“22. Where a petition is presented based on a judgment debt, the court sitting in its bankruptcy jurisdiction is guided by the following principles.
22.1 The bankruptcy court 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.
22.2 As prima facie evidence of indebtedness, it may be rebutted and that is what is meant by “going behind” the judgment. It is important to understand the rationale for this approach. First, bankruptcy affects an individual’s legal status. Secondly and importantly in this context, the bankruptcy court’s exercise of the power and/or duty to inquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgments entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors.
22.3 In Ex parte Kibble In re Onslow [1874-75] LR 10 Ch App 373 it was held:
“It is the settled rule of the Court of Bankruptcy, on which we have always acted, that the Court of Bankruptcy can inquire 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 among 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” (per James, LJ at 376-7).
“It is quite clear that in the Court of Bankruptcy the consideration for a judgment may be investigated, particularly when a judgment has gone by default. I do not mean to say that this rule applies to such an extent that in every case in which a defendant has a good defence to an action and does not plead it, … the Court of Bankruptcy would allow the creditors to go behind the judgment. The real question must always be whether there was a good consideration for the debt …” (per Mellish LJ at 378).
22.4 See also Williams and Muir Hunter on Bankruptcy, 19th ed. p.57:
“The court has a very wide power, and in many cases, a duty, to inquire into the consideration even of a judgment debt, whether upon hearing a petition or adjudicating upon a proof … ; for otherwise a debtor might by default suffer judgment without consideration, and deprive his just creditors of their rights”.
23. In other words, the reason why a bankruptcy court is not conclusively bound by a judgment debt is so that (in appropriate circumstances) it can inquire whether there was actually bona fide consideration for it. Of course apart from opposing creditors at the petition seeking to impugn the judgment debt, the judgment debtor himself can also seek to do so, especially if the judgment had been obtained by default. See Fletcher, The Law of Insolvency, 4th ed. p.163 para.6-116:
“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 later 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 …”.
However that is not to say that in every case the bankruptcy court should exercise its powers of inquiry simply for a judgment debtor to get a second bite of the cherry and conduct parallel proceedings to review a judgment which he has lost or to avoid its execution.
24. The rationale discussed above should guide the approach to be taken by the bankruptcy court when a judgment debtor opposes a petition on the ground that he challenges the judgment debt.
25.1 If the judgment debtor has lodged either an application to set aside the judgment (in a case where the judgment did not require a decision on the merits) or an appeal, the bankruptcy court maystay the hearing of the petition to await the result of the application or appeal.
25.2 However, the bankruptcy court need not do so in every case. It may refuse to stay the petition and may proceed to make a bankruptcy order if the judgment debtor fails to satisfy the court that he has a reasonable prospect of succeeding in the application to set aside or the appeal (Watts v London Borough of Newham [2009] EWHC 377 at [53]). Put another way, an application to set aside or an appeal falling short of that standard would not be a viable or bona fide one, and the judgment debtor would have failed to rebut the prima facie evidence of indebtedness. As noted by the learned editor of the Law of Insolvency, at p.162 para.6-114:
“It is important to note that the power to stay proceedings is once again a discretionary one, and that the mere fact that a debtor has lodged appeal against a judgment does not confer upon him the right to insist upon a stay of any bankruptcy proceedings founded upon that judgment. If the law were otherwise it would, as was observed by Lord Esher MR in Flatau, Re furnish an intolerable means whereby the debtor might delay the hearing of the petition, perhaps for months or even years, by embarking upon purely frivolous appeals. As it is, if the bankruptcy court forms the opinion that the appeal is without merit it may make a bankruptcy order without more ado”.
26.1 Where the judgment debtor has not lodged an application to set aside or an appeal by the time of the petition hearing but intends to do so (probably out of time), he must, in addition to satisfying the bankruptcy court of the reasonable prospects of success in his application or appeal, also provide a reasonable explanation why he has failed to act in time. If he can do so, the bankruptcy court may adjourn the hearing of the petition to enable him to commence an application to set aside or appeal, giving appropriate directions to ensure that it is conducted expeditiously, with liberty to apply so that either party may apply to restore or dismiss the petition as appropriate.
26.2 Where the judgment debtor is unlikely to be able to pursue an application to set aside or an appeal for procedural reasons eg where there has been gross and inexcusable delay, the bankruptcy court may consider his case to see if he can rebut the prima facie evidence of indebtedness. Before arriving at a decision, the bankruptcy court will consider the circumstances in which the judgment was obtained. At one end of the spectrum, the court may decide to dismiss the petition even if a regular judgment had been obtained in default, e.g. if service of a writ had been effected on the judgment debtor’s previous address and he can clearly establish a substantial defence. At the other side of the spectrum is a petition based on a judgment obtained after a full trial on the merits. In the latter situation, the general principle is that the bankruptcy court would inquire into such a judgment only if the judgment debtor can show fraud, collusion or miscarriage of justice, the latter term having been described as “something from which [the court] 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” (Dawodu v American Express [2001] BPIR 983 quoted in Watts at [48]).