Challenging bankruptcy notices – when can the court go behind the judgment?

11 December 2009

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Generally, when challenging a bankruptcy notice, it is said that a court cannot go behind the judgment that gives rise to the subject debt. However, the recent Federal Court case of Boglari v Coadys [2009] FCA 1398 is a reminder that a court may go behind the judgment if the debtor can establish substantial reasons that question the existence of the debt itself.

Facts

A law firm sued its former clients, Mr and Mrs Boglari, who were from a non-English speaking background. The firm sought the payment of outstanding legal fees.

Significantly, Mr and Mrs Boglari were unrepresented. No doubt, this contributed to their defence not being properly pleaded and therefore being struck out. The firm then applied for, and obtained, default judgment against Mr and Mrs Boglari. A bankruptcy notice was shortly afterwards issued in reliance on this judgment.

Again without legal representation, Mr and Mrs Boglari challenged the bankruptcy notice. Amongst other things, they put forward certain material suggesting that they may not actually have been required to pay to the firm the amount claimed. In this context, they argued that the debt being claimed was “fictional/non existent”. They urged the court to “revisit/go behind” the underlying judgment.

Decision

Justice Gray in the Federal Court stated that a court, when considering a challenge to a bankruptcy notice, has a limited discretionary power to go behind the underlying judgment in order to determine whether the bankruptcy notice is founded on a real debt. His Honour suggested that a court should exercise this discretion when the debtor can demonstrate substantial reasons for questioning the existence of the debt in the first place, and that a court should be more ready to find that such reasons exist where the judgment was given by default.

Justice Gray found as follows:

• There was a real dispute between Mr and Mrs Boglari and the firm as to whether the amount claimed was actually owed.
• If the matters of dispute raised by Mr and Mrs Boglari were accepted, the basis on which the firm claimed it was entitled to the unpaid fees would need to be explored.
• Because the judgment was a default judgment, Mr and Mrs Boglari had not had a proper opportunity to explore these issues.
• This particular combination of facts amounted to a substantial reason for going behind the judgment and for questioning whether Mr and Mrs Boglari in fact owed the firm the amount of unpaid fees being claimed.

His Honour therefore set aside the bankruptcy notice. This was despite the underlying judgment having been made in accordance with proper court process.

Significance

This decision is useful reminder that, in certain circumstances, a debtor seeking to set aside a bankruptcy notice may be able to convince a court to look behind the underlying, apparently regular, judgment. We suggest however that the onus would always be on the debtor to detail substantial and sufficient reasons questioning the existence of the debt itself.

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