Going Behind A Judgment Is No Easy Feat

Liquidator’s Power To Go Behind A Judgment

The following is an extract from the helpful case on this topic of International Brands USA Inc v Goldstein & Anor [2005] EWHC 1293 (Ch) that neatly summaries the position on a Liquidator going behind a Judgment with reference to various authorities.

It is clear that it can be done in certain instances in the interests of justice:

It was common ground that there is a well-established principle that a liquidator or a trustee in bankruptcy has the power to inquire into the consideration for a judgment debt when adjudicating upon a proof of debt. The rationale for this is that otherwise a debtor might, by default, suffer judgment without any, or any adequate, consideration and thereby deprive his just creditors of their rights: see ex parte Kibble (1875) LR 10 Ch App; ex parte Lennox (1885) 16 QBD 315. However, the judgment or order is conclusive, unless the consideration (i.e. the cause of action or the substance of the claim) can be questioned: see Re Beauchamp [1904] 1 KB 572. In practice this means that the validity of the judgment debt will only be inquired into where there is evidence of fraud, collusion, or some other miscarriage of justice.

In McCourt and Siequien v Baron Meats Limited and the Official Receiver [1997] BPIR 114 at 120-121, Warner J (with whom Peter Gibson J agreed) summarised the authorities as laying down the following principles:

“(1) A court exercising the bankruptcy jurisdiction (‘a bankruptcy court’) although it will treat a judgment for a sum of money as prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum may, in appropriate circumstances, go behind the judgment, that is to say, inquire into the circumstances in which the judgment was obtained and, if satisfied that those circumstances warrant such a course, treat it as not creating or evidencing any debt enforceable in bankruptcy proceedings.

(2) The reason for the existence of that power of a bankruptcy court is that such a court is concerned not only with the interests of the judgment creditor and of the judgment debtor, but also with the interest of the other creditors of the judgment debtor. The point was succinctly made by James LJ in Ex Parte Kibble, Re Onslow (1875) LR 10 Ch App at pp 376-377 …

(3) It follows that the grounds upon which a bankruptcy court may go behind a judgment are more extensive than the grounds upon which an ordinary court of law or equity may set it aside.

(4) In particular, a bankruptcy court will go behind a judgment if satisfied that the judgment creditor manifestly had no claim against the judgment debtor upon which the judgment could have been founded. Thus, in Ex Parte Kibble the court went behind a judgment obtained by default which was founded on a bill of exchange drawn by the debtor during his infancy. In Ex Parte Banner, Re Blythe (1881) 17 Ch D 480 it went behind a judgment giving effect to a compromise of an action brought by one party to a fraud against the other party to it for the fruits of it. Re Lennox, ex parte Lennox (1885) 16 QBD 315 was a somewhat similar case. In that case the court ordered an inquiry into the facts because the debtor, who had submitted to judgment, tendered evidence to the effect that the debt on which the judgment was founded never really existed but was based on the fraud of the creditor. Lastly, in Re Fraser (above) the court went behind a judgment obtained by the holders of a bill of exchange against a former partner in the firm in whose name the bill had been accepted. He was not liable on the bill, but his defence to an action on the bill had been so ineptly conducted that judgment had been obtained against him under Ord 14 and that an application made on his behalf for the judgment to the set aside had failed.

(5) There are two stages in bankruptcy proceedings at which a court may be called upon to exercise the power in question. There first is at the hearing of a petition, when the court has to consider whether or not to make a receiving order ….”

In Dawodu v American Express Bank [2001] BPIR 983, Etherton J adopted these propositions subject to the further interpretation of “miscarriage of justice” at 990:

“… the cases establish that what is required before the court is prepared to investigate a judgment debt in the absence of an outstanding appeal or an application to set is aside is some fraud, collusion or miscarriage of justice. The latter phrase is of course capable of wide application according to the particular circumstances of the case. What … is required is that the court be shown something from which it can conclude that had there been a properly conducted judicial process it would have been found or very likely would have been found that nothing was in fact due to the claimant.”

Finally, in Re Menastar Finance Limited (in liquidation) [2003] 1 BCLC 338, Etherton J confirmed the quasi-judicial position of the liquidator who has to determine whether to accept or reject a creditor’s proof. In that case, he held that a liquidator was entitled to refuse to go behind a judgment obtained in proceedings which were uncontested by the company on the basis that the company and its parent had themselves effectively engineered a situation whereby the company did not contest the claim. He helpfully summarised the law at paragraphs 43 to 51 of his judgment.

“43. There is a long line of authority going back to the 19th century establishing the principle that, on making a winding up order or a bankruptcy order, and, in the case of both personal and corporate insolvency, in considering whether to admit a creditor’s proof based on a judgment debt, the court can in appropriate circumstances go behind the judgment to see whether the debt is truly due.

  1. The power of a liquidator is, in this respect, no different from that of the court itself, since the liquidator, in deciding whether to accept or reject a creditor’s proof in whole or in part, is acting in a quasi judicial capacity: see Tanning Research Laboratories Inc v O’Brien [1990] 8 ACLC 248 at p253, citing Re Britton & Millard Limited [1957] 107 LJ 601. His statutory duty is to ensure that the company’s property is collected in and applied in satisfaction of its liabilities pari passu among its proper creditors.
  2. In deciding whether to go behind the judgment debt, and, if so, in appraising the validity of the creditor’s claim, neither the court nor the liquidator nor the trustee in bankruptcy is limited to the evidence that was before the court when it gave its judgment: see re Trepka Mines Ltd [1960] 1 WLR 1273.
  3. The rationale behind the principle is that the duty of the liquidator is to ensure that the assets of the insolvent company ‘are distributed amongst those who are justly, legally and properly creditors …’: see re Van Laun [1907] 2 KB 23, 29, per Cozens-Hardy MR, and also Ex parte Kibble [1874] 10 Ch.App 373 at 376-377, per Sir W.M. James LJ. The same is equally true of the trustee of a bankrupt.
  4. In Van Laun, the Court of Appeal approved the way the matter had been put by Bigham J at first instance, who said ([1909] 1 KB 155, 162-163):

‘The trustee’s right and duty when examining a proof for the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him. In the present case the trustee desires to satisfy himself that the claims for costs represent a real indebtedness. He can only do this by seeing and examining the bills. When he sees them, it may be that he thinks them fair and reasonable and, if so, he will probably admit the truth. But until Mr Chatterton furnishes him with the means of forming an opinion I think the trustee cannot do otherwise than reject the proof.’

  1. It is equally well established that the court (and the liquidator or trustee in bankruptcy) will not, as a matter of course, look behind every judgment debt and consider afresh the validity of the debt. In re Flatau [1889] 22 Ch.D 83, 85, Lord Esher MR said:

‘It is not necessary now to repeat that, when an issue has been determined in any other court, if evidence is brought before the Court of Bankruptcy of circumstances tending to show that there has been fraud or collusion or miscarriage of justice, the Court of Bankruptcy has power to go behind the judgment and to enquire into the validity of the debt. But that the Court of Bankruptcy is bound in every case as a matter of course to go behind a judgment is a preposterous proposition.’

  1. There has been some debate before me as to the circumstances, outside fraud and collusion, in which the court will (and a liquidator or trustee in bankruptcy should) go behind a judgment in order to examine the validity of the creditor’s proof. In re Flatau, as has been seen from the passage I have quoted, Lord Esher MR referred to circumstances in which there has been a “miscarriage of justice”. In the earlier case of re Lennox [1886] 16 QBD 315, 323, Lord Esher MR said that the court is bound to look into the alleged debt ‘upon a sufficient case being shewn’. In Van Laun Buckley LJ, drawing the two statements of Lord Esher MR together, said (at [1907] 2KB p31):

‘If there be a judgment it is not necessary to show fraud or collusion, it is sufficient, in the language of Lord Esher, to show miscarriage of justice – that is to say, that for some good reason there ought not to have been a judgment.’

  1. Many of the authorities were reviewed by Warner J in McCourt v Baron Meats Ltd [1997] BP1R 114. Warner J, with whose judgment Peter Gibson J agreed, said (at p120) that the bankruptcy court would ‘in appropriate circumstances’ go behind the judgment, that is to say, inquire into the circumstances in which the judgment was obtained and, if satisfied that those circumstances warrant such a course, treat it as not creating or evidencing any debt enforceable in bankruptcy proceedings.
  2. Finally, in Dawodu v American Express Bank [2001] BPIR 983, I said (at p990), by way of observation on the summary of the law by Warner J in the McCourt case: …

‘what is required before the court is prepared to investigate a judgment debt, in the absence of an outstanding appeal or an application to set it aside, is some fraud, collusion or miscarriage of justice. The latter phrase is of course capable of wide application according to the particular circumstances of the case. What in my judgment is required is that the court be shown something from which it can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant.'”

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