On 17 August 2017 in the matter of Ramsay Health Care Australia Pty Ltd v Compton  HCA 28, the High Court ruled (by a 4:1 majority) that a bankruptcy court may “go behind” a judgment if the debtor raises sufficient reasons for impeaching the original debt.
Previously, the accepted practice was that a bankruptcy court would not go behind a judgment unless it was:
- A default judgment (because it is not a judgment on the merits);
- Obtained by fraud or collusion; or
- Under appeal.
In this case, a creditor obtained a judgment after a full trial (where both parties had legal representation). The claim was for monies owing under a guarantee.
The debtor’s only defence was non est factum (literal meaning “not my deed”, but in practice “I didn’t know what I was doing”).
This defence failed and judgment was entered for the creditor.
There was no suggestion that the judgment was affected by fraud or collusion. Nor was it appealed.
The creditor caused the issuance of a bankruptcy notice. The debtor did not apply to set it aside.
Then the creditor presented a creditor’s petition. The debtor resisted the petition on the basis that the bankruptcy court should go behind the judgment because the debtor had raised claims that offset or reduced the debt.
Unsurprisingly (at the time), the bankruptcy court refused to go behind the judgment. The debtor appealed to the Full Court of the Federal Court of Australia. He was successful.
High Court judgment
The High Court dismissed the creditor’s appeal by a 4:1 majority. In doing so, the plurality held that:
- There never was any point of precedent that said a bankruptcy court could only go behind a judgment in one of the three circumstances outlined previously – so much had happened in the earlier cases;
- The circumstances in which a bankruptcy court can go behind a judgment are not closed – the court will do so if it decides the facts of the matter warrant it;
- That said, a bankruptcy court would be reluctant to exercise that jurisdiction unless there was good reason;
- Bankruptcy is not merely a process involving the plaintiff and defendant – it has a public character with “quasi-penal consequences” and affects third parties who deal with the bankrupt party
- Accordingly, the bankruptcy court erred in refusing to consider the debtor’s arguments against the judgment.
We expect to see more judgment debtors asking bankruptcy courts to go behind judgments to challenge bankruptcy notices and creditor petitions. Whether or not they will be successful is another matter entirely.
It remains to be seen whether the debtor in this case will succeed in his offsetting claims or if the judgment is merely a stay of execution.
In any event, we predict that most judgment debtors will be unsuccessful. In our view, this is just another hurdle that a judgment creditor may have to overcome against a recalcitrant debtor on the route to bankruptcy.