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Bankruptcy courts still need convincing that a debt is valid

Insolvency Law News | August 2016

In our view there appears to be a reluctance by the government or the courts to “get tough” with bankrupts. This is evident by the proposed changes to bankruptcy laws to reduce the period of bankruptcy from 3 years to 1 year, and the actual changes to the laws in past few years to increase the threshold for a debt upon which a petition for bankruptcy can be commenced from $2000 to $5000. The following recent case is a further indication of the “conciliatory” approach to considering a bankruptcy.

In the case of Compton v Ramsay Health Care Australia Pty Ltd the Supreme Court judge declined an application to use his discretion to ‘go behind’ a judgment against the bankrupt to inquire into nature of the bankrupt’s debt. The appellant (Compton) contested this action in an appeal to the Full Federal Court of Australia. The court heard that the previous submission was declined based on Compton’s actions during the Supreme Court case. The Federal court considered that the Supreme Court’s decision not to ‘go behind’ the judgement on this basis was insufficient and instead a more centralised approach should be utilised.

To determine whether to ‘go behind’ judgement, the court had to consider whether there was a legitimate basis for questioning the validity and reality of the debt outstanding. After examining the facts presented by Mr Compton, the court decided there was a sufficient and substantial basis for questioning the validity of the debt, resulting in a successful appeal. The outcome of the bankruptcy proceedings is still pending, based on the outcome of a separate hearing. 

This finding reiterates the importance for creditors undertaking bankruptcy proceedings to understand that, despite a judgement debt being relied on to create the petition, it is still necessary that the court be satisfied that the creditor is truly owed by the debtor.

The solicitors at Forum Law in Sydney’s inner west have extensive knowledge and experience in the area of bankruptcy and insolvency law. If you are owed money as a creditor or you are defending debt proceedings feel free to contact us to discuss your concerns on (02) 9560 3388 or in our friendly and professional office in Leichhardt where parking for clients is free.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.