Often, bankruptcy proceedings will be based on a judgement debt. In such proceedings, the Bankruptcy Court must satisfy itself that the debt being claimed by the petitioning creditor is truly owing, and often the petitioning creditor will rely on the judgement debt as proof of this.

The High Court of Australia recently confirmed that a Bankruptcy Court is not bound to accept a judgement debt as conclusive, and has discretion to “go behind” a judgement debt, even if the judgment debt was obtained after a contested hearing.

In Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28, the High Court discussed the Bankruptcy Court’s obligation to satisfy itself that a judgement debt being relied upon by the petitioning creditor in a bankruptcy hearing, is in fact truly owing.

In this case, the plaintiff, Ramsay, commenced NSW Supreme Court proceedings against Mr Compton. Mr Compton engaged a solicitor and defended the proceeding. The quantum of the debt was not put as an issue before the Court at that time. The Court found in favour of Ramsay, and entered judgement against Mr Compton in the amount of $9.8 million. Mr Compton did not appeal this judgement.

After issuing a Bankruptcy Notice, with which Mr Compton failed to comply, Ramsay commenced bankruptcy proceedings to enforce the judgement debt. In the bankruptcy proceeding, Mr Compton requested that the Bankruptcy Court “go behind” the judgement to satisfy itself that the debt was actually owing to Ramsay. Ramsay’s solicitor conceded that it was an “open question” as to whether the debt, as calculated by Ramsay with respect to offsets and rebates was factually correct. As commonly occurs, the judge accepted the judgement debt as satisfactory proof of the debt owed by Mr Compton.

Mr Compton appealed this decision, arguing that the concession made by Ramsay as to the question of the debt calculation meant that the Bankruptcy Court could not be satisfied that the debt was truly owing, as required by section 52 of the Bankruptcy Act 1996 (Cth).

On appeal, the Full Court of the Federal Court, and subsequently, the High Court found that as there was a question in relation to the calculation of the debt, the judgement from the Supreme Court was not sufficient proof that the debt as claimed by Ramsay was in fact owing by Mr Compton.

What does this mean for you?

This case shows that in bankruptcy proceedings, a judgement debt from another Court may not be sufficient to satisfy the Bankruptcy Court that the debt being claimed is truly due and payable.

If you can show that there is a question as to whether the debt being claimed is truly owing, notwithstanding that there may be a judgement debt against you in that amount, the Bankruptcy Court cannot simply accept the judgement debt as proof of debt, and must go behind the judgement to satisfy itself that the claimed debt is truly owing.

If you have received a Bankruptcy Notice or Creditor’s Petition, and dispute that the debt being claimed is actually owing, please do not hesitate to contact our Laszlo Konya or Daniel Rathner on 03 9614 7707 with any queries or to discuss.