In the recent Hong Kong decision of Re Primlaks (H.K.) Ltd (In Liquidation), the High Court confirmed the liquidators’ decision to reject the applicant’s proof of debt (POD) on the grounds that: (1) the liquidators were entitled to go behind the default judgment, which formed the basis of the POD, on the ground of a miscarriage of justice; and (2) the applicant had not discharged its burden of proving the loans underlying the default judgment were genuine debts owed by the company.

The POD submitted by the applicant to the liquidators was based on, inter alia, a default judgment obtained against the company in separate proceedings. The applicant appealed against the liquidators’ decision not to admit the sums under the POD based on the default judgment. In dismissing the application, the High Court revisited the applicable principles when challenging rejections of proofs of debt as follows:

1. An appeal against a liquidator’s adjudication is a hearing de novo, at which the Court may confirm, reverse or vary the liquidator’s decision.
2. The Court is bound to decide the rights of the applicant in light of all the evidence and not merely express a view as to whether the liquidator was right or wrong in rejecting the proof based on the then-available evidence.
3. A liquidator who defends their decision to reject a proof is no longer acting in a quasi-judicial capacity, but is cast in the role of an adversary.
4. The onus of proof is on the applicant to show on a balance of probabilities that a real debt is due to them.
5. To admit a proof, a liquidator must be satisfied on the evidence that the proof is founded on a real debt, which is a relatively low threshold. However, a liquidator is entitled to go behind mere form to ascertain the truth.
6. On an appeal against the rejection of a proof, the burden is on the applicant to prove a real debt, to be established by credible evidence.
7. An applicant cannot say that their claim should be admitted but insufficient evidence is available because it has been lost or destroyed; the burden remains with the applicant to establish proof of the claim on the balance of probabilities on the evidence produced.
8. The Court is not bound to accept at face value any previous accounts of a company and is entitled to go behind them to form its own conclusions.

Applying the above, the Court held that liquidators are entitled to go behind a judgment to ascertain whether a debt is owed. The usual grounds for doing so include fraud, collusion or a miscarriage of justice. In this case, the Court accepted that the miscarriage of justice ground applied. A default judgment, by its nature, involves a one-sided presentation of facts, the objectivity and accuracy of which may be subject to challenge or further scrutiny. The Court took the view that had the company properly defended the proceedings, it would have succeeded.

This case is a timely reminder that creditors should be aware that a proof of debt based on a judgment or company records may be subject to independent assessment by liquidators in determining the legitimacy of the debt and the extent to which the applicant should be allowed to rank as a proving creditor.