Bona fide dispute as to debt — judgment conclusive unless obtained by fraud or had been miscarriage of justice
The plaintiffs (“Ps”) and the debtor (“D”) held shares in a company (“C”), whereby they entered into a deed whereby Ps would withdraw from the investment in C and D guaranteed C’s repayment of the share capital contributed by Ps (the “Deed”). Ps duly took legal action after D failed to make payment. The parties then agreed to settle if Ps would transfer all outstanding equity in C to D for US$23.8 million (HK$185 million). D however, again failed to pay. A consent order was duly made for judgment against D, subject to an undertaking by Ps to preserve C’s assets. The assets of C’s subsidiary were sold through auction before the order was executed. Upon D’s continual failure to pay, Ps issued a petition for bankruptcy against D, who opposed this action on the ground that this was a bona fide dispute as to the debt on substantial grounds, and that the petition was presented with improper motives.
Held, allowing Ps’ petition, that, inter alia:
A judgment was conclusive but the bankruptcy court could go behind a judgment to determine if it had been obtained by fraud or collusion, or some miscarriage of justice. These principles also applied to a consent order which could be impeached upon any ground such as mistake or that the debt was fictitious which invalidated an agreement. Plus, there was no bona fide dispute as to the judgment debt under the consent order on substantial grounds. Ultimately, there was no evidence that the petition was presented with an improper motive.