Ipsofactoj.com: International Cases [2001] Part 4 Case 7 [CAEW]


COURT OF APPEAL, ENGLAND & WALES

Coram

Hurst

- vs -

Bennett

PETER GIBSON LJ

ARDEN LJ

SIR CHRISTOPHER STAUGHTON

16 FEBRUARY 2001


Judgment

Arden LJ

INTRODUCTION

  1. This is an appeal by Mr Robert Hurst against an order made by Ferris J dated 24 May 2000 in proceedings brought by Mr Hurst under rule 6.4 of the Insolvency Rules 1986. In the proceedings Mr Hurst seeks to set aside a statutory demand served upon him by Mrs Margaret Bennett and three other individuals who were formerly partners of his in a solicitors' partnership under the name Malkin Janners (MJ). Insolvency Rule 6.5(4)(a) provides that the court may grant the application if:

    (a)

    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 ...

  2. MJ was formed as the result of a merger between a firm of solicitors carrying on business under the name Malkin Cullis & Sumption ("MCS") and a second firm carrying on business under the name of Janners. The merger took effect on 1 June 1989. Mr Hurst became an equity partner of MJ with effect from that date. He had formerly been employed as a salaried partner by MCS.

  3. The business of the merged firm was carried on at 15 King Street in London W C 2. The leasehold interest in the premises was vested in Ms. Bennett and the other three respondents as trustees for the partnership. The lease was for 20 years. The rent was 95,000 p.a. subject to an upwards only rent review. The partnership deed provided that the individuals who were trustees were entitled to an indemnity from the partnership and the other partners in respect of the liability for rent under the lease. Clause 3 provides:

    3.1

    The partnership business shall be carried on under the firm name of 'Malkin Janners' and the principal place of business shall be at Inigo House, 29 Bedford Street, Covent Garden, London WC2E 9RT and additionally or alternatively at such other place or places at the partners may from time to time determine ('the partnership premises')

    3.2

    The partnership premises shall be held by the partners as partnership property and the cost of all rents, rates repairs and insurance and other outgoings and expenses relating thereto or to any other property acquired for the purpose of the partnership business shall be borne by the partnership.

    3.3

    The legal estate in all the freehold or leasehold property acquired for the purpose of the partnership (including the leasehold property referred to in clause 3.1) shall be vested in the partners upon trust for sale or in some of the partners as trustees for all the partners and the net proceeds of sale and the rents and profits until sale shall form part of the partnership assets and the trustees shall be entitled to be indemnified by the partnership against the rent and all outgoings in respect of the said property and the costs and expenses of observing the covenants relating thereto.

  4. MJ was the subject of internal disputes which led to its dissolution in circumstances which have already been considered by the courts, including the House of Lords: see Hurst v Bryk [2000] 2 WLR 740. The partnership came to an end on Mr Hurst's acceptance of the repudiatory breach of his co-partners on 31 October 1990. The partnership premises in King Street continued to be held for the partnership by the respondents until their surrender at a premium of 50,000 in late 2000.

  5. On 12 May 1997, following the dissolution of MJ and before partnership accounts had been finalised or agreed between the former partners, the respondents, as trustees of the lease, served a statutory demand on Mr Hurst in respect of what was said to be his contribution under the indemnity. The debt on which the statutory demand was based was calculated as follows:

    Particulars of the sum demanded herein are:

    Total rent paid to the landlords in respect of the Premises

    From December 1991 to and including the March Quarter 1997

    498,750.00

    Less rents received from sub-tenants for same period

    176,190.33

    Net Rents

    322,559.67

    Debtors liability 3.478% x 322,559.67

    11,218.63

    Less paid into Court by Debtor in the said action

    1,145.21

    Present sum demanded[a]

    9,767.42

  6. The court has power to set aside a statutory demand in the circumstances set out in rule 6.5(4) of the Insolvency Rules 1986. As already explained, subparagraph (4)(a) provides that a statutory demand may be set aside 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 statutory demand. The issue in the present case is whether Mr Hurst has a counterclaim, or cross-demand against the respondents for the purpose of this rule.

  7. The matter came before Deputy Registrar Middleton on 10 November 1997. He dismissed the application to set aside the statutory demand because he was not satisfied that there was any cross-demand that could exceed the amount of the statutory demand or reduce it to below the bankruptcy level. The appeal from that decision came before Harman J. It was adjourned pending the partnership litigation which eventually went to the House of Lords. The application to set aside the statutory demand came back before Ferris J in May 2000. It is his decision on the appeal from Mr Deputy Registrar Middleton which is the subject of Mr Hurst's appeal to this Court.

  8. Ferris J was sceptical of Mr Hurst's claims to be entitled to a sum from the trustees or from the partnership which exceeded the amount that was being claimed against him and his alternative claim that the assets due for him would be reduced the claim to a very small sum. Ferris J held that in any event the claim on which Mr Hurst relied was not a counterclaim or cross-claim against the trustees' claim. He said that he would be better able to understand Mr Hurst's contention if the trustees' claim was dependent on the taking of full partnership accounts.

    He continued:

    As I see it, however .. that is fundamentally not the position of the trustees. The trustees make their claim against Mr Hurst not in their capacity as partners, although all of them were partners in the former firm, but in their capacity as trustees holding property in trust for the partnership. That, it seems to me, is a totally separate capacity from their own capacity as partners. In particular, they have the benefit of the indemnity from the partnership which I have already referred to. It seems to me that, regardless of the state of affairs within the partnership between the individual partners, the trustees are entitled to have that indemnity satisfied. In the ordinary way, of course, with an ongoing partnership they would expect the liability under the lease to be met by the partnership. That is indeed what happened until October 1990. Since the partnership came to an end, however, the trustees have had to bear the liability to the landlord and have had to do whatever they can to recoup the appropriate contribution by way of indemnity from each of their erstwhile partners. Some, it seems, have made contributions; others have not.

    The claim of the trustees advanced in the statutory demand is quite clearly a claim made by them as trustees under their right to an indemnity and not as partners. It seems to me that in these circumstances, even if Mr Hurst were right in saying that on the taking of full partnership accounts it will be found that a balance is due to him, that represents no sort of counterclaim or cross-demand by Mr Hurst against the trustees as trustees. As I have said, I have a good deal of scepticism as to whether, on the taking of the partnership accounts, that will be the position, but even if it was it seems to me that it constitutes no basis on which to attack or reduce the indebtedness referred to in the statutory demand which has to be considered in isolation.

  9. The approach of the Judge is to be contrasted with that of Rimer J in In re a Debtor (No 87 of 1999) (Times Law Reports 14 February 2000). In that case Rimer J was prepared to accept that, for the purposes of rule 6.5(4)(a) of the Insolvency Rules 1986, a cross-demand could include a demand by the debtor against the creditor who had served the statutory demand notwithstanding that there was a lack of mutuality, that is to say, that a debtor can raise by way of cross-demand a claim against the creditor personally notwithstanding that the debt on which the statutory demand is based is a debt which the creditor hold upon trust for others. Rimer J held:

    There is nothing in Part 20 of the Civil Procedure Rules 1998 which indicates that a claimant suing personally cannot be made the object of a counterclaim against him in some different capacity, although I of course accept that the provisions of Part 20.9 indicate that that particular feature of a counterclaim will be a factor to which the court should have regard in considering whether to dismiss the counterclaim or to require it to be dealt with separately from the main claim. It would, however, in my view, be surprising if the CPR were so rigid as to place a complete bar on such counterclaims, particularly when there was not such rigidity under the former practice: see In re: Richardson, Richardson v Nicholson [1933] W.N., 90. It appears to me that it may well in many cases be convenient and just to permit such a counterclaim to be raised in the same proceedings as the claim; and I cannot see that there ought to be any presumption that there is anything intrinsically impossible or inconvenient about permitting both such claims to proceed and to be tried together. At the end of the proceedings the court will of course have every opportunity to give such judgement as is just having regard to the different nature of the two claims. It will not be compelled, for example, to set the claim and counterclaim off against each other and merely give judgment to one party for the balance. In many cases that might produce a great injustice. In other cases it might perhaps be a just order to make.

    Rimer J then proceeded to consider Re Bayoil S.A. [1999] 1 WLR 147 (to which I will refer below). Specifically he entertained some doubt as to whether "inability to litigate" was part of the principles established by that case. In the light of the way the case had been argued he took the view that he should not regard the debtor's delay in bringing his claim as fatal to the success of the cross-demand argument.

  10. In fact, Rimer J's conclusion on the particular facts of the case was that he could regard the action as brought against the executrix personally. Accordingly the question whether it was a requirement of a counterclaim or cross-demand that there should be mutuality between the debtor and the creditor was not necessary for his decision.

  11. In this context mutuality means that the legal character in which the creditor is or may be liable to the debtor by virtue of the counterclaim or cross-claim raised by the debtor is the same as the legal character in which the creditor is entitled to the debt the subject of the statutory demand. It does not mean that the claims have to arise out of the same contract or transaction. An example of a situation in which there is no mutuality is where a person brings a claim in his personal right and the defendant seeks to set off a claim against him in his capacity as a trustee for others. But the courts are prepared in certain situations to look at the reality of the situation, as Rimer J was prepared to do: see also for example Re Chapman ex parte Parker (1887) 4 Morr. 109, where a defaulting trustee of a will was entitled to set off against a claim by the continuing trustees the amount to which he was entitled as a residuary legatee.

    MR. HURST'S SUBMISSIONS

  12. Mr Hurst's makes the following submissions. He complains of a lack of information about the King Street premises. He says the figures he is given are meaningless. However he did not particularise any objection to any of the figures in the statutory demand. He points out that there have been amendments to these figures but he does not suggest that the amendments are material for the purposes of the present appeal. Since Mr Hurst cannot give reasons why he objects to the figures in the statutory demand, this ground of objection cannot assist him on this appeal and I will say no more about it.

  13. Mr Hurst further submits that in March 1995 at the hearing before Carnwath J the other partners in effect assured the court that a dissolution account would be prepared. It is clear from the witness statement of Ms Bennett that that is not now proposed because it would simply demonstrate the liabilities of the members. There is no prospect of a dividend. Mr Hurst's submission is that accounts would show that the former partners in MCS were substantial debtors of Janners. He contends that the rent should be brought into the dissolution account and is not recoverable from him before this is done. In support of this submission, Mr Hurst relies on passages from the speech of Lord Millett in Hurst v. Bryk [2000] 2 WLR 740. At 748, Lord Millett said

    Neither during the continuance of the relationship nor after its termination has any partner any cause of action at law to recover monies due to him from his fellow partners. The amount owing to a partner by his fellow partners is recoverable only by the taking of an account in equity after the partnership has been dissolved.

    The passage continues

    ... only the Court of Chancery was equipped with the machinery necessary to enable such an account to be taken and the basis on which the account was taken reflected equitable principles. These could be modified by agreement ...

    At 750, Lord Millett said:

    In the latter connection it is to be observed that, both under the general law and under clause 3.3 of the partnership deed, the lessees of King Street are trustees for the firm and are entitled to be indemnified by the firm, that is to say the partners jointly, and not by the individual partners. As Hobhouse LJ [1999] Ch. 1, 26B pointed out, Mr Hurst's personal liability for the rent is indirect. Like any other liability of the firm it is a joint liability of the partners and, if paid by his fellow partners, is recoverable by them from him in the course of taking the dissolution account. The lessees' right as trustees to be indemnified by their beneficiaries for liabilities undertaken by them in the course of their trust establishes the firm's liability but says nothing about Mr. Hurst's obligation to his fellow partners to contribute towards its discharge.

    Again, at 752 Lord Millett says:

    Section 44 is designed to ensure that, as between the partners themselves, any surplus is shared and any deficit is ultimately borne by the partners in the appropriate proportions. If a partner is obliged to pay more than his proper share of the firm's liabilities, section 44 entitles him to be reimbursed the excess through the taking of the dissolution account. In relation to the firm's liabilities it thus reflects the same equitable doctrine of contribution which applies between co-sureties and other co-obligors. That is a doctrine which is "bottomed and fixed on general principles of justice, and does not spring from contract; though contract may qualify it:" per Eyre C.B. in Dering v Earl of Winchelsea (1787) 1 Cox Eq. 318, 321

  14. Mr Hurst submits that the partnership owes him the proportion of the proceeds of book debts received after dissolution attributable to the partnership shares of those partners which have been assigned to him. The sum in question amounts to some 2,751.58.

  15. Mr Hurst further submits that it was the practice of the partners to bring the rent into the partnership accounts and to set it against the balances due on their current accounts. However in support of this submission, he produces merely a schedule prepared by one of the partners, Mr Simmons, covering the affairs of the partnership after the dissolution. This schedule does not, however, show what the practice of the partners was before dissolution. Mr Hurst's point, if correct would circumvent any need for mutuality as between the respondents' claim and the cross-claim of Mr Hurst: see Freeman v Lomas (1851) 9 Hare 109 (to which I refer below).

  16. Mr Hurst further submits that there should be credited against his liability for rent his proportionate share of a tax repayment which the partnership received in November 1997. The amount of this tax repayment was 54,076.36. Mr Hurst submits that in fact there would have been an additional repayment of 10,000 which the Revenue were holding on account in November 1996. In my judgment, in the absence of some documentary evidence that the Revenue made a further repayment of 10,000, it is inherently unlikely that this amount was not taken into account in the repayment in November 1997. What had happened to the repayment of 54,076.36 on the evidence before us is that some 30,000 has been apportioned among partners, other than Mr Hurst and another partner, and the balance has been appropriated to the liability to tax of MCS for 1988/9. He also suggests that there may be other post-cessation receipts. However he is not able to produce any particulars of those receipts.

  17. Mr Hurst submits that for the purposes of the dissolution of the partnership there should be a dissolution account prepared by an independent accountant. He raises queries about bookkeeping charges, retentions, the employment of MJ staff and so on. None of these matters are relevant to the present appeal. Mr Hurst does not intend to renew his application to the court for an account and has not made any offer to contribute to the cost of obtaining a final account by an independent accountant. The decision of Carnwath J in April 1995 would not prevent Mr Hurst from making a new application for an account on the basis that there had been a material change of circumstances. Since the decision of Carnwath J the other partners have decided not to have a final account drawn up by independent accountants, and this may constitute such a change.

  18. Mr Hurst contends that the other partners applied for personal use their share of a sum of 336,480 set aside for business expenses. He contends, without evidence, that they will have to repay their share of this sum back to the firm. He says that his share of this amount will then be 11,702.77. There is no evidence to support Mr Hurst's contention about the use of this sum set aside for business expenses and therefore this is not an allegation which can form the basis of the exercise by the Court of its discretion under Insolvency Rule 6.5(4), if it is applicable.

  19. Mr Hurst relied on Re Bayoil S A [1999] 1 WLR 147: That case decided that where a winding up petition is based on an undisputed debt, but the company has a genuine and serious cross-claim, exceeding the amount of the petitioner's debt, the court would, in the absence of special circumstances, exercise its discretion by dismissing or staying the petition. (As already noted Rimer J raised the question whether, as the headnote states, the cross-claim has to be one which it had been unable to litigate). I note that in the application of similar principles to personal insolvency the requirement of inability to litigate has not been insisted on: see Garrow v Society of Lloyd's 13 October 1999, unreported, where Robert Walker LJ said:

    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 an attempt to stave off bankruptcy.

  20. Mr Hurst made a number of submissions as to the exercise of discretion. He informed the Court that he is running a small practice as a solicitor from his home. He is unable to take up opportunities which have been offered to him from larger firms of solicitors because of the tendency of these proceedings. These proceedings are also absorbing his time as well as limiting his income. If he were to become bankrupt, the trustee in bankruptcy might or might not sue for the amounts due to him from the partnership.

    THE RESPONDENTS' SUBMISSIONS

  21. Mr Adair, for the respondents, accepts that if there is a genuine cross-claim the statutory demand should be set aside. However on his submission the cross-claim asserted is not genuine. The issues raised by Mr Hurst were all decided and dealt with in the main action. Moreover, on his submission, to set aside the statutory demand the court would have to go behind an order made by Carnwath J dated 11 April 1995. He further submits that there is no mutuality between the claim made by the trustees under the statutory demand and that sought to be made by Mr Hurst.

  22. The relevant part of the order of Carnwath J dated 11 April 1995 contains a declaration that Mr Hurst "is liable to meet or pay his share (being 3.478%) of the debts liabilities and losses of Malkin Janners (including ongoing liabilities and losses yet to be realised and in particular but without prejudice to the generality of the foregoing his share of the rent and other outgoings of and relating to the said firm's premises at 15 King Street London WC2." Mr Adair submits that it is implicit in this declaration that payment should be made, and that it should be made directly to the trustees.

  23. Mr Adair's further submission is that the amount due in the statutory demand can be treated as a judgment debt for the purposes of paragraph 12 of the Practice Direction on Insolvency Proceedings (Civil Procedure, Vol 1, Autumn 2000 at page 1549). This provides:-

    12.

    Setting aside statutory demand

    ....

    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 enquire 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.

  24. Mr Adair then submits, on the basis of the effect of the passages from the speech of Lord Millett set out above, that in the absence of a final account one partner does not have a claim against another. Accordingly on his submission Mr Hurst has no "counterclaim" or "cross-demand" which can be set against the debt owed to the trustees. As respects this submission, in my judgment, the words "counterclaim" and "cross-demand" in Insolvency Rule 6.5 (4) (a) include a claim which has not been liquidated. Accordingly Mr Hurst has a claim against the trustees which, subject to the question of mutuality, is capable of being a "counterclaim" or "cross demand" notwithstanding that he has not issued proceedings or issued them to judgment.

  25. Mr Adair further submits that Mr Hurst is not able to set off any share of the tax repayment of 54,076.36 against the rent claimed by the trustees for an additional reason, namely that he has already appropriated it against the sum of 4,056.00 which he was ordered to pay by Carnwath J. In my judgment, there is no sustainable answer to this point.

  26. I now turn to Mr Adair's main point. He contends that the statutory demand is presented by the trustees in their capacity as such and cannot be set off against amounts for which all the partners are jointly liable. Accordingly he says that the claim made by Mr Hurst is not on this his primary submission a "counterclaim" or "cross-demand" for the purposes of Insolvency Rule 6.5(4)(a). It is trite law that a party cannot set against a debt claimed from him in legal proceedings a sum which the claimant owes but in some different capacity. There are many authorities for this proposition, including Freeman v Lomas (1851) 9 Hare 109, which Mr Adair cited. The head note in that case reads

    Cross-demands existing in separate rights are not in equity (except under special circumstances) allowed to be set off one against the other; and therefore an executor and trustee of a legacy, who was also the residuary legatee, and had become a creditor of the husband and administrator of a deceased legatee, was not, in the absence of any special agreement, allowed to set off his debt against the legacy to which the husband (having survived his wife, the legatee) was, as such administrator, entitled.

    The Court has, on slight circumstances, presumed the existence of an agreement to set off against another cross-demand, although existing in different rights; but such an agreement will not be presumed without some circumstances from which it might be inferred - semble. Where one demand is equitable, and the other legal there may be set-off in equity, if there would be set-off at law had both demands been legal.

  27. Mr Adair also distinguishes Re Bayoil S A, above. In that case there was no lack of mutuality. He also submits that it is essential to any counterclaim that may be raised that the debtor has been previously unable to litigate the counterclaim.

  28. Mr Adair submits that the document produced by Mr Simmons does not constitute an agreement that rent should be dealt with in the dissolution account. He contends that the document has no status and expresses only the view of Mr Simmons. He says that it was Mr Simmons' attempt at an equivalent account. There is some dispute about this and it is said that Mr Simmons represents the steering group which now controls the partnership's affairs. In any event, submits Mr Adair, the document does not bear the interpretation placed on it by Mr Hurst. The allocation of the tax rebate is indicative only and is attributed to the other partners because they have paid their share of the rent. The view of the other partners is that interim distribution or allocations of credit should not be made on a piece meal basis.

  29. Mr Adair's principal submission with respect to discretion is that Ferris J had exercised it appropriately. The respondents are in a vulnerable position. It is difficult for them if Mr Hurst does not pay his due proportion of the rent because it is a substantial and (until recently) an ongoing liability. The trustees could themselves be made bankrupt. Accordingly, on his submission, they ought to be treated as separate persons for the purposes of enforcing payment.

  30. Mr Adair further submits (without producing any authority) that the court could decline to set aside the statutory demand on the basis that there were grounds for believing Mr Hurst was insolvent in any event due to the unpaid judgment of 4,056.00 and the unpaid costs of the main action which according to his instructions amounted to over 120,000. Further, as respects discretion, Mr Adair submitted that the court must be satisfied that the counterclaim is of substance (see Re Bayoil S.A.). On his submission Mr Hurst's cross-claim does not stand up to scrutiny.

    CONCLUSIONS

    Is the statutory demand based on a judgment debt?

  31. In my view, the part of the order of Carnwath J on which Mr Adair relies (above, para 22) is not a judgment debt in favour of the respondents. It is clearly simply a declaration. The declaration is made in favour of all the partners, who were all parties to the proceedings. The declaration does not deal with the specific amount for which Mr Hurst is liable or to whom it is to be paid. If the position were otherwise, the court would have decided without consideration the question of the amount of appropriate deductions, for example for sub-rents received. That cannot be the position. Accordingly the respondents cannot rely on paragraph 12.3 of the Practice Direction on Insolvency Proceedings.

    Meaning of "counterclaim" or "cross-demand" in Insolvency Rule 6.5(4)(a)

  32. As already explained, Mr Adair's submission is that the debt on which the statutory demand is based is due to the trustees in their capacity as such and the cross-claim which Mr Hurst raises is against them as partners, and therefore the claims lack mutuality. More precisely the amount in the statutory demand is due to the respondents personally whereas that due to Mr Hurst (if it is due) is due to him from all the other partners jointly. (Partnership Act 1890, section 9 and see generally Hurst v Bryk, above). If this submission is right that is the end of the case.

  33. The terms "counterclaim" and "cross-demand" are not defined in the Insolvency Rules. Neither party has produced any definition. Insolvency Rule 4.90 provides for the offset "mutual credits, mutual debts and other mutual dealings" in an insolvency. In this context it is well-established that mutuality involves more than simply that the parties' claims are in the same right. Accordingly this provision does not assist.

  34. I have no reason to doubt the point made by Rimer J 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. Insolvency Rule 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 the position under the Bankruptcy Rules 1952. Under those Rules a bankruptcy notice could be set aside on the grounds of set off counterclaim or cross-demand, but the counterclaim or cross-claim had to be between the debtor and the creditor in the same right. Thus the Court of Appeal declined to set aside a bankruptcy notice in Re Molesworth (1907) 51 SJ 653, where the debtor sought to raise against executors whose bankruptcy notice was based on a judgment for costs a claim which the debtor had against the estate. The executors had incurred the costs in their capacity as executors, but were entitled to recover the costs personally. It would follow that in this case the court should not exercise its powers under Insolvency Rule 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.

  36. That does not, however, conclude the matter. There are two more issues to be considered.

    • First, can the trustees bring proceedings in respect of unpaid rent before the final accounts of the partnership are drawn up?

    • Second, does Mr Hurst have a cross-claim and can that cross-claim be brought before the final accounts of the partnership are drawn up?

    The trustees' claim

  37. The question thus arises whether the passages set out above from the speech of Lord Millett in Hurst v Bryk prevent the trustees from bringing a claim under their right of indemnity in advance of the final account. I bear in mind that Clause 3 of the partnership deed provided that the lease should be a partnership asset, and that the rent should be a partnership liability. In addition, as the rents have been paid, the respondents are making the present claim in their personal capacity, not as trustees for the other partners (cp Re Molesworth, above).

  38. Ferris J held that the passages set out above from pages 748 and 750 of Lord Millett's speech were distinguishable. As respects the passage at 748, he said that Lord Millett was not dealing "with the essentially different claim by trustees for a partnership against individual partners who are obliged to indemnify them". Ferris J distinguished the passage at page 750 similarly. He said that Lord Millett was dealing with the case of a partner who was not a trustee. I agree that in those passages Lord Millett draws a distinction between the right of the trustees to be indemnified and the right of partners who pay more than their share of partnership liabilities to be reimbursed by partners who have not paid their share of such liabilities. The extract quoted from page 752 is likewise concerned with the latter right. It is only the latter right which can only be enforced through the process of taking accounts.

  39. Accordingly, for the reasons given above, Ferris J in my judgment came to the right conclusion.

    Mr Hurst's cross-claim

  40. In the circumstances, it becomes unnecessary to consider whether the cross-claim is of substance for the purposes of obtaining an order setting aside the bankruptcy notice on the principles in Re Bayoil S.A. However, since the point was argued, I will state briefly conclusions on this point.

  41. In my judgment Mr Hurst's cross-claim has no substance save as to his claim for a proportion of post-cessation book debts. The proportionate share of the tax repayment has already been utilised in satisfaction of the judgment debt of 4,056.00. As I have already explained, in my judgment there is no material to support Mr Hurst's suggestion that he is entitled to a further sum of 11,131.37 (together with a small increase in the tax refund) because of unauthorised application of the sum set aside for business expenses.

  42. However, since the amount of Mr Hurst's claim for a proportion of post-cessation book debts is less than the amount due in respect of rent, this could not of itself have led the court to set aside the statutory demand.

  43. In any event, even if Mr Hurst is correct in his contention that the partnership has received and holds funds in which he is entitled to share, there are no grounds for setting aside this statutory demand. Mr Hurst must, if he wishes to recover his share, seek to recover it in the winding up of the partnership (Hurst v Bryk, above). All the claims of the partners will then be taken into account. Until that occurs it is not possible for the Court on the facts of this case to say that there will necessarily be, or even that there is a good prospect that there will be, a balance in Mr Hurst's favour.

  44. I note that in their recent joint consultation paper on Partnership Law (Law Commission consultation paper no 159; Scottish Law Commission discussion paper no. 111) (July 2000), the Law Commissions came to a similar conclusion with respect to actions between partners under English law and the right of one partner to obtain reimbursement from his fellow partners in respect of a partnership liability:

    17.20

    It was stressed in Meyer v Faber [(No.2) [1923] 2 Ch. 421] that a partner cannot be a creditor or debtor of the firm, because English law does not recognise that existence of a firm as distinct from the members of it and a man cannot make a contract with himself. It remains a fundamental partnership principle that a debt owed by a partner to the firm (and vice versa) is normally only recoverable by a partnership account. As Lindley & Banks puts it:

    It is a well recognised rule that, whenever money allegedly belonging or owing to the firm in respect of a partnership transaction is sought to be recovered from a partner, an action for an account is required, unless an account has already been taken between the partners or, exceptionally, taking an account would serve no useful purpose.

    17.21

    The case law in this area was comprehensively reviewed by Peter Gibson LJ in the case of Marshall v Bullock [Court of Appeal, 27 March 1998, unreported]. A partnership between two joiners had been dissolved. The assets of the partnership were taken by one partner, who discharged its liabilities. No account was taken between the partners. More than six years after the dissolution of the partnership, but within six years of the discharge of liabilities, proceedings were brought by this partner against the other for his share of the discharged liabilities. In holding that this action was time-barred Peter Gibson LJ commented:

    Just as one cannot say what is the entitlement of a partner in respect of a partnership asset without the taking of an account, so one cannot say what is the liability of a partner in respect of a partnership liability discharged by another partner without that account being taken. The authorities show that unless the case is an exceptional one the court will not allow one partner to seek to recover from another partner a sum which is referable to a partnership asset save though an action for an account. So too, I would hold, generally a contribution in respect of the discharge of a partnership liability must be sought by an action for an account.

    [footnotes omitted].

  45. In my judgment this is not a case in which the Court could conclude that this is an exceptional case in which there is no need for a final account before Mr Hurst could pursue his cross-claim against his partners by action.

  46. In those circumstances there would for these reasons also be no grounds for setting aside the statutory demand.

    DISPOSITION OF THIS APPEAL

  47. Accordingly I would dismiss this appeal.

    Sir Christopher Staughton

  48. I agree that this appeal should be dismissed. For my part I would not base that conclusion on lack of mutuality. The Respondents are indeed trustees. But the demand that they make is not, as I see it, for trust money. They are asking for an indemnity, for compensation in respect of the losses they have suffered. If and when they receive any money from Mr Hurst, they will put it in their own pockets. On the other hand Mr Hurst's liability is as a partner, or a former partner. It is not clear to me that this gives rise to such a lack of mutuality that the law should refuse him any relief under Rule 6.5(4)(a).

  49. However, what is quite clear in my judgment is that this is a case where Mr Hurst should not be allowed to claim at all until a partnership account has been taken. There is no prospect of that happening in the foreseeable future, if at all. Even if it did happen, there is no reason to believe that the four Respondents will be net contributors to the account. The chances are that they will all be creditors and not debtors.

  50. It would be quite wrong to deprive them of an established remedy against Mr Hurst until the occurrence of an event which in all probability will never happen.

    Peter Gibson LJ

  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 Insolvency Rules 1986 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 a 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 plc v Platts [1998] 2 BCLC 1 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. R. 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 (see Halsbury's Laws of England 4th ed. Reissue (1999) Vol. 42 para. 438). 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 a cross demand may be relevant. A counterclaim may be permitted procedurally even if the claim and counterclaim are not between the parties in the same right. However, as Rimer J. said in Re a Debtor (No. 87 of 1999) The Times, 14 February 2000, 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 a gross injustice.

  53. The reference in r. 6.5 (4)(a) to "cross demand" must be interpreted more widely than "counterclaim" or "set-off" (see Re a Bankruptcy Notice [1934] Ch. 431, a case on the similar concatenation of "counterclaim, set off or cross demand" in s. 1 (1)(g) Bankruptcy Act 1914 and r. 140 (2) Bankruptcy Rules 1915, replaced by r. 137 (b) Bankruptcy Rules 1952). But I am not aware of any case where a cross demand has been held relevant despite an absence of mutuality between the debtor and creditor in their rival claims. In TSB Bank at p. 8 this court said that a cross claim not amounting to an equitable set off was relevant in determining whether the statutory demand should be set aside and at the hearing of the bankruptcy petition. This court continued:

    The rationale for that must be that the cross-claim undermines the apparent inability of the debtor to pay the statutory demand debt

    If the creditor claims in one right and is claimed against in another right, it will by no means follow from the eventual establishment of the cross claim that the creditor's debt will be reduced accordingly.

  54. Ferris J. was clearly of the view in the present case that there was a fatal lack of mutuality, the claim of the trustees against the debtor being brought by them as trustees and not as partners whereas the debtor's claim is not against the trustees as such but appears to be a claim against the partners other than himself. The debtor says that on the taking of a dissolution account it would be shown that moneys are due to him. But, he does not say, and indeed cannot say in the absence of an account, that any moneys claimed to be due to him will have to be met by contributions from any of the trustees as partners. Further, the trustees are not trustees for the former partners of the firm for any purpose other than in connection with the lease of the King Street premises.

  55. Chadwick L.J. was persuaded to give permission to appeal on the strength of the brief report of Re a Debtor (No. 87 of 1999) in the Times on 14 February 2000. But the full transcript of Rimer J.'s judgment provides no support for the setting aside of a statutory demand in circumstances such as the present, and the debtor made no reference to the case when addressing us. In that case a creditor had served a statutory demand for the payment of a debt owed to her in her personal capacity. The debtor applied to set aside the statutory demand, raising a cross-demand against the creditor as executrix. By the time the debtor's application was heard, the estate of which the creditor was executrix had been fully wound up, the creditor was the substantial beneficiary interested in the estate and there were no other creditors or beneficiaries whose claims remained unsatisfied. Rimer J. found that the creditor's failure to plead plene administravit raised a presumption that the assets were sufficient to meet the debtor's claim. Rimer J. said:

    In these somewhat special circumstances, I consider that the debtor's cross demand, although in form brought against [the creditor] in her capacity as an executrix, can and should for all practical purposes be regarded as one brought against her personally. I conclude that it is a cross demand of a nature which did justify the setting aside of the statutory demand.

    It would appear that if Rimer J. had not been able to find that in substance the cross demand was a claim against the creditor personally, that is to say in the same capacity as that in which she was a creditor, he would not have been prepared to set aside the statutory demand. In my judgment that is the correct approach.

  56. On this ground of mutuality it appears to me that this appeal must fail. I would add that the debtor has other difficulties too. I am far from persuaded that in reality there is any pot of gold awaiting the debtor if only the dissolution account were taken. He needs an account to be taken to establish which partners should be making contributions and which partners should receive payment under s. 44 Partnership Act 1890. But he has not made, nor indicated that he was prepared to make, any contribution to the costs of taking the account. Nor does any other of the former partners want to pay for an account. When asked what he proposed should happen if the appeal were allowed and the statutory demand set aside, he indicated that nothing would happen. He would therefore not be seeking the taking of an account. Indeed it is very unlikely that he could bring new proceedings for an account. He sought an order for an account in the earlier proceedings. That was refused by Carnwath J. and the decision on that point was upheld by this court in Hurst v Bryk [1999] Ch. 1 and not challenged in the House of Lords. In the circumstances he has not convinced me that there is a genuine triable issue resulting from his cross demand which would justify setting aside the statutory demand (see para. 12. 4 of the Practice Direction Insolvency Proceedings).

  57. I too would dismiss this appeal.


Cases

Hurst v Bryk [2000] 2 WLR 740; In re a Debtor (No 87 of 1999) (Times Law Reports 14 February 2000); Re Bayoil S.A. [1999] 1 WLR 147; Re Chapman ex parte Parker (1887) 4 Morr. 109; Hurst v Bryk [2000] 2 WLR 740; Freeman v Lomas (1851) 9 Hare 109; Re Bayoil S A [1999] 1 WLR 147; Garrow v Society of Lloyd's, 13 October 1999, unreported; Re Molesworth (1907) 51 SJ 653; TSB Bank plc v Platts [1998] 2 BCLC 1; Re a Bankruptcy Notice [1934] Ch. 431

Legislations

Insolvency Rules 1986: R. 6.4, R. 6.5(4)(a),

Practice Direction on Insolvency Proceedings, para.1

Authors and other references

Partnership Law (Law Commission consultation paper no 159; Scottish Law Commission discussion paper no. 111) (July 2000)

Halsbury's Laws of Engalnd 4th ed. Reissue (1999) Vol. 42

Representations

Mr. Hurst appeared in person.

Mr. Stuart Adair for the Respondent (instructed by Messrs Thomas Eggar Church Adams of Reigate)

Notes:-

[a] Calculation error. The correct result is 10,073.42


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