England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM READING COUNTY COURT
HIS HONOUR JUDGE HARRIS QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th November 2010

Lord Justice Maurice Kay:

1. This case arises out of the sale of a business by an agreement in writing dated 13 July 2007. Paseana purchased the business and assets of Lextrex. The business was concerned with the sale of printers on the internet. The purchase price was £200,000 payable on completion. Mr Steven Evans and Mr John Ellison were parties to the agreement as guarantors in respect of any liabilities of Lextrex. Mr Evans was the managing director and Mr Ellison, who had been responsible for the early development of the business, was a non-executive director of Lextrex.
2. By clause 3.3 in Schedule 1, Lextrex was entitled to an additional earn-out consideration based on performance in the 12-month period following the sale. By paragraph 19 of Schedule 3 it was agreed that Paseana would act in good faith and use all reasonable endeavours to maximise the profit of the business and "enter into all transactions and arrangements on arm's-length terms". By clause 6.1 of the agreement Mr Evans and Mr Ellison guaranteed "payment of all sums due from time to time from [Lextrex]".
3. In addition to the agreement in writing there was an oral agreement that Lextrex would run and accommodate the business for an initial period following completion while Paseana was preparing its own premises. It was agreed that Paseana would pay Lextrex a monthly management fee. In the event, Lextrex ran the business for Paseana for some three months following the sale. In these proceedings Paseana claimed the sum of £67,908.56 plus interest. The sum was made up as follows. Firstly it was claimed that Lextrex had received £105,482.30 as receipts on behalf of Paseana in respect of credit card transactions during the three months when it was continuing to run the business; however, Paseana accepted that Lextrex had paid out £51,175.36 as expenses in the course of the operation of the business during that time. The net figure for credit card receipts was therefore £54,306.94. Paseana accepted that Lextrex was entitled to £3,750 in respect of management fees for the initial three-month period, which further reduced the claim to £50,556.94. Secondly, Paseana claimed that Lextrex had received an additional £17,104.44 on behalf of Paseana in relation to non-credit card transactions. Thirdly, Lextrex had failed to pay Paseana for goods supplied, which were the subject of three invoices totalling £237.18. The claim was therefore for £50,556.94 + £17,104.44 + £237.18 = £67,908.56.
4. The history of the proceedings is as follows. On 13 October 2008 Paseana issued its claim form. The proceedings were served on 27 October 2008. On 5 November 2008 Mr Ellison filed an acknowledgement of service. On 28 November 2008 Paseana entered judgment against Lextrex and Mr Evans in default of acknowledgements of service by them. On 8 December 2008 it entered judgment against Mr Ellison, who had not filed a defence. On 16 December 2008 Lextrex went into liquidation and Mr Evans and Mr Ellison issued applications to set aside the default judgments against themselves. No such application was ever made by or on behalf of Lextrex or its liquidator. The applications to set aside were listed for hearing on 19 March 2009, but on that date the matter was adjourned. On 22 June 2009 the applications were dismissed by District Judge Henson in Reading County Court. On 7 December 2009 HHJ Harris QC dismissed appeals by Mr Evans and Mr Ellison. Mr Evans and Mr Ellison subsequently sought permission to appeal to this court. Permission was initially refused on the papers, but it was granted by Longmore LJ following an oral hearing on 6 May 2010.
5. When District Judge Henson refused to set aside the default judgments she did so on the single ground that, as Lextrex had not applied to set aside the judgment against it, Mr Evans and Mr Ellison were unable, as a matter of law, to have the judgments against themselves as sureties set aside. It is now common ground that that reasoning was largely erroneous. When HHJ Harris refused to set aside the judgments against Mr Evans and Mr Ellison he did so on different grounds. He had before him witness statements from Mr Evans and Mr Ellison in identical form, in which they asserted that, because of the intervention of the liquidation, they had not been served with the notice of proceedings. On the other hand, Mr John Clarke, Paseana's solicitor, had made a witness statement testifying to service by first class post on 27 October 2008 and adding that, given that Lextrex did not go into liquidation until 16 December:

"all of the paperwork was sent to the various parties nearly six weeks before the date of the company's liquidation"

6. In addition, as I have said, Mr Ellison had filed an acknowledgement of service on 5 November 2008. In dismissing the appeals the judge said:

"For a court to exercise its discretion in a defendant's favour it normally requires a reasonable explanation for what has happened. That explanation, it goes without saying, should be truthful. Here what was clearly an inaccurate and dishonest explanation was put forward. When shown not to be accurate the matter was simply ignored. It is argued on the defendant's behalf that dishonesty is not a suitable ground for disallowing an application to set aside. I disagree. A party seeking the court's indulgence cannot reasonably expect to try to mislead the court and then to leave it in ignorance. That seems to be the position here. Had the second and third defendant said simply that, in the impending shipwreck of their company, this was a matter overlooked, they might have done more to engage the court's sympathy, but they chose not to do that.

It is argued that there is a real prospect of a successful defence ... In this connection the defendants make a number of assertions about the amount of money owed to the company, but no documents are exhibited, no draft defence was before the District Judge, though one has been recently produced. It may be that there are matters which can properly be employed which would just about justify a finding of a real prospect of a successful defence, at least perhaps in part; but, looking at the matter overall, I do not conclude that this is a proper case in which to exercise the court's discretion. Manifest and unexplained lack of frankness fatally undermines this application."

7. The appeal to this court is put mainly on the basis that the judge erred in his application of CPR 13.3. The material parts of CPR 13.3 are as follows:

"…the court may set aside or vary a judgment entered under Part 12 if –

(a) the defendant has a real prospect of successfully defending the claim; or

(b) it appears to the court that there is some other good reason why –

(i) the judgment should be set aside or varied; or

(ii) the defendant should be allowed to defend the claim.

(2) In considering whether to set aside^(GL) or vary a judgment entered under Part 12, the matters to which the court must have regard include whether the person seeking to set aside the judgment made an application to do so promptly [Rule 3.13 provides that the court may attach conditions when it makes an order]"

8. It is common ground that it is not enough to show "an arguable defence"; the defendant must show that he had "a real prospect of successfully defending the claim". In ED & F Man Liquid Products Limited v Patel [2003] EWCA Civil 472 Potter LJ said:

"…although generally the burden of proof is a practice of only marginal importance in relation to the assessment of evidence, it seems almost inevitable that, in particular cases, a defendant applying under CPR 13.3(1) may encounter a court less receptive to applying the test in his favour than if he were a defendant advancing a timely round of resistance to summary judgment under CPR 24.2"

9. It is common ground that the application to set aside was made promptly. The hearing before us has focussed on two issues. The first is whether the judge was justified in finding that the explanations proffered by Mr Evans and Mr Ellison for their respective defaults were "inaccurate or dishonest". There is a degree of ambiguity in the judge's language as between inaccuracy and dishonesty; however, I do not consider it necessary to resolve it. At the very least, the judge was entitled to find that both Mr Evans and Mr Ellison had put forward inaccurate accounts of how they had come to default and had not further explained themselves when the inaccuracies were pointed out. It would be surprising if, having acknowledged service, Mr Ellison would have gone on deliberately to deny it; on the other hand, Mr Evans, who did not acknowledge service, was managing director at the time, and it would be surprising if there had been no early conversation between the two men after Mr Ellison was served, even if Mr Evans was not served at the same time. I do not find it necessary to venture further into this aspect of the case.
10. The real question revolves around the second issue, namely whether the judge was justified in treating the inaccurate (or even dishonest) explanations as determinative of the applications to set aside. The judge did not reject the submission that the draft defence which was produced to him offered a real prospect of a successful defence. In the concluding part of the passage which I set out earlier, he seems, perhaps grudgingly, to have accepted it did. No one is suggesting that inaccuracy, or even dishonesty, in relation to a procedural matter is an absolute bar to an application to set aside a judgment; moreover, it does not seem to me that the judge considered that that finding fatally undermined the defendant's case on the substantial underlying dispute. He did not expressly link that inaccuracy or dishonesty to the substantive dispute and any determination of it.
11. Such a finding would not have been appropriate. The question was, and is, whether the finding was one which the judge was entitled to rely upon so as to determine the application in the circumstances of this case. In my judgment, it was not. Two reasons support my conclusion. The first is that it was incumbent upon the judge to have regard not just to CPR 13.3 but also to the overriding objective of dealing with the case justly and the provisions of CPR 3.9, which deals with relief from sanctions and which requires consideration of all the circumstances of the case: see Hussein v Birmingham City Council [2005] EWCA Civ 1570.
12. The second, which follows on from that, is that, if he had done so and if he had carried out a balancing exercise in relation to the respective potential injustices as between the parties, he ought to have taken into account the fact that the case advanced in the draft defence was substantially (albeit not in every detail) consistent with the case which had been spelt out in correspondence by Mr Evans as managing director as long ago as 25 February 2008, some nine months before the proceedings were issued. It was not a case cobbled together at the eleventh hour simply to support the application.
13. In these circumstances the judge was wrong to refuse the application to set aside. Mr Evans and Mr Ellison ought not to have been denied the opportunity to defend Paseana's claim. The default judgments against them ought to have been set aside, albeit a cost sanction against them would have been appropriate.
14. Accordingly, I would allow the appeal and set aside the default judgments. However, I would impose a condition on Mr Evans' and Mr Ellison's further defence of Paseana's claim. It seems highly probable that that claim may be indefensible in part. Mr Sinai does not seriously dispute that, although he suggests that it may relate to only a small part of the claim. We have no means of quantifying it with accuracy. I would make the future defence of the action conditional upon the payment into court by Mr Evans and Mr Ellison of £5,000 within 14 days. If my Lords agree, there will also remain the question of costs here and below upon which further submissions will be appropriate.

Lord Justice Hooper:

15. I agree.

Lord Justice Tomlinson:

16. I also agree.

Order: Appeal allowed