“Going behind” a judgment debt in the bankruptcy context

The decision of the High Court of Australia in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28; 261 CLR 132 (Ramsay) clarified the limits of a Bankruptcy Court's discretion to "go behind" a judgment, that is, to investigate whether the underlying debt relied upon for the making of a sequestration order is, in truth and reality, owing to the petitioning creditor. Recently, the Ramsay decision was applied by the Federal Court of Australia in Dunkerley v Comcare [2019] FCA 1002 (Dunkerley).

 

Litigation, litigation and more litigation…

On 24 October 2007 Ms Dunkerley suffered a mental health injury which she claimed was significantly contributed to by her employment as a teacher. In June 2009, the AAT made a consent decision in which Comcare accepted liability for Mr Dunkerley's injury suffered.

In March 2009, a psychiatrist concluded that Ms Dunkerley no longer presented with any psychiatric diagnosis and had full capacity to return to work. Around six months later, Ms Dunkerley made another claim for compensation following an allegation that her condition had been aggravated by her interactions with a more senior colleague in the context of her seeking a promotion.

That claim for aggravation was rejected by Comcare. Ms Dunkerley's application for a review of Comcare's decision was rejected by the AAT. Ms Dunkerley's appeals to the Federal Court and the Full Federal Court were also unsuccessful.

In May 2013, Comcare rejected a further claim for compensation by Ms Dunkerley arising from her 2007 injury. Her claim for further compensation met the same fate before the Federal Court. In April 2015, Perram J made a cost order against Ms Dunkerley (First Judgment Debt) and expressed the view that her appeal was "devoid of merit" and that the proceedings "are beginning to border on the vexatious".

Ms Dunkerley appealed the April 2015 orders. Flick J made case management orders, which included that Ms Dunkerley prepare an appeal book. Subsequently, Comcare filed an interlocutory application to dismiss the appeal on the basis that Ms Dunkerley had failed to comply with Court directions and had failed to appear at a directions hearing. The application was successful and on 8 October 2015, Ms Dunkerley was ordered to pay Comcare's costs of its application (Second Judgment Debt).

Ms Dunkerley applied for an extension of time and leave to appeal against the October 2015 orders. Her appeal was denied by Rares J in December 2015, with costs (Third Judgment Debt).

On 24 September 2018, Ms Dunkerley was served with a bankruptcy notice which was based on the First, Second and Third Judgment Debts. Ms Dunkerley sought to contest the validity of the bankruptcy notice and to convince the Federal Court that it should "go behind" the underlying judgment debts.

When can the Court "go behind" a judgment debt?

It is now well established that the Court has discretion to "go behind" an underlying judgment debt upon which a bankruptcy notice is based in an appropriate case. Some of the relevant principles summarised by the Federal Court (at [68]) were as follows:
  1. The power of the Court to go behind a judgment debt "is not readily exercised if there has been a substantive hearing of the matter on its merits by the court in which the judgment was granted".
  2. A party must establish special circumstances for the Court to go behind the underlying judgment debt. Special circumstances of this nature are usually only when the "judgment debtor was unable to present his or her case on its merits", for example, where there has been a consent or default judgment (Ramsay at [69], [70] per Kiefel CJ, Keane and Nettle JJ).
  3. A bankruptcy court will "rarely have substantial reasons to investigate whether a judgment debt was truly owed" unless, for example, there is some evidence that it has been obtained by "fraud, collusion or a miscarriage of justice". However, the enlivening of the discretion is not limited to these categories (Ramsay at [111]-[112] per Edelman J).

Determination

Ms Dunkerley submitted that the Court should go behind the three underlying judgment debts upon which the bankruptcy notice was based, because (she alleged):  Comcare and its lawyers committed fraud by falsely representing to Flick J that she had no explanation for her failure to comply with June 2015 orders; the bankruptcy notice was an abuse of process as there was no complete investigation of the issues at trial by reason of the appeal being dismissed;  Flick J's case management orders deprived her of the opportunity to make full submissions and created an apprehension of bias; and the manner in which Comcare had conducted itself brought the administration of justice into disrepute.

The Court rejected each of the above submissions. Instead, it was found that they "were no more than an attempt to re-litigate the same issues of fact and law that had been considered and rejected in prior proceedings".

Accordingly, Ms Dunkerley failed to show that there had been any circumstances – "let alone special circumstances" – to support her submissions that the Court should exercise its discretion to go behind the costs orders and judgment debts that underlay the bankruptcy notice against her.

Key points

  1. A judgment debtor must convince a Bankruptcy Court that it falls within the "special circumstances" category to have the underlying judgment debt investigated.
  2. Judgment debts after a fully contested substantive hearing are widely regarded as the most reliable form of debt, and it will therefore be very difficult to persuade a Bankruptcy Court to "go behind" such a judgment debt.
  3. A Court's discretion to "go behind" a judgment debt will not be enlivened if the application by the judgment debtor in reality represents an attempt to re-litigate on the same evidence a dispute which has already been heard and determined in adversarial proceedings.
McCabe Curwood has significant knowledge and experience in the areas of bankruptcy and insolvency, including in relation to applications to have bankruptcy notices set aside and at the creditor's petition stage, when the Court is tasked with determining whether to make a sequestration order.

Contributors

Nathan Jones Special Counsel
Gidon Kangisser Lawyer