Case: 478/SD/02, 5208/SD/02, 
516/SD/02, 503/SD/02 
Neutral Citation Number: [2003] EWHC 1890 (Ch) 

IN THE HIGH COURT OF JUSTICE 
CHANCERY DIVISION 

Royal Courts of Justice 
Strand 
London 
WC2A 2LL 
Friday 18th July 2003 

B e f o r e : 
THE HONOURABLE MR JUSTICE LADDIE 

EVERARD AND OTHERS, Applicants
- and -
THE SOCIETY OF LLOYD'S, Respondent


Tape transcript of Smith Bernal Wordwave Limited 
190 Fleet Street London EC4A 2AG 
Tel No: 020 7404 1400 Fax No: 020 7831 8838 
(Official Shorthand Writer's to the Court) 

MR J CALLMAN (instructed by Grower Freeman) appeared on behalf 
of the Applicants 
MR D BANNISTER QC and MR D FOXTON (instructed by Lloyd's) 
appeared on behalf of the Respondent 

JUDGMENT 
(As Approved by the Court) 

MR JUSTICE LADDIE: 

1. This is the judgment in an application in which the primary 
relief sought is an order setting aside statutory demands issued 
by the respondent, The Society of Lloyd's ("Lloyd's"). The 
applicants are a number of former Names at Lloyd's. The 
respondent has obtained judgments in substantial sums against 
each of them. The statutory demands are based on those judgment 
debts. There is no dispute as to the existence of the debts nor 
is there now any application to set the judgments aside or to 
appeal them. In fact, these are not the only statutory demands 
issued by the respondent against former Names. This application 
is being treated as a test case. Its outcome is likely to affect 
a considerable number of former Names in substantially the same 
position as the applicants here. 

2. The history of events leading to this application is long and 
tortuous. It, or parts of it, have been described in a number of 
judgments in earlier proceedings and applications. I set out 
below, as briefly as possible, the stages in that history which 
constitute the necessary background to this application. In 
doing so I borrow heavily from the admirable skeleton arguments 
prepared by Mr Jeremy Callman, who appears from the applicants, 
and Mr Edward Bannister QC and Mr David Foxton, who appear for 
Lloyd's. 

3. As is now notorious, in the 1980s and early 1990s the Lloyd's 
insurance market was rocked by financial problems which surfaced 
in large part, but not exclusively, as a result of claims 
arising out of asbestos litigation in the United States of 
America. Each Name had unlimited liability for the losses 
suffered by his syndicate. A reconstruction and renewal plan was 
put in place. Part of that involved Names and former Names 
reinsuring all their 1992 and prior years underwriting business 
into an entity called Equitas Reinsurance Limited. Payment of 
the Equitas premium for this reinsurance was compulsory. These 
premiums were large. In some cases they were very large. Some 
Names, including the applicants in this case, refused to pay. In 
many cases they said that they did not have the resources to do 
so. Various challenges were made by Names to their obligation to 
pay the Equitas premium. All such challenges eventually failed 
in the courts. Judgments were obtained against defaulting Names 
and former Names, hence the judgment debts which underlie the 
statutory demands here. 

4. However, the final judgments in relation to the outstanding 
Equitas premiums was not the end of the Names' fight against 
Lloyd's. A number of Names put forward cross-claims alleging 
fraudulent misrepresentation. The leading action in which that 
allegation was raised is known as the Jaffray proceedings. In 
mid 1998, Coleman J ordered the determination of a preliminary 
issue in those proceedings, sometimes referred to as the 
"threshold fraud" point. It is in the following terms: 

"Whether Lloyd's made misrepresentations, which it knew to be 
untrue, and/or as to which it was reckless, whether they were 
true or false and whether such misrepresentations were 
communicated to the Names and if so, when." 

5. The trial of the threshold fraud issue, together with another 
issue which had been added by order of Creswell J, commenced 
before the latter Judge on 4 March 2000. It lasted about three 
months. Judgment was given on 3 November of that year. The 
claims made against Lloyd's by Names in the Jaffray action were, 
in the majority of cases, confined to claims in fraud, although 
certain Names who had joined Lloyd's before the Lloyd's Act 1982 
("the Lloyd's Act") came into effect, also included claims for 
negligent misrepresentation, but only in relation to periods 
before 5 January 1983. The reason for this cut off date was that 
s 14(3) of the Lloyd's Act purported to protect Lloyd's from, 
amongst other things, misrepresentation claims unless the 
misrepresentations were made in bad faith. 

6. Before the trial of the preliminary issue had commenced, 
Lloyd's decided to enforce some of the judgments it had obtained 
against defaulting Names. To this end, in 1998, Lloyd's served 
statutory demands on a number of Names. The Names immediately 
applied to set them aside. The power of the court to do that is 
contained in Rule 6.5(4) of the Insolvency Rules 1986. The 
grounds, as set out in Rule 6.5(4), are as follows: 

"(a) 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 or, 

(b) the debt is disputed on grounds which appear to the court to 
be substantial or, 

(c) it appears that the creditor holds some security in respect 
of the debt claimed by the demand and either Rule 6.1(5) is not 
complied with in respect of it or the court is satisfied that 
the value of the security equals or exceeds the full amount of 
the debt or, 

(d) the court is satisfied on other grounds that the demand 
ought to be set aside." 

It appears that the Names relied upon grounds (a) and (b). 
7. Those applications to set aside, which are known as the 
Garrow proceedings, came before Jacob J in June 1999. He 
declined to go into the merits of the threshold fraud issue in 
the counterclaims which were to be considered at the hearing of 
the Jaffray proceedings before Creswell J the following year. He 
said that to try to do so would be futile. He found for the 
Names under Rule 6.5(4)(a). An appeal from that decision to the 
Court of Appeal was dismissed. Both judgments are reported (see 
Re: A debtor Number 544/SD/98 [2001] BCLC 103). 

8. As Mr Bannister explains in his skeleton, if the Names had 
succeeded in the Jaffray action in establishing fraudulent 
misrepresentations by Lloyd's, their claims for losses would 
have extended, subject to questions of limitation, to all 
succeeding years including, in principle, the obligation to pay 
the Equitas premium because the Names had a new cause of action 
for each year of account in which they participated as 
underwriting members of Lloyd's. The possibility of such 
recoveries meant that a successful counterclaim by a Name in the 
Jaffray action could result in a liability on the part of 
Lloyd's to that Name at least equalling the amount of the 
judgment on the Equitas premiums. Any claims in the fraudulent 
misrepresentation would not have been covered by the immunity 
given to Lloyd's under the Lloyd's Act. 

9. Creswell J's judgment on the threshold fraud point in the 
Jaffray action went against the Names. He held that there was 
neither fraud nor any representation made by Lloyd's to the 
Names. He refused permission to appeal. Such permission was 
subsequently given by the Court of Appeal. That appeal gave rise 
to a lengthy judgment (see The Society of Lloyd's v Jaffray 
[2002] EWCA Civ. 1101). The Court of Appeal found that various 
brochures produced by Lloyd's and given to Names contained: 

"A representation that there was in place a rigorous system of 
auditing which involved the making of a reasonable estimate of 
outstanding liabilities, including unknown and unnoted losses." 

10. It also found that those at the centre of Lloyd's must have 
intended the representations to be understood in that way and 
that it was material, in the sense that it was intended to be 
relied on, and that the representation was false. However, the 
court also found that the Names had failed to prove fraud. 
11. As Cooke J has said in a recent judgment, the relationship 
of which to this history will be explained in a moment, 

"By an order dated 28th October 2002, the Court of Appeal spelt 
out the consequences of its decision. It refused applications 
for a stay of execution of enforcement of judgments obtained 
against any Name for that person's Equitas premium, of any costs 
orders made in the specified Lloyd's litigation or of any 
original claims forms issued or to be issued in respect of 
Central Fund debt. By paragraph 8(2) the Court refused the 
application of the Names to discharge the order made by Creswell 
J on 27th April 2001, in which he dismissed the Names' claims 
and refused permission to amend, but, in a passage in 
parenthesis, the Court stated that "for avoidance of doubt, 
nothing in that order shall prevent the Names or any of them 
making a further application for permission to amend to the 
Commercial Court."" 

12. Thus, Lloyd's was allowed to seek to enforce the judgments 
it had obtained against the Names while, at the same time, the 
Names were handed the opportunity to consider, and if 
appropriate, to apply to raise negligent misrepresentation 
claims. Such claims would be made as amendments in the Jaffray 
proceedings. Needless to say, the Court of Appeal was not in a 
position to consider and did not consider the strength of any 
negligent misrepresentation claim nor the impact, if any, such a 
claim might have on Lloyd's' future attempts to enforce the 
money judgments it had obtained. 

13. Both sides have made use of the opportunities made available 
to them by the Court of Appeal. In early November 2002, Lloyd's 
served the statutory demands in issue here in an attempt to 
enforce the judgments it had obtained. At about the same time, a 
number of Names applied to amend to raise claims for negligent 
misrepresentation. This was resisted by Lloyd's on a variety of 
grounds. Among other things, it relied upon the immunity given 
to it by virtue of Section 14(3) of the Lloyd's Act. It said 
that this immunity applied from the date of Royal assent, namely 
23 July 1982. Furthermore, it argued that none of the proposed 
claims had any realistic prospect of escaping the effect of the 
Limitation Act 1980. Since, so it said, with certain exceptions, 
the proposed amended claims did not arise out of substantially 
the same facts as the facts pleaded in the Jaffray proceedings, 
no amendment to introduce them was permissible. Furthermore, 
even if the new claims did arise out of the same facts and 
matters pleaded in the Jaffray proceedings, they were time 
barred. At risk of great over simplification, old claims were 
caught by the Limitation Act, newer claims were caught by the 
immunity created by the Lloyd's Act. 

14. The Names raised a significant number of arguments in 
response to these submissions. No purpose will be served by 
trying to prŽcis them in this judgment. I only need to refer to 
one of them at this stage. For various reasons, and again at the 
risk of great over simplification, it was argued that the effect 
of the Human Rights Act ("HRA") was to make the court construe 
the Lloyd's Act in such a way as to, in effect, remove any 
relevant immunity Lloyd's might have. 

15. The application to amend came on for hearing before Cooke J 
on 26 March 2003. Some indication of the scope of the arguments 
advanced is given by the fact that the hearing lasted eleven 
days. Two days later, Cooke J gave a judgment which, to me at 
least, appears to have been written with great economy of style. 
For example, although reference is made to many of the 
authorities which had been cited, there is no extensive 
quotation from them. Notwithstanding this, the judgment runs to 
78 pages, ignoring the schedules attached to it and contains 218 
paragraphs of text. It is formidable. 

16. On most of the issues Lloyd's won. Cooke J held that a 
majority of Names represented before him, referred to as the 
Category 1 Names during the course of the argument before me, 
failed to obtain permission to amend. A somewhat smaller group 
of Names, the Category 2 Names, did obtain, in principle, 
permission to amend, subject to them filing properly 
particularised claims which would need to be considered by the 
court. However, although the Category 2 Names achieved some 
measure of victory, it was very limited in scope. 

17. Mr Bannister summarises the position as follows. First, a 
Name underwriting on more than one year of account suffered 
separate damage in respect of each year of account (paragraphs 
46-51 of the judgment). Second, the only Names with any 
realistic prospect of success, and thus of obtaining permission 
to amend, were those Names who had previously made claims for 
statutory negligent misrepresentation in the Lloyd's' brochure, 
as opposed to any other document in the Jaffray action, who had 
relied upon misrepresentations made within 15 years before their 
counterclaims were to be treated as having been commenced 
(because of the 15 year longstop provisions in s 14B of the 
Limitation Act 1980) who had relied upon such representations in 
concluding arrangements with Lloyd's and with underwriting 
agents before 23 July 1982 and who did not have the requisite s 
14A knowledge earlier than 3 years before the commencement of 
their counterclaims (paragraph 16 (viii) of the judgment). 

18. As noted above, the Category 2 Names did not thereby acquire 
an automatic right to amend to plead their counterclaim. Cooke J 
held that those Names would be given permission to amend only if 
they properly particularised the date of the operative 
representations and their reliance upon them and properly 
particularised a case on knowledge, such as to bring themselves 
within Section 14A of the Limitation Act (see paragraph 216 (xv) 
of the judgment). 

19. In those circumstances, perhaps it is not surprising that 
during the short hearing at which his judgment was handed down, 
Cooke J commented that the Category 2 Names had got home by the 
"skin of their teeth". It should be noticed that the Category 2 
Names would not only have to address and overcome the 
particularisation hurdle set by the Judge, but even if they did 
so, their counterclaims would be very severely limited. They 
would only be able to claim in respect of damages for the window 
between the application of the extended time limit under the 
Limitation Act and the commencement of Lloyd's' immunity under 
the Lloyd's Act. This means that in all cases, the window of 
negligent misrepresentation in respect of which counterclaims 
may be possible, would be measured in months. This is 
particularly significant because in most, if not all cases, the 
permissible counterclaims would be worth significantly less than 
the sums in the relevant statutory demands. 

20. Cooke J refused permission to appeal. An application for 
permission has been lodged with the Court of Appeal. It is 
currently outstanding. That application is supported by a 
lengthy skeleton argument to which I will refer later. 

21. It is now necessary to go back in the chronology. It will be 
recalled that in November of last year, Lloyd's issued the new 
statutory demands which are in issue here. Beside applying to 
amend to plead negligent misrepresentation, the Names applied to 
set aside those demands. In fact, as will be explained below, 
the relief sought by the Names went beyond simply asking for the 
statutory demands to be set aside. The Names pointed out that 
they had applied to plead new counterclaims on the back of the 
false representations which the Court of Appeal in Jaffray found 
to have been made by Lloyd's and that, as in the Garrow 
proceedings, it would be wrong to allow the statutory demands to 
stand, which would rapidly lead to the service of bankruptcy 
petitions, while those counterclaims had not been adjudicated 
upon. 

22. Evidence was served in support of the applications to set 
aside. That included an affidavit of Michael David Freeman, the 
solicitor acting for many of the Names. It is dated 19 November 
of last year. In it, besides asserting that the negligent 
misrepresentation claims, if allowed to be pleaded and then 
successful, would overtop the sums covered by the statutory 
demand - not least because one of the heads of damage claimed is 
the Equitas premium - he suggested that the course being 
followed by Lloyd's was not sensible, proportionate or 
consistent with proper case management. His affidavit neatly 
encapsulates the position taken by his clients. He said: 

"The application to Amend the Counterclaim is pending and the 
Court will no doubt manage the Application efficiently. The 
hearing of the Application will inevitably last several days. No 
doubt at that Hearing Lloyd's will deploy all of its arguments 
as to whether the Claims in negligent misrepresentation disclose 
a genuine triable issue. The Court will consider the Application 
in considerable detail. In the event that the Court felt that 
there was no genuine triable issue disclosed on the proposed 
amendments then no doubt Permission to Amend will be refused. 
The course being adopted by Lloyd's in prematurely serving 
Statutory Demands will merely achieve a needless increase in 
costs. The proper form for an examination of the strength and 
the substance of the Counterclaim is at the forthcoming 
Application to Amend. In the event that the Application fails, 
then no doubt Lloyd's will pursue its Statutory Demands at that 
stage. It is difficult to see what advantage is sensibly gained 
by proceeding at this stage in advance of the Application to 
Amend. To such extent as Lloyd's may assert some advantage, that 
will be outweighed by the cost, lack of proportionality and 
procedural inefficiency of proceeding in the way that Lloyd's is 
presently seeking to do. This is especially so given the 
relative disparity of funds available to Lloyd's as compared to 
funds available to the various individuals faced with Statutory 
Demands." 

23. Sensibly, the parties agreed that is was not appropriate for 
the Names' set aside application to be determined in advance of 
the application to amend the pleadings. Without making any 
concessions, Lloyd's was agreeable to allowing the applications 
to set aside to stand over and to come on for determination 
after Cooke J had delivered his judgment on the amendment 
issues. Lloyd's' position was that the amendments proposed were 
hopeless. There was, therefore, no good basis upon which to set 
aside the statutory demands. Unsurprisingly, it says that this 
assessment has now been vindicated by Cooke J. 

24. In relation to the latter, it is worth bearing in mind what 
Cooke J was doing. He was not considering whether the Names 
would succeed in their claims for negligent misrepresentation, 
but only whether those claims were pleadable. The test he used 
was expressed by him as follows: 

"The essential question is therefore, whether or not the case 
which the Names wish to advance by way of amendment has a 
reasonable prospect of succeeding or is properly arguable. If it 
has no such reasonable prospect then the application should be 
rejected. If it has a real, not a fanciful, prospect of 
succeeding at the trial, then it is properly arguable and the 
amendment should be allowed." (Judgment, paragraph 30). 

Applying that test, in substance, he found against the Names. 

25. As recorded above, the Names' application before Cooke J for 
permission to appeal also failed. The criteria relevant to 
determining that issue are those set out in CPR 52.3(6) namely 
that permission will only be given where: 

"(a) the court considers the appeal would have a real prospect 
of success; or 
(b) there is some other compelling reason why the appeal should 
be heard." 

26. Thus, in refusing permission to appeal, it must be taken 
that the judge considered that not only was the Names' case not 
properly arguable, but that there was no real prospect of 
successfully overturning that decision on appeal. 

27. As I say, these decisions were made by the Judge after 
eleven days of argument. Unless and until overturned on appeal, 
assuming permission to appeal is granted, they constitute a 
final determination in the High Court of those issues. Mr 
Callman was anxious to make it clear that he was not inviting me 
to usurp the function of the Court of Appeal in relation either 
to Cooke J's judgment on the amendment or on the application for 
permission to appeal issues. He also disclaimed any desire to 
invite me to conclude, sub rosa, that I would have decided 
either issue differently. 

28. Before considering the arguments, it is worth highlighting 
what will be the impact of making or not making the order sought 
by the Names. If the Names do not succeed on this application, 
the automatic stay which has so far prevented Lloyd's from 
presenting bankruptcy petitions will be removed. The 
presentation of such petitions is likely to have a significant 
adverse effect on the Names. It is because of the well known 
impact of presentation of winding up and bankruptcy petitions 
that the court is given the power, for example, to restrain 
publication. Furthermore, there will follow rapidly the hearing 
of the petitions which will lead, almost inevitably, to 
bankruptcy. That, in turn, will result in the trustee in 
bankruptcy for each Name taking over the current amendment 
proceedings. 

29. As both Mr Callman and Mr Bannister agree, it is 
inconceivable that the trustees will pursue amendment any 
further, even were the Court of Appeal to indicate that the 
Names have reasonable prospects of success. Because the 
trustees' function is to get in the bankrupt's assets for the 
benefit and on behalf of the creditor, he will not use his 
powers to pursue the creditors. The result is that if this 
application fails, the Names will have lost what is likely to be 
their last opportunity to bring counterclaims against Lloyd's. 

30. Mr Bannister points out that bankruptcy would not be the end 
of the road. A bankrupt would be able to ask his trustee in 
bankruptcy to sell him the cause of action for a nominal sum. On 
reflection, Mr Bannister accepts that that would take the Names 
little further. First, it is far from clear that the trustee 
acting for the creditors would be prepared to sell the cause of 
action and in any event, if the Name acquired the cause of 
action, he could only pursue it for the benefit of the 
creditors. As a practical matter, this application, if 
unsuccessful, will sound the death knell for the Names' attempts 
to sue Lloyd's. 

31. Mr Callman says that that would be unfair to the Names. It 
would deprive the Names of the appeal process which the CPR 
makes available to them. He says that there are HRA consequences 
of that. 

32. Mr Bannister agrees that the outcome will be bleak for the 
Names, but he points out that all this litigation is being 
funded by Lloyd's and therefore indirectly by the 

Names who have met their obligations. What Lloyd's wants is 
enforcement of debts, the existence of which is not now open to 
doubt, and to put an end to the delaying tactics based on 
unsustainable counterclaims. He points out that further delay 
could be harmful to Lloyd's' attempts to make recoveries. 
Lloyd's is being kept out of the ability to make use of the 
considerable investigative powers which the trustee in 
bankruptcy has. Delay will assist Names to put assets beyond 
reach, an activity which, it is suggested, has already been 
engaged in by one of the Names who is party to these 
applications. It will delay the ability of the trustee to 
unravel impeachable transactions. In addition, Lloyd's does not 
have a limitless ability to present bankruptcy petitions. The 
six year time limit for doing so will expire in about March of 
next year. The Names' offer not to take any limitation point is 
said to be insufficient to meet all Lloyd's' concerns; in 
particular, any such undertaking could not bind third parties 
who may have entered into transactions which the trustee seeks 
to unravel. 

33. I can now turn to consider in more detail the relief sought. 
Mr Callman put his clients' case in three ways. The first is 
that the circumstances here justify the making of an order 
setting aside the statutory demands under Rule 6.5(4)(a) or (d). 
The second is that, as a matter of case management, it is 
appropriate to adjourn this application until after the final 
determination of the appeal process from Cooke J's judgment. 
Such an adjournment would automatically extend the prohibition 
on Lloyd's petitioning for bankruptcy. The third is that I 
should exercise the powers under Rule 6.5(6) to fix a date after 
which Lloyd's may present its petitions. That date would be 
after the determination of the appeal process. 

Rules 6.5(4)a) and (d) 

34. It is convenient to consider Rule 6.5(4)(a) first. In full 
it reads as follows: 

"The court may grant the application [to set aside the statutory 
demand] if the debtor appears to have a counterclaim which 
equals or exceeds the amount of the debt or debts specified in 
the statutory demand." 

35. This should be read in conjunction with the Practice 
Direction: Insolvency Proceedings [2000] BCC, 927, ("the 1999 
Practice Direction"). The making of that practice direction is 
governed by s 1 of the Civil Procedure Act 1997. It has the 
force of law. Paragraph 12 is concerned with setting aside 
statutory demands. Paragraph 12.4 provides: 

36. "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." 

37. Mr Bannister suggests that it is also relevant to have in 
mind paragraph 12.3 which is in the following terms: 

"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." 

38. Both counsel agree that, although Rule 6.5(4)(a) is drafted 
in terms of what the court "may" do, this does not create a 
discretion. If the debtor appears to have a counterclaim which 
equals or exceeds the amount of the debt specified in the 
statutory demand, the court must set the demand aside. That was 
the limit of their agreement. 

39. Mr Callman puts forward three possible constructions of the 
Rule. His least ambitious argument is also his most persuasive. 
He says that what the court has to determine is whether there is 
a genuine triable issue on the counterclaim. Although Cooke J's 
judgment and his refusal to give permission to appeal may be 
taken into consideration, they are not determinative. On the 
other hand, the mere existence of an application to the Court of 
Appeal for permission to appeal is not enough to determine that 
a genuine triable issue exists. He says that a genuine triable 
issue exists if the application for permission to appeal and any 
appeal to be conducted if such permission is granted, amounts to 
an appeal of substance and weight. 

40. In relation to this issue, he drew my attention to a number 
of authorities. The starting point is Ex parte Yeatman (1880) 16 
Ch D 283. That was a case in which the bankruptcy proceedings 
had been commenced and the debtor had challenged the creditor's 
debt. He had lost at first instance on that issue, but an appeal 
was pending. Translated to the modern procedures involving 
statutory demands, this was not an attempt to prevent the 
presentation of a bankruptcy petition, but an attempt to adjourn 
the hearing of that petition until after the determination of 
the appeal. It was, therefore, in substance an application like 
those covered by paragraph 12.3 of the 1999 Practice Direction. 
In the Court of Appeal Cotton LJ, in considering the Registrar's 
power to adjourn, said: 

"But if he is satisfied that a real appeal from the judgment is 
pending he ought, in my opinion, as was done in the present 
case, to adjourn the hearing of the petition until after the 
appeal shall have been disposed of." 

41. The next case chronologically is Re: Noble [1965] 1Ch, 129, 
in which Russell LJ said: 

"It seems to me that there is power to make a receiving order, 
where the petitioner's debt is the subject of a pending appeal, 
although it should not be then made if the Registrar is 
satisfied that the appeal is bona fide." (p 145) 

42. Both these cases were considered by Harman J in Ex parte 
Cobbs Property Services Ltd [1995] 1WLR, 467. Once again, this 
was a paragraph 12.3 case. Counsel for the debtor had submitted 
that the test was, "Can the appeal be said to have some 
substance?" Harman J accepted that submission. He said: 

"Mr Patchett-Joyce shows me that the phrase 'bona fide' [in the 
head note in Re: Noble] comes from the head note in Re: Yeatman 
16 Ch D 283. The phrase of Cotton LJ himself was 'a real 
appeal.' That has been followed and applied in cases more 
recently and the test advanced by Mr Patchett Joyce, which in my 
judgment is the correct way to look at the matter for the 
purpose of the Registrar considering whether to exercise the 
power which he has to adjudicate on the bankruptcy petition, or 
whether to adjourn that petition pending an appeal, must turn 
upon the Registrar's consideration as to whether the appeal was 
serious and whether the appeal was being taken seriously. Mr 
Patchett-Joyce's words are, in my opinion, entirely apt. Serious 
appeals are real appeals, to use Cotton LJ's phrase, and could 
be called bona fide appeals, that is, appeals properly worth 
considering and raising a point of law or other relevant 
appellate ground of substance." (p 470) 
and: 

"When I consider that test, and without involving the court in a 
mini trial, which should not be undertaken for the purpose of 
this decision, it seems to me quite clear that there is a 
serious point of construction raised on appeal from Master 
Trench's judgment. Whether that point is right or wrong is not a 
thing I ought now to consider, merely that there is a serious 
appeal." (p 471). 

43. By 1994 Hoffman LJ was able to summarise the practice as 
follows in Royal Bank of Scotland v Farley [1996] BPIR, 638 at 
641: 

"The bankruptcy procedure has ample safeguards built into it for 
enabling the bankrupt to challenge the existence of the debt. He 
may, as I say, do so on an application to set aside the 
statutory demand. If he has a bona fide appeal or application to 
set aside the judgment in existence at the time when the 
petition comes on to be heard, it is the invariable practice to 
adjourn the hearing of the petition until that application or 
appeal has been decided. 

44. Mr Callman argues that the terminology does not matter. 
Whether one talks in terms of "real" or "bona fide" appeals or 
appeals which are "serious and are being taken seriously", where 
such an appeal exists, the court must allow the debtor to pursue 
it. At the stage of a statutory demand, this means that the 
court must accede to an application to set aside. The court is 
therefore obliged to consider whether there is a non-frivolous 
appeal which is being conducted seriously. In doing that, the 
court must not engage in a mini trial but it must get sufficient 
feel for the issues which the debtor wishes to raise in order to 
determine whether the appeal is sufficiently serious, real or 
bona fide. If it is then the counterclaim raises a genuine 
triable issue within the meaning of paragraph 12.4 of the 
Practice Direction. 

45. I understand Mr Callman to go further than this. He relies 
on Clifton v Barclays Bank Plc [1998] BPIR, 565 in which a 
statutory demand was set aside. The head note records that this 
was because the debtor might have a counterclaim. The way 
Mervyn-Davies J expressed it in his judgment was: 

"It may well be ... that submissions could be made to the effect 
that [the debtor] has a substantial counterclaim." (p 570). 

46. Based on this, Mr Callman suggest that a statutory demand 
could be set aside in a situation like this even if the appeal 
was not substantial, as long as it could be said that the debtor 
"might" have a counterclaim. Whatever the correct test for 
determining whether a counterclaim is genuinely triable, in my 
view it cannot be as low as this, nor do I read Mervyn Davies J 
as so holding. I will concentrate on Mr Callman's less ambitions 
argument that a counterclaim is genuinely triable if there is a 
real, substantial or bona fide appeal seeking the introduction 
of that counterclaim. 

47. Mr Callman argues that construing the Rules in accordance 
with his submissions way is to be encouraged because it is 
consistent with the HRA. The Names are entitled to have access 
to the appeal procedure made available under our court rules. 
The almost inevitable result of the failure of this application 
would be that the Names would be deprived of their right to 
pursue the appeal process to its natural conclusion. 

48. Mr Bannister argues that this is an illegitimate 
construction of the Rules and the Practice Direction. He has 
taken me through a tour of the history of the use of statutory 
demands in relation to bankruptcy proceedings and he argues that 
the authorities relied upon by Mr Callman, with the exception of 
Clifton, are all cases in which what was at issue was an appeal 
in relation to the judgment which created the judgment debt. 
Very different considerations apply to these sort of cases. 

49. As he explains, the current Rules make it clear that once a 
statutory demand exists it creates a rebuttable presumption that 
the money is owed. Furthermore, where the statutory demand is 
based on a judgment debt, unless and until the judgment debt is 
set aside, the existence of the debt and that it is owed to the 
creditor is not open to dispute. Any attempt to challenge the 
debt has to be made at the time of the hearing of the petition, 
which is consistent with Practice Direction 12.3. At the hearing 
of the petition it is open to the debtor to challenge the 
judgment debt. It is in this context that Yeatman and the other 
authorities relied on by Mr Callman come into play. They 
indicate the level at which one must challenge a judgment debt. 
They throw no light on whether there is a "genuinely triable 
issue" as to whether the debtor has a counterclaim of sufficient 
merit and size to equal or exceed the debt set out in the 
demand. 

50. Mr Bannister develops the latter point as follows. Rule 
6.5(4)(a), when read in conjunction with paragraph 12.4, is 
dealing with cases where there has not been a judicial 
determination of the counterclaim. Appeals from, or application 
to set aside, judgment debts are dealt with at the hearing of 
the petition. Arguments that there is a triable counterclaim 
arise at the set aside stage. In this respect the terminology is 
important. Paragraph 12.4 refers to "triable" issues, not 
"appealable" ones. 

51. Translated the facts of this case, there has been a judicial 
determination that the issues which the Names wish to raise are 
not triable. It is not open to me, nor am I being asked, to 
determine that Cooke J was wrong. Even if I were, the fact is 
that he has listened to eleven days of argument. I have heard 
very little. Indeed, Mr Bannister has only touched very lightly 
on one or two of the issues considered by the Judge, but then 
only to give me a flavour of why Lloyd's is confident that Cooke 
J's judgment is correct. 

52. The profound differences in these submissions can be 
appreciated by the limited concessions each side is prepared to 
make. Mr Callman concedes that, on his analysis, the application 
to set aside will fail if either the Court of Appeal refuses 
permission to appeal or, if it gives permission, the appeal 
fails. Save in those cases, the question is only whether there 
is a serious appeal or appeal process being advanced seriously 
by the Names. On the other hand, Mr Bannister only concedes that 
there will be a genuine triable issue if the Court of Appeal 
both gives permission to appeal and allows the appeal on points 
of substance. It is only in those circumstances that Practice 
Direction 12.4 is engaged. This means, as he readily accepts, 
that, even were the Court of Appeal to give permission to 
appeal, before the appeal is determined there is no jurisdiction 
to set aside the statutory demand. Until such final 
determination, there is a judgment binding on all the parties 
that the Names' claims are, in substance, not sufficient to be 
pleadable or triable. As Mr Bannister said in the course of his 
submissions, this would be so, even if, at the time of giving 
permission to appeal, the Court of Appeal were to express strong 
misgivings as to the correctness of Cooke J's judgment on 
matters of substance. 

53. Mr Bannister says this is not as unfortunate a result as it 
may at first appear. If the Court of Appeal were to grant the 
Names permission to appeal, it could always order that all 
further steps in the bankruptcy petition be stayed, pending the 
outcome of appeal. Similarly, Cooke J could have ordered a stay, 
but he did not. As Mr Bannister puts it, it is not for this 
court to impose a stay where other courts have not. 

54. These are not complete answers to the point. Most 
importantly, in many cases, of which this may well be one, the 
Court of Appeal may well not consider the application for 
permission to appeal before the creditor has launched the 
bankruptcy proceedings. The fact that those proceedings may be 
stayed does not address the desirability in suitable cases of 
avoiding the harm which is likely to be inflicted on the debtor 
by the presentation of the petition. 

55. In coming to a conclusion on the issues surrounding the 
application of Rule 6.5(4)(a), it is convenient to start at a 
fairly basic level. When an attempt is made to bankrupt an 
individual, it is a defence for that individual to demonstrate 
that his net indebtedness to the creditor is zero, or more 
precisely, below the bankruptcy limit of £750. This can be done 
in either of two ways. First, the debtor can demonstrate that 
there is no debt. Second, he can demonstrate that the debt is 
matched or exceeded by sums owed to him by the creditor. He 
could put forward a mixture of the two. Whichever ground or 
grounds he advances, the purpose is to demonstration zero net 
indebtedness. The Rules and case law impose procedures which 
indicate how and when the debtor can raise his objections to the 
bankruptcy procedure. 

56. Rule 6.5(4) indicates that all objections, including the 
existence of a counterclaim and the disputing of the debt, can 
be raised at an early stage as grounds for setting aside the 
statutory demand. This means the petition will not be presented. 
However, there are refinements to this. First, where the 
indebtedness is challenged on grounds available under Rule 
6.5(4), not only is the debtor obliged to get on with the 
challenge (see 1999 Practice Direction paragraph 12.1). Second, 
and more importantly, it is not appropriate to adjourn the 
challenge so that it can be raised on the hearing of the 
bankruptcy petition. In other words, the challenge should be 
assessed before the petition is issued. This was explained by 
Chadwick LJ in Turner v The Royal Bank of Scotland [2000] BPIR 
683. Having referred to the Practice Note (Bankruptcy: Statutory 
Demand: Setting Aside) (No 1/87) which is, in substance, the 
same as the 1999 Practice Direction, he said: 

"That note reflects the practice, long-adopted in the bankruptcy 
courts and in the companies court in the context of petitions to 
wind up companies, that insolvency proceedings are not the 
proper forum in which to determine issues in relation to 
disputed debts or cross-claims. If there is an issue which can 
be described as 'a genuine triable issue', then that ought to be 
resolved by a trial before the insolvency process is invoked. 
But it is important to have in mind that para 4 of the Practice 
Note refers to a counterclaim, set-off or cross-demand which 
equals or exceeds the amount of the debt or debts specified in 
the statutory demand. There has to be a genuine triable issue on 
the question whether the amount of the cross-demand will exceed 
the amount of the debt specified in the statutory demand. 
The scheme of those provisions, plainly, is to ensure that if 
the debtor wishes to dispute the debt, or wishes to raise a 
counterclaim or cross-demand against the debt creditor, he 
should have the opportunity to do so by an application to set 
aside the statutory demand; and that until that application has 
been heard and determined, no petition for bankruptcy can be 
presented. If an application to set aside a statutory demand is 
made, the court is required to consider, and adjudicate upon, 
any contention advanced by the debtor that he has a cross-demand 
which extinguishes the debt. If satisfied that there is a 
genuine triable issue in that respect, then the court will 
normally set aside the statutory demand and no bankruptcy 
petition can be presented." (p 692). 

57. He went on to state that once these challenges had been 
mounted at the set aside stage, they could not be argued again 
in the hearing of the bankruptcy petition. The effect of this is 
to require challenges which are capable of being levelled at the 
statutory demand, to be made at that stage and to be evaluated 
by the court at that stage. 

58. The same point was made, and the reasons for it explained in 
the judgment of Robert Walker LJ in Garrow: 

"Although Lloyd's has a judgment against G, it has chosen to 
proceed by way of statutory demand and the statutory demand is 
crucial to the making of a bankruptcy order. It would be 
contrary to the scheme of the legislation and to the practice of 
the bankruptcy court, to allow a doubtful statutory demand to 
stand on the ground that the debtor would still have the 
opportunity of opposing a bankruptcy petition, once presented. 
Counsel for Lloyd's have argued that that course would enable 
Lloyd's to present a petition and so establish a date by 
reference to which transactions might be invalidated or 
impeached under Sections 284 and 339 (and following) of the 
Insolvency Act 1986, while protecting G by an adjournment of the 
final hearing of the petition. However, it is precisely because 
of the far-reaching effect of those Sections, incomparable 
sections in the winding up legislation that the bankruptcy court 
and the Companies Court have a strong and well established 
policy of discouraging long or repeated adjournments of 
bankruptcy and winding-up petitions. The judge was right to 
reject the suggestion that he should allow a petition to be 
presented and then go into suspended animation." ([2000] 1BCLC, 
116-117) 

59. The other major refinement is that a different regime 
applies where the debtor's attempt to demonstrate net zero 
indebtedness involves attacking a judgment debt. Perhaps 
because, as Mr Bannister says, as between the debtor and the 
creditor the judgment debt creates an issue estoppel, such a 
debt cannot be impugned prior to the presentation of the 
petition. This is expressly provided for in 1999 Practice 
Direction paragraph 12.4. Thus, the procedure applied to these 
proceedings ensures that most challenges have to be mounted at 
the set aside stage. This includes all challenges based on the 
existence of an alleged counterclaim and most challenges to the 
existence of the debt itself. It is only one particular category 
of debt, namely judgment debts, which have to be challenged at 
the petition stage. 

60. Although this means that different challenges are to be 
considered at different stages, there is nothing in the Rules or 
authority to suggest that the court's assessment of the 
seriousness of the challenge should differ from one stage to the 
other. On the contrary, there is every reason why the height of 
the hurdle the debtor has to negotiate should be substantially 
the same at whichever stage he mounts he challenge. There can be 
no doubt, for example, that challenges to the debt which have to 
be brought at the set aside stage (Rule 6.5(4)(b)) have to 
demonstrate a genuine triable issue (1999 Practice Direction 
paragraph 12.4). There is no reason why the debtor's challenge 
should have to reach a different level of substantiality when he 
challenges the debt (that is, in the form of a judgment debt) at 
the petition stage. 

61. If this is correct, then there is no difference of substance 
between the extent to which the debtor needs to show he has a 
triable counterclaim or challenge to the debt at the set aside 
stage and the extent to which he needs to show he has a ground 
for appealing or setting aside a judgment debt at the petition 
stage. If the debtor, at the petition stage, challenges a 
judgment debt, it is no answer to say that, pending a successful 
appeal, the original judgment binds the parties. Cases such as 
ex parte Cobbs Property factor in the reality that sometimes 
judgments are reversed on appeal. 

62. The question to ask at the set aside stage is whether the 
debtor has raised a genuine triable issue. The fact that at 
first instance a Judge has held the issue to be too 
insubstantial to be allowed to be pleaded is an important factor 
in deciding whether the issue is genuinely triable but it is not 
determinative. If an appeal process is on foot, the court must 
decide whether it is a real, as opposed to a frivolous, appeal. 
Once again, the fact that the first instance Judge refused 
permission to appeal is a factor to take into account in 
deciding whether the appeal is real, but it cannot be 
determinative. 

63. How, then, does one respond to Mr Bannister's point on the 
use of the word "triable" and not "appealable" in the 1999 
Practice Direction paragraph 12.4? A simple answer is that there 
is nothing to suggest that the draughtsman of the paragraph had 
in mind and intended to draw distinctions between trials and 
appeals. Most challenges at the set aside stage will not have 
entered the list at all, let alone reached the level of an 
appeal. This litigation is likely to be somewhat unusual in that 
respect. 

64. A more involved answer can be given by reference to an 
example. It will be recalled that Mr Bannister argues that 
unless and until reversed by the Court of Appeal, Cooke J's 
judgment means that as between the parties, the negligent 
misrepresentation claims are not sufficiently substantial to go 
to trial. They are, in the language of paragraph 12.4, 
untriable. The result is that even were the Court of Appeal to 
grant permission to appeal and at that stage to express grave 
misgivings about the first instance judgment, the position would 
remain unchanged. Until successful on the appeal, the debtor's 
counterclaim is not triable and the court has no jurisdiction to 
set aside the demand. Mr Bannister accepts that this might 
appear hard on the debtor but it is the inevitable consequence 
of the way the provisions are written. As Mr Callman points out, 
not only would this be hard on the debtor, it also would be 
arbitrary. If the appeal process were to be speeded up and the 
application to set aside slowed down, it might be possible to 
obtain a favourable judgment from the Court of Appeal before the 
court has to determine whether the counterclaim is triable. 

65. Mr Callman provides an answer to this point of construction. 
It is not in dispute that were the Court of Appeal to give 
permission to appeal and to allow the subsequent appeal on 
points of substance, at that stage it would be clear and 
determined once and for all, ignoring the possibility of appeals 
to the House of Lords, that the counterclaim is triable. If it 
is triable at that stage, it has always been triable even though 
at earlier stages that may have been less easy to discern. The 
position after the decision at first instance is that the 
Judge's decision to refuse permission to plead the counterclaim 
is a major factor in determining whether the counterclaim is 
triable but is not the final word. 

66. For these reasons, I have come to the conclusion that Mr 
Callman is correct in saying that Cooke J's judgment and his 
decision not to give permission to appeal are not determinative 
of whether the Names' proposed counterclaims raise a genuine 
triable issue. It is necessary to take into account the fact 
that an application for permission to appeal has been lodged 
with the Court of Appeal and to assess whether the appeal which 
the Names wish to pursue is a real bona fide and non-frivolous 
one. In these circumstances it is not necessary to consider Mr 
Callman's argument that the construction of the rules should be 
modified to accommodate HRA considerations. 

67. On the issue of whether the Names' appeal here is 
substantial or real, I have been taken at some length through 
the skeleton argument which the Names have served in support of 
the application for permission to appeal so as to appreciate at 
least some of the major arguments which the Names intend to 
raise. Whether or not this exercise was necessary, or necessary 
in the detail with which Mr Callman conducted it, is academic 
because Mr Bannister has chosen not to challenge this part of 
his opponent's submissions. Although it is clear that Mr 
Bannister considers that some of the Names' argument, including 
in particular the HRA arguments designed to circumvent the 
effect of the Lloyd's Act, to be hopeless, he does not argue 
that, taken as a whole, the appeal could be dismissed as 
frivolous or other than real. In the result, Mr Callman succeeds 
in relation to his Rule 6.5(4) argument. 

68. I would only add that, had I not been prepared to set aside 
the statutory demands, I would almost certainly have refused to 
exercise any discretion I have under the CPR to stay these 
proceedings so as to achieve an equivalent result by the back 
door. If the effect of the Rules is to prevent the court from 
setting aside the statutory demand, it would not be appropriate 
to try to undermine the legislative intent by use of the CPR. 
For very similar reasons, it is most unlikely that I would have 
felt it appropriate to exercise the power under Rule 6.5(6) in a 
way which appears to be contrary to its purpose. 

69. I would only add a few points. First of course, if the 
application to the Court of Appeal for permission to appeal is 
unsuccessful, it will be open for Lloyd's to serve new statutory 
demands. Second, if permission is granted, but the appeal is 
unsuccessful, subject to any questions concerning appeals to the 
House of Lords, again Lloyd's will be able to serve new 
statutory demands. Third, if permission is granted and the 
appeal is wholly successful, as Mr Bannister accepts, it will 
not be appropriate to serve new statutory demands. 

70. On the other hand, if the appeal is successful, but only in 
part, it may be that it would be open to Lloyd's to serve new 
statutory demands. For example, if the Names were only to be 
successful on the issue of the commencement date of the Lloyd's 
Act with the result that the period of negligent 
misrepresentation, in respect of which they could sue, is 
expanded by a few months, then it may well be that any 
counterclaim based on that would be too small to match the sums 
in the statutory demands. 

71. I should also say something about the undertakings offered 
by the Names in respect of the limitation period for the 
presentation of bankruptcy petitions. The precise form of these 
was not finalised or discussed before me and in any event, 
Lloyd's is not prepared to accept them since they do not meet 
its concerns. In the circumstances, I shall set aside the 
statutory demands but without requiring any undertakings from 
the Names. The absence of any safeguard for Lloyd's in relation 
to the limitation period is, however, a concern. For what it is 
worth, this is a matter which should be drawn to the attention 
of the Court of Appeal. It may affect the timing of 
consideration of the application for permission to appeal and 
the appeal, if there is one.