In Ramsay Health Care Australia Pty Ltd v Compton, the High Court of Australia considered the Bankruptcy Court's discretion, under s52 of the Bankruptcy Act 1966 (Cth), to go behind a judgment to satisfy itself that a debt is truly owing before making a sequestration order against a debtor.

The judgment debt arose under a guarantee. The judgment debtor, Compton, opposed Ramsay's bankruptcy petition, claiming that the judgment was founded on a disputed debt. The primary judge declined to investigate, on grounds that Compton chose to confine his defence at trial to the enforceability of the guarantee, without disputing quantum.

The Full Court of the Federal Court unanimously held that the issue for the Bankruptcy Court was not the finality of forensic choices made by parties at trial, but the statutory requirement for satisfactory proof of debt. The Bankruptcy Court should have exercised its discretion to go behind the judgment.

A majority of the HCA agreed and dismissed Ramsay's appeal. The legislation requires the Bankruptcy Court to be satisfied that there is, in truth and reality, a debt, before it makes a debtor bankrupt. Scrutiny of the debt protects third parties, particularly other creditors. The discretion is not limited to cases of fraud, collusion or miscarriage of justice, and is available even after a contested trial. Here, evidence before the primary judge raised questions over whether the debt was truly owing, and should have been investigated.

See full decision here.