Going Behind a Judgment Debt

Going Behind a Judgment Debt: The Bankruptcy Court’s discretion to satisfy itself of a debt

A recent High Court judgment Ramsay Health Care Australia Pty Ltd v Crompton [2017] HCA 28 considered when a Bankruptcy Court can exercise its discretion to “go behind” a judgment to investigate whether a debt is actually owing.

In this case, Ramsay Health Care Australia Pty Ltd (Ramsay) commenced a claim against Mr Adrian Crompton (Crompton) in the Supreme Court of New South Wales, for money owing to it under guarantee by Crompton.

Crompton raised only a non est factum defence, which failed, and judgment was awarded in Ramsay’s favour for $9,810,312.33. Ramsay served a bankruptcy notice on Crompton, which was not complied with and Ramsay presented a Creditor’s Petition based on that act of bankruptcy (being the non-compliance with the bankruptcy notice).

Crompton filed a notice stating grounds of opposition to the Creditor’s Petition, contending that the debt was not owing as the judgment was not founded on a debt owed, and that the court should exercise its discretion to “go behind” the judgment. Crompton also filed an interim application, seeking a separate determination as to whether the Court should exercise that discretion.

The High Court considered the discretion under s 52 of the Bankruptcy Act 1966 (Cth), namely that the court shall require proof of debt, and if it is satisfied with the proof may then make a sequestration order.

The primary judge refused to exercise this discretion in going behind the judgment. Crompton appealed to the Full Court of the Federal Court, which allowed the appeal. Ramsay then appealed to the High Court.

Ramsay argued that a Bankruptcy Court’s discretion to “go behind” a judgment should only be enlivened in cases involving some fraud, collusion or miscarriage of justice, whereas Crompton argued that the discretion is enlivened where “sufficient reason is shown for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor” (see [37]).

The High Court indicated that a judgment will usually be considered sufficient evidence of a debt, as a trial in which the merits of a claim are tested will usually provide an answer as to whether a debt is owing and in what amount. However, where there is a “substantial question” as to whether the debt was owing, the Bankruptcy Court should investigate that question (see [72]).

The discretion of the Bankruptcy Court in satisfying itself of a debt serves to protect the interests of third parties, such as other creditors of the debtor, who may be prejudiced if a sequestration order is based on a debt amount that is not in truth or reality owing. Cases involving consent or default judgments may raise concern for third parties, as the judgment was not rigorously argued and proven through the adversarial court process.

Debtor’s Take Away

“A Bankruptcy Court has a statutory duty to be “satisfied” as to the existence of the petitioning creditor’s debt; a creditor should not be able to make a person bankrupt on a debt which is not provable” (see [54]).

If there is sufficient reason to doubt that there was in truth and reality a debt owing, even if there is a judgment against you for that debt, you may raise this with the Bankruptcy Court and this may enliven its discretion to “go behind” the judgment and satisfy itself that there is a debt owing.

Creditor’s Take Away

A judgment stating that a debt is owing to you will likely be considered sufficient evidence of the debt owing, and may in fact be the “most reliable statement of the debt humanly attainable” (see [68]).

However, where there are reasons to question whether a debt behind a judgment is in fact owing, the Court has the discretion to satisfy itself that the debt is in fact owing. An example of this may be where a claim was uncontested and a default judgment was obtained.

This highlights the importance of sufficiently setting out your claim and documentary evidence of the debt right from the start, so that even if the Bankruptcy Court exercises its discretion to investigate whether the amount is owing, you will be in a position to prove that the debt was and still is owing.

 

Shannon McMenamin

31 October 2017