Earlier this month, the High Court of Australia unanimously decided that a judgment creditor cannot apply for a certificate to effect enforcement overseas in circumstances where the judgment debtor is bankrupt.

The Background of the Case

In March 1992, several properties in central Prague, which had been seized by and vested in the state of Czechoslovakia after World War Two, were restored to one Jan Emil (the son of the owners of the properties), who resided in Melbourne, Australia.

In 1998, Jan Emil’s sister and the children of his deceased brother sought equitable relief in the Supreme Court of Victoria on the basis that it had been agreed that the three siblings would share equally in the benefit of the restored properties.

In 2009, Kyrou J held that the plaintiffs in the application (the respondents in the High Court) were entitled to equitable compensation pursuant to the terms of a settlement agreement reached in 2001.

On 4 November 2011, the plaintiffs commenced proceedings in the courts of the Czech Republic to enforce the orders of Kyrou J for the payment of equitable compensation and, upon the request of the plaintiffs, the Supreme Court of Victoria issued a document entitled ‘Certificate of Finality of Judgments and Orders’ (Certificate) in reliance on section 15 of the Foreign Judgments Act (Cth) (FJA), which was filed in the execution proceeding.

On 7 November 2011, Jan Emil was made bankrupt by order of North J of the Federal Court of Australia. In 2014, Jan Emil’s widow sought to have the Certificate set aside.

In Australia, there is a statutory regime for the recognition and enforcement of certain foreign judgments under the FJA. The FJA provides, by way of registration, for the enforcement of judgments rendered by the superior courts (and some specified inferior courts) of those countries listed in the Foreign Judgments Regulations 1992.

Under section 15(1) of the FJA, a judgment creditor who wishes to enforce a judgment given in an Australian court in a foreign country can apply to the Registrar of the Australian court for a certified copy of the judgment and a certificate with respect to that judgment. The judgment creditor can then rely on those documents in the foreign court to enforce the Australian judgment. However, under section 15(2) of the FJA, an application may not be made by the judgment creditor until the expiration of ‘any stay of enforcement of the judgment’ in question.

The High Court’s Decision

The issue before the High Court was the proper construction of the phrase ‘any stay of enforcement of the judgment’ in section 15(2). Specifically, the question was whether the prevention of the execution of a judgment brought about by section 58(3) of the Bankruptcy Act 1966 (Cth) is a ‘stay of enforcement’ within the meaning of s 15(2).

Section 58 of the Bankruptcy Act ensures that property of a bankrupt, which has vested in the Official Trustee, is not depleted to the advantage of individual creditors and the disadvantage of creditors generally. It provides, relevantly:

(1) Subject to this Act, where a debtor becomes a bankrupt:

(a) the property of the bankrupt…vests forthwith in the Official Trustee…

(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt…

The plurality of the High Court stated that the purpose of s 15(2) is to prevent the possibility of a foreign court acting upon a certificate to allow the execution of a judgment that would not be enforceable by execution under Australian law.

The plurality stated further that to exclude the operation of s 58(3) from the reach of s 15(2) would be to undermine an essential feature of the Bankruptcy Act because it would enable a judgment creditor to take action for the purpose of obtaining payment of a debt due to them, thereby obtaining an unfair advantage over other creditors.

The decision is a sensible one. To decide otherwise would severely undermine the policy settings which serve as the basis for insolvency law (namely, equitable distribution among creditors). There is no risk that, by this decision, judgment debtors will go into bankruptcy or liquidation so as to prevent enforcement against overseas assets. Any Australian judgment will still be paid by the trustee in bankruptcy to the extent of available assets, including overseas assets (i.e. the trustee or liquidator will pay a rateable portion of the judgment in accordance with the usual rules).

The authors previously discussed the statutory regime for the enforcement of foreign judgments under the Foreign Judgments Act 1991 (Cth) here.