International Brands USA Inc v Goldstein & Anor

A liquidator may inquire into the substance of a judgment debt when adjudicating a proof, because the interests of all creditors must be protected. The judgment remains conclusive unless there is sufficient evidence of fraud, collusion, or miscarriage of justice. A deliberate decision by a company to abandon properly conducted foreign proceedings does not, without more, establish a miscarriage of justice. A subsequent judgment does not retrospectively alter the character of a claim for voting purposes at an earlier creditors’ meeting. Where the evidence shows that the foreign court considered substantial material and the company deliberately chose not to defend, the liquidator should accept the resulting proof unless the debt is shown to be manifestly unfounded.

International Brands USA Inc and Interbrands Inc claimed damages arising from the termination of an exclusive distributorship for alcoholic beverages. The company’s United States lawyers withdrew shortly before trial after the company declined to fund its defence. The United States District Court subsequently entered a reasoned judgment awarding damages.

After the company entered creditors’ voluntary liquidation, the applicants’ proof was admitted only in a limited amount for voting purposes and was rejected for dividend purposes. The applications concerned the chairman’s decision under the Insolvency Rules 1986 and the liquidator’s rejection of the proof. The central issues were whether the later judgment could affect the earlier voting decision and whether the liquidator was entitled to go behind the judgment.

1. Voting proof. The court stated, obiter, that the chairman had been entitled under rules 4.67(3) and 4.70 of the Insolvency Rules 1986 to reject the unliquidated damages element of the applicants’ proof at the date of the section 98 meeting. The later United States judgment did not retrospectively convert that claim into a liquidated debt or show that the chairman’s exercise of discretion had been flawed. The court also indicated that the proxy objection would have failed: the applicants’ representative had been allowed to vote without objection, so the identity requirement had been waived or could not fairly be relied upon retrospectively.
2. Power to go behind judgment. A liquidator acting in a quasi-judicial capacity may inquire into the consideration for a judgment debt when adjudicating a proof. The judgment is ordinarily conclusive, but the court or liquidator may investigate where there is evidence of fraud, collusion, or miscarriage of justice, including evidence that the judgment creditor manifestly had no claim.
3. Application of the test. The United States proceedings were properly conducted. They involved extensive documentation, motions, depositions, legal authorities and findings of fact. The company and its director knew that judgment was likely, deliberately chose not to fund the defence, and effectively engineered the circumstances in which the judgment was entered. That conduct did not establish a miscarriage of justice and did not justify relitigating the claim in England.
4. The liquidator’s reasons for rejecting the proof relied substantially on the director’s assertions and did not establish that the applicants manifestly had no claim. The appeal against rejection of the proof was therefore allowed. The liquidator was directed to accept it, subject to argument on the precise amount and any interest element. The court declined to remove the liquidator.

The judgment itself records an appeal from the order of Registrar Jacques dated 30 July 2004, which had dismissed the applicants’ application under rule 4.70 of the Insolvency Rules 1986. The court indicated that this appeal would have succeeded on the proxy issue but would otherwise have failed on the substantive voting question. The separate rule 4.83 application was allowed, and the proof was directed to be accepted.