Going behind court judgments in bankruptcy proceedings: the High Court’s consideration
This case note considers the outcome of an appeal from a decision I covered previously in my blog. That decision was upheld on appeal. You can read my earlier post on that decision here.
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A court exercising jurisdiction under section 52 of the Bankruptcy Act 1966 (Cth) may, in some circumstances, ‘go behind’ a court judgment in order to satisfy itself that the debt relied upon by a petitioning creditor against a person facing bankruptcy is truly owing.
Just over a year ago, the Full Court of the Federal Court handed down its decision in Compton v Ramsay Health Care Australia Pty Ltd.[1] The proceeding turned on the issue of whether the primary judge had erred in failing to investigate whether the debt allegedly owed by Mr Compton was in fact owing. The Full Court ruled that the primary judge had so erred, and found in favour of Mr Compton. The Court clarified the circumstances in which a court’s discretion to ‘go behind’ should be enlivened, and drew a distinction between the conduct of parties to bankruptcy proceedings and the underlying merits of their arguments about the debt.
Ramsay Health Care went on to appeal to the High Court.[2] On appeal, it argued that a court should only go behind a judgment to scrutinise a debt where there has been some fraud, collusion or miscarriage of justice.
The High Court’s consideration
By a majority of 4–1, the High Court upheld the decision of the Full Court of the Federal Court.
In a joint judgment, Kiefel CJ, Keane and Nettle JJ held that a court’s discretion to go behind a judgment and scrutinise a debt is not restricted to the kind of circumstance that Ramsay Health Care proffered, namely where there has been some fraud, collusion or miscarriage or justice to impeach the judgment.[3] Their Honours observed:
‘In point of principle, scrutiny by a Bankruptcy Court of the debt propounded by a judgment creditor seeking a sequestration order in no sense involves an attempt to impeach the judgment. A Bankruptcy Court is not concerned with whether the judgment should be set aside as upon an appeal, or even as a default judgment or a judgment obtained by fraud may be set aside; nor is a Bankruptcy Court concerned to deny the effect of the judgment as “res judicata” between the parties to it. A Bankruptcy Court is not concerned to prevent the judgment creditor from invoking the ordinary processes of execution available under the general law. Rather, a Bankruptcy Court is concerned with whether the debt on which it is based is truly a basis for the making of a sequestration order. 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’.[4]
Commenting on the issue of whether a court, in determining whether to go behind a judgment, ought consider the conduct of the parties at trial, their Honours looked to the broader significance of bankruptcy proceedings and noted:
‘[T]he notion that a party is bound by the conduct of his or her case has never been a sufficient reason not to look behind a consent judgment or a default judgment. That is because a Bankruptcy Court is concerned, not to discipline litigants or to protect finality in the administration of justice as between parties to litigation, but to protect the interests of third parties who were not participants in the litigation which led to the judgment in question’.[5]
Their Honours noted that while the existence of a judgment will generally be ‘sufficient evidence of a debt’, nonetheless ‘where the merits of a claim and counterclaim have not been tested in adversarial litigation, a judgment debt will not have this practical guarantee of reliability’.[6] In the present case, Mr Compton had failed to present particular evidence at trial and this was noted by the primary judge.
In a separate decision and agreeing with the majority, Edelman J emphasised the open-ended nature of the discretion to go behind a court judgment. Citing the decision of Barwick CJ in Wren v Mahoney,[7] Edelman J considered that the presence of a judgment might not constitute satisfactory proof of the underlying debt where there are ‘substantial reasons’ for querying the indebtedness. His Honour stated that ‘[w]hether a matter will amount to substantial reasons so as to permit the exercise of the discretion will depend upon the particular circumstances’.[8]
Conclusion
In Ramsay Health Care Australia Pty Ltd v Compton, the High Court affirmed the position that a court’s discretion to go behind a judgment is not restricted to situations of fraud, collusion or a miscarriage of justice occurring at trial. In doing so, the majority was mindful of the importance of protecting in bankruptcy proceedings the interests of third parties — particularly other creditors — who do not participate in the trial and who later seek to rely on the bona fides of a judgment debt when a sequestration order is made.
[1]: [2016] FCAFC 106.
[2]: Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28.
[3]: Ibid [47]. Gageler J, dissenting, held that where there has been a trial of the action and in the absence of any fraud, collusion or miscarriage of justice, a court ought not go behind the resulting judgment to scrutinise the debt: see [91].
[4]: Ibid [54] (emphasis added).
[5]: Ibid [67] (emphasis added).
[6]: Ibid [68].
[7]: (1972) 126 CLR 212, 224–225.
[8]: Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28, [111].