Bankruptcy – ‘the Court looks with suspicion on consent judgments and default judgments’

It is not often that a bankruptcy court will go behind the judgment upon which the creditor’s petition against the debtor is based. But there is a fundamental position taken that this can be done if there is some doubt as to whether there was in fact a debt due by the debtor to the creditor: Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28.

This usually arises when the creditor’s petition is challenged by the debtor at the hearing.

But in DuluxGroup (Australia) Pty Ltd v Hado [2020] FCCA 1887 the registrar had already made a sequestration order, on 20 February 2020, and the Federal Circuit Court was asked to review that decision.

That is a hearing de novo: see Important rules in reviewing registrars’ sequestration orders.

In light of further evidence since the making of the order, the Court decided that the magistrates court judgment on which the petition was based should be examined:

  • it was a default judgment given in the absence of an appearance and defence by the debtor;
  • although the debtor had not adequately explained his failure to appear in those proceedings, that is only one matter which a court takes into account. The debtor had applied to have the judgment set aside but ‘apparently’ those proceedings were placed on hold because of a ‘perception that [the debtor] does not have standing to bring those proceedings’. While the Court doubted ‘that perception is correct’, the reality is that the debtor is bankrupt and such a claim should have vested in his trustee;
  • there had been no adjudication on the merits of the petitioning creditor’s claim and the debtor’s response to it;
  • the evidence for each of the parties demonstrated ‘substantial issues of fact between them. If the debtor’s case is accepted, then apart from the sum of $825 there is no other debt owing’; and
  • a debt of $825 is insufficient to support the making of the sequestration order.

The Federal Circuit Court explained that

‘the Court looks with suspicion on consent judgments and default judgments. Where the judgment in question is a default judgment, it appears that the Court will always “go behind” the judgment if there is what it regards as a bona fide allegation that no real debt lay behind the judgment’,

citing Katter v Melhem (No 2) [2014] FCA 1176 at [69].

In that decision, Justice Wigney, of the Federal Court, under the heading of Relevant principles – “going behind” a judgment, set out at [69] and in several following paragraphs the relevant principles.  Paragraph [69] said that

“the existence of a judgment is prima facie evidence of a debt …However, a judgment is never conclusive in bankruptcy and the Court has a discretion to “go behind” the judgment to investigate whether there was a good debt to support it”,

citing Corney v Brien.

In any event, the Federal Circuit Court was

‘satisfied that there is a bona fide allegation that no debt sufficient to sustain the making of the sequestration order lays behind the judgment’.

The matter was adjourned to 10 August, with directions.  The Court was conscious that the debtor was bankrupt under a sequestration order. There was no evidence or indication from the trustee as to the state of that bankruptcy.



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