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Creditor's Petitions – they may not be the end of the road

23 Nov 2012

At times, people who are bankrupted challenge to the bitter end the validity of a bankruptcy notice or whether they genuinely owe a debt the subject of bankruptcy. Creditors rely upon a judgment (often by default) to found the bankruptcy notice and petition.

The recent case of Ali v Retail Decisions Pty Ltd [2012] FCA 1130 in the Federal Court called into question the evidentiary burden placed upon a Respondent to a creditor's petition and the process that the Court should follow when the debt is being challenged.

The Respondent, Retail Decisions Pty Ltd (Retail Decisions) is a provider of fuel cards for the purpose of purchasing fuel on credit. It was alleged that Mr Ali applied for, used and accrued a debt of approximately $38,000.00 on such a card.

Retail Decisions obtained default judgment against Mr Ali in the Victorian Magistrates’ Court, and subsequently issued a Creditors’ Petition in the Federal Magistrates Court based on the unsatisfied judgment and further interest that had accrued. A sequestration order was made by the Registrar against Mr Ali.

Mr Ali applied for a review of the Registrar’s decision on the basis he had never applied for or used such a card, was not indebted to Retail Decision and was solvent. The Federal Magistrate did not accept Mr Ali’s submissions and determined that a sequestration order was properly made however decided that the execution of the petition should be delayed for a period of two months.

Mr Ali appealed and was successful. He argued that the Federal Magistrate erred by imposing an unwarranted burden of proof upon Mr Ali in his application for review.

The Federal Court considered whether the court should exercise its discretion to look behind the original judgment to determine whether there is "in truth and reality a debt due to the petitioning creditor". The Court determined that a two-stage process ought to be followed.

The first step is for the Court to consider whether it should go behind the judgment. A court will more readily look behind the judgment where the judgment was obtained by default.

To overcome the first step, Mr Ali needed to satisfy a tactical onus of demonstrating that there was a substantial reason for questioning the debt.  Mr Ali provided unchallenged evidence under oath that he did not apply for the fuel cards, did not authorise anyone else to do so and did not use any fuel cards.  The Court held this was sufficient to discharge the tactical onus.

The second step involves the onus of proof shifting to the other party, here Retail Decisions, which was then required to establish that a debt was in fact due ‘in truth and reality’. Retail Decisions was unable to satisfy this onus.

The Court allowed the appeal by Mr Ali on the basis that the Federal Magistrate "placed an unwarranted burden of proof upon Mr Ali to prove as a fact, that which had merely been raised as a plausible possibility."

What does this mean for you?

This matter outlines the ability to overturn default judgments in certain circumstances. It also means that where a debt is being disputed (even post default judgment), creditors should fully investigate the legitimacy of default judgments before the expense of bankruptcy proceedings are commenced.

Here, a creditor had spent the time, effort and money in obtaining judgment, issuing a bankruptcy notice and moving to sequestration to find themselves back at the starting block.