England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
in the matter of Shruth Limited (in creditor's voluntary liquidation)
and in the matter of the Insolvency Act 1986

		Royal Courts of Justice Strand, London, WC2A 2LL
		23rd June 2005

Mrs Justice Gloster, DBE:

Parties

1. There are two linked applications before the Court. International Brands USA Inc ("International Brands") is the Applicant in both applications i.e., 2567 and 7490. Interbrands Inc ("Interbrands") is a co-applicant in 2567 of 2004, but not an applicant in 7490 of 2004. Interbrands is a company incorporated in Delaware in 1978 which operated as an importer and distributor of alcoholic beverages in the USA. In 1989 it was appointed as an exclusive distributor of the products of Shruth Limited ("the Company"), the second respondent to application 7490 and the third respondent to application 2567. International Brands was incorporated in Delaware in 1994. International Brands took over the business of Interbrands. It contends, in particular, that it took an assignment of the exclusive distributorship between Interbrands and the Company in 1994. The Company is an English registered company which was incorporated on 26 April 1972, and which was formerly known as "Old St Andrews Limited". Until recently, the Company produced alcoholic beverages including the Old St Andrews Clubhouse range of golf ball-shaped whisky bottles. The Company went into voluntary liquidation on 26 February 2004.
2. The first Respondent to application 2567, Mr Julian Haswell ("Mr Haswell"), was the sole director and controlling shareholder of the Company and sat as the chairman of the meetings of the Company's creditors held pursuant to section 98 of the Insolvency Act 1986 ("the Act") on 12 and 26 March 2004. He is also a director and the secretary of Gilfin International (Tapemate) Limited ("Gilfin"), a director of Wholly Spirits Drinks Co Limited and a director of Old St Andrews International Limited.
3. The first Respondent to application 7490 (and the second respondent to application 2567) is Mark Stephen Goldstein ("Mr Goldstein"). Mr Goldstein is an insolvency practitioner and the liquidator of the Company. Mr Goldstein was nominated as liquidator by Mr Haswell and eventually appointed at the section 98 meeting on 26 March 2004.

The applications

4. The first of the two applications before the Court (2567) is an appeal from the order of Registrar Jacques dated 30 July 2004 in which he dismissed the Applicants' application pursuant to r4.70 of the Insolvency Rules 1986 ("the Rules") whereby they sought to appeal the decision of Mr Haswell (as chairman) rejecting their proof for voting purposes at the section 98 meeting and to remove Mr Goldstein as liquidator ("the r4.70 application"). The second of the two applications (7490) is brought by International Brands pursuant to r4.83(1) seeking to reverse the decision of Mr Goldstein rejecting the Applicants' proof of debt for a dividend ("the r4.83 application").

The US proceedings

5. On 26 February 2002 the Applicants began proceedings against the Company (then trading as Old St Andrews Limited) in the United States District Court for the District of Connecticut ("the US Proceedings"). In the US Proceedings the Applicants claimed that the Company had unlawfully terminated an exclusive distribution agreement pursuant to which the Company appointed the Applicants the exclusive right to distribute the Company's whisky products in the USA.
6. On 17 December 2003, the case was listed to come on for trial in the US District Court on 19 April 2004. On 5 March 2004, the Company's US attorneys, Feldman & Hickey LLC issued a motion before the US District Court to withdraw appearance, which was akin to an application in this jurisdiction to come off the record.
7. The Applicants' statement of claim in support of their proof in the liquidation of the Company shows that the Applicants sought to recover damages against the Company in the total sum of US$ 1,505,608.53 (approximately £813,842.45) under the following heads:

i) advertising and promotional expenses for the Company's products during the period 1999-2001, less profits from sales in that period, in the sum of US$ 1,224,324.00;

ii) amounts due under credit invoices numbers 715 and 716 for goods returned in the sum of US$ 37,903.64;

iii) advance payment for bulk whisky less purchase price for 1,200 cases of Clubhouse Scotch whisky delivered to the Applicants in the sum of US$ 6,801;

iv) legal fees and expenses in the sum of US$ 236,579.89.

8. The motion to withdraw appearance stated that Mr Haswell had informed the Company's US attorneys that the Company did not intend to defend the Applicants' claim. The evidence clearly shows that the reason for the Company's US attorneys withdrawing was not only because the Company did not intend to defend, but also because the Company lacked funds to pay its outstanding legal bills and the ability to keep funding the defence. That position is confirmed in the report prepared by Mr Haswell in advance of the section 98 meeting.
9. On 10 March 2004, on the recommendation of the judge in the US proceedings, the Company's US attorneys wrote to Mr Goldstein and Mr Haswell setting out the consequences of their coming off the record. In their letter, the US attorneys clearly advised both Mr Goldstein and Mr Haswell that, pursuant to Connecticut law:

i) without counsel the Company was not permitted to represent itself;

ii) if the motion to withdraw were upheld and no new counsel were retained, then it was very likely that a default judgment would be entered against the Company;

iii) the effect of the entry of a default would be that there would be judgment on liability for the Applicants and that the Company's counterclaims would be dismissed; and

iv) there would then be a hearing for the quantification of damages based upon the evidence of the applicants, which the Company would not attend; the Company would therefore not be in a position to challenge the damages estimate of US$ 1,505,608.53 submitted by the Applicants.

The letter from the US attorneys also confirmed a conversation with Mr Goldstein that the Company would not be arranging for the attendance at the trial nor would it pay legal fees for the preparation of the Company's case.

10. On 2 April 2004, the US District Court made an order granting the Company's US attorneys permission to come off the record and giving notice to the Company that, unless it retained legal representatives, the Applicants could seek to enter judgment.
11. By a judgment dated 15 June 2004, District Judge Kravitz awarded the Applicants damages in the sum of US$ 1,378,246.64 ("the US judgment"). Although it was technically a default judgment, the judge gave a fully reasoned decision and it is clear that he had had the opportunity to consider various documents which had been provided to the Court by the Applicants including several affidavits, deposition transcripts and numerous exhibits relating to both the merits of the claim as well as the issue of damages. There is no suggestion in the judgment that there was any issue raised by the defence as to the identity of the company with whom the Company had concluded the distributorship agreement.

The section 98 meeting

12. By a notice dated 26 February 2004, the Company convened a meeting of creditors pursuant to section 98 of the Act to be held on 12 March 2004. In accordance with his obligations under section 99 of the Act, Mr Haswell prepared a report setting out the background of the Company and its decline, and to which he appended a statement of affairs. In the section of the report commenting on creditors, Mr Haswell explained that the claim of the "American customer", namely the Applicants, was disputed, but that it had been included in the list of creditors as a prospective claim for the sake of completeness. The value placed on the Applicants' claim in the statement of affairs was £658,363.97, as compared with the figure claimed in the US Proceedings, which totalled approximately £813,842.45.
13. The report also explained that, only a few days prior to the liquidation of the Company, the assets of the Company and the brand "Old St Andrews" had been sold for a total consideration of £74,000 and that the proceeds of sale had been paid to the Company's lenders in satisfaction of a charge over the assets. The report did not name the purchaser of the assets or the party who took an assignment of the Old St Andrews brand. However, trademark searches of the Old St Andrews brand carried out by the Applicants have revealed that, in May 2002, the trademarks were assigned to Gilfin.
14. In advance of the meeting a director of International Brands, Mr Rolf Andersen, submitted a proof for voting purposes at the section 98 meeting in the sum of £813,843.45 and a proxy appointing Mr David Grant of Halliwells (the Applicants' solicitors) as the Applicants' proxy holder to attend and vote at the meeting.
15. The meeting, convened for 12 March 2004 (and attended by Mr Grant for the Applicants) was adjourned after some heated discussion between Mr Goldstein and Mr Haswell on the one part, and the creditors on the other, and reconvened on 26 March 2004. It was chaired by Mr Haswell and Mr Goldstein was in attendance. He read out Mr Haswell's report, ran through the statement of affairs and invited questions. The initial meeting was adjourned because creditors were not satisfied which the answers which they had received from Mr Haswell to questions in relation to the sale of the Company's assets. In particular, they were concerned that they had not been told the identity of the purchaser nor the basis for the calculation of the prices at which the Company's assets had been sold.
16. Prior to the meeting, Mr Goldstein had notified Halliwells that the chairman of the meeting (Mr Haswell) planned to reject the Applicants' proof for voting purposes and was only prepared to admit the proof with a value of approximately £17,000; Halliwells were told that this amount would be accepted as the amount shown on credit invoices in the statement of claim in the US proceedings. The reason for that decision appears to have been that, notwithstanding the inclusion of the claim in the statement of affairs, Mr Haswell regarded the claim as an unliquidated and unascertained claim for damages.
17. Halliwells wrote to Mr Goldstein on 24 March 2004 expressing concern that Mr Haswell intended to act in contravention of the Rules by not placing any value on the US proceedings claim, and stating that Mr Goldstein, as the nominated liquidator who had offered insolvency advice to the Company, ought to provide the "correct" guidance. Mr Goldstein replied by way of a fax dated 25 March 2004, stating that Mr Haswell had taken legal advice and would continue to exercise his discretion under Rule 4.67(3).
18. At the adjourned section 98 meeting, which took place on 26 March 2004, Mr Haswell chaired the meeting, although Mr Goldstein was in attendance and appears in fact to have conducted it. A Mr Michael Mulligan, a solicitor at Halliwells, attended in place of Mr Grant, the Applicants' formally appointed proxy holder. Mr Mulligan was in fact permitted to vote on behalf of the Applicants without demur. As had been foreshadowed in the earlier correspondence, Mr Goldstein, on behalf of Mr Haswell, admitted the Applicants' proof for voting purposes in the limited sum of £17,876 (representing the credit notes). The reason given by Mr Goldstein was that the balance of the claim was unliquidated and unascertained, and was, moreover, subject to a counterclaim. Mr Goldstein told the meeting that the claim was subject to litigation in the USA but no mention was made of the fact that there had been an application by the Company's US attorneys to come off the record. Mr Mulligan nominated a Mr Timothy Dolder of Begbie Traynor, as liquidator in place of Mr Goldstein. However, Mr Goldstein informed the meeting that the level of proxy votes held by Mr Haswell as chairman meant that Mr Goldstein's appointment as liquidator was confirmed. The Applicants contend that, had they been admitted to proof for voting purposes in the full amount of their claim, Mr Dolder would have been appointed liquidator in place of Mr Goldstein, because the Applicants would have then represented more than 50% of all creditors.
19. On 29 March 2004, Halliwells wrote to Mr Goldstein, once again explaining the Applicants' position and pointing out what they claimed was the error in the decision to exclude them. They also invited Mr Goldstein to convene a meeting to remedy this error. According to the sworn statement of affairs prepared by Mr Haswell, the Applicants represented more than one-tenth in value of the Company's creditors and so were entitled to requisition a meeting pursuant to section 168 of the Act. Mr Goldstein was put on notice that, if he failed to convene a meeting of creditors to address the wrongful rejection of the Applicants' proof, the Applicants would issue proceedings.

The r4.70 application

20. Mr Goldstein did not summon a further meeting. Accordingly, by application dated 15 April 2004, the Applicants applied to the Court for the following relief:

i) to reverse the decision of Mr Haswell as chairman of the section 98 meeting rejecting their proof (in part) for voting purposes;

ii) to remove Mr Goldstein as liquidator pursuant to sections 108 and 171 of the Act; and/or

iii) to have the section 98 meeting reconvened for the purpose of passing a resolution for the appointment of a new liquidator.

21. This application was heard by Mr Registrar Jacques and dismissed by him in a judgment given on 30 July 2004 on the preliminary, or threshold, ground that the Applicants had not voted at the section 98 meeting at all, because their vote was cast by Mr Mulligan, as opposed to by their duly appointed proxy, Mr Grant. By notice dated 13 August 2004, the Applicants appealed the Registrar's decision, and that appeal came before this court together with the r4.83 application.
22. Logically, the r4.70 application arises for determination first. However, if I were to hold in favour of International Brands on its r4.83 application, it would, in the event, be irrelevant that I hold against it in relation to the Applicants' r4.70 application. That is because a determination in favour of International Brands on the r4.83 application would mean that there would have to be another meeting of creditors in any event, at which International Brands would be entitled to exercise its vote as a creditor with (on this hypothesis) an admitted judgment debt of £813,842.45.
23. As appears below, I have determined the r4.83 application in favour of International Brands. It is not therefore necessary to overburden this judgment with a detailed analysis of why I would, if it had been necessary to decide the r4.70 application, have found in favour of the Company and Mr Haswell on the r4.70 application. However, my reasons, briefly stated, may be summarised as follows:

i) I would have allowed an appeal against the Registrar's order on the grounds that his decision on the preliminary or threshold point was wrong. Having allowed Mr Mulligan to vote in place of Mr Grant in respect of the limited amount of £17,876, it was not open to Mr Haswell (or indeed the court) retrospectively to assert that Mr Mulligan could not have voted for the full amount. In the circumstances here (but, of course, not always), the identity of the proxy was in fact a procedural matter of absolutely no significance; the fact that neither Mr Goldstein nor Mr Haswell appreciated that Mr Mulligan was not Mr Grant is irrelevant. Moreover, any requirement as to the identity of the proxy was waived, since no requirement was stipulated at the meeting that Mr Mulligan should produce identification to prove that he was the duly appointed proxy of Mr Grant, and he was nonetheless allowed to vote. Alternatively, the Company, Mr Haswell, the chairman, and the liquidator, Mr Goldstein, are estopped from relying on the point. If authority is needed for these propositions, it is to be found in Secretary of State for Trade & Industry v Langridge [1991] Ch 402; and in Marx –v- Estates and General Investments Limited [1976] 1 WLR 380.

ii) I would then have held that, as at the date of the section 98 meeting, before judgment had been obtained, Mr Haswell, as chairman of the meeting, was entitled, pursuant to r4.70(2) and (4) to reject that part of the Applicants' claim in the sterling equivalent of £813,842.45 as representing unliquidated damages of £795,166.45. That figure represented the total amount of the claim less the agreed credit notes of £17,876. In this respect I accept the submissions of Mr John Briggs, who appeared on behalf of Mr Haswell, that as at 26 March 2004, prior to the judgment in US proceedings, the damages for alleged breach of the distributor's agreement was an unliquidated claim.

iii) I also accept Mr Briggs' submission that, in rejecting the claim, Mr Haswell was exercising his right under r4.67(3) to reject a claim for an unliquidated amount (in the absence of agreement) and was not operating subject to the obligation imposed by r4.70(3) to mark a proof as objected to, but allow the creditor to vote, in circumstances where he was in doubt whether the proof should be admitted or rejected.

24. Accordingly, had it been necessary to do so, I would have found against the Applicants on their r4.70 application. I would not have considered it appropriate, for the purposes of that application for the Registrar to have assumed, retrospectively that he could have approached the matter on the basis that he could regard the judgment in the US proceedings as having been obtained by the date of the meeting.
25. In this context, Miss Jane Giret QC, for the Applicants, submitted, that following the judgment in favour of the Applicants in the US proceedings, it was clear that the damages claim had by then crystallised into a liquidated debt and had done so by the time of the hearing in front of the Registrar. Therefore, she contended, in considering an appeal from the decision of the chairman to reject a creditor's proof for voting purposes, the evidence which the court can consider is not confined to that which was available to the chairman at the meeting; the court may take into account evidence available as at the date of the application pursuant to r4.70: see Re a Company No 004539 of 1993 [1995] BCLC 459 at 465f to 466g and Re Philip Alexander Securities & Futures Limited [1998] BCC 819 at 823E-G. Thus, she submitted, it was clear that Mr Haswell's decision as chairman to exclude the proof in respect of the claim in the US proceedings as being an unliquidated claim should be reversed in the light of the US Judgment.
26. In my judgment, the US judgment which was obtained after the date of the section 98 meeting does not render invalid Mr Haswell's decision not to admit the proof for voting purposes. I accept that a court can, on an appeal under r70(4), look at all the evidence put before it, and is not confined to the evidence that was before the chairman of the meeting : see per Blackburne J in Re a Company No 004539 of 1993 (above) at 466b-c and per Neuberger J in Re Philip Alexander Securities & Futures Limited at 823G. However, in both of those cases the court received evidence which showed what the position was, in fact, at the time of the meeting: in the first case that, as at the date of the meeting, the particular creditor's claim had been abandoned; in the second case, that, likewise, as at the date of the meeting, certain proxies had been lodged with the authority of certain creditors. In the present case, on the contrary, the evidence that subsequently a judgment was obtained clearly does not demonstrate that the claim was a liquidated claim at the time of the meeting. Nor does it show that the claim should not have been treated as falling within the discretionary power of the chairman under r67(3) to "agree" to put an estimated minimum value on the proof for voting purposes. In other words, the subsequent judgment in the Applicants' favour does not, in my judgment, retrospectively change the categorisation of the claim from an unliquidated debt within r67(3) into a liquidated claim about which the chairman wrongly (in the light of subsequent events) had "a doubt" for the purposes of r70(3) at the time of the meeting.
27. At the time of the meeting, Mr Haswell, on advice, no doubt considered that the company had defences to the claim which it would be in a position to puruse in a liquidation, notwithstanding the prospective default judgment that he must have appreciated would at some early future date be awarded against the Company, if its attorneys were not put in funds. In the light of this judgment, he has been shown to be wrong in his view as to the liquidator's ability to challenge the judgment. However, that does not mean that, at the date of the meeting, the exercise of his discretion was so flawed as to entitle this court to set aside his discretionary decision. I would not have been prepared, for example, to have found, on the evidence before me, that he knew that the Company's defence and counterclaim, even if fully litigated, was doomed to failure.
28. I turn then to consider the r4.83 appeal.

The r4.83 application appealing Mr Goldstein's decision to reject the proof for dividend purposes

29. As I have already stated, judgment was given in the US proceedings in favour of the Applicants on 15 June 2004. Subsequently, the Applicants submitted a proof of debt for a dividend in the liquidation of the Company in the sum of US$ 1.387 million. Mr Goldstein formally rejected that proof of debt by a notice dated 15 November 2004. The basis for the rejection was stated to be as follows:

i) there was no evidence that the debt was founded on a real debt;

ii) the US judgment was not conclusive in light of the fact that the Company could not defend the proceedings and so the US Court had to decide damages but not disputes of fact;

iii) there was no evidence of a distribution agreement;

iv) the proof was lodged on behalf of both International Brands and Interbrands, and the Company had had no dealings with International Brands.

30. The r4.83 application is supported by the witness statements of Michael Mulligan dated 6 December 2004 and 11 March 2005. Although he had been served with the r4.83 application on 6 December 2004, by 8 March 2005, Mr Goldstein had not served any evidence in answer. Accordingly, on 8 March 2005, David Richards J ordered that, unless Mr Goldstein served his evidence by 4pm on 10 March, he be debarred from relying on any evidence. Mr Goldstein then provided a witness statement dated 10 March 2005 in which he explained his reasons for rejecting the proof as follows:

i) the US judgment is a default judgment, which did not consider issues of fact;

ii) he was aware of a counterclaim;

iii) there was no evidence of a distribution agreement other than the appointment letter of 2 August 1989;

iv) Mr Haswell informed him that the Company had had no dealings with International Brands.

The law relating to a liquidator's power to go behind a judgment

31. 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.
32. 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 …."

33. 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."

34. 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.

44. 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.

45. 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.

46. 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.

47. 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.'

48. 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.'

49. 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.'

50. 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.

51. 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.'"

35. Miss Marianne Perkins, on behalf of Mr Goldstein, submitted that the liquidator and the court were, in the circumstances of this case, permitted to go behind the US judgment on the ground that there has been a miscarriage of justice in the US proceedings. She submitted that the judicial process had not been properly conducted in those proceedings. She relied on the following principal points:

i) The claim was contested by the Company by way of voluminous and complex documentation. In particular, Mr Haswell's evidence was that the document said to evidence the distribution "agreement" was created merely for the purposes of meeting the requirements of the Connecticut Liquor Control Commission and to obtain Federal approval. Moreover, Mr Goldstein stated that he spent quite some time reviewing the background of the Applicants' claim in coming to his decision to reject their proof.

ii) The Company had a substantial counterclaim against the Applicants.

iii) It is apparent from the motion to withdraw appearance that the Company's decision not to defend or pursue its counterclaim at the hearing arose out of its inability to pay the fees of its US attorneys.

iv) Upon the withdrawal of its US attorneys, the Company was not permitted to represent itself before the Connecticut court.

v) No evidence appears to have been put before the Connecticut court on the question of the applicable law regarding the construction of the "agreement". Local law was applied by the court, which contained penalties which would not have been recoverable under English law.

vi) There was much confusion surrounding the identity of International Brands and its ability to prove for the judgment debt.

vii) The judgment is one-sided, and cannot be considered as conclusive, because the court's task was merely to assess quantum and not to consider any of the disputed underlying facts.

viii) Consequently, she submitted the court should look behind the judgment. It was, she said, apparent that, had the Company had an opportunity to defend the US proceedings, its evidence was capable of rebutting the claim against it and precluding the same from ultimately properly amounting to a provable debt.

36. I reject Miss Perkins' submissions. I have considered the documentation relating to the US proceedings which has been exhibited to the witness statements before this court. I prefer the factual analysis of the claim as carried out by Miss Giret, and her application to those facts of the legal principles set out above. In my judgment, it is impossible to say that the determination of the US District Court in the US proceedings amounts to a "miscarriage of justice", or that the Company and Mr Goldstein as liquidator, have satisfied the court that International Brands "manifestly" has no claim: see per Warner J in McCourt & Siquien (above). On the contrary, it appears to me that the US District Court had ample material before it from which to conclude that International Brands had indeed made out its claim for damages.
37. My reasons for holding that there has been no miscarriage of justice, and that the liquidator has no justification for going behind the US judgment, largely reflect the submissions advanced by Miss Giret, and may be stated as follows:

i) Apart from the US judgment itself, there was clear evidence in the US proceedings of a distribution agreement and a trade relationship between Interbrands (and later International Brands) on the one part and the Company on the other. In particular:

a) Mr Haswell's father, Mr Robert Haswell, as managing director of the Company, signed a letter dated 23 August 1989 appointing Interbrands as the Company's exclusive agent for the sale and distribution of the Company's products in the USA.

b) On 23 May 1991, Mr Robert Haswell wrote a letter to Mr Andersen of Interbrands in which he stated:

"If you cannot comply with our request to clear this account it would obviously jeopardise the exclusive arrangement we have with your company as our distributor for the products you are handling."

On 20 September 1991, Mr Robert Haswell wrote to Mr Andersen in the following terms:

"… we shall send you in writing formal notice of the termination of the exclusive agency agreement concerning our range of Scotch Whisky products".

Despite this threat, the distribution agreement was not terminated until 21 November 2001.

c) On 1 September 1994, Interbrands gave notice that it had assigned the rights and obligations under the distribution agreement with the Company to International Brands.

d) In the US proceedings themselves, in paragraphs 11, 16 and 17 of its defence, the Company admitted that it had dealt with both the Applicants.

e) The Company raised counterclaims based on orders placed by International Brands.

ii) The affidavit of Rolf Andersen dated 8 May 2004 and the accompanying exhibit provide ample evidence that International Brands acted in reliance upon the existence of a distribution agreement with the Company. The documents exhibited include invoices, orders, price lists, correspondence regarding promotional artwork, advertisements and distribution figures.

iii) In his deposition of 7 February 2003, Mr Haswell confirmed that, with the exception of duty-free shops, the Company only sold its goods in the USA via the Applicants. In the same deposition, Mr Haswell was taken to a list of the Company's distributors.

iv) Klim Design Inc provided evidence confirming that the Applicants placed orders with it for the creation of promotional and advertising materials in relation to the Company's products.

v) A Mr Harold Gorman, who can boast of experience in the distilled spirits industry spanning over 35 years, confirmed that the letter dated 2 August 1989 was consistent with the practice of appointing a distributor. This view was confirmed by another expert, Mr Andrew Hillman.

vi) As the docket report in the US proceedings shows, the proceedings ran from 26 February 2002 to 17 June 2004. Within that period both parties took a number of steps including the filing of motions and the taking of depositions. Both sides vigorously pursued the various claims and counterclaims. The US judgment includes findings of fact which were based on the very extensive documentation presented to the judge and which it may be reasonably inferred that he read.

vii) It is clear that the US judgment is not merely a default judgment "rubber-stamping" a statement of claim. The US judgment takes into account extensive evidence and a variety of legal authorities. It is carefully considered and was obtained after two years of litigation at a stage when the parties were on the verge of trial. It does not, contrary to Miss Perkins' submissions, make any award of punitive damages, either under the Connecticut Unfair Trade Practices Act or otherwise. Nor does it award any legal costs in favour of International Brands.

viii) It is clear from Mr Haswell's statement that he deliberately chose not to provide a guarantee in respect of the Company's legal fees. Mr Haswell and the Company were fully aware that a judgment was likely to follow as they had been advised to this effect by the Company's US attorneys. Their decision not to litigate the claim was deliberate. In my judgment, it can be inferred, when coupled with the chronology, that it was a deliberate ploy to enable Mr Goldstein, as liquidator, to be in a position to challenge any adverse judgment in a liquidation. Accordingly, in my judgment, the Company and its sole director effectively engineered the situation whereby it is faced with an adverse US judgment, and it should not be allowed the opportunity of relitigating its claim: see Re Menastar Finance (in liquidation) (above).

ix) The US judgment is a reasoned judgment. Mr Goldstein barely attempts in his witness statement to explain how he arrived at his conclusion that the proof should be rejected. Nor does he suggest that he undertook any independent investigation of the relevant issues. On the contrary, he appears to have relied on what he was told by Mr Haswell. The description of the distribution agreement as an "at will arrangement" appears to have been quoted from Mr Haswell's report to the section 98 meeting. Further, in paragraph 5.6 of his witness statement dated 10 March 2005, he concedes that he relied on information from Mr Haswell in reaching his finding that there had been no dealings by the Company with International Brands.

x) There has indeed been a properly conducted judicial process, albeit a process which the Company chose to abandon. In my judgment the Company had not shown that a properly conducted process has not taken place, nor provided any sufficient evidence to demonstrate that if a properly conducted judicial process were to take place, no debt would be found due: see Dawodu at 991

38. Accordingly, in my judgment, there has been no miscarriage of justice; the Company has not demonstrated that International Brands "manifestly" had no claim. On the contrary, the deposition evidence points strongly to the existence of such a claim. It would be contrary to justice to permit the Company in litigation to put International Brands to the expense of relitigating the matter in a trial in this country.
39. It follows that I allow International Brands' appeal against the rejection of its proof.
40. I direct the liquidator to accept the proof. I will hear argument about the precise sum and the extent to which any interest element falls to be disallowed. It follows that International Brands will be in a position to convene a meeting of the Company's creditors to consider removing Mr Goldstein as liquidator, if they see fit to do so. I do not consider it is appropriate on the evidence before me for this court to make any order for his removal. The fact that the court does not agree with Mr Goldstein's decision does not mean that his removal by the court is required.
41. I will also hear argument as to the precise terms of the order.