The claimant applied for the setting aside of a default judgment entered against it after it failed to file a defence to the second defendant’s counterclaim.
The claimant had extended credit to a company owned by the second defendant’s husband, secured by a charge executed by the couple over their house. When the loan was not repaid, the claimant sued for possession of the house. In July 2015, the second defendant served a defence that the charge amounted to a regulated mortgage contract which the claimant was not licensed to provide. She argued that it was void under the Insolvency Act 1986 s.284 because it was arranged after a bankruptcy petition was filed against her husband; that the house was subject to a trust for their daughter’s benefit; and that she had been unduly influenced by her husband in executing the charge. She repeated the defences in her counterclaim for a declaration that the charge was unenforceable, void or voidable, and for it to be set aside. The claimant did not file a defence despite enquiries from the second defendant, who then applied for default judgment. A deputy master granted her application on 17 February 2016, setting aside the charge and declaring it void. The claimant instructed new solicitors on 26 February and filed the instant application on 3 March with some supporting evidence. It served full supporting evidence on 22 March. It claimed that its previous lawyers had failed to file its defences to the counterclaim, namely that the credit was provided to a corporate borrower so was not a regulated mortgage contract; s.284 did not prevent the second defendant from charging her own beneficial interest in the house; and the questions of trust and undue influence were triable issues.
The claimant argued that the default judgment should be set aside under CPR r.13.3(1)(a) as it had a real prospect of successfully defending the counterclaim.
HELD: The claimant’s contentions raised triable issues and gave it a real prospect of successfully defending the defendant’s counterclaim. However, when deciding whether to exercise its discretion to set aside a default judgment, the court had to consider under r.13.3(2) whether the application was made promptly. It was not ordinarily right to serve an application notice for such an important order as the setting aside of a default judgment with some evidence in support at the time and an additional witness statement several weeks later, as the claimant had done. A party was not excepted from that merely because it had just changed lawyers: if it wanted to seek alternative advice it had to do so without delay. Consequently, the claimant had not applied promptly within r.13.3(2) and, while not fatal to the application, it was an important matter to take into account. The court also had to apply the three Denton criteria to r.13.3 applications, Denton v TH White Ltd  EWCA Civ 906,  1 W.L.R. 3926 and Gentry v Miller  EWCA Civ 141,  C.P. Rep. 25 applied. The first stage was the seriousness of the failure to file a defence to the counterclaim. The claimant had not filed for some six months despite the second defendant’s correspondence and an application for default judgment being issued in respect of it. The second defendant did not know what was and was not in issue and the litigation could not progress. That was a serious failure on the claimant’s part. The second stage was whether there was a good reason for the failure. The burden was on the claimant to provide an explanation, and relying on alleged failures by legal representatives might not be sufficient. It should have waived privilege and enabled the lawyers to explain their conduct, Devon & Cornwall Autistic Community Trust (t/a Spectrum) v Cornwall CC  EWHC 129 (QB) applied. Accordingly, it had not discharged the burden of properly explaining the reason for the failure. The third stage was to assess all the relevant circumstances. The claimant had shown a cavalier disregard for the procedural rules concerning the defence to counterclaim. Litigation could not be conducted efficiently and at proportionate cost if a party ignored the rules. Taking everything into account, it was not a case where the court should exercise its discretion to grant the claimant relief. Therefore, the default judgment stood and the claimant was estopped from pursuing its original claim against the second defendant (see paras 21, 24, 28-29, 47-50, 58-66, 93-94 of judgment).