RESPONDENT GRANTED RELIEF FROM SANCTIONS WHEN WITNESS EVIDENCE WAS SERVED LATE: TO SHUT IT OUT FROM PRESENTING ITS BEST EVIDENCE WOULD BE “WHOLLY UNJUST AND DISPROPORTIONATE”

In Tanfield & Anor v Meadowbrook Montessori Ltd [2024] EWHC 1759 (Ch) ICC Judge Barber allowed a respondent’s application for relief from sanctions when witness evidence was served late.  The Denton test was considered and, although the respondent could not meet the first two criteria, all the circumstances of the case favoured allowing it to adduce the evidence.

“… I entirely accept Mr Hunter’s argument that the court should not proceed on the basis that the forfeiture has already been found to be unlawful, for reasons addressed in a later section of this judgment, the Company has demonstrated a strongly arguable case that the forfeiture was unlawful and that it has caused loss to the Company considerably in excess of the petition debt. To shut out the Company from presenting its best evidence in such circumstances would in my judgment be wholly unjust and disproportionate to the breach in issue.”

THE CASE

The petitioner issued a winding up petition against the defendant company that ran a school.  The initial hearing of the winding up petition was adjourned and the respondent company ordered to file witness evidence in reply.  The petitioner then, without notice to the respondent and the court, exercised a purported right  of peaceable  forfeiture over the school premises, closing the school down.   The respondent company then instructed solicitors who arranged for a witness statement to be filed setting out the respondent’s case that the petition was disputed (in part) but also that the petitioner’s actions had given rise to a cross claim which exceeding the undisputed element of the sums claimed by the petitioner.  That witness statement was served late and the respondent required relief from sanctions.

THE JUDGMENT ON RELIEF FROM SANCTIONS

The respondent’s evidence was that once the petition was issued its funds were frozen.  Time had to be spent raising money to pay for lawyers to fund its representation.  The petitioner opposed the application for relief from sanctions.

THE JUDGMENT ON RELIEF FROM SANCTIONS

The judge granted relief from sanctions.   The breach was serious. There was no good reason for the respondent’s failure. However all the circumstances of the case militated in favour of the respondent being able to give evidence of its cross claim.

“Grounds of the application

1. 1. The evidence in support of the application for relief from sanctions was set out in the application notice itself, which bears a statement of truth.

1. 1. In broad summary, the Company’s evidence was that as a result of the winding up petition, the Company had been unable to use its own funds in order to instruct solicitors and that Mr Byron had had to raise the funds himself. This process had taken some time and, even after such funds had been raised, the solicitors instructed required further time to read into the papers before assisting him in the preparation of his witness statement.

Relief from sanctions: the Petitioners’ submissions

1. 1. The Petitioners argued that any suggestion that the breach was not serious and significant was untenable. Under the court’s directions, the Petitioners were to have three weeks to consider the Company’s evidence, conduct any necessary investigations, and draft responsive evidence to any cross-claim that was enunciated. Mr Hunter contended that the Petitioners had been ‘deprived’ of the opportunity to respond to the cross-claim, although he did go on to confirm that the Petitioners were not seeking an adjournment to allow time to file evidence in reply.

1. 1. Mr Hunter submitted that no good reason had been given for the breach. He observed that, whilst Mr Byron was said to have required time to source funds, this had not been set out in any detail in the evidence. He also maintained that Mr Byron had a history of late filings and always went ‘to the wire’.

1. 1. Mr Hunter invited the court to note that no reason has been given why Mr Byron could not make an ‘in-time’ application for an extension of time if he was having difficulty sourcing funds. He also observed that the same firm of solicitors had been assisting Mr Byron on and off since before the forfeiture happened; in light of that, he argued, the firm would not need to as much time to read in.

1. 1. In relation to the third Denton stage, Mr Hunter argued that the Company had raised nothing of import. He reminded the court that in determining a relief from sanctions application, the court must consider the need to comply with court orders and the need to deal with cases expeditiously and at proportionate cost.

Relief from sanctions: the Company’s submissions

1. 1. Ms Farrell accepted that the breach was serious, but submitted that on the facts of this case, the breach was not of great significance. She argued that from the matters addressed at the 29 November 2023 hearing, and the order of that date itself (which by its recitals made express reference to the re-entry having been effected without any formal demand at common-law), the Petitioners had been on notice for some considerable time that the Company’s case was that the re-entry was unlawful and that this gave rise to a cross-claim. She contended that Mr Byron’s most recent statement did not, on the whole, advance facts which were new or would not be known to the Petitioners anyway. She also submitted that the fact that the Petitioners had not sought an adjournment to allow time to respond to the latest evidence was relevant to the issue of significance. She argued that the impact on the Petitioners was minor but that, even if it was not, that impact was outweighed by the prejudice to the Company if it was denied the opportunity to rely on its evidence.

1. 1. In relation to stage 2 (the reason why the default occurred), Ms Farrell submitted that good reason had been given; the Company had been unable to utilise its own funds for advice in light of the winding up petition and therefore arrangements had to be made which would enable Mr Byron to pay for such advice personally. Time was thereafter required for those solicitors to digest a significant amount of papers that have been generated in the proceedings. She also argued that the reason why no in-time extension application had been made was that the Company’s solicitors only came on the record on 3 May; prior to that point, Mr Byron had acted in person.

1. 1. In relation to stage 3 (all the circumstances), Ms Farrell submitted that it is wrong to assume that, even if a breach is serious or significant and there is no good reason for the breach, the application will automatically fail: Denton at [31]. In Denton at [37] the court quoted with apparent approval paragraph 26 of the 18^th Implementation Lecture on the Jackson reforms:

‘[the relationship between justice and procedure] has changed not by transforming rules and rule compliance into trip wires. Nor has it changed by turning the rules and rule compliance into the mistress rather than the handmaid of justice. If that were the case, we would have, quite impermissibly, rendered compliance an end in itself and one superior to doing justice in any case’.

1. 1. At [38] in Denton, the court continued:

‘It seems that some judges are approaching applications for relief on the basis that, unless a default can be characterised as trivial or there is a good reason for it, they are bound to refuse relief. This is leading to decisions which are manifestly unjust and disproportionate. It is not the correct approach and is not mandated by what the court said in the Mitchell case: see in particular para 37. A more nuanced approach is required as we have explained’.

1. 1. Ms Farrell argued that justice was the overwhelming factor in this case. She maintained that the Petitioners’ actions, in purportedly forfeiting the Lease after the first hearing of the petition, had prevented the Company from operating from the Premises and from trading at all, thereby causing it to lose revenue streams from which it could otherwise have answered the petition. She submitted that it would be unjust for the Company to be prevented from relying on its late evidence, when Mr Byron personally had taken time to generate the funds to seek legal advice and challenge the lawfulness of the forfeiture on the Company’s behalf. She also reminded the court that the Petitioners, who have been represented throughout, had been on notice for months of the basis of the cross-claim. She invited the court to ensure a fair hearing by granting relief from sanctions and permitting the Company to rely upon the late evidence.

Relief from sanctions – discussion and conclusions

1. 1. Having considered with some care the evidence and the submissions of the parties, I conclude that relief from sanctions should be granted.

1. 1. In relation to the first Denton stage: in my judgment, the failure to comply with the November 2023 order was undoubtedly serious. It was also significant, although the ultimate significance of the non-compliance is, in my judgment, tempered to an extent on the facts of this case by the Petitioners’ election not to seek an adjournment to allow further time for reply evidence to be filed.

1. 1. Turning next to the second Denton stage (why the breach occurred): I reject Mr Hunter’s submission that the evidence in support of the application goes no further than ‘mere assertion’. The Company’s evidence explains that in light of the winding up petition the Company had no access to its own funds and that accordingly Mr Byron had to raise funds personally to cover the costs of legal advice for the Company. Paragraph 13.5 of Mr Byron’s witness statement dated 28 November 2023 had already confirmed that the Company’s bank account had been frozen.

1. 1. Whilst, in theory, the Company could have applied for a validation order to allow access to its own funds to cover the costs of instructing solicitors to advise and represent the Company on the issue of the cross-claim, there was no guarantee that any such application would not be opposed by the Petitioners. Moreover, whilst directors acting in person often make applications for validation orders, on present facts, in the context of what was (by then, following the re-entry in April 2023) a non-trading company, articulating a case for a benefit to creditors as a whole (or even an argument that creditors would be no worse off) for the purposes of a validation order application would be extremely difficult without addressing, in overview at least, the merits of the unlawful forfeiture argument; a highly technical area which most lay directors would struggle with, and which was the very reason the Company was seeking formal advice and representation in the first place.

1. 1. It is entirely unsurprising, therefore, to find that Mr Byron was left in the position of having to fund legal advice and representation for the Company himself. That this took time is also unsurprising, given the costs of legal advice in such a technical area (as evidenced by the statement of costs filed subsequently on behalf of the Company) and the (indisputable) fact that the business for which Mr Byron had worked (the School) had abruptly closed down in April 2023, on no notice, as a result of the purported forfeiture. For Mr Byron to demonstrate to a prospective lender in such circumstances his ability to service any loan would undoubtedly have been a challenge. I was told (on instruction) that ultimately, he had to remortgage his house in order to raise the required funds.

1. 1. Inability to pay for legal advice and representation, however, is not, of itself, regarded as a good reason for a delay in complying with a procedural deadline or court order: R (Hysaj) v Secretary of State for the Home Department [2014] EWCA Civ 1633. Moreover, being a litigant in person is not of itself considered a good reason for failing to comply with court orders: Elliott v Stobart Group Ltd [2015] EWCA Civ 449.

1. 1. In light of such caselaw, it seems to me that it is not open to this court to conclude, on the evidence before it, that the Company has shown ‘good reason’ for its breach of the November 2023 order.

1. 1. I turn finally to stage 3 of the Denton test (all the circumstances). In this regard I remind myself of the guidance given in Denton that it is wrong to assume that, even if a breach is serious or significant and there is no good reason for the breach, the application will automatically fail.

1. 1. I accept that the court must consider the need to comply with court orders and the need to deal with cases expeditiously and proportionate costs. I also accept that the Company has filed some witness statements at the eleventh hour in the past and that that is a factor which the court must take into account when considering stage 3 of the Denton test.

1. 1. In the circumstances of this case overall, however, in my judgment it would be manifestly unjust and disproportionate to the breach in question to deny the Company the relief sought.

1. 1. By the time of the hearing in May 2024, the Petitioners, who have been legally represented throughout, had been fully aware of the basis of the cross-claim argument (unlawful re-entry due to want of formal demand at common law) for over 5 months. Mr Byron had made reference to his belief that the re-entry had been unlawful in his earlier witness statements. It had then been flagged at the hearing in November 2023 and was set out, in terms, in a recital to the order made that day.

1. 1. The issue whether the re-entry was unlawful (or more accurately, in the context of winding up proceedings, whether it was properly arguable that it was unlawful) involved consideration of the Lease (which was already in evidence) and legal submissions. Some aspects of quantum had already been addressed in earlier witness statements filed in the proceedings. In relation to loss of revenue, for example, Mr Byron had by his statement dated 28 November 2023 already made reference to the sum lost in school fees for the term in which the re-entry occurred. The standard termly fees charged by the School in recent years were in any event published information, readily available on the internet. While other aspects of quantum and certain updating facts were addressed in the latest evidence (served on 3 May 2024, 12 days ahead of the hearing on 15 May), the Petitioners by their skeleton argument and by Counsel at the outset of the hearing made clear that they did not seek an adjournment to allow time for the filing of evidence in reply. The Petitioners were then given several further express opportunities at the hearing to apply for an adjournment if they wished, with a view to filing evidence in reply, and declined all such invitations through their Counsel. It is in my judgment legitimate to conclude in all the circumstances that no material aspects of the quantum evidence came as a surprise to the Petitioners or were matters that the Petitioners considered themselves able to undermine or refute by way of evidence in reply.

1. 1. I also take into account the serious potential consequences of denying the Company the opportunity to give its best evidence on the cross-claim. As a portion of the petition debt is admitted to be due, the Company’s cross-claim is its primary defence to the petition.

1. 1. I also take into account the highly unusual circumstances of this case. The Petitioners’ actions, in purportedly forfeiting the Lease by physical re-entry without notice, after the first hearing of the petition at which it was directed that the Company be given an opportunity to file evidence in answer to the petition, caused an immediate cesser of trading and a loss of access to revenue streams which (subject to appropriate s127 relief, as a trading company) the Company could otherwise have employed in answering the petition and paying off the (relatively modest) undisputed part of the debt with a view to carrying on in business. Whilst I entirely accept Mr Hunter’s argument that the court should not proceed on the basis that the forfeiture has already been found to be unlawful, for reasons addressed in a later section of this judgment, the Company has demonstrated a strongly arguable case that the forfeiture was unlawful and that it has caused loss to the Company considerably in excess of the petition debt. To shut out the Company from presenting its best evidence in such circumstances would in my judgment be wholly unjust and disproportionate to the breach in issue.

1. For all these reasons, I shall grant relief from sanctions.”