Darbyshire v Turpin & Anor

MR JUSTICE ARNOLD: This is an appeal by Gareth Darbyshire against the order of DJ Matharu sitting in Manchester County Court dated 28 May 2012. By her order, the District Judge adjudged Mr Darbyshire bankrupt upon a petition presented on 28 April 2010 by the respondents.

The background to the dispute is of some complexity and long standing. It involves a transaction between a company called Darbyshire Holdings Ltd, of which Mr Darbyshire was a director, and a company called TPT Construction Ltd, of which the respondents were directors. There was a share purchase agreement, there were guarantees and there were indemnities and so on. I do not propose to go into the details of those matters for two reasons. First, there is no evidence before the court as to any of those matters. Secondly, and more importantly, I do not regard the details of those matters as being important for the purposes of this appeal. What, to my mind, is much more important is the procedural history, which was as follows:

The petition was based upon a statutory demand served by the respondents on 18 January 2010. As I understand it, although I have not actually seen the statutory demand, the amount claimed was approximately £138,000. As I understand it, the respondents have subsequently acknowledged that the debt was overstated and that the true debt is in the region of £115,000, but again that does not matter for present purposes.

More importantly, Mr Darbyshire applied to set aside that statutory demand. That application came before HHJ Cooke sitting in Manchester County Court and was dismissed by him on 27 April 2010. It should be noted that, although I have not seen the actual order, it is common ground that it did not specify any date on or after which the respondents could present a petition. The respondents presented their petition the following day, 28 April 2010.

Thereafter, Mr Darbyshire set about seeking to challenge Judge Cooke's order. In the first place he filed an appellant’s notice seeking to appeal to this court. As I understand it, in the first instance, a stay was granted by Norris J. Ultimately, the matter came before Briggs J on 27 January 2011, as I understand it, as a rolled up application for permission to appeal and for the appeal if permission was granted. At the conclusion of that hearing, as I understand it, Briggs J refused permission to appeal against Judge Cooke's order.

Thereafter there was a hearing of the petition before DJ Obodai sitting in the Manchester County Court on 18 April 2011. It is not entirely clear to me whether that was the first hearing of the petition or not, but it does not appear to me that matters for present purposes. What does matter is that on 8 April 2011, although it is misdated 2010, in preparation for that hearing, Mr Darbyshire filed a notice of opposition running to nine paragraphs.

In his notice of opposition, Mr Darbyshire took a number of points. The first point that I wish to note is that he took a point on the absence of any order by Judge Cooke under Rule 6.5(6) of the Insolvency Rules. Secondly, he referred to the overstatement of the petition debt. Thirdly, he set out his understanding that the respondents had sold a property from which they had realised a sum of some £59,000 odd and contended that that should be set against the debt. Fourthly, he contended that he had a further cross claim as follows, and I quote paragraph 6 of the Notice of Opposition:

At the hearing before DJ Obodai, the petition was adjourned generally pending the outcome of Mr Darbyshire's application for permission to appeal to the Court of Appeal. No directions were given at that stage for the filing of any evidence.

The next development was that, notwithstanding that Briggs J had refused permission to appeal, Mr Darbyshire attempted to appeal to the Court of Appeal. That application for permission to appeal was dismissed by the Court of Appeal on 5 March 2012.

Following the dismissal of Mr Darbyshire's application for permission to appeal to the Court of Appeal, the respondents requested that the petition be relisted for hearing and it was duly relisted for 28 May 2012. In advance of that hearing, Mr Darbyshire filed a supplementary notice of opposition running to again nine paragraphs on 18 May 2012. In his supplementary notice of opposition, he enlarged upon his case that there were to be set-off against the petition debt various cross claims which extinguished it. I refer, in particular, to paragraph 5 of the supplementary notice, which was in the following terms:

At the hearing on 28 May 2012, Mr Darbyshire was unable to attend. He was represented at the hearing, however, by counsel who was equipped with a skeleton argument running to 39 paragraphs which, as I understand it, had in fact been prepared by Mr Darbyshire himself rather than by counsel. In that skeleton argument, Mr Darbyshire once again raised the point under Insolvency Rule 6.5(6). He furthermore advanced the case as to the three cross claims. In addition, he said that, if all else failed and it was found that he had no defence to the petition, then he requested an adjournment of the petition for a short period to enable him to discharge the petition debt, relying upon the case of Harrison v Seger [2005] EWHC 411 (Ch), [2004] BPIR 583.

It is stated by Mr Darbyshire, and supported by the contents of the skeleton argument he prepared for the hearing before the District Judge, that his expectation was that, at that hearing, the court would not be considering in detail the substance of his objection to the petition, but rather would be making directions for the filing of evidence. On the other hand, it is clear that, in his skeleton argument, Mr Darbyshire did take the trouble to set out his position in some detail.

At the hearing, DJ Matharu, having heard argument from counsel for Mr Darbyshire and counsel for the respondents, proceeded to conclude that there was no reason why a bankruptcy order should not be made, and accordingly made Mr Darbyshire bankrupt. The following points should be noted about her judgment. First, she did not deal with the Rule 6.5(6) point at all. Secondly, she referred in her judgment no less than six times to the fact that Mr Darbyshire was not present. Thirdly, she referred to the fact that there was no evidence before the court from Mr Darbyshire, and in that context she referred to the fact that none of the documents filed by Mr Darbyshire bore any statement of truth.

Fourthly, she dealt with the asserted cross claim for £55,000 as follows, and I quote paragraphs 9 and 10 of her approved judgment:

So far as the other two asserted cross claims were concerned, all she said about them in paragraph 8 was this:

Finally, she dealt with the request for a short adjournment. She mentioned the request for a short adjournment in paragraph 11 of her judgment and implicitly rejected that request for reasons she gave in paragraph 13 as follows:

To continue the chronology before turning to the substance of the appeal, subsequent to that order, Mr Darbyshire made a further attempt to persuade the Court of Appeal to accept his application for permission to appeal against Judge Cooke's order, but that was refused on 18 October 2012. Permission to appeal to this court against DJ Matharu's order was given by Morgan J on paper on 5 December 2012.

On the appeal, Mr Darbyshire takes three main points, although the second point is put in a number of different ways. The first point is the point under Rule 6.5(6) of the Insolvency Rules. This provides as follows:

As I have said, it is common ground that Judge Cooke's order of 27 April 2010 did not provide for either of those two alternatives. In those circumstances, Mr Derbyshire submits that it was not possible for a petition to be presented. His argument is that, once an application is made to set aside a statutory demand, the creditor cannot then present a petition. Against that background, the purpose of Rule 6.5(6) is to provide a mechanism to lift that restriction and allow a petition to be presented. I do not agree with that analysis of the purpose of Rule 6.5(6). Once the application to set aside the statutory demand is dismissed, then the restriction on filing a petition automatically falls away. The purpose of Rule 6.5(6) is to enable the debtor, whose application to set aside the statutory demand has been dismissed, to ask for time in which to pay the debt before a petition is presented or, if not to pay the debt, to try and arrive at some compromise with the prospective petitioner.

As counsel for the respondents rightly submitted in his skeleton argument, the default position, in the absence of any request by the debtor for more time or, even if a request is made, if no justification is provided, is for the court to authorise the presentation of a petition forthwith. Accordingly, in those circumstances, it seems to me to be clear that Rule 6.5(6) should not be interpreted as prohibiting the petitioner from presenting a petition forthwith if no date is specified in the order. In support of that approach I would rely upon the judgments in Re Bezier Acquisitions [2011] EWHC 3299 (Ch) at [19]-[21], Re Ceart Risk [2012] BCC 592 at [15]-[16] and Re BXL Services [2012] BCC 656 at [10]-[13].

The second point taken by Mr Darbyshire is that the District Judge was wrong to proceed to a substantive determination of the petition at the hearing on 28 May 2012. Rather, she should have adjourned the matter for a substantive hearing at a later date with directions for the filing of evidence in the meantime. He argues that the two notices of opposition, which he had filed pursuant to Rule 6.2(21) of the Insolvency Rules, had raised objections to the petition which required the filing of evidence and proper consideration in due course. In this context, he relies upon the fact that, particularly in the supplementary notice of opposition, he had raised three cross claims which if substantiated would, in total, be sufficient to extinguish the petition debt. His submission is that in those circumstances what was required was the filing of evidence by the parties directed to the question of whether those three cross claims raised bona fide disputes on substantial grounds sufficient to constitute a defence to the petition. Furthermore, he submits that the District Judge was quite wrong to regard his absence as relevant to the matters before her and that she was also wrong to have regard to the fact that his notices of opposition were not verified by a statement of truth in circumstances where there is no requirement in the Rules for such a statement of truth. In support of these submissions, Mr Darbyshire relied, in particular, upon the judgment of Lloyd J in Re Pearce [2012] EWHC 1495 (Ch) at [24(3) and (4)]. He further argues that, insofar as the District Judge dealt with the three asserted cross claims in her judgment, she did not give any sufficient reason for dismissing them out of hand in the absence of evidence.

Against those submissions, counsel for the respondents accepts that the question that the District Judge had to consider was whether there was any prospect of Mr Darbyshire establishing that there were bona fide disputes on substantial grounds in respect of the three cross claims such as to give rise to a defence to the petition. He points out correctly that, in order to defeat the petition, it was necessary for Mr Darbyshire to show that he had a real prospect of success in respect of all three of the cross claims. It would not suffice for Mr Darbyshire's purpose to succeed merely in respect of one or two of them.

So far as the cross claim in respect of the sale of the property is concerned, counsel for the respondents accepted on instructions that a property had been sold for a sum which, on his instructions, was £51,500 rather than £59,000. Furthermore, he accepted, for the purposes of this appeal only, that Mr Darbyshire had an arguable case to say that that ought to be set-off against the petition debt. The primary point he made insofar as that is concerned is the one to which I have already averted, namely that success in respect of that matter on its own would not go anywhere near far enough to extinguish the petition debt.

So far as Mr Darbyshire's claim in respect of the costs order is concerned, counsel for the respondents accepted that there had been a costs order in favour of Mr Darbyshire. Mr Darbyshire's contention is that he will recover somewhere between £40,000 and £47,000 in respect of that costs order. He told me that detailed assessment proceedings had been commenced and had thereafter been stayed as a result of his attempts to obtain permission to appeal from the Court of Appeal and had not progressed since his second attempt had been rejected in October 2012.

The point made by counsel for the respondents was that it remained to be seen what a detailed assessment would produce by way of an actual certificate of costs in favour of Mr Darbyshire. Furthermore, he pointed out that, as Mr Darbyshire accepts, there are also costs orders going the other way. One of those costs orders, counsel for the respondents told me on instructions, was for a matter in respect of which the respondent's bill was of the order of £68,000. In addition, they had another costs order in respect of which it was thought that they would have a claim of over £12,000. Accordingly, his submission was that, again, this second cross claim was unlikely, even in combination with the first, to extinguish the petition debt.

Turning to the third cross claim, the trust claim for £55,000, counsel for the respondent submitted that it was extremely hard to understand from Mr Darbyshire's notices of opposition the facts and matters that were relied upon as giving rise to that claim.

Over and above those submissions, counsel for the respondents made the over-arching point that the District Judge had been entitled and correct to have regard to the overall chronology of the matter and the fact that Mr Darbyshire had made a number of challenges to the respondent's attempts to recover the debt they were owed, which had resulted in the matter being delayed, but which had ultimately been unsuccessful.

I accept that the District Judge was entirely justified in having regard to the chronology of the matter. Nevertheless, it seems to me that the District Judge was not entitled summarily to dispose of the petition in the way that she did without giving Mr Darbyshire the chance to substantiate the grounds of opposition that he had set out in his notices of opposition by evidence. If Mr Darbyshire's three cross claims are substantiated in evidence, then, as I have already indicated, it is accepted that they will extinguish the petition debt.

As can be seen from my account of the arguments presented by counsel for the respondents, there is no reason to doubt that Mr Darbyshire has a real prospect of success in relation to the cross claim in respect of the property.

So far as the costs orders are concerned, again there seems no reason to doubt that, on the basis of the information before me, that Mr Darbyshire is entitled to something in respect of the costs order in his favour. I do not doubt that the respondents have orders in their favour, but the fact is that there is no satisfactory evidence before me as to the amounts of those respective costs or what the ultimate balance may be or in favour of whom. That is a matter which requires evidence.

As to the trust claim, I am wholly unable to accept the argument of counsel for the respondents that the District Judge was entitled to dismiss it out of hand without giving Mr Darbyshire the opportunity to file evidence in support of it. While I agree with counsel for the respondents that the matter is rather shortly described in the notice of opposition, I do not think it is possible to conclude, without any evidence whatsoever, that there is no substance at all in the matter. It is something which requires evidence and analysis. The District Judge appears to have been influenced in her attitude to the trust claim by the fact that Mr Darbyshire was not present. As counsel for the respondents rightly accepted, however, that was not a material consideration. Likewise, she appears to have been influenced by the absence of a statement of truth on the notice of opposition. Again, as counsel for the respondents rightly accepted, however, there was no obligation on Mr Derbyshire to have verified his notices of opposition by a statement of truth.

I would add that the District Judge in her judgment did not really get to grips with the point that, if all three cross claims were added together and were sufficiently substantiated to the relevant standard, then they would extinguish the petition debt.

In those circumstances, it seems to me that the appeal must be allowed and that the matter must be remitted to the Manchester County Court for directions to be made for the filing of evidence and the appointment of a substantive hearing for the petition to be heard. I should say that I reach that conclusion with some regret, for this reason: it may ultimately turn out that, when evidence is filed and the matter is properly analysed, the conclusion will be that Mr Darbyshire is unable to show that he has sufficient grounds for extinguishing the petition debt. If so, as I suspect may well turn out to be the case, the result of this appeal will only have been to put off the evil day. Nevertheless, I do not consider that that justifies the District Judge's attempt at short circuiting the matter.

Finally, for completeness I should deal with Mr Darbyshire's third point, which is that, in any event, he ought to have been given a short adjournment in which to pay the outstanding sum. I am unimpressed with that point. The request was only raised in the skeleton argument and neither there or anywhere else did Mr Darbyshire provide any indication of his ability to pay the petition debt if an adjournment were granted. In those circumstances, I consider that the District Judge was well within the ambit of her discretion to refuse an adjournment on that basis.

For the reasons I have given, however, this appeal must be allowed.