Ashworth v Newnote Ltd.

This is a renewed application for permission to appeal from an order made on 12 September 2006 by HHJ Pelling QC, sitting as a Deputy Judge of the High Court, in the Manchester District Registry of the Chancery Division, on an appeal from an order made of 27 February 2006 by Deputy District Judge Masheder sitting in Bankruptcy in Thameside County Court.

The application before the deputy district judge, made by a notice dated 30 November 2005, was for an order setting aside a statutory demand dated 10 November 2005 in the sum of £23,119.43, which had been served on the applicant, Mr Bryce Ashworth, by his employer, Newnote Limited. Mr Ashworth had been employed by, and Managing Director of, Newnote Limited until late 2004; but that employment had been terminated by the company.

For reasons set out in a short reserved judgment handed down by the district judge on 27 February 2006, the application to set aside the statutory demand succeeded. The district judge directed himself that it was for the applicant to satisfy him that there was a genuine triable issue on substantive grounds. He expressed himself satisfied that that burden had been discharged. He said this:

“There is no doubt in my mind that the applicant has raised genuine triable issues. When viewed against the background and the length and complexity of the relationship between the parties, together with the sheer number of financial transactions involving the parties and the various companies which were merged to form the Respondent Limited Company I am satisfied that the applicant has shown that he has ‘substantial grounds’. The correspondence at ‘BA2’ lends weight to my view.”

The district judge must, I think, have had in mind -- although he does not refer to them in terms -- the provisions of rule 6.5, paragraph(4)(b) of the Insolvency Rules 1986 (SI 1986/1925) which provide that the court may grant an application to set aside a statutory demand if the debt is disputed on grounds which appear to the court to be substantial.

The creditor, Newnote Limited, appealed to the High Court, as it was entitled to do under rule 7.48(2) of the Insolvency Rules 1986. Judge Pelling allowed the appeal to the extent of permitting the creditor to proceed on the demand in a reduced amount of £6,976.07. He gave permission to Newnote Limited to issue a Bankruptcy Petition after 21 days from 12 September 2006 in that limited sum; he ordered that Mr Ashworth pay the costs of the application to set aside the statutory demand and of the appeal, those costs to be assessed, if not agreed; and he ordered that the sum of £11,462.50 be paid on account of costs by Mr Ashworth.

It is from that order that Mr Ashworth seeks to appeal to this court. Permission to appeal was refused on 9February 2007 by Lawrence Collins LJ after consideration on the papers. Judge Pelling took the view that the deputy district judge’s decision was flawed, on the grounds that he had failed to give adequate reasons to support it. So the judge decided to treat the matter before him as rehearing: to “start afresh” as he put it. He recognised that that was an unusual course in the case of this nature.

The judge started afresh by reference to a schedule which had been put before him on behalf of Mr Ashworth, who was represented by counsel. The schedule was part of exhibit BA3 to an affidavit which he had made on 30 November 2005. The schedule showed an admitted debt in the sum of £8,976.07. But that admitted debt was said to be subject to cross-claims in the amount of £22,439.36. If the cross-claims could be made good, then the balance of indebtedness was some £13,463 in Mr Ashworth’s favour.

The judge reminded himself of the provisions in sub-paragraph (a) of rule 6.5(4) of the Insolvency Rules. That paragraph provides that the court may grant an application to set aside a statutory demand if the debtor appears to have a counterclaim, set-off or cross-demand that equals or exceeds the amount of the debt or debts specified in the statutory demand. The judge referred to the observations of Mr Roger Kaye QC, sitting as the Deputy Judge at the High Court, in Kellar v BBR Graphic Engineers (Yorkshire) Ltd [2002] BPIR 544. He concluded that the hurdle set by rule 6.5(4)(a) was a low hurdle. Nevertheless, save as to £2000, the judge was not satisfied that Mr Ashworth had surmounted that hurdle. The judge identified by reference to the schedule to which I have referred two of the major items in the cross-claim. They were (i) £9,500 in respect of unpaid salary for a three-month notice period (based on a salary of £38,000 gross); and (ii) a sum of £4,683.17 in respect of unpaid salary for November and December 2004 plus 15 days accrued holiday (again, based on a salary of £38,000).

In relation to the first of those items -- the £9,500 claimed as earnings in respect of a three-month notice period -- the judge said this:

“In relation to these claims it is submitted that the [company] was plainly entitled to dismiss [Mr Ashworth] summarily because, on his own case, he had acted in manifest breach of duty to the [company] by receiving and retaining sums paid to him by the company which he knew he was not entitled to. No proper attempt has been made to show why this is not so, despite the point having been made by [the company’s solicitor] in the schedule.”

And the judge went on:

“It seems to me that the company would succeed in a claim to be entitled to summarily dismiss [Mr Ashworth] on the basis of allegations that [he] had received funds from the company knowing them to have been paid to him by mistake in breach of his fiduciary duties as a director.”

So -- as the judge thought -- there could be no serious cross claim for £9,500; even if it could be shown that Mr Ashworth would otherwise have been entitled to three months’ notice (an issue which was in dispute).

Mr Ashworth’s contention is that the judge has misunderstood the circumstances in which he received monies from the company’s account with National Westminster Bank. Those monies were, as Mr Ashworth contends, monies repaid to him in respect of loans which he had made to the company. The question, in the context of the present application and any appeal, is whether that was an issue which Judge Pelling could properly decide in the summary way in which he did: that is to say, whether he had before him material on which he could decide on a summary basis, without hearing any oral evidence, that Mr Ashworth had been in breach of fiduciary duties as a director such as to justify summary dismissal from his employment.

In relation to the £4,683 claimed for unpaid salary for November and December -- a period during which Mr Ashworth was working -- and unpaid holiday accrued entitlement, the judge said this at paragraph 18:

“So far as the salary for November and December is concerned there is the dispute as to whether he was paid for November, which has never been satisfactorily answered by the Respondent [that is Mr Ashworth in that context]. Whilst I accept that there is no evidence to support the claim to have accrued holiday entitlement, the figures available to me do not enable me to separate out what is attributable to salary for November, salary for December and holiday pay. However the total sum claimed is £4,683.17 and it seems to me that at least half of that is attributable for salary for November which the company alleges has been paid, a point which has not been answered, in my judgment, satisfactorily.”

The judge went on, at paragraph 20, to accept that there was an arguable counterclaim for a maximum of £4683.17, which is the unpaid salary and accrued holiday claim.

As to the other items which make up the counterclaim -- which include the payment of an insurance premium on behalf of the daughter, of his co-shareholder, a payment to shop fitter in the sum of £2,500, and mileage allowance claim in the sum of £2,287 -- the judge said this at paragraph 19:

“I accept the submissions made on behalf of [the company] that there is no sufficient evidence to support the balance of claim set out in the schedule at paragraph 91[sic], in so far as it is asserted that it contains a tenable cross claim. Whilst I accept that the hurdle is low for the Respondent to overcome, in my judgment, more than mere assertion is required if a cross claim is to be found to be a sufficient answer to a statutory demand.”

On that basis the judge would have been left with the position that there was an admitted debt of £8,976 and an arguable cross-claim for £4,683. Nevertheless, when he came to make his order, he permitted the company to proceed on the basis of £6,976: that is to say he allowed only £2,000 in respect of the cross-claim. That is strange in the circumstances that the company’s solicitor, in an affidavit that he had made on 23 February 2006, had accepted (at paragraph 5) that Mr Ashworth had a right to set-off limited to £3,093.41 gross in respect of salary. It is difficult to reconcile with the judge’s finding, at paragraph 20, that Mr Ashworth had an arguable counterclaim for the maxim of £4,683.17. In those circumstances it is difficult to see how the judge could have arrived at a figure for admitted debt of £6,976; even if (i) he were right to exclude the claim of £9,500 in respect of lost earnings for a three-month notice period and (ii) he were right to reject the other itemised matters which Mr Ashworth had included in his schedule.

This is, of course, an application for permission to appeal in relation to what would, strictly, be a second appeal: that is to say, an appeal from a judgment in the High Court on an appeal from the decision of the district judge in the County Court. As Lawrence Collins LJ noted, in refusing permission on 9 February 2007, it is difficult to see that a second appeal in this matter would raise an important point of principle or practice -- or indeed any point of principle or practice. The approach in this area of law is well known. Statutory demands are not to be used for the purposes of seeking to enforce disputed debts, or against debtors who themselves have a genuine counterclaim which exceeds the amount of the admitted debt. That is set out in rule 6.5(4). If the judge went wrong in this case, it is in the application of the principle rather than in failing to recognise the principle. Nevertheless, permission for a second appeal can be granted under rule 52.13, paragraph (b), if there is other compelling reason -- other than an important point of principle or practice -- why the Court of Appeal should hear a second appeal.

In the present case I am satisfied that there is some other compelling reason. First, it is important to keep in mind that, although strictly a second appeal, in substance this is an appeal from a decision made by Judge Pelling approaching the matter, as he said, on a fresh basis. In other words, this is not a case in which Judge Pelling’s judgment is in any sense a review of the judgment of the deputy district judge. Judge Pelling’s judgment stands alone because he approached the matter afresh. So that, although CPR 52.13 is strictly in point, in substance the vice which that rule was introduced to meet does not exist in this case. To refuse permission in circumstances where, as it seems to me, an appeal would plainly have a real prospect of success, would be to refuse Mr Ashworth a right to have a first appeal on the points that were actually decided against him. Second, it seems to me that this is a case in which Mr Ashworth would have real grounds for feeling that there had been a failure in the in the administration of justice if he were condemned, on the basis of the judge’s judgment, by a finding that he was so in breach of his fiduciary duties as a director that he was liable to summary dismissal. That, as it seems to me, is a point which ought not to be decided against him in a summary process, save in very clear cases.

For those reasons, it seems to me right to give permission for a second appeal in this case. In order that that appeal may be effective, I stay payment of the £11,462 on account of costs ordered by paragraph 5 of Judge Pelling’s order. Mr Ashworth tells me, and there is no reason not to accept, that he is not able to pay that amount at the moment. Unless stayed, there will simply be a further debt on which a statutory demand and bankruptcy petition would follow. And I stay the permission granted in paragraph 3 of that order -- which enables the company to proceed to issue a bankruptcy petition against Mr Ashworth based on the statutory demand. There is to be no bankruptcy petition based on this statutory demand until after the hearing of the appeal in this matter or further order. The costs which Judge Pelling ordered to be paid on account are stayed until after the hearing of the appeal.

The appeal may be listed before two Lord Justices with a time estimate of 3 hours. It should be heard as soon as convenient. It is not right that impending bankruptcy proceedings should hang over Mr Ashworth; particularly in circumstances where, as he tells me, there is a county court action which may provide the vehicle for resolving the various matters of account which are in dispute between the parties.