Power v Godfrey

For a bankruptcy petition to succeed, the petitioner must establish a debt which is not defeated by a bona fide cross-claim on substantial grounds. A judgment in favour of the alleged bankrupt is material evidence of such a cross-claim and must be treated as subsisting unless and until it is set aside. The court should not go behind that judgment and determine the underlying claim merely because it was entered in default. Where an application to set aside could be made, the court must consider the prospects of success and the requirement of promptness under the Civil Procedure Rules. A bankruptcy order should not be made where the judgment provides a substantial cross-claim exceeding the petition debt. The petition may be dismissed where the judgment creditor has had ample time to seek set-aside relief but has not done so.

A bankruptcy order was made against Mr Power on a petition founded on unpaid costs owed to Mr Godfrey. After the petition had been presented, Mr Power obtained a default judgment against Mr Godfrey for approximately £60,000. Mr Godfrey had known of that judgment for a considerable period but had not applied to set it aside.

Mr Power sought permission to appeal out of time, permission to adduce further evidence and to challenge the bankruptcy order. The central issue was whether the Deputy Registrar had been entitled to go behind the default judgment, assess the underlying claim and disregard it as a cross-claim.

1. The court formally granted permission to appeal, allowed the appeal and dismissed the bankruptcy petition.

2. The order extending time for the appellant’s notice did not itself grant permission to appeal. The hearing was properly treated as an application for permission followed, if permission were granted, by the substantive appeal.

3. The settled approach to a petition debt requires consideration of whether the alleged bankrupt has a bona fide cross-claim on substantial grounds. Where the alleged bankrupt has obtained a judgment, the question of bona fides concerns reliance on that judgment, rather than the bona fides of the underlying claim. Until set aside, the judgment remains a judgment of the court and may be relied on and deployed as a cross-claim.

4. The Deputy Registrar erred by treating the default judgment as effectively non-existent, going behind it and assessing the underlying claim. Although the prospects of a successful defence might be relevant to an application under CPR rule 13.3, the court must also consider the separate requirement of promptness under rule 13.3(2). The Deputy Registrar had failed to do so.

5. Mr Power’s judgment substantially exceeded the petition debt and the other debts relied on by Mr Godfrey. Mr Power therefore had substantial grounds for relying on it. A new trial was unnecessary under CPR rule 52.10. Given the age of the petition, Mr Godfrey’s knowledge of the judgment and his failure to seek its setting aside, dismissal rather than adjournment was the appropriate order. The court made no determination about any future application to set aside the default judgment.

• High Court (Chancery Division): The Deputy Registrar made a bankruptcy order against Mr Power on 26 February 2013. Mr Power appealed out of time. The High Court granted permission to appeal, allowed the appeal and dismissed the bankruptcy petition.