Publications

Creditors beware: a judgment debt is not always enough

Introduction

It is well-known that Bankruptcy Courts have the power (and obligation) to ‘go behind’ a judgment in certain circumstances to determine if there is a genuine debt.  Most attempts to do so involve either a default judgment or allegations of improper conduct.

What has not been clear was when the Bankruptcy Courts would be prepared to go behind a judgment after a contested matter, where there was no allegation of fraud.

In its decision in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28 the High Court confirmed that a Bankruptcy Court may ‘go behind’ an earlier judgment to investigate whether a judgment debt is truly owing, even where there has been a contested trial on the merits and no suggestion of fraud, collusion or miscarriage of justice in relation to the judgment debt.

Background

In November 2012, Ramsay Health Care Australia Pty Ltd (Ramsay), a private hospital operator, entered into a medical products importation and distribution agreement (Agreement) with Compton Fellers Pty Ltd t/a Medichoice (Medichoice).1 Adrian Compton, a director of Medichoice, signed a personal guarantee in favour of Ramsay (Guarantee) under which he guaranteed Medichoice’s liability to Ramsay under the Agreement. On 30 June 2013, the Agreement expired and Medichoice went into liquidation.

Supreme Court proceeding

On 2 June 2014, Ramsay commenced a proceeding in the NSW Supreme Court against Mr Compton, claiming he owed $9,810,312.33 to Ramsay under the Guarantee.

Both Ramsay and Mr Compton filed evidence on the issues of quantum and liability, but at the trial (at which both parties were represented), Mr Compton did not dispute quantum and only challenged liability.  Mr Compton’s defence failed and, in the absence of any dispute as to quantum, the Supreme Court entered judgment against him for $9,810,312.33 (Judgment).2

Mr Compton did not appeal the Judgment and on 29 April 2015, Ramsay served a bankruptcy notice on him, with which Mr Compton failed to comply.

Federal Court proceeding

On 4 June 2015, Ramsay filed a creditor’s petition against Mr Compton and on 7 July 2015, Mr Compton filed a notice opposing the petition on the basis that no debt was really owing to Ramsay because the Judgment was not ‘founded on a debt that was in trust and reality‘ owing to Ramsay under section 52(1) of the Bankruptcy Act 1966 (Cth) (Act).3 Section 52(1) of the Act requires a Bankruptcy Court to be satisfied that the debt on which the petitioning creditor relies is still owing.

At the hearing before the primary judge (Flick J), Mr Compton produced a reconciliation of indebtedness and contended that it was Ramsay who in fact owed money to Medichoice.

Further, Ramsay by its counsel frankly accepted that the figures it relied upon at trial were inaccurate and did not truly identify the debt.

However, Flick J held that he had no discretion to go behind the Judgment and investigate whether the Judgment debt was truly owing, after taking into account the facts that Mr Compton was represented by counsel in the Supreme Court proceeding and had made the forensic decision not to dispute quantum.4

Full Court appeal

Mr Compton appealed this decision to the Full Court and Ramsay opposed the appeal.

In the appeal, Ramsay argued that Corney v Brian5 provides that “a Bankruptcy Court should not go behind a judgment which follows a full investigation at which both parties were represented …[and] that ‘fraud, collusion or miscarriage of justice ‘ are exhaustive of the circumstances in which a Bankruptcy Court may or should go behind a judgment.”6

However, Siopsis, Katzmann and Moshinsky JJ of the Full Court rejected this restrictive interpretation of Corney v Brian and unanimously allowed the appeal, ordering that the Bankruptcy Court should go behind the Judgment.7

The Court considered that a telling factor was the acceptance of the inaccuracy of the debt amount relied upon by Ramsay.

High Court appeal

Ramsay obtained special leave to appeal this decision to the High Court, where it again argued that Corney v Brian limited the circumstances in which a Bankruptcy Court can go behind a judgment to ‘fraud, collusion, or miscarriage of justice’ and that this was consistent with the common law principle of finality of litigation, a lens through which section 52(1) of the Act should be read.8

Mr Compton argued that both the Act and Wren v Mahony9 supported the proposition that “the question for the Bankruptcy Court was whether the judge was persuaded that there was a debt truly owing to the petitioning creditor” and that it “should go behind a judgment where sufficient reason is shown for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor“.10

A majority of the High Court (Kiefel CJ, Keane, Nettle and Edelman JJ, with Gageler J dissenting) dismissed the appeal and ordered that the Bankruptcy Court should proceed to investigate whether the debt on which Ramsay relied was owing in order to decide whether it was open to it to make a sequestration order.11

In reaching this decision, the majority found that ‘fraud, collusion and miscarriage of justice’ were not the only circumstances which allowed a Bankruptcy Court to go behind a judgment.12 On the issue of ‘finality of litigation’, the majority noted that there was a “real question so to whether Mr Compton had failed to present his case on its merits at the trial in the Supreme Court… it is no answer … to say … that Mr Compton is bound by the conduct of his case on his behalf at the trial in the Supreme Court.13

The joint majority of Kiefel CJ, Keane and Nettle JJ determined that the Full Court was correct to conclude that there was a substantial question as to whether the debt on which appellant relied was owing. That being so, the Court should proceed to investigate this question in order to decide whether it was open to it to make a sequestration order. There was evidence before the Court which, while it remained uncontradicted, was apt to suggest that the debt was not truly owing.

The joint majority further found that 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“.14 Even though at common law the rights associated with a debt merge on judgment, that does not operate to relieve a Bankruptcy Court of the paramount need to have satisfactory proof of the petitioning creditor’s debt.15

His Honour Justice Edelman found that the circumstances which enlivened the discretion to go behind the judgment were not constrained to any categories, even when the judgment debt was obtained after a contested hearing.16

Conclusion

A judgment debt continues to be reliable evidence of a debt owing for the purposes of a bankruptcy proceeding. However the High Court’s decision confirms that a judgment debt will not always be enough.

This may be the case even where fraud, collusion or miscarriage of justice have not been alleged and where there has been a contested hearing on the merits in the original proceeding.

The key question will not be on the way original proceeding was conducted, but on whether there is, in truth and reality, a debt due to the petitioning creditor.

This could mean an increase in the number of respondents to creditors’ petitions seeking to challenge the existence of a debt and using bankruptcy proceedings as a means to re-litigate debts, even after trial.

This article was written by Scott Cromb, Senior Associate, and Warren Jiear, Partner, in our Brisbane office.

Publication Editor: Grant Whatley.

1Ramsay Health Care Australia v Compton [2015] NSWSC 163 at [7]
2Ibid at [82]-[83]
3 Compton v Ramsay Health Care Australia Pty Ltd (2016) 246 FCR 508 at 510
4Ramsay Health Care Australia Pty Ltd v Compton [2015] FCA 1207
5 (1951) 84 CLR 343
6Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28
7Above, n 3 at 530 [80]
8Above, n 6 at [33]-[34]
9(1972) 126 CLR 212
10Above, n 6 at [37]
11Ibid at [72]
12Ibid at [39]
13Ibid at [66]-[67]
14Ibid at [54]
15 Ibid at [58]
16Ibid at [97]

Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.