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Home » Latest News » Can a Judge in Bankruptcy Proceedings go behind the underlying judgment debt

Can a Judge in Bankruptcy Proceedings go behind the underlying judgment debt

Can a Judge in Bankruptcy Proceedings go behind the underlying judgment debt

The standard road to bankrupting a debtor is well trodden: issue a money claim, obtain judgment, present a bankruptcy petition and obtain a bankruptcy order.

Provided that the statutory threshold of £5,000 is met, any petition based on a valid, enforceable and – importantly – unsatisfied judgment debt should as a matter of common-sense result in a bankruptcy order which is resistant to any challenge.

The reality is not always so straightforward.

Where a court has adjudicated a dispute and handed down judgment in favour of the creditor, it would appear contrary to the doctrine of res judicata to allow the debtor to relitigate, during bankruptcy proceedings, the issues which gave rise to the judgment debt. The principle of finality is an essential component of any functioning legal system.

Despite this, a bankruptcy court with proper jurisdiction does indeed possess the discretion to go behind a judgment, both at the hearing of the petition and upon an application for annulment of the bankruptcy order pursuant to Section 282 of the Insolvency Act 1986.

In certain circumstances, the court can annul a bankruptcy order if it considers that the underlying petition debt (i.e. the money judgment) is invalid.

This is a matter of obvious concern to petitioners. If a bankrupt successfully applies for an annulment, the petitioner can fall liable for the entire costs of the bankruptcy, including those of the Official Receiver and the Trustee in Bankruptcy. These costs can be substantial.

The courts in England and Wales have been understandably reluctant to exercise this power. Broadly speaking, a bankruptcy court will only challenge the validity of a judgment debt in circumstances where evidence exists that the judgment was obtained by fraud or collusion, or if there has been a clear miscarriage of justice. Given that the concept of a ‘miscarriage of justice’ is somewhat subjective and nebulous, the bankruptcy court would seem to have a very wide discretion to go behind a judgment.

As such, a prudent bankruptcy petitioner will be keen to ensure as far as possible that their judgment is robust – particularly if they are relying upon a default judgment or if the judgment is expected to be subject to any meritorious appeal or application to set aside. If in doubt, a creditor may be advised to exhaust cheaper and less hazardous methods of enforcement before pursuing the nuclear option of a bankruptcy petition.

Once the window for appeal has passed, a judgment obtained on the merits should be safe enough to withstand any challenge during bankruptcy, but we recommend that you obtain expert professional legal advice before taking any steps. 

Our dispute resolution team have experience in insolvency matters and are here to help. To contact a member of our team please email: [email protected] or call 01482 320620.