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High Court rules on extent Bankruptcy Court can ‘go behind’ a Judgment Debt – Implications for Petitioning Creditors

Key Points:

  • The discretion of the Bankruptcy Court to ‘go behind’ a judgment debt is not limited to only where there has been suggestion of fraud, collusion or a miscarriage of justice.
  • Merger of a prior existing debt into a judgment is not to relieve the need of the Bankruptcy Court to have satisfactory proof of the petitioning creditor’s debt. Therefore, the debt is not taken to be comprised in the judgment itself.
  • The High Court reaffirmed the important role of the Bankruptcy Court in the protection of third party rights in creditor petitions.

Yesterday, the High Court, in its decision of Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28 rejected a narrow interpretation of the Bankruptcy’s Court discretion to ‘go behind’ a judgment and stated that the discretion is not strictly limited to circumstances of fraud, collusion or where there has been a miscarriage of justice.

In reaching its decision, the majority of the High Court held that even though fraud, collusion and miscarriage of justice are the most frequent examples enlivening the Bankruptcy Court’s jurisdiction to ‘go behind’ a judgment, the overarching obligations of s 52 of the Bankruptcy Act 1966 (Cth) involve the protection of the interests of third parties, particularly other creditors of the debtor (at [55]).

The decision is not reflective of a broadening of the discretion of the Bankruptcy Court to look behind a judgment debt. Rather, it is a reaffirmation of the unfettered discretion, not to be narrowly interpreted, of the Bankruptcy Court to determine whether the debt relied upon by the petitioner creditor is truly owing.

This decision should not be taken to suggest that the Bankruptcy Court will examine every judgment debt, absent the establishment of special circumstances. However, the High Court indicated that consent judgments and default judgments, not having had the claim tested in an adversarial litigation, will not have a practical guarantee of reliability (at [68]). In these situations, the potential disadvantage to third parties will be a vital consideration to the Bankruptcy Court.

Effect for petitioning creditors

In situations where a judgment debt has been obtained after the merits have been tested in adversarial litigation, petitioning creditors can find some comfort in that the Bankruptcy Court may never need to investigate whether the debt is truly owing. This decision does not broaden the Bankruptcy Court’s discretion or provide a new approach to petitioning creditor claims. Rather, this decision is a summation of the High Court’s refusal to limit the Bankruptcy Court’s discretion in situations where further investigation is needed into whether the debt is truly owing, with a particular emphasis on the debts where there is an increased potential disadvantage to third parties.

Author
Jessica Allen | Lawyer
T +61 3 9258 3760
E jessica.allen@maddocks.com.au

Key Points:

  • The discretion of the Bankruptcy Court to ‘go behind’ a judgment debt is not limited to only where there has been suggestion of fraud, collusion or a miscarriage of justice.
  • Merger of a prior existing debt into a judgment is not to relieve the need of the Bankruptcy Court to have satisfactory proof of the petitioning creditor’s debt. Therefore, the debt is not taken to be comprised in the judgment itself.
  • The High Court reaffirmed the important role of the Bankruptcy Court in the protection of third party rights in creditor petitions.

Yesterday, the High Court, in its decision of Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28 rejected a narrow interpretation of the Bankruptcy’s Court discretion to ‘go behind’ a judgment and stated that the discretion is not strictly limited to circumstances of fraud, collusion or where there has been a miscarriage of justice.

In reaching its decision, the majority of the High Court held that even though fraud, collusion and miscarriage of justice are the most frequent examples enlivening the Bankruptcy Court’s jurisdiction to ‘go behind’ a judgment, the overarching obligations of s 52 of the Bankruptcy Act 1966 (Cth) involve the protection of the interests of third parties, particularly other creditors of the debtor (at [55]).

The decision is not reflective of a broadening of the discretion of the Bankruptcy Court to look behind a judgment debt. Rather, it is a reaffirmation of the unfettered discretion, not to be narrowly interpreted, of the Bankruptcy Court to determine whether the debt relied upon by the petitioner creditor is truly owing.

This decision should not be taken to suggest that the Bankruptcy Court will examine every judgment debt, absent the establishment of special circumstances. However, the High Court indicated that consent judgments and default judgments, not having had the claim tested in an adversarial litigation, will not have a practical guarantee of reliability (at [68]). In these situations, the potential disadvantage to third parties will be a vital consideration to the Bankruptcy Court.

Effect for petitioning creditors

In situations where a judgment debt has been obtained after the merits have been tested in adversarial litigation, petitioning creditors can find some comfort in that the Bankruptcy Court may never need to investigate whether the debt is truly owing. This decision does not broaden the Bankruptcy Court’s discretion or provide a new approach to petitioning creditor claims. Rather, this decision is a summation of the High Court’s refusal to limit the Bankruptcy Court’s discretion in situations where further investigation is needed into whether the debt is truly owing, with a particular emphasis on the debts where there is an increased potential disadvantage to third parties.

Author
Jessica Allen | Lawyer
T +61 3 9258 3760
E jessica.allen@maddocks.com.au