In a recent decision of the Full Court of the Federal Court, it was determined that in bankruptcy proceedings, the Court should go behind a judgment obtained in the Supreme Court by the petitioning creditor, to determine whether there was sufficient proof of the petitioning creditor’s debt.

In Compton v Ramsay Health Care Australia Ltd [2016] FCAFC 106, although the judgment upon which the petitioning creditor relied in subsequent bankruptcy proceedings was based on a hearing at which the judgment debtor was represented, certain forensic choices had lead to the quantum of the debt not being the subject of challenge or evidence.  There was therefore an open question as to the indebtedness of the judgment debtor.

The Court’s paramount focus in bankruptcy matters is satisfactory proof of the petitioning creditor’s debt.  In this case, the Full Court found that the primary judge had instead focused on the means by which the judgment debtor conducted its case at hearing in the Supreme Court.

Section 52 of the Bankruptcy Act 1966 (Cth) provides the power to go behind a judgment to see if, in truth and reality, a debt is owing.

The consequences of the decision is a timely reminder that no judgment is iron clad in matters of bankruptcy.  Where reason is shown for questioning whether there is in truth and reality a debt due to the petitioning creditor, a judgment can still be displaced by the Federal Court in exercising its powers to go behind a judgment  This applies despite such a judgment being obtained after a hearing on the merits taking place with a properly represented defendant.

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