11 September 2017

Bankruptcy update

Ramsay Health Care Australia v Compton [2017] HCA 28

The High Court has handed down a significant decision which has created uncertainty when it comes to enforcing judgment debts by way of bankruptcy.

Ramsay Health Care Australia (“Ramsay”) was owed money by Compton Fellers Pty Ltd (in liquidation), trading as Medichoice.  Ramsay filed a claim in the NSW Supreme Court against Adrian Compton, the director of Medichoice pursuant to a personal guarantee.

At trial, Mr Compton disputed his liability pursuant to the personal guarantee, but did not dispute the amount of the debt owing. His defence was unsuccessful and he was ordered to pay $9,810,312.33 to Ramsay.  Ramsay then issued a bankruptcy notice to Mr Compton formally demanding payment of the judgment debt within 21 days.  The bankruptcy notice was not complied with.

Relying on Mr Compton’s failure to comply with the bankruptcy notice as an act of bankruptcy, Ramsay presented a creditor’s petition in the Federal Court seeking a sequestration order against Mr Compton, declaring him bankrupt and appointing a trustee in bankruptcy.  Mr Compton defended the petition by disputing the amount of the debt and introducing new evidence of alleged offsets and rebates owed by Ramsay to Medichoice.  In making the sequestration order, the Judge at first instance focussed on the fact that there was a judgment in place which had not been appealed, and determined that it was not appropriate to go behind that judgment and consider fresh evidence.  This decision was appealed by Mr Compton.

Significantly, the Court of Appeal and High Court both disagreed with the conclusion of the primary judge, emphasising that sections 52(1) and (2) of the Bankruptcy Act 1966 requires the court to be satisfied that the debt the subject of the petition is actually owing at the time of the making of a sequestration order.  The High Court held that given the new evidence, there was a substantial question as to whether the debt was actually owing.  The court rejected the contention that Mr Compton should be bound by his conduct during the initial trial, which included a failure to introduce the evidence of the offsets and rebates.

The impact of this decision is that a judgment debt issued after fully contested proceedings which has not been appealed is no longer considered conclusive evidence of a debt.  Instead, a debtor may be able to contest the amount owing in subsequent bankruptcy proceedings initiated by a creditor to enforce the debt.  Whilst there will need to be ‘substantial reasons for questioning’ the existence of a debt before a court will investigate, this decision introduces uncertainty in litigation for creditors and practitioners when it comes to enforcing a judgment debt by way of bankruptcy.

Talacko v Bennett [2017] HCA 15

Earlier this year the High Court considered whether a declaration of bankruptcy in Australia will prevent a creditor from enforcing a judgment for a debt in another country.  This case involved a long history of family dispute, where one sibling had been successful in obtaining judgment against another sibling who was subsequently declared a bankrupt.

The High Court held that because a declaration of bankruptcy prevents a creditor from enforcing a remedy against the bankrupt, it is a ‘stay of enforcement of the judgment’ within the meaning of section 15(2) of the Foreign Judgments Act.  This means that where a person is declared a bankrupt in Australia, an Australian court will not issue a certificate of finality of judgment and orders which would enable a creditor to enforce a judgment debt by instigating proceedings in another jurisdiction.

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