England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY
IN THE MATTER OF BROADSIDE COLOURS AND CHEMICALS LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986

		The Court House Oxford Row Leeds LS1 3BG
		20/2/2012

Judge Behrens :

1 Introduction

1. This is an application by the Second Respondent ("James Button") to set aside so much of the judgment dated 4^th May 2011 as relates to him. In a nutshell he contends that he was never served with the proceedings and knew nothing about the proceedings until September 2011. In July 2011 the Liquidators of Broadside Colours and Chemicals Ltd ("BCCL") had obtained final charging orders against two properties owned but let by him. He contends that he has a complete defence to the claim.
2. James Button wrote to the solicitors of the Liquidators at the end of September 2011 and there then followed correspondence between Mr Kelly, the solicitor at HLW Keeble Hawson LLP with conduct of the matter on behalf of the Liquidators, and Mr Medley, a financial advisor instructed on behalf of James Button. The correspondence between Mr Medley and Mr Kelly is not before the court as it was conducted on a without prejudice basis.
3. The negotiations between Mr Medley and Mr Kelly broke down in early January 2012 when the Liquidators issued proceedings for an order for sale of the two properties. On 17^th January 2012 James Button made this application to set aside the judgment.
4. It is supported by witnesses statements from James Button and Simon Kaberry and opposed by a witness statement from Mr Kelly.
5. In a nutshell the Liquidators submit that the proceedings were validly served on James Button because they were sent to his "last known address". They rely on a ruling I made on the first day of the trial when I held that they were validly served. They deny that there is a good defence on the merits. Indeed they contend that there is no realistic prospect of any part of James Button's proposed defence succeeding. Furthermore they contend that, as the application has not been made promptly it should be dismissed.

2 The judgment

6. The nature of the Liquidators' claims and the reasons for the judgment are reported on BAILII – see [2011] EWHC 1034 (Ch). It is thus not necessary to set out the matter in any detail. However in order to understand the nature of the case and the submissions it is necessary to summarise the issues and my conclusions.

Geoffrey Button is James Button's father. Both Geoffrey Button and James Button were directors of BCCL. Geoffrey Button became a director when BCCL was incorporated in 1979. James Button was appointed a director in 1999.

According to the records filed at Companies House James Button resigned as a director on 24 July 2004. He now contends that he resigned in the summer of 2003. BCCL entered into creditors voluntary liquidation on 10 September 2004.

On 9 September 2010 the Liquidators issued these misfeasance proceedings against James Button Geoffrey Button and Catherine Button under section 212 of the Insolvency Act 1986. They claimed £58,711.75 against Geoffrey Button and £68,636 .95 against James Button said to be repayable under section 341 of the Companies Act 1985 as unlawful loans to directors by virtue of section 330(2)(a) of the Act.

Geoffrey Button sought to avoid the consequences of section 341 by reliance on a final dividend of £58,700 due in respect of the year ending 31^st July 2003 and an Interim Dividend of £41,463 in respect of the period from 1^st August 2003 to 31^st March 2004.

In the course of my judgment I held that the sums due on James Button's loan account were as follows:

Period	Amount
Yr ending 31/7/2003	£28,763.36
1/8/2003 – 31/3/2004	£23,253.05
1/4/2004 – 31/8/2004	£13,359.50
Total	£65,375.91

For the reasons set out in paragraphs 41 to 49 and 50 to 52 I held that both the Final and the Interim Dividend were unlawful.

Even though the proceedings were not issued until 9 September 2010 I held that the claims were not statute barred. I held that both James Button and Geoffrey Button were fiduciaries and that there was no limitation period to recover trust property unlawfully received by a fiduciary. The claim against Catherine Button failed as it was statute barred.

3 Service of the proceedings on James Button

7. As already noted these proceedings were issued on 9^th September 2010. On 1^st October 2010 the Application Notice, Points of Claim and Notice of Hearing were "served" on James Button by sending them by first class post to The Tudors, Adel Mill, Eccup Lane, Adel, Leeds LS16 8BF ("The Tudors").
8. The Liquidators had no personal knowledge of James Button's address. However they carried out a search at Companies House in respect of BCCL. That search revealed that James Button was appointed as a Director on 10^th May 1999, that he resigned on 24^th July 2004 and that The Tudors was his address.
9. It is now clear that The Tudors was indeed James Button's address in 2004. It is still the address of his wife and children. However there has been an acrimonious divorce and a family rift in 2009 and James Button has not spoken to his father or wife for some considerable time. The Tudors was not his address in October 2010 and his wife did not forward mail to him. His father did not inform him of the proceedings.
10. The application came before DJ Jordan on 7^th October 2010. None of the Respondents attended. DJ Jordan gave directions designed to ensure the pleadings were complete by 11^th November 2010 and adjourned the matter to 24^th November 2010.
11. On 24^th November 2010 the matter came back before DJ Jordan. Geoffrey Button had filed a Defence and attended in person. It is not clear what DJ Jordan was told but he directed that the Points of Defence stand as the Points of Defence of all the Respondents. He gave further directions in relation to disclosure and witness statements and directed that the matter be listed for trial on 28^th and 29^th March 2011.
12. Mr Kelly continued to send all documents to James Button at The Tudors. There was no response. He did not receive any of them from his wife.
13. The application duly came before me on 28^th March 2011. Geoffrey Button attended but James Button did not. It immediately became clear that Geoffrey Button had no authority to act on behalf of James Button. He made it clear that he had not spoken to his son and was not authorised to act on his behalf. On behalf of the Liquidators Miss Jackson submitted that the application could continue against James Button because it had been served at his "last known residence". In a short ruling on 28^th March 2011 I accepted that submission and directed that the trial should continue against James Button.

4 James Button's Defence

14. On 23 January 2012 James Button filed a Defence in which he makes a number of points:

He was a Director of BCCL between 1999 and the summer of 2003. During that time he was a salesman being remunerated by commissions on sales and reimbursement of expenses. BCCL was in reality being run by his father.

Acting on professional advice and in order to minimise tax payments were recorded as loans which were set off by dividends.

Even though he resigned as a Director in the summer of 2003 BCCL or its agents failed to notify Companies House of his resignation until July 2004. Notwithstanding his resignation BCCL wrongly recorded payments to him as loans

The claims are statute barred.

As he was acting on professional advice he ought to relieved from any liability.

15. These points were repeated by James Button (with the assistance of Mr Kaberry) at the hearing on 27^th January 2012.
16. Miss Jackson suggested that these defences had no realistic chance of success. She makes the point that the moneys were clearly received by James Button, that the financial records were prepared by the company book keeper and the company accountant and that I had evidence from Mr North (the accountant) at the trial.
17. If James Button ceased to be a director in the summer of 2003 there is in my view clearly a defence to the two claims after that date. Payments made to him after that date could not have been directors loans. They may have been loans or they may have been payments for commission or expenses as he alleges. Either way they were not paid to him as a fiduciary and it is to my mind well arguable that their recovery is statute barred. It has to be remembered that these proceedings were not issued until September 2010.
18. Thus the date when James Button resigned as a director may well be a critical feature in the case. The only evidence in support of the date in July 2004 is the entry at Companies House. This is refuted by James Button. Miss Jackson did not assert that the date at Companies House was conclusive. In those circumstances it is impossible for me to say that James Button's evidence on the point must be rejected. It follows that there is a realistic possibility of a successful defence to these two claims.
19. The position for the claim for the year ending 31/7/2003 is, to my mind, more problematical. James Button was a director for this period and approved the accounts. There is force in Miss Jackson's submission that there is no realistic prospect that a judge would differ from my view that the 2003 final dividend was unlawful. I am however troubled by the potential defence under section 727 of the Companies Act 1985. It is true, as Miss Jackson points out, that loans to directors are expressly prohibited under section 330 and that there is a right of recovery under section 340(2) of the Act.
20. Under section 727 the Court has power to relieve a director for breach of duty if he has been honest, acted reasonably and the court considers he fairly to be excused. There are a number of factors here in James Button's favour. He was very much the junior director who was not concerned with the financial aspects of BCCL; he was acting on advice from Mr North and believed that the procedure adopted was lawful. Furthermore it cannot be said that the overall remuneration (treating the loan/dividend package as remuneration) was in any way excessive. In my view therefore there is a realistic possibility that the defence under section 727 could succeed or succeed in part.
21. I therefore conclude that there is a defence with realistic prospects of success to all three claims.

5 Procedure

22. The matter does not end there. Miss Jackson submits that James Button faces insuperable procedural difficulties in his application.

5.1 Service

23. She submits (as she did on March 28^th 2011) that the position as to service is governed by the Insolvency Rules as to service prior to the amendment of the Rules in 2010. Under Insolvency Rule 12.11 CPR Part 6 applies as regards any matter relating to service. Under CPR 6.9 the application must be served on an individual at "his usual or last known residence". Under CPR 6.9(3) there are circumstances where a claimant must make reasonable enquiries to ascertain a defendant's current address but they only arise when a claimant has reason to believe that the address is not current. Miss Jackson submits that the Liquidators were entitled to rely on the address at Companies House as the "last known address". She points out that the Liquidators had no reason to believe that it was not the current address and accordingly she submits there was no duty to make any further enquiries. Accordingly she submits that the proceedings were validly served.

5.2 Lack of Promptness

24. James Button did not attend the trial and thus she submits that the position is governed by CPR 39.3(5). She submits that the Court only has a discretion to set aside the judgment if James Button can establish that he acted promptly, had a good reason for not attending the trial and had reasonable prospects of success. She referred me to the decision of the Court of Appeal in Regency Rolls v Carnall [2001] AER (D) 1417. She submitted that there were no realistic prospects of success and that James Button had not acted promptly. She relied on the period between September 2011 and January 2012 and submitted that that period was not prompt.
25. In case there was no valid service of the proceedings she also referred me to Nelson v Clearsprings Management [2007] 2 AER 407 and submitted that given the delay and (as she submitted) the lack of merits the Court should not set aside the judgment.

6 Discussion

6.1 Insolvency proceedings

26. These were insolvency proceedings. Accordingly the right to review the order is governed not by CPR 39.3(5) but by Insolvency Rule 7.47(1) which gives the court power to review, rescind or vary any order made by it in the exercise of its jurisdiction. There is an equivalent power in the case of bankruptcy under section 375(1) of the Insolvency Act 1986. A comprehensive review of the section 375 mechanism was carried out by Laddie J in Papanicola v Humphreys [2005] 2 AER 418. In paragraph 25 he set out a number of principles:

It seems to me that a number of propositions can be formulated in relation to s 375. Some of them are derived from the passages cited above. (1) The section gives the court a wide discretion to review vary or rescind any order made in the exercise of the bankruptcy jurisdiction. (2) The onus is on the applicant to demonstrate the existence of circumstances which justify exercise of the discretion in his favour. (3) Those circumstances must be exceptional. (4) The circumstances relied on must involve a material difference to what was before the court which made the original order. In other words there must be something new to justify the overturning of the original order. (5) There is no limit to the factors which may be taken into account. They can include, for example, changes which have occurred since the making of the original order and significant facts which, although in existence at the time of the original order, were not brought to the court's attention at that time. (6) Where the new circumstances relied on consist of or include new evidence which could have been made available at the original hearing, that, and any explanation the applicant gives for the failure to produce it then or any lack of such explanation, are factors which can be taken into account in the exercise of the discretion.

27. In paragraph 37 he considered CPR 39.3:

The power to vary or rescind under s 375 can be exercised whether or not the applicant attended or was represented at the hearing where the original order was made. However where he did not attend and that is said to have contributed significantly to the alleged error in the original order, it is incumbent on the applicant to explain why he did not attend and what steps he took to bring the matter back speedily to court. Were it otherwise, a party intent on delay could decline to attend a hearing and then simply apply for rescission later and at his leisure. Although s 375 is a statutory code relating to insolvency proceedings, it seems to me that when a party seeks the review or rescission of an order made in his absence, the philosophy underlying CPR 39.3(3)-(5) applies. The applicant must explain why he was absent from the earlier hearing and he must apply for rescission promptly, meaning with reasonable celerity. If there is a delay between the original order and the application under s 375, he should explain, if it be the case, that he has acted with reasonable speed. He has done none of these things here.

28. Thus, whilst it will be seen that CPR 39.3 is relevant and the question of promptness is accordingly relevant it is not a bar to relief under rule 7.47(1) that James Button has not acted promptly.
29. To my mind the two most important factors influencing my discretion are first that, as I have held, James Button does have realistic prospects of success on the merits and second that he had no knowledge of the proceedings at all until September 2011. I accept that he did not act promptly in seeking the order set aside between September 2011 and January 2012 but to my mind this is not fatal. He notified Mr Kelly at the end of September that he knew nothing of the claim and there were without prejudice negotiations between the parties between September 2011 and January 2012. No doubt James Button should also have issued this application but it has to be remembered that he was (and is) a litigant in person and was not aware of the need for promptness whilst he was negotiating with the Liquidators.
30. In my view, therefore, even if the proceedings were validly served on James Button it is appropriate to set aside the order of 4^th May 2011 in so far as it affects James Button.

6.2 Valid Service

31. As it may be relevant to the question of costs and other ancillary orders it is right that I should express a view on whether James Button was validly served. Plainly there is power to review my decision under rule 7.47 now that the matter has been raised by James Button.
32. I agree with Miss Jackson that the matter is governed by CPR 6.9 and that the crucial question is whether The Tudors is James Button's last known residence within the meaning of the rule. No authority was cited to me on these words at either hearing and I have therefore carried out some research in the light of the discussion in paragraphs 6.9.3.1 and 6.9.4 of the 2011 White Book. The most useful decision is that of Collie v Williams [2006] 1 WLR 78 where there is a discussion of this point in paragraphs 60 – 72 of the judgment.
33. It is not necessary to cite the whole of the passage but paragraphs 67 – 71 are important:

Mr Yeo contends that, in construing the meaning of the phrase "last known residence", the court should not indulge in fine philosophical notions of "knowledge", and should adopt a practical common sense approach which does not impose unfair burdens on a claimant.

No authority has been cited to us in which the court has had to decide whether an address can be a person's last known residence if it was never his residence at all. As Mr Butler points out, the rule could have been expressed in terms of "the address reasonably believed to be the usual or last residence of the individual". The use of the concept of knowledge was deliberate. There is no other area of the law where the concept of knowledge is equated with that of belief. No authority has been cited to us in support of the proposition that a piece of information which is false can nevertheless be known. As a matter of the ordinary meaning of words, to say "I know X" entails the proposition that "X is true". We do not see how the phrase "last known residence" can be extended to an address at which the individual to be served has never resided.

We accept that the rules should, if possible, be interpreted in a practical way which promotes certainty and minimises the risk of satellite litigation. This does not, however, warrant rewriting the rules so as to make them bear a meaning which they plainly do not have. Nor do we see how interpolating the words "or reasonably believed" in the phrase "the address known to be last residence of the individual" adds to certainty or reduces the risk of satellite litigation.

It follows in our judgment that the judge was right to hold that service was not effected on the defendant's last known residence for the simple reason that he had never resided at 47 Hays Mews.

What is the position where the address is one at which the individual to be served has resided at some time? The point does not arise for decision in the present case. But in view of the uncertainty that exists as to the meaning of "last known residence", we think that it may be helpful if we express our view in particular on the interesting suggestion made by Mr Zuckerman. What state of mind in the server is connoted by the words "last known"? In our judgment, Mr Zuckerman's interpretation goes too far. As we have said, there is an important distinction between belief and knowledge. It is a distinction particularly well understood in the criminal law, but elsewhere too. The draftsman of the rules deliberately chose the word "known". In our view, knowledge in this context refers to the serving party's actual knowledge or what might be called his constructive knowledge, ie knowledge which he could have acquired exercising reasonable diligence. We arrive at this conclusion on the basis of what we understand the words to mean. We do not believe that there are any policy reasons which require us to give the words a strained or unusual meaning. The risk of satellite litigation is inherent in whatever interpretation is adopted. It is true that a defendant who has not in fact received the claim form should have no difficulty in setting aside a default judgment. But it is not desirable that defendants should be put to the trouble and expense of making applications to set aside default judgments.

34. As can be seen from this passage the test involves knowledge rather than belief. The only evidence as to knowledge in this case was the Companies House search which indicated (or could be taken to have indicated) that in 2004 (i.e. more than 6 years earlier) James Button's residence was The Tudors. The question to be decided is whether this is, without more, sufficient to constitute knowledge rather than belief.
35. The information at Companies House is based on information sent by the Company under section 288 and 289 of the Companies Act 1985. Furthermore where there is an appointment of a Director the form which is sent has to contain the consent of the director and be signed by him.
36. In those circumstances, applying the practical approach advocated by the Court of Appeal in paragraph 69 of the judgment it seems to me that the Liquidators should be able to treat the information from Companies House as "knowledge" rather than "belief". As the Liquidators had no reason to believe that James Button was no longer resident at The Tudors they did not come under the obligation to make any further enquiries.
37. It follows that I adhere to the view expressed on 28^th March 2011 that the proceedings were validly served even though James Button had no knowledge of them until September 2011.

7 Conclusion

38. The judgment against James Button will be set aside. It follows that the two charging orders will also be set aside.