By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.
It is an unfortunate predicament for bankruptcy trustees that they become a new target for the litigious bankrupt. Bankrupts hell-bent on maintaining the original dispute with the petitioning creditor often request bankruptcy courts to ‘look behind the judgment’, an exercise in which a bankruptcy court can determine whether a debt is really owing in substance, notwithstanding that there may be a pre-existing court order.
Such is the saga of the Bankrupt Estate of Shaw, the history of which was set out by Snaden J in Shaw v The Official Trustee in Bankruptcy  FCA 1574 (“the Review Application”), an application by the bankrupt seeking to review the trustee’s decision to admit the petitioning creditors’ debt. The decision in the Review Application has recently been affirmed on appeal in Shaw v The Official Trustee in Bankruptcy  FCAFC 142 (“the Review Appeal”).
Mr Shaw had failed to pay the balance of the purchase price on a contract, which was subsequently rescinded by the vendor. Mr Shaw commenced proceedings in the Supreme Court of Victoria against the original vendor and assignee (“the Creditors”) seeking specific performance. Mr Shaw was unsuccessful, resulting in him being ordered to pay damages and costs.
Mr Shaw considered he should not be liable to pay the creditors’ costs because, as he argued, the creditors themselves had not incurred any liability to their legal practitioners because there was no written retainer. However, the legal practitioners had a retainer with a related company within the same corporate group as the Creditors. In the numerous decisions that followed, the courts routinely held that Mr Shaw was liable to pay the Creditors’ costs by reason of the indemnity principle. That is, because the related entity funding the litigation was in effect indemnifying the Creditors, Mr Shaw was liable to pay the adverse costs orders.
Looking behind the judgment
Mr Shaw first asked the Federal Court of Australia to ‘go behind the judgment’ when the creditors sought a sequestration order. Gordon J declined to go behind the judgment. Unsuccessfully, Mr Shaw sought to re-agitate the same issue by appealing the sequestration order, commencing fraud proceedings against the creditors, seeking to annul the bankruptcy and lastly, by seeking a review of the Official Trustee’s decision to admit the creditors’ Proof of Debt (in part).
In the Review Application, Snaden J summarised some of the relevant principles that apply where a bankrupt asks a bankruptcy court to go behind a judgment. They may be summarised as:
- It is not sufficient to show that the judgment (or costs order) was wrongly made. It is necessary in all of the circumstances to show evidence of fraud, collusion or a miscarriage of justice: Shaw v Yarranova Pty Ltd  FCAFC 88 (“the Annulment Appeal”) at ; Corney v Brien  HCA 31 as cited in Yarranova Pty Ltd v Shaw (No 2)  FCA 616 (“the Sequestration Decision”) at .
- If the judgment in question followed a full investigation at a trial on which both parties appeared, the court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out: Corney v Brien as cited in the Sequestration Decision at .
- An annulment application is not an occasion for a bankrupt to have the question of whether to go behind the judgment considered anew, as though the proceedings on the creditor’s petition and the subsequent appeal had never occurred: the Annulment Appeal at .
- Where, on an annulment application, a judge has already declined to go behind the petitioner’s judgment on a an application for a sequestration order, it will be necessary to show that there is evidence in existence that was not put before the sequestration order judge: the Annulment Appeal at .
- A bankrupt should not advance grounds for annulment that cannot be proven by evidence already known to, or in the possession of, the bankrupt: the Annulment Appeal at .
- Where bankruptcy courts have already declined to go behind a judgment on an application for a sequestration order or annulment application, and the bankrupt raises the same contention on an application to review a trustee’s decision, the Court is likely to also decline to go behind the judgment: the Review Application at  – .
The Shaw decisions provide a helpful guide to some of the key principles applicable to the concept of ‘going behind a judgment’ in bankruptcy proceedings.
If you would like more information or advice in relation to bankruptcy, contact Andrew Hack at email@example.com or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or firstname.lastname@example.org
Stephen Mullette on (02) 9806 7459 or email@example.com.