England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		30/06/2016

Master Matthews :

Introduction

1. This is my judgment on an application by the Claimant by notice dated 3 March 2016 for an order pursuant to CPR rule 13.3 to vary the order of Deputy Master Rhys dated 17 February 2016. By this order the Deputy Master gave judgment in default of defence for the Second Defendant on her counterclaim, and dismissed the Claimant's claim as against the Second Defendant, with certain other consequential orders. The application is supported by a witness statement dated 22 March 2016 of Mark John McGuire with one exhibit, and a further witness statement from him dated 22 April 2016, and opposed by the witness statement dated 18 April 2016 of Jonathan Robert Felce.
2. The first hearing of the application was on 25 April 2016, but the time allowed was not enough, and it continued on 10 May 2016 and 12 May 2016. Even then it was not quite concluded, and written submissions were made subsequently on one point, concluding on 20 May. James Collins QC appeared for the Claimant (applicant) and Zoë Barton appeared for the Second Defendant (respondent). The First Defendant, who is the Second Defendant's husband, did not appear and was not represented. The Third Defendant, who is the First Defendant's trustee in bankruptcy, was represented by Eileen McErlean, who, however, held only a watching brief. It is right to add that Mr Collins QC and his solicitors were not appointed to represent the Claimant until after the order of 17 February had been made, when they replaced the legal team acting until then.

Background

3. The application is made in the context of a claim commenced against the First Defendant and the Second Defendant alone by claim form, together with Particulars of claim, on 27 February 2015, in the Slough County Court. The claim sought possession of a residential property known as 9 Woodcote Place, Ascot ("the Property"), of which the First Defendant and Second Defendant are and since 1996 have been the joint registered proprietors. The claim is made under a legal charge dated 2 July 2014 entered into by both the First Defendant and the Second Defendant ("the Charge"). The Charge was intended to secure the First Defendant's liability under a guarantee by deed dated 6 March 2014, but varied on 2 July 2014, which he alone had given of the liability of his company, Ascot Cable and Power Solutions Ltd ("Ascot"), arising under a stock purchase agreement dated 23 June 2014 with the Claimant. At the date of issue of proceedings, the money claim intended to be so secured was said to be in excess of £1.4 million.
4. Prior to the issue of the claim, however, a number of important events had taken place. The original deed of guarantee was dated 6 March 2014, and was supported by an earlier, purported charge of the Property executed by the First Defendant. This charge was however not executed by the Second Defendant, so it is common ground that it could not be effective to create a charge of the legal estate in the Property. On 19 May 2014 a bankruptcy petition had been presented against the First Defendant by an unrelated third party. On 30 June 2014 the Claimant made a bankruptcy search against the First Defendant, revealing the existence of the petition. On 2 July a variation of the guarantee was made, and the Charge was executed by both the First Defendant and the Second Defendant. On 14 January 2015 the Claimant appointed LPA receivers of the Property pursuant to the charge. On 19 January 2015 the First Defendant was adjudicated bankrupt. The First Defendant's letter informing the Claimant of the adjudication appears to have crossed with the letter serving the claim form on the First Defendant and Second Defendant.

History of the proceedings

5. At the first hearing of the claim in the county court, on 14 April 2015, the First Defendant's trustee in bankruptcy was added to the proceedings as the Third Defendant. On 29 July 2015 the Second Defendant filed and served her defence and counterclaim. These had been settled by Ms Barton of counsel. In summary, her defence to the claim for possession was fourfold. First, the Charge amounted to a regulated mortgage contract (concerning the home of the First Defendant and Second Defendant and their daughter, Hayley), which was unenforceable because the Claimant was not licensed by the Financial Conduct Authority to perform regulated activities under the Financial Services and Markets Act 2000 ("FSMA") and the orders made thereunder (and of which this was one such security). Second, the Charge was void under the Insolvency Act 1986, s 284, as a disposition after presentation of a petition for the First Defendant's bankruptcy. Third, the Property was subject to a trust for the benefit of the daughter of the First Defendant and the Second Defendant, of which they were the trustees, and the Claimant did not take the Charge free of the trust. Fourth, the Charge was induced by the undue influence of the First Defendant practised on the Second Defendant, and of which the Claimant had notice. The defence gives full particulars of these various defences. It amounts to some 29 paragraphs.
6. The counterclaim, on the other hand, is very short. It reads as follows:

"30. The defence herein is repeated.

31. By reason of the foregoing, the Transaction [ie the grant by the First and Second Defendants of the Charge] is unenforceable as a regulated mortgage contract and further or alternatively the Charge is void as a disposition after presentation of bankruptcy petition or voidable by reason of undue influence. As such, the Second Defendant seeks declaratory relief to that effect as appropriate and to set aside the Charge.

32. In the premises, the appointment of LPA receivers by the Claimant on or about 14 January 2015 is of no effect and declaratory relief to that effect is sought.

AND THE SECOND DEFENDANT COUNTERCLAIMS

(i) declaratory relief as aforesaid as to the Transaction being unenforceable, the Charge being void or voidable as the case may be and the appointment of the LPA receivers being ineffective;

(ii) such other relief as the Court deems fit."

7. The history of the litigation thereafter is complex, but important. On the same day as filing and serving her defence, 29 July 2015, the Second Defendant applied by notice for the transfer of the claim to the Chancery Division of the High Court. This application was listed for hearing on 14 August 2015, when there was also a case management conference to be held. On 11 August 2015 the Third Defendant and on 13 August the First Defendant agreed to the transfer. The Claimant however continued to object to it. However, also on 11 August, the Claimant and the Second Defendant did at least putatively agree an extension of time for the service of the defence to counterclaim to 28 August. Pursuant to CPR rule 15.4, as applied by CPR rule 20.3, the time for serving a defence to counterclaim would have been 14 days from the last date for deemed service upon the Claimant. This was apparently 14 August 2015. By CPR rule 15.6, the parties could extend time by agreement for up to a further 28 days, ie to 11 September 2015.
8. On 14 August the transfer application and the case management conference were not heard, but adjourned to after 16 October 2015. It seems that the putative agreement to extend time for the service of the defence to counterclaim to 28 August was abandoned, though in the event nothing turns on that. The Second Defendant chased the Claimant in relation to other aspects of the proceedings on 21 August, 8 September and 19 September 2015, though not the defence to counterclaim. On 1 October 2015 the Second Defendant chased the Claimant in respect of the defence to counterclaim, noting that time for service (whether extended or not) had now long expired. Nothing happened. It seems that the Claimant was considering whether to amend the particulars of claim in light of new information it had obtained, and then counsel was instructed to prepare the draft amended particulars.
9. On 24 November 2015, the Second Defendant issued an application notice for default judgment in relation to the counterclaim. This was listed for hearing on 14 December 2015. On 1 December 2015 the Claimant issued an application notice for permission to amend the particulars of claim, which was listed for hearing on the same date. But also on 1 December, the Claimant finally agreed to the transfer of the claim to the High Court. When the matter came before the District Judge on 14 December, he made the order transferring the matter to the Chancery Division. I add only that, although this appears to have been considered at an earlier stage by the Claimant, no application has been made for validation of the Charge under s 284(1) of the Insolvency Act 1986 (see the transcript of the judgment of Deputy Master Rhys at paragraph 7).
10. On 17 February 2016, Deputy Master Rhys heard the Second Defendant's application for default judgment, based on the Claimant's failure to file a defence to counterclaim, and the Claimant's application to amend the particulars of claim. Ms Barton represented the Second Defendant. The Claimant was represented at the hearing by counsel (not Mr Collins QC). At the end of the hearing the Deputy Master gave an extempore judgment in favour of the Second Defendant. For present purposes, the important parts of his order are contained in the first four paragraphs and the single declaration at the end. In summary, the Deputy Master

1. Gave judgment for the Second Defendant on the counterclaim;

2. Dismissed the Claimant's claim as against the Second Defendant;

3. Dismissed the Claimant's application to amend;

4. Set aside the charge of 2 July 2014 "as against the Second Defendant's legal and beneficial interests in the Property";

5. Declared that the charge was void pursuant to s 284 of the Insolvency Act 1986.

11. Following the hearing of 17 February 2016, the Claimant asked its then lawyers for advice. On 26 February 2016, apparently on the basis of not having received any, the Claimant contacted another law firm. Some papers were provided to it. On 29 February 2016, the Claimant instructed that law firm (the present one) in place of the former, and further papers were supplied. On 1 March papers from the former counsel and solicitors were handed over. A notice of change of solicitor (dated 1 March 2016) was filed at Court on 2 March 2016. On 3 March 2016 the present application was served on the Second Defendant. The evidence in support however was simply that set out in box 10 of the application notice (which was however longer than usual). The full witness statement evidence was not forthcoming until nearly three weeks later, on 22 March, when the witness statement of Mark John McGuire was served. A second witness statement from Mr McGuire was served on 22 April, in answer to that of Jonathan Robert Felce of 18 April 2016, opposing the application. In the meantime the execution of the costs orders of 17 February order was stayed by consent on 17 March 2016, pending the outcome of the present application.

This application

12. The application notice of 3 March 2016 seeks an

"order pursuant to CPR 13.3 to vary the order of 17 February 2016 as the Claimant has a real prospect of successfully defending the Second Defendant's counterclaim or there are some good reasons why the Claimant should be allowed to defend the Second Defendant's counterclaim and the costs order be set aside".

The order sought is attached to the application notice as a draft. For present purposes, the most important parts are these. The first three paragraphs of Deputy Master Rhys's order (see para 10 above) would be completely deleted. In paragraph 4 the words "or beneficial" and the letter "s" at the end of "interests" would be deleted. The declaration at the end would be altered to read "The disposition by the First Defendant by the Charge is void pursuant to s 284 of the Insolvency Act 1986". The Claimant would have permission to amend its defence and so would the Second Defendant consequentially.

13. CPR rule 13.2 deals with cases where the court must set aside judgment given under CPR Part 12, ie in default. It is common ground that it does not apply here. Rule 13.3 reads as follows:

"(1) In any other case, 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 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."

In addition, rule 13.3(4) requires that an application under rule 13.3 must be supported by evidence.

14. It is clear that the court should deal first with the application to set aside under this rule before considering any question of relief from sanctions: Mitchell at [45]-[45]. It is also clear (and I think common ground) that if there are any triable issues (in the summary judgment sense) then the Claimant (as defendant to counterclaim) has a "real prospect of successfully defending the claim" within rule 13.3(1)(a) in relation to them. As to "some other good reason" (on the footing that the Claimant does not have such a "real prospect") there was no such agreement between the parties. Two points in particular are raised which may have to be considered under this head. One is whether a declaration ought to be made at all in relation to the Second Defendant's counterclaim on a default judgment. The other is whether, if the answer is Yes in relation to the counterclaim, the consequence ought nonetheless to be the striking out of the claim itself in relation to the Second Defendant. I will return to these questions later.
15. Lastly, at the final hearing of the application the question was raised by me as to how far a default judgment of the kind that Deputy Master Rhys was giving in relation to the counterclaim might operate as an estoppel for the purposes of the Claimant's claim. As neither party had prepared to argue this point, I gave permission for written submissions on it to be made to me serially. I duly received submissions from both the Claimant and the Second Defendant to which I shall refer in due course.
16. In this application the burden lay on the Claimant to establish the necessary conditions for the order sought. No application was made for cross-examination of any witness whose statement was put in evidence. As to the four heads of defence to the Claimant's claim put forward by the Second Defendant, the Claimant said this. The first head was that the Charge was a regulated mortgage contract and the Claimant was unlicensed. The Claimant denied that it was a regulated mortgage contract because the person to whom the credit was provided, Ascot, was a corporate rather than an individual borrower. The First Defendant was merely the guarantor. The second head was the s 284 point. The Claimant accepted that this section prevented the First Defendant from mortgaging his own property interests, and therefore the Charge was not effective as a legal charge, but argued that s 284 could not prevent the Second Defendant from charging her own beneficial interest. Third, the Second Defendant said the Property was acquired by the First Defendant and Second Defendant, not as beneficial owners, but as trustees for their daughter. The Claimant accepted there were triable issues in relation to the questions of (i) whether there was a trust at all, (ii) whether the Claimant had notice of the trust, and (iii) the trustees' powers or authority. Fourth, as to undue influence, the Defendant said that the focus was on actual rather than presumed undue influence. This was denied, and therefore there was a triable issue here as well.
17. However, I remind myself that, in this application, I am not (so far) considering the Claimant's claim against the Second Defendant. I am considering the default judgment obtained by the Second Defendant against the Claimant on the counterclaim. The counterclaim was described by Mr Collins QC, somewhat pejoratively I think, as a "mirror" of the defence. The same points were raised by the counterclaim as had already been raised by the defence. Yet it does sometimes happen that the same points in issue, if decided one way, can give raise to a claim, but if decided the other way can both knock out the claim and give rise to a counterclaim. It is particularly likely where what the counterclaim seeks is a declaration, eg of non-liability. I was taken to no authority or rule on this point, but in my judgment there is nothing to require me for the purposes of rule 13.3 to treat a default judgment obtained on a counterclaim in any different way from a default judgment obtained on a claim, merely because the counterclaim is a mirror of the defence.
18. In the order of 17 February, the court awarded judgment in default to the Second Defendant. It set aside the Charge as against the Second Defendant, and declared that it was void under s 284. The Claimant argued that, in order to satisfy rule 13.3, all that it had to show was a triable issue (a "real prospect of successfully defending") on a given point in the counterclaim. It was not necessary to show that it would win, even though on the first and second points it argued that its chances of success were much higher than merely triable. I deal with each of the four points in turn.

Regulated mortgage transaction

19. First there is the argument that the Charge was a regulated mortgage contract and the Claimant was unlicensed. The claim by paragraph 5.2(4) alleges that the Charge secured liabilities arising under the Claimant's guarantee of Ascot's liabilities under the stock purchase agreement of 23 June 2014 between the Claimant and Ascot. The defence by paragraph 4(vii) asserts that the Claimant agreed to provide a facility to fund the purchase of stock by Ascot. And in paragraphs 24-27 the Second Defendant avers that the Property was occupied at all material times by the First Defendant, the Second Defendant and their daughter as a dwelling, and that the Claimant knew of this. By paragraph 30, these allegations are repeated in the counterclaim.
20. The Claimant argued that, by virtue of FSMA ss 19, 26(1), the FSMA Regulated Activities Order 2001 No 544, art 61(3) and the PERG Handbook paras 4.4.1(1) and 4.4.2, where security is given for credit provided to a corporate borrower, the transaction cannot be a "regulated mortgage contract" within the legislation. The Second Defendant pointed to the words used and the definitions in art 61 of the 2001 Order. Art 61(3)(a), so far as material, defines a regulated mortgage contract as one where a lender "provides credit to an individual", with "the obligation of the borrower to repay to be secured by a mortgage on land", and at least 40% of the land is used as a dwelling. Moreover, art 61(3)(c) provides that "'credit' includes a cash loan, and any other form of financial accommodation".
21. I assume for present purposes that the Claimant accepts that the Property is land at least 40% of which is used as a dwelling. It appears to be common ground that the main liability in this case was that of Ascot (to whom credit was clearly provided) rather than the First Defendant (who merely guaranteed Ascot's liabilities) or the Second Defendant (who, with the First Defendant, provided security for the First Defendant's guarantee liability). The Second Defendant may seek to argue that some form of financial accommodation was given to the First Defendant as guarantor. For present purposes it does not matter. It is at least well arguable for the Claimant that the only financial accommodation provided here was provided to Ascot, a corporate borrower, and that accordingly the first head of defence would fail at trial.

Insolvency Act 1986, s 284

22. The second argument is that the charge was void under the Insolvency Act 1986, s 284. So far as material, that section provides as follows:

"(1) Where a person is adjudged bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.

[ … ]

(3) This section applies to the period beginning with the day of the presentation of the petition for the bankruptcy order and ending with the vesting, under Chapter IV of this Part, of the bankrupt's estate in a trustee.

[ … ]

(6) A disposition of property is void under this section notwithstanding that the property is not or, as the case may be, would not be comprised in the bankrupt's estate; but nothing in this section affects any disposition made by a person of property held by him on trust for any other person."

23. Paragraphs 2(iii)(a) and 21 of the defence assert that the Charge is void under that provision because a bankruptcy petition had been presented against the First Defendant prior to its execution, which later resulted in an adjudication of bankruptcy against him. Paragraph 7 further alleges that the Claimant knew of the petition at the time of the Charge (this might be relevant if it came to disapplying s 284). It is argued that, because the registered freehold estate in the Property was vested in the First Defendant and the Second Defendant jointly, by virtue of this section the Charge could not and did not create a legal charge in favour of the Claimant. This is because an attempt by the First Defendant, as one of the two joint owners of a legal estate in land, to create a legal mortgage of that land is "any disposition of property" within s 284(1), and so in the circumstances is void. And, as a matter of general law, the Second Defendant as one of two joint legal owners could not create a legal mortgage of the Property on her own.
24. However, that analysis does not take into account s 284(6). That in effect provides that a disposition is not avoided by this section if it is a disposition by a bankrupt so far as he holds property on trust for another person. Here, of course, the First Defendant held as one of two trustees on trust either for the First Defendant and Second Defendant (as the Claimant would say) or for their daughter (as the Second Defendant would say). I cannot and do not determine on this application which of those is right (if either). This is a matter of mixed fact and law, unsuitable for determination at this stage, and eminently suitable for trial. In my judgment it cannot be said that the prospect of establishing one or other at trial is unreal.
25. If it turns out to be the former, then the Claimant argues that the Second Defendant was able to and did create a charge of her own equitable interest in the Property, following such cases as Bateman v Hyde [2009] EWHC 81 (Ch), [13] (permission to appeal refused: [2009] EWCA Civ 1055), and Cadlock v Dunn [2015] EWHC 1318 (Ch), [33]. As I understand it, these cases were not cited before the Deputy Master. In them, as here, A and B were legal and beneficial co-owners of land, and a bankruptcy petition was presented against one of them, followed by a purported transfer or a charge of the joint legal estate by both. As HHJ Behrens said in Cadlock v Dunn,

"[33] … 3. It was also common ground that the legal charge dated 17^th January 2011 was effective to create an equitable charge of Mrs Dunn's beneficial half share of the property in favour of the Lenders in respect of the whole of the outstanding debt. I was referred in particular to the decision of Judge Pelling QC in Bateman v Hyde [2009] BPIR 737 who in paragraph 13 had referred to Thames Guarantee v Campbell [1985] 1 QB 210. I respectfully agree with the views of Judge Pelling QC on this point."

So, in the present case, that would result in an equitable charge over the Second Defendant's beneficial interest in the Property in favour of the Claimant.

26. If it turns out to be the latter, then the Claimant says that it is not bound by the trust for the daughter. If that is so (but this is of course contested by the Second Defendant), then the Claimant may even take its charge at law, because s 284(6) in effect says that a bankrupt trustee for another person can nevertheless to that extent create a disposition of the trust property in accordance with the terms of the trust. In my judgment, each of these is arguable from the relevant premise, and amounts to a triable issue for the purposes of the summary judgment test, and therefore for rule 13.3. Either way, it is properly arguable that the second head of defence would fail at trial.

Trust for the daughter

27. The third head is that the Property was subject to a trust for the benefit of the daughter (now aged 25 or 26) of the First Defendant and the Second Defendant, of which they were the trustees, and the Claimant did not take the Charge free of the trust. Hayley, the daughter, is now aged 25 years. She was about 6 or 7 years old when the Property was acquired and the trust said to have been created. Paragraphs 2(iii)(b), 9 and 10 of the defence make this argument. The counterclaim repeats it by paragraph 30. The Claimant says it is unclear on what basis the trust (if proved) "would vitiate the Charge", and that the Claimant was unaware of it. Moreover, it says that there is no allegation that the trustees had no power to grant the Charge.
28. In my judgment, whether the trust was created at all, whether the Claimant had notice of it (if indeed that is the relevant test) or is otherwise bound by it, and whether the trustees of the trust had the power to bind the beneficial interest by creating the Charge, are all matters put potentially in issue in the draft defence to counterclaim. They are all largely matters of fact with some aspects of law involved. They cannot be determined now. If the issues are determined at trial in favour of the Claimant, then the Second Defendant would fail on this head of defence. In my judgment these are triable issues on which the Claimant has real prospects of success.

Undue influence

29. The fourth head is that the Charge was induced by the undue influence of the First Defendant practised on the Second Defendant, and of which the Claimant had notice. Paragraphs 2(iii)(c), 11-20, and 22-23 of the defence make this argument. Again, the counterclaim repeats it in paragraph 30. It is potentially put in issue by the draft defence to counterclaim. The Claimant argues that this is a case where the Second Defendant was financially dependent on her husband, and that if he could not borrow money they would both suffer. Hence, it is said, there is no manifest disadvantage to the Second Defendant and no presumption of undue influence can arise. The focus will therefore be on actual undue influence. In order to resolve the undue influence issue it will be necessary to hear the evidence and test it in cross-examination. Once again, in my judgment this is a triable issue on which the Claimant has a real prospect of success.

"Some other good reason"

30. Having reached the conclusion that the Claimant has real prospects of success of successfully defending the points raised by the Second Defendant in her counterclaim, it is not strictly necessary for me to consider whether there would be (under rule 13.3(1)(b))

"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."

But as earlier stated, there were two such points raised and argued by the Claimant. First, the counterclaim was the mirror of the defence. Second, the court ought not to give declaratory relief on an application for default judgment.

"Mirror of defence"

31. As to the first, the Claimant referred me to CPR rule 12.11(1), which reads:

"Where the claimant makes an application for a default judgment, judgment shall be such judgment as it appears to the court that the claimant is entitled to on his statement of case."

This rule expressly says that the default judgment is a judgment on the claim put forward in the applicant's statement of case, here the counterclaim. It is not a judgment on anyone else's claim. But the claim put forward may be a negative one, eg a declaration of non-liability, as well as a positive one. Here the Second Defendant's counterclaim is essentially negative in nature, even though it asks that she be relieved of the effect of the Charge.

32. The Claimant accordingly argued that, although the court could grant default judgment to the Second Defendant on her counterclaim, it could not grant her default judgment on the Claimant's original claim. In relation to that claim, the Claimant was after all not in default. I agree with this, so far as it goes. The Claimant went on to submit that therefore the court should not have made paragraph 2 of the order of 17 February 2016, dismissing the Claimant's claim as against the Second Defendant. In my judgment, the default judgment on the counterclaim does not in itself mean that the Claimant's claim as against the Second Defendant should be dismissed. However, at this point other considerations may arise. For example, if an issue estoppel is thereby raised, it may be that the consequence of the default judgment is to make it impossible for the Claimant to continue with its claim as against the Second Defendant, and that therefore the claim should be brought to an end straight away. Whether that is so will depend on the scope of the default judgment, and the application of the rules of res judicata, which I will consider later.

Declaration on default judgment

33. The second point was that the court ought not to give declaratory relief on an application for default judgment. In relation to this question, I was referred to the well-known decision of the Court of Appeal in Wallersteiner v Moir [1974] 1 WLR 991. There the Claimant sued the Defendant for libel in respect of a circular letter to shareholders of a company of which the Claimant was a director, alleging that the Claimant's creature company was seeking to acquire shares in that and another company in breach of company law. The Defendant immediately put in a 'home-made' defence, which some two years later was replaced by a professionally drafted defence and counterclaim. That counterclaim sought declarations of fraud, misfeasance and breach of fiduciary duty by the Claimant, and the payment of equitable compensation to the companies concerned. The Claimant did not file or serve a reply or defence to counterclaim, or indeed prosecute the action.
34. Some three years later, the Defendant applied for (i) dismissal of the claim on the basis of want of prosecution and (ii) judgment on the counterclaim, including both monetary relief for the breach of company law and the declaratory relief as to the conduct of the Claimant. The master (i) refused the application to dismiss the claim, but (ii) granted the application for judgment on the counterclaim. On appeal to the judge, the master's decision on the first point was reversed, and the claim dismissed. On the second point the judgment in default given by the master was affirmed. The Claimant appealed to the CA.
35. The Court of Appeal refused the appeal so far as related to the first point, the dismissal of the claim. But, on the second point, the court distinguished between the declaratory and monetary relief sought on the counterclaim. It dismissed the appeal in relation to the monetary relief. But it allowed it in relation to the declarations granted. Lord Denning MR devoted most of his judgment to the monetary relief aspect of the case. As to the remainder, he said simply this (at 1017E):

"On the other issues [than monetary relief] Dr Wallersteiner should be given leave to put in a defence, but on the terms that he pays all the costs incurred hitherto.

On the broad lines of the case, I find myself in agreement with the judge and would dismiss the appeal: but there should be variations in the respects I have mentioned."

36. Buckley LJ (at 1028H-1029D) was more forthcoming:

"The order which [the judge] made was on the lines of a minute which had been prepared and submitted to him. There was little or no discussion about its form. Following the prayer in the counterclaim, it contains a large number of declarations, including declarations that Dr Wallersteiner has been guilty of fraud. I am more familiar with the practice in the Chancery Division than in any other division of the High Court, but it is probably in the Chancery Division that more use is made of declaratory relief than elsewhere. It has always been my experience and I believe it to be a practice of very long standing, that the court does not make declarations of right either on admissions or in default of pleading. A statement on this subject of respectable antiquity is to be found in Williams v. Powell [1894] WN 141, where Kekewich J, whose views on the practice of the Chancery Division have always been regarded with much respect, said that a declaration by the court was a judicial act, and ought not to be made on admissions of the parties or on consent, but only if the court was satisfied by evidence. If declarations ought not to be made on admissions or by consent, a fortiori they should not be made in default of defence, and a fortissimo, if I may be allowed the expression, not where the declaration is that the Defendant in default of defence has acted fraudulently. Where relief is to be granted without trial, whether on admission or by agreement or in default of pleading, and it is necessary to make clear upon what footing the relief is to be granted, the right course, in my opinion, is not to make a declaration but to state that the relief shall be upon such and such a footing without any declaration to the effect that that footing in fact reflects the legal situation."

37. Scarman LJ (at 1030C-E) made the same decision, though his reasons were not the same:

"[T]hough I entertain grave doubts as to the bona fides and honesty of Dr Wallersteiner both in the financial dealings the court is now considering and in the conduct of this litigation, injustice might well be done to him if without the benefit of trial the court should declare him fraudulent, guilty of misfeasance and of breach of trust. For the very reason that the case reeks of the odour of suspicion, it is, I believe, the duty of the court to exercise caution before committing itself to sweeping declarations: to look specifically at each claim, and to refrain from making declarations, unless justice to the claimant can only be met by so doing. Generally speaking, the court should leave until after trial the decision whether or not to grant declaratory relief, and if so, in what terms: see Williams v. Powell [1894] WN 141."

38. I note in passing that in New Brunswick Railway Co Ltd v British and French Trust Co Ltd [1939] AC 1, HL (to which I was referred on the quite different question of estoppel), Lord Maugham LC said (at 22):

"I think it right to observe that it is in my view undesirable that judges should make declarations as to the true construction of documents on motions for judgment in default of defence. It has not, I believe, been the practice to do so in the Chancery Division for a good many years. As far as possible the Court should make such declarations only when the matter has been argued by counsel on each side, and is then the subject of adjudication by the judge."

39. In the same case, Lord Russell of Killowen said (at 28):

"I would only add that I agree with what the Lord Chancellor has said as to the undesirability of making declarations as to the construction of documents except after arguments on behalf of all persons interested."

40. The Claimant relies on the decision in Wallersteiner v Moir to argue that the court should not on an application for default judgment grant a declaration. In that case the Court of Appeal stripped out the declaratory relief from that granted by the judge. But it is notable that the three judges expressed themselves differently as to the applicable principle. Buckley LJ was most clearly in favour of the principle that the court should not grant a declaration on default judgment: "If declarations ought not to be made on admissions or by consent, a fortiori they should not be made in default of defence." Indeed, he said that this case was all the stronger, because it accused the Claimant of fraud. But the fraud accusation was not the ground of his judgment on this point; it was the default judgment.
41. On the other hand, Scarman LJ founded his decision clearly on the accusation of fraud against the C: "injustice might well be done to him if without the benefit of trial the court should declare him fraudulent". Thus, it was the duty of the court "to refrain from making declarations, unless justice to the claimant can only be met by so doing." It was only "[g]enerally speaking" that "the court should leave until after trial the decision whether or not to grant declaratory relief". Lord Denning MR was even less clear that there should be a principle of the kind referred to by Buckley LJ. He simply gave leave to the Claimant to put in a defence without explaining why.
42. At the same time I bear in mind that of the three judges who sat, Buckley LJ was the only one who had practised at the chancery bar and sat in this division of the High Court. I also bear in mind the comments of the two chancery members of the HL in the New Brunswick Railway case, at paras [39-40] above. They speak of the "undesirability" of making declarations in relation to the construction of documents without argument. That does not go quite as far as Buckley LJ, but it does go further than Scarman LJ and Lord Denning MR.
43. Whatever the experiences of the past, in the modern legal system, where the rules in the High Court should not be interpreted differently in the QBD and in this division, and the overriding objective (CPR rule 1.1) of doing justice at proportionate cost is to be observed everywhere, it would not be right to hold that declarations can never be given on default judgments. In my judgment, the better rule is that declarations should not be given without argument inter partes, save in the clearest cases. That is consistent with all the judicial statements to which I was referred except that of Buckley LJ. Even in relation to his views, the fact is that the rules of evidence today are more relaxed than they were in his time, and there is an even greater need to conserve precious trial time for those cases where it really is necessary. So long as a declaration can be given without injustice to those affected by it, the court should not be hamstrung merely by the fact that it is being sought on an application for default judgment.
44. Accordingly I consider whether there is anything in the present case which made it wrong for the Deputy Master to give the declaration which he did on 17 February 2016. First of all, it is to be noted that counsel and solicitors on behalf of the Claimant (not the present team) appeared at the hearing and argument was heard against the making of the declaration. Second, the Deputy Master appears to have had regard to all the relevant facts, including the facts that time for filing and service of the defence to counterclaim had expired in August (or at the latest in September) 2015, that the Second Defendant had chased for the missing statement of case, that the Second Defendant had then issued its application notice in November 2015, but the Claimant had done nothing up to the time of the hearing, five months later, to remedy the defect. At that stage there was no draft reply or defence to counterclaim, nor indeed any application for relief from sanctions.
45. The Deputy Master in his judgment said this:

"8. The Claimant is in default and has been since August 2015. As I have said, no proper, or indeed, any attempt has been made to remedy any of the defaults. In the circumstances I will give the Defendant [ie the Second Defendant] judgment in default of defence in the form of the amended order suggested by Miss Barton which will include a declaration that the legal charge is void within the meaning of s 284 of the Insolvency Act 1986…"

46. I am not surprised that, on the arguments and material before him, the Deputy Master came to the decision which he did to grant the declaration and make the orders which he did. He did so in the knowledge that the court might decide later to set aside his judgment, but, as he said, "that depends on numerous other factors and I cannot second guess the outcome of any such application." In my judgment, in all the circumstances the declaration given, that the Charge was void under s 284, was not an exercise of discretion by the Deputy Master which can be criticised. He had the relevant materials, and he heard argument from both sides, which did not include any argument that there was a good equitable charge created by the Charge. In itself, therefore, it would not amount to "some other good reason" within rule 13.3 (1)(b) why the judgment should be varied. But, as I have already said, there are reasonable prospects of success under rule 13.3(1)(a), and therefore this point is not determinative.

Discretion

47. I therefore now turn to the question of discretion. I have already set out rule 13.3(2) above, but here I remind myself once more of its terms:

"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."

In addition, there is the question of the application by analogy of the Denton/Mitchell criteria. The present is not at this stage a case of relief from sanctions as such. The court on 17 February 2016 awarded the Second Defendant judgment in default of defence to counterclaim, in accordance with the specific rules on such default judgments, not the generic rules on sanctions for breach of rules or orders.

48. In Regione Piemonte v Dexia Crediop SpA [2014] EWCA Civ 1298 the Court of Appeal held that the Denton criteria were relevant also to an application to set aside a default judgment under CPR rule 13.3. (Even before Denton/Mitchell, the CPR rule 3.9 criteria were applied by analogy to applications under rule 13.3.) But I can pass straight to the even more recent decision of the Court of Appeal in Gentry v Miller [2016] EWCA Civ 141. This was a case of a road traffic accident, where the insurer admitted liability under the Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents as early as April 2013, it appearing that the claim was of low value. However, matters did not progress, and the claimant issued proceedings on 3 July 2013. The defendant failed to acknowledge service of proceedings sent by post to the defendant on the same day, and judgment was accordingly entered against him by default for damages to be assessed on 8 August 2013. On 17 October 2013, there was a disposal hearing to assess damages of which the defendant's insurer appears not to have had notice, but certainly did not attend. The court assessed the damages in the sum of more than £75,000 plus costs. On 25 November 2013 the defendant's insurer on his behalf applied to set aside the default judgment under rule 13.3. This application was dismissed on 11 February 2014, because the defendant did not attend, though the insurer was ordered to be joined as a party.
49. The insurer acquired information suggesting that the claim was fraudulent, and on 26 February 2014 applied to set aside both the default judgment and the assessment of damages, under CPR rule 39.3. The district judge set aside both judgments, and the recorder on appeal affirmed that decision. The Claimant appealed to the Court of Appeal. Vos LJ (with whom Lewison and Beatson LJJ agreed) began his judgment with this sentence:

"This appeal raises the question of how the court should approach the grant of relief from sanctions in a case where the defaulting party has delayed in applying for relief but is able to point to evidence that enables it to allege that the claim is a fraudulent one."

The application was actually one to set aside a judgment or order under CPR Part 39.3, but the court treated the applicable law as the same as for rule 13.3.

50. In introducing the legal issues, Vos LJ said:

"24. It is useful to start by enunciating the applicable principles. Both sides accepted that it was now established that the tests in Denton were to be applied to applications under CPR Part 13.3 (see paragraphs 39-40 of the judgment of Christopher Clarke LJ in Regione Piemonte v. Dexia Crediop Spa [2014] EWCA Civ 1298, with whom Jackson and Lewison LJJ agreed). It seems to me equally clear that the same tests are relevant to an application to set aside a judgment or order under CPR Part 39.3."

25. The first questions that arise, however, in dealing with an application to set aside a judgment under CPR Part 13.3 are the express requirements of that rule, namely whether the Defendant has a real prospect of successfully defending the claim or whether there is some other reason why the judgment should be set aside, taking into account whether the person seeking to set aside the judgment made an application to do so promptly. Since the application is one for relief from sanctions, the Denton tests then come into play. The first test as to whether there was a serious or significant breach applies, not to the delay after the judgment was entered, but to the default in serving an acknowledgement that gave rise to the sanction of a default judgment in the first place. The second and third tests then follow, but the question of promptness in making the application arises both in considering the requirements of CPR Part 13.3(2) and in considering all the circumstances under the third Denton stage.

[ … ]

26. The next question that arises is the appropriate approach to a case where an insurer wishes to set aside a judgment because it has ascertained that there is a viable allegation that the claim was brought fraudulently. The competing considerations here are the finality of litigation set against the desirability of allowing the allegation of fraud to be tried out. In the context of an application after trial to adduce new evidence, this was considered by the Court of Appeal in Owens v. Noble [2010] EWCA Civ 224, [2010] 1 WLR 1489. There, the court determined that the true principle was that "where fresh evidence is adduced in the Court of Appeal tending to show that the judge at first instance was deliberately misled, the court will only allow the appeal and order a retrial where the fraud is either admitted or the evidence of it is incontrovertible. In any other case, the issue of fraud must be determined before the judgment of the court below can be set aside" (see paragraph 27 of Smith LJ, paragraph 50 of Elias LJ, and paragraph 72 of Sedley LJ).

27. An application to set aside a default judgment is not entirely analogous to an application to adduce new evidence of fraud after a trial, because CPR Part 13.3(1)(a) expressly sets the level of proof necessary by providing that the Defendant must show a "real prospect of successfully defending the claim" rather than that the evidence is incontrovertible. But nonetheless, it is axiomatic that there must be finality to litigation and the rules of court must be obeyed, so a default judgment cannot be set aside as a matter of course just because an arguable fraud is alleged, however long after that judgment the application is made. At some point, the court must leave the applicant to seek to vindicate its rights by bringing a fresh action based on the fraud as envisaged by the decision in RBS supra. The question of precisely when that point arises will depend on all the circumstances of the particular case, and can be resolved by the application of the CPR and the rules that I have already summarised."

51. The Court of Appeal accepted that the insurer could show that it had a real prospect of successfully defending the claim. But it appears not to have started to investigate the case until November 2013, and adduced no evidence of a fraudulent claim until February 2014. The court considered whether the insurer was to be regarded as having acted promptly in making the application of 25 November 2013, and concluded that it was not (see [30]-[31]). The court analysed the delay, and said (at [35]):

"the relevant period of delay is, at the least, from 19^th September (almost a month after the insurer made its CPR Part 36 offer) to 25^th November 2013, a period of more than 2 months. The insured cannot, in the context of the history I have described, be regarded as having made its application to set aside the default judgment promptly. CPR Part 13.3(2) enjoins the court to have regard to that lack of promptness in exercising its discretion as to whether or not to set aside the judgment."

52. Then the court applied the Denton tests. The default was serious or significant, but there was a partial but not complete excuse for it. Finally, considering all the circumstances of the case, the court considered that the application to set aside the default judgment should have been refused (at [38]).
53. The Second Defendant also cited to me the decision of Green J in Devon & Cornwall Autistic Community Trust (trading as Spectrum) v Cornwall Council [2015] EWHC 129 (QB). In that case, the claimant was a provider of residential care facilities to local authorities. In correspondence it claimed some £2.5 million in total as debts due from the defendant, said to be in respect of services rendered. The claim as actually issued in June 2012 was for a little over £2 million plus interest. A notice of funding with a 100% CFA was given. The statement of case was criticised as deficient, and in December 2013, the master ordered the claimant to reformulate the claim as one in quantum meruit. Counsel settled a draft amended statement of case, seeking just over £700,000. At a CMC in April 2014 the defendant agreed to this amended draft, with certain further particulars to be given. There was an unsuccessful mediation in June. In August 2014 the claimant "was ordered to produce detailed particulars of key aspects of its claim". The timetable ordered by the court for the progress of the claim, as varied, was laid down in November 2014. Witness statements and notices were to be served by 12 December 2014. They were not.
54. Meanwhile the claimant's first solicitors were subject to a Law Society intervention in summer 2013. They were replaced in December 2013 by a second firm, Kitsons. In July 2014 the claimant's chief financial officer was sentenced to imprisonment for apparently non-work related dishonesty. The chief executive officer was on police bail in relation to an allegation of perverting the course of justice. Subsequently, on 18 December 2014, both Kitsons and leading counsel purported to terminate their retainer and instructions with the claimant. Kitsons continued to maintain a lien on their papers, and would not release them to the claimant's new solicitors.
55. Because of the failure to comply with the December 2014 deadline for witness statements, and the change in representation, the claimant applied to the court for an order permitting the service of witness statements late, and to vacate the trial, on the basis that time was needed to draft and serve the statements. Effectively it was complaining that it had been let down by its lawyers. As the judge noted, the case

"concerns issues relating to the burden of proof upon an Applicant for relief from sanctions and as to the type of evidence required to discharge that burden. It concerns the types of explanation that should be given to a Court when the reasons advanced involve an allegation (express or implied) that prior legal advisors have acted improperly."

56. The judge considered the application in accordance with the well-known Denton criteria. At the first stage he considered that the failure in that case was very serious. At the second stage, he said:

"[21] … The burden of proof lies with the party seeking relief from sanctions …. Here I must consider the reasons given for the failure. As matters stand, I find the reasons advanced to be opaque. I know that the Claimant may have experienced internal difficulties as a result of the engagement of senior personnel with the police, to which I have already alluded … . However, there is no evidence before me to explain how or why these events actually caused the failure on the part of the Claimant to comply with the court orders. As for the reasons why Kitsons and Leading Counsel withdrew I have been provided with no direct evidence. … In my judgment, the reasons which explain why matters have come to this pass cried out for proper and detailed explanation. In circumstances such as this, I would have expected a detailed witness statement from senior employees of the Claimant setting out, with full particulars, the precise events which have led to the present situation and, for reasons set out below, a waiver of privilege thereby permitting the legal advisors to explain themselves."

57. The judge went on to say that since the claimant blamed its lawyers it should waive privilege and enable a full explanation to be given by the lawyers of their criticised conduct. But he emphasised that the burden lay on the claimant, and that simply relying on failures by legal representatives may not be a sufficient explanation. He referred to Mitchell at [41], where the Court of Appeal said that "mere overlooking a deadline, whether on account of overwork or otherwise, is unlikely to be a good reason," and at [43], where the court said that solicitors should delegate more, or not take on the work at all. Whereas good reasons are likely to arise from conduct outside a party's control, the conduct of lawyers was regarded as a matter within that control. In the present case, the circumstances "cried out for a full, detailed, and candid explanation of the relationship between the Claimant and the previous legal advisers" (at [28]). Accordingly he concluded that no good reason had been given.
58. Rule 13.3 and the cases cited enjoin the court to take into account whether the application (which by rule 13.4(3) must be supported by evidence) was made "promptly". In the present case the Second Defendant argues that the Claimant has not made its application promptly. As to what must be done in making such an application, para 12.6 of the Chancery Guide, February 2016 edition, provides that:

"An application to set aside a default judgment must be filed and served on the claimant and should include a witness statement in support and if possible include a draft defence."

Here the application notice (containing in box 10 a statement of the grounds of the application) was issued on 3 March 2016, just over two weeks after the order of 17 February, and sent to the Second Defendant's solicitors that evening. However, no witness statement was provided in support until 22 March 2016, nearly three weeks later. A draft defence to counterclaim was supplied only the day before, on 21 March 2016. Hence, the Second Defendant says, what was served on 3 March was a "bare" application. The "full" application was not served until 22 March 2016, some five weeks after the order concerned. Of course the statement in box 10 of the application notice did supply some evidence in support. It was not a completely bare application.

59. Nevertheless, there is some force in this criticism. It is ordinarily not right to serve an application notice for such an important order as this with some evidence in support at the time, and then, several weeks later, have a second bite at the cherry with an additional witness statement. And in my judgment a party is not excepted from this merely because he or she has just changed lawyers. If a party loses faith in its lawyers, it must seek alternatives without delay. And a bare application could have been made the day after new lawyers were instructed. A full witness statement might take a few days, say up to a week, longer. Here the Claimant took over a week after the hearing to decide to contact another law firm. It was instructed on the next business day, but it was another three business days before the bare application was issued. Then it took nearly three weeks to produce a (not very long) witness statement. In my judgment, although the case is nearer the borderline than in the Gentry case, taking all the events together, the Claimant did not apply promptly within rule 13.3(2). That is not fatal to the application. But it is an important matter to take into account.

Denton: first stage

60. Looking then at the Denton tests, I deal first with the question of the seriousness of the failure. Here the Claimant did not file a defence to counterclaim for some six months, from August 2015 to February 2016, notwithstanding, first of all, being chased in correspondence for it and, secondly, an application notice being issued for default judgment in respect of it. I have to say I am astonished that, with all that time available, the Claimant did not even trouble to produce a draft defence to counterclaim by the time of the February hearing (three months after the application notice was issued). Every trainee solicitor in a litigation seat knows that if you turn up at the hearing with a draft of what you are supposed to have already filed you are in a much stronger position than if you do not. A more deliberate, risk-taking approach I find it therefore difficult to imagine. The rules on statements of case and when they are to be served are there for a good reason. The Claimant's failure meant that the Second Defendant did not know what was in issue and what not. The litigation could not progress. In my judgment, this is a serious failure.

Denton: second stage

61. Secondly, there is the question whether there is a good reason for the failure. The evidence of Mr McGuire for the Claimant is unsatisfactory on a number of grounds. First, it is short, running to 14 paragraphs over two substantive pages of A4. Second, it is bald, giving very little detail. Third, there is an inconsistency between what the Claimant says now and what it said back in February. Back in February it said that the delay in preparing a defence to counterclaim was that the Claimant considered that it would make more sense on costs efficiency grounds for the Second Defendant to amend her defence (to take account of proposed amendments to the Particulars of claim) before the Claimant filed and served a reply and defence to counterclaim. Now Mr McGuire does not mention any of that, but simply blames the lawyers for not telling him what was happening. Fourth, in the 14 paragraphs there are no fewer than four statements to the effect "without waiving any privilege". Mr McGuire (no doubt on advice, for he is not a lawyer, but a salesman) seems to believe that if he uses those words he can say what he likes about the communications between himself (or the Claimant) and the law firm formerly instructed, without running the risk of inadvertently waiving legal privilege for those communications. But, whilst the intention not to waive privilege is significant, it cannot prevent waiver where the party seeks to rely on privileged communications and fairness demands that the whole of those communications be opened up so as to prevent cherry-picking.
62. At all events, Mr McGuire explains in his witness statement that he was given responsibility on behalf of the Claimant to deal with this claim, and accordingly dealt with the former lawyers. In essence he blames them for not informing him (and through him the Claimant) that a defence to counterclaim had to be served within a certain time, that this had expired and the Claimant was vulnerable to a default judgment, or that the Second Defendant had applied for that default judgment. He also blames them for not telling him that the hearing of that application was fixed for 17 February 2016 (though he was told that the hearing that day would be for directions). He says that had he known these things, he would have instructed the lawyers to serve a defence to counterclaim. Apart from the bald statements of the substances of the communications, there is no additional detail given. Nothing is said as to when, where, how and with whom these communications occurred, and no letters, emails or attendance notes are exhibited in support. It is profoundly unsatisfactory. It is also, as I say, not the explanation given by counsel then acting for the Claimant at the hearing on 17 February.
63. As already stated, the burden here lies on the Claimant. Just as in Devon & Cornwall Autistic Community Trust (trading as Spectrum) v Cornwall Council [2015] EWHC 129 (QB), simply relying on alleged failures by legal representatives may not be a sufficient explanation. In this case, since the Claimant blamed its lawyers for what had happened, it should have waived privilege and enabled a full explanation to be given by the lawyers of their criticised conduct. But it did not do so. The result is that I do not know what the lawyers would say. They may say they told Mr McGuire, or someone else at the Claimant. They may say that they did not tell Mr McGuire for some other reason. Or there may be some other explanation. The point I that I just do not know. And it is entirely within the control of the Claimant as to whether I am told or not. Accordingly, in my judgment the Claimant has not discharged the burden of properly explaining the reason for the failure.

Denton: third stage

64. I therefore turn to the third stage in the process. This is to assess all the relevant circumstances, including factors (a) and (b) in rule 3.9(1), although here promptness will also play a role. The Claimant failed, for reasons essentially still unexplained to the court, to file and serve a defence to counterclaim, even in draft form, for six months leading up to a well-heralded application for judgment in default of defence. Founding on a number of issues which I have found to be triable (in the sense that the Claimant enjoys a prospect of success which is not unreal or illusory, and in some respects is rather better than that), the Claimant then made an application to set aside which I have found not to be prompt. The Claimant has shown a cavalier disregard for the procedural rules in relation to the defence to counterclaim.
65. It appears also from a letter from the Third Defendant's solicitors to the Second Defendant's solicitors dated 10 December 2015, and from paragraph 15 of the Claimant's skeleton argument dated 13 December 2015, that the Claimant knew of the bankruptcy petition against the First Defendant at the date of the Charge, but nevertheless proceeded with the transaction, and so in one sense can be regarded as to that extent the author of its own misfortune. In addition, the Claimant must have become aware of the s 284 point at least by the time that the Second Defendant had filed and served her defence and counterclaim on 27 July 2015. Yet it made no proposal to amend its case to deal with this until December 2015. On the face of what Mr McGuire says in his witness statement, it would appear that the Claimant may have a claim against its former lawyers. If that is so, then the Claimant will not be entirely without remedy if it suffers any loss by virtue of the default judgment.
66. I give specific consideration to the two factors set out in rule 3.9(1). Factor (a) is the need for litigation to be conducted efficiently and at proportionate cost. In my judgment it is not so conducted if, as here, a party ignores the rules and delays in proposing changes to its case to reflect the reality of the situation. Factor (b) is the need to ensure compliance with rules, practice directions and orders. Here the Claimant has simply ignored the rule requiring a defence to counterclaim to be filed and served. Although it is not a test, it seems to me that the failures here are rather worse than in Gentry or in Devon & Cornwall Autistic Community Trust, in both of which relief against sanctions was refused. Taking into account all these matters, I conclude that it is not a case in which in the exercise of my discretion I should give relief. The judgment in default in relation to the counterclaim therefore stands.
67. Because I have taken into account the Denton/Mitchell criteria in reaching a conclusion on the application under rule 13.3, there is no justification for my considering separately whether to give relief from sanctions. The sanction was imposed on 17 February. Under rule 13.3 I have been considering whether to relieve from it. There is no sense in doing the exercise again.

Effect of default judgment on claim

68. However, I must now go on to consider what effect the default judgment has on the Claimant's claim. The primary focus is on the question of res judicata. As mentioned above, since the parties had not come to the hearing prepared to argue this, I adjourned to permit written submissions to be made. I am grateful to both counsel for their contributions, which I have found very helpful.
69. Both counsel referred to the decision of the House of Lords in New Brunswick Railway Company v British and French Trust Corporation Limited [1939] AC 1, and the decision of the Judicial Committee of the Privy Council in Kok Hoong v Leong Cheon Kweng Mines Limited [1964] AC 993. In the former case a Canadian railway company had issued bonds of £100 sterling each in 1884, under which the company had to pay interest at 5% per annum, and to repay the capital 50 years later, on 1 August 1934. But the bonds contained a so-called 'gold' clause, requiring the company to repay the capital at the due date at the then value of gold coin of that nominal amount. By 1934 Britain had come off the gold standard, and the value of £100 gold coin was substantially more than £100 nominal. After the bonds had become due for repayment, a speculative investor acquired a number of them. It brought an action in August 1934 on a single bond of the same kind which it had acquired earlier, claiming the gold value. The statement of claim sought a declaration as to the true construction of the bond, both as to the capital repayment due and also as to the interest. The railway company did not enter an appearance, perhaps considering that for a single bond it was not worth fighting about. In November 1934 the investor obtained a judgment in default, including a declaration as asked as to the true construction of the bond. The court heard counsel for the investor plaintiff, but no-one appeared for the railway company defendant.
70. In March 1935 the investor sought repayment of the capital and interest remaining outstanding on all the other 992 bonds that it had acquired, on the same basis as in the default judgment. The company refused to pay on that basis, and the present action was begun. This time both sides were represented. The judge at first instance held that there was no estoppel by reason of the default judgment, because although the parties were the same each bond was a separate contract. He went on to construe the bonds to mean that only the nominal value and not the gold value was repayable.
71. The investor appealed. After the first instance decision and before the appeal was heard the Canadian Parliament passed legislation purporting to entitle a borrower faced with a gold clause to discharge his obligations by reference to the nominal value only. The Court of Appeal subsequently allowed the appeal. It construed the bonds in the sense desired by the investor (as to both capital and interest) and also held that the railway company was estopped by the default judgment. Lastly, it declined to give effect to the Canadian legislation, as retrospective. The railway company appealed.
72. The House of Lords affirmed the decision of the Court of Appeal as to the construction of the obligation to repay capital, but reversed it on the construction of the interest coupon. It also declined to give effect to the Canadian legislation. On the question of estoppel, the House held that the Court of Appeal had been wrong and the judge right. Here there could be no issue estoppel because the contracts in the two cases were different, even though they were in the same terms and the parties to the litigation were the same.
73. Lord Maugham LC said (at 21):

"In my opinion we are at least justified in holding that an estoppel based on a default judgment must be very carefully limited. The true principle in such a case would seem to be that the Defendant is estopped from setting up in a subsequent action a defence which was necessarily, and with complete precision, decided by the previous judgment; in other words, by the res judicata in the accurate sense. If that be the principle, the appellants are not in the present case estopped from raising any contention they think fit in an action on the 992 bonds."

74. Lord Russell of Killowen said (at 28) that:

"numerous authorities upon this question of estoppel were cited to us, but after considering them with care I can find none which would justify us in adopting the view, much less compel us so to do, that the doctrine applies so as to estop a defendant (against whom a default judgment has been obtained based upon a particular construction of one contract) from raising as a defence in contesting a subsequent action on a different contract (but couched in the same or similar language), that the construction of that contract is something different from the adjudged construction of the other contract."

75. Lord Wright said (at 35):

"A judgment by default, if not set aside by the Court on a proper application under the Rules of Court, is binding on the parties (which term may in this as in other cases include privies) and constitutes res judicata in respect of the matter directly decided. Thus it is not possible for the appellants to reopen the question in regard to bond 3300 or to contest the declaration made in respect of that bond as to its construction and effect. The respondents, however, have contended that the default judgment has created an estoppel against the appellants on the true legal construction of the 1938 provision as to interest which is all that is now in issue."

76. And then (at 38):

"There are grave reasons of convenience why a party should not be held to be bound by every matter of fact or law fundamental to the default judgment. It is, I think, too artificial to treat the party in default as bound by every such matter as if by admission. All necessary effect is given to the default judgment by treating it as conclusive of what it directly decides. I should regard any further effect in the way of estoppel as an illegitimate extension of the doctrine, which in the absence of express authority I am not prepared to accept."

77. Lord Romer said (at 43):

"If in an action the question of the construction of a particular document has been in substance decided, each party to the action is estopped from subsequently litigating the same question of construction of that particular document. But he is not estopped from subsequently litigating the question of construction of another document even though the second one be in substantially identical words. For the documents are two distinct documents, and the questions of their construction are two distinct questions."

78. On this issue Lord Thankerton expressed no separate view, but agreed with the other members of the House (see at 26). It appears therefore that the reason why the plea of estoppel failed was because this was a claim on different contracts, albeit in the same terms, from that which had been the subject of the default judgment. So although there is an issue estoppel involved in a default judgment, it is confined to the minimum necessary for the decision.
79. This is also seen in the second decision, in Kok Hoong v Leong Cheon Kweng Mines Limited [1964] AC 993. In this case the appellant in 1954 brought an action against the respondent for rent under the terms of an agreement to hire certain equipment, and obtained a default judgment. In 1957 the appellant brought a second action against the respondent also for arrears of rent under essentially the same contract, but varied. The defence put forward by the respondent was that the appellant was a moneylender and that the contract was a disguised contract of sale on credit at interest which was, under the relevant legislation void and unenforceable. The appellant replied that the respondent was estopped by the 1954 judgment from asserting this defence.
80. The Privy Council, affirming the decision of the Court of Appeal of the Federation of Malaysia, held that the respondent was not so estopped. Giving the advice of the Board, Viscount Radcliffe (who had been of counsel in the New Brunswick Railway case) said (at 1010):

"there is no doubt that by the law of England, which is the law applicable for this purpose, a default judgment is capable of giving rise to an estoppel per rem judicatam. The question is not whether there can be such an estoppel, but rather what the judgment prayed in aid should be treated as concluding and for what conclusion it is to stand."

81. He went on to say (as 1012) that the decision of the House of Lords in had reinterpreted the earlier caselaw:

"This reinterpretation amounts to saying that default judgments, though capable of giving rise to estoppels, must always be scrutinised with extreme particularity for the purpose of ascertaining the bare essence of what they must necessarily have decided and, to use the words of Lord Maugham LC, they can estop only for what must "necessarily and with complete precision" have been thereby determined.

82. Viscount Radcliffe went on to say (at 2013) that

"What, then, must the default judgment be taken to have decided in this earlier action? As a decree it adjudges in terms no more than that the appellant is entitled to recover from the respondent a fixed sum of dollars, interest and costs, and it was argued on this appeal that the judgment can estop from nothing more than a denial of that bare fact. That would not cover the respondent's proposed plea that the hiring agreement of June 20, 1952, was in reality only one aspect of a larger transaction which, in truth though not in form, amounted to a moneylending transaction and a bill of sale. Their Lordships, however, do not think that, where as here the plaint upon which the judgment has been obtained is itself upon and so forms part of the record, there is any valid ground for refusing to notice what case it is that a plaintiff has set up in order to found the order that he claims."

83. Here the defence

"maintains that, when that agreement is read in conjunction with another contemporaneous agreement the obligation to pay the moneys claimed will be seen to be part of a transaction the real nature of which was the borrowing of money on the security of goods. That is an issue which was not raised at all by the plaint in the first action. As a defence, it is more like a plea by way of confession and avoidance than a traverse. On the whole their Lordships think it impossible to say that there was anything in the first judgment which 'necessarily and with complete precision' decided this issue against the respondent, and they hold consequently that the estoppel claimed cannot be maintained against it."

84. In preparing this judgment, I came across the decision of the Court of Appeal in Pugh v Cantor Fitzgerald Ltd [2001] EWCA Civ 307, where these decisions were cited and followed. There the claimant sued his former employer for wrongful dismissal, and obtained a default judgment on liability. The defendant applied to set aside the default judgment on the basis of discovery of matters which would have justified the dismissal. The master dismissed the application, and gave directions for the assessment of damages. The counter-schedule filed by the defendant sought to restate allegations of breaches of contract which (it said) would have entitled the defendant to dismiss the claimant and would be relevant to causation and mitigation. The master struck these out as matters already adjudicated on in the application to set aside the default judgment. The defendant appealed to the judge, who upheld the master's view on causation but allowed the appeal on mitigation. The claimant appealed to the Court of Appeal.
85. In the course of his judgment Ward LJ (with whom Evans-Lombe J agreed) said:

"Thus the second question is what issues are determined by a judgment entered in default of defence. I accept the principle as it was expressed by Viscount Radcliffe in the Privy Council in Kok Hoong v Leong Cheong Kweng Mines Ltd. [1964] AC 993, 1012:-

'... default judgments, though capable of giving rise to estoppels, must always be scrutinised with extreme particularity for the purpose of ascertaining the bare essence of what they must necessarily have decided and, to use the words of Lord Maugham LC (in New Brunswick Railway Co v British & French Trust Corporation Ltd. [1939] AC 1, 21), they can estop only for what must "necessarily and with complete precision have been thereby determined".'

86. Unfortunately there was no note of the master's decision refusing to set aside the default judgment. Ultimately the court found it impossible to conclude that in a summary hearing of which it knew practically nothing such certain conclusions could be drawn as would justify an estoppel of fact per rem judicatem. The appeal was therefore allowed. I offered the opportunity to counsel to make any additional submissions on this case, but neither wished to do so. It is clear that the principle laid down in the New Brunswick Railway case as to the extent of estoppels created by default judgments is still followed today. Both the Claimant and the Second Defendant in their written submissions accepted this.
87. In the present case the position is obviously factually different from any of these decisions. The default judgment here is not obtained in relation to a different contract, or to a contract which forms part only of the alleged complete transaction. Instead it is obtained in relation to a counterclaim which mirrors the defence, and in essence seeks declarations of non-liability in respect of the Claimant's claims and relief from the transaction which is alleged to give rise to such liability. Unlike the Pugh case, where the default judgment was in respect of the same contract, we have the benefit of the Deputy Master's judgment.
88. The Claimant argues (in summary) two main points. The first is that the default judgment only gives rise to an estoppel in relation to the legal charge which the charge of 2 July 2014 was designed to create. Hence it cannot bar any claim founded on an equitable charge, even arising out of the same transaction. But, secondly, even if there was no equitable charge, the Second Defendant was not entitled to default judgment on the Claimant's claim, for two separate reasons. One is that the Second Defendant did not seek dismissal of the Claimant's claim in her counterclaim. The other is that there is no power in the rules to give default judgment against the Claimant on its claim.
89. On the other hand the Second Defendant argues (in summary) that the default judgment justifies dismissal of the Claimant's claim because both claims required the determination of the same issues. However, at the same time the Second Defendant appears to accept that the Claimant could bring a claim on an equitable charge, because "the existence of such was not an issue on the pleadings, and therefore not res judicata". At first blush these two propositions seem inconsistent. However, for the reasons which I give below in relation to the Claimant's arguments, I do not think that the second is right.
90. The Claimant's primary point is that the counterclaim sought declaratory relief in relation to the "Transaction", defined as "the First and Second Defendants' purported granting of the Charge over the Property…", and "the Charge" was defined as "the legal charge dated 2 July 2014". The Claimant founds on the words "legal charge". It says that the claim to set aside the Charge was limited to a claim to set aside the "legal charge", meaning a charge of the legal estate in the land having effect at law, and not any charge that might arise in equity. Hence the default judgment could only be in relation to such a limited claim. Since (as it argued, and I have held) on these statements of case a claim was also possible, and triable, to an equitable charge in the same land, there could be no estoppel in relation a claim to such an equitable charge.
91. In my judgment this is a false opposition, derived from a misconstruction of the words used in the defence and counterclaim. The rules of pleading do not require the pleading of legal conclusions, just of facts. The phrase "the legal charge dated 2 July 2014" plainly refers to a concrete document intended to create a legal charge rather than to the abstract transaction which creates such a legal charge (and only such a charge). It refers to the document entered into by the First Defendant and the Second Defendant on that date, which was no doubt considered by the parties (or at least their lawyers) to be in appropriate form to create a charge on the fee simple estate in the land concerned. It is not confined to a document which only creates a legal charge and nothing else.
92. I can illustrate the point in this way. If A, as the legal and beneficial owner of the fee simple estate in Blackacre on sale executes a deed of conveyance of Blackacre to B, that is not two conveyances, one of the legal estate and one of the equitable interest. It is just one conveyance, of the legal estate, carrying with it the beneficial enjoyment. Now suppose instead that the document executed by A and intended to achieve the conveyance of the legal estate is formally defective (eg no witness), so that it does not qualify as a deed, but that it nevertheless satisfies the requirements of signed writing sufficient for the equitable interest to pass to B. In that case there is a conveyance, by a document purporting to be a conveyance of the legal estate, of the equitable interest to B, with A remaining the owner of the legal estate. Whether the document is a deed or not, either way it operates as a single conveyance: the question is simply what is its effect at law and in equity. In my judgment the present claim was a claim to whatever security could be obtained from "the Transaction", meaning the document executed on 2 July 2014. The parties may well have thought it was a legal charge, and originally argued the case on that basis, even though it turned out not to be.
93. The Second Defendant's counterclaim sought declaratory and other relief in relation to the document constituting "the Transaction". It alleged that it was unenforceable, or void, or voidable. The Claimant then failed to file a defence to counterclaim. Given the default, the Deputy Master gave a judgment in default in which he set "the Transaction" aside "as against the Second Defendant's legal and beneficial interests in the Property" and made a declaration that "the Charge" (meaning "The charge dated 2 July 2014") was void under s 284 of the Insolvency Act 1986. The Second Defendant had claimed that the Transaction had no effect as against her. Consequently, the default judgment given is about the (lack of) effect as against the Second Defendant of the Transaction, ie the document executed as a legal charge on 2 July 2014. The "necessary and precise" determination of the default judgment is that the charge document of 2 July 2014 does not create any valid security in favour of the Claimant which was binding on the Second Defendant.
94. The Claimant complains of a failure by the Second Defendant to include in her prayer a specific claim to an order setting aside the Transaction. I do not think that this matters, given that in paragraph 31 of the counterclaim there is a clear assertion as to its unenforceability, voidness or voidability, and the prayer includes a claim to "such other relief as the Court deems fit". The Claimant also says that the words "and beneficial" in para 4 of the order of Deputy Master Rhys should not have been included. On the contrary, in my judgment they express the Court's decision that the Transaction had no effect whether at law or in equity as against the Second Defendant, or at any rate was being completely set aside as against her. For these reasons, then, I consider that the default judgment operates as an issue estoppel in relation to the entire legal effect of the Transaction as against the Second Defendant, and that the Claimant cannot be allowed to continue its claim in respect of that Transaction as against her. Hence paragraph 2 of the Deputy Master's order is in my judgment correct, and must stand.
95. If I were wrong, and it was right that the Claimant was claiming all along on the basis of having a legal charge alone, and not on the wider basis of having simply a charge (of whatever sort it turned out to be), and therefore the Second Defendant in her counterclaim was only defending and counterclaiming in relation to that claim, then the matter would be different. On the face of it, it would follow that the default judgment was similarly limited, and there could be no issue estoppel against the Claimant in relation to the claim so far as based on an equitable charge. But in that case the claimant would first of all need to amend his claim, to plead the equitable or other charge. This would require permission. Secondly, there would be at least a question as to the applicability of the well-known rule in Henderson v Henderson (1843) 3 Hare 100, as explained in Johnson v Gore Wood & Co [2002] 2 AC 1, that a party must bring forward the whole of his claim on one occasion, and not seek to litigate it in successive parts. But none of this was explored before me, and it is not relevant in view of my holdings. Therefore I should and do say nothing about it now.
96. The Claimant argues, secondly, that even if there was no equitable charge, the Second Defendant was not entitled to default judgment on the Claimant's claim, for two quite separate reasons. The first of these is that the Second Defendant did not seek dismissal of the Claimant's claim in her counterclaim. This is quite true. But it is also irrelevant. It is unnecessary for a defendant to seek dismissal of a claim at all, in the counterclaim or otherwise. If the defence is made good, the dismissal of the claim follows as of course. The counterclaim seeks relief based on an independent cause of action which may or may not impeach the title of the Claimant to obtain relief on its claim (and if so may constitute a true defence justifying dismissal of the claim rather than merely – at best – an equitable set-off). But whether the counterclaim sought the dismissal of the claim is irrelevant in considering whether the dismissal of the claim was justified by any issue estoppel created by the default judgment. That is a quite different question.
97. The second reason given by the Claimant for denying the default judgment is that there is no power in the rules to give default judgment against the Claimant on its claim. I accept the premise. The CPR do not give the power to the court to award default judgment on a claim because there is a default on a counterclaim. But the conclusion is wrong. I do not say that the Second Defendant is entitled to judgment on the Claimant's claim against her because of some rule that a default on a counterclaim entitles the innocent party to a judgment on the claim. I say that she is entitled to it because the issue estoppel arising from the default judgment on the counterclaim, properly and narrowly analysed, means that the Claimant is unable to pursue its original claim against her. That results from the law of res judicata, not the statutory rules of procedure.

Conclusion

98. For the reasons given, this application fails and must be dismissed.