Bankruptcy Update, Take 2: Going behind the judgment

Articles, Restructuring + Insolvency

Last year we outlined the decision of the Full Court of the Federal Court in Compton v Ramsay Healthcare Australia Pty Ltd [2016] FCAFC 106 in which the Court found that the paramount focus in bankruptcy matters is satisfactory proof of the petitioning creditor’s debt. This focus arises from section 52 of the Bankruptcy Act 1966 (Cth) which provides the power to go behind a judgment to see if, in truth and reality, a debt is owing.

These proceedings went on appeal to the High Court and on 17 August 2017 the High Court gave its decision in Ramsay Healthcare Australia Pty Ltd v Compton [2017] HCA 28. The High Court, in dismissing the appeal, confirmed the discretion of the Bankruptcy Court to go behind the judgment was not limited to a narrow interpretation which required the existence of fraud, collusion or a miscarriage of justice. It acknowledged that the Bankruptcy Court can go behind the judgment to satisfy itself that there is a debt, which is the necessary foundation for the making of a sequestration order. The merger of a debt into a judgment does not relieve a Bankruptcy Court of the paramount need to have satisfactory proof of the petitioning creditor’s debt.  This is because a Bankruptcy Court is concerned with the protection of interests of third parties so that other bona fide creditors do not become victims of a failed legal process when it comes to the distribution of the assets in a bankruptcy.

The circumstances which enliven the discretion to go behind the judgment are not constrained by categories even when the judgment debt arises after a contested hearing.  Where substantial reasons are given for questioning whether behind the judgment there was, in truth and reality, a debt due to the petitioning creditor, the Court can exercise its discretion by not accepting a judgment as satisfactory proof of a debt. Whether the facts will amount to substantial reasons so as to permit the exercise of the discretion will depend upon the particular circumstances.

Judgment creditor’s should not be too concerned about the prospect of a judgment being challenged where a judgment has been obtained after the testing of the merits in adversarial litigation.  A Bankruptcy Court will rarely have substantial reasons to investigate whether the debt which merged in the judgment was truly owed in the absence of some evidence of fraud, collusion or a miscarriage of justice, but it is possible. The same however might not be said of judgments obtained by default which are more likely to be carefully scrutinised by the Court.

For more information contact ERA Legal.

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