Bankruptcy update: The Court’s power to go behind a Judgment
In a landmark decision, the High Court of Australia in Ramsay Health Care Australia Pty Ltd v Compton  HCA 28 found that a bankruptcy notice founded on a judgment debt can be challenged to determine whether the debt is truly owing.
The decision serves as a timely reminder to creditors that the Court is not bound to accept a judgment as conclusive evidence and can use its discretion to “go behind” a judgment that is relied upon in a bankruptcy notice.
What is ‘going behind’ a judgment?
It is a requirement in bankruptcy proceedings that the Court be satisfied that the debt on which the petitioning creditor relies is still owing. The general practice is to consider judgment debts as conclusive evidence of a valid and enforceable debt when making sequestration orders (bankrupting an individual).
Section 52 of the Bankruptcy Act 1966 (Cth) provides the Court with a discretion to dismiss a creditor’s petition if, for some other sufficient cause, a sequestration order ought not to be made. This requires the Court to determine whether the debt in question really exists before deciding to go behind a judgment to enquire as to its validity. The Court can exercise this discretion even when the judgment debt ordered to paid follows a contested hearing.
The decision made on 17 August 2017 by the High Court was an appeal from the case of Compton v Ramsay Health Care Australia Pty Ltd  FCAFC 106 in which the petition filed by the creditor, Ramsay, was heard by the Federal Court.
The debtor, Compton, asked the Court to separately determine whether it should “go behind” the judgment which was obtained in the Supreme Court. The Federal Court was presented with evidence by the debtor that the creditor owed money to the debtor’s business. The Court did not go behind the judgment on the following grounds:
- The judgment debtor was represented by Counsel before the Supreme Court;
- The factual matters relating to the “offsets” and “rebates” were available to the debtor at the time of the Supreme Court hearing;
- A forensic decision had been made by the judgment debtor not to challenge the quantum of his indebtedness before the Supreme Court; and
- No explanation had been provided as to why the quantum of indebtedness was not put in issue before the Supreme Court.
Subsequently, the debtor appealed to the Full Federal Court which was upheld by a majority in the High Court. In particular, the High Court held that it may go behind a judgment debt in order to set aside the sequestration orders if there has been a ‘miscarriage of justice’.
What does this mean for me?
Although the High Court’s decision does not make life easier for creditors, debtors can now challenge the existence of the debt to determine whether it is truly owing under section 52 of the Bankruptcy Act 1966 (Cth). Where the Court is satisfied that there are questions surrounding the existence of the debt due to a petitioning creditor, it will exercise its discretion under section 52 of the Bankruptcy Act 1966 (Cth). This suggests that the Court will adopt a broad interpretation of section 52 and will rely on the evidence presented by the debtor in determining whether the sequestration orders should be set aside.
Please note that this article does not constitute legal advice as Bankruptcy Notices and Creditor’s Petition proceedings are complex. We recommend that you contact DSS Law for tailored legal advice and to obtain further information on this area of law.
DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on 1300 DSS LAW or firstname.lastname@example.org.