England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		The Rolls Building 7 Rolls Buildings Fetter Lane London EC4A 1NL
		5 December 2013

1. MR JUSTICE MORGAN: On 26 February 2013 Deputy Registrar Garwood made a Bankruptcy Order in relation to Lawrence Power. The bankruptcy debt on which the petition was funded arose in this way.
2. Mr Power has been involved in litigation for some years with a Mr Godfrey. On the whole, the litigation has gone in favour of Mr Godfrey and against Mr Power and indeed, his wife, Mrs Power. One step in the long litigation led to an order being made on 16 October 2008 by Master Fontaine in a claim brought by Mr Power against Mr Godfrey. Mr Power had earlier obtained a default judgment in that claim and Master Fontaine set aside the default judgment, struck out the claim and ordered Mr Power to pay Mr Godfrey's costs of the action to be summarily assessed at £8,614.25.
3. Putting arguments as to set off and counterclaim on one side, it is clear that Mr Power has never paid the costs which were summarily assessed. That led to Mr Godfrey serving, or allegedly serving, on Mr Power a statutory demand. The statutory demand was based upon the order for costs; a small amount of interest was added, taking the debt, the subject of the statutory demand to £8,850.26. There is an issue as to whether that statutory demand was served on Mr Power. There is strong evidence that it was but Mr Power, if it were material, would wish to challenge that evidence. As matters have turned out, at the hearing today it has not become necessary to go into that issue.
4. The debt referred to in the statutory demand was not paid by Mr Power, again putting issues of set off and counterclaim on one side, and Mr Godfrey on 26 February 2010 presented a bankruptcy petition which led to the bankruptcy order to which I have referred. In the petition, Mr Godfrey relied upon and relied only upon the statutory demand and the debt referred to therein. I should say that Mr Godfrey would contend that Mr Power owes him more than the sum in the statutory demand and refers to other orders for costs which have been made. Even taking those sums under those other orders together with the sum in the statutory demand, the issue in this appeal still falls to be dealt with.
5. As I have indicated, the petition was presented some considerable time ago. There have been a number of hearings in the Bankruptcy Court when directions have been given and eventually the matter came on for a substantive contested hearing before the Deputy Registrar on 26 February 2013. As I have indicated, he made a Bankruptcy Order in relation to Mr Power. Mr Power did not appeal within the time fixed for appealing; instead, he served a Notice of Appeal on 19 April 2013. He correctly stated that he needed permission to appeal, had not been granted permission to appeal and therefore sought permission to appeal. He correctly stated that he was out of time to lodge his appellant's notice and asked for an extension of time for so doing and relied upon a number of matters. He also applied for an order that permission be granted to adduce further evidence in the form of a particular witness statement of a Ms Wang.
6. The appellants notice had annexed to it a document headed, "Grounds of Appeal". There were three grounds of appeal and the first criticised the way in which the Deputy Registrar had conducted the hearing on 26 February 2013. The second ground of appeal was to the effect that Mr Power had never been served with the statutory demand to which I have referred. The third ground of appeal was in these terms and I will read part of the ground of appeal as presented as follows:

"Mr Power had a default judgment against Mr Godfrey for £59,326 which had been entered in April 2011, i.e. nearly two years earlier. It was not subject to a set aside application for Mr Godfrey who had known about it for at least ten months. The judgment was closely connected with the bankruptcy debt owed by Mr Power to Mr Godfrey which amounted to just £8,614 plus interest. Consequently, Mr Power's judgment was self-executing in that it operated as an equitable set-off to extinguish his debt to Mr Godfrey automatically. (The ground of appeal as drafted then refers to three earlier authorities) Thus, the Deputy Registrar was not entitled to go behind the default judgment and consider the likelihood that it might ultimately be set aside. He failed to recognise that at the time of the hearing, the bankruptcy debt no longer existed and so could not found the petition."

7. The appellant's notice as I say was dated 19 April 2013. The first thing that had to be done was to consider whether this appellant's notice should go forward, it being out of time. The papers were plainly put before David Richards J and on 22 April 2013 he made an order in the appeal. The order bears the date stamp for the next day, 23 April 2013 and the recital to the order is, "Upon considering the applications made in the appellant's notice". The first paragraph of the order is in these terms, "Appellant's application to bring this appeal out of time is granted". The second order required the appellant to file a full appeal bundle and a transcript of the judgment. The third paragraph of the order gave the appellant permission to adduce the witness statement of Ms Wang as had been sought in the appellant's notice.
8. The first question which I must consider is whether the order of David Richards J on 22 April 2013 gave Mr Power permission to appeal. I am quite satisfied that it did not. It did what it said and no more in that it gave Mr Power the ability to bring the appeal even though he had served his appellant's notice out of time. The order on its true construction, even read as I am asked to read it against the background of all the applications made in the appellant's notice and the recital in the order does not mention permission to appeal and neither grants it nor refuses it. That is because the established procedure is that with an in-time appeal the appellant must lodge certain documents. It will be the case in all but a tiny handful of appeal that the judge needs a transcript of the judgment before he can consider whether it is appropriate to grant permission to appeal. It is suggested to me by Mr McDonagh who appears today on behalf of Mr Power that this was such an obvious case for permission to appeal that it is no surprise that David Richards J gave permission to appeal (even though he did not say so) without having had an appeal bundle and even more importantly, a transcript of the judgment. It seems to me improbable in the extreme that the judge would have given permission to appeal without those essential documents.
9. The judges of this Division are very well used to reading grounds of appeal that say something which when one examines the underlying judgment are found to be wholly without substance. I should add this; I have for the avoidance of all doubt asked David Richards J whether he considered he was granting permission to appeal. He has told me that he did not grant permission to appeal and has pointed out to me (and I agree with him) that the language of his order is the standard language used for giving an extension of time to appeal and does not say one way or the other whether permission is given or refused.
10. It follows that this matter has been listed erroneously on the basis that it is a substantive appeal. It can only be at the highest, if I permitted it, an application for permission to appeal with appeal to follow if permission granted. I will permit that to be the character of this hearing. It seems to me that that is what the appellant wants and there is no injustice to Mr Godfrey in proceeding in that way. Mr Godfrey tells me that he is ill and not able to come to deal with this appeal in person. He lives in New York; his funds have been seriously depleted by a number of matters which he would say are largely the fault of Mr Power. I make no finding about that but what is important is that as I read a very detailed skeleton argument supplied to me by Mr Godfrey, it is quite clear that he was expecting today's hearing to be the substantive hearing of an appeal. For that reason there is no injustice to him if I deal with it as an application for permission to appeal and if permission is appropriate, go on straight away to deal with the substantive appeal.
11. It will be apparent from what I say later in this judgment that the ground of appeal on which I intend to concentrate is the third ground of appeal dealing with the default judgment which came about in this way. In giving this recital of the history, I am ignoring a large number of matters which in the end do not bear on today's decision but which might be very relevant on other applications which may need to be made in this case. For that reason, I go straight to a claim which was issued by Mr Power against Mr Godfrey. The claim number is HQ10X04776 and was issued on or about 16 December 2010, therefore after the petition was presented. The brief details of claim indicated the claim was pursuant to an assignment of a debt due from the defendant. I will not read out the entirety of the particulars of claim (brief though they are) but I will attempt to summarise them further.
12. The particulars of claim refer to an agreement made between the parties in June 1990. The agreement in substance involved Mr Godfrey agreeing to repay a sum of £24,000 which was owed to Mr Power by a company which was being acquired from Mr and Mrs Power by Mr Godfrey. It is then said that although Mr Godfrey undertook to pay the £24,000 he did not do so. It is then said perhaps with an eye on the question of limitation that there was a later agreement when the question of payment was deferred until a later event involving the receipt of monies from a property development in relation to a property known as, "The Old Rectory" in Staffordshire. It is then said that the later event which was to trigger the obligation to repay came about so that the debt accrued and the limitation period no doubt began to run but had not expired, no doubt, by the time of the issue of this claim.
13. The way in which Mr Power says he is entitled to sue on this debt involves a little complication. He does not sue on the original agreement that the money was to be paid to him. Rather he says that he assigned the debt to a Mr White in 1991 and Mr White reassigned it to Mr Power in 2009. As I say, this claim was then brought after the petition was presented, the claim being 16 December 2010. Mr Power then applied for a default judgment against Mr Godfrey. He produced a certificate of service of the claim form, applied for judgment and the court was satisfied that the paperwork was in order because on 12 April 2011 the court in those proceedings entered judgment against Mr Godfrey stating that Mr Godfrey had not replied to the claim form and he was ordered to pay the sum of £58,696.77 in relation to the debt and £630 for costs, bringing the sum to a total of £59,236.77. That judgment was entered on 12 April 2011, 2½ years ago. There was no application made before the hearing in front of the Deputy Registrar on the part of Mr Godfrey to set aside that judgment. Indeed, there has been no application made since February 2013 before today, 5 December 2013 by Mr Godfrey to set aside that judgment.
14. It is quite clear that Mr Godfrey has been aware of the judgment's existence for some time. That matter was investigated at the hearing before the Deputy Registrar. Whether Mr Godfrey does or does not have good reasons for allowing time to pass before applying to set aside the default judgment is not a matter in which I will express any concluded view, but it is clear from what Mr Godfrey said when asked about the matter by the Deputy Registrar, that he has been aware of the existence of this judgment, perhaps not immediately in April 2011, but for a considerable period of time. That is a most important matter for today's purposes.
15. At the hearing in February 2013 the Deputy Registrar plainly gave some consideration to the circumstances in which Mr Godfrey might, if he applied for it, be able to have the default judgment set aside. On the hearing of this appeal I have been taken to CPR Rule 13.2 and 13.3. Rule 13.2 identifies cases where the court must set aside judgment entered under Part 12, as this was. On examining Rule 13.2 I am not able to see any ground on which Mr Godfrey would be entitled to have the judgment set aside on those mandatory grounds. Rule 13.3 deals with cases where the court may set aside or vary such a default judgment. The requirements of Rule 13.3 are well known and two in particular ought to be mentioned. The first is that the defendant must show a real prospect of successfully defending the claim and further, under Rule 13.3(2) the following is directed:

"In considering whether to set aside 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."

16. My attention has also been drawn to the notes in Civil Procedure, Volume 1, pages 448 and 449 under note 13.3.3 which refer to what is meant by the reference to "Acting promptly" when seeking to set aside our default judgment. The position as regards setting aside the default judgment is therefore this: Mr Godfrey had not applied to set aside the judgment prior to the hearing before the Deputy Registrar in 2013. Further, he has not applied even before today to have that judgment set aside. In theory, in principle he could apply even today to have it set aside and if he were to apply, two points would no doubt be of importance. The first would be whether he could show he had a real prospect of successfully defending the claim but I am not going to express a view on that. If an application is made to set aside the judgment that will be for the court dealing with that application. However, I can say this much; it does not seem to me that the requirement of showing a real prospect of successfully defending the claim would be Mr Godfrey's principal difficulty. He will no doubt face argument as to whether he has applied promptly. That is one of the matters to which the court must have regard and the way in which the court has regard to it is described in the notes in Civil Procedure.
17. It is not necessary for the purpose of disposing this appeal to make a final assessment of Mr Godfrey's prospects of getting the judgment set aside, nor Mr Power's prospects of defeating Mr Godfrey's application to set aside the judgment. Let me assume in Mr Godfrey's favour that he has a real prospect of having the judgment set aside. That does not mean that Mr Power has no prospect of holding that judgment. It must be considered that Mr Power does have a real prospect of holding onto that judgment if an application to set aside where ever to be made by Mr Godfrey.
18. Accordingly, the position in relation to the debts of the two parties is as follows. On the face of it, Mr Power was liable to pay the costs, £8,600-odd plus a little interest to Mr Godfrey and Mr Godfrey has been judged liable to pay a sum approaching £60,000 to Mr Power. Plainly, £60,000 is far greater than £8,600 and indeed, even if one added the other orders for costs in Mr Godfrey's favour which he has obtained against Mr Power and regarded those as in the balance against the £60,000, that amount still easily exceeds the sum which Mr Godfrey can say was otherwise due to him.
19. The settled practice when one is considering whether a petitioner has established that a debt is owing, sufficient to found a bankruptcy petition and a bankruptcy order, is to ask whether the alleged debtor has a bona fide cross claim put forward on substantial grounds. Mr Power is entitled to say he has far more than that; he has a judgment of the court in his favour and there is no current application to set aside that judgment. Applying the language of the usual test, "bona fide cross claim on substantial grounds" I make the following points.
20. It seems to me in a case like the present where Mr Power has a judgment in his favour, the issue as to bona fides relates to his reliance on the judgment rather than on the bona fides of the underlying claim which he made in his claim form. I say that because if there had been an issue before me as to whether the claim was put forward bona fide, that would be a substantial point that I would need to consider and form an opinion about. However, that is not the matter which has to be bona fide. What has to be bona fide is Mr Power's ability to rely upon the judgment in his favour. It is a judgment of the court and until it is set aside, he has every right to seek to enforce it and deploy it as a cross-claim in relation to the petition debt.
21. As to whether Mr Power has substantial grounds for relying on the judgment, first of all, it is a judgment, secondly there is no current application to set it aside and thirdly, if there were to be an application, I have expressed my views about what the outcome could be. In accordance with those views I hold that Mr Power has substantial grounds for saying that he is owed £60,000 pursuant to that judgment. On that basis, there really ought not to have been a bankruptcy order made, certainly not at this stage. How then did the Deputy Registrar came to a different conclusion?
22. I have been provided with a full transcript of the hearing before the Deputy Registrar on 26 February 2013. I have read through that, not least because of the other ground of appeal suggesting that the Deputy Registrar had intervened excessively in the hearing resulting in an unfair procedure. Dealing with the default judgment, on the present ground of appeal I have also the extempore judgment of the Registrar which extends to 4½ pages, or 24 paragraphs. The Registrar refers to the statutory demand, he refers to other matters, he refers to the default judgment and he rightly says it is for about £60,000. In paragraph 6 he says this:

"A point to which that gives rise is whether I can and, if so, should look behind that judgment. In that sense, I am of the view that I can look behind it because it is not a judgment reached by a decision of a court at any hearing. Rather it is a judgment obtained in default of defence. Counsel for Mr Power rightly says to me that a judgment which has been obtained in default is a judgment which stands until it is set aside, and it is increasingly difficult for the defendant against whom a judgment has been made to apply successfully the longer he leaves it. It is fair to say that this judgment goes back to 12 April 2011 and therefore, just short of … well some ten months ago. In that sense, no application has even been made to have it set aside."

23. The Deputy Registrar then went to the question as to what Mr Godfrey knew about the judgment and at paragraph 9 he says that one possibility would be for him to adjourn the petition so that Mr Godfrey could go off and seek to apply to have the judgment set aside. That would then allow the Deputy Registrar or another judge to decide whether in relation to the underlying claim which had led to the judgment and indeed a further where there is no judgment, whether those claims were sufficiently strong cross claims to lead to a refusal to make a bankruptcy order. The Registrar then says at paragraph 10 that the matter has been going on for a considerable time. Before continuing with the judgment I say that the Deputy Registrar has gone into that history in some detail at the hearing before him and I have gone into the matter in a little detail at the hearing of this appeal. The Deputy Registrar then goes through the history as to how the alleged debt which led to the judgment had come about and what Mr Power had to say. In the course of discussing that matter the Deputy Registrar puts forward reasons why Mr Power in truth had no real claim, even though he later obtained judgment. At paragraph 21 he says:

"As I say, my conclusion in relation to this is that although Mr Power has managed since the presentation of this petition in whatever way to obtain a default judgment, that is a default judgment which is so obviously tainted and so obviously would have been set aside, that it would be bizarre if I were to adjourn this matter to give Mr Godfrey an opportunity to have it set aside, incurring yet further costs in applying to do so."

24. The Deputy Registrar then dealt with another suggested cross claim rather similar to the one which had led to the default judgment but in fact a different claim, as the Deputy Registrar acknowledged. Having dealt with the claim which led to the default judgment and the claim where there was no default judgment, he says this at paragraph 24:

"I go through these things because obviously it is very important. It would be wholly wrong for the court to make a bankruptcy order without very careful consideration of what may turn out to be or may appear to be at first sight, a potentially significant and relevant cross claim or indeed, two such cross claims. I am entirely satisfied on the evidence before me or the absence of evidence before me to support any such debt that Mr Power has simply not made any case by reference to which there is any reasonable possibility whatsoever that he actually has the benefit of any cross claims against Mr Godfrey. In those circumstances, as the petition debt cannot be disputed the only conclusion which I can reach is that I can properly make a bankruptcy order and that it is appropriately exercised in my discretion to do so. I therefore make a bankruptcy order in respect of Mr Power."

25. It is apparent from those paragraphs in the Deputy Registrar's reasoning that he effectively treated the judgment as not existing. He went behind the judgment to the underlying claim, then assessed the underlying claim and expressed his view upon it. I am not going to indicate one way or the other whether I agree with the Deputy Registrar's assessment of the underlying claim and whether there is anything in the other grounds of appeal as to whether the Deputy Registrar had reached that conclusion as a result of a procedurally unfair hearing. I will assume in the respondent's favour that the Deputy Registrar was entitled to reach those conclusions and did not act in any way which was procedurally unfair.
26. However, what is wholly missing from that assessment of the situation is an assessment of whether Mr Godfrey would apply to have the default judgment set aside and if he did apply, how he would fare in relation to the question of promptness in Rule 13.3. It can be said that what the Deputy Registrar decides is that for the purposes of Rule 13.3 Mr Godfrey had an overwhelming argument for saying that he had a real prospect of successfully defending the claim. However, the Deputy Registrar does not anywhere refer to the separate matter of promptness, a matter which the cases on that jurisdiction show is a matter which is given considerable weight, at least in many such cases.
27. Accordingly, I reach the conclusion that the reasoning of the Deputy Registrar in relation to this default judgment is flawed. I revert to my own assessment which is that Mr Power on the basis of the default judgment, rather than anything else, can show that he has a bona fide cross claim on substantial grounds. It follows that I should set aside the bankruptcy order which has been made by the Deputy Registrar.
28. That brings me to a question which is perhaps not entirely straightforward and that is what should now be done. It seems to me that the three courses are for this court on appeal to dismiss the bankruptcy petition, alternatively to adjourn the bankruptcy petition giving Mr Godfrey a chance to make an application, if so advised, to set aside the default judgment and the bankruptcy petition would then await the outcome of such an application. A third possibility is that I direct a new trial of the matter and all points can be looked at again, including this question of the relevance of the default judgment.
29. I draw attention to the fact that in the appellant's notice the order which is sought is an order for a new trial. As against that, under Rule 52.10 the Appeal Court has power to make the order which it thinks appropriate, including all the orders that could have been made by the court from which the appeal is brought. It seems to me that it would not be a proper use of resources and would not be a proper order to make as regards the parties having to engage with a further trial process for me to direct a new trial. Whatever about the underlying dispute, the claim which is put forward in Mr Power's claim form, and whatever might or might not be said about that there is this single point which I have described in the course of argument as "the trump card" which is that Mr Power has a default judgment in his favour. It seems to me that while that is the position, the choice must really be between dismissing the bankruptcy petition or adjourning the bankruptcy petition in the way that I have earlier described.
30. In favour of dismissing the bankruptcy petition is the fact that after it was presented but long before the hearing before the Deputy Registrar, Mr Power obtained a default judgment for a sum which exceeded all of the debts which he is said to owe to Mr Godfrey. Mr Godfrey was aware of that default judgment for a very substantial period of time. He did not at any point before the hearing before the Deputy Registrar apply to have that default judgment set aside. Indeed, there has been no application since February of this year to have the default judgment set aside. Mr Godfrey has not, in what is otherwise an informative skeleton argument, indicated that he wishes now to make that application. I entirely understand that he may have felt he did not need to make the application because after all, he had obtained the bankruptcy order which he had sought against Mr Power. Also in favour of dismissing the bankruptcy petition is the fact that this bankruptcy petition has been hanging over the head of Mr Power for a considerable period of time. If I were to adjourn it rather than dismiss it, it will hang over his head for a further period of time. In favour of adjourning the petition rather than dismissing it is the fact that if the petition is adjourned and kept alive, then certain consequences follow under the insolvency legislation in relation to the period from the presentation of the petition.
31. In all the circumstances, I consider that the appropriate response to this problem is to dismiss the bankruptcy petition. Mr Godfrey has had a very considerable time already to apply to set aside the default judgment and he has not done so. I do not say that he cannot try to set it aside hereafter and I make no prediction as to what the outcome of that application might be. However, in the absence of a pending application or even a request for time to make an early application, it seems to me the time has come to take the view that this bankruptcy petition should now be dismissed.
32. It will be apparent from that discussion that it is not necessary for me to consider whether the ground of appeal dealing with service of the statutory demand is a good ground of appeal and it is equally not necessary for me to consider the criticisms which have been made of the Deputy Registrar in relation to his conduct of the hearing in February of this year. I can see nothing to be gained by discussing those points inconclusively and so I will not do so.
33. I therefore formally give permission to appeal, I will allow the appeal and I will further dismiss the bankruptcy petition.