Finality? Think again: When a Court will "look behind the judgment" in bankruptcy proceedings

In its recent decision in Ramsey Health Care Australia Pty Ltd v Adrian John Compton [2017] HCA 28, the High Court considered the circumstances when a Bankruptcy Court can "look behind a judgment debt", even when that debt arose following a contested trial. 

The High Court’s decision came after the debtor, Mr Adrian Compton, defended a Creditor’s Petition which was founded on a judgment against Crompton in the sum of $9,810,312.33. 

Crompton was found liable for this sum following a contested trial in the Supreme Court and in which he was legally represented. 

After obtaining judgment, the judgment creditor served a Bankruptcy Notice on Mr Crompton and, after Mr Crompton failed to comply, served a Creditor’s Petition on him, thereby commencing bankruptcy proceedings in the Federal Court. 

At first instance, Mr Crompton argued that the Federal Court should exercise its discretion to look behind the judgment. 

Mr Crompton argued that the Court should not be satisfied that the debt or debts on which the petitioning creditor relied were still owing, as the quantum of the debt assessed by Hammerschlag J in the Supreme Court was not the quantum actually owing. 

The Federal Court rejected Mr Crompton's argument. Ultimately, the High Court found that the Federal Court should not have rejected the argument. 

In his decision, Flick J of the Federal Court held that, in circumstances where Mr Crompton was legally represented in the Supreme Court proceedings and failed to raise quantum as an issue in those proceedings, the Court had no discretion to go behind the judgment. 

Relevantly, Flick J held that Crompton was in a position to raise the issue of quantum at the time of the Supreme Court proceedings but made a forensic decision to confine the issues in dispute to the enforceability of the guarantee. 

His Honour also held that, even if the Court did have discretion to go behind the judgment, the discretion should not be exercised for those same reasons. 

Mr Crompton appealed to the Full Federal Court. 

On appeal, the petitioning creditor argued that the decision of the High Court in Corney v Brien (1951) 84 CLR 343 was authority for the proposition that the Court's discretion should not be exercised following a full investigation at trial in which the parties were represented, unless there has been some kind of fraud, collusion or miscarriage of justice. 

The Full Federal Court rejected this argument and allowed the appeal, adopting the broader view of the test advanced by Mr Crompton. 

According to the Full Federal Court, the Federal Court had erred in focusing on the way in which the case was run in the Supreme Court and should instead have directed itself to: 

the central issue, which was whether reason was shown for questioning whether behind the judgment there was in truth and reality a debt due to the petitioning creditor. 

Special leave to appeal to the High Court was granted to the petitioning creditor. 

In their majority judgment, Kiefel CJ, Keane and Nettle JJ explained that Flick J "unduly complicated" the discretion, and that the only discretion is whether or not to accept the judgment as satisfactory proof of the debt – a discretion which, as Barwick CJ explained in Wren v Mahoney (1972) 126 CLR 212 at 224, "is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner". 

The High Court therefore dismissed Ramsey's appeal and referred the proceedings back to the Federal Court to investigate whether behind the debt underlying the judgment there was in truth and reality a debt due to the petitioning creditor. 

The decision introduces a degree of uncertainty to the process. The creditor would have thought that, following a fully contested trial, the Bankruptcy Courts would not spend any time "going behind the Judgment". 

Gavin Parsons & Associates have a wealth of experience in bankruptcy litigation. If you believe that your client has a potential issue with a judgment debt at the hearing of the Creditors Petition, you/your client should call Gavin Parsons & Associates now and obtain advice.

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Date posted: 2017-10-31