Popely v Popely

This appeal raises questions as to the true meaning and effect of r.6.5(4)(a) of the Insolvency Rules 1986 (SI 1986/1925) (“the Rules”), which confers a discretion on the court to set aside a statutory demand based on an undisputed debt where the debtor ‘appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt …. specified in the statutory demand’; and as to the approach which the court should adopt in deciding how to exercise that discretion where (a) the ‘cross demand’ relied upon is a claim made in a pending action brought by the debtor against the creditor, and (b) the debt on which the statutory demand is based arises under a costs order made in proceedings closely associated with that action. It also raises a question as to the consequences of the failure of a district judge to give reasons when dismissing an application to set aside a statutory demand under the summary procedure prescribed by r.6.5(1) of the Rules.

The appeal is brought by Ronald Albert Popely (“Ronald”) against an order made by Mr Edward Bartley Jones QC, sitting as a Deputy High Court Judge of the Chancery Division, on 25 July 2003. The deputy judge allowed an appeal by Ronald’s brother John Henry Popely (“John”) against an order made by Deputy District Judge Murphy (“the district judge”) in the Canterbury County Court (in Bankruptcy) on 16 May 2003 dismissing John’s application to set aside a statutory demand dated 23 April 2003 served on him by Ronald. By his order, the deputy judge set aside the statutory demand.

The statutory demand is based on John’s liability under a costs order made by His Honour Judge Dean QC in the Wood Green Crown Court on 12 April 2002.

The proceedings in the Wood Green Crown Court concerned documents which had been seized by H.M. Customs & Excise with a view to criminal proceedings being brought against, among others, John and Ronald. In the Crown Court proceedings John sought permission to make use of certain of those documents in an action which he had commenced against Ronald in the Chancery Division on 13 August 2001 (“the First Action”).

John’s application in the Crown Court proceedings was dismissed and an order for costs was made against him. Following a detailed assessment, the costs payable under the order were certified in the sum of £41,617.

John subsequently commenced a second action against Ronald in the Chancery Division (“the Second Action”) claiming the same relief as that claimed in the First Action. The First Action and the Second Action have since been consolidated.

John having made no payment under the costs order, Ronald issued the statutory demand as a preliminary to the presentation of a bankruptcy petition against John. John applied to set aside the statutory demand. His application was dismissed by the district judge under the summary procedure prescribed by r.6.5(1) (as to which, see paragraph 38 below). The district judge gave no reasons. John’s appeal to the High Court was allowed by the deputy judge.

John contends that his claim in the consolidated action (“the Underlying Claim”) is a ‘cross demand’ within the meaning of r.6.5(4)(a); and that, absent special circumstances (and he contends that there are none in the instant case), the court should exercise its discretion under the rule by setting aside the statutory demand.

Ronald contends that for the purposes of r.6.5(4)(a) the costs order made in the Crown Court proceedings falls to be treated in the same way as if it were an interlocutory costs order made in the consolidated action. On that footing, he contends that where an interlocutory order provides for the immediate payment of costs by a claimant or (as the case may be) by a defendant who is advancing a counterclaim, the paying party’s claim in the action in which the costs order was made is not a ‘cross demand’ within the meaning of the rule. Alternatively, he contends that if and to the extent that in such circumstances the court has a discretion whether to set the statutory demand aside, it should not exercise such discretion by setting the statutory demand aside since to do so would be to subvert the interlocutory costs order in so far as it provided for the immediate payment of costs.

Thus the particular questions which fall for decision on this appeal are: firstly, whether, as a matter of construction of r.6.5(4)(a) and in the particular circumstances of the instant case, the Underlying Claim is a ‘cross demand’ within the meaning of the rule (for if it is not, the rule does not apply); and secondly, if so, what approach the court should adopt to the exercise of its discretion.

Permission for a second appeal was granted by Peter Gibson LJ on the papers on 29 October 2003.

Prior to 1999 John and Ronald carried on various property ventures together, in England and abroad. In early 1999 differences arose between them and discussions took place with a view to a sale of their jointly-owned assets, which included properties in England, in Northern Cyprus and in France. John claims that in the course of those discussions a concluded agreement was reached which Ronald has breached by realising the jointly-owned assets for his own benefit, to the exclusion of John. That is the Underlying Claim, which John values at more than £1.8 million.

On 13 August 2001 John commenced the First Action, advancing the Underlying Claim and seeking relief in the form of accounts and inquiries as to the sale of the jointly-owned assets, a declaration that he is entitled to a one third share in the net proceeds of sale of such assets, and, further or alternatively, damages for breach of contract.

On 20 August 2001 the Claim Form and the Particulars of Claim in the First Action were served on Ronald by first-class post, at his last known address in England. On 19 September 2001 Ronald issued an application contesting the jurisdiction of the English courts, on the grounds that he was neither present in the jurisdiction on 20 August 2001, nor resident or domiciled in the jurisdiction at that time, and that accordingly the purported service of the proceedings on him was bad. Further or alternatively, he contended that the High Court was not the appropriate forum for the adjudication of the Underlying Claim.

In February 1998 a number of documents had been seized by H. M. Customs & Excise in connection with criminal proceedings which were at that time contemplated against, among others, John and Ronald (in the event the contemplated criminal proceedings were never brought to trial). On 28 November 2001 John issued an application in the Wood Green Crown Court for an order that he be permitted to use certain of those documents in the First Action and in another action which he had commenced in the Bromley County Court (the latter action is not material for present purposes). A further application to similar effect was issued on 13 March 2002.

John’s applications, which were opposed by Ronald, were heard by His Honour Judge Dean QC on 12 April 2002. He dismissed the applications with costs, to be the subject of a detailed assessment.

In the meantime, Ronald applied for security for costs in the First Action. On 14 January 2002 Master Winegarten made no order on the application, and no order as to costs. Ronald appealed against the Master’s order, and on 17 June 2002 Mr Peter Leaver QC, sitting as a Deputy High Court Judge, allowed the appeal. He directed that John provide security in the sum of £75,000, and that the First Action be stayed in the meantime. He further ordered that John pay Ronald’s costs of the appeal, which he summarily assessed in the sum of £35,000. John applied to the Court of Appeal for permission for a second appeal.

On 10 July 2002 Ronald applied for a detailed assessment of the costs payable by John under the order made in the Crown Court proceedings.

John made no payment under the costs order made by Mr Leaver QC, and on 29 July 2002 Ronald issued a statutory demand in respect of such costs, in the sum of £35,000 plus interest. The statutory demand was served on 2 August 2002. John applied to Canterbury County Court to set aside the statutory demand. On 19 September 2002 the district judge dismissed that application, with costs.

In paragraph 22 of his judgment in the instant case, the deputy judge quoted a passage from the transcript of the proceedings before the district judge, describing it as containing the crux of the district judge’s reasoning. In the passage in question the district judge said this:

There was no appeal against the district judge’s decision.

On 3 October 2002 John’s application for permission to appeal against the order made by Mr Leaver QC was dismissed by Brooke LJ.

In due course Ronald presented a bankruptcy petition against John, based on the statutory demand. The petition came on for hearing in the Canterbury County Court on December 2002 and was dismissed by consent, the petition debt having by then been paid.

On 24 February 2003 the costs payable by John under the order made in the Crown Court proceedings were certified at £41,617.

On 14 March 2003, in an attempt to outflank Ronald’s challenge to the jurisdiction of the court in the First Action, John commenced the Second Action. The Second Action advances the Underlying Claim once again, seeking substantially the same relief as that sought in the First Action. On 17 April 2003 Master Bragge granted John permission to serve the Claim Form and Particulars of Claim in the Second Action on Ronald in Cyprus, and, as an alternative method, on Ronald’s solicitors, Herbert Smith, in England.

On 23 April 2003 Ronald issued the statutory demand which is the subject of this appeal, based on the costs of £41,617 payable under the order made in the Crown Court proceedings, plus interest. The statutory demand was served on John the following day.

On 8 May 2003 Herbert Smith wrote to Whitehead Monckton, John’s solicitors, declining to withdraw the statutory demand. In the course of their letter, Herbert Smith said this:

On 9 May 2003 John applied once again in the Canterbury County Court to set aside the statutory demand. On 16 May 2003 the district judge dismissed the application without notice to Ronald. As already noted, he gave no reasons. It would appear (although in the absence of reasons one cannot be certain) that he regarded the application as in all material respects indistinguishable from John’s application to set aside the earlier statutory demand.

On 29 May 2003 Ronald issued an application in the Second Action challenging the jurisdiction of the court on grounds similar to those which he had advanced in the First Action. He also contended that the Second Action should be struck out as an abuse of process.

John appealed from the district judge’s dismissal of his application to set aside the statutory demand, and on 25 July 2003 the deputy judge allowed John’s appeal and set the statutory demand aside.

On 29 September 2003 Master Moncaster dismissed, with costs, Ronald’s application to strike out the Second Action as an abuse of process. The Master directed that Ronald’s applications challenging the jurisdiction in the First Action and the Second Action respectively be heard together.

On 15 October 2003 Deputy Master Nurse made an order by consent that John pay a further sum of £87,500 into court by way of security for costs of the First Action and the Second Action. That sum was duly paid on 21 October 2003.

On 29 October 2003 Peter Gibson LJ granted Ronald permission to appeal against the deputy judge’s order.

On 11 November 2003 Evans-Lombe J dismissed with costs Ronald’s applications challenging the jurisdiction of the court. He ordered that there be an immediate detailed assessment of the costs, and that Ronald make a payment on account within 14 days of the order. He further directed that the sum of £162,500 paid by John by way of security for costs be paid out to him forthwith, with accrued interest, and that the First Action and the Second Action be consolidated.

As at 1 December 2003 the state of account as between John and Ronald as regards the outstanding liability of each to the other under costs orders thus far made in the First Action and the Second Action (and bringing into account for this purpose the costs order made in the Crown Court proceedings) was that Ronald was a net debtor, owing John a sum in excess of £52,000. It appears that that situation has not substantially changed.

I begin with the relevant provisions of the Insolvency Act 1986 (“the 1986 Act”) and of the Rules.

The relevant provisions of the 1986 Act are as follows:

The relevant provisions of the Rules are rr.6.4 and 6.5, which are contained in the Second Group of Parts, relating to individual insolvency (bankruptcy). They provide as follows (so far as material):

Also relevant for present purposes is paragraph 12 of the Practice Direction: Insolvency Proceedings, which took effect on 26 April 1999 (“the 1999 Practice Direction”). The 1999 Practice Direction replaced a previous direction in similar terms which came into effect in 1987. It has force of law by virtue of section 1 of the Civil Procedure Act 1997.

Part 3 of the 1999 Practice Direction relates to bankruptcy proceedings. Paragraph 12 in Part 3 is headed ‘Setting Aside a Statutory Demand’. Subparagraphs 12.3 and 12.4 are in the following terms:

Of the authorities cited to us, the only direct authority on the issues which arise on this appeal is the decision of His Honour Judge Hegarty QC, sitting as a judge of the High Court, Chancery Division, in Barnes v. Uttlesford District Council (unreported, judgment delivered 15 May 1998).

In Barnes, the claimant disputed his liability for council tax. In October 1994 the magistrates granted liability orders to the Council in the sum of £1,166.57 in respect of unpaid council tax. No payment having been made, in April 1995 the bailiffs distrained on the claimant’s car. In May 1995 the claimant commenced an action for damages for unlawful seizure of the car, claiming some £4,000 plus interest. He applied in the action for a mandatory order for the return of the car. Buxton J dismissed that application and ordered the claimant to pay the costs of it forthwith. The costs so payable were subsequently certified in the sum of £4,712.28. In July 1997 the Council served a statutory demand in respect of those costs. The claimant applied to set the statutory demand aside, relying on his claim in the action as a ‘cross demand’ exceeding the amount of the debt on which the statutory demand was based or at least reducing it below the bankruptcy level. The district judge dismissed the claimant’s application. The claimant’s appeal was dismissed by Judge Hegarty QC.

Judge Hegarty QC began his judgment by expressing doubts as to whether, even if Mr Barnes’ claim for damages were to succeed, the damages recovered would reduce the debt below the bankruptcy level. He then turned to the judgment of the district judge, saying this (at p.15 of the transcript):

Judge Hegarty QC having refused permission to appeal, Mr Barnes applied for such permission to the Court of Appeal. At an oral hearing, the Court of Appeal (Simon Brown and Mummery LJJ) dismissed the application. Mr Barnes was represented at that hearing by counsel. However, counsel had been instructed only an hour or so before the hearing, and his instructions were to apply for an adjournment. He accordingly applied for an adjournment, but he also made submissions on the merits of the application. The first judgment was given by Mummery LJ. In the course of it, Mummery LJ said this:

Simon Brown LJ agreed with Mummery LJ. In the course of his judgment, echoing the passage in Judge Hegarty QC’s judgment quoted in paragraph 45 above, Simon Brown LJ said this:

It is pertinent at this point to note the observations of Lord Woolf MR in Clark v. University of Lincolnshire and Humberside [2000] 1 WLR 1988 at 1998 as to the weight to be given to judgments on applications for permission to appeal. In paragraphs 42 and 43 of his judgment in that case, Lord Woolf MR said this:

Returning to the issues which arise on this appeal, although there are significant differences between the legislative regime which applies to bankruptcy and that which applies to corporate insolvency (companies winding up) – in particular, the Rules make no specific provision for the setting aside of a statutory demand in the context of companies winding up – it is nevertheless instructive for present purposes to consider the practice of the Companies Court in this respect.

In Re Bayoil [1999] 1 WLR 147 Nourse LJ identified and explained the current practice of the Companies Court where a winding up petition based on an undisputed debt is resisted on the ground that the company has a cross-claim which exceeds the amount of the debt on which the petition is based.

The facts in Bayoil were, in summary, as follows. Bayoil SA (“Bayoil”), a Swiss company, chartered a tanker from Seawind Tankers Corporation (Seawind”), a Liberian company, to carry crude oil from Iraq to the United States. Due to the failure of one of its engines, the tanker had to be diverted via South Africa. Seawind claimed freight charges and diversion expenses; Bayoil counterclaimed for damages for breach of the charterparty, alleging misrepresentation and breach of warranty. The dispute was submitted to arbitration in London. In due course, an interim final award was made in favour of Seawind in respect of freight charges. No stay of the interim award was sought or granted. Seawind served a statutory demand on Bayoil, based on the interim award. Bayoil having failed to make any payment under the statutory demand, Seawind presented a winding up petition against Bayoil based on the statutory demand.

At the hearing of the petition, Bayoil did not dispute the debt on which the petition was based; rather, it contended that the petition ought to be stayed or dismissed on the ground that it had a counterclaim which exceeded the amount of the petition debt. The judge at first instance held that he had a discretion which was at large, and that in the circumstances of the case that discretion ought to be exercised by making a winding up order. Bayoil’s appeal was allowed by the Court of Appeal.

In the Court of Appeal the first judgment was given by Nourse LJ. Ward LJ delivered a concurring judgment, and Mantell LJ agreed with Nourse LJ.

In the course of his judgment, Nourse LJ analysed the decision of the Court of Appeal in Re Portman Provincial Cinemas Ltd. Although Portman was decided in 1964, the case is reported, in a note, at [1999] 1 WLR 157. Nourse LJ concluded (at p.152G) that the decision in Portman is clear authority for the proposition that a winding up petition ought to be dismissed in what he described as “cross claim cases”, save in special circumstances.

Nourse LJ then turned to the decision of the Court of Appeal in In re LHF Wools Ltd [1970] Ch 27, in which Portman was considered. He concluded (at p.154C) that in LHF Wools the Court of Appeal “recognised and affirmed” the existence of the practice in cross claim cases established by the Court of Appeal in Portman.

Nourse LJ went on to refer to two first instance decisions in cross claim cases: In re FSA Business Software Ltd [1990] BCLC 825 (a decision of Warner J), and In re a Company (No. 006273 of 1992) [1993] BCLC 131 (a decision of Millett J). The judgment in each of those cases contains observations to contrary effect. Nourse LJ concluded that since the judges in those cases did not have before them a transcript of the judgments in Portman, weight should not be given to their views on this question. Nourse LJ went on to find support for his interpretation of the judgments in Portman and LHF Wools in the Privy Council case of Malayan Plant (PTE) Ltd v. Moscow Narodny Bank Ltd [1980] MLJ 53 (a disputed debt case), where Lord Edmund-Davies, delivering the judgment of the Board, said this:

After referring to the approach taken by the judge at first instance in Bayoil, Nourse LJ continued (at p.155B):

Nourse LJ then turned to the various matters relied on by Seawind as constituting special circumstances for this purpose. Those matters included the fact that the interim award was both final and unappealable; the fact that security for Bayoil’s counterclaim had been provided by Seawind’s P & I club; and the fact that there was concern as to Bayoil’s solvency and its ability to meet any award. Nourse LJ continued (at p.155D):

I shall return below to Nourse LJ’s inclusion of the requirement that the cross-claim “must be one which the company has been unable to litigate”.

In his concurring judgment, Ward LJ gave four reasons for his conclusion that the appeal should be allowed. First, he noted that the discretion given to the court by section 125 of the 1986 Act to dismiss a winding up petition, or to adjourn it, or to make any other order that it thinks fit, is one which must be exercised judicially, having regard to such guidance as the courts, and in particular the Court of Appeal, may have seen fit to give. However, he went on to stress that although judicial guidance may establish a general rule, special circumstances will always justify a departure from that general rule. Secondly, he agreed with Nourse LJ that, on the authority of Portman and LHF Wools, the practice of the court is “not to allow the winding up where there is a genuine cross-claim except in special circumstances”. Thirdly, citing the passage from the judgment of the Privy Council in Malayan Plant quoted by Nourse LJ (see paragraph 56 above), he took the view that there was little practical difference between a disputed debt case and a cross-claim case. Fourthly, he considered that since a winding up order is, as he described it, a draconian order, the court should proceed cautiously. He continued (at p.156G):

I must refer at this point to LHF Wools, not only because it was considered by Nourse LJ in Bayoil but also because, as will appear, Ronald relies on certain observations of Harman LJ in that case in relation to the relevance, on the hearing of a winding up petition, of the prospect of delay in the adjudication of a cross-claim.

In LHF Wools, the company bought wool from a Belgian merchant. It paid for the wool by accepting a bill of exchange drawn by the merchant on a Belgian bank and payable to the bank. The merchant failed to deliver the wool, and the bill was dishonoured on presentation. The merchant was made bankrupt and convicted for fraud. The bank brought an action against the company in England, based on the dishonoured bill. The company counterclaimed for damages against the bank under the Belgian civil code (the counterclaim did not give rise to a cause of action under English law). At trial, the company abandoned its counterclaim and submitted to judgment, on the basis that it would be cheaper and easier to prosecute its claim against the bank in Belgium. The judge refused to stay the judgment. The bank presented a winding up petition against the company, which had no assets apart from its claim against the bank. Following presentation of the winding up petition, the company commenced an action against the bank in Belgium. The Belgian action could not proceed until after an appeal by the merchant against his conviction had been finally concluded. On the hearing of the winding up petition, the company sought to have the petition stayed or dismissed, relying on its cross-claim against the bank in the Belgian action. At first instance, Plowman J made a winding up order. The company appealed.

The Court of Appeal allowed the company’s appeal, holding that Plowman J had erred in principle in exercising his discretion, in that (among other things) he had given insufficient weight to the modern practice that where a company has a genuine and serious cross-claim against the petitioning creditor which it had not reasonably been able to litigate, the petition should usually be dismissed or stayed. The first judgment was given by Harman LJ. In the course of it, he referred to a passage in the judgment of Plowman J where the judge attached significant weight to the delays which were likely to occur if the company were to pursue its claim in Belgium. Harman LJ continued:

I will return to the above passage when considering Ronald’s submissions in relation to delay.

I must now return, however, to Nourse LJ’s reference to a requirement that for the purposes of r.6.5(4)(a) a cross-claim must be “one which the company has been unable to litigate”.

In Re a Debtor (No. 87 of 1999) (unreported, judgment delivered on 17 January 2000), a bankruptcy case, Rimer J confessed to some uncertainty as to the nature of that apparent requirement; and in particular as to whether, on the hearing of a bankruptcy petition, delay in prosecuting the cross-claim should, by itself, operate as a bar to the dismissal of the petition. It was a feature of the case that the debtor could have litigated his cross-claim to a conclusion before the statutory demand was served on him, but had not done so. Rimer J held that this fact did not, in itself, preclude the debtor from relying on the cross claim as a ground for setting aside the statutory demand. He continued (at p.11 of the transcript at line 3):

Rimer J’s uncertainty in this respect was shared by Park J in Montgomery v. Wanda Modes Ltd [2002] 1 BCLC 289 (a companies winding up case). In the course of his judgment, Park J said this:

It is also to be noted that in Re a Debtor (No. 554/SD/98) [2000] 1 BCLC 103 Robert Walker LJ said (at p.114):

I referred earlier (see paragraph 47 above) to the existence of significant differences between the legislative regime applicable to bankruptcy and that applicable to companies winding up, noting in particular that the Rules contain no equivalent to rr.6.4 and 6.5 in the context of companies winding up. Giving the judgment of the court in TSB Bank plc v. Platts [1998] 2 BCLC 1 (a bankruptcy case), Peter Gibson LJ drew attention to the greater importance of a statutory demand in the context of the bankruptcy regime, as compared with companies winding up, saying this (at 6h):

However, notwithstanding this important distinction between bankruptcy and companies winding up, paragraph 12.4 of the 1999 Practice Direction makes clear that in addressing an application to set aside a statutory demand under rule 6.5(4) the bankruptcy court will adopt a practice similar to that of the Companies Court in a cross-claim case, as explained in Bayoil. As Peter Gibson LJ said later in his judgment in TSB Bank (at p.7b), in the context of the identical provision in paragraph 4 of the 1987 Practice Direction:

In TSB Bank the judge at first instance concluded that on the hearing of the bankruptcy petition the court, in considering the significance of a cross-claim by the debtor against the petitioner, could take account of other debts owed by the debtor to the petitioner notwithstanding that such debts had not been made the subject of a statutory demand. As to that, Peter Gibson LJ said this (at p.8d):

In Hofer v. Strawson [1999] 2 BCLC 336 (another bankruptcy case), the debtor had agreed to buy a company from the petitioner, the price to be payable in instalments by means of post-dated cheques. The debtor alleged misrepresentation and stopped one of the cheques. The petitioner served a statutory demand based on the dishonoured cheque. The district judge dismissed the debtor’s application to set aside the statutory demand, concluding that although the debtor had an arguable claim for damages for misrepresentation such a claim could not amount to a defence to a claim on the dishonoured cheque, and that in consequence it could not provide a ground for setting aside the statutory demand. The debtor appealed. Neuberger J dismissed the appeal on the basis that the misrepresentation claim did not disclose a genuine triable issue. However, in the course of his judgment he considered the meaning of the expression ‘counterclaim, set-off or cross demand’ in r.6.5(4)(a), saying this (at p.341a):

Neuberger J went on to point in particular to the words in brackets in paragraph 4 of the 1987 Practice Direction (words which are repeated in paragraph 12.4 of the 1999 Practice Direction) – viz. ‘(whether or not he could have raised it in the action in which the judgment or order was obtained)’ – as supporting his conclusion.

Neuberger J went on to stress the difference between execution on a judgment and bankruptcy, saying this (at p.342c):

That there are limits on the meaning of the expression ‘cross demand’ in r.6.5(4)(a) is clear from the decision of the Court of Appeal in Hurst v. Bennett & Ors. [2001] 2 BCLC 290 (another bankruptcy case). In that case the appellant was a former equity partner in a firm of solicitors which was dissolved in 1990. The lease of the premises where the partnership practised was vested in the respondents as trustees for the partnership. The partnership deed provided that those individuals who were trustees of the lease were entitled to an indemnity from the partnership and the other partners in respect of their liability for rent under the lease. In 1997, before the partnership accounts had been finalised or agreed between the former partners, the respondents, in their capacity as trustees of the leasehold interest, served a statutory demand on the appellant based upon what was claimed to be his liability for contribution under the indemnity. The appellant applied to set aside the statutory demand under r.6.5(4)(a), claiming to be entitled to a sum from the respondents or from the partnership which exceeded his alleged liability for contribution. The application was dismissed by the district judge, on the ground that he was not satisfied that there was any cross demand which could exceed the amount of the debt on which the statutory demand was based, or reduce it below the bankruptcy level. The appellant appealed to the High Court. Dismissing the appeal, Ferris J was doubtful as to the size of the appellant’s claim, but he held that in any event that the claim was not a counterclaim or ‘cross demand’ within the meaning of r.6.5(4)(a), since whereas the appellant’s claim was against the partners in their capacity as such, the respondent’s claim against the appellant (on which the statutory demand was based) was advanced in their capacity as trustees. Ferris J’s decision was upheld by the Court of Appeal (Peter Gibson and Arden LJJ and Sir Christopher Staughton).

The leading judgment was given by Arden LJ. In the course of it, she said this:

In the course of his judgment, Peter Gibson LJ said this:

Lastly, so far as the authorities are concerned, I should note that in Everards & Ors v. The Society of Lloyds [2003] EWHC 1890 (Ch) Laddie J recorded (in paragraph 38 of his judgment) that counsel in that case had agreed that the word ‘may’ in r.6.5(4) does not create a discretion, and that if the debtor appears to have a counterclaim which equals or exceeds the amount of the debt specified in the statutory demand, the court must set the demand aside. No submission to that effect has been advanced in the instant case. I would in any event regard the proposition as untenable.

After summarising the facts, the deputy judge concluded (in paragraph 30 of his judgment) that the costs order in the Crown Court proceedings was not materially different from a costs order made in the First Action or the Second Action.

On that footing, the deputy judge turned to the submission made by Mr Christopher Harrison (counsel then appearing for Ronald) that, on the true construction of r.6.5(4), the Underlying Claim is not a ‘counterclaim’ or ‘cross demand’ “when the statutory demand is based on a costs order made in the proceedings in which that underlying claim is being pursued”. The deputy judge “unhesitatingly” rejected that submission. He gave his reasons for so doing in paragraph 32 of his judgment, as follows:

The deputy judge then turned to the decision in Barnes. After quoting a passage from the judgment of Judge Hegarty QC in that case, the deputy judge continued:

The deputy judge then turned to the function of the bankruptcy court, saying this:

The deputy judge then turned to the decision of the district judge to dismiss John’s application to set aside the statutory demand without notice to Ronald, pursuant to r.6.5(1). He approached the district judge’s decision on the basis that r.6.5(1) requires a high degree of satisfaction that no sufficient cause is shown, and that if as matter of discretion he (the deputy judge) were to take a different view from the district judge it would follow that the district judge ought not to have adopted the summary procedure under the rule. The deputy judge concluded (in paragraph 44 of his judgment) that as a matter of discretion he would unhesitatingly have set aside the statutory demand. He set out his reasons as follows:

The deputy judge turned next to the question whether, as an appellate judge, he was entitled to interfere with the district judge’s decision. He concluded (in paragraph 46 of his judgment) that he was entitled to do so, on the basis that the district judge ought not to have adopted the summary procedure prescribed by r.6.5(1), and that the district judge had not exercised his discretion either properly or at all. He accordingly set the statutory demand aside.

By his grounds of appeal, Ronald contends:

that as a matter of construction of r.6.5(4)(a) the Underlying Claim is not, in the particular circumstances of the instant case, a ‘cross demand’ within the meaning of the rule;

alternatively, that in so far as the question whether to set aside the statutory demand called for the exercise of a discretion by the district judge (a) the district judge must be taken to have exercised that discretion, and (b) there was no, or no sufficient, basis for the deputy judge to interfere with the manner in which he did so;

in the further alternative, that in so far as the deputy judge was entitled to exercise his own discretion in the matter, he erred in his exercise of that discretion; and in any event

that there is no basis upon which the district judge can be criticised for having dismissed the application to set aside the statutory demand without notice to Ronald and without giving reasons.

Under the third of his grounds of appeal, Ronald contends in particular that the deputy judge failed to pay any, or any sufficient, regard (a) to the fact that John has admitted that he has taken steps in relation to his assets which would make it difficult to enforce an order for costs against him; and (b) to the fact that it has been found at an earlier stage in the Underlying Claim that such steps have been taken by John with the intention of making it difficult to enforce a costs order against him.

Ronald further asserts that John has not adduced evidence to show (a) that he is unable to discharge his liability under the costs order on which the statutory demand is based, or (b) that as a result of his being required to discharge that liability (or as a result of his being made bankrupt) the Underlying Claim would in any way be stifled.

Ronald contends that having regard to John’s ability to pay earlier costs orders and to provide security for costs, the deputy judge ought to have concluded that it was probable that his failure to discharge his liability under the costs order on which the statutory demand was based was as a result of a decision not to pay rather than an inability to pay.

In Part 10 of his Appellant’s Notice, Ronald seeks permission to rely on additional evidence in the form of a witness statement by Mrs Nicola Peters of Herbert Smith, with exhibits. Mrs Peters’ evidence is directed at, among other things, John’s dealings with his assets. She refers to observations made by Master Moncaster and by Mr Peter Leaver QC to the effect that John has so dealt with his assets as to make it more difficult to enforce a costs order against him. Mrs Peters also gives evidence as to the delays which have taken place in John’s prosecution of the Underlying Claim.

By a Respondent’s Notice, John invites this court to uphold the decision of the deputy judge for the reasons he gave, and in particular for the reason that Barnes was decided per incuriam and should not be followed. He contends that Ronald is not entitled to rely on the various facts and matters asserted under his third ground of appeal, pointing out that the hearing before the deputy judge was a true appeal and not a rehearing, and that such facts and matters were not relied on before either the district judge or the deputy judge. He accordingly contends that Ronald should not be permitted to rely on the evidence of Mrs Peters. Should such permission be granted, however, John seeks permission to rely on a witness statement by Mr Adrian Robbins of Whitehead Monckton.

Mr John Briggs (appearing before us for Ronald) submits firstly that, as a matter of construction of r.6.5(4)(a), a debtor’s claim in the same proceedings as those in which the costs order on which the statutory demand is based was made (or in proceedings closely connected with such proceedings) is not a ‘cross demand’ within the meaning of the rule. He submits that the contrary construction would render the costs order “meaningless and irrecoverable”. He submits that the construction for which he contends is consistent with paragraph 12.4 of the 1999 Practice Direction, and in particular with the words in parenthesis ‘(whether or not he could have raised it in the action in which the judgment or order was made)’.

Secondly, Mr Briggs submits that, having regard to the observations made by the district judge when dismissing John’s application to set aside the earlier statutory demand, in dismissing the later application under r.6.5(1) the district judge must be taken to have exercised his discretion; and that there is no basis on which the deputy judge could properly have interfered with that exercise of discretion. He submits that the district judge’s observations when dismissing the earlier application (as quoted by the deputy judge in paragraph 22 of his judgment: see paragraph 21 above) indicate that the district judge took the view that the Underlying Claim as advanced in the First Action (the Second Action had not at that stage been commenced) was not a ‘cross demand’ because the action had been stayed.

Accordingly, submits Mr Briggs, the district judge should not be taken to have accepted the point made by Herbert Smith in their letter dated 8 May 2003 (see paragraph 29 above) to the effect that the later application was indistinguishable from the earlier. It is more likely, he submits, that the district judge had regard to a number of factors, including the complexity of the issues, both interlocutory and substantive, raised in the First Action and the Second Action, and that he exercised his discretion in the light of such factors.

Alternatively, Mr Briggs submits that if and to the extent that the deputy judge was entitled to substitute his own exercise of discretion, the deputy judge erred in so doing. He submits that the deputy judge applied Bayoil slavishly, and without taking proper account of the fact that the 1999 Practice Direction, albeit it has the force of law, provides general guidance only. He submits that in principle a creditor with an undisputed debt is entitled to a bankruptcy order unless there is a real prospect of the debt being paid within a reasonable time; and that in this respect there is a qualitative difference between cross-claim cases and disputed debt cases.

Relying on Barnes, Mr Briggs submits that, given that the costs order in question was made in effectively the same proceedings as the cross-claim, it would be contrary to principle, and inconsistent with the ‘pay-as-you-go’ philosophy of the Civil Procedure Rules (“the CPR”), for the bankruptcy court to set aside the statutory demand. He submits that although bankruptcy is technically not a form of execution, it is nevertheless a legitimate process of debt recovery through which a creditor is entitled to payment. As to Bayoil, he relies on the requirement (stated by Nourse LJ) that the cross-claim should be one which the debtor has been unable to litigate. He also relies on Nourse LJ’s observation (quoted in paragraph 58 above) that, unlike a bankruptcy order, an order winding up a company is often a death knell. He submits that it would often be unfair for a creditor to be kept out of his money indefinitely because of unresolved litigation against him by the debtor.

Mr Briggs submits that the complexity of the issues raised by the Underlying Claim is such that it is inevitable that a substantial delay will occur before the Underlying Claim is finally adjudicated upon. Relying on the passage from the judgment of Harman LJ in LHF Wools quoted in paragraph 63 above, he submits that the prospect of delay in establishing a cross-claim is an important factor which the bankruptcy court should take into account when considering whether to exercise its discretion to set the statutory demand aside.

Mr Briggs also seeks to rely on the existence of unsatisfied costs orders as evidence of John’s impecuniosity. He accepts that this was not a matter which was raised before the deputy judge, but he submits that it is a further factor which the deputy judge should have taken into account.

Mr Briggs submits that in exercising his discretion the deputy judge wholly failed to appreciate that in the context of interim costs orders where, as in the instant case (as he asserts), a debtor has no ostensible assets, the threat of bankruptcy is a powerful incentive to the debtor to run complex litigation responsibly and cost-efficiently by compelling the debtor to find a third party to fund it. Finally, he submits that in any event the deputy judge failed to recognise the existence of ‘special circumstances’ in the instant case.

For John, Mr Jasbir Dhillon submits firstly that on the true construction of r.6.5(4)(a) the expression ‘counterclaim, set-off or cross demand’ includes a cross-claim of the nature of the Underlying Claim, and that that construction of the rule is not affected by the fact that the debt on which the statutory demand is based arises from a costs order made in proceedings which are directly related to the actions in which John is advancing the Underlying Claim. In support of that submission he relies in particular on Hofer v. Strawson and on the words in parenthesis in paragraph 12.4 of the 1999 Practice Direction. He submits that the particular procedural form of the cross-claim, or its procedural relationship with the debt on which the statutory demand is based is irrelevant; what is relevant, he submits, is the substance of the cross-claim, and whether it makes it unjust for the creditor to present a bankruptcy petition.

Mr Dhillon submits that the purpose of the legislative regime would be defeated if Ronald’s construction of the rule were accepted. He reminds us of the crucial importance of a statutory demand in the context of bankruptcy (as explained by Peter Gibson LJ in TSB Bank: see paragraph 69 above).

He submits that the deputy judge was right to remind himself that bankruptcy is not a form of execution. He points out that it is accepted on John’s behalf that the costs order on which the statutory demand is based is valid and enforceable by execution. He submits that Ronald, having elected to proceed along the bankruptcy route, must take the bankruptcy regime as he finds it.

As to the ‘pay-as-you-go’ philosophy of the CPR, Mr Dhillon submits that the bankruptcy court is concerned not with the enforceability of the costs order (which is admittedly enforceable) but with the question whether the debtor can be made bankrupt under the relevant legislative regime. Mr Dhillon submits that, in his judgment in Barnes Judge Hegarty QC wrongly elided those two questions. As to the judgments of Mummery and Simon Brown LJJ refusing permission to appeal in that case, Mr Dhillon submits that both judgments proceed on the footing that the debtor’s claim was a ‘cross demand’ within the meaning of r.6.5(4)(a), and thus support his contentions as to the true construction of the rule. However, he submits that in so far as the views expressed by Mummery and Simon Brown LJJ in refusing permission to appeal are authority for the proposition that to set aside the statutory demand in that case would subvert the costs order, such views are inconsistent with the 1999 Practice Direction and with Bayoil. In any event, he submits (relying on the observations of Lord Woolf CJ in Clark: see paragraph 48 above) that little weight should be given to such views, especially since counsel had only been instructed an hour or so before the hearing and that his instructions were to apply for an adjournment.

Turning to the decision of the district judge, Mr Dhillon submits that if (as he contends) the deputy judge’s construction of the rule was correct, it follows that the district judge’s decision was wrong and that the deputy judge was entitled to set it aside and to exercise his own discretion in the matter. Apart from that, however, Mr Dhillon submits that the district judge fell into error in other respects. First, he submits that the district judge ought not to have adopted the summary procedure prescribed by r.6.5(1). He submits that that rule was directed at preventing attempts by the debtor to buy time by means of a frivolous or insubstantial application, whereas John’s application was neither frivolous nor insubstantial. Secondly, he submits that in so far as the district judge may have regarded himself as bound by his decision in relation to the earlier statutory demand he erred in so doing. Thirdly, he submits that the district judge’s failure to give reasons vitiates his decision. Fourthly, he submits that in so far as the district judge exercised a discretion he erred in principle in that he failed to have regard to and to apply the general rule as derived from the rule and from paragraph 12.4 of the 1999 Practice Direction.

Turning lastly to the exercise of discretion by the deputy judge, Mr Dhillon submits that there are no grounds on which an appellate court can interfere with the deputy judge’s decision. In particular, he submits that the deputy judge was right to reject the argument, based on Barnes, that to set aside the statutory demand would be to subvert the costs order.

Mr Dhillon submits that the court’s approach to the exercise of its discretion under the rule is the same whether the debt on which the statutory demand is based is a judgment debt (as in Re a Debtor (No. 544/SD/98)), an interim final award (as in Bayoil), or a dishonoured cheque (as in Hofer v. Strawson); and that there is no warrant for a different approach where the debt arises under a costs order. This, he submits, is consistent with the underlying purpose of the statutory bankruptcy regime, which is to provide a process whereby individuals may be relieved of the burden of unpaid debts. He submits that it would be unfair for the debtor to be subjected to the draconian effects of a bankruptcy order if he has a genuine cross-claim against the creditor which exceeds the debt on which the statutory demand is based.

As to Barnes itself, Mr Dhillon submits that Judge Hegarty QC’s decision lays down no proposition of law, and that in any event the facts of Barnes are distinguishable from those of the instant case.

As to Ronald’s application for permission to rely on additional evidence, Mr Dhillon submits that, given that this is a second appeal, such permission should not be granted. In any event, he submits, it is not the function of the court, in exercising its discretion to set aside a statutory demand, to conduct an investigation into the debtor’s overall financial position: that, he submits, is a matter for the court on the hearing of the bankruptcy petition if the statutory demand is allowed to stand. As to delay, he submits (relying on the observation of Robert Walker LJ in Re a Debtor No. 544/SD/98 quoted in paragraph 68 above) that in the context of an application to set aside a statutory demand under r.6.5 delay is only a relevant factor to the extent that it may throw doubt on the genuineness of the cross-claim.

In the instant case, he submits, there can be no doubt as to the genuineness of John’s cross-claim; and there are no such special circumstances as could justify a departure from what he submits is the court’s general practice when considering how to exercise its discretion under the rule.

In my judgment the failure of the district judge to give any reasons for his decision leads inevitably to the conclusion that his decision cannot stand.

In Ruiz Torija v. Spain (1994)19 EHRR 553, the European Court of Human Rights said this (at paragraph 29 of its judgment):

In English v. Emery Reimbold & Strick Ltd [2002] 1 WLR 2409 CA Lord Phillips of Worth Matravers MR, giving the judgment of the court, said this (at paragraph 12 of the judgment):

Turning to the common law requirement to give reasons, the court said (in paragraph 16 of its judgment):

In the instant case it is to be inferred from the mere fact that the district judge thought it appropriate to adopt the procedure prescribed by r.6.5(1) that he must have been satisfied that no sufficient cause had been shown for the application. A further possible inference is that he was so satisfied because he regarded the application as indistinguishable from the application to set aside the earlier statutory demand. But possible inferences are not good enough, in my judgment. In particular, the peremptory character of the procedure does not absolve the court from its general duty to give reasons for its decisions. Indeed, its peremptory character makes it in my judgment all the more important that the court should explain why it was satisfied that no sufficient cause had been shown for the application.

In the circumstances it is fruitless, in my judgment, to speculate as to whether or not the district judge regarded himself as exercising a discretion. The very fact that speculation is required demonstrates that his decision cannot stand. It follows that it was for the deputy judge to address the matter afresh. I turn, therefore, to the deputy judge’s judgment and to the issues which he addressed.

With all respect to Mr Briggs, on this issue he was in my judgment attempting to argue the unarguable. Either the Underlying Claim is a ‘cross demand’ within the meaning of the rule, or it is not; and whether it is or not cannot in my judgment depend on the nature of the debt which is the subject of the statutory demand. In contrast to the words ‘counterclaim’ and ‘set-off’, the word ‘cross’ in the expression ‘cross demand’ does not imply any kind of procedural or juridical relationship to the debt which is the subject of the statutory demand: all it means, in my judgment, is that the ‘demand’ is one which goes the other way, i.e. that it is a ‘demand’ by the debtor on the creditor.

In my judgment, therefore, as a matter of construction of the rule, just as the Underlying Claim would be a ‘cross demand’ in the context of a statutory demand based on a judgment (including a default judgment: see paragraph 12.3 of the 1999 Practice Direction), so is it a ‘cross demand’ in the context of a statutory demand based on the debtor’s liability under a costs order; and the deputy judge was right so to conclude. In my judgment, the meaning of the expression ‘cross demand’ in r.6.5(4)(a) cannot change according to whether the judgment or order on which the statutory demand is based was obtained in the same proceedings as those in which the claim relied on as a ‘cross demand’ is being advanced.

I turn, therefore, to the deputy judge’s exercise of his discretion.

In addressing this aspect of the case I will assume in favour of Ronald (without deciding) that the costs order in the Crown Court proceedings falls to be treated for present purposes in exactly the same way as if it had been an interlocutory costs order in the consolidated action.

In my judgment the argument that for the court to exercise its discretion under r.6.5(4)(a) by setting aside the statutory demand would be to ‘subvert’ the costs order is misconceived, for the following reasons:

The setting aside of the statutory demand does not render the costs order either invalid or unenforceable. Notwithstanding the setting aside of the statutory demand the costs order remains valid and enforceable in the same way as any other judgment or order of the court providing for the immediate payment of money. The available methods of enforcing such a judgment or order are set out in CPR Part 70.

Bankruptcy is no more a form of execution than companies winding up (see the observations of Ward LJ in Bayoil quoted in paragraph 58 above). This is illustrated by the fact that section 268(1)(b) of the 1986 Act enables a creditor who has made an unsuccessful attempt to enforce a judgment or order to rely on that fact as proof of the debtor’s inability to pay his debts – i.e. as a ground for presenting a bankruptcy petition. An unsatisfied execution does not entitle the creditor as of right to a bankruptcy order on the hearing of the petition.

Paragraph 12.4 of the 1999 Practice Direction expressly provides that a statutory demand based on a judgment or order ‘ will normally ’, that is to say in the absence of special circumstances (cf. Bayoil ), be set aside where there is a cross demand (sc. a genuine cross demand) which exceeds the debt. In the course of argument, the example was taken of a not uncommon type of case in which the claimant sues on a dishonoured cheque; the defendant advances a genuine counterclaim for damages for defective goods supplied by the claimant; the claimant obtains summary judgment on the cheque and serves a statutory demand based on the judgment; and the defendant applies to set aside the statutory demand, relying on his counterclaim. In such circumstances, as paragraph 12.4 provides, the statutory demand will ‘ normally ’ be set aside, notwithstanding the absence of any stay of the judgment. In that example, there is no question of the judgment thereby being ‘subverted’. The judgment remains valid and enforceable.

In addition to the procedures available to a receiving party to enforce an interlocutory costs order under CPR Part 70, the court has power under section 49(3) of the Supreme Court Act 1981, either of its own motion or on the application of the receiving party, to stay the action until the costs are paid. (No such application was made in the instant case.)

In the light of paragraph 12.4 of the 1999 Practice Direction, and of the Bayoil approach in the context of companies winding up, there is in my judgment no basis in principle for treating the fact that the debt on which the statutory demand is based happens to arise under an interlocutory costs order, rather than (for example) an interlocutory judgment, as a ‘special circumstance’ taking the case out the general rule.

As to Barnes , in the light of the observations of Lord Woolf MR in Clark (quoted in paragraph 46 above) as to the weight to be attached to judgments delivered on applications for permission to appeal, the observations of Mummery and Simon Brown LJJ when dismissing the claimant’s application for permission to appeal are to be regarded as being of no more than persuasive authority. For the reasons I have given, I respectfully take a different view to Mummery and Simon Brown LJJ on this question (although I should not be taken to be suggesting that the decision of the district judge in Barnes (upheld on appeal by Judge Hegarty QC) was necessarily wrong on the particular facts of that case, which differed in a number of respects from those of the instant case).

Are there, then, any other factors in the instant case which could amount to ‘special circumstances’, taking the instant case out of the general rule as expressed by paragraph 12.4 of the 1999 Practice Direction?

In this court, Ronald seeks to rely on John’s alleged impecuniosity and on alleged delays on John’s part in progressing the litigation (neither being matters relied on by Ronald before the deputy judge).

As to impecuniosity, I accept Mr Dhillon’s submission that that is a matter to which the court may have regard at the hearing of a bankruptcy petition, in considering whether the debtor is ‘able to pay all his debts’ (see section 271(3) of the 1986 Act, quoted in paragraph 37 above). In my judgment, it is not a matter which falls for investigation at the stage of an application under r.6.5(4)(a). In any event, since it was not a matter which was raised before the deputy judge it is not in my judgment open to Ronald to rely on it in this court as a ground for interfering with the deputy judge’s exercise of his discretion.

As to delay, I respectfully agree with the observations of Robert Walker LJ in Re a Debtor (No. 544/SD/98) quoted in paragraph 66 above. However, in making those observations I do not understand Robert Walker LJ to be excluding the possibility that there may be cases where delay is a factor which has relevance extending beyond the question of the genuineness of the asserted cross-claim. At all events, I would for my part wish to keep open that possibility. But on the facts of the instant case the point is academic. In the instant case the Underlying Claim is clearly genuine (albeit I am in no position to form any view as to whether or not it will succeed), and the alleged delays on the part of John seem to me to carry the matter no further.

In any event, as in the case of John’s alleged impecuniosity, delay was not a factor which was relied on before the deputy judge and in my judgment it is not open to Ronald to rely on it in this court.

In this connection, however, I must return briefly to the requirement expressed by Nourse LJ in Bayoil to the effect that the cross-claim must be “one which the [debtor] has been unable to litigate”. As to that, I respectfully share the concerns of Rimer J in Re a Debtor (No. 87 of 1999) (quoted in paragraph 64 above) and of Park J in Montgomery (quoted in paragraph 65 above). I respectfully agree with their view that Nourse LJ’s reference to this requirement probably derives from the terms of the headnote to the report of LHF Wools.

Be that as it may, I do not in any event understand Nourse LJ to be intending to lay down any absolute requirement to the effect that the debtor must demonstrate that he has been unable to litigate his cross-claim. Rather, I understand Nourse LJ to be doing no more than indicating that where, as in LHF Wools, there has been delay in the prosecution of the cross-claim the delay must not be such as to throw real doubt on the genuiness of the cross-claim (it will be recalled that in LHF Wools the delay occurred because the company could not litigate its claim in the Belgian action until the merchant’s appeal against his conviction had been finally concluded; hence the delay threw no real doubt on the genuiness of the cross-claim in that case).

For reasons already given, however, the point does not arise on the facts of the instant case.

I accordingly conclude that in exercising his discretion under r.6.5(4)(a) in the instant case the deputy judge correctly directed himself in law as to the approach to be adopted, and that there are no grounds on which this court could or should interfere with his exercise of that discretion.

I would dismiss this appeal.

I agree.

I also agree.