In the recent decision of Ramsay Health Care Australia Pty Ltd v Compton [2015] FCA 1207, the Federal Court of Australia has reaffirmed the principles which apply to the exercise of the Court’s discretion to “go behind” a judgment upon which a Creditor’s Petition is predicated.

Due to the quasi-penal nature of bankruptcy, the Court has the discretion to “go behind” the judgment upon which a Creditor’s Petition is based. As stated by the High Court of Australia, per Barwick CJ, in Wren v Mahony “the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt”. The existence of a judgment is prima facie evidence of a debt (Corney v Brien).

In Ramsay, Flick J was asked to go behind a debt which arose as a result of a personal guarantee. The salient issue in the matter was that the judgment was entered following a 3 day hearing before the Supreme Court of NSW.

The case law, as summarised in Ramsay, makes it clear that there is somewhat of a “sliding scale” in applying the principles, whereby the Court looks with suspicion on consent judgments and default judgments, and will often use discretion to scrutinize those judgments; however, the Court will not often reopen the matter where there has already been a full investigation at a trial, unless a prima facie case of fraud, collusion or miscarriage of justice is made out. Judgments entered between those extremes, for example, pursuant to a compromise, may be challenged if relevant grounds are shown.

In Ramsay, Flick J held that the circumstances in which the discretion should be exercised had not been enlivened because there was no “miscarriage of justice” and no “injustice” to the applicant. At the hearing which gave rise to the judgment, the Applicant was represented by Counsel, all available evidence was adduced, and a forensic decision had been made to confine the issue to be resolved.

Justice Flick did however note that, in reaching this conclusion, the fact that there had been a hearing on the merits, where both parties appeared, did not preclude the exercise of the discretion to go behind a judgment and that facts may later come to light, or the facts as found may give rise to a legal issue which was overlooked.

As such, it is open to any respondent in bankruptcy proceedings to seek advice and investigate the circumstances which gave rise to the judgment upon which the creditor’s petition is based, and to consider whether it is open to scrutiny.

For more information please contact ERA Legal.