Challenging Judgement Debts, the role of Ramsay

10 July 2022 in Civil and Commercial Litigation and Law

The High Court’s Decision in Ramsay: Challenging Judgement Debts

Overview

In 2017 the High Court of Australia initiated a shift in Australian bankruptcy law due to the court’s decision in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA (Ramsay).

The High Court’s decision in Ramsay has increased the capacity for debtors to dispute bankruptcy notices. The civil litigation lawyers at Brander Smith McKnight are up to date with recent developments in the law, such as the Ramsay decision.

Prior to Ramsay, it was generally accepted that judgement debts were solid evidence that a debt is still owing to a creditor. Traditionally, the only general exceptions to this were in circumstances where the legitimacy of a judgement was tainted in some contestable way, such as where the judgement was based on fraud or collusion.

The Ramsay decision allows debtors to contest the validity of judgement debts as evidence of a debt that is owing. The context and implications of the Ramsay decision are discussed below.

Context

In 2015, Ramsay obtained a judgement from the Supreme Court of NSW for a debt Compton owed them. Compton did not appeal the judgement and was served a bankruptcy notice which he did not comply with, resulting in an act of bankruptcy. Accordingly, bankruptcy proceedings commenced in the Federal Court of Australia.

Compton opposed the creditor’s petition presented by Ramsay, explaining that the court ought to exercise its discretion to investigate the legitimacy of the judgment debt upon which the creditor’s petition was based. Compton’s objection was based on his assertion that the judgement of the Supreme court did not actually reflect the debt that was owed by Compton to Ramsay. The Federal Court of Australia rejected Compton’s assertion that they investigate the judgment debt.

Compton appealed the decision to the Full Federal Court. The Full Federal Court accepted Compton’s appeal and decided that the initial Federal Court judge should have exercised their discretion in investigating the judgment debt. Ramsay appealed the Full Court’s decision to the High Court of Australia.

Decision

The main issue for the High Court to consider in Ramsay was whether the court could “go behind” the judgement debt to investigate whether a debt was truly owing to a petitioning creditor.

The majority of the High Court upheld the decision of the Full Court. They held that the court could “go behind” a judgement debt where there is a “sufficient reason” for questioning whether the debt is truly owed. Such discretion to “go behind” a judgement debt requires evidence which challenges the validity of the debt owed. Further, the court emphasised that the potential for a “miscarriage of justice” can spark the court’s discretion to “go behind” the judgement. The court noted that such “miscarriage of justice” need not be so egregious as to have the judgement set aside.

In reaching the decision, the court relied on the approach taken by the court in Wren v Mahoney. That is the judgement should not be considered as conclusive evidence in bankruptcy. Rather the court has the discretion to either accept or reject the judgement.

The court also emphasised that the Bankruptcy Act 1966 (Cth) affords the court the discretion to verify a debt owed in order to protect third party creditors of the debtor. The court examined s52(1)(c) of the act which states that at the hearing of a creditor’s petition, the court shall require proof of a number of things including “that the debt or debts on which the petitioning creditor relies is or are still owing”.

The court clarified that a judgement debt “may usually be taken to be sufficient evidence of a debt in that a judgement against a debtor in favour of a creditor obtained after a trial is, generally speaking, a reliable indiction if the true state of indebtedness between a creditor and debtor”.

The High Court dismissed Ramsay’s appeal and reiterated that the Bankruptcy Court should investigate whether the relevant debt was in fact owed to Ramsay.

Implications

The High Court’s decision in Ramsay has created another potential barrier for creditors in bankruptcy proceedings. Creditors are now unable to rely on the judgement debts as evidence in bankruptcy proceedings to the extent they could prior to the Ramsay decision. Accordingly, creditors should insure that they retain evidence of the debt that are owed rather than simply rely on a judgement as conclusive evidence of a debt.

The BSM civil litigation lawyers can assist defendants facing bankruptcy who now have the opportunity to re-examine an irregular judgement. We are happy to advise and assist you with your bankruptcy matter.