Avoiding bankruptcy by attacking the ‘judgment debt’

The High Court’s recent decision in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28 has confirmed a bankruptcy court can exercise a discretion to go behind the judgment debt where sufficient reason is shown for questioning whether there is a debt due to the petitioning creditor.

In Ramsay, the judgment debtor, Mr Crompton, was successful in challenging a creditor’s petition even though there had been a contested trial. The basis relied upon by Mr Crompton for challenging the ‘debt’ was not raised by Mr Crompton at the trial even though he could have done so.

Background

• Ramsay sued Mr Crompton under a guarantee relating to a contract between Ramsay and its distributor.
• The guarantee contained a clause that provided that a certificate from Ramsay stating that an amount was owing was to be taken to be correct unless the contrary was proved (known as a ‘Dobbs certificate’).
• At the trial:
  • Mr Crompton relied entirely upon a defence that he did not give the guarantee on which he was sued. His defence failed.
  • Mr Crompton did not dispute the amount of the alleged guarantee debt nor did he tender any evidence as to the amount of the alleged debt.
  • Ramsay relied upon its certificate as to the amount owing.
• Ramsay issued a bankruptcy notice based on the judgment debt and then issued a creditor’s petition seeking to bankrupt Mr Crompton as he had failed to comply with the bankruptcy notice.
• In seeking to challenge the creditor’s petition, Mr Crompton contended that a reconciliation of the indebtedness between Ramsay and its distributor showed that there was no debt owing by the distributor to Ramsay and as a result no debt was owed by Mr Crompton as guarantor.
• Mr Crompton could have contested the amount of the alleged debt at trial as the reconciliation evidence was available.

The decision

The High Court observed that the testing of the relative merits of a claim and counterclaim under the rigours of adversarial litigation will usually establish the true state of accounts as between the parties to the proceedings.

Accordingly, a bankruptcy court will usually have no occasion to investigate whether the judgment debt is a true reflection of the real debt. However, where the merits of a claim and counterclaim have not been tested in adversarial litigation, a judgment debt will not have this practical guarantee of reliability.

The High Court held that it is a paramount requirement for a bankruptcy court under section 52 of the Bankruptcy Act 1966 (Cth) to be ‘satisfied’ that the debt relied upon by the petitioning creditor is truly owing, so as to protect the interests of third parties (such as other creditors of the judgment debtor) who were not parties to the proceedings that resulted in the judgment debt.

Where there has been a contested hearing, looking behind the judgment is not limited to showing some fraud, collusion or miscarriage of justice.

On the facts, there was a substantial question as to whether the judgment debt on which Ramsay relied was owing.

Comments

Despite the decision in Ramsay, it is ordinarily prudent for a person being sued to defend the claim by putting in issue and adducing evidence of all matters that are relevant to whether the alleged claim is owing.

Although Ramsay involved a contested hearing, the principles are equally if not more applicable where the relevant judgment was obtained by default or consent. In these circumstances, a judgment debtor should not delay in obtaining legal advice.

Ramsay also reinforces that it may not always be prudent for a creditor to rely entirely upon a Dobbs certificate to establish the amount of the debt.

For a judgment creditor, the position is problematic where a judgment debtor asserts that they are entitled to go behind the judgment. It would be prudent to request the judgment debtor to provide full details and supporting evidence of the basis of their assertions before proceeding with bankruptcy proceedings.

If you would like further information about these issues, please contact Graham Roberts, Rocco Russo or Mali Karunaratne of our litigation and dispute resolution team on 07 3231 2444.