The Bankruptcy Court’s power to look behind a judgment

The decision in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28

This decision concerned the circumstances in which a Court may “go behind” a judgment in order to be satisfied that the debt relied upon by the petitioning creditor is truly owing. The majority of the High Court held that where a creditor’s petition is based upon a judgment debt resulting from a contested hearing, yet there are substantial reasons for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner, the Court has a discretion to “go behind” the judgment to investigate whether the debt relied upon is truly owing.

Brief Facts

In November 2012, Ramsay Health Care Australia Pty Ltd (“Ramsay”) entered into an agreement with Compton Fellers Pty Ltd trading as Medichoice (“Medichoice”), of which Adrian Compton was a director. Under the agreement, Medichoice was to import medical products on Ramsay's behalf and coordinate the procurement, importation, logistics and inventory management of the products.

Pursuant to a "Guarantee and Indemnity" ("the Guarantee") executed by Mr Compton in his personal capacity, Mr Compton irrevocably and unconditionally guaranteed to Ramsay the payment of all money that Medichoice might become liable to pay Ramsay on any account in connection with Medichoice's performance of its obligations under the agreement.

Subsequent to Medichoice going into liquidation, Ramsay commenced proceedings in the Supreme Court of New South Wales against Mr Compton, claiming money purportedly owing to it by Mr Compton under the Guarantee. In the Supreme Court proceedings, Mr Compton did not tender evidence in respect of quantum, nor did he seek to dispute the quantum of the alleged debt. Rather, Mr Compton simply sought to rely on a non est factum defence to Ramsay's claim, specifically, that the written agreement was invalid because Mr Compton was mistaken about its character when signing it.

At first instance, Mr Compton's non est factum defence failed. In the absence of any issue as to the quantum of the debt alleged by Ramsay, Hammerschlag J awarded judgment for Ramsay against Mr Compton in the amount of $9,810,312.33 ("the Judgment").¹ Mr Compton did not appeal the Judgment and was later served with a bankruptcy notice which he failed to comply with, thereby committing an act of bankruptcy. On 4 June 2015, Ramsay presented a creditor's petition in reliance upon that act of bankruptcy in the Federal Court of Australia.

Bankruptcy proceedings

By way of an interim application, Mr Compton sought to oppose the creditor’s petition on the basis that "the Court should exercise its discretion to go behind the [J]udgment upon which the Creditor's Petition is based and consider whether the amount of the claimed debt as a whole is actually owed by [Mr Compton] to [Ramsay]".²

Relevantly, section 52(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) provides that:

At the hearing of a creditor's petition, the Court shall require proof of:

…

(c)         the fact that the debt or debts on which the petitioning creditor relies is or are still owing;

and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.

The primary judge (Flick J) dismissed Mr Compton's interim application. In concluding that he had no discretion to go behind the Judgment, his Honour noted that:

• Mr Compton was represented by counsel in the proceedings before the Supreme Court;
• there was available evidence that had been filed in that Court addressing the quantum of any debt that may be owed; and
• a forensic decision had been made to confine the issue to be resolved by that Court to the enforceability of the Guarantee.³

Mr Compton successfully appealed Flick J’s decision to the Full Court of the Federal Court by way of unanimous judgment (Siopis, Katzmann and Moshinsky JJ). In reaching their decision, the Full Court rejected the narrow view that Corney v Brien⁴ established that a Court considering a creditor’s petition should not go behind a judgment which follows a full investigation at trial at which both parties were represented. Ramsay argued that the decision stood for the proposition that "fraud, collusion or miscarriage of justice" are exhaustive of the circumstances in which a Court may or should go behind a judgment.⁵ Instead, the Full Court applied the approach of Barwick CJ (with whom Windeyer and Owen JJ agreed) in Wren v Mahony:⁶

"where reason is shown for questioning whether behind the judgment ... there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof", but rather must "exercise its ... discretion to look at what is behind the judgment”.⁷

The Full Court went on to hold that the primary judge erred in focusing on:

"the way in which Mr Compton conducted his case in the Supreme Court rather than on the central issue, which was whether reason was shown for questioning whether behind the judgment there was in truth and reality a debt due to the petitioning creditor".⁸

High Court decision

In reaching their decision to dismiss Ramsay’s appeal, the High Court majority (Kiefel CJ, Keane and Nettle JJ, with Edelman J agreeing) relied on the decision in Wren v Mahony as authority for the proposition that the absence of fraud, collusion, or miscarriage of justice, did not preclude the possibility of there being sufficient reason for questioning the underlying debt.

The High Court maintained that while a judgment will usually constitute a reliable indication of the true indebtedness as between a debtor and creditor, the failure to test the merits of a claim and counterclaim in adversarial litigation can erode the practical reliability of the judgment.⁹ Emphasis was placed on the obligation imposed on the Court considering the debtor’s petition under section 52(1) to be satisfied that the debt which is the subject of the petitioning creditor’s action is still owing. The High Court affirmed that how a party conducts their case is not sufficient reason not to look behind a judgment.¹⁰ This is because the Court, considering the creditor’s petition, is not concerned with disciplining litigants or protecting the finality in the administration of justice as between parties to litigation, rather, its purpose is to “protect interests of third parties who were not participants in the litigation which led to the judgment in question”.¹¹

This decision serves as a timely reminder to creditor’s that a judgment debt is not always sufficient evidence to support a sequestration order against the estate of a judgment debtor. Given the Court’s power to look behind a judgment under section 52(1), a creditor should also ensure that it remains in a position to prove the soundness of the underlying debt which formed the basis of the judgment.