Bankruptcy Hearing - Challenging the Validity of a Debt behind a Judgment Debt

1. Where a creditor bankruptcy petition is founded upon a judgment debt (or a sum ordered to be paid), and the proper procedure for bring the petition has been completed, the judgement debtor/respondent to the petition will have only a limited selection of grounds upon which he/she can resist the Bankruptcy Court adjudicating the judgment debtor as bankrupt.

2. This article will consider one ground for resisting the petition, namely, that the Bankruptcy Court should: (a) go behind the judgment debt because the judgment debt was obtained as a result of fraud, or collusion or miscarriage of justice, and consequently (b) decline to enforce the judgment debt through the making of a bankruptcy order because there is, in truth, no debt[1]. Such jurisdiction was described by Registrar Briggs in Barclays Bank v Atay [2015] EWHC 3198 (Ch), at 12, as ‘extraordinary’.

3. Readers should note that: (1) the governing Insolvency Rules are due to change on 6th April 2017. Prior to that date, the Insolvency Rules 1986 apply, thereafter, the Insolvency Rules 2016 (SI 2016/1024) will apply; (2) debtors bankruptcy petitions now operate under a new separate scheme (see ss. 263H-263O of the Insolvency Act 1986); creditors are not involved in the presentation of the debtors bankruptcy petition before the adjudicator (see Budniok v Adjudicator, Insolvency Service [2017] EWHC 368 (Ch), Registrar Baister, paragraphs 65-67)

The Governing Law

4. The Insolvency Rules 1986, provide in Rule 6.25(1), that the Court may at a bankruptcy hearing make a bankruptcy order where satisfied of certain conditions. Rule 6.25(1) reads:

‘On the hearing of the petition, the court may make a bankruptcy order if satisfied that the statements in the petition are true, and that the debt on which it is founded has not been paid, or secured or compounded for.’

5. Section 271(1) of the Insolvency Act 1986 states that the court shall not make a bankruptcy order unless it is satisfied that the debt in respect of which the petition was presented has been neither paid nor secured or compounded for.

6. Section 266(3) of the Insolvency Act 1986 provides:

‘The Court has a general power if it appears to it appropriate to do so, on the grounds that there has been a contravention of the rules or for any other reason, to dismiss a bankruptcy petition or stay proceedings on such a petition, and where it stays proceedings on a petition, it may do so on such terms and conditions as it thinks fit.’

7. Arden J in Westminster City Council v Parkin [2001] BPIR 1156 stated at 1157B, that this ‘…gives the court an unusual but general power where there has been a contravention of the Rules or ‘for any reason’ to dismiss a petition or to stay proceedings on a petition.’ Peter Smith J in Re Micklethwait [2003] BPIR 101, at paragraph 6 described the power set out in the section as ‘quite unfettered’, and at paragraph 9 said ‘…the power can be exercised if the making of a bankruptcy order might cause an injustice.’

8. Returning to Rule 6.25, emphasis is placed on the word ‘may’, in ‘…the court may make a bankruptcy order…’ Evans-Lombe J in In Eberhardt v Mair [1995] 1 W.L.R. 1180 said at 1186:

‘…as rule 6.25(1) makes plain the making of a bankruptcy order is a matter of discretion. It has long been established that the bankruptcy court has a power and indeed a duty to ensure that a bankruptcy is not instituted in circumstances which amount to injustice and has exercised a power to inquire into the consideration for the petitioning debt even to the extent of going behind judgments: see such cases as Ex parte Kibble (1875) L.R. 10 Ch.App. 373’

Preliminary Issue - Meaning of Consideration and a Receiving Order

9. In the above passage (and in subsequent passages), the word ‘consideration’ has what is now an atypical meaning. It is used to mean cause of action or substance of the claim. So, essentially, Evans-Lombe J in Eberhardt was stating that the Bankruptcy Court has a power to inquire into the cause of action or claim that preceded/produced the judgment debt - for instance, a secondary obligation to pay damages upon breach of a contractual primary obligation; or a claim arising from a breach of a common law duty of care owed by the judgment debtor to the petitioning creditor.

10. While on the subject of language in the caselaw, it is also appropriate to note here that some old authorities refer to the now obsolete ‘receiving order’ – which was a preliminary order for the protection of the estate (under s4 and s7 Bankruptcy Act 1883; s3 and s7 of Bankruptcy Act 1914) – it was a prelude to a bankruptcy order.

Inquiry into the Substance not Form of the Consideration

11. This inquiry into ‘consideration’ (meaning, of course, the cause of action or substance of the claim) which produced the judgment debt, is an enquiry into substance and not form. In Re Beauchamps [1904] 1 KB 572, the Court of Appeal said at 581: ‘the fact that the judgment may be irregular or wrong in form is no sufficient reason for going behind the judgment and dismissing the petition.’ Later, the Court said at 582: ‘…the power of the Court of Bankruptcy to go behind a judgment is a power to inquire into the consideration for and not into the form of the judgment. The judgment, in our opinion, is conclusive, unless the consideration can be questioned.’

12. As concisely stated in Ex parte Kibble, re Onslow, (1874-75) L.R. 10 Ch. App. 373, by G.Mellish LJ at 378, the ‘real question must always be whether there was a good consideration for the debt’. 

Challenging a Judgment Debt after Presentation of the Petition

13. It is not possible to mount this challenge to the judgment debt (as distinct from an unproven debt) before presentation of the petition. The challenge may not be run as part of any application to set aside a statutory demand. In the current Practice Direction - Insolvency Proceedings, there is part 11.4, entitled 'Setting aside a statutory demand'; in that part, there is paragraph 11.4.4, which reads:

'Where the debt claimed in the statutory demand is based on a judgment, order, liability order, costs certificate, tax assessment or decision of a tribunal, the Court will not at this stage inquire into the validity of the debt...'

Speaking in relation to a earlier version of the Insolvency Practice Direction, Laddie J in Everard v The Society of Lloyd’s [2003] EWHC 1890 (Ch), said at paragraph 59:

‘…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… It is only one particular category of debt, namely judgment debts, which have to be challenged at the petition stage.’

14a. In Dias v London Borough of Havering [2011] EWHC 172 (Ch) ('Dias'), at paragraph 24, the Court noted an application to set aside a statutory demand failed as ‘…the normal practice of the court is not to go behind such an order or to inquire into the validity of the debt at the statutory demand stage…’

14b. However, where the server of the statutory demand (the 'Statutory Demander') is not the original judgment creditor (i.e. the Statutory Demander claims to be the legal assignee of the debt contained in the judgment), the recipient of the statutory demand (the 'Statutory Demandee') is entitled to challenge the validity of the assignment. That is not an impermissible challenge to the judgment itself, but is a legitimate challenge to the Statutory Demander's claim to be the Statutory Demandee's creditor. Reference should be made to section 136 of the Law of Property Act 1925, entitled 'Legal assignments of things in action', and (1) Promontoria (Oak) Ltd v Emanuel [2021] EWCA Civ 1682 (paragraphs 49 to 56); and (2) Emmott v Michael Wilson & Partners Ltd [2022] EWHC 2682 (Ch) (paragraphs 28 to 31)

14c.. As an aside, Practice Direction - Insolvency Proceedings paragraph 11.4.4 also states that '...the Court will not at this stage...as a general rule...adjourn the application to await the result of an application to set aside the judgment, order, decision, costs certificate or any appeal.' - the first 'application' in this sentence being a reference to the application to set aside a statutory demand. In other words, the bankruptcy court will not, as a general rule, accede to an application to adjourn, where the bankruptcy court has before it: (i) an application to set aside a statutory demand on the basis that the statutory demand is based on a judgment debt, liability order, costs certificate, tax assessment or decision of a tribunal (as the case maybe), and (ii) an application to adjourn, founded upon the submission that there is, in the proceedings/process in which that judgment debt, liability order, costs certificate, tax assessment or decision of a tribunal (as the case maybe), was made, an extant application to set that judgment debt, liability order, costs certificate, tax assessment or decision of a tribunal (as the case maybe) aside, or an extant appeal against the said judgment debt, liability order, costs certificate, tax assessment or decision of a tribunal (as the case maybe).

14d. In King v Bar Mutual Indemnity Fund [2023] EWHC 1408 (Ch) (HHJ Kelly, sitting as a judge of the High Court), an argument that a personal insolvency statutory demand should be set aside under r.10.5.(5)(b) as 'disputed', failed where the debt founding the statutory demand was an interim costs order. At paragraph 121, the judge said of the argument:

'this goes behind Paragraph 11.4.4 of the Practice Direction: Insolvency Proceedings [2020] BCC 698. Moreover, the Costs Order is not even subject to any appeal or application to set it aside. It is therefore unrealistic to suggest that it is “disputed”.'

The Threshold and the Court’s Election to Inquire into Judgment Debt

15. The Bankruptcy Court will not undertake an enquiry in the validity of the debt behind a judgment debt, unless there is evidence tending to show that there has been fraud, or collusion or miscarriage of justice. This initial threshold must be met, as a precondition to an enquiry. As stated by Lord Esher MR in Re Flatau Ex p. Scotch Whiskey Distillers Ltd, [1889] 22 QBD 83, at 85-86[2]:

‘…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 had 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.’[3]

16. The Bankruptcy Court is not constrained to only undertake the enquiry, when invited to by a party. On its own initiative and independently of the conduct of the parties or anyone else, the Court may elect to go behind the judgment debt. In Re Lennox (1885) 16 QBD 315, Lord Esher MR said at 322, that ‘the Court of Bankruptcy is entitled to see that it is not put in motion without foundation, when there is no petitioning creditor's debt at all. The Court has that right independently of the conduct of the debtor or of the creditor or of any one else….The Court is not estopped by the conduct of the parties, but it has a right to inquire into the debt.’[4]

17. A very significant passing of time since the judgment debt was entered, will not prevent the Bankruptcy Court going behind the judgment debt, if evidence triggers a ground for inquiry[5].

Evidential Strength of Judgment Debt 

18. A judgment debt is evidence that the judgment debtor does indeed owe the judgment creditor the sum. However it is not conclusive evidence before the Bankruptcy Court. The strength of this evidence varies depending on how the judgment was obtained – by default[6], by consent or after a contested trial. Lord Esher MR in Lennox was concerned with a judgment debt obtained by consent. He said at 323:

‘It cannot be doubted that a judgment is prima facie evidence of a debt, and that a judgment or order to which a debtor has consented is far stronger evidence against him of the validity of the debt for which it purports to be given than mere judgment by default. It is very strong evidence against him. Nevertheless it seems to me that, upon certain allegations being brought forward, the Court is entitled to enquire into the alleged debt and the Court, exercising a judicial authority, is bound to do so upon a sufficient case being shown. Circumstances may be alleged that would shew that the judgment ought to be disregarded in bankruptcy. ’

19. It could be said that unless collusion or fraud is alleged, the judgment debtor would have been incentivised to contest the claim that produced the judgment debt, rather than capitulate and agree to a consent order, if his defence had had merit. The judgment debtor’s willingness to capitulate could therefore be said to be evidence that the claim that a debt was owed, was valid.

Basis for the Power

20. The Bankruptcy Court will not allow its processes to be used to produce injustice. To avoid injustice, the Bankruptcy Court is empowered to go behind the judgment debt founding the petition. However, the dominant reason for the power is not to avoid the risk of injustice to the judgment debtor himself. Indeed there is only modest authority[7] for the proposition that it exists for the protection[8] of the judgment debtor at all[9]. Very much the dominant basis for recognising this power rests on the need to protect the general body of genuine unsecured non-preferential creditors of the judgment debtor’s estate, from having their ordinary right to sue the judgment debtor on their respective causes of action/claims, unjustifiably interfered with. Genuine unsecured creditors should not have their rights as against the judgment debtor replaced with an entitlement to prove for a dividend in a bankruptcy, unless the petitioner is genuinely a creditor of the judgment debtor[10]. Lord Esher MR in Re Fraser [1892] 2QB 633 said at 636-637:

'The decision is based upon the highest ground - viz., that in making a receiving order, the Court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts, and that the Court ought not to exercise this extraordinary power unless it is satisfied that there is a good debt due to the petitioning creditor. The existence of the judgment is no doubt prime facie evidence of a debt; but still the Court of Bankruptcy is entitled to inquire whether there really is a debt due to the petitioning creditor.’

21. Lord Esher MR said in Hawkins, at 408:

'We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties; it is a matter which will affect and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should or should not be made, which will or may result in the debtor being made a bankrupt. The Court will go into the whole matter, and see whether upon the whole it is fair to the whole body of creditors that the man, on the particular transaction between himself and the petitioning creditor, should have a receiving order made against him. In the same way, when a creditor comes to prove in bankruptcy the Court will go behind the judgment, and inquire into the whole transaction which preceded it. To make a man a bankrupt is obviously a strong interference with the rights of the general body of his creditors. Each creditor is materially affected to the extent that he cannot by his own diligence get the whole of his debt. From the moment of bankruptcy, though he be the most diligent of the creditors, he has to go into equal competition with the most idle.'

22. The process exists to identify bogus petitioning creditors, and to prevent the judgment debtor entering bankruptcy when the bogus creditor has no standing to instigate a petition for that purpose. Unwarranted judgment debts can arise through the (a) mismanagement of a defence, by failing to file an acknowledgment of service/file and serve a defence; (b) mismanagement of a defence by unwisely/rashly compromising on unfavourable terms, by way of a consent order; or (c) collusive arrangements between the judgment debtor and favoured third parties, co-operating to produce a judgment debt when no debt actually existed (see Ex parte Kibble, re Onslow,(1875) LR 10 Ch App 373).

No Issue Estoppel (or Res Judicata) 

23. There is no Issue Estoppel (or Res Judicata)[11] as between any determination in the ordinary civil court that promulgates the judgment debt, and the Bankruptcy Court. Evans-Lombe J in Eberhardt said at 1187:

‘It seems to me that just as the bankruptcy court would, in an appropriate case, go behind a judgment for the petitioning debt so it would go behind any issue estoppel resulting from a judgment in the proceedings themselves. It follows, it seems to me, that no issue estoppel can be finally binding on a court of bankruptcy at the point when that court comes to consider whether to make a bankruptcy order.’

24. In Fraser, Lord Esher MR said at 637, after referring to an unsuccessful challenge in the civil court to the impugned judgment:

‘But that decision was an adjudication upon the question whether the judgment could be set aside at the instance of the judgment debtor himself; the present question is whether, the judgment standing as a good judgment, the debt can in the Court of Bankruptcy constitute a good petitioning creditor's debt.’

Collusion

25. One ground for initiating an inquiry is evidence of ‘collusion’. This is a concern that a judgment debtor in financial peril (or at least anxious about the position), and a third party, collude to manufacture the judgment debt (whether through judgment by consent, judgment by default or more rarely judgment following trial) as a device to defeat the judgment debtor’s genuine creditors.

In Ex parte Kibble, re Onslow, (1875) LR 10 Ch App 373 James LJ said, at 376–377:

‘It is the settled rule of the court of bankruptcy on which we have always acted, that the court of bankruptcy can enquire into the consideration for a judgment debt. There are obviously strong reasons for this, because the object of the bankruptcy laws is to procure the distribution of a debtor's goods amongst his just creditors. If a judgment were conclusive, a man might allow any number of judgments to be obtained by default against him by his friends or relations, without any debt being due on them at all. It is therefore necessary that the consideration of the judgment should be liable to investigation.’

26. Lopes LJ in Re Hawkins (1895) 1QB 404 put it this way, at 410:

‘…the Court of Bankruptcy is not bound by a judgment at law, but is entitled to investigate all the facts of the case whenever, but not before, a prime facie case impeaching the judgment is made out. Otherwise a man might defeat all his just creditors by allowing judgment to be taken by default or consent. The principle appears to be that it would be… unjust to the general body of creditors to permit one creditor, by means of a judgment which had no solid foundation, to obtain an undue advantage over them, and obtain payment of his alleged debt in full to their prejudice.'

27. Undiscovered bogus judgment debts, proved and admitted for dividend from the bankrupt estate, stand pari passu along side the genuine debts/judgment debts of unsecured creditors to a bankrupt estate. When a distribution to unsecured creditors takes place, the available funds for distribution to the unsecured creditors will be divided pari passu over an enlarged number of apparent debts. Correspondingly, each unsecured creditor for a dividend distribution will receive a reduced/diluted dividend (pence in the pound). Genuine creditors will get less than they are entitled to, and some bogus creditors will received undue dividends.

28. A collusive compromise, encapsulated in a judgment by consent, is a way of manufacturing bogus judgment debts. Lopes LJ in Hawkins said at 410:

‘It is said, however, that although that may be true with regard to an ordinary judgment, a judgment founded upon a compromise by the parties is a different thing, and ought not to be subjected to the same investigation as may be applied to a judgment not so circumstanced. Now, I see no distinction. In my judgment, both an ordinary judgment and one obtained by compromise may be inquired into directly, but not before, it is made out that either the one or the other has been improperly or unfairly obtained. I do not go the length of saying that it must have been fraudulently obtained; it is sufficient, in my opinion, if it is made out that the judgment was improperly or unfairly obtained.’

29. Lord Esher in Hawkins  put it this way, at 408:

‘…a judgment obtained by a compromise does not of itself stop the Court from going behind it. We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties; it is a matter which will affect and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should or should not be made, which will or may result in the debtor being made a bankrupt. The Court will go into the whole matter, and see whether upon the whole it is fair to the whole body of creditors that the man, on the particular transaction between himself and the petitioning creditor, should have a receiving order made against him.’

30. An observation that could be made, is that while a person in or on the verge of insolvency might readily collude to produce bogus creditors, for use at the proof and admission of debts for entitlement to a dividend stage, it is hard to conceive what motivation a collusive bogus creditor might have to actually actively seek to place the judgment debtor into bankrupt, by having carriage of a petition[12]. The creditor receives no preference when it comes to proving entitlement to a dividend, for also having been the petitioning creditor. It may be a rare case that involves a collusive bogus creditor having presented a bankruptcy petition. 

Miscarriage of Justice 

31. One ground for initiating an inquiry is evidence of ‘miscarriage of justice’. In the leading case of Dawodu v American Express [2001] BPIR 983, Etherton J considered an appeal by Mr Dawodu against a bankruptcy order founded on a petition in respect to a ‘series of judgment debts and interest’ amounting to £15,000. None of the orders relied upon by the petitioning creditor American Express had been appealed by Mr Dawodu.

32. After referring to the established threshold of ‘some fraud, collusion, or miscarriage of justice’, Etherton J in Dawodu said at 990D:

‘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. It is clear that in those circumstances the Court can enquire into the judgment and the judgment debt, even though the debtor himself has previously applied to have the judgment set aside, and even though that application has been refused and that refusal has been affirmed by the Court of Appeal — see Re Fraser [1892] 2QB 633.’

33. The case referred to, Re Fraser [1892] 2QB 633, concerned a judgment debtor, who had exhaustively challenged in the ordinary civil courts, the imposition of a judgment debt upon him, but without success. In the ordinary civil courts, his application to set aside the judgment debt had failed before a Master (twice), Judge (once), Divisional Court (once) and Court of Appeal (once). But this presented no bar in the Bankruptcy Court. The judgment debtor was successful at resisting a bankruptcy petition founded upon the judgment debt, the registrar deciding that there was no good petitioning creditor debt. The bankruptcy petition was dismissed, and the Court of Appeal later refused to disturb this in the subsequent appeal. In Re Van Laun [1907] 2 KB 23, though not the ratio of the case, Buckley LJ said at 31 that to show 'that for some good reason there ought not to have been a judgment' is to show miscarriage of justice.

34. A recent case is Barclays Bank v Atay [2015] EWHC 3198 (Ch); [2016] B.P.I.R. 12. Atay concerned a judgement debtor resisting a bankruptcy petition on the ground, amongst others, that the Bankruptcy Court should go behind the judgment debt and consider the fairness of the compromise agreement recorded in a Tomlin-like order (a type of structured order by consent). That Tomlin Order permitted judgment to be entered if the schedule terms were breached. The argument was made that the compromise agreement (compromising a claim for over £1.8m) was structured unfairly in that the judgment debtor was to pay £200,000 by instalments, but if he fell into 3 months arrears, judgment could be entered against him for £300,000. This ‘Differential’ was said to make the judgment for £300,000 (the judgment debt), later obtained following default in paying the instalments, unfair.  Accordingly, the issue raised for adjudication in the Bankruptcy Court was whether, behind the judgment debt there had in fact been a valid obligation to pay money (i.e. to pay £300,000). That obligation existed within the compromise agreement, and so the case involved the question of whether the compromise agreement could be impugned.

35. The Bankruptcy Court in Atay quoted from a passage in Law of Insolvency, 4th ed., paragraph 6-116, on judgment debts from compromise agreements:

‘The ability of the Bankruptcy Court to go behind a judgment where necessary was well established by a series of 19th Century cases and although this species of scrutiny is not carried out as a matter of course, it is always possible for it to be done if it is expressly requested, whether by the debtor himself or by the trustee in bankruptcy. Nor is it any obstacle to the invocation of this doctrine that the debtor has originally consented to the very judgment against himself which he is now attacking, or that his earlier appeal from the judgment was dismissed. One justification for the existence of this power is that a debtor might connive with others to allow a number of bogus default judgments to be entered against himself by his ‘allies' who could rescue some of his estate on his behalf by pater proving for the debts in the bankruptcy. But the far more usual occasion for invoking this doctrine is when it is the debtor who will otherwise suffer injustice, and this is particularly capable of occurring when the judgment was obtained by a compromise of action or by default. A default judgment, by its very nature involves a one-sided presentation of the facts which may lack objectivity and may even be inaccurate or unfair, whilst it may equally be possible to show that the terms upon which an action was compromised were unfair or unreasonable from the debtor's point of view. In either situation if the court accepts that the result is unfair the petition may be dismissed’.

36. It was said in Atay that had there been: (a) factors vitiating the judgment debtor’s consent to be bound by the compromise obligations; or (b) grounds for concluding that a properly conducted judicial process would have found nothing due on the underlying consideration[13] (here the claim for over £1.8m), there would in fact have been no true debt and so the petition should be dismissed. However, Registrar Briggs in Atay said at paragraph 12:

'[counsel for the judgment debtor] accepts that there are no vitiating factors such as fraud, collusion, mistake, undue influence or misrepresentation. No particulars of miscarriage of justice have been identified. I accept that the jurisdiction may extend to compromise agreements but doubt that mere unfairness as to the terms, from the stand point of the debtor is sufficient. Absent a vitiating factor there has to be a miscarriage of justice to in order to engage the jurisdiction. To test whether there has been a miscarriage of justice the court can ask, if following a properly conducted judicial process where argument is put and tested, preferably by all parties, it would be found that nothing is in fact due. Parties may compromise actions for all sorts of reasons which are not necessarily spelt out when the agreement is reduced to writing.’

37. In practice, the threshold for miscarriage of justice is not  static; the injustice of the compromise can be affected by whether the parties entered into it with their own legal advisors advice. The assistance of lawyers raises the threshold.  Registrar Briggs said at paragraph 12 of Atay:

‘The threshold for invocation of the jurisdiction becomes more difficult to meet where a compromise is agreed and all parties are legally represented. The view given by the author of ‘Law of Insolvency’ is where a debtor was properly represented by counsel and or solicitors at the negotiations which led to the compromise, there has to be some compelling reason to go behind a judgment. The compelling reason is a requirement to find that there is a miscarriage of justice.’

38. On the facts of Atay, the ground of opposition failed as there was no vitiating factors, and no instances of miscarriage of justice. There was ‘…nothing compelling about the circumstances…’ to lead to a conclusion that the Bankruptcy Court should have go behind the Tomlin-like Order or judgment thereon. The Registrar said at paragraph 13 and 14:

‘When viewed against the sum [the petitioner] was claiming under the guarantees the Differential does not appears out of place. Although I heard no submissions on the issue, I infer from the fact that [the judgment debtor] was represented by a legal team at the time of the compromise, that the Differential is likely to represent a reasonable price for default. When agreeing the Differential the parties may have taken into account interest, potential costs for advice from solicitors and counsel, the cost of obtaining judgment and the likely costs of enforcement procedures or the opportunity cost of money.

I infer that [the judgment debtor] was acquainted with the merits of any defence he had advanced in the main guarantee proceedings; knew that the compromise with [the petitioner] was in part, at least, based on a statement of affairs he had rendered; knew the consequences of default and was prepared to pay the Differential if default arose. He may have been confident that default would not arise due to a breach of warranty but the parties could not have been sure that [the judgment debtor] would never default on repayments as they stretched out long into the future: future events may be unpredictable.’

However, there are signs that the jurisdiction under 'miscarriage of justice' has narrowed significantly. See below under subheading 'Miscarriage of Justice - Procedural Miscarriages but not Substantive Miscarriages?'

Fraud 

39. One ground for initiating an inquiry is evidence of ‘fraud’. This issue of a judgment debt obtained by fraud arose in Re Blythe (1881) L.R. 17 Ch. D. 480 though not during the petitioning stage, but while the bankrupt estate was being administered by the trustee in bankruptcy. The trustee in bankruptcy had rejected a Proof of Debt for an entitlement to a dividend, on the basis that the judgment creditor’s judgment debt had been obtained by fraud - the judgment creditor had had no good consideration leading to the judgment debt. The judgment debt was contained in an order by consent, arising from compromise agreement between the claimant/employee (‘employee’) and the employers/prospective judgment debtors/bankrupts (‘employers’), the employee having claimed to be owed some commission monies which both sides had know was entered into the business records to defraud some underwriters on an insurance claim. The employers had compromised the claim just before trial commenced, when they did not want to go into the witness box and admit the fraud on the underwriters, or commit a further perjury.

40. James LJ said at 487:

‘…in order to conceal the transaction, the name of [the employee] was used, with his consent and with his knowledge, for the purpose of cheating other persons. That is the plain truth, expressed in simple English language; the account was entered and the bargain was made in the name of [the employee] in order that a fraud might be committed upon the underwriters, or, if not upon them, upon the co-owners. Then the money was received by [the employers], and [the employee], knowing in what a position they had put themselves, knowing how, in order to carry into effect this scheme, the accounts had been made out and statements made representing him as the real owner of the money, when he knew perfectly well that he had no more right to any part of the money than anybody else in the world, that he was only seeking to obtain a share of that which was in truth plunder intended to be made at the expense of other persons, brought his action. He brought his action, based on the fact that his name had been used as the real owner of the money, and under the circumstances the men who had employed him, or had used him as a tool for the purpose of committing the fraud, were not in a position effectually to resist his claim by going into the witness box, and by reason of the pressure thus put upon them they were driven to submit to an order for a small sum given by way of compromise. They have become bankrupts, and their other creditors, who no doubt include the very persons upon whom this fraud was committed, say that the compromise ought not to stand, that it cannot be the foundation of a good debt in bankruptcy. I am of the opinion that it would be a shocking violation of justice, truth, and honesty if we were to allow a claim, originating in the circumstances which I have mentioned, based upon a compromise entered into in the manner I have described, to prevail in competition with the honest creditors of the bankrupts.’

41. Brett LJ said in Blythe at 490:

‘In my view the judgment in the present case was a dishonest judgment, obtained by dishonest pressure, not because there was any doubt about the cause of action, not even because either party believed that there was any doubt about the cause of action, but, both parties knowing that there was no real cause of action, the one endeavoured to oppress the other by reason of that other's infamy known to him, and the other yielded, not because he believed there was, or doubted whether there was, a cause of action, but because he did not dare to face the consequences of his own infamy.

Under these circumstances it seems to me that to allow the other creditors to be ousted of their rights by such a judgment would be a monstrous conclusion, and one not warranted by the law. And, if we do go behind the judgment, it seems to me that there is not and never was any colour or pretence for saying that there was any debt due from [the employers] to [the employee].’ 

General Propositions

42. Fortunately, Warner J in McCourt v. Baron Meats Limited (1997) BPIR 114, at 120, drew together and set down, general propositions for this area, propositions he considered to be established beyond question:

'(1) A court exercising the bankruptcy jurisdiction (“a bankruptcy court”), although it can 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 interests of the other creditors of the judgment debtor. 

(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 on 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 ChD 480, he 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 enquiry into the facts because the debtor who had submitted to the judgment tendered evidence to the effect that the debt on which the judgment was founded never really existed, but was based on the fault of the creditor. Lastly, in Re Frazer…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 the judgment had been obtained against him on Ord 14 and that an application made on his behalf for the judgment to be 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. The first is at the hearing of the petition, when the court has to consider whether or not to make a receiving order….The other stage at which the court may be called upon to do so is the stage of proof of debts. The Court will then in appropriate circumstances reject a creditor's proof.’

43. In Dawodo, after quoting the above propositions from McCourt, Etherton J said at 990D:

‘My only qualification to the summary by Warner J. is that 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 it aside, is some fraud, collusion, or miscarriage of justice.' 

44. McCourt and Dawodu were followed without demur in Henderson J in Dias, paragraph 34, and Registrar Briggs in Atay, paragraph 11.

Judgment Debt consists of a Liability Order for Unpaid Local Tax

45. A judgment debt can consist of a liability order arising because of unpaid local tax, whether non-domestic national rates (i.e. business rates) or domestic, council tax.

46. Notwithstanding a general reluctance within the Bankruptcy court to investigate liability for tax, as recognised in Chamberlin v Revenue and Customs Commissioners [2011] BPIR 691 at paragraph 20, this ‘…general practice appears to have admitted of exceptions in the case of the late council tax…’ London Borough of Lambeth v Simon [2007] BPIR 1629 was provided as an example.

47. In Simon, the Bankruptcy Court dismissed the billing authority’s petition based on liability orders obtained for unpaid council tax. The petition was dismissed because the Bankruptcy Court was not satisfied as to the integrity of statements on what liability orders existed and were unpaid. The billing authority had a history of presenting incomplete/inconsistency petitions and statement of account, and the Bankruptcy Court was critical of the billing authority for not properly explaining in the current petition, the liability orders, and how the alleged judgment debtor’s payments to the billing authority had been appropriated as between debts. Arguably therefore, contrary to Chamberlin, Simon is not in fact an example of the Bankruptcy Court going behind a judgment (that is, each individual liability order), to consider the grounds for imposing the debt (for instance, looking at whether the judgment debtor was in rateable occupation), but was actually centred around whether the Bankruptcy Court was satisfied that certain liability orders existed and/or had been paid off, such that the Bankruptcy Court could be satisfied that the petition statements were in fact true. On the other hand however, the Court in Simon did make a broad statement, which presumably was suppose to then be applied to its facts; at paragraph 27 it said ‘It is …well established that the Bankruptcy Court has power (and in suitable cases a duty) to go behind a judgment debt or order in order to satisfy itself that the statements in the petition are true and that the debt is properly payable.’

48. A better example for Chamberlin of an exception to the general practice not to go behind tax based judgment debts, would have been Dias (decided a month before Chamberlin) - though Dias is a business rates (non-domestic national rates) liability order case, rather than a ‘late council tax’ liability order case. In Dias, Henderson J considered a billing authority’s bankruptcy petition against a ratepayer for non-payment of 2 liability orders[14a], and a costs order for a failed statutory demand set aside application, the Court confirmed that the Dawodu ‘fraud, collusion, or miscarriage of justice’ gateway test applied equally to going behind liability orders. For an illustrative example of an (unsuccessful) attempt to persuade the Bankruptcy Court to go behind liability orders founding a billing authority's bankruptcy petition, see Tower Hamlets LBC v Naris [2019] EWHC 886 (Ch).

In Lambert v Forest of Dean DC [2019] EWHC 1763 ('Lambert 2019'), ICCJ Mullen, at paragraph 47 said:

'The effect of making a liability order, whether under the 1989 Regulations or the 1992 Regulations, is thus to create a statutory debt that may found a bankruptcy petition. The court will not look behind a statutory debt or a court order unless there is collusion, fraud or a miscarriage of justice.'

Costs Orders

Most courts/tribunals can impose cost orders on parties to litigation.

While there are instances where there seems to be affirmation that a bankruptcy court can go behind a costs order (see (i) Dias related to a costs order as well as 2 liabilities orders; and (ii) the current Practice Direction - Insolvency Proceedings - paragraph 11.4.4 refers to a 'costs certificate'), in the author's view, there is a conceptual problem in this area. That is because, it is judge (justices/judge) who imposes the costs order upon a party. Prior to the costs order being imposed:

(i) the prospective costs order creditor has no right to a costs order against the prospective costs order debtor. This is clear from R. (on the application of Burkett) v Hammersmith and Fulham LBC (Costs) [2004] EWCA Civ 1342; [2005] 1 Costs L.R. 104, wherein Brooke LJ (giving the judgment of the Court of Appeal) stated, at paragraph 46:

'...no right to costs arises until the judge decides that the right exists...he has discretion in creating the right'

In Deutsche Bank AG v Sebastian Holdings Inc [2016] 4 WLR 17, Moore-Bick LJ giving the judgment of the Court of Appeal, said, at paragraph 22:

'...an application under section 51 does not involve the assertion of a cause of action; it is a request for the court to exercise a statutory discretion in relation to the costs of proceedings before it. Section 51 is now the source of the court's discretion to determine who shall bear the costs of proceedings, whether they are parties to the proceedings or third parties.'

In Turner v Thomas & Ors [2022] EWHC 1944 (Ch), a non-party costs order, Zacaroli J observed from the Court of Appeal summary in Grizzly Business Ltd v Stena Drilling Ltd [2017] EWCA Civ 94 at paragraph 51:

3) "The very fact that the making of such an order is discretionary demonstrates that the question is not one of rights and obligations of a non-party, for no obligations exist unless and until the court exercises its discretion...." (Threlfall v ECD Insight Ltd per Lewison LJ at [13])'  (as noted in Re Coplexia Collaborative LLP (also known as Arnstein v Coplexia Collaborative LLP) [2023] EWHC 714 (Ch) by ICC Judge Barber, at paragraph 101)

The costs order is therefore not 'recognising' a pre-existing right/cause of action, as with normal money judgments/orders.

(ii) there is only a contingent liability on the prospective costs order debtor, arising by his participating in litigation, that a judge may impose a costs order upon him. That is true of almost all parties to litigation. In Nortel GmbH (also known as Bloom v Pensions Regulator [2014] A.C. 209; [2013] 3 WLR 504, Lord Sumption said, at 136:

'In the costs cases, I consider that those who engage in litigation whether as claimant or defendant, submit themselves to a statutory scheme which gives rise to a relationship between them governed by rules of court. They are liable under those rules to be made to pay costs contingently on the outcome and on the exercise of the court's discretion. An order for costs made in proceedings which were begun before the judgment debtor went into liquidation is in my view provable as a contingent liability, as indeed it has been held to be in the case of arbitration proceedings: In Re Smith; Ex p Edwards (1886) 3 Morr 179. In both cases, the order for costs is made against someone who is subject to a scheme of rules under which that is a contingent outcome. … Of course, an order for costs like many other contingencies to which a debt or liability may arise, depends on the exercise of a discretion and may never be made. But that does not make it special.'

When a bankruptcy court is then invited to 'go behind' the costs order, what is the bankruptcy court to investigate? Unless the court/tribunal had no power to award costs, it is hard to see how the bankruptcy court can go behind the costs order, and find that there was, in fact, no liability behind the cost order. It seems wrong to ask whether there was, in fact, a debt which the costs order 'recognised', since the inevitable answer is that there was not.

In a winding up petition case, an attempt to argue a costs order (which founded a winding up petition) made by a High Court Judge was 'invalid' or 'flawed', and so incapable of founding a winding up petition, was swiftly dismissed in Re Property Services LDN Ltd [2023] EWHC 1778 (Ch)[14b].

Miscarriage of Justice - Procedural Miscarriages but not Substantive Miscarriages?

The phrase 'fraud, collusion, or miscarriage of justice' has been a part of the law since at least when Lord Esher MR used it in Re Flatau Ex p. Scotch Whiskey Distillers Ltd [1889] 22 QBD 83, at 85-86[2], when he said:

‘…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 had 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.’

The issue is whether the judgment of Etherton J in Dawodu narrowed the jurisdiction, such that, for the Court to go behind a judgment, there must have been a procedural miscarriage of justice. That it is insufficient, to invoke the power, for there to have been (merely) a substantive miscarriage of justice.

In Dawodu, Etherton J said,

'My only qualification to the summary by Warner J. is that 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 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. It is clear that in those circumstances the Court can enquire into the judgment and the judgment debt, even though the debtor himself has previously applied to have the judgment set aside, and even though that application has been refused and that refusal has been affirmed by the Court of Appeal — see Re Fraser [1892] 2QB 633.' [bold added]

In Lambert 2019, ICCJ Mullen, repeating this key part, at paragraph 47 said:

'A miscarriage of justice in this context requires evidence:

‘from which it can conclude that had there been a properly conducted judicial process it would have found, or very likely would have found, that nothing was in fact due to the claimant’

(per Etherton J, as he then was, in Dawodu v American Express Bank [2001] BPIR 983).

The issue is: does the reference to a 'had there been a properly conducted judicial process' mean that the judgment debtor must show, for the Bankruptcy Court to invoke the power, that the ordinary civil court process that resulted in the judgment, was procedurally defective - contained procedural impropriety or unfairness?  

On the one hand, there is:

(a) in Dias, Henderson J at paragraph 35, where he said, after quoting Etherton J in Dawadu:

'There is no question of fraud or collusion in the present case, so the question is whether Mr Dias was the victim of a miscarriage of justice in the sense explained by Etherton J. At first blush, it is hard to see how a case of miscarriage of justice can get off the ground. There is no allegation of procedural impropriety or unfairness by Mr Dias in his witness statement...The appropriate procedure for obtaiing the liability orders was employed, and Mr Dias had the opportunity to attend and present his case at both hearings. The nub of his complaint appears to be that the liability orders were wrong in substance, but in the absence of any effective opposition from him it is hardly surprising that the magistrates' court did not investigate the matter...'

Pausing there. As to this last sentence, while Mr Dias may not have attended the Magistrates Court to put forward an effective opposition to the application by way of complaint for a liabilty order, and so the outcome almost a foregone conclusion, this is: (1) akin to a judgment in default of defence, being entered; not the strongest prima facie evidence that a debt actually existed; and (2) given the judgment debtor's other creditor were not party to the LB of Havering v Mr Dias Magistrates Court proceedings, can hardly be a criticism against them, warranting them losing protection against bogus judgment creditors.

Henderson J in Dias continued, at paragraph 36:

'Nevertheless, counsel for Mr Dias submits that there was a miscarriage of justice. He says that it arises in three ways...'  Henderson J then records Mr Dias' allegations that there were 3 procedural defects in the Magistrates Court proceedings. Each was dismissed as being unfounded. Without returning to any substantive point, Henderson J held, at paragraph 38, that the DJ below (it was an appeal by the debtor against a DJ's refusal to 'set aside' the bankruptcy petition) should have declined the invitation to consider whether or not Mr Dias (rather than his company) was liable for the business rates. Permission to appeal to the debtor was refused on that basis.

(b) in an recent unreported case called Lueshing v Taylor, Dix and Lewisham LBC, judgment 23.8.21, ICCJ Burton concluded that only a procedural miscarriage of justice was sufficient to invoke the power.

On the other hand, arguably,

(a) it may be said that ICCJ Mullen in Lambert 2019 did not see the jurisdiction to have narrowed to only procedural miscarriages of justice, when he dismissed on the evidence, rather than as outside the power, Mr Lambert's argument that he was not liable for council tax/business rates. ICCJ Mullen said, at 47:

'In my judgment there has been no miscarriage of justice here. First, Mr Lambert has produced no evidence from which it could be concluded that he had a prospect of persuading the Magistrates’ Court that he did not in fact owe any council tax or non domestic rates to the Council for the relevant period. Indeed his reluctance to provide details of the persons in occupation of his various properties tends to suggest that he is'

(b) it would go against the dominant purpose underlying the power to so limit it. It may be said that the general body of creditors should be protected against bogus judgment creditors affecting their rights, whether the bogus judgment creditor obtained judgment through a procedural or substantive defect in the original civil court proceedings.

(c) Dias is a permission to appeal decision. Permission to appeal decisions are only of persuasive authority and reference to them is not encouraged – see Clark v University of Lincolnshire and Humberside [2000] 3 All ER 752[14c].

Dismissal of Petition 

49. Where following the inquiry, the Bankruptcy Court reaches the view that there was, in fact, no good consideration leading to the judgment debt, the Bankruptcy Court ought to exercise its discretion and dismiss the petition. This is because only a creditor of a person may petition for that person's bankruptcy. In Mann v Goldstein [1968] 1 W.L.R. 1091, Ungoed-Thomas J said the following while considering the Companies Court's jurisdiction to grant a prohibitory injunction restraining the threatened presentation of an (analogous) petition against a company, at 1098-1099:

‘For my part, I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding-up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court.’

50. Mann was approved in Angel Group Ltd v British Gas Trading Ltd [2012] EWHC 2702 (Ch); [2013] BCC 265, at paragraph 22.

Res Judicata for subsequent Bankruptcy Petitions

51. Where a bankruptcy petition is dismissed following an investigation into the validity of the debt underlying the judgment debt (whatever the ground that triggered the inquiry), that finding by the Bankruptcy Court does not bind subsequent Bankruptcy Courts. As between separate and subsequent bankruptcy petitions, there is no issue estoppel. In Re Vitoria [1894] 2 QB 387, Lord Esher MR said at 390:

‘The matter was res judicata in the county court as regards the particular bankruptcy notice upon which the petition there was founded, but not as regards another bankruptcy notice. There was no res judicata as regards the judgment debt. The registrar of the High Court might indeed have done exactly the same thing as the registrar of the county court did - that is, he might have refused to exercise his jurisdiction to make a receiving order. But he was not bound to do so, and he did not.

It is said that our decision will cause great inconvenience, by enabling a creditor to harass his debtor with renewed applications for a receiving order. The remedy for that is, I think, very simple. If a creditor persisted in attempting to obtain a receiving order against his debtor under precisely the same circumstances, the Court could exercise its discretion by refusing to make a receiving order. In my opinion, the doctrine of res judicata has no application to the present case.’[15]

Judgment not Set Aside, just not Enforced by a Bankruptcy Order 

52. Whatever the outcome of the Bankruptcy Court’s inquiry into the judgment debt, the decision of the Bankruptcy Court leaves the judgment debt itself unaffected. The Bankruptcy Court’s decision is simply to refuses to enforce it through adjudging the judgment debtor bankrupt. The Bankruptcy Court has no power to set aside the judgment debt, or to stay all forms of enforcement on the judgment debt. In Fraser [1892] 2QB 633, Lord Esher MR said at 636:

‘As a matter of law the judgment, therefore, stands as a good judgment against [the judgment debtor], and it cannot be questioned by him in any Court, except the Court of Bankruptcy. …The Court of Bankruptcy can go behind the judgment, and can inquire whether, notwithstanding the judgment, there was a good debt. In so doing, the Court of Bankruptcy does not set aside the judgment. If I may use the expression, the Court goes round the judgment, and inquires into the subject matter. …s. 7 shews that the Court of Bankruptcy, though the judgment cannot be set aside, may inquire, even at the instance of the debtor, whether there is any ground for making a receiving order. … though there is a judgment, which the judgment debtor cannot set aside, he may nevertheless ask the Court of Bankruptcy to inquire whether the debt on which the judgment was founded was a good debt, and that, if the Court is satisfied that it was not, it may refuse to make a receiving order in respect of the debt.' 

53. In Re Vitoria [1894] 2 QB 387, Lord Esher MR said at 389:

‘Under s. 7 of the Bankruptcy Act, 1883, it is not the province of the registrar to adjudicate whether there is a valid debt; his business is to determine whether he shall make a receiving order, and for this purpose he is entitled to go behind the judgment. Take the strongest possible case. Suppose that the registrar should come to the conclusion that the judgment was obtained by fraud; he would then have power to say that he would not make a receiving order. But he would have no power to set aside the judgment, or to stay execution upon it. The authority of a registrar in bankruptcy depends entirely upon the Bankruptcy Act, and he has no power to set aside or to review a judgment. But the Court of Bankruptcy can refuse to make a receiving order in respect of a judgment which it cannot set aside...A registrar in bankruptcy has large powers, but he has no power to set aside a judgment. All that he can do is to refuse to make a receiving order in respect of the judgment debt. That is the limit of his discretion.’[16]

54. Accordingly, in the event that the bankruptcy petition is dismissed in such circumstances, this dismissal will not affect the validity of the judgment debt itself, even if the dismissal is because the Bankruptcy Court found that the judgment obtained was obtained by fraud or miscarriage of justice.

55. Lord Esher in Re Vitoria said at 389;

‘In my opinion, when an application is made to a registrar in bankruptcy for a receiving order founded upon a judgment debt, the registrar has no jurisdiction to determine, as between the parties, that there never was a debt due. There is a judgment for the debt, and the judgment is still standing. As between the parties it is res judicata that there is a judgment debt, until the judgment is either set aside or satisfied.’

56. Given that the Bankruptcy Court has no power affect the validity of the judgment debt, nor ‘stay execution upon it’, the judgment creditor/petitioning creditor can still elect, post dismissal of the bankruptcy petition, to bring an alternative enforcement procedure against the judgment debtor, for instance, for a: (i) Third Party Debt Order; (ii) Charging Order; or (iii) Attachment of Earnings Order. This is because these enforcement procedures are non-collective[17] enforcement procedures in nature. Given that non-collective enforcement procedures don’t involve, in the same way[18], additional, genuine unsecured creditor interests, consequently the issue estoppel / res judicata principle has universal application, barring any challenge to the validity of the debt.

Other Creditors of the Judgment Debtor

57. The Bankruptcy Court’s decision to dismiss a petition, will not affect other creditors causes of action/claims as against the judgment debtor. The validity of each creditor’s consideration to found a petition against the judgment debtor will operate, and will be judged, individually.

Liquidators/Trustees in Bankrupt Similarly Entitled

58. This article has focused on the jurisdiction of the bankruptcy court to go behind a ordinary civil court judgment. A liquidator/trustee in bankrupt has a similar ability when at the 'helm' of the company in liquidation/bankruptcy estate. A putative creditor of the company in liquidation/bankruptcy estate may have a judgment from an ordinary civil court, recognising so to speak, that existence of a debt between the company in liquidation/bankrupt. A liquidator/trustee in bankrupt can reject (or admit for less), a proof of debt tendered by a judgment creditor, in the liquidator/trustee in bankrupt. See International Brands USA Inc v Goldstein [2007] BCC 960 and Re Menastar Finance Ltd (In Liquidation) [2003] BCC 404[19]

Conclusion

59. The existence of a judgment debt (unimpeached by an appeal or set aside order) is binding on the parties to the civil proceedings that produced it, that there is a valid debt owed by the judgment debtor to the judgment creditor – the issue is res judicata. The collective nature of bankruptcy proceedings involves other interests, those of the general body of unsecured creditors of the judgment debtor, who were not parties to that claim, and so are not bound by any res judicata. For the other parties, and the Bankruptcy Court, the existence of a Judgment Debt is still good evidence that there exists between the judgment creditor and the judgment debtor, a valid debt, but it is not conclusive. Where there is evidence tending to show that the judgment debt was obtained as a result of fraud, or collusion, or a miscarriage of justice (evidence which thereby undermines the evidential weight the judgment debt normally has), the Bankruptcy Court should commence an enquiry into the validity of the debt. The Bankruptcy Court has the power to go behind the judgment debt, following an investigation, and to reach the conclusion that: (a) in fact, there was no debt (apparently recognised by the judgment debt); and (b) it will not make a bankruptcy order upon the impugned judgment debt.

60. The dominant reason that this power exists, is to enable the Bankruptcy Court to protect the general body of genuine unsecured creditors, from bogus creditors affecting their rights against the judgment debtor, through the imposition of an unwarranted bankruptcy order.

61. It is an open question whether, to invoke the Bankruptcy Court's power, under the 'miscarriage of justice' category, there must have been a procedural miscarriage of justice in the ordinary civil court process that resulted in the judgment, and that a substantive miscarriage of justice is insufficient.

62. The judgment debt itself (i.e. the money judgment), is unaffected by any decision of the Bankruptcy Court, to dismiss a petition founded upon it, on the basis of fraud, collusion and/or miscarriage of justice. The judgment debt remains enforceable at the judgment creditor’s election, through an alternative enforcement process (though whether the judgment debtor then decides to try and impugn the judgment debt itself, in an ordinary civil court, is another matter).

SIMON HILL © 2017-2022

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.