“It does not seem to me that the proceedings [i.e. the First Action] which are currently stayed, amount to, in themselves, a counterclaim or set-off or cross demand. This depends on whether your application to the Court of Appeal [i.e. for permission to appeal] is successful. It is for the High Court to determine the merits of your claim. Obviously, if you are successful, and an award of damages is made in your favour, you will be entitled to pursue it against your brother in the same way that he has pursued this debt against you. This is what we call an ‘interlocutory order’ for costs. That means it is an order which is made as part of proceedings, it not being a final order, and it seems to me that the creditor, Mr [Ronald] Popely, is entitled to issue a statutory demand against you in respect of this order [i.e. the costs order made by Mr Leaver QC].”
“It is not possible to distinguish between the two applications and therefore the decision made by District Judge Murphy in respect of the Previous Statutory Demand would apply in this case. The District Judge ordered that your client’s application to set aside the Previous Statutory Demand be dismissed. In making his judgment District Judge Murphy concluded that under [paragraph 12.4 of the 1999 Practice Direction: as to which, see paragraph 40 below] the [Underlying Claim] did not amount to a Counterclaim. The same order would be made in the event that your client made an application to set aside the Current Statutory Demand given that both statutory demands arise out of costs orders made as a consequence of [the pending actions]. The application in the Wood Green Crown Court arose because your client wanted to use documents which had been seized by Customs and Excise in the course of criminal proceedings, in the [pending actions]. It is therefore circular, illogical and inequitable for your client to argue that [the Underlying Claim] is a ‘counterclaim, set-off or cross demand’ to the claim for payment of the costs order which arose because of your client’s wish to use certain documents in the [pending actions].”
“12.3 Where the statutory demand is based on a judgment or order, the Court will not at this stage go behind the judgment or order and inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment or order. 12.4 Where the debtor (a) claims to have a counterclaim, set off or cross demand (whether or not he could have raised it in the action in which the judgment or order was obtained) which equals or exceeds the amount of the debt or debts specified in the statutory demand or (b) disputes the debt (not being a debt subject to a judgment or order) the Court will normally set aside the statutory demand if, in its opinion, on the evidence there is a genuine triable issue.”
“However, the principal matter which appears to have led her to her view on this aspect of Mr Barnes’ application is that the order of Buxton J was never appealed and was an order for payment of costs forthwith. She does not develop that in detail but I do not consider that it would have been necessary for her to do so. In my judgment, the very point of an order directing payment of costs forthwith on an interlocutory basis is to ensure that there can be no set-off against any cross orders as to costs or any claim for damages which may ultimately result in a judgment in those self-same proceedings and indeed to ensure that there can be no stay upon any such order as to costs; certainly no stay had been asked for as far as I am aware. If one were to accept that the possibility that the plaintiff might recover monies in this action were something which could properly be set off against the amount of the taxed costs, that would, in my judgment, subvert the whole purpose of the forthwith order. I bear in mind that under r.6.5(4) the power of the court is ultimately a discretionary one; but whether or not one has to enter into the field of discretion, I take the view that the reality is that the possibility of Mr Barnes obtaining judgment for a sum which I doubt will reduce the amount in any event to less than£750 cannot be regarded as a proper basis from preventing the Council from pursuing by every means available to it an order which was specifically made as a forthwith order. In those circumstances I consider that the district judge was entirely correct.”
“As to the cross claim, the position is quite simply this. The court has a discretion whether or not to grant an application [i.e. to set aside a statutory demand] where the debtor appears to have a counterclaim, set off or cross demand. In the exercise of the discretion the court is entitled to take account of the fact that the statutory demand is for a sum which the court has ordered should be paid, and to be paid forthwith. Judge Hegarty was entitled to take that into account. For the purposes of his submissions, [counsel] had to take the point that it was incorrect for the judge to take into account that matter. In my view that submission cannot possibly be correct. It would not succeed on an appeal to this court. For that reason alone I would refuse this application.”
“The critical reason why this application was doomed to inevitable failure is because the judge exercised his undoubted discretion on the perfectly proper ground that this demand is founded on a forthwith costs order and the whole purpose of such an order would be subverted were set offs of this character to be allowed.”
“42. Until recently it would be unusual for any judgment on an application for permission to appeal to be reported. However, as a result of the development of specialist reports, even in relation to applications for permission, judgments are now commonly reported. However, the fact that they are reported does not alter the consideration which the judge can give to the terms in which his judgment is couched. Furthermore the judge is not usually referred to reports of other cases, or if he is referred to reports, he will have them drawn to his attention in a much more summary manner than would be the case on the hearing of an appeal. 43. Even if [counsel] had been right, when he submitted [that] there is no decision which directly deals with the status of judgments of this court on applications for permission to appeal, it is well established that the court does not regard them as binding authorities. …. The court does not therefore have to follow the decisions given on applications for permission to appeal. They are at best only of persuasive weight. The court does not encourage reference to judgments given on applications for permission. ….”
“There is no distinction in principle between a cross-claim of substance (such as in the [LHF Wools] case) and a serious dispute regarding indebtedness imputed against a company, which has long been held to constitute a proper ground on which to reject a winding up petition.”
“Having held that [Bayoil] had a serious and general counterclaim in the arbitration, which it had been unable to litigate, in an amount exceeding the amount of Seawind’s debt, the judge ought to have asked himself whether there were special circumstanceswhich made it inappropriate for the petition to be dismissed or stayed.” (Emphasis supplied)
“In my judgment those matters do not amount to special circumstances. Indeed, with the exception of security for the company’s counterclaim, they are likely to be found in many cross-claim cases. [Counsel for Seawind] has also sought to rely on the fact that no stay of the interim award was sought or granted. This adds nothing to his other points. The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up. Moreover, an order that a company can be wound up, unlike a bankruptcy order, is often a death knell. Nor can it be certain that a liquidator, even with security behind him, will prosecute the company’s claims with the diligence and efficiency of its directors. These, I believe, are considerations which go to justify the practice in cross-claim cases. I emphasise that the cross-claim must be genuine and serious or, if you prefer, one of substance; that it must be one which the company has been unable to litigate; and that it must be in an amount exceeding the petitioner’s debt. All those requirements are satisfied in this case.”
“Very similar considerations inform the court’s approach to the granting of a stay of execution, where the court does not lightly deprive the successful litigant of the fruits of his judgment, but will do so where an appeal would otherwise be rendered nugatory. I appreciate that this analogy cannot be taken too far. Winding up is not a form of execution, and stays may not be granted on a judgment for a dishonoured cheque, which is treated as cash, just as freight has a similar unique characterisation. None the less, the principles underlying that approach seem to me to be of relevance when dealing with a company winding up.”
“I am far from saying that in the ordinary case that is not a most weighty consideration. If the company is trading, or even if it is not trading, if it has assets, these are things which may melt away while the matter is delayed, and the petitioning creditor is not to be put off and see the only security for the debt vanish into thin air, either in litigation, good, bad or indifferent, or in some other way. But here is a company which it has never been suggested has any assets at all except this one claim. It does no business: it does not trade; there is nothing to dwindle away by delay. It does not seem to me that delay matters much. …. Therefore, I do not think that delay is a matter to which I should have given much weight.”
“Whilst, I recognise, with some concern, that this conclusion might not appear to lie easily with Nourse LJ’s statement of the relevant criteria, I consider it does reflect an approach which is consistent with the actual decision in Portman, which Nourse LJ regarded as establishing the correct view.”
“31. The requirement that the debtor must not have been able to litigate his …. cross-claim was not part of the ratio decidendi of Bayoil: in that case there was no dispute that, because (I infer) the whole dispute between the two parties was governed by an arbitration clause, the debtor had not been able to litigate its cross-claim. Therefore there was no issue on this particular point. So where does the proposition stated by Nourse LJ come from? I respectfully agree with Rimer J that there is no other case which establishes it. The wider principle enunciated in Bayoil was that a cross-claim could be a ground for dismissing a winding-up petition based on an undisputed debt. The court derived that principle largely from the decision of the same court in [Portman] …. [Portman] certainly did not decide that a debtor company could not rely on a cross-claim after all if it could have litigated it earlier but had not done so. If that had been the view of the court it would almost certainly have acceded to the winding up petition instead of dismissing it: …. 32. There has been only one other directly relevant Court of Appeal case after Portman and before Bayoil. It is [LHF Wools]. A winding up petition against the company was dismissed on the ground that it had a cross-claim which, if it succeeded, would exceed the debt. As in Bayoil there was no issue about the company having been able to litigate its cross-claim but not having done so. The cross-claim would have to be litigated in Belgium and under Belgian law could not yet have been commenced. The headnote does however contain these words ….: ‘…. the modern practice that where a company had a genuine and serious cross-claim against the petitioner which it had not reasonably been able to litigate, the petition should usually be stayed or dismissed’. (My emphasis) I think that, as Rimer J suggested, the words which I have emphasised are likely to have been the origin of the words in Nourse LJ’s judgment which I am considering here. However, the problem is that there is nothing to support them in the judgment in the LHF Wools case. Although it was true that the company could not have litigated its cross-claim, none of the three members of the court says anything to suggest that that was important, or that the result would or might have been otherwise if the company could already have litigated its cross-claim. Indeed, Harman LJ said that the company appealed on the ground that ‘according to modern practice if there is a genuine cross-claim, it is just as good as if there was a disputed debt’, making no reference to whether or not the cross-claim could reasonably have been litigated already. I can only conclude that the headnote writer went beyond what the court had decided, and that his expansion may have found its way into the judgment of Nourse LJ in Bayoil. 33. In the circumstances I do not consider that I am bound by what Nourse LJ said to reject [the company’s] argument on the ground that it could have litigated its cross-claim against [the petitioner] but had not done so. As a matter of principle I would not myself think it right to decide against [the company] on that ground. I do not think that there is anything objectionable in a company which believes that it has a claim against another party holding back from pursuing it, but then, if the other party starts to threaten it with winding-up proceedings if it does not pay a debt owed in the other direction, deciding that it must pursue its cross-claim after all. A decision in favour of [the petitioner] on this issue would have the undesirable effect of penalising a company for refraining from litigating an issue when it first could have done, and encouraging parties to litigate their possible claims sooner rather than later.”
“Whether or not Bayoil provides a close analogy in cases where an individual debtor is relying on a cross-claim in an application to have a statutory demand set aside, the general rule which the judge derived from r.6.5(4)(a) of the [1999 Practice Direction] requires the debtor to show that his cross-claim has substance and will, if it succeeds, at least equal the debtor’s liability. Delay in putting forward a cross-claim may lead to an inference that it is not put forward in good faith, but only as a pretext in order to stave off bankruptcy.” (Emphasis supplied)
“The statutory demand can therefore be seen to be of crucial importance if a creditor, who does not have a judgment debt, is to obtain a bankruptcy order. As Sir John Vinelott put it …., the statutory demand is ‘the straight and narrow gateway’ through which such a creditor must pass. It is accordingly quite different from a statutory demand in the field of company law which merely provides one means of establishing a company’s inability to pay its debts, the usual ground on which a company is wound up compulsorily. In contrast, in bankruptcy it is not the debtor’s general inability to pay his debts that is crucial but the apparent inability to pay the debt in the statutory demand, and at the hearing of the bankruptcy petition the failure to pay or compound for that debt.”
“Where the debtor claims that r.6.5(4)(a) or (b) is satisfied and, in the case of (b), that the debt is not subject to [quaere: the subject of] a judgment or order, the court will normally set aside the statutory demand if in its opinion on the evidence there is a genuine triable issue ([para 4 of the 1987 Practice Direction]).”
“We have doubts as to whether that is the right approach. Take a case of a cross-claim which does not amount to an equitable set-off. By reason of r.6.5(4) that cross-claim can be seen to be a relevant matter in determining whether the statutory demand should be set aside, and, it is not in dispute, it is also relevant at the hearing when the court is considering whether to make a bankruptcy order. The rationale for that must be that the cross-claim undermines the apparent inability of the debtor to pay the statutory demand debt. …. If it were possible to take account of other indebtedness, it would undermine an essential safeguard for the debtor in the statutory scheme, whereby the debtor is only faced with a debt claimed in the statutory demand which he can seek to set aside. A creditor faced with a cross-claim after service of the statutory demand but who has a further debt on which he can rely can always serve a further statutory demand and petition on the greater debt.”
“Fastening upon the words ‘counterclaim, set-off or cross demand’ in r.6.5(4)(a) [counsel for the debtor] contends that although a counterclaim of the sort contemplated in [the debtor’s] evidence could not avail her as a defence against a claim by [the petitioner] for judgment on the cheque, it does provide a basis for setting aside the statutory demand. In my judgment that argument is correct. First, the difference between set-off on the one hand, and a cross-demand or counterclaim, on the other hand, is as follows. A set-off is a claim which can be, as its name suggests, set off against another claim, i.e. in practice it operates as a defence to that other claim. On the other hand a counterclaim or cross-demand which is not a set-off is a claim or demand which, although perfectly valid in itself, cannot for some reason be invoked as a set-off or defence to another claim. In my judgment, the way in which the three words are used in r.6.5(4)(a) is such that they have that effect in the context of the rule. Secondly, it is difficult to give the reference to counterclaim or cross-demand any sensible alternative meaning. If they are limited to counterclaims or cross-demands which act as set-offs there would have been no reason to refer to them. They would have been covered by the simple word ‘set-off’. Thirdly, some support for this view is to be found in [paragraphs 3 and 4 of the 1987 Practice Direction, which were in identical terms to paragraphs 12.3 and 12.4 of the 1999 Practice Direction].”
“Fifthly, it is not surprising that there is a difference between the law relating to the right to judgment on a cheque, on the one hand, and on the other hand, the right to bankrupt the writer of the cheque. One can well see why …. a cheque should be treated as cash for the purpose of the payee, and why therefore, subject to arguments as to whether judgment should be stayed and if so on what terms, the payee should be entitled to judgment on the cheque notwithstanding the existence of cross-claims against him. If the judgment is not stayed, he would be entitled to enforce the judgment through the various means of enforcement of judgment[s] contained in the Rules of the Supreme Court. On the other hand if the debtor, the writer of the cheque, does have a genuine counterclaim which may exceed the amount of the cheque, while it is appropriate that he should have to pay on the cheque, it is quite another thing to say that he should be liable to be bankrupted in respect of it in circumstances where he has a genuine cross-claim which may well exceed the amount of the cheque.”
“33. The terms ‘counterclaim’ and ‘cross demand’ are not defined in the [Rules]. Neither party has produced any definition. …. 34. I have no reason to doubt the point made by Rimer J [in Re a Debtor (No. 87 of 1999)]that procedurally a party can raise a counterclaim against another party in some different capacity than that in which he is himself sued by that party. R.6.5(4) is not, however, dealing with procedural matters but whether there is good reason to set aside a statutory demand. There is little point in setting aside a statutory demand if the debt on which it is based cannot be liquidated by the cross-claim. That this is the purpose of the provision is confirmed by the requirement that the cross-claim should equal or exceed the debt on which the statutory demand is based. 35. That conclusion is confirmed by theBankruptcy Rules 1952 . Under those rules a bankruptcy notice could be set aside on the grounds of counterclaim, set-off or cross-demand, but the counterclaim or cross-claim had to be between the debtor and the creditor in the same right. …. It would follow that in this case the court should not exercise its powers under r.6.5(4) because the debt on which the statutory demand is based is one to which the respondents (alone) are entitled whereas the proposed cross-claim would be against all the partners jointly.”
“51. The central issue on this appeal is whether a debtor who owes a sum of money, the subject of a statutory demand, to four trustees, who held a lease for the debtor, the trustees and 15 other former partners of a firm, can obtain the setting aside of the demand under r.6.5(4)(a) of the [1986 Act] when the debtor asserts a cross demand against the 19 other former partners which, he says, equals or exceeds the amount of the debt specified in the demand. He claims that on the taking of the dissolution account he would be entitled to receive a substantial payment from the partnership. 52. The function of the statutory demand in bankruptcy was considered by this court in [TSB Bank] when it was pointed out that the statutory demand is an essential element of the statutory procedure for making a debtor bankrupt, the apparent inability of the debtor to pay the debt in the statutory demand through failing to satisfy the statutory demand enabling a bankruptcy petition to be presented by the creditor against the debtor. Rule 6.5(4)(a) gives the court a discretion to set aside the statutory demand if the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the demand. Despite the generality of the language used, it is clear that limits must be implied. Thus, in the case of set-off the claims must exist between the same parties and, subject to immaterial exceptions, in the same right …. The set-off directly reduces the amount of the debt claimed by the creditor. But it was obviously thought that to limit claims to liquidated sums due between the parties at the time of the hearing of the application to set aside was unfair to the debtor and that other claims yet to be proved should be allowed to be taken into account. Hence, a counterclaim or cross demand may be relevant. A counterclaim may be permitted procedurally even if the claim and counterclaim are not between the same parties in the same right. However, as Rimer J said in Re a Debtor (No. 87 of 1999) …. when the claim and counterclaim are heard, the court will not be compelled to set the claim and counterclaim off against each other and merely give judgment to one party for the balance, as in many cases that might produce gross injustice. 53. The reference in r.6.5(4)(a) to ‘cross demand’ must be interpreted more widely than ‘counterclaim’ or ‘set-off’ …. But I not aware of any case in where a cross demand has been held relevant despite an absence of mutuality between the debtor and creditor in their rival claims. ….”
“35. It is not entirely clear to me whether His Honour Judge Hegarty, Q.C. was acting in pursuance of a discretion or rather holding as a matter of law that no counterclaim or cross-demand could be set against a forthwith costs order. If the learned judge was so holding as a matter of law, then for the reasons I have already given, which are of course based on authorities which were delivered since the date of the learned judge's judgment, I respectfully disagree with His Honour Judge Hegarty, Q.C. and decline to follow his decision. 36. Mr Barnes sought permission to appeal from the Court of Appeal. His application was refused and, again, due to the last-minute instruction of counsel on his behalf the submissions made on his behalf must, of necessity have been severely curtailed. In any event, as Lord Woolf M.R. stated in [Clark] at paragraphs 40 to 43, judgments given on applications for permission to appeal are not binding authorities and are, at best, of persuasive weight: "Reference to them is not to be encouraged." Nevertheless, as I have indeed been referred to the decision of the Court of Appeal in Barnes, I think it best to comment thereon briefly. 37. It is quite clear that both Simon Brown LJ and Mummery LJ refused Mr Barnes permission to appeal solely on the basis that the discretion available under r.6.5(4)(a) was certain to be exercised against him. No suggestion was made by the Court of Appeal that Mr Barnes' cross-demand was not capable, as a matter of law, of being set-off against a forthwith costs order. Accordingly, the decision that I have come to on this particular point seems to me to be entirely consistent with what was said by the Court of Appeal in Barnes. 38. It follows from what I have already said that, in my judgment, the District Judge was wrong in law in his September 2002 decision, in that such September 2002 decision appears to me to be based entirely on the proposition that a counterclaim or cross-demand cannot, as a matter of law, be set against a costs order.”
“39. The function of the Insolvency Court must of necessity be limited. It cannot try the counterclaim or cross-demand. All it can do is to ascertain whether the counterclaim or cross-demand is genuine and serious - just as all the Insolvency Court does in the case of a disputed debt on a winding-up petition is to ascertain whether the debt is bona fide disputed on substantial grounds (see on this paragraph 8 of Park J's judgment in Montgomery). 40. I have no hesitation in finding that the claimant's claims in the first and second actions are genuine and serious counterclaims or cross-demands and that they would, if successful, substantially exceed the sums payable under the Wood Green Crown Court Costs order. Indeed, Mr Harrison so conceded, albeit he made submissions about the manner in which the first and second actions had been litigated. These submissions, in my judgment, could go, if at all, only to the question of discretion, with which I shall shortly deal. 41. I appreciate that the jurisdiction issues remain to be determined and that, if decided against the claimant, that could well be an end to the first and second actions. So too, perhaps, with the abuse issue. However, this Insolvency Court is in no position to try those jurisdiction issues or the abuse issue. All that this court can do is to say that genuine and serious issues arise over these matters. In any event, neither r.6.5(4)(a)nor paragraph 12.4 of the [1999] Practice Direction require the counterclaim or cross-demand to be justiciable in England. Nor, as I have already indicated, is it necessary for proceedings to have already been issued before a counterclaim or cross-demand can qualify for consideration under r.6.5(4)(a) and paragraph 12.4. 42. Furthermore, in respect of the submissions about the manner in which the case has been litigated, this Insolvency Court is entitled to, and does, take account of the fact that to-date the claimant has shown the clearest possible appetite to litigate through to judgment all his causes of action against his brother in each, every and all available courts or jurisdictions.”
“(1) The decision in Bayoil establishes that where there is a genuine and serious counterclaim or cross-demand the petition (this was, of course, a winding-up case) should be dismissed (or perhaps stayed) unless exceptional circumstances exist to negate such practice - see per Nourse LJ at page 154 and Ward LJ at page 156. The discretion, therefore, to the extent that it exists, could perhaps be best described and classified as a "reverse" discretion. The rule of practice is that the petition should be dismissed or stayed. If that rule is to be negated, it is because of an exercise of discretion against the rule and that exercise of discretion against the rule is to occur only in special circumstances. (2) It is particularly noteworthy that in Bayoil the fact that the petitioner's debt was based on a final and unappealable interim award which had not been stayed was not regarded as a special circumstance which could invoke the reverse discretion. For my part, I find it very difficult, indeed impossible, to see how such an award differs in practicality or substance from a costs order. In Bayoil freight was to be paid without deduction and the interim award reflected that fact. The claim for diversion expenses could not be set-off against that claim for freight, hence the interim award. That award seems to me to be identical in substance to a forthwith costs order. If setting aside a statutory demand has the effect, as His Honour Judge Hegarty, Q.C. suggested, of subverting the whole purpose of the forthwith costs order, then why did the decision of the Court of Appeal in Bayoil not have the effect of subverting the whole purpose of the interim arbitration award (and the rules relating to payment for freight)? (3) The principles set out in Bayoil are clearly equally applicable, by analogy, to statutory demands - see per Rimer J in Re A Debtor (No. 87 of 1999), to which I have already referred. (4) I cannot, therefore, see any special circumstances which exist in this case. So, in fact, the question of exercise of the reverse discretion does not even arise. The ordinary rule of practice must be followed. It matters not whether that rule be a true rule (i.e. not a matter of discretion) or a rule as to how the discretion is to be exercised. Either way, the statutory demand must be set aside. Such a decision is in accord with the reasoning I utilised to justify my conclusion that, in law, a costs order is not for bankruptcy purposes protected against a counterclaim or cross-demand arising from the underlying claim in the proceedings in which the costs order was made.”
“The court reiterates that article 6(1) [of the European Convention on Human Rights] obliges the courts to give reasons for their judgments, but cannot be understood as requiring a detailed answer to every argument. The extent to which this duty to give reasons applies may vary according to the nature of the decision. It is, moreover, necessary to take into account, inter alia, the diversity of the submissions that a litigant may bring before the courts and the differences arising in contracting states with regard to statutory provisions, customary rules, legal opinion and the presentation and drafting of judgments. That is why the question whether a court has failed to fulfil the obligation to state reasons, deriving fromarticle 6 of the Convention , can only be determined in the light of the circumstances of the case.”
“12. The Strasbourg court, when considering article 6, is not concerned with the merits of the decision of the domestic court that is under attack. It is concerned to see that the procedure has been fair. It requires that a judgment contains reasons that are sufficient to demonstrate that the essential issues that have been raised by the parties have been addressed by the domestic court and how those issues have been resolved. …. We do not believe that the extent of the reasoning that the Strasbourg court requires goes any further than that which is required under our domestic law ….”
“16. We would put the matter at its simplest by saying that justice will not be done if it is not apparent to the parties why one has won and the other has lost.”