England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MANCHESTER HIGH COURT
DISTRICT REGISTRY
HIS HONOUR JUDGE PELLING QC
M6X00034

		Royal Courts of Justice Strand, London, WC2A 2LL
		27/07/2007

Lord Justice Lawrence Collins:

I Background

1. This is an unfortunate case. It originates in an application by Mr Bryce Ashworth to set aside a statutory demand by his former employer, Newnote Limited ("Newnote"), of which he was also a director. The demand was for about £23,000, including £1,643 interest.
2. Mr Ashworth admitted a claim of £8,976, but asserted cross-claims exceeding the amount claimed. The Deputy District Judge set aside the demand on the basis that there were cross-claims which exceeded the amount of the demand. The Circuit Judge allowed an appeal by Newnote and held that there was a debt of at least £6,976 against which there were no genuinely triable cross-claims. Chadwick LJ gave permission to Mr Ashworth to make a second appeal.
3. This court was told that the parties have incurred costs of about £65,000 to £70,000 on these proceedings. This is an absurd waste of resources, and plainly something has gone seriously wrong.
4. Newnote and Money Express Limited ("Money Express") are sister companies. The great majority of the shares in each of them are owned by Mr Michael Pearson. Their business is cheque encashment and pawn broking, carried on from seven shops in the North of England under the name Money Express Cash Centres.
5. Mr Ashworth began working for predecessor companies in 1999, and became a director of one of them in that year. Following a re-organisation 2001 he became a director of both Newnote and Money Express, and acquired (he says) a 9% shareholding in Newnote. As from September 2001 he took over the position as managing director of Newnote and took over general responsibility for the running of the seven shops.
6. On October 29, 2004 Mr Ashworth resigned as a director of Newnote and Money Express.
7. Solicitors' correspondence began with a letter from Mr Ashworth's solicitors to Mr Pearson on November 3, 2004. In that letter they referred to Mr Ashworth's resignation as a director, but said he was still an employee, although because of changes made over the previous two days Mr Ashworth was unclear as to his employment status (which may have been a reference to his suspension on November 1, 2004). They said he was willing to attend a meeting with Mr Pearson to resolve the matter.
8. On November 10, 2004 Newnote's solicitors sent Mr Ashworth an email requiring him to attend a meeting on November 12, 2004. A disciplinary meeting was eventually held on December 13 and Mr Ashworth's employment was terminated on December 23, 2004 by a letter which expressed concerns by Mr Pearson about (inter alia) Mr Ashworth's (1) "explanation as to why funds had been misappropriated from the company" (2) "explanation as to why cash and cheques had been taken from the branches at Huddersfield and Halifax." His responses were considered unsatisfactory and incomplete, and he was summarily dismissed for gross misconduct.

II The statutory demand

9. The solicitors' correspondence continued, and on July 1, 2005, Newnote's solicitors claimed that Mr Ashworth had an overdrawn loan account, and said that if they did not hear from Mr Ashworth or his solicitors within 14 days in a satisfactory and meaningful way, Newnote would be left with no alternative other than to issue proceedings.
10. No proceedings were issued, but on about November 10, 2005 Newnote, through its solicitors, served a statutory demand on Mr Ashworth. The particulars of debt look very much more like the particulars of claim in a County Court action than the particulars for a statutory demand.
11. The particulars stated that Mr Ashworth was indebted to Newnote in the sum of £21,476.07 (plus interest of £1643.36) in respect of an overdrawn director's loan account which he had failed to pay. The amount was made up as follows: (1) an opening overdraft of £1,000; (2) a loan by Mr Ashworth to Money Express of £30,000; (3) a payment by Newnote on October 4 of £10,000 as part repayment of the loan to Money Express; (4) the payment by Mr Ashworth on behalf of Newnote on October 4, 2004 of £1,523.93 (for a laptop computer); (5) a payment by Newnote on October 6, 2004 of £30,000 being the balance of Mr Ashworth's loan to Money Express, and an overpayment of £10,000; (6) a loan by Mr Ashworth to Newnote of £15,000 on October 26, 2004; (7) the taking of £2,000 in cash by Mr Ashworth from Newnote on October 30, 2004; (8) the taking by Mr Ashworth on October 30, 2004 of third party cheques to the value of £10,000; (9) the transfer by Mr Ashworth of £15,000 from Newnote's bank account on November 4, 2004 (which was accepted to be the repayment of the advance made on October 26).

III Application to set aside

12. Mr Ashworth applied to set aside the statutory demand.
13. In his evidence (a) he accepted that in about November 2001 an additional £1,000 was paid to him but understood that it had been originally recorded in the accounts as a cash float and understood that it would be written off; (b) the payment of £10,000 on October 4, 2004 was not a repayment of the Money Express loan but was to ensure that he had cash available if cash was required by one of the branches; (c) he accepted that £10,000 was overpaid because Pauline Burns, the company secretary, did not realise that he had retained the £10,000 paid on October 4, but he had not at that time balanced what moneys were due and owing between himself and Newnote and therefore did not at the time think it was appropriate or necessary to pay back any money; (d) the two payments of £15,000 were an advance by him at the request of Newnote's bank to place funds in the account, as the overdraft was unacceptably high, and the amount was credited when funds were available in the account; (e) he denied he took £2,000 from Newnote, and said it was left in cash in a drawer at the Huddersfield branch for the purpose of taking money to the Leeds branch on November 1; (f) he accepted he retained some third party cheques, but had instructed his solicitors to deliver them up.
14. He produced a schedule in which he showed a debit balance of £8,976 on the loan account and then indicated that he had cross-claims of £22,439, leaving a balance in his favour of £13,467.
15. The cross-claims were for various expenses incurred on behalf of Mr Pearson and his daughter (somewhat over £2,000); a payment to a shop fitter (Mr Chadderton) of £2,500; a mileage allowance of £2,287; and unpaid salary for November and December, and accrued holiday pay (based on a salary of £38,000) amounting to £4,683, and three months salary in lieu of notice (£9,500).
16. In answer, Mr Middleton, Newnote's solicitor, said: (a) Mr Ashworth had accepted that he had been overpaid £10,000; (b) Mr Ashworth had without authority increased his salary to £62,000, and Newnote sought leave to amend the statutory defence to include the gross salary overpayment; (c) the particulars of debt were not inaccurate in stating that Mr Ashworth took third party cheques, and in fact he had taken cash as well, a total of £12,000 (£5,000 from the Huddersfield branch and £7,000 from the Halifax branch).
17. He produced a schedule contesting the cross-claims. In particular he said that there was no evidence for the smaller amounts. Mr Ashworth was not entitled to unpaid salary because he had not made himself available for work, and he was not entitled to notice or payment in lieu because he was summarily dismissed, and he had no right to payment in lieu of untaken holidays.
18. There was a further round of evidence, in which Mr Ashworth claimed that he had continued in employment until summarily dismissed on December 23, 2004, and denied the misappropriation of cash.

IV Judgments

Deputy District Judge Masheder

19. In a reserved judgment on February 27, 2006 Deputy District Judge Masheder recorded that counsel for Newnote had gone through the items, but had "sought to deal with matters in a fairly narrow sense". He went on: "It is clear to me that the claims upon which the Statutory Demand have been founded are part of a much more intricate course of dealings between the parties over a lengthy period of time and involving a number of other issues relating to the employment/contractual relationship between the parties."
20. He referred to Mr Ashworth's affidavit, and concluded: "There is no doubt in my mind that the Applicant has raised genuine triable issues. When viewed against the background of the length and complexity of the relationship between the parties together with the sheer number of financial transactions involving the parties and the various companies which were merged to form the Respondent Limited Company I am satisfied that the Applicant has shown that he has 'substantial grounds'. The correspondence … lends weight to my view."

HH Judge Pelling QC

21. On appeal Judge Pelling QC decided that the Deputy District Judge had given insufficient reasons for his decision.
22. He rejected an application to amend the statutory demand so as to refer to the overpayment of £10,000 being held on constructive trust on the basis that Mr Ashworth knew that it had been paid to him by mistake. He considered the proper course was for a fresh demand to be issued. He also refused Newnote permission to rely on a new point of law, namely that there could be no set off against the £10,000 overpayment.
23. He allowed the appeal. So far as material his reasoning was as follows. First, Mr Ashworth had in his schedule admitted a sum of £8,976 was due to Newnote, but had asserted cross-claims of £22,439. Second, at the heart of the cross claim was the claim for £9,500 for three months salary in lieu of notice, and there was also a claim for £4,683 for unpaid salary and accrued holiday pay. Third, Newnote was plainly entitled to dismiss Mr Ashworth summarily, because on his own case he had acted in manifest breach of duty by receiving and retaining sums paid to him by Newnote which he knew he was not entitled to, which meant he could have no serious counterclaim or cross claim for the £9,500. Fourth, at least half of the sum of £4,683 was attributable to salary for November which Newnote had said had been paid, and to which Mr Ashworth had not answered. Fifth, there was insufficient evidence to support the balance of the claims made by Mr Ashworth. Sixth, at best he had an arguable counter claim for the unpaid salary and accrued holiday pay, but, in reality, for a sum significantly less than that (which, following discussion after the judgment was given, he quantified at £2000). Seventh, he accepted Newnote's claim for the £2000 said to have been removed by Mr Ashworth, and rejected Mr Ashworth's evidence that he had left the £2,000 in a drawer. Accordingly, Newnote was entitled to proceed on the basis of a demand for £6,976.

IV Court of Appeal

24. Chadwick LJ gave Mr Ashworth permission to bring a second appeal. He was impressed by Mr Ashworth's point that, on Mr Middleton's own figures, more than £3,000 was owing for November/December salary, but, more importantly, thought that a finding that a director was in breach of fiduciary duty ought not to be made in a summary process except in very clear cases.
25. By a respondent's notice, Newnote says that the judge should have dealt with, and accepted, Newnote's contention that Mr Ashworth held the £10,000 on trust for Newnote and that there could be no mutuality in respect of that claim against Mr Ashworth as trustee and the cross claims by Mr Ashworth.
26. A great deal of irrelevant material has been placed before this court, and arguments addressed at length on matters which have no place in the application and this appeal. In particular a number of matters are raised which are said to go to Mr Ashworth's credibility and honesty. They include a salary increase which he is said to have given himself, and his alleged dealings with scrap metal. It is wholly unnecessary to deal with them on this appeal, and they have only served to increase the costs.

V Conclusions

27. The only serious issues are these: first, whether Judge Pelling QC should have held that Mr Ashworth's claim to salary in lieu of notice should have been rejected on the ground that Newnote were entitled to dismiss him summarily because he retained £10,000 paid to him by mistake; second, whether Judge Pelling QC was right to reject his miscellaneous expenses claims on the ground that Mr Ashworth had not produced sufficient evidence; third, whether Judge Pelling QC was right summarily to dismiss Mr Ashworth's claim that he had not taken £2,000; fourth, whether Newnote should be allowed to run the point that Mr Ashworth held the £10,000 on trust and that there was no cross claim available in his capacity as employee.
28. In summary my conclusion is that the history of the matter (including the inter-solicitor correspondence) shows clearly that the statutory demand was a tactical move in the dispute between Mr Ashworth and Mr Pearson. The statutory demand procedure should not have been used to decide whether Newnote was entitled summarily to dismiss Mr Ashworth; the judge gave no reasons for rejecting the expenses claims; it was wrong for the judge in effect to try Mr Ashworth on affidavit on whether he had taken the £2,000; it was within the discretion of the judge not to allow Newnote to run the new point, and there are no grounds for interfering with the exercise of his discretion, or for this court to allow the new point to be taken now.
29. The principles to be applied are not in doubt. By Insolvency Rules 1986, Rule 6.5(4)(a) a statutory demand may be set aside 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 statutory demand" and by Rule 6.5(4)(b) a statutory demand may be set aside if "the debt is disputed on grounds which appear to the court to be substantial".
30. By paragraph 12.4 of the Insolvency Proceedings Practice Direction, 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, the court will normally set aside the statutory demand if, in its opinion, on the evidence there is a genuine triable issue.
31. There was some discussion in the courts below whether the "genuine triable issue" was the same threshold as, or a lower threshold than, the "real prospect of succeeding on the claim/successfully defending the claim" test for summary judgment under CPR 24.2(a). That means a realistic as opposed to fanciful prospect of success, carrying some degree of conviction (and not merely arguable): Swain v Hillman [2001] 1 All ER 91, at 92; cf. ED & F Man Liquid Products Ltd v Patel [2003] EWCA Civ 472, at [7]-[8].
32. Prior to the Civil Procedure Rules it had been held that the "bona fide disputed on substantial grounds" test in the context of a winding up petition could be satisfied even if the debtor could not resist summary judgment under Order 14: Re Welsh Brick Industries Ltd [1946] 2 All ER 197. But in that context the distinction has not survived the CPR. In Re The Arena Corporation Limited [2004] BPIR 415, 433 Sir Andrew Morritt V-C said that in the context of winding up proceedings the test is whether the debt is bona fide disputed on substantial grounds, which, for practical purposes, is synonymous with "real as opposed to frivolous." See also Hofer v Strawson [1999] 2 BCLC 336; Guinan III v Caldwell Associates [2004] EWHC 3348 (Ch), [2004] BPIR 531.
33. It seems to me that a debate (see e.g. Kellar v BBR Graphic Engineers (Yorks) Ltd [2002] BPIR 544, 551) as to whether there is a distinction between the "genuine triable issue" test for cross-claims and "real prospect of succeeding on the claim" (i.e. on the cross-claims) involves a sterile and largely verbal question, and that there is no practical difference between "genuine triable issue" and "real prospect" of success and certainly not in this case.
34. In each case it is open to the court to reject evidence because of its inherent implausibility or because it is contradicted by or not supported by the documents: National Westminster Bank plc v Daniel [1993] 1 WLR 1453, 1456-7 (summary judgment); Portsmouth v Alldays Franchising Ltd [2005] BPIR 1394, para 12 (setting aside of statutory demand).
35. In Popely v Popely [2004] EWCA Civ 463, [2004] BPIR 778 it was held that the expression "cross-demand" in rule 6.5(4)(a) did not imply any kind of procedural or juridical relationship to the debt subject to the statutory demand. All it meant was that the demand was one that went the other way, i.e. was a demand by the debtor on the creditor. The cross-claim must of course be one which can be characterised as genuine and serious, or of substance (Popely v Popely at [68], applying Re Bayoil SA [1999] 1 WLR 147, a winding up petition case), or as raising a "genuine triable issue" (paragraph 12.4 of the Insolvency Proceedings Practice Direction).

A Reasoning

36. Newnote supports the criticism by Judge Pelling QC of the Deputy District Judge's reasoning. Newnote says that there was no analysis, nor any identification, of what the supposed triable issues were, why they were substantial, or how the correspondence assisted. The Deputy District Judge had to decide whether Mr Ashworth had satisfied him that there was a genuine triable issue on substantial grounds, not merely assert that because there were a number of financial transactions and a complex relationship that that amounted to substantial grounds. This amounts to him giving no reasons at all.
37. A judicial decision which affects the substantive rights of the parties should, of course, be reasoned; a judge must explain why he or she has reached the decision; and the scope of the duty depends on the subject matter of the case: English v Emery Reimbold & Strick Ltd [2002] 1 WLR 2409.
38. Although the Deputy District Judge's reasons are short, it seems to me that they met the test in the context of the present application. The decision for the Deputy District Judge was simply whether on the evidence there were genuine triable issues on the cross-claims. He referred to the evidence, and it is clear why Mr Ashworth won, which is that the claims arose in the context of an employment dispute and could not be determined in an application to set aside a statutory demand.
39. But that is not enough to dispose of the matter, since Judge Pelling QC was entitled to examine the Deputy District Judge's exercise of his discretion and consider whether the Deputy District Judge had grounds for coming to the conclusion that Mr Ashworth had raised genuine triable issues.

B Summary dismissal point

40. Mr Ashworth challenges Judge Pelling QC's decision that the cross-claims for payment in lieu of notice could not be maintained by Mr Ashworth because there were abundant grounds on which there had been repudiatory conduct justifying summary dismissal. He says that this was wholly unsuitable for determination by summary process. He told this court that he had issued proceedings for salary in lieu of notice, and that a hearing was to take place on July 16, 2007.
41. Newnote says in particular that a managing director who keeps money mistakenly repaid to him without repaying it cannot conceivably resist instant dismissal on any of those grounds let alone all of them. Mr Ashworth's evidence accepted that he knew at the time that the payment was a mistake. Despite the fact he was managing director of Newnote and associated companies, he did nothing to alert Newnote.
42. Mr Ashworth says that the amount paid to him on October 6, 2004 was in fact £37,800, although nothing turns on the additional £7,800 on this appeal. He accepted that £10,000 was an overpayment in respect of a loan to Money Express, because Pauline Burns, the company secretary, did not realise that he had already been paid £10,000 out of his £30,000 loan. He did not repay the £10,000 because he kept it for paying company expenses.
43. He told this court that most of the £10,000 had been used for company matters, and resiled from what he had previously accepted, namely that Pauline Burns had not realised that he had retained the £10,000. I do not consider that it would be right for this court to take account of these statements, which were not evidence, and of which advance notice had not been given to Newnote.
44. The overpayment was part of a payment of £30,000 made on October 6, 2004. This represented an overpayment of £10,000, in relation to a loan previously made by Mr Ashworth to Money Express of £30,000. Subsequently on October 26, 2004 Mr Ashworth advanced £15,000 to Newnote or Money Express, at the request of its bankers.
45. Nevertheless I am satisfied that the course of dealing between Mr Ashworth and the companies, his evidence, and the inter-solicitor correspondence shows that this is a matter which ought not to have been resolved on an application to set aside a statutory demand. The figures show that Mr Ashworth lent money to, and was repaid money by, Newnote or Money Express on a regular basis. It seems to me plain that this is not a matter which can or should be resolved on affidavit, and that the Deputy District Judge was right to decide that the claims were part of a course of dealings between the parties over a lengthy period of time and involving a number of other issues relating to the employment/contractual relationship between the parties.

C Miscellaneous expense items

46. Judge Pelling QC dismissed ten individual items for reimbursement of expenses claimed by Mr Ashworth, amounting to about £7,500 on the ground that Mr Ashworth had not produced sufficient evidence of the expenditure. Mr Ashworth's evidence was that he was forever laying out his own funds for Newnote, which he generally paid in cash out of his own account. He then would take this money back from Newnote as and when cashflow allowed him to do so or when the final invoice was raised.
47. This sum included £1,242 for insurance for Mr Pearson's daughter which has (we were told by Mr Ashworth) been paid in full by Newnote following proceedings by Mr Ashworth.
48. It also included £2,500 to a shopfitter, Mr Chadderton, and Mr Ashworth's evidence was that he paid deposits upfront to the contracted shopfitter for works he did on behalf of the business. He has commenced proceedings against Newnote for reimbursement, which have been stayed pending the outcome of these proceedings.
49. There is also an item for mileage allowance of £2,287. Newnote's evidence was simply that Mr Pearson had said that no mileage claims were submitted by Mr Ashworth and in the absence of claims submitted they could not be paid.
50. In view of my conclusions on the wrongful dismissal point it is not necessary to decide this point, but it does seem to me that in view of the relationship between the parties, and the way in which the business was conducted, that it was wrong for the judge to reject this cross claim simply because Mr Ashworth had produced no documentary evidence.

D £2000 cash

51. Judge Pelling QC rejected Mr Ashworth's evidence in relation to £2,000 in cash, which he had transferred from the Halifax branch to the Huddersfield branch on November 1, 2004. Mr Ashworth's evidence in his first affidavit was that he advised Mandy Wood, Branch Manager at Huddersfield, that the money had been left upstairs in his top drawer for transfer to the Leeds branch. He said: "I can only assume that this money was collected either by Mandy or by Michael Pearson but, certainly, I never removed these monies from the business for my own personal use."
52. Newnote's case had been that Mr Ashworth's account was incredible. In particular it was incredible that if he had left £2,000 in a drawer, he would have failed to mention that or have it mentioned on his behalf in the solicitors' correspondence. Quite apart from the inherent implausibility of a managing director leaving cash in those circumstances (when he knew that the state of relations between the parties was that he was under great suspicion) it is even more incredible that nothing would be said about it when the inevitable accusations followed and he had instructed solicitors.
53. I do not think that it was open to Judge Pelling QC to decide this question on affidavit, in the context of a cash business whose record-keeping and modus operandi seems to have been very haphazard.

E New mutuality point

54. Newnote sought before Judge Pelling QC to raise a point which had not been argued before the Deputy District Judge. The point was this: (a) Mr Ashworth had accepted that he received £10,000 by a mistake on the part of Newnote; (b) accordingly he held it on trust for Newnote: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 714-715; Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, at [29]; (c) the consequence is that because that debt constituted a trust obligation vis-a-vis Newnote there could be no set off against that amount for want of mutuality: Hurst v Bennett [2001] 2 BCLC 290.
55. Judge Pelling QC did not permit the new point to be argued. I do not consider that there are any grounds for interfering with that exercise of discretion, nor do I consider that this court should itself permit the new point to be raised. It involves difficult points of law, which have not been finally settled, and which are unsuitable to be determined on a summary application of this kind, particularly in a case where there may be an issue as to whether the money was paid by mistake, and whether, if it was paid by mistake, Mr Ashworth knew it, and is bound to account.
56. First, in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 714-715, Lord Browne-Wilkinson did not express a final view on whether a trust/proprietary remedy was available in cases of payment by mistake. Second, I am far from satisfied that Hurst v Bennett [2001] EWCA Civ 182, [2001] 2 BCLC 290 shows that, even if the mistaken payment did give rise to a restitutionary trust remedy, there would be no answer to the statutory demand. In Hurst v Bennett it was held that a statutory demand served on Mr Hurst in relation to an indemnity on partners to trustees of the lease would not be set aside because of Mr Hurst's claims against the partnership. It was because this claim was against the partners in their capacity as such, and their claim was advanced in their capacity as trustees. Mr Hurst owed money to four trustees who held a lease for themselves, Mr Hurst and fifteen other former partners. The trustees' statutory demand was not subject to Mr Hurst's cross-demand against his nineteen other former partners. As Arden LJ said, at [32], the amount due to the four trustees was due to them personally whereas any amount due to Mr Hurst was due to him from all the other partners jointly. This is far from the case here, where the claim is by Newnote against Mr Ashworth for restitution, and the claim by Mr Ashworth is for arrears of salary etc against Newnote.

F Newnote/Money Express accounts

57. As I have said, the statutory demand by Newnote was dated November 10, 2005, and was for £21,476.07, plus interest. At the hearing before this court, Mr Ashworth produced the accounts for Newnote and Money Express for the year ended June 30, 2006. The accounts for Money Express (and not Newnote) show a figure of £21,476 as a loan as at June 30, 2006, and also as at June 30, 2005.
58. Mr Pearson was in court when Mr Ashworth produced these accounts, but was not in court in the afternoon, when Mr Michael Booth QC for Newnote was asked about the accounts. He was unable to assist, because he had no instructions, and was driven to suggest that it might not be the same debt, or that the accounts were wrong. This was a most unsatisfactory response, since even if the statutory demand had in other respects not been liable to be set aside, this would have been an additional ground for it to be set aside on the basis that it had been served on behalf of a person who was not the creditor: see Coulter v Chief Constable of Dorset Police [2004] EWCA Civ 1259, [2005] 1 WLR 130, at [23].
59. I would therefore allow the appeal and set aside the statutory demand.

Lord Justice Buxton:

60. I agree.