoil. It is [LHF Wools]. A winding up petition against the company was dismissed on the ground that it had a cross-claim which, if it succeeded, would exceed the debt. As in Bayoil there was no issue about the company having been able to litigate its cross-claim but not having done so. The cross-claim would have to be litigated in Belgium and under Belgian law could not yet have been commenced. The headnote does however contain these words ….:

'…. the modern practice that where a company had a genuine and serious cross-claim against the petitioner which it had not reasonably been able to litigate, the petition should usually be stayed or dismissed'. (My emphasis)

I think that, as Rimer J suggested, the words which I have emphasised are likely to have been the origin of the words in Nourse LJ's judgment which I am considering here. However, the problem is that there is nothing to support them in the judgment in the LHF Wools case. Although it was true that the company could not have litigated its cross-claim, none of the three members of the court says anything to suggest that that was important, or that the result would or might have been otherwise if the company could already have litigated its cross-claim. Indeed, Harman LJ said that the company appealed on the ground that 'according to modern practice if there is a genuine cross-claim, it is just as good as if there was a disputed debt', making no reference to whether or not the cross-claim could reasonably have been litigated already. I can only conclude that the headnote writer went beyond what the court had decided, and that his expansion may have found its way into the judgment of Nourse LJ in Bayoil.

33. In the circumstances I do not consider that I am bound by what Nourse LJ said to reject [the company's] argument on the ground that it could have litigated its cross-claim against [the petitioner] but had not done so. As a matter of principle I would not myself think it right to decide against [the company] on that ground. I do not think that there is anything objectionable in a company which believes that it has a claim against another party holding back from pursuing it, but then, if the other party starts to threaten it with winding-up proceedings if it does not pay a debt owed in the other direction, deciding that it must pursue its cross-claim after all. A decision in favour of [the petitioner] on this issue would have the undesirable effect of penalising a company for refraining from litigating an issue when it first could have done, and encouraging parties to litigate their possible claims sooner rather than later."

66. It is also to be noted that in Re a Debtor (No. 554/SD/98) [2000] 1 BCLC 103 Robert Walker LJ said (at p.114):

"Whether or not Bayoil provides a close analogy in cases where an individual debtor is relying on a cross-claim in an application to have a statutory demand set aside, the general rule which the judge derived from r.6.5(4)(a) of the [1999 Practice Direction] requires the debtor to show that his cross-claim has substance and will, if it succeeds, at least equal the debtor's liability. Delay in putting forward a cross-claim may lead to an inference that it is not put forward in good faith, but only as a pretext in order to stave off bankruptcy." (Emphasis supplied)

67. I referred earlier (see paragraph 47 above) to the existence of significant differences between the legislative regime applicable to bankruptcy and that applicable to companies winding up, noting in particular that the Rules contain no equivalent to rr.6.4 and 6.5 in the context of companies winding up. Giving the judgment of the court in TSB Bank plc v. Platts [1998] 2 BCLC 1 (a bankruptcy case), Peter Gibson LJ drew attention to the greater importance of a statutory demand in the context of the bankruptcy regime, as compared with companies winding up, saying this (at 6h):

"The statutory demand can therefore be seen to be of crucial importance if a creditor, who does not have a judgment debt, is to obtain a bankruptcy order. As Sir John Vinelott put it …., the statutory demand is 'the straight and narrow gateway' through which such a creditor must pass. It is accordingly quite different from a statutory demand in the field of company law which merely provides one means of establishing a company's inability to pay its debts, the usual ground on which a company is wound up compulsorily. In contrast, in bankruptcy it is not the debtor's general inability to pay his debts that is crucial but the apparent inability to pay the debt in the statutory demand, and at the hearing of the bankruptcy petition the failure to pay or compound for that debt."

68. However, notwithstanding this important distinction between bankruptcy and companies winding up, paragraph 12.4 of the 1999 Practice Direction makes clear that in addressing an application to set aside a statutory demand under rule 6.5(4) the bankruptcy court will adopt a practice similar to that of the Companies Court in a cross-claim case, as explained in Bayoil. As Peter Gibson LJ said later in his judgment in TSB Bank (at p.7b), in the context of the identical provision in paragraph 4 of the 1987 Practice Direction:

"Where the debtor claims that r.6.5(4)(a) or (b) is satisfied and, in the case of (b), that the debt is not subject to [quaere: the subject of] a judgment or order, the court will normally set aside the statutory demand if in its opinion on the evidence there is a genuine triable issue ([para 4 of the 1987 Practice Direction])."

69. In TSB Bank the judge at first instance concluded that on the hearing of the bankruptcy petition the court, in considering the significance of a cross-claim by the debtor against the petitioner, could take account of other debts owed by the debtor to the petitioner notwithstanding that such debts had not been made the subject of a statutory demand. As to that, Peter Gibson LJ said this (at p.8d):

"We have doubts as to whether that is the right approach. Take a case of a cross-claim which does not amount to an equitable set-off. By reason of r.6.5(4) that cross-claim can be seen to be a relevant matter in determining whether the statutory demand should be set aside, and, it is not in dispute, it is also relevant at the hearing when the court is considering whether to make a bankruptcy order. The rationale for that must be that the cross-claim undermines the apparent inability of the debtor to pay the statutory demand debt. …. If it were possible to take account of other indebtedness, it would undermine an essential safeguard for the debtor in the statutory scheme, whereby the debtor is only faced with a debt claimed in the statutory demand which he can seek to set aside. A creditor faced with a cross-claim after service of the statutory demand but who has a further debt on which he can rely can always serve a further statutory demand and petition on the greater debt."

70. In Hofer v. Strawson [1999] 2 BCLC 336 (another bankruptcy case), the debtor had agreed to buy a company from the petitioner, the price to be payable in instalments by means of post-dated cheques. The debtor alleged misrepresentation and stopped one of the cheques. The petitioner served a statutory demand based on the dishonoured cheque. The district judge dismissed the debtor's application to set aside the statutory demand, concluding that although the debtor had an arguable claim for damages for misrepresentation such a claim could not amount to a defence to a claim on the dishonoured cheque, and that in consequence it could not provide a ground for setting aside the statutory demand. The debtor appealed. Neuberger J dismissed the appeal on the basis that the misrepresentation claim did not disclose a genuine triable issue. However, in the course of his judgment he considered the meaning of the expression 'counterclaim, set-off or cross demand' in r.6.5(4)(a), saying this (at p.341a):

"Fastening upon the words 'counterclaim, set-off or cross demand' in r.6.5(4)(a) [counsel for the debtor] contends that although a counterclaim of the sort contemplated in [the debtor's] evidence could not avail her as a defence against a claim by [the petitioner] for judgment on the cheque, it does provide a basis for setting aside the statutory demand.

In my judgment that argument is correct. First, the difference between set-off on the one hand, and a cross-demand or counterclaim, on the other hand, is as follows.

A set-off is a claim which can be, as its name suggests, set off against another claim, i.e. in practice it operates as a defence to that other claim. On the other hand a counterclaim or cross-demand which is not a set-off is a claim or demand which, although perfectly valid in itself, cannot for some reason be invoked as a set-off or defence to another claim. In my judgment, the way in which the three words are used in r.6.5(4)(a) is such that they have that effect in the context of the rule.

Secondly, it is difficult to give the reference to counterclaim or cross-demand any sensible alternative meaning. If they are limited to counterclaims or cross-demands which act as set-offs there would have been no reason to refer to them. They would have been covered by the simple word 'set-off'.

Thirdly, some support for this view is to be found in [paragraphs 3 and 4 of the 1987 Practice Direction, which were in identical terms to paragraphs 12.3 and 12.4 of the 1999 Practice Direction]."

71. Neuberger J went on to point in particular to the words in brackets in paragraph 4 of the 1987 Practice Direction (words which are repeated in paragraph 12.4 of the 1999 Practice Direction) – viz. '(whether or not he could have raised it in the action in which the judgment or order was obtained)' – as supporting his conclusion.
72. Neuberger J went on to stress the difference between execution on a judgment and bankruptcy, saying this (at p.342c):

"Fifthly, it is not surprising that there is a difference between the law relating to the right to judgment on a cheque, on the one hand, and on the other hand, the right to bankrupt the writer of the cheque. One can well see why …. a cheque should be treated as cash for the purpose of the payee, and why therefore, subject to arguments as to whether judgment should be stayed and if so on what terms, the payee should be entitled to judgment on the cheque notwithstanding the existence of cross-claims against him. If the judgment is not stayed, he would be entitled to enforce the judgment through the various means of enforcement of judgment[s] contained in the Rules of the Supreme Court.

On the other hand if the debtor, the writer of the cheque, does have a genuine counterclaim which may exceed the amount of the cheque, while it is appropriate that he should have to pay on the cheque, it is quite another thing to say that he should be liable to be bankrupted in respect of it in circumstances where he has a genuine cross-claim which may well exceed the amount of the cheque."

73. That there are limits on the meaning of the expression 'cross demand' in r.6.5(4)(a) is clear from the decision of the Court of Appeal in Hurst v. Bennett & Ors. [2001] 2 BCLC 290 (another bankruptcy case). In that case the appellant was a former equity partner in a firm of solicitors which was dissolved in 1990. The lease of the premises where the partnership practised was vested in the respondents as trustees for the partnership. The partnership deed provided that those individuals who were trustees of the lease were entitled to an indemnity from the partnership and the other partners in respect of their liability for rent under the lease. In 1997, before the partnership accounts had been finalised or agreed between the former partners, the respondents, in their capacity as trustees of the leasehold interest, served a statutory demand on the appellant based upon what was claimed to be his liability for contribution under the indemnity. The appellant applied to set aside the statutory demand under r.6.5(4)(a), claiming to be entitled to a sum from the respondents or from the partnership which exceeded his alleged liability for contribution. The application was dismissed by the district judge, on the ground that he was not satisfied that there was any cross demand which could exceed the amount of the debt on which the statutory demand was based, or reduce it below the bankruptcy level. The appellant appealed to the High Court. Dismissing the appeal, Ferris J was doubtful as to the size of the appellant's claim, but he held that in any event that the claim was not a counterclaim or 'cross demand' within the meaning of r.6.5(4)(a), since whereas the appellant's claim was against the partners in their capacity as such, the respondent's claim against the appellant (on which the statutory demand was based) was advanced in their capacity as trustees. Ferris J's decision was upheld by the Court of Appeal (Peter Gibson and Arden LJJ and Sir Christopher Staughton).
74. The leading judgment was given by Arden LJ. In the course of it, she said this:

"33. The terms 'counterclaim' and 'cross demand' are not defined in the [Rules]. Neither party has produced any definition. ….

34. I have no reason to doubt the point made by Rimer J [in Re a Debtor (No. 87 of 1999)] that procedurally a party can raise a counterclaim against another party in some different capacity than that in which he is himself sued by that party. R.6.5(4) is not, however, dealing with procedural matters but whether there is good reason to set aside a statutory demand. There is little point in setting aside a statutory demand if the debt on which it is based cannot be liquidated by the cross-claim. That this is the purpose of the provision is confirmed by the requirement that the cross-claim should equal or exceed the debt on which the statutory demand is based.

35. That conclusion is confirmed by the Bankruptcy Rules 1952. Under those rules a bankruptcy notice could be set aside on the grounds of counterclaim, set-off or cross-demand, but the counterclaim or cross-claim had to be between the debtor and the creditor in the same right. …. It would follow that in this case the court should not exercise its powers under r.6.5(4) because the debt on which the statutory demand is based is one to which the respondents (alone) are entitled whereas the proposed cross-claim would be against all the partners jointly."

75. In the course of his judgment, Peter Gibson LJ said this:

"51. The central issue on this appeal is whether a debtor who owes a sum of money, the subject of a statutory demand, to four trustees, who held a lease for the debtor, the trustees and 15 other former partners of a firm, can obtain the setting aside of the demand under r.6.5(4)(a) of the [1986 Act] when the debtor asserts a cross demand against the 19 other former partners which, he says, equals or exceeds the amount of the debt specified in the demand. He claims that on the taking of the dissolution account he would be entitled to receive a substantial payment from the partnership.

52. The function of the statutory demand in bankruptcy was considered by this court in [TSB Bank] when it was pointed out that the statutory demand is an essential element of the statutory procedure for making a debtor bankrupt, the apparent inability of the debtor to pay the debt in the statutory demand through failing to satisfy the statutory demand enabling a bankruptcy petition to be presented by the creditor against the debtor. Rule 6.5(4)(a) gives the court a discretion to set aside the statutory demand if the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the demand. Despite the generality of the language used, it is clear that limits must be implied. Thus, in the case of set-off the claims must exist between the same parties and, subject to immaterial exceptions, in the same right …. The set-off directly reduces the amount of the debt claimed by the creditor. But it was obviously thought that to limit claims to liquidated sums due between the parties at the time of the hearing of the application to set aside was unfair to the debtor and that other claims yet to be proved should be allowed to be taken into account. Hence, a counterclaim or cross demand may be relevant. A counterclaim may be permitted procedurally even if the claim and counterclaim are not between the same parties in the same right. However, as Rimer J said in Re a Debtor (No. 87 of 1999) …. when the claim and counterclaim are heard, the court will not be compelled to set the claim and counterclaim off against each other and merely give judgment to one party for the balance, as in many cases that might produce gross injustice.

53. The reference in r.6.5(4)(a) to 'cross demand' must be interpreted more widely than 'counterclaim' or 'set-off' …. But I not aware of any case in where a cross demand has been held relevant despite an absence of mutuality between the debtor and creditor in their rival claims. …."

76. Lastly, so far as the authorities are concerned, I should note that in Everards & Ors v. The Society of Lloyds [2003] EWHC 1890 (Ch) Laddie J recorded (in paragraph 38 of his judgment) that counsel in that case had agreed that the word 'may' in r.6.5(4) does not create a discretion, and that if the debtor appears to have a counterclaim which equals or exceeds the amount of the debt specified in the statutory demand, the court must set the demand aside. No submission to that effect has been advanced in the instant case. I would in any event regard the proposition as untenable.

THE JUDGE'S JUDGMENT

77. After summarising the facts, the deputy judge concluded (in paragraph 30 of his judgment) that the costs order in the Crown Court proceedings was not materially different from a costs order made in the First Action or the Second Action.
78. On that footing, the deputy judge turned to the submission made by Mr Christopher Harrison (counsel then appearing for Ronald) that, on the true construction of r.6.5(4), the Underlying Claim is not a 'counterclaim' or 'cross demand' "when the statutory demand is based on a costs order made in the proceedings in which that underlying claim is being pursued". The deputy judge "unhesitatingly" rejected that submission. He gave his reasons for so doing in paragraph 32 of his judgment, as follows:

"(1) Bankruptcy is not a form of execution. In [Bayoil] Ward LJ expressly stated (at page 156) that winding-up was not a form of execution. The distinction between winding-up and execution was also expressly referred to by Nourse LJ (at page 155) when he said:

"The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up."

Whilst Bayoil was a case concerned with winding-up and whilst Nourse LJ did draw a distinction between a bankruptcy order and a winding-up order, describing the latter as often being a death knell, I, for my part, cannot see that bankruptcy can be a form of execution if a winding-up is not. A conclusion to the contrary would be at odds with the underlying purpose behind statutory demands, at odds with the limited role of the Bankruptcy Court in assessing the merits of cross-disputes and claims and would ignore the draconian effects of a bankruptcy order on the debtor, in particular by divesting him of his causes of action.

(2) In this context it is necessary to analyse the purpose behind statutory demands. A bankruptcy order cannot be made unless the debt is one which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay - s.267(2)(c) of the [1986 Act]. This requirement is satisfied if, but only if, the requirements of s.268 of the 1986 Act are satisfied. This brings me to a statutory demand served under s.268(1)(a) of the 1986 Act. The function of such a statutory demand was considered by the Court of Appeal in [TSB Bank] and summarised in paragraphs 52 and 53 of the judgment of Peter Gibson LJ in [Hurst v. Bennett]. The essential rationale for taking account of a counterclaim or a cross-demand is that these matters undermine the apparent inability of the debtor to pay the statutory demand debt. Such a conclusion is only fair. Suppose a defendant has wrongfully appropriated to himself all the claimant's assets but in proceedings to recover those assets some procedural misfortune results in a modest costs order being made against the claimant. It must surely be right for a claimant to be able to say that his apparent inability to pay such costs order has been caused by the defendant being in wrongful possession of all the claimant's assets.

(3) It is quite clear that a costs order which is the subject matter of a statutory demand can have set against it a counterclaim or cross-demand made, or to be made, in proceedings separate and different from the proceedings in which the costs order (the subject matter of the statutory demand) was made - see the decision of Rimer J in Re A Debtor (No. 87 of 1999) ….; see also, albeit in the context of winding-up, the decision of Park J in Montgomery v. Wanda Modes Limited….

(4) It is quite clear that a counterclaim or cross-demand being pursued in proceedings can be set against an earlier award made in those same proceedings, even where both the counterclaim or cross-demand on the one hand and earlier award on the other arise out of the same factual matrix. Thus, in Bayoil there was a dispute over a voyage charterparty. The petitioner obtained an interim arbitration award against the respondent for freight - in accordance with the well-established rule that freight must be paid free of all deductions whatsoever. However, the respondent was cross-claiming for diversion expenses in respect of which an interim award was not available and hence was not made. Nevertheless, the Court of Appeal held that this was a genuine and serious counterclaim which could be set against the interim award even though no stay of that interim award had ever been sought or granted.

(5) The words, "counterclaim" or "cross-demand" where they appear in r.6.5(4)(a) and paragraph 12.4 of the [1999] Practice Direction are not specifically defined. Clearly, a cross-demand must be interpreted more widely than a counterclaim or set-off (see per Peter Gibson LJ in Hurst at paragraph 53). However, the language used is one of generality (see per Peter Gibson LJ again in Hurst at paragraph 52). The issue of proceedings or the issue and pursuit of proceedings to judgment is not a requisite precondition for a counterclaim or cross-demand to exist (see per Arden LJ in Hurst at paragraph 24 and per Park J in Montgomery at paragraphs 28 to 34. It is clear from what Park J there said that proving earlier inability to litigate is not, despite what Nourse LJ had to say in Bayoil, a requisite precondition for establishing a counterclaim or cross-demand for the purposes of r.6.5(4)(a) and paragraph 12.4 of the [1999] Practice Direction).

(6) Despite the generality of the words used in r.6.5(4)(a) and paragraph 12.4 of the [1999] Practice Direction, some limits must be implied (see per Peter Gibson LJ in Hurst at paragraph 52). In Hurst, the limitation implied was a requirement for mutuality, but mutuality is not an issue on the present appeal. In my judgment - as I think is clear from paragraphs 52 and 53 of the judgment of Peter Gibson LJ in Hurst - the limitations to be implied must be tested against and based, on the true functions of a statutory demand as I have already identified and described it.

(7) Therefore, should the limitation contended for by Mr Harrison be implied? Against the above context, in my judgment clearly not. Notwithstanding the "pay-as-you-go" ethos of the CPR, what is now in issue is not the justification and vindication of the CPR regime but the statutory procedure by which a debtor may be made bankrupt. And why should he be made bankrupt if his apparent inability to pay is vitiated by the counterclaim or cross-demand? The true position may well turn out to be that, even after giving credit for the amount due under the costs order, there are still very substantial sums due from the creditor to the apparent debtor. Whether that is or is not the case is not a matter which the Insolvency Court is able to decide. And there is no inherent unfairness in this. Suppose the creditor were the defendant in the proceedings and brought no counterclaim and also had no other claims against the claimant. It might be pointed out that if, subsequently, a costs order were made against the person who is creditor/defendant then, subject to any questions of set-off of costs orders, the creditor/defendant could be made bankrupt on that costs order, whereas earlier, on the first costs order, he could not have made the claimant so bankrupt. But there is no unfairness in this. It arises from the very function of the statutory demand. In the case of the earlier costs order the claimant can impeach his apparent inability to pay for the purposes of the bankruptcy regime. In the latter case the defendant cannot, because he has no factual grounds for such impeachment. So, common sense, prayed in aid by Mr Harrison, in my judgment works entirely against his submissions when what is brought into account in applying that common sense is the structure and function of the bankruptcy jurisdiction rather than the ethos of the CPR. Furthermore, as Mr Dhillon correctly points out, the Wood Green Crown Court costs order is fully enforceable against the claimant by all means other than bankruptcy."

79. The deputy judge then turned to the decision in Barnes. After quoting a passage from the judgment of Judge Hegarty QC in that case, the deputy judge continued:

"35. It is not entirely clear to me whether His Honour Judge Hegarty, Q.C. was acting in pursuance of a discretion or rather holding as a matter of law that no counterclaim or cross-demand could be set against a forthwith costs order. If the learned judge was so holding as a matter of law, then for the reasons I have already given, which are of course based on authorities which were delivered since the date of the learned judge's judgment, I respectfully disagree with His Honour Judge Hegarty, Q.C. and decline to follow his decision.

36. Mr Barnes sought permission to appeal from the Court of Appeal. His application was refused and, again, due to the last-minute instruction of counsel on his behalf the submissions made on his behalf must, of necessity have been severely curtailed. In any event, as Lord Woolf M.R. stated in [Clark] at paragraphs 40 to 43, judgments given on applications for permission to appeal are not binding authorities and are, at best, of persuasive weight: "Reference to them is not to be encouraged." Nevertheless, as I have indeed been referred to the decision of the Court of Appeal in Barnes, I think it best to comment thereon briefly.

37. It is quite clear that both Simon Brown LJ and Mummery LJ refused Mr Barnes permission to appeal solely on the basis that the discretion available under r.6.5(4)(a) was certain to be exercised against him. No suggestion was made by the Court of Appeal that Mr Barnes' cross-demand was not capable, as a matter of law, of being set-off against a forthwith costs order. Accordingly, the decision that I have come to on this particular point seems to me to be entirely consistent with what was said by the Court of Appeal in Barnes.

38. It follows from what I have already said that, in my judgment, the District Judge was wrong in law in his September 2002 decision, in that such September 2002 decision appears to me to be based entirely on the proposition that a counterclaim or cross-demand cannot, as a matter of law, be set against a costs order."

80. The deputy judge then turned to the function of the bankruptcy court, saying this:

"39. The function of the Insolvency Court must of necessity be limited. It cannot try the counterclaim or cross-demand. All it can do is to ascertain whether the counterclaim or cross-demand is genuine and serious - just as all the Insolvency Court does in the case of a disputed debt on a winding-up petition is to ascertain whether the debt is bona fide disputed on substantial grounds (see on this paragraph 8 of Park J's judgment in Montgomery).

40. I have no hesitation in finding that the claimant's claims in the first and second actions are genuine and serious counterclaims or cross-demands and that they would, if successful, substantially exceed the sums payable under the Wood Green Crown Court Costs order. Indeed, Mr Harrison so conceded, albeit he made submissions about the manner in which the first and second actions had been litigated. These submissions, in my judgment, could go, if at all, only to the question of discretion, with which I shall shortly deal.

41. I appreciate that the jurisdiction issues remain to be determined and that, if decided against the claimant, that could well be an end to the first and second actions. So too, perhaps, with the abuse issue. However, this Insolvency Court is in no position to try those jurisdiction issues or the abuse issue. All that this court can do is to say that genuine and serious issues arise over these matters. In any event, neither r.6.5(4)(a)nor paragraph 12.4 of the [1999] Practice Direction require the counterclaim or cross-demand to be justiciable in England. Nor, as I have already indicated, is it necessary for proceedings to have already been issued before a counterclaim or cross-demand can qualify for consideration under r.6.5(4)(a) and paragraph 12.4.

42. Furthermore, in respect of the submissions about the manner in which the case has been litigated, this Insolvency Court is entitled to, and does, take account of the fact that to-date the claimant has shown the clearest possible appetite to litigate through to judgment all his causes of action against his brother in each, every and all available courts or jurisdictions."

81. The deputy judge then turned to the decision of the district judge to dismiss John's application to set aside the statutory demand without notice to Ronald, pursuant to r.6.5(1). He approached the district judge's decision on the basis that r.6.5(1) requires a high degree of satisfaction that no sufficient cause is shown, and that if as matter of discretion he (the deputy judge) were to take a different view from the district judge it would follow that the district judge ought not to have adopted the summary procedure under the rule. The deputy judge concluded (in paragraph 44 of his judgment) that as a matter of discretion he would unhesitatingly have set aside the statutory demand. He set out his reasons as follows:

"(1) The decision in Bayoil establishes that where there is a genuine and serious counterclaim or cross-demand the petition (this was, of course, a winding-up case) should be dismissed (or perhaps stayed) unless exceptional circumstances exist to negate such practice - see per Nourse LJ at page 154 and Ward LJ at page 156. The discretion, therefore, to the extent that it exists, could perhaps be best described and classified as a "reverse" discretion. The rule of practice is that the petition should be dismissed or stayed. If that rule is to be negated, it is because of an exercise of discretion against the rule and that exercise of discretion against the rule is to occur only in special circumstances.

(2) It is particularly noteworthy that in Bayoil the fact that the petitioner's debt was based on a final and unappealable interim award which had not been stayed was not regarded as a special circumstance which could invoke the reverse discretion. For my part, I find it very difficult, indeed impossible, to see how such an award differs in practicality or substance from a costs order. In Bayoil freight was to be paid without deduction and the interim award reflected that fact. The claim for diversion expenses could not be set-off against that claim for freight, hence the interim award. That award seems to me to be identical in substance to a forthwith costs order. If setting aside a statutory demand has the effect, as His Honour Judge Hegarty, Q.C. suggested, of subverting the whole purpose of the forthwith costs order, then why did the decision of the Court of Appeal in Bayoil not have the effect of subverting the whole purpose of the interim arbitration award (and the rules relating to payment for freight)?

(3) The principles set out in Bayoil are clearly equally applicable, by analogy, to statutory demands - see per Rimer J in Re A Debtor (No. 87 of 1999), to which I have already referred.

(4) I cannot, therefore, see any special circumstances which exist in this case. So, in fact, the question of exercise of the reverse discretion does not even arise. The ordinary rule of practice must be followed. It matters not whether that rule be a true rule (i.e. not a matter of discretion) or a rule as to how the discretion is to be exercised. Either way, the statutory demand must be set aside. Such a decision is in accord with the reasoning I utilised to justify my conclusion that, in law, a costs order is not for bankruptcy purposes protected against a counterclaim or cross-demand arising from the underlying claim in the proceedings in which the costs order was made."

82. The deputy judge turned next to the question whether, as an appellate judge, he was entitled to interfere with the district judge's decision. He concluded (in paragraph 46 of his judgment) that he was entitled to do so, on the basis that the district judge ought not to have adopted the summary procedure prescribed by r.6.5(1), and that the district judge had not exercised his discretion either properly or at all. He accordingly set the statutory demand aside.

THE ISSUES ON THE APPEAL

83. By his grounds of appeal, Ronald contends:

1. that as a matter of construction of r.6.5(4)(a) the Underlying Claim is not, in the particular circumstances of the instant case, a 'cross demand' within the meaning of the rule;

2. alternatively, that in so far as the question whether to set aside the statutory demand called for the exercise of a discretion by the district judge (a) the district judge must be taken to have exercised that discretion, and (b) there was no, or no sufficient, basis for the deputy judge to interfere with the manner in which he did so;

3. in the further alternative, that in so far as the deputy judge was entitled to exercise his own discretion in the matter, he erred in his exercise of that discretion; and in any event

4. that there is no basis upon which the district judge can be criticised for having dismissed the application to set aside the statutory demand without notice to Ronald and without giving reasons.

84. Under the third of his grounds of appeal, Ronald contends in particular that the deputy judge failed to pay any, or any sufficient, regard (a) to the fact that John has admitted that he has taken steps in relation to his assets which would make it difficult to enforce an order for costs against him; and (b) to the fact that it has been found at an earlier stage in the Underlying Claim that such steps have been taken by John with the intention of making it difficult to enforce a costs order against him.
85. Ronald further asserts that John has not adduced evidence to show (a) that he is unable to discharge his liability under the costs order on which the statutory demand is based, or (b) that as a result of his being required to discharge that liability (or as a result of his being made bankrupt) the Underlying Claim would in any way be stifled.
86. Ronald contends that having regard to John's ability to pay earlier costs orders and to provide security for costs, the deputy judge ought to have concluded that it was probable that his failure to discharge his liability under the costs order on which the statutory demand was based was as a result of a decision not to pay rather than an inability to pay.
87. In Part 10 of his Appellant's Notice, Ronald seeks permission to rely on additional evidence in the form of a witness statement by Mrs Nicola Peters of Herbert Smith, with exhibits. Mrs Peters' evidence is directed at, among other things, John's dealings with his assets. She refers to observations made by Master Moncaster and by Mr Peter Leaver QC to the effect that John has so dealt with his assets as to make it more difficult to enforce a costs order against him. Mrs Peters also gives evidence as to the delays which have taken place in John's prosecution of the Underlying Claim.
88. By a Respondent's Notice, John invites this court to uphold the decision of the deputy judge for the reasons he gave, and in particular for the reason that Barnes was decided per incuriam and should not be followed. He contends that Ronald is not entitled to rely on the various facts and matters asserted under his third ground of appeal, pointing out that the hearing before the deputy judge was a true appeal and not a rehearing, and that such facts and matters were not relied on before either the district judge or the deputy judge. He accordingly contends that Ronald should not be permitted to rely on the evidence of Mrs Peters. Should such permission be granted, however, John seeks permission to rely on a witness statement by Mr Adrian Robbins of Whitehead Monckton.

THE ARGUMENTS ON THIS APPEAL

89. Mr John Briggs (appearing before us for Ronald) submits firstly that, as a matter of construction of r.6.5(4)(a), a debtor's claim in the same proceedings as those in which the costs order on which the statutory demand is based was made (or in proceedings closely connected with such proceedings) is not a 'cross demand' within the meaning of the rule. He submits that the contrary construction would render the costs order "meaningless and irrecoverable". He submits that the construction for which he contends is consistent with paragraph 12.4 of the 1999 Practice Direction, and in particular with the words in parenthesis '(whether or not he could have raised it in the action in which the judgment or order was made)'.
90. Secondly, Mr Briggs submits that, having regard to the observations made by the district judge when dismissing John's application to set aside the earlier statutory demand, in dismissing the later application under r.6.5(1) the district judge must be taken to have exercised his discretion; and that there is no basis on which the deputy judge could properly have interfered with that exercise of discretion. He submits that the district judge's observations when dismissing the earlier application (as quoted by the deputy judge in paragraph 22 of his judgment: see paragraph 21 above) indicate that the district judge took the view that the Underlying Claim as advanced in the First Action (the Second Action had not at that stage been commenced) was not a 'cross demand' because the action had been stayed.
91. Accordingly, submits Mr Briggs, the district judge should not be taken to have accepted the point made by Herbert Smith in their letter dated 8 May 2003 (see paragraph 29 above) to the effect that the later application was indistinguishable from the earlier. It is more likely, he submits, that the district judge had regard to a number of factors, including the complexity of the issues, both interlocutory and substantive, raised in the First Action and the Second Action, and that he exercised his discretion in the light of such factors.
92. Alternatively, Mr Briggs submits that if and to the extent that the deputy judge was entitled to substitute his own exercise of discretion, the deputy judge erred in so doing. He submits that the deputy judge applied Bayoil slavishly, and without taking proper account of the fact that the 1999 Practice Direction, albeit it has the force of law, provides general guidance only. He submits that in principle a creditor with an undisputed debt is entitled to a bankruptcy order unless there is a real prospect of the debt being paid within a reasonable time; and that in this respect there is a qualitative difference between cross-claim cases and disputed debt cases.
93. Relying on Barnes, Mr Briggs submits that, given that the costs order in question was made in effectively the same proceedings as the cross-claim, it would be contrary to principle, and inconsistent with the 'pay-as-you-go' philosophy of the Civil Procedure Rules ("the CPR"), for the bankruptcy court to set aside the statutory demand. He submits that although bankruptcy is technically not a form of execution, it is nevertheless a legitimate process of debt recovery through which a creditor is entitled to payment. As to Bayoil, he relies on the requirement (stated by Nourse LJ) that the cross-claim should be one which the debtor has been unable to litigate. He also relies on Nourse LJ's observation (quoted in paragraph 58 above) that, unlike a bankruptcy order, an order winding up a company is often a death knell. He submits that it would often be unfair for a creditor to be kept out of his money indefinitely because of unresolved litigation against him by the debtor.
94. Mr Briggs submits that the complexity of the issues raised by the Underlying Claim is such that it is inevitable that a substantial delay will occur before the Underlying Claim is finally adjudicated upon. Relying on the passage from the judgment of Harman LJ in LHF Wools quoted in paragraph 63 above, he submits that the prospect of delay in establishing a cross-claim is an important factor which the bankruptcy court should take into account when considering whether to exercise its discretion to set the statutory demand aside.
95. Mr Briggs also seeks to rely on the existence of unsatisfied costs orders as evidence of John's impecuniosity. He accepts that this was not a matter which was raised before the deputy judge, but he submits that it is a further factor which the deputy judge should have taken into account.
96. Mr Briggs submits that in exercising his discretion the deputy judge wholly failed to appreciate that in the context of interim costs orders where, as in the instant case (as he asserts), a debtor has no ostensible assets, the threat of bankruptcy is a powerful incentive to the debtor to run complex litigation responsibly and cost-efficiently by compelling the debtor to find a third party to fund it. Finally, he submits that in any event the deputy judge failed to recognise the existence of 'special circumstances' in the instant case.
97. For John, Mr Jasbir Dhillon submits firstly that on the true construction of r.6.5(4)(a) the expression 'counterclaim, set-off or cross demand' includes a cross-claim of the nature of the Underlying Claim, and that that construction of the rule is not affected by the fact that the debt on which the statutory demand is based arises from a costs order made in proceedings which are directly related to the actions in which John is advancing the Underlying Claim. In support of that submission he relies in particular on Hofer v. Strawson and on the words in parenthesis in paragraph 12.4 of the 1999 Practice Direction. He submits that the particular procedural form of the cross-claim, or its procedural relationship with the debt on which the statutory demand is based is irrelevant; what is relevant, he submits, is the substance of the cross-claim, and whether it makes it unjust for the creditor to present a bankruptcy petition.
98. Mr Dhillon submits that the purpose of the legislative regime would be defeated if Ronald's construction of the rule were accepted. He reminds us of the crucial importance of a statutory demand in the context of bankruptcy (as explained by Peter Gibson LJ in TSB Bank: see paragraph 69 above).
99. He submits that the deputy judge was right to remind himself that bankruptcy is not a form of execution. He points out that it is accepted on John's behalf that the costs order on which the statutory demand is based is valid and enforceable by execution. He submits that Ronald, having elected to proceed along the bankruptcy route, must take the bankruptcy regime as he finds it.
100. As to the 'pay-as-you-go' philosophy of the CPR, Mr Dhillon submits that the bankruptcy court is concerned not with the enforceability of the costs order (which is admittedly enforceable) but with the question whether the debtor can be made bankrupt under the relevant legislative regime. Mr Dhillon submits that, in his judgment in Barnes Judge Hegarty QC wrongly elided those two questions. As to the judgments of Mummery and Simon Brown LJJ refusing permission to appeal in that case, Mr Dhillon submits that both judgments proceed on the footing that the debtor's claim was a 'cross demand' within the meaning of r.6.5(4)(a), and thus support his contentions as to the true construction of the rule. However, he submits that in so far as the views expressed by Mummery and Simon Brown LJJ in refusing permission to appeal are authority for the proposition that to set aside the statutory demand in that case would subvert the costs order, such views are inconsistent with the 1999 Practice Direction and with Bayoil. In any event, he submits (relying on the observations of Lord Woolf CJ in Clark: see paragraph 48 above) that little weight should be given to such views, especially since counsel had only been instructed an hour or so before the hearing and that his instructions were to apply for an adjournment.
101. Turning to the decision of the district judge, Mr Dhillon submits that if (as he contends) the deputy judge's construction of the rule was correct, it follows that the district judge's decision was wrong and that the deputy judge was entitled to set it aside and to exercise his own discretion in the matter. Apart from that, however, Mr Dhillon submits that the district judge fell into error in other respects. First, he submits that the district judge ought not to have adopted the summary procedure prescribed by r.6.5(1). He submits that that rule was directed at preventing attempts by the debtor to buy time by means of a frivolous or insubstantial application, whereas John's application was neither frivolous nor insubstantial. Secondly, he submits that in so far as the district judge may have regarded himself as bound by his decision in relation to the earlier statutory demand he erred in so doing. Thirdly, he submits that the district judge's failure to give reasons vitiates his decision. Fourthly, he submits that in so far as the district judge exercised a discretion he erred in principle in that he failed to have regard to and to apply the general rule as derived from the rule and from paragraph 12.4 of the 1999 Practice Direction.
102. Turning lastly to the exercise of discretion by the deputy judge, Mr Dhillon submits that there are no grounds on which an appellate court can interfere with the deputy judge's decision. In particular, he submits that the deputy judge was right to reject the argument, based on Barnes, that to set aside the statutory demand would be to subvert the costs order.
103. Mr Dhillon submits that the court's approach to the exercise of its discretion under the rule is the same whether the debt on which the statutory demand is based is a judgment debt (as in Re a Debtor (No. 544/SD/98)), an interim final award (as in Bayoil), or a dishonoured cheque (as in Hofer v. Strawson); and that there is no warrant for a different approach where the debt arises under a costs order. This, he submits, is consistent with the underlying purpose of the statutory bankruptcy regime, which is to provide a process whereby individuals may be relieved of the burden of unpaid debts. He submits that it would be unfair for the debtor to be subjected to the draconian effects of a bankruptcy order if he has a genuine cross-claim against the creditor which exceeds the debt on which the statutory demand is based.
104. As to Barnes itself, Mr Dhillon submits that Judge Hegarty QC's decision lays down no proposition of law, and that in any event the facts of Barnes are distinguishable from those of the instant case.
105. As to Ronald's application for permission to rely on additional evidence, Mr Dhillon submits that, given that this is a second appeal, such permission should not be granted. In any event, he submits, it is not the function of the court, in exercising its discretion to set aside a statutory demand, to conduct an investigation into the debtor's overall financial position: that, he submits, is a matter for the court on the hearing of the bankruptcy petition if the statutory demand is allowed to stand. As to delay, he submits (relying on the observation of Robert Walker LJ in Re a Debtor No. 544/SD/98 quoted in paragraph 68 above) that in the context of an application to set aside a statutory demand under r.6.5 delay is only a relevant factor to the extent that it may throw doubt on the genuineness of the cross-claim.
106. In the instant case, he submits, there can be no doubt as to the genuineness of John's cross-claim; and there are no such special circumstances as could justify a departure from what he submits is the court's general practice when considering how to exercise its discretion under the rule.

CONCLUSIONS

The district judge's decision

107. In my judgment the failure of the district judge to give any reasons for his decision leads inevitably to the conclusion that his decision cannot stand.
108. In Ruiz Torija v. Spain (1994)19 EHRR 553, the European Court of Human Rights said this (at paragraph 29 of its judgment):

"The court reiterates that article 6(1) [of the European Convention on Human Rights] obliges the courts to give reasons for their judgments, but cannot be understood as requiring a detailed answer to every argument. The extent to which this duty to give reasons applies may vary according to the nature of the decision. It is, moreover, necessary to take into account, inter alia, the diversity of the submissions that a litigant may bring before the courts and the differences arising in contracting states with regard to statutory provisions, customary rules, legal opinion and the presentation and drafting of judgments. That is why the question whether a court has failed to fulfil the obligation to state reasons, deriving from article 6 of the Convention, can only be determined in the light of the circumstances of the case."

109. In English v. Emery Reimbold & Strick Ltd [2002] 1 WLR 2409 CA Lord Phillips of Worth Matravers MR, giving the judgment of the court, said this (at paragraph 12 of the judgment):

"12. The Strasbourg court, when considering article 6, is not concerned with the merits of the decision of the domestic court that is under attack. It is concerned to see that the procedure has been fair. It requires that a judgment contains reasons that are sufficient to demonstrate that the essential issues that have been raised by the parties have been addressed by the domestic court and how those issues have been resolved. …. We do not believe that the extent of the reasoning that the Strasbourg court requires goes any further than that which is required under our domestic law …."

110. Turning to the common law requirement to give reasons, the court said (in paragraph 16 of its judgment):

"16. We would put the matter at its simplest by saying that justice will not be done if it is not apparent to the parties why one has won and the other has lost."

111. In the instant case it is to be inferred from the mere fact that the district judge thought it appropriate to adopt the procedure prescribed by r.6.5(1) that he must have been satisfied that no sufficient cause had been shown for the application. A further possible inference is that he was so satisfied because he regarded the application as indistinguishable from the application to set aside the earlier statutory demand. But possible inferences are not good enough, in my judgment. In particular, the peremptory character of the procedure does not absolve the court from its general duty to give reasons for its decisions. Indeed, its peremptory character makes it in my judgment all the more important that the court should explain why it was satisfied that no sufficient cause had been shown for the application.
112. In the circumstances it is fruitless, in my judgment, to speculate as to whether or not the district judge regarded himself as exercising a discretion. The very fact that speculation is required demonstrates that his decision cannot stand. It follows that it was for the deputy judge to address the matter afresh. I turn, therefore, to the deputy judge's judgment and to the issues which he addressed.

The meaning of 'cross demand' in r.6.5(4)(a)

113. With all respect to Mr Briggs, on this issue he was in my judgment attempting to argue the unarguable. Either the Underlying Claim is a 'cross demand' within the meaning of the rule, or it is not; and whether it is or not cannot in my judgment depend on the nature of the debt which is the subject of the statutory demand. In contrast to the words 'counterclaim' and 'set-off', the word 'cross' in the expression 'cross demand' does not imply any kind of procedural or juridical relationship to the debt which is the subject of the statutory demand: all it means, in my judgment, is that the 'demand' is one which goes the other way, i.e. that it is a 'demand' by the debtor on the creditor.
114. In my judgment, therefore, as a matter of construction of the rule, just as the Underlying Claim would be a 'cross demand' in the context of a statutory demand based on a judgment (including a default judgment: see paragraph 12.3 of the 1999 Practice Direction), so is it a 'cross demand' in the context of a statutory demand based on the debtor's liability under a costs order; and the deputy judge was right so to conclude. In my judgment, the meaning of the expression 'cross demand' in r.6.5(4)(a) cannot change according to whether the judgment or order on which the statutory demand is based was obtained in the same proceedings as those in which the claim relied on as a 'cross demand' is being advanced.
115. I turn, therefore, to the deputy judge's exercise of his discretion.

Discretion

116. In addressing this aspect of the case I will assume in favour of Ronald (without deciding) that the costs order in the Crown Court proceedings falls to be treated for present purposes in exactly the same way as if it had been an interlocutory costs order in the consolidated action.
117. In my judgment the argument that for the court to exercise its discretion under r.6.5(4)(a) by setting aside the statutory demand would be to 'subvert' the costs order is misconceived, for the following reasons:

(1) The setting aside of the statutory demand does not render the costs order either invalid or unenforceable. Notwithstanding the setting aside of the statutory demand the costs order remains valid and enforceable in the same way as any other judgment or order of the court providing for the immediate payment of money. The available methods of enforcing such a judgment or order are set out in CPR Part 70.

(2) Bankruptcy is no more a form of execution than companies winding up (see the observations of Ward LJ in Bayoil quoted in paragraph 58 above). This is illustrated by the fact that section 268(1)(b) of the 1986 Act enables a creditor who has made an unsuccessful attempt to enforce a judgment or order to rely on that fact as proof of the debtor's inability to pay his debts – i.e. as a ground for presenting a bankruptcy petition. An unsatisfied execution does not entitle the creditor as of right to a bankruptcy order on the hearing of the petition.

(3) Paragraph 12.4 of the 1999 Practice Direction expressly provides that a statutory demand based on a judgment or order 'will normally', that is to say in the absence of special circumstances (cf. Bayoil), be set aside where there is a cross demand (sc. a genuine cross demand) which exceeds the debt. In the course of argument, the example was taken of a not uncommon type of case in which the claimant sues on a dishonoured cheque; the defendant advances a genuine counterclaim for damages for defective goods supplied by the claimant; the claimant obtains summary judgment on the cheque and serves a statutory demand based on the judgment; and the defendant applies to set aside the statutory demand, relying on his counterclaim. In such circumstances, as paragraph 12.4 provides, the statutory demand will 'normally' be set aside, notwithstanding the absence of any stay of the judgment. In that example, there is no question of the judgment thereby being 'subverted'. The judgment remains valid and enforceable.

(4) In addition to the procedures available to a receiving party to enforce an interlocutory costs order under CPR Part 70, the court has power under section 49(3) of the Supreme Court Act 1981, either of its own motion or on the application of the receiving party, to stay the action until the costs are paid. (No such application was made in the instant case.)

(5) In the light of paragraph 12.4 of the 1999 Practice Direction, and of the Bayoil approach in the context of companies winding up, there is in my judgment no basis in principle for treating the fact that the debt on which the statutory demand is based happens to arise under an interlocutory costs order, rather than (for example) an interlocutory judgment, as a 'special circumstance' taking the case out the general rule.

(6) As to Barnes, in the light of the observations of Lord Woolf MR in Clark (quoted in paragraph 46 above) as to the weight to be attached to judgments delivered on applications for permission to appeal, the observations of Mummery and Simon Brown LJJ when dismissing the claimant's application for permission to appeal are to be regarded as being of no more than persuasive authority. For the reasons I have given, I respectfully take a different view to Mummery and Simon Brown LJJ on this question (although I should not be taken to be suggesting that the decision of the district judge in Barnes (upheld on appeal by Judge Hegarty QC) was necessarily wrong on the particular facts of that case, which differed in a number of respects from those of the instant case).

118. Are there, then, any other factors in the instant case which could amount to 'special circumstances', taking the instant case out of the general rule as expressed by paragraph 12.4 of the 1999 Practice Direction?
119. In this court, Ronald seeks to rely on John's alleged impecuniosity and on alleged delays on John's part in progressing the litigation (neither being matters relied on by Ronald before the deputy judge).
120. As to impecuniosity, I accept Mr Dhillon's submission that that is a matter to which the court may have regard at the hearing of a bankruptcy petition, in considering whether the debtor is 'able to pay all his debts' (see section 271(3) of the 1986 Act, quoted in paragraph 37 above). In my judgment, it is not a matter which falls for investigation at the stage of an application under r.6.5(4)(a). In any event, since it was not a matter which was raised before the deputy judge it is not in my judgment open to Ronald to rely on it in this court as a ground for interfering with the deputy judge's exercise of his discretion.
121. As to delay, I respectfully agree with the observations of Robert Walker LJ in Re a Debtor (No. 544/SD/98) quoted in paragraph 66 above. However, in making those observations I do not understand Robert Walker LJ to be excluding the possibility that there may be cases where delay is a factor which has relevance extending beyond the question of the genuineness of the asserted cross-claim. At all events, I would for my part wish to keep open that possibility. But on the facts of the instant case the point is academic. In the instant case the Underlying Claim is clearly genuine (albeit I am in no position to form any view as to whether or not it will succeed), and the alleged delays on the part of John seem to me to carry the matter no further.
122. In any event, as in the case of John's alleged impecuniosity, delay was not a factor which was relied on before the deputy judge and in my judgment it is not open to Ronald to rely on it in this court.
123. In this connection, however, I must return briefly to the requirement expressed by Nourse LJ in Bayoil to the effect that the cross-claim must be "one which the [debtor] has been unable to litigate". As to that, I respectfully share the concerns of Rimer J in Re a Debtor (No. 87 of 1999) (quoted in paragraph 64 above) and of Park J in Montgomery (quoted in paragraph 65 above). I respectfully agree with their view that Nourse LJ's reference to this requirement probably derives from the terms of the headnote to the report of LHF Wools.
124. Be that as it may, I do not in any event understand Nourse LJ to be intending to lay down any absolute requirement to the effect that the debtor must demonstrate that he has been unable to litigate his cross-claim. Rather, I understand Nourse LJ to be doing no more than indicating that where, as in LHF Wools, there has been delay in the prosecution of the cross-claim the delay must not be such as to throw real doubt on the genuiness of the cross-claim (it will be recalled that in LHF Wools the delay occurred because the company could not litigate its claim in the Belgian action until the merchant's appeal against his conviction had been finally concluded; hence the delay threw no real doubt on the genuiness of the cross-claim in that case).
125. For reasons already given, however, the point does not arise on the facts of the instant case.
126. I accordingly conclude that in exercising his discretion under r.6.5(4)(a) in the instant case the deputy judge correctly directed himself in law as to the approach to be adopted, and that there are no grounds on which this court could or should interfere with his exercise of that discretion.

RESULT

127. I would dismiss this appeal.

Mr Justice Moses:

128. I agree.

Lord Justice Ward:

129. I also agree.
Order: Appeal dismissed with costs agreed in the sum of £20,750 to be paid to the appellant within 14 days. (Order does not form part of the approved judgment)