FEDERAL COURT OF AUSTRALIA

Boglari v Coadys (A Firm) (Receiver and Manager Appointed) [2009] FCA 1398

BANKRUPTCY – bankruptcy notice – setting aside – bankruptcy notice based on judgment of County Court – judgment given after striking out defence for failure to comply with rules of court – federal magistrate refused to exercise discretion to go behind judgment – whether federal magistrate’s exercise of discretion miscarried – whether substantial reason to question whether judgment in respect of an actual debt – whether material indicating real dispute between appellants and their former solicitors about whether appellants were liable for costs beyond what they had already paid – whether County Court should have taken the view that strict compliance with rules by an unrepresented litigant was required

PRACTICE AND PROCEDURE – whether exercise of discretion miscarried because the correct principles were not applied

Legal Profession Act 2004 (Vic) s 3.4.19

Boglari & Anor v Coadys (a firm) [2008] FMCA 1277 cited

Corney v Brien (1951) 84 CLR 343 cited

House v The King (1936) 55 CLR 499 followed

Joossé v Commissioner of Taxation [2004] FCAFC 245 (2004) 137 FCR 576 followed

Neil v Nott (1994) 121 ALR 148 applied

Wolff v Donovan (1991) 29 FCR 480 cited

SANDOR BOGLARI and SUSANNA BOGLARI v COADYS (A FIRM) (RECEIVER AND MANAGER APPOINTED)

VID 759 of 2008

GRAY J

27 NOVEMBER 2009

MELBOURNE

THE COURT ORDERS THAT:

1.         The motion the subject of the notice of motion filed on 18 June 2009 be dismissed.

2.         To the extent necessary, the time within which the appellants can apply for leave to appeal from the judgment of the Federal Magistrates Court of Australia, given on 1 September 2008 in proceeding number MLG 1008 of 2008, be extended, and the appellants have leave to appeal from that judgment.

3.         The appeal be allowed.

4.         The orders of the Federal Magistrates Court of Australia, made on 1 September 2008 in proceeding number MLG 1008 of 2008, be set aside.

5.         There be substituted for those orders orders that:

            (1)        The bankruptcy notice, directed to the appellants and issued on 9 July 2008,     be set aside.

            (2)        The respondent pay the appellants’ costs of the proceeding in the Federal          Magistrates Court of Australia.

6.         The respondent pay the appellants’ costs of the appeal.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

The nature and history of the proceeding

1                          This appeal is from a judgment of the Federal Magistrates Court in Boglari & Anor v Coadys (a firm) [2008] FMCA 1277.  The learned federal magistrate dismissed an application by the appellants to set aside a bankruptcy notice.  The bankruptcy notice was founded on a judgment of the County Court of Victoria, which was given in default of defence.  The federal magistrate refused to exercise the discretion to go behind the judgment.  The substantial question in the appeal is whether this exercise of discretion miscarried, because the federal magistrate did not apply the correct principle. 

2                          The respondent is a firm of solicitors.  The appellants engaged the respondent to act for them in litigation with another party or parties.  The details of that litigation are not relevant to this appeal.  The appellants paid the respondent three sums of money in respect of costs and disbursements in relation to the litigation.  The respondent alleged that the appellants owed further money.  The respondent sued the appellants in the Magistrates Court of Victoria.  The appellants counterclaimed for alleged negligence by the respondent in the conduct of the litigation.  Their counterclaim was for an amount that exceeded the jurisdiction of the Magistrates Court of Victoria.  The proceeding was therefore transferred to the County Court of Victoria.  On 12 December 2006, the proceeding came before a judge of the County Court for directions.  The respondent then filed affidavit material and the proceeding came before another judge on 29 January 2007.  That judge directed the appellants to file and serve a defence and counterclaim in proper form and adjourned the matter until 23 February 2007.  On that occasion, his Honour struck out the defence and counterclaim because they were not properly pleaded.  He refused to give judgment for the respondent then and there, without a formal application for judgment.  On 16 April 2007, the judge gave judgment for the respondent for $3,211.15 plus interest of $848.68 and ordered the appellants to pay the costs of the proceeding in the Magistrates Court of Victoria and the County Court.

3                          On 9 July 2008, the respondent procured the issue of a bankruptcy notice directed to both appellants, claiming a debt of $4,659.77.  This was made up of the total amount of the judgment, $4,059.83, and interest accrued since the date of the judgment of $599.94.  The respondent did not claim anything in the bankruptcy notice in respect of the costs of the proceeding in the Magistrates Court of Victoria and the County Court.

4                          The appellants applied to the Federal Magistrates Court on 15 August 2008.  Their application specified that they sought the following orders:

1)         Set aside the Bankruptcy Notice

2)         Set aside the judgment/ orders of the county court [sic] CI 06/ 02602

3)         That the court revisit/ go behind the judgment of the Hon judge [sic] Holt of the County Practice Court

4)         To set aside/ or dismiss the above mentioned judgment on the basis that :

a)         the debt is fictional/ non existent

b)         the Practice Court was prejudice [sic] due to no legal representation

c)         Dismissal of counter claim

d)         Dismissal of defense [sic] (not even requested by the Plaintiff/ Defendant by counter claim (Coadys Firm)

e)         Not allowing the improved / clearly outlined Defense [sic] to go ahead in front of a judge and jury.

f)          Denial of Natural Justice (based on the remarks of the Hon Judge Holt) that I have no Legal Representation and I cannot provide the correct format of forms for my defense [sic].  Taking into consideration that I am from a non-English speaking background, nor am I a legal practitioner, which is evident.

g)         Extreme prejudice in not allowing me to present my own defense [sic] and all the contractual evidence support [sic].  This should have been presented to the Judge and Jury.

5                          The application was heard, and judgment was given by the Federal Magistrates Court, on 1 September 2008.  By the notice of appeal filed in this Court on 22 September 2008, the appellants advanced grounds expressed in the following terms:

1.That the original amount –($3112, + ... ) is fictitious and the County practice court [sic] judge did not examined [sic] that “in truth and reality a debt is due“ [sic]

2.The judgment obtained by default  .

3.The judgment obtained by an avertion [sic] .NO evidence of signed Client Service Agreement .

4.The judgment obtained from a practice court           and there  for  , [sic] no full trial conducted

            a/  Coadys       never acknowledged dispute exist  , [sic] or what Contract     they base the claim  .

            b/ No opportunity to face original Agreement  acceptor–Mr Roger Johnson ex Coadys  lawyer-that, is he disputes  the PIECE by PIECE WORK and payment [sic] .

5.Neither court –county practice c. [sic] ,Federal magistrate c. [sic] –was newer [sic] interested to be SATISFIED that the debt which the practitioner relies [sic] is due by debtor.

The orders sought in the notice of appeal are:

1.Set aside the Bankruptcy Notice

2.Set aside the judgment /orders of the county court [sic] CI06/02602and the           Federal/Magistrate Court order MLG 1008/ 2008

3.That the court revisit /go behind the judgment of the hon. judge [sic] Holt of the County Practice court [sic]

4.To set aside / or dismiss the above mentioned judgment on the grounds and Affidavit provided .

6                          On 19 December 2008, the respondent filed a notice of objection to the competency of the appeal in the following terms:

1.         The orders of the learned Federal Magistrates [sic] were interlocutory and the appellant being required to obtain leave to appeal from them has neither sought leave nor an extension of time within which to seek such leave;

2.         The notice of appeal is defective because none of the grounds of appeal amount to a proper contention of error by the learned Federal Magistrate;

3.         The appeal is an abuse of process to the extent that the Appellant seeks to set aside a judgment of the County Court of Victoria on which no appeal was brought by the appellant in a court of competent jurisdiction.

4.         Alternatively, this Court has no power or jurisdiction under ss 75-77 of the Commonwealth of Australia Constitution Act to set aside a judgment obtained in a court of competent jurisdiction in the State of Victoria.

7                          On 27 October 2008, I had already ordered that any objection to the competency of the appeal be dealt with on the hearing of the appeal.  This order appears to have prompted the appellants to file a notice of motion on 18 June 2009, the day on which the appeal was heard.  The effect of that notice of motion appears to be to seek an order that the case be heard by a judge other than me.  From the affidavit in support of the notice of motion, it appears that the first appellant thought that what occurred at the directions hearing on 27 October 2008 was that I invited or directed that there be an objection to the competency of the appeal.  He took this to be an indication that I had pre-determined the case.  At the hearing of the appeal, I explained to the first appellant, who appeared on his own behalf and also made submissions on behalf of the second appellant, that the object of my order was simply to ensure that there would only be one day of hearing in relation to the appeal, rather than the possibility of a day devoted to hearing an unsuccessful objection to competency and a day devoted to hearing the appeal.  The first appellant did not press the motion.

The reasons for judgment of the federal magistrate

8                          At [17] of his reasons for judgment, the federal magistrate found that “the order made by Judge Holt was plainly a final judgment on the claim made by the creditor and it was made following proper process.”  At [18]-[20], his Honour then said:

Mr Boglari wants to go behind that judgment and examine whether or not ultimately he ever owed Coadys the $3,000.00 they claimed.  It is sufficient to say that it is immediately apparent that the competing factual assertions to which that would give rise would doubtless be both lengthy and complicated.

This is not a case in which fraud is alleged.  Rather, from the transcript it is quite apparent that his Honour dismissed the defence on the footing that there was no proper defence pleaded.  His Honour had already given clear warning on two occasions that that might be the way things would proceed and indeed it would appear that Judge Lawson made remarks to not dissimilar effect.

In my view, the judgment was regularly made and it is not appropriate that this Court exercise its discretion to seek to go behind it.  From the way in which the matter has proceeded today it is more probable than otherwise to me, to the extent that I have discretion, that I should exercise it in favour of the creditor.  It is far more probable that this would give rise to a welter of further and unnecessary litigation.

9                          At [21], the federal magistrate quoted from the transcript of the directions hearing in the County Court on 23 February 2008 the following exchange between the first appellant and the judge:

MR BOGLARI:       If the rules cannot be complied with but the person is not necessarily ignorant but unable to - but able to present the truth, the truth or the facts can be dismissed for the sake of - - -

HIS HONOUR:      No, the facts won’t be dismissed, they won’t come to trial.  They won’t come to trial.

MR BOGLARI:       So anybody who cannot get representation or cannot afford one is liable to lose.  It doesn’t matter how forceful or how wrongly they have been done.  Is that correct?

HIS HONOUR:      Basically, yes.  Yes.

MR BOGLARI:       I accept Your Honour’s word.  Thank you.  Thank you, Your Honour.

10                        The federal magistrate then proceeded at [22]-[24]:

Looked at in isolation that exchange would be troubling but it needs to be borne in the context of the transcript of the two days during which Mr Boglari was before his Honour.  His Honour was endeavouring, at great length and in a perfectly, if I may respectfully say so, appropriate and courteous way, to explain to Mr Boglari the necessity for him to comply with the Rules of the Court.  Mr Boglari was, albeit understandably perhaps, indicating an incapacity and inability to do so.

His Honour’s observations really amount to no more or less, looked at fairly in my view, than that a total failure to pay regard to these rules is only more likely in the event of lack of representation and is indeed liable to be very unfavourable as to outcome.  It does not appear to me to involve anything in the nature of an abuse of process such as to ground the application that Mr Boglari presses.

These matters not being made out and these, as far as I can see, being the only bases upon which the application is pressed, it follows inevitably that the application to set aside the bankruptcy notice should be dismissed and I will so order.

Going behind the judgment

11                        The power of a court on an application to set aside a bankruptcy notice to “go behind the judgment” on which the bankruptcy notice is based is a discretionary power.  In an appeal from a judgment involving the exercise of discretion, the question for the appeal court is not whether it would have exercised the discretion differently from the court below.  The basis on which an appeal court is required to act is set out in the well-known passage in the joint judgment of Dixon, Evatt and McTiernan JJ in House v The King (1936) 55 CLR 499 at 504-555:

The manner in which an appeal against an exercise of discretion should be determined is governed by established principles.  It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course.  It must appear that some error has been made in exercising the discretion.  If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so.  It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance.  In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.

12                        The nature of the discretion the exercise of which is sought when a recipient of a bankruptcy notice seeks to set aside that notice by going behind the judgment on which it is based is set out in the joint judgment of North and Finkelstein JJ in Joossé v Commissioner of Taxation [2004] FCAFC 245 (2004) 137 FCR 576 at [3]:

The court can go behind a judgment to determine whether it is founded on a real debt because a sequestration order should not be made on the petition of a person who is not a real creditor.  The court has a discretion whether or not to go behind the judgment.  The discretion is of a limited kind.  In Wren v Mahony (1972) 126 CLR 212, Barwick CJ, with whom Windeyer and Owen JJ agreed, said (at 224-225) that:

[t]he Court’s discretion ... is a discretion to accept the judgment as satisfactory proof of [the petitioning creditor’s] debt.  That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.

13                        There is also authority to the effect that a court will be more ready to find that there is a substantial reason for questioning whether a judgment is based on an actual debt when that judgment has been given by default.  See Corney v Brien (1951) 84 CLR 343 at 348 per Dixon, Williams, Webb and Kitto JJ and 357-358 per Fullagar J and Wolff v Donovan (1991) 29 FCR 480 at 486 per Lee and Hill JJ.

14                        There is no indication in his reasons for judgment that the federal magistrate in the present case applied these principles.  His Honour did not determine whether there was or was not a substantial reason to question whether the judgment of the County Court was in respect of an actual debt.  Although aware that the judgment was a default judgment, his Honour was more concerned that the judgment was “made following proper process” and was “regularly made”.  His Honour therefore acted on a wrong principle.  In addition, his Honour allowed an irrelevant matter to guide him, namely that “the competing factual assertions” that would be encountered in going behind the judgment “would doubtless be both lengthy and complicated” and that it was “far more probable” that exercising the discretion in favour of the appellants “would give rise to a welter of further and unnecessary litigation.”  If there is a substantial reason for questioning whether a judgment is in truth underlain by a debt, the difficulty and expense of determining whether there is in truth a debt is not a reason for refusing to go behind the judgment.

15                        From the material the appellants placed before the federal magistrate, it was apparent that there was a real dispute between them and the respondent as to whether the appellants owed the respondent the amount claimed.  The first appellant maintained that he had declined to sign a costs agreement, pursuant to s 93(a) of the Legal Profession Act 1996 (Vic) (the legislation applicable at the time the appellants engaged the respondent to act for them - see now s 3.4.19(a) of the Legal Profession Act 2004 (Vic)).  He was contending that he had made clear to the respondent that the appellants wished only to incur expense on the basis that they were making progress payments for work actually done.  This is also apparent from the first appellant’s correspondence to the respondent.  Further, the first appellant was saying that the appellants had paid the respondent the amounts demanded of them from time to time while work was being done.  If these contentions were to be accepted, the basis on which the respondent would be entitled to claim additional costs would need to be explored.  Because the judgment of the County Court was a default judgment, the appellants had not had a proper opportunity to explore these issues.  This combination of facts amounted to a substantial reason for going behind the judgment, and for questioning whether the appellants in fact owed the respondent the amount claimed in the proceeding in the County Court.  The federal magistrate should have so found.  If his Honour had applied the correct principles, and had not been distracted by the irrelevant considerations to which I have referred, he would have done so.

16                        It is also unfortunate that the federal magistrate devoted a significant part of his reasoning to defending the position of the County Court judge in the exchange referred to in [9] above.  This was but one passage of several in the transcript of the County Court proceeding before the federal magistrate in which the County Court judge appeared to be suggesting that, unless the appellants could afford to engage a lawyer, or could comply strictly with the rules of the County Court, they would lose the case.  It would be a pity if, in the 21st century, any court were to take the view that precise pleadings were always necessary.  Because of the decline in legal aid, and perhaps for other reasons, there is a plethora of unrepresented litigants in all courts.  As the High Court said in Neil v Nott (1994) 121 ALR 148 at 150:

A frequent consequence of self-representation is that the court must assume the burden of endeavouring to ascertain the rights of parties which are obfuscated by their own advocacy.  It has been so in this case.  It is necessary to focus on the material placed before Tadgell J and to ascertain whether, on that material, a refusal to extend time bespeaks an error of principle affecting the exercise of the discretion to extend time.

It may be that, as was the case in Neil v Nott, what the High Court described at 151 as “misconceived advocacy” by the unrepresented litigant made matters difficult for the County Court judge.  Nevertheless, it was apparent from what the first appellant told the County Court judge that he claimed to have a defence of the kind outlined above.  Even if it could be said that the purported counterclaim of the appellants, based on alleged negligence by the respondent, was so incompetently drafted as to require striking out, it is difficult to see how the striking out of the counterclaim would justify treating the appellants as if they had no defence to the respondent’s claim. 

17                        For the foregoing reasons, the federal magistrate’s refusal to exercise the discretion to go behind the County Court judgment in favour of the appellants should be set aside.  Rather than remitting the matter to the Federal Magistrates Court, I should exercise the discretion myself.  My finding that there is a substantial reason for questioning whether the County Court judgment is based on an actual debt leads to the conclusion that the discretion should be exercised in favour of setting aside the bankruptcy notice.

The objections to competency

18                        Ground 1 of the respondent’s notice of objection to competency is said to have been included because there is a conflict of authority as to whether a judgment given on an application to set aside a bankruptcy notice is interlocutory or final.  If it were necessary to come down on one side or other of this controversy, I should be inclined to hold that the judgment was final.  Subject to appeal, it determined the rights of the parties in relation to the bankruptcy notice.  It is true that, if there were to be a creditor’s petition, based on an act of bankruptcy constituted by a failure to comply with a demand made in the bankruptcy notice by the due time, there would be further proceedings between the two parties.  They would be proceedings instituted separately, however, in respect of different rights from those the subject of an application to set aside the bankruptcy notice.  It is unnecessary to determine the controversy, however.  Any requirement that there be leave to appeal ought not to be allowed to stand in the way of the appellants in the present proceeding.  To the extent necessary, an extension of time to seek leave to appeal should be granted, and leave should be granted to appeal, so that the appeal can be heard and determined in their favour.

19                        Ground 2 of the notice of objection to competency attacks the validity of the grounds in the notice of appeal.  It is true that the grounds are not in perfect form.  It could hardly be expected of a litigant in person whose first language is not English that he display the skill of a legal draftsperson.  Following what the High Court said in Neil v Nott, this is another situation which the Court must not have its attention diverted by the misconceived advocacy of an unrepresented litigant, but must endeavour to ascertain the rights of the parties.  There is sufficient substance in the complaints made by the appellants in the grounds of appeal to enable the appeal to proceed.  The grounds are directed to criticism of the judgment of the County Court.  They do contain considerations that I have held the federal magistrate should have taken into account, namely the fact that the County Court judgment is obtained by default and the allegation that the debt on which the County Court judgment was based was not in fact due.  There are sufficient grounds to make the appeal competent.

20                        Grounds 3 and 4 of the notice of objection to competency refer to the fact that the notice of appeal seeks orders having the effect of setting aside the judgment of the County Court.  Manifestly, this Court does not sit on appeal from the County Court in relation to judgments for debts.  The presence of the claim for orders beyond the powers of this Court does not render the entire notice of appeal incompetent.  Grounds 3 and 4 of the notice of objection to competency are not proper grounds for dismissing the appeal as incompetent.  The orders sought by the appellants, to which grounds 3 and 4 of the notice of objection to competency relate, simply cannot be made. 

Conclusion

21                        The appellants’ notice of motion, filed on 18 June 2009, must be dismissed.  To the extent to which it is necessary, time should be extended to enable the appellants to apply for leave to appeal, and leave should be granted to the appellants to appeal from the judgment of the Federal Magistrates Court.  The appeal should be allowed and the orders made by the federal magistrate should be set aside.  For those orders, there should be substituted an order setting aside the bankruptcy notice.

22                        The appellants are litigants in person.  They cannot claim professional costs in relation to either the proceeding in the Federal Magistrates Court or the appeal.  Nevertheless, they may have incurred out-of-pocket expenses for which they can claim.  Accordingly, orders should be made that the respondent pay the appellants’ costs, both of the proceeding below and of the appeal.

23                        This result leaves the controversy between the parties in an unsatisfactory state.  The judgment of the County Court remains on the record.  The only result of this appeal is that that judgment cannot be enforced by means of a bankruptcy notice.  Unless the appellants apply to the County Court to set aside the judgment in default, so that the issues between the parties may be determined by the County Court, it will be open to the respondent to take other steps to execute the judgment.  Whether the respondent will do so, in light of the dispute that exists over the correctness of the judgment, remains to be seen.  Whether the appellants will apply to set aside the County Court judgment, and whether they will succeed if they do, are matters on which I cannot comment.  It would be desirable, however, that the dispute between the parties about any liability of the appellants to the respondent in respect of professional costs and disbursements should be resolved as quickly and cheaply as possible.

Associate:

Dated:         27 November 2009