Re Menastar Finance Ltd

Facts

Application by a creditor, Menastar Ltd ('Menastar'), of Menastar Finance Ltd ('MFL'), to reverse the decision of MFL's liquidator to admit a proof of debt based on a judgment debt, in favour of MFL's only other creditor, B M Samuels Finance Group plc ('BMS'). BMS had commenced proceedings ('the QB proceedings') against MFL seeking the recovery of allegedly outstanding debts. On 9 May 2000, MFL having failed to attend the summary judgment hearing, judgment was entered in BMS's favour. In May 2000 BMS presented a winding up petition based on the judgment debt at the hearing at which MFL again failed to appear. MFL was a wholly owned subsidiary of Menastar. In September 1999 Menastar received over #200,000 from MFL in the form of a dividend leaving MFL without free assets to satisfy the debt allegedly due to BMS. In February 2002 the liquidator issued an originating application against Menastar and one of Menastar's directors for misfeasance, wrongful trading, the making of a transaction at an undervalue and wrongful preference. Menastar submitted that: (i) MFL had a good defence in the QB proceedings and in fact had a counterclaim against BMS that exceeded the amount claimed; and (ii) the liquidator ought to have rejected BMS's proof as its basis stemmed from a judicial process that had not been properly conducted and therefore the court should reverse the liquidator's decision on the basis that in such circumstances the court could look behind the judgment.

Held

(1) It was an established principle that in the making of a winding up or bankruptcy order the court could, in appropriate circumstances, when considering whether to admit a creditor's proof based on a judgment debt, go behind the judgment debt to see whether it was in fact due. The power of the liquidator was no different from that of the court. In deciding whether to do so, neither the court nor the liquidator was limited to the evidence before the court when the judgment was made. Re Trepca Mines Ltd (1960) 1 WLR 1273 considered. The rationale was based on the liquidator's duty to ensure the assets of the insolvent company were distributed amongst those who were justly, legally and properly creditors. Re Van Laun (1907) 2 KB 23 considered. (2) It was equally well-established that a court or a liquidator would not as a matter of course look behind every judgment debt and consider afresh its validity. On the unusual facts of this case the liquidator was fully justified in refusing to go behind the judgment. The assets available to meet creditors' claims should not be diluted by unjustified claims based on fraud or collusion or suggestions that had the judicial process been properly conducted then it would have been found that nothing was in fact due to the creditor. In this case there were only two creditors and it was apparent from the size of the proof and the minimal assets available to meet the proof that the real motivation for the present application was to undermine the liquidator's claims against Menastar and one of its directors. In such circumstances, the court would not come to Menastar's assistance as Menastar itself had engineered the situation in which there had been no representation at the summary judgment hearing. McCourt Siequien v Baron Meats Ltd (1997) BIPR 114 considered. (3) There was no reason to believe that even if MFL had been represented on the summary judgment hearing it would have been very likely to have succeeded on its cross-claims.

Application dismissed.

Comment

The court would not assist a creditor of a company in going behind a judgment and reversing a liquidator's decision to admit a proof of debt that was founded upon a judgment debt where that creditor had engineered the situation causing the company to have judgment entered against it.