Neutral Citation Number: [2016] EWHC 237 (Ch)
Case No: 8679/2014
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL

Date: 16/02/2016

Before:

THE HONOURABLE MR JUSTICE PETER SMITH
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Between:

	(1) Gad Rubin
(2) Dina Rubin	
Respondents/ Petitioners	
	- and -		
	(1) Andrew James Parsons
(2) Lorraine Julie Parsons
(3) OFF2 Logistics LLP
(4) OFF2 Executive Travel Ltd	

Appellants/  Respondents	

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Mr Burns (instructed by Turners) for the Respondents/Petitioners
Richard Ascroft (instructed by Rawlins Davy Ltd) for the Appellants/Respondents

Hearing dates: 21 January 2016
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Judgment
Peter Smith J: 
INTRODUCTION
1.	This is the appeal of the First, Second and Fourth Respondents to the Petition against the decision of Mr Registrar Baister on 10th July 2015 when he ordered them to pay the Petitioner the sum of £54,000 and the Petitioners’ costs to be assessed in detail if not agreed.  The latter order is on the basis of a standard basis it not being said to be on an indemnity basis.
2.	The proceedings are an unfair prejudice petition brought by Mr and Mrs Rubin seeking relief against Mr and Mrs Parsons and OFF2 Logistic Services LLP, the LLP the centre of the dispute.  The Fourth Respondent OFF2 Executive Travel Ltd was joined as a Respondent by the order of Arnold J on 15th April 2015.
3.	Permission to appeal was granted by Norris J on 16th October 2015.  
4.	On 13th January 2016 the Appellant issued an application for relief from sanctions in relation to a breach of an order made on 16th June 2015.  I will explain the significance of that order further in this judgment.  
BACKGROUND
5.	The dispute concerns the Third Respondent (“the LLP”) which was incorporated on 26th April 2011 under the Limited Liability Partnerships Act 2000.  The beneficial interest in the LLP is owned by the Petitioners and the First and Second Respondents each owning a 25% share.  Its business was a private hire and chauffer business operating in the Bournemouth area.  
6.	The relationship deteriorated according to the Amended Petition such that in the autumn of 2014 there were negotiations for a parting of the ways.  From that date the Petitioners alleged that they had been excluded from the running of the LLP and denied access to the books.  Further they allege that on 30th September 2014 the First and Second Respondents had secretly caused the incorporation of a limited company of which they were the sole shareholders with a similar name to the LLP, OFF2 Executive Travel Ltd (the Fourth Respondent) and had set up a new website.  The essence of the Rubins’ complaint is that the LLP has been hijacked by the First and Second Respondents and certain of its assets have been misappropriated by them.
7.	After the issue of the petition the Rubins discovered various other matters of complaint and they are set out in the subsequent amendments to the petition (paragraphs 15-23).
8.	It is alleged that the First and Second Respondents as agents of the LLP owe fiduciary duties which have been broken by the various matters complained of. 
9.	In the Amended Petition (paragraph 26) the Rubins submitted that the affairs of the LLP have been and are being conducted in a manner which is unfairly prejudicial to the interests of some or other members.  What is missing of course is any statement that there is a surplus in the LLP available to the members.  That is usually a sine qua non to an unfair prejudice petition.  Mr Burns who appears for the Petitioners accepted that the LLP was actually insolvent.
10.	The relief sought in the Amended Petition is significant:-
“27. The Petitioners therefore pray for one or more of the following forms of relief under section 996 Companies Act 2006 as follows:
(i) That the Parsons be required to buy Rubins’ interest in the LLP for £155,000 (i.e. at its June 2014 valuation) or at such other sum as the court deems fit;
(ii) That the Petitioners be given leave to sue the Parsons in the name of the LLP for the loss and damage to the LLP business caused by them;
(iii) the Parsons be required to take all steps necessary to re-assign the business, assets and goodwill which they have stolen back to the LLP;
(iv) that the Parsons be required to give the Rubins full access to and control over the affairs of the LLP;
(vii) that there be an account and enquiry into the Parsons’ profit derived from or accumulated in Off2 Executive Travel Ltd and into any other such benefits and profits made by them from their wrongdoing, and payment of those sums to a the LLP.
(viii) that a receiver be appointed to control the affairs of the LLP or wind it up
(ix) interim relief to restrain the Parsons from trading or assisting in the trading of Off2 Executive Travel LTD in competition with the LLP and or that they account to the LLP for benefits made by them from such work until these matters have been resolved
(x) damages for loss of income and future loss at the rate of £2000 per month or in such amount as the court deems fit
(xi) damage for loss of use of the LLP assets
(xii) such other or further relief as the court deems fit.”
11.	The amended additions arise from the order of Arnold J of 15th April 2015 and comprise permission to the Petitioners to bring a derivative claim on behalf of the LLP.
RESPONSE OF RESPONDENTS/APPELLANTS
12.	Not to be outdone (a familiar theme in unfair prejudice petitions) the Appellants/Respondents served a Defence and Counterclaim on 9th April 2015.  In that document the Appellants accepted the relationships had deteriorated but blamed the Petitioners.  They alleged also that the parties excluded each other from parts of the business contending that the petitioners continued to use the LLP’s booking system to get jobs but excluded the Appellants/Respondents from it.
13.	They challenged a valuation (see below) of the LLP of £310,000 and denied the allegations of misappropriation of the LLP’s business.  They also set out allegations of alleged wrongdoing by the petitioners which caused the relationship to deteriorate to the extent that they could no longer work together and it is just and equitable it be wound up (paragraph 22).
14.	The Respondents contended they refused to purchase the Petitioners’ interests because the Petitioners’ actions allegedly caused the deterioration and loss of value.  In paragraph 44 they set out numerous alleged breaches of fiduciary duty committed by the petitioners.
15.	By a Counterclaim they sought an order requiring the petitioners to purchase their shares (the counterpart to the primary claim of the Petitioners) and permission to bring a derivative action on behalf of the LLP.
16.	The Petitioners denied all of this in their Reply and Defence to Counterclaim.  
EVENTS LEADING TO THE HEARING
17.	In his order of 25th April 2015 Arnold J (inter alia) ordered the Appellants to provide the following:-
“2. By 4pm on 14th May 2015 the First and Second Respondents shall serve on the Petitioner’s solicitor copies of the following documents:
(i) A list of all business transactions including without limitation receipts carried out by the LLP from 1st October 2014 to the date of this order;
(ii) A list of all transactions and the detail of the transactions (including without limitation receipts commissions sales scrapping etc) of which they are aware from 1st October 2014 to the date of this order involving the following vehicles: Ford Galaxy Reg LR590EY; Ford Galaxy Reg LN10VKE; Ford Glaxy Reg LN10VJF; Ford Galaxy Reg LR10HFJ; Mercedes E220 Reg EY10XDH; Ford Tourneo Reg YB14YHY
(iii) A list of all transactions and the detail of the transactions (including without limitation receipts commissions sales scrapping etc) of which they are aware from 1st October 2014 to the date of this order date involving the following vehicles registration numbers respectively: MJ64KHL, MJ64KHC, MJ64KHH and MJ64KJV to the exent that they have been used in private hire or chauffeur business.
(iv) A list of all equipment, logs, licenses, furniture, computers and other LLP chattels which they removed or caused to be removed from the LLP office premises at 6 Suite F3A, Whittle Road Ferndown Industrial Estate Wimborne Bournemouth BH21 7R on or after 1st October 2014.”
18.	The Appellants failed to comply with that order and on 16th June 2015 Registrar Baister made an Unless Order against them in respect of paragraphs 2 (ii) and 2 (iii).
19.	It is to be noted that that order is made against all Respondents including the LLP and the additional company.  
20.	The order provided that unless the material was provided by 4.30pm on 30th June 2015 the Respondents “shall be debarred from defending the proceedings”.
APPELLANTS’ RESPONSE
21.	The Appellants provided a large amount of documents but it is jumbled and was not in the form required by Mr Registrar Baister’s order.  The requirement to list is so obvious so as to not require explanation.  It is not for the Petitioners/Respondents to have to work their way through a large amount of documents which are not explained in an attempt to understand what information is being provided.  Nevertheless the Petitioners/Respondents’ solicitors on receipt of the documents wrote “these documents are not in the form required by the Court Orders but to a great extent do satisfy the terms of the order of 15th April to 16th June with the following obvious exceptions” they then set out 5 items and concluded that “In all of the above circumstances we are of the view that your clients remain in breach of the orders of 15th April and 16th June 2015”.
THE HEARING OF 10TH JULY 2015
22.	At the hearing Mr Burns appeared for the Petitioners/Respondents.  Mr Parsons appeared in person and the other Respondents are noted as not having appeared nor being represented.
23.	An examination of the transcript of the hearing is vital to understand this appeal.  After introducing himself Mr Burns said “I have just handed you a very short draft order.  That is what I am asking for.  What I am asking for is that the Respondents by which I mean all Respondents should be debarred from defending the petition…” 
24.	The Petitioners/Respondents’ solicitors had written to the solicitors then acting for the Appellants/Respondents on 7th July 2015 contending that the Appellants/Respondents were in breach of the orders above mentioned 15th April and 16th June and that they intended “to apply to the Court on 10th July 2015 for an order declaring that your clients are debarred from defending the proceedings”.  A bundle was served but I have not seen that bundle.
25.	The hearing was listed as a Case Management Conference.  
26.	One would therefore expect the hearing assuming that there was no dispute that the Appellants/Respondents were in breach of the Unless Order that the learned Registrar would debar them from defending and then make directions for the further consideration of the Petition and the Defence and Counterclaim. It must be appreciated that the Unless Order did not have any relevance in respect of the Counterclaim which was a point which was not considered at the hearing in any great detail.
27.	Mr Burns continued his submissions (page 71) informing the learned Registrar that the LLP had a value of about £300,000.  This was said to be based on a jointly commissioned valuation which was obtained from an accountant called Robert Field in June 2014.  It was not clear whether this document was before the learned Registrar or not at the hearing.  Mr Burns was unable to recall.  However it is important to appreciate that the report is not a report prepared by an expert for the hearings (whether jointly or otherwise).   Further it is not an agreed report.  Finally the report itself as a preamble which says:-
“The valuations shown in this document are for discussion purposes only and should not be relied upon for any other purpose.  They show various valuations based upon certain assumptions that carry degrees of subjectivity and should therefore only be used for discussion purposes.  They are for the sole use of the partners of the LLP and not to be relied upon by any third party.”
28.	 It seems to me that no proper reliance could be made at that stage on the report as giving any indication as to the worth of the LLP.  Further as I have said above Mr Burns acknowledged it was insolvent (although there would be a dispute between the parties as to the reasons why it became insolvent). 
29.	The accounts at table 1 to the Field report show a relatively modest business with net profits in the statutory accounts of £63,449 and £73,657 for 2013/2014 respectively.   The only assets for the LLP are the fixed assets which are motor vehicles with a net book value of £32,590.  The calculations for the valuation are set out in table 7 and the figure of around £300,000 is the largest figure and is based on a figure for good will of £310,000.  It is extremely difficult to see how this modest business would achieve those kinds of figures and no real basis is made out.  
30.	After setting out the background of the Appellants/Respondents failure to comply with the order by not producing the documents in a properly listed form Mr Burns said this (page 74) “MR Burns: It does not contain the list of the transactions cross referenced to the particular vehicles.  We say in summary it is not in compliance with the order.  They are debarred.  What should happen in this case is that this matter should be sent for a final hearing as soon as possible what I am asking for is a debarring order and a remedy hearing.”
31.	In my view that was the proper application to make and the proper order to have ensued although some consideration should have been given in addition to the Counterclaim.  That follows which as far as I am concerned is the established procedure, when a Defendant/Respondent is debarred where the claim for relief is something more than a simple debt claim for instance.  If that is the situation (it plainly was here) the learned Registrar should have been invited to set a final hearing as Mr Burns said and give directions for the service of the evidence by the Petitioners so the Petitioners could prove their case.  At such a hearing although the Respondents are debarred from defending, that means that they are debarred from relying on any evidence but they have a right in my view to require the Petitioners to prove their case.  The directions should have enabled the remedy hearing as described by Mr Burns to hear the Petitioners’ evidence and decide what relief if any should be granted in the light of that evidence.  As the Counterclaim is not struck out the hearing would also have to address the Counterclaim simultaneously.  That would have been disposed of in the normal way by both parties giving evidence after disclosure and service of witness statements.  There might be a need for expert evidence unless the Registrar decided that the first hearing should be one of liability only i.e. to determine whether there had been unfair prejudice and if so what kind of relief should be granted.  It will be recalled that both parties are seeking an order that the other side buy their shares (interests) in the LLP.  That is still a live issue even after the Appellants/Respondents are barred out from defending the Petition.
32.	The learned Registrar then heard submissions by Mr Parsons.  After an exchange he explained briefly but carefully to Mr Parsons why he was in breach of the order and why he was thereby debarred from defending the Petition.  He did alert Mr Parsons the possibility of him being able to apply for relief from sanctions.
33.	The learned Registrar then said this:- 
“Let us just think perhaps a little more informally, with Mr. Burns’s permission.  He will stop me if he thinks I am going too far.  I am trying to think what both sides are trying to achieve here.  From what I gathered from the pleadings - and it has been confirmed by what Mr. Burns has said - we are talking about an LLP worth probably about 300,000 odd at best, subject to whether there are any subsequent rights in relation to what you have been doing with your new company.  Can I put it bluntly, Mr. Burns?  What are you after?  Can I make it clear I am exploring things?  I am not pinning anyone to any final decision.

MR. BURNS:  You will be amazed to hear that we have made a without prejudice offer of 52,000 and it is absolute Christmas.  In fact, our claim is well over 100.
THE REGISTRAR:  I appreciate this is me sticking my finger in here, perhaps rather naughtily.  Your claim might be 150 or something.  Mr. Parsons, again Mr. Burns will stop me if he thinks I am overstepping my mark a bit.  These cases are nightmares.  Everyone hates one another.  They cost an absolute fortune if they go through to the end.  If any of you are present in court at any hearing that I have conducted in this, I would have probably been begging people to go away and settle because they usually end badly.  It is not up to me to twist your arm into settlement but, if Mr, Burns is right, then that is probably a pretty reasonable deal for getting out of it.  Of course, I bear in mind that you have your counter petition and you have not been struck out on that, I do not think.  You have simply been debarred from defending yours.  You may still have a counter petition that is on foot, because I was not asked to debar you from that.  I have to be fair to him, Mr. Burns.  Obviously, if you were going to settle, it would be very good news if you were to settle the whole lot.
MR. PARSONS:  52,000?  It may just as well be five million.  It is not that.  I do not have the funds.  They are aware of that.  They have been told that.
THE REGISTRAR:  You might be right and that is none of my business because people’s inability to pay is simply not my concern.  I simply deal with the principles of things.  The only thing I can do in those circumstances, I think, is agree with Mr. Burns and send this off for a hearing.  I suppose the alternative is, although these things usually go fought to the judge, technically the petitions before me, unfair prejudice petitions generally go to the judge for hearing.  On what possible basis could I refuse you judgment for a sum that is considerably less, if you were prepared to limit yourself to it?

34.	There are a number of difficulties about this exchange.  First the learned Registrar was with respect misled as to the effectiveness of the report and the suggestion that the LLP might be worth £300,000.
35.	Second Mr Burns disclosed a without prejudice offer that the Respondents/Appellants had made of £52,000.  This to my mind was a plain breach of the without prejudice privilege which attached to that offer.  I refer generally to “Documentary Evidence” (12th Edition) Charles Hollander QC paragraph 20-01 and following.  This regrettably contaminated the learned Registrar’s mind.  Mr Parsons cannot be criticised as a lay man for not realising that Mr Burns should not have revealed this figure.  The third difficulty is in relation to the Counterclaim.  The Registrar averted to it but with respect to him he did not address the consequences of not dealing with it.  For example when one looks at the final decision he made (namely an order that the Appellants/Respondents pay the Petitioners/Respondents £54,000) he has not considered two matters.  First he has not considered the relief sought on behalf of the LLP which does not receive a mention.   Second he has not addressed the consequence of the Counterclaim which includes also an order for the Petitioners to buy the Respondents’ shares and also has claims against the Petitioners on behalf of the LLP.  An inevitable question of set off at the very least would arise as indeed a question of the stay of the order for £54,000 pending the finalisation of the Counterclaim.  That would be the normal procedure.  
36.	The learned Registrar as shown from the extract above showed his initial view was to send the matter off for a hearing but he then asked on what possible basis “could I refuse you judgment for a sum that is considerably less if you are prepared to limit yourself to it” Mr Burns responds saying that the Petitioners are looking for a result and a quick result to save anymore joint journeys up to London.  
37.	The Registrar then went on to say:-
“if you were to agree with Mr Rubin to limit your claim to what is manifestly reasonable,  there can be no justification, could there, in spending a lot of court time either at my level or the Judge level in working out what is almost going to certainly amount to much more than you are asking for?  Is that a proper approach bearing in mind your application to me and to Mr Parsons as well as your own client of course.” 
38.	Mr Burns did not do anything in response except to say that he believed the Registrar had jurisdiction.  The learned Registrar then asked to look at the report for the first time and Mr Burns gave evidence about the basis of which the report was commissioned.  The difficulty however is the elevation of this report to the status of a report of an expert prepared for the purpose of litigation.  As I have set out above it plainly was not and the figures were not intended to be for that.  The Registrar then said that he was prepared to give judgment of £54,000 this afternoon.  Mr Burns accepts the £54,000 must have been a mis-hearing of the figure of £52,000.  In other words, the Registrar having been told of the without prejudice position wrongly, is prepared to offer that immediately to the Petitioners/Respondents.
THE JUDGMENT
39.	The Judgment was quite brief.  After setting out the background in paragraphs 1-5 he then asks the rhetorical question “the question is where to we go from here?” (paragraph 6).  He then referred to the draft order produced by Mr Burns which provided for a further remedy hearing.  He expressed the view (probably correctly) that the relationship between the parties had broken down and therefore somebody is going to have to buy somebody else out or pay some money.  However that overlooks a number of matters.  First he has not addressed the question of buyout by either party which can only be ordered after there has been a determination of unfairly prejudicial conduct.  Second he has not considered the derivative claims brought by both parties.  Thirdly he has not addressed what should have happened if this matter is going to be dealt with summarily.  He should have directed that the LLP be wound up and a liquidator appointed to recover the assets in the usual way, pay out the creditors and return any surplus to the Petitioners/Respondents as owners of the LLP.  In the course of that exercise the liquidator would have power to bring proceedings in the LLP’s name against either the Petitioners or Respondents for any breaches of fiduciary duty that he was properly advised should be made.  
40.	The error with respect to the learned Registrar arises out of the failure to consider those derivative claims and the Counterclaims.  Let us suppose that the Counterclaim carried on and when the evidence was heard in that it was clearly established that the Petitioners were to blame for the breakdown.  That would be a finding that would be available on the Counterclaim but would no longer be available to defend the Petition because the Petition had been disposed of finally by the award of £54,000.
41.	In addition the order for the payment of £54,000 is extended to the Fourth Respondent yet the Fourth Respondent could never have complied with the order for production of that material.  Further it does not appear to be identified as a Respondent in the original order of 16th June 2015 and the original order made by Arnold J was against the First and Second Respondent.
42.	Although the learned Registrar acknowledged that the accountant’s report was not prepared for the purpose of the proceedings there was no critical examination of that report.  Once it is considered its limited use is exposed, as I have set out above, it simply should not have been used in my judgment at the hearing especially when it was sprung on the Appellants/Respondents without warning.  It lured the Registrar in to thinking that the Petitioners would establish an entitlement to at least £100,000 when there was no basis for that at all.  That led him inexorably to the conclusion that it would be almost certain that they would achieve £54,000.  He was only aware of that figure of course because Mr Burns revealed a figure which was covered with without prejudice litigation privilege.
GROUNDS OF APPEAL
43.	I refer to the revised skeleton argument submitted on behalf of the Appellants/Respondents.  After pointing out (paragraph 2) that the order was made in the course of a costs and case management hearing where the Appellants/Respondents were not represented and on the court’s initiative it was following what is described as apparent non compliance with the Unless Order without giving them any adequate opportunity to explain their purported compliance or seek relief from sanctions.  This was despite, as they pointed out the existence of a cross petition and derivative claim brought by the Appellants/Respondents.
44.	I can disregard the complaints about the lack of opportunity to show purported compliance or to seek relief from sanctions.  First the learned Registrar explained why there had not been compliance namely because the material provided was not listed as required by the order of Arnold J.  I agree with that analysis.  It follows that the Unless Order has taken effect.  It should also of course be appreciated that there was no appeal against the Unless Order.  As regards the question of relief from sanctions the learned Registrar raised that.  It might have been different had the Appellants/Respondents sought an adjournment to seek relief against sanctions or had sought relief against sanctions on the basis that they had not complied with the Unless Order.  Neither is the fault of the learned Registrar.  The Appellants/Respondents have now addressed that by their latest application.
45.	In paragraph 6 of the skeleton filed on the Appellants/Respondents behalf they set out their grounds of appeal.  The first of those was that the learned Registrar was wrong to grant summary relief against the Fourth Respondent in circumstances where the Fourth Respondent was not and ought not to have been barred from defending the Petition (it not being subject to the original obligations).  It seems to me that submission is impeccable and there can be no basis for the order having taken effect against the Fourth Respondent for failure of other Respondents to comply with the order of Arnold J.
46.	Next, complaint is made about the way in which the Registrar dealt with the non compliance and a complaint is then made that he failed to give them a reasonable opportunity to obtain legal advice to make an application for relief from sanctions.  I cannot see that there is any basis for criticising the Registrar on those matters as I have set out above.  The next criticisms are more significant.  First it is complained that the learned Registrar purported to exercise his broad discretion under section 996 (1) CA 2006 without regard to the possible impact of the cross petition which remained to be determined.  Then it is complained that he failed to specify the consequences of the relief granted to the Petitioners as specifically whether or not the sum ordered reflected or included the value of the Petitioners’ interest in the Third Respondent and meant that the Petitioners were obliged upon payment of the sum to transfer their interests in the Third Respondent and whether it included account of profits derived from or accumulated by the Fourth Respondent through wrong doing on its part.  Finally it is said that in effect a compromise was imposed on the Appellants/Respondents where there is no power to do so.
47.	There is much force in all of those submissions in my view.  The question of the beneficial ownership was simply not addressed as Mr Burns frankly accepted.  Equally the question of the derivative applications was not addressed.  As I asked in argument, was the payment of £54,000 to the lay Petitioners/Appellants intended to be in full and final settlement of the claims including the derivative claims that they were bringing on behalf of the Third Respondent?  The next question I then posed with Mr Burns was whether it was appropriate for them owing a fiduciary duty in effect to give away any claims they brought on behalf of the LLP for a personal payment of £54,000 to themselves.  Mr Burns described that as being a clever point brought up by the Judge.  Whether that is the case or not it is in my mind symptomatic of the failure to address the complexities of the action and to treat it as a debt/damages claim alone.  I can well understand the learned Registrar’s desire to curtail the costs in this case given the modest value of the LLP.  I have already observed how the asset value of the LLP appears to be based on a speculative figure of good will.  However the enthusiasm of the Registrar to achieve a final result at that hearing should in my view have been with respect to him restrained.  The failure to address all the other matters identified by me above and the impact especially on the Counterclaim is fatal to his decision to render the whole claim down to a simple monetary payment.  I have already observed how he became aware of that monetary figure and to my mind that was just wrong and unjust.
48.	It is in my view clear that the learned Registrar imposed a settlement on the Appellants/Respondents by awarding the Petitioners/Respondents precisely the figure that they had offered on a without prejudice basis.
49.	Mr Burns for the Petitioners/Respondents submits that the appeal should be dismissed and the learned Registrar’s decision was perfectly correct and open to him.  I have already averted to the fact that the hearing was a directions hearing only and that Mr Burns had initially simply sought directions for a final determination of the issues.  The matter which was debated most vigorously between Mr Burns and myself was the consequence of the debarring order.  His submission was that the debarring order, once not complied with, took effect without the need for any further order and that on an application to enter judgment under CPR 3.5 (5) the court’s function was limited to deciding what order should properly be made to reflect the sanctions which had already taken effect.  In that respect he relied upon the Court of Appeal decision in Marcan Shipping (London) Ltd v Kefalas & Anr [2007] 1WLR 1864 I refer to paragraphs 34-36 as follows:-
“34 In my view it should now be clearly recognised that the sanction embodied in an "unless" order in traditional form takes effect without the need for any further order if the party to whom it is addressed fails to comply with it in any material respect. This has a number of consequences, to three of which I think it is worth drawing particular attention. The first is that it is unnecessary, and indeed inappropriate, for a party who seeks to rely on non-compliance with an order of that kind to make an application to the court for the sanction to be imposed or, as the judge put it, "activated". The sanction prescribed by the order takes effect automatically as a result of the failure to comply with its terms. If an application to enter judgment is made under rule 3.5(5), the court's function is limited to deciding what order should properly be made to reflect the sanction which has already taken effect. Unless the party in default has applied for relief, or the court itself decides for some exceptional reason that it should act of its own initiative, the question whether the sanction ought to apply does not arise. It must be assumed that at the time of making the order the court considered all the relevant factors and reached the decision that the sanction should take effect in the event of default. If it is thought that the court should not have made an order in those terms in the first place, the right course is to challenge it on appeal, but it may often be better to make all reasonable efforts to comply and to seek relief in the event of default. ”
35  The second consequence, which follows from the first, is that the party in default must apply for relief from the sanction under rule 3.8 if he wishes to escape its consequences. Although the court can act of its own motion, it is under no duty to do so and the party in default cannot complain if he fails to take appropriate steps to protect his own interests. Any application of this kind must deal with the matters which the court is required by rule 3.9 to consider. 
36  The third consequence is that before making conditional orders, particularly orders for the striking out of statements of case or the dismissal of claims or counterclaims, the judge should consider carefully whether the sanction being imposed is appropriate in all the circumstances of the case. Of course, it is impossible to foresee the nature and effect of every possible breach and the party in default can always apply for relief, but a conditional order striking out a statement of case or dismissing the claim or counterclaim is one of the most powerful weapons in the court's case management armoury and should not be deployed unless its consequences can be justified. I find it difficult to imagine circumstances in which such an order could properly be made for what were described in Keen Phillips v Field as "good housekeeping purposes". 
50.	Moore-Bick LJ pointed out the difference between a failure to comply with an Unless Order and an application to strike out for failure to comply in paragraph 39:-
“39 It appears that both the judge and the defendants themselves may have been misled by those submissions and by the requirements of rule 3.5(5) into approaching the matter as if it were an application under rule 3.4(2)(c) to strike out the claim for failure to comply with an order of the court to which no specific sanction had been attached. If that had been the case, it would have been necessary for the judge to consider all the circumstances before deciding whether it was appropriate to make such an order, but it was not and he should therefore have confined himself to the question whether the order being sought by the defendants properly reflected the effect of Marcan's failure to comply with the order made on 21st July. In the event, however, having found that there was a clear breach of that order, the judge asked himself whether he should, in his words, "activate" the sanction for which it provided. In the light of the nature of the default and Marcan's previous failures to comply with the court's orders he considered that he should do so and made the order sought by the defendants.” 
51.	It is important to appreciate however that Marcan was a case involving striking out of the Claimant’s statement of case.  Once it is struck out or they are debarred from defending the action then is dead.  The position as regards debarring a Defendant from defending the case is in my view different.  It will depend entirely on the nature of the Claimant’s case.  This is anticipated by CPR 3.5 which provides:-
“Judgment without trial after striking out
3.5-(1) This rule applies where-
(a)the court makes an order which includes a term that the statement of case of a party shall be struck out if the party does not comply with the order; and
(b) the party against whom the order was made does not comply with it.
(2) A party may obtain judgment with costs by filing a request for judgment if-
(a) the order referred to in paragraph (1)(a) relates to the whole of a statement of case; and
(b) where the party wishing to obtain judgment is the claimant, the claim is for-
(i) a specified amount of money;
(ii) an amount of money to be decided by the court;
(iii) delivery of goods where the claim form gives the defendant the alternative of paying their value; or
(iv) any combination of these remedies.
(3) The request must state that the right to enter judgment has arisen because the court's order has not been complied with.
(4) A party must make an application in accordance with Part 23 if he wishes to obtain judgment under this rule in a case to which paragraph (2) does not apply.”
52.	It will be seen that a party can simply obtain a judgment by filing a request where either the claim relates to the whole of the statement of case or where there is a claim for a specified amount of money or money to be decided by the court or delivery of the goods where the Defendant is given an alternative of paying the value.
53.	The claim in the Petition could only fall within sub rule a if the £54,000 was sought by the Petitioners as satisfying the whole of the statement of case.  That was clearly not the situation as the question of the beneficial interests of the Petitioners in the LLP was not considered as Mr Burns accepted.  More significantly, the question of the derivative actions was not considered either.  If those matters are not dealt with then the order the learned Registrar made cannot stand because the figure of £54,000 payment cannot be dealt with in isolation from those outstanding matters.  I have already observed that in this case the counterclaim is a further factor which in my view inhibits the Registrar in dealing with the way he attempted to do so.
54.	Where none of the requirements of sub rule (2) are applicable the party has to apply for a judgment.  That is what Mr Burns originally intended to do.  Unfortunately he was drawn in to the enticing trap of immediate payment of £54,000.  
55.	There is nothing significant about this in my view.  Where the case goes beyond the simple remedies sought in sub rule (2) the court must assess very carefully the extent to which not withstanding the debarring order the other party is required to prove its case.  I averted to this in the case of Masood & Ors v Zahoor [2008] EWCH 1034 (Ch) at paragraphs 140-154 as follows:-
“140 As I have already set out in this judgment SM has in my view forged documents.  The next section of this judgment will deal with the more serious aspects of his forgery.  
141 It is also the case that MZ and PS have also forged documents.  Although in the closings on behalf of MZ it was submitted in effect that his forgery was not too serious, I reject that.  In my view the documents MZ and PS forged were done to create a deliberately false impression that documents were contemporaneously executed on the dates put on them.  This was done to bolster their case and to deceive the Court.  These documents had been put forward initially as being genuine documents.  They were referred to in pleadings.  For example in paragraph 45 of D1-D5’s Defence reference is made to the Loan documents as being dated 13th December 1996 but the true date of the execution is not revealed.  Similarly in paragraph 124 reference is made to the Agreement dated 19th September 2002 whereby PS took over the obligations of KS under the Loan Deed.  In fact this document was not executed until 2005.  Likewise PS in her Amended Defence whilst referring to the Loan Agreement (paragraph 12) does not identify that it was not executed until May 2002.  No mention of that fact is made in the section headed “Developments in 2002” (paragraphs 18-22) either.  Finally the 19th September 2002 Agreement was in the initial pleading referred to as an agreement in writing and it is only by amendment dated 18th January 2008 that it is revealed that there was an oral agreement and a later written agreement (2005) but it fails to explain why the document is dated 19th September 2002.  In this context it was established in cross examination of PS and MZ that the terms set out in this document could not possibly have reflected an agreement that was struck in September orally.  
142 The relevant documents were of course given false dates in the disclosure list.  Under CPR 32.19 a party is deemed to admit the authenticity of a document disclosed to him under part 31 unless he served notice that he wished the document to be proved at trial.  It seems to me plain that if the true date of the creation of the document is not set out in the disclosure statement a party will not know that the document is not a genuine document i.e. it has a false date on it and was created on a different date yet he would be deemed to admit the authenticity about something which he does not know.  This seems to me to be a plain breach of the obligations of disclosure and has led to a false disclosure statement.
143 As the rest of this judgment will show the trial in this case took place with the major witnesses all having lied and therefore having delivered perjured evidence.  In addition the major witnesses on both sides have sought to bolster their case by forged documents.  
144 This is deplorable.  It made my task of evaluating the true facts about the dispute difficult if not impossible in some areas.  All the parties have abused the process of the Court by the way in which they have presented their cases.  I should say that when I say that I am not criticising any of the lawyers.  Save in respect of the joinder of PS about which I shall say further in this judgment I have no criticisms of the way in which the case has been presented by the lawyers as it appears before me.  
145 It is therefore distasteful and unacceptable that I am required to determine the dispute between parties who commit such wanton acts of dishonesty.  
146 I have considered the case of Arrow Nominees Inc& anr v Blackledge [2000] 2 BCLC 167 (C.A.) In that case there was a petition under section 459 of the Companies Act 1985 presented by two minority shareholders Nigel Tobias (“NT”) by his Nominee company Arrow Nominees Inc and Lorraine Blackledge.  NT in the course of standard disclosure produced documents which he knew to be forged.  An application was made for the petitions to be dismissed on the basis that a fair trial was not possible because of that forgery.  The Judge dismissed the application because he was not so satisfied but he emphasised that if further evidence emerged during the trial that documents had been suppressed or fraudulently altered an application could then be renewed and is highly likely to be successful.  The petitioner’s case was opened; their evidence led and they were extensively cross examined.  During the course of the trial NT was found to have forged diary entries in addition to the letters which he had initially admittedly forged.  Despite that the Judge did not strike out the petition as he believed there was no substantial risk that a fair trail could not be held although he acknowledged that the part of the Claimant of the petition which was based on documents could not be fairly tried.  The Respondents appealed and the Court of Appeal upheld their appeal.  In giving the leading judgment Chadwick LJ said this:-
“The appeal against the judge's refusal to strike out on the second application
42. The acts or omissions on the part of the Blackledge respondents on which the petitioners rely as conduct of the company's affairs in a manner which is unfairly prejudicial to their interests are to be found in the amended para 8 of the petition. The paragraph is introduced by an allegation in three parts: that 'in causing or procuring matters hereunder complained of' the respondents have acted (i) contrary to the 1994 agreement, (ii) contrary to the legitimate expectations of the parties, and (iii) 'in any event' unfairly in the conduct of the company's affairs so as to prejudice the petitioners. It is alleged, further, that Graham and Margaret Blackledge are 'in breach of the fiduciary duty of directors'.
43. The judge held that there was a substantial risk that there could not be a fair trial in so far as the complaints of unfair conduct were based on (i) or (ii) – acting contrary to the 1994 agreement or to the petitioners' legitimate expectations. He did so on the basis that the admitted forgeries, coupled with his finding that Nigel Tobias had continued to lie on oath as to the extent of his fraudulent activity in relation to documents, made it impossible to have confidence in any documents produced by the petitioners unless those documents were corroborated by some other evidence. Further, and this is an important element in his approach, that the existence of the forged documents and the diaries was likely to have infected evidence contained in affidavits and witness statements prepared in reliance on those documents and diaries.
44. The judge's conclusion as to the extent and effect of Nigel Tobias' fraudulent conduct is challenged by a respondents' notice served by the petitioners. But, to my mind, that challenge must fail. There was ample material before the judge to justify his conclusion that Nigel Tobias had continued to lie on oath as to the extent of his fraudulent activity in relation to documents. The judge had the advantage, which this court did not have, of hearing and seeing Nigel Tobias give oral evidence at the trial under cross-examination. There is no basis on which this court could interfere with the judge's finding of fact. Nor can it be said that the judge was wrong to take the view that the existence of forged documentary material is likely to infect the oral evidence. In a case of this nature it is inevitable that documents will provide the basis for recollection. It is likely to be very difficult for a witness – even for a witness doing his or her best to tell the truth under oath – to accept that what the witness now thinks that he or she recalls from memory may, in truth, be based on a document which has been shown to be false, or in relation to which there is suspicion. The effect of forged documentary material on a trial is pernicious, because witnesses who have, at one stage in the process of preparing for trial, believed that documentary evidence to be genuine are unlikely to be able to evaluate, objectively, the effect which it has had on their recall of the events to which it relates”
147 After reviewing the surviving allegation Chadwick LJ concluded that the Judge was wrong to allow these to survive for the reasons set out in paragraph 53 as follows:-
“53.  In those circumstances I take the view that it was wrong for the judge to allow the petition to proceed once he had reached the conclusion that there was a substantial risk that the allegations in relation to the disputed terms of the 1994 agreement were incapable of a fair trial. He recognised, correctly, that a claim to relief based on allegations of abuse by the Blackledge respondents of their powers as directors and shareholder after 1997 would not require an investigation into what had or had not been agreed in 1994. But, as it seems to me, he failed to appreciate that, on a true analysis, the allegations made in the petition were allegations of oppressive conduct by Blackledge plc as supplier or as lender; and were not allegations of oppressive conduct by Blackledge plc as majority shareholder. In so far as there were general allegations of breach of duty by Graham and Margaret Blackledge as directors, those allegations were not supported by any evidence which the judge identified; and are contradicted by the material which was put before this court. In my view the judge ought to have reached the conclusion that, once the allegations in respect of which there was a substantial risk that Nigel Tobias' fraudulent conduct had made a fair trial impossible were put on one side and left out of account, there was no case for relief which remained to be tried.
54. It would be open to this court to allow the appeal against the judge's refusal to strike out the petition on that ground alone. But, for my part, I would allow that appeal on a second, and additional, ground. I adopt, as a general principle, the observations of Millett J in Logicrose Ltd v Southend United Football Club Ltd (1988) Times, 5 March, that the object of the rules as to discovery is to secure the fair trial of the action in accordance with the due process of the court; and that, accordingly, a party is not to be deprived of his right to a proper trial as a penalty for disobedience of those rules, even if such disobedience amounts to contempt for or defiance of the court, if that object is ultimately secured, by (for example) the late production of a document which has been withheld. But where a litigant's conduct puts the fairness of the trial in jeopardy, where it is such that any judgment in favour of the litigant would have to be regarded as unsafe, or where it amounts to such an abuse of the process of the court as to render further proceedings unsatisfactory and to prevent the court from doing justice, the court is entitled, indeed, I would hold bound, to refuse to allow that litigant to take further part in the proceedings and (where appropriate) to determine the proceedings against him. The reason, as it seems to me, is that it is no part of the court's function to proceed to trial if to do so would give rise to a substantial risk of injustice. The function of the court is to do justice between the parties; not to allow its process to be used as a means of achieving injustice. A litigant who has demonstrated that he is determined to pursue proceedings with the object of preventing a fair trial has forfeited his right to take part in a trial. His object is inimical to the process which he purports to invoke.
55. Further, in this context, a fair trial is a trial which is conducted without an undue expenditure of time and money; and with a proper regard to the demands of other litigants upon the finite resources of the court. The court does not do justice to the other parties to the proceedings in question if it allows its process to be abused so that the real point in issue becomes subordinated to an investigation into the effect which the admittedly fraudulent conduct of one party in connection with the process of litigation has had on the fairness of the trial itself. That, as it seems to me, is what happened in the present case. The trial was 'hijacked' by the need to investigate what documents were false and what documents had been destroyed. The need to do that arose from the facts (i) that the petitioners had sought to rely on documents which Nigel Tobias had forged with the object of frustrating a fair trial and (ii) that, as the judge found, Nigel Tobias was unwilling to make a frank disclosure of the extent of his fraudulent conduct, but persisted in his attempts to deceive. The result was that the petitioners' case occupied far more of the court's time than was necessary for the purpose of deciding the real points in issue on the petition. That was unfair to the Blackledge respondents; and it was unfair to other litigants who needed to have their disputes tried by the court.
56. In my view, having heard and disbelieved the evidence of Nigel Tobias as to the extent of his fraudulent conduct, and having reached the conclusion (as he did) that Nigel Tobias was persisting in his object of frustrating a fair trial, the judge ought to have considered whether it was fair to the respondents, and in the interests of the administration of justice generally, to allow the trial to continue. If he had considered that question, then, as it seems to me, he should have come to the conclusion that it must be answered in the negative. A decision to stop the trial in those circumstances is not based on the court's desire (or any perceived need) to punish the party concerned; rather, it is a proper and necessary response where a party has shown that his object is not to have the fair trial which it is the court's function to conduct, but to have a trial the fairness of which he has attempted (and continues to attempt) to compromise”.
Ward LJ delivered a concurring judgment but in so doing he made reference to the consequences of dishonest conduct in relation to other court users as well:-
“73. The attempted perversion of justice is the very antithesis of parties coming before the court on an equal footing. The matter has become hugely more expensive (to an extent we did not appreciate until we were told when application was made for a freezing order that the amount of the appellants' costs overall and on a solicitor and own client basis may be in the region of £1.5m). The judge commented at the beginning of his judgment that the hearing had run for 29 days greatly exceeding the parties' estimate. The original estimate was three weeks and we were told another week to ten days would be required to conclude the matter even on the limited basis that the judge would still permit. The judge did not, however, treat cost and time as elements of the overriding objective. He did not appear to allot to the case an appropriate share of the court's resources while taking into account the need to allot resources to other cases. In this day and age they are elements of case management which must not only be seen to have been placed in the scales but also given due and proper weight when assessing how justice is to be done to the parties and to other litigants. The balance must be struck so that the case is dealt with in a way which is proportionate to the amount of money involved in the case, its importance and complexity and the financial position of the parties. Mr Tobias stood to gain much had his fraud gone undetected. He was seeking on behalf of the minority shareholders to wrest control of the company from the majority and he persisted in that claim even to the point of his cross-appeal. He bolstered his claim by what the judge found to be a campaign of forgery and, more importantly, the judge was not satisfied with the explanation given for it. He found:
'In his evidence Nigel sought to give the impression that his forgeries came about as a result of an impulsive moment of madness flowing from his disappointment that his case was not adequately supported by the documents. In my judgment, so far from that being the case, it is apparent that the process of forgery, which Nigel admitted to, was sophisticated and must have taken some time to complete including the special manufacture of headed note paper of the defunct Tobias family company. But for the slip up with relation to the telephone number shown on the headings it would, in all probability, not have been discovered.'
Any notion that this was a petitioner coming to the Court of Equity with clean hands is utterly dispelled by the devastating conclusion in para 44:
'I am not satisfied that I have received from Nigel a truthful picture of the circumstances of the forgeries which he admits.'
74. This was, therefore, a flagrant and continuing affront to the court. Striking out is not a disproportionate remedy for such an abuse, even when the petitioners lose so much of the fruits of their labour”.
149 It is not excessive to describe SM’s conduct in producing and relying upon forged documents to the extent that he has and the consequential perjured evidence and false disclosure of documents as being a flagrant and continuing affront to the court.  
150 If I was dealing solely with misconduct by SM I would have had no hesitation in striking out the entirety of his claims.  He has not made the case impossible but he has very nearly made it so.  To remove from the Judge’s tools for assessing where the truth lies all significant contemporaneous documents is a very serious act of misconduct.  He has made my task virtually unmanageable.  
151 That is not however the end of the matter.  In this case the Defendants themselves have also been guilty of forging documents and perjury.  It is not as extensive as that of SM’s but it is equally pernicious.  The difficulty I have is with the application of an appropriate sanction.  With regard to a Claimant the sanction is clear; it is the dismissal of the action which it was sought to bring with the use of illegitimate material.  If SM’s action is struck out then striking out the Defendants’ Defence does not achieve anything because they have no claim to meet.  I could not even if I struck out the Defence prevent a Defendant from having the right to challenge a case without calling any evidence itself.  That is a normal consequence when a court strikes out a Defence.  The hearing has to be listed so that the Claimant can prove his case.  
152 Where as in this case all the main parties are guilty of forgery and perjury striking out the claim in effect awards victory to a wrongdoer Defendant.  It would be unjust (if that is the appropriate word for a forger and a perjurer) if SM’s claim is struck out with no corresponding effective sanction applied to the Defendants.  There may be cases where doing that can achieve a fairness as between misconducting parties.  It is possible to think of examples where that might be effective.  However in the present case the Defendants are in possession of the shares which form the primary claim.  Simply putting an end to an action from both sides’ points of view leaves them in possession of the shares.  These are particular assets which they have sought to maintain possession of by forgery and perjury.  Now it can be said that the reason why they succeed despite their forgery and perjury is because SM fails because of his own forgery and perjury.  He is therefore the victim of his own misconduct and one should not weep over it.  
153 Putting it another way if both sides have their ability to adduce evidence removed because of their misconduct one falls back on the principle that the case is decided on the basis that the party on whom the burden of proof lay has failed to satisfy that burden see Rhesa Shipping SA v Edmunds [1985] 1WLR 948 at 951 B-D.
154 The easy course given the parties conduct would be simply to decline to adjudicate the case and strike out all the pleadings and then leave SM with no remedy.  I have come to the reluctant conclusion that that in itself would not be an appropriate action in the present case.  At the end of the day everybody (however badly they perform) is entitled to have access to the courts to have disputes resolved.  If they abuse their right to access then the court has sanctions.  However when all abuse their access as in the present case punishing one to a greater extent than the other would itself in my view create an injustice.  I have accordingly therefore come to the reluctant view that despite all my misgivings and (I have to say) the great distaste I feel about this that I must attempt to resolve all the issues doing the best I can but without a great deal of assistance from testimony of the main players and with the need to adopt an extremely cautious approach to contemporaneous documents.  Ultimately if I am unable to decide an issue on the uncontaminated material that is left to me that issue will be decided on the burden on proof.  The parties will then suffer the consequences of their actions.  I have made clear to the parties during the course of the trial that it is extremely likely that I will take further action over their misconduct and I intend so to do”.  

56.	I refer in particular to paragraph 151.
57.	The necessity of a further hearing was demonstrated by the exchange that took place between Mr Burns and myself when it became clear that in taking the proffered £54,000 there was no consideration in any coherent way of what the £54,000 was for (i.e. in the terms of relief in the Amended Petition) and how that was to impact as regards the ownership of the LLP and any possible transfers and the final fatal failure to consider the Counterclaim.
58.	There are other default procedures for example CPR 12 where a party fails to file an acknowledgement.  There the courts have long allowed a party to seek such judgment as is available to it on the pleadings.  However as CPR 12 sets out where the relief sought goes beyond the monetary claims (like CPR 3.5) consideration must be given to all claims that are being sought and whether or not some are being abandoned.  The fact that Mr Burns was quite unable to tell me what aspects of the Amended Petition remained extant after the £54,000 award was made demonstrates the fundamental flaw in the matter as it proceeded before the learned Registrar.
59.	For all of those reasons I regret to say that the learned Registrar in an understandable desire to bring a speedy conclusion to these wasteful proceedings fell in to error and the appeal must be allowed.  The Appellants attended what was a CMC for directions and left with a judgment of £54,000 plus costs against them.  This is unjustified and procedurally unfair.
RELIEF FROM SANCTIONS 
60.	 In my view I should remit that application back to the Registrar to consider.  
MEDIATION/SETTLEMENT
61.	I urge the parties to resolve this dispute.  It is extremely unlikely that there is any money to be had for either party and they really ought to consider in my view a liquidation on the basis that the LLP is insolvent.  The examination of the cost of the Claims and Counterclaims in respect of the alleged misconduct is likely to involve if the parties persist in litigation where the only issue is to avoid a liability for costs.  Now in my judgment is the time for the parties to contemplate resolution of this unfortunate dispute.  If the parties are unable to do that then at the same time as the application for permission for relief against sanctions the Registrar should make directions in the event that he dismisses the application for relief as to how the debarring order takes effect.  In the alternative if he gives relief from sanctions he should then consider what further directions are needed for the prosecution of the Petition and the Counterclaim.