FEDERAL COURT OF AUSTRALIA

Kedem v Johnson Lawyers Legal Practice Pty Ltd (No 3) [2013] FCA 739

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INTRODUCTION

1    This is an appeal from a decision of the Federal Magistrates Court of Australia (now the Federal Circuit Court of Australia). In the case of this appeal, the appellate jurisdiction of this Court is to be exercised by a single judge of the Court unless there is reason to think that it is appropriate for the appellate jurisdiction to be exercised by a Full Court (s 25(1AA) Federal Court of Australia Act 1976 (Cth)). There was no reason in this case to think that it is appropriate for the appellate jurisdiction of the Court to be exercised by a Full Court.

2    The appellant is Mr Einav Kedem and the respondent is Johnson Lawyers Legal Practice Pty Ltd ACN 087 954 498. The respondent acted as the appellant’s solicitors for a relatively short period in the middle of 2005 and that gave rise to the respondent’s claim that the appellant was indebted to it for legal costs. The respondent’s claim culminated in the service by the respondent of a Bankruptcy Notice on the appellant in April 2012. Under the Bankruptcy Notice, the respondent claimed a total of $6,599.94 and interest of $455.16. The principal amount of $6,599.94 comprised four final judgments as follows:

(1)    Judgment entered by the Supreme Court of South Australia on 17 May 2011 in the sum of $1,000 being the costs of a taxation of costs (“first judgment”).

(2)    Judgment entered by the District Court of South Australia on 26 May 2011 in the sum of $4,535.29 being the respondent’s costs of $2,800, interest of $735.29 and costs of the review undertaken by the District Court of $1,000 (“second judgment”).

(3)    Judgment entered by the Supreme Court of South Australia on 14 July 2011 being the costs of an application to set aside the taxation. Those costs were subsequently (on 3 November 2011) fixed in the amount of $814.65 (“third judgment”).

(4)    Judgment entered by the District Court of South Australia on 23 August 2011 in the sum of $250.00 being the costs of an application to set aside the District Court’s orders on the review (“fourth judgment”).

3    The history of the proceeding to set aside the Bankruptcy Notice is set out below.

4    On 24 April 2012 the appellant issued an application in the Federal Magistrates Court seeking an order setting aside the Bankruptcy Notice. His application was supported by an affidavit of the same date.

5    On 16 July 2012 the District Registrar heard the application and made an order that it be dismissed. The appellant was ordered to pay the respondent’s costs of the application.

6    On 1 August 2012 the appellant applied for a review of the District Registrar’s decision. He filed three affidavits which were dated 1 August 2012, 27 August 2012 and 7 September 2012 respectively.

7    On 21 September 2012 the appellant’s application for review came on for hearing before a Federal Magistrate. On 30 November 2012 the Federal Magistrate made an order that the appellant’s application for review be dismissed, and he delivered reasons for his decision: Kedem v Johnson Lawyers Legal Practice P/L [2012] FMCA 1118.

8    On 19 December 2012 the appellant lodged an appeal against the decision of the Federal Magistrates Court in this Court. The appeal was listed for hearing on 15 May 2013. On 15 April 2013 the appellant issued an interlocutory application supported by an affidavit in which he sought an adjournment of the hearing of the appeal. He filed a further affidavit on 1 May 2013. The respondent filed an affidavit on 2 May 2013.

9    On 6 May 2013 I heard the appellant’s application for an adjournment and refused it: Kedem v Johnson Lawyers Legal Practice Pty Ltd [2013] FCA 433.

10    On 13 May 2013 the appellant issued a second interlocutory application seeking an adjournment of the hearing of the appeal. That application was also supported by an affidavit.

11    On 13 May 2013 the respondent filed an affidavit annexing a decision of a judge of this Court in proceeding SAD 161 of 2012 Einav Kedem v Johnson Lawyers Legal Practice Pty Ltd (Kedem v Johnson Lawyers Legal Practice Pty Ltd [2013] FCA 432). The significance of that decision is explained later in these reasons.

12    On 14 May 2013 the appellant’s second application for an adjournment of the hearing of the appeal came on before the judge assigned to hear the appeal. Her Honour granted an adjournment until 22 May 2013: Kedem v Johnson Lawyers Practice Pty Ltd (No 2) [2013] FCA 472.

13    On 20 May 2013 the appellant issued a third interlocutory application seeking, among other orders, an order adjourning the hearing of the appeal. That application was supported by an affidavit.

14    On 22 May 2013 the appellant’s third interlocutory application and the appeal came on for hearing before me. I refused the appellant’s application for an adjournment of the hearing of the appeal. There was simply no basis to adjourn the hearing of the appeal.

ISSUES ON THE APPEAL

15    The appellant appeared in person on the appeal. In his submissions he tended to re-argue his application for review before the Federal Magistrates Court, rather than identify alleged errors in the reasoning or approach of that Court. Furthermore, his submissions were difficult to follow. I have allowed for those matters and I have considered the material carefully with a view to determining whether there is any error in the decision of the Federal Magistrates Court.

16    The appellant applied to put before the Court various affidavits he had sworn since he lodged his appeal. The affidavits had a number of documents attached to them. I reserved my decision on whether the affidavits should be received. I refuse to receive the affidavits. Insofar as they contain material which was before the Federal Magistrates Court, that material is already before the Court. Insofar as it is material which was not before the Federal Magistrates Court, there is nothing to suggest it could not have been put before that Court. More importantly (and decisive of the application) is the fact there is nothing to suggest that the material would affect the result of the appeal.

17    The effect of the appellant’s submissions is that he attacked the Bankruptcy Notice on two grounds. First, he contended that the circumstances were such that the Court should go behind the four judgments. Secondly, he contended that he had a counter-claim, set-off or cross-demand for an amount which exceeded the amount claimed in the Bankruptcy Notice. That counter-claim, set-off or cross-demand was the claim he made in SAD 161 of 2012 in this Court.

18    The relevant legal principles are not in doubt.

19    I start with the appellant’s submission that the Federal Magistrates Court erred in not going behind the four judgments.

20    Generally, the Court will accept a judgment as conclusive of the existence of the debt which is the subject to the bankruptcy proceedings unless the consideration on which it is founded is questioned: Re Beauchamp; Ex parte Beauchamp [1904] 1 KB 572; Re Bedford; Ex parte HC Sleigh (Qld) Pty Ltd (1967) 9 FLR 497; [1967] QWN 17. However, in an appropriate case, the Court has the power to go behind a judgment debt in order to examine whether there is in truth consideration for the judgment debt. This power may be exercised on an application to set aside a Bankruptcy Notice where substantial reasons are given for questioning whether there is in truth and reality a debt to the creditor: Olivieri v Stafford (1989) 24 FCR 413; 91 ALR 91.

21    The Court does not have the power to set aside the judgment on which the Bankruptcy Notice is based, even if it does go behind the judgment and find proof of the debt wanting. As between the parties, the judgments stand unimpeached until set aside by the Court which gave it: Re Vitoria; Ex parte Vitoria [1894] 2 QB 387. In this case there is no outstanding application by the appellant to set aside the four judgments. In fact, he has already applied unsuccessfully to set aside the Supreme Court’s taxation of costs on 17 May 2011 and the District Court’s decision of his review which resulted in orders on 26 May 2011.

22    The Court will bear in mind in deciding whether to go behind a judgment founding a Bankruptcy Notice that the consequences of having committed an act of bankruptcy are not as severe as the making of a sequestration order: Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264 at 270.

23    The Court will inquire into the validity of the judgment when there is evidence it has been obtained by fraud or collusion, or there is reason to doubt it is founded on a real debt or real consideration, especially if the judgment is founded on a default or compromise: Corney v Brien (1951) 84 CLR 343; Wren v Mahony (1972) 126 CLR 212; Wolff v Donovan (1991) 29 FCR 480 (Davies, Lee and Hill JJ).

24    The Court may also inquire into the judgment, even though it is by consent, if it might be tainted by illegality and may have been entered in a proceeding that should never have been commenced: Rixon v Bryett (2001) 112 FCR 295. A judgment for the amount of an illegal consideration cannot found a bankruptcy notice: Wilkinson v Osbourne and Another (1915) 21 CLR 89.

25    In determining whether to go behind a judgment on the ground that it was obtained by fraud, or that there is fresh evidence, while it is not the task of the Bankruptcy Court to set aside the judgment, the Court should have regard to the principles which would govern a proceeding to have a judgment set aside on the ground of fraud or fresh evidence, although in an appropriate case the Court might apply a more flexible approach: Bourke and Another v Beneficial Finance Corporation Limited (1993) 47 FCR 264 at 272-273 (Sheppard, Einfeld and Beazley JJ).

26    I turn now to the principles which are relevant to the appellant’s submission that the Federal Magistrates Court erred in declining to hold that he had a counter-claim, set-off or cross-demand for an amount which exceeded the amount claimed in the Bankruptcy Notice.

27    The degree to which the debtor needs to satisfy the Court in order to have a Bankruptcy Notice set aside on the grounds of a counterclaim, set-off or cross-demand has been variously formulated as follows:

(1)    The debtor must satisfy the Court that he has a genuine demand. A demand must be more than bona fide. The Court must be satisfied that it has a reasonable probability of success: Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346; Cameron v Cole (1944) 68 CLR 571; Gomez v State Bank of New South Wales Ltd [2002] FCA 442; [2002] FCAFC 101.

(2)    The debtor must show that he or she has a prima facie case, even if there and then he or she does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved: Ebert v The Union Trustee Co of Australia Ltd; Gomez v State Bank of New South Wales Ltd.

(3)    The matter to which the Court directs its attention is whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate: Cameron v Cole..

(4)    The state of satisfaction referred to in ss 40(1)(g) and 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied on by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim: Guss v Johnstone (2000) 74 ALJR 884; 171 ALR 598; [2000] HCA 26; Cameron v Cole; Gomez v State Bank of New South Wales Ltd.

(5)    The application of the criteria above requires the Court to undertake some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross-demand finally. Plainly, in order to “satisfy” the Court for the purposes of paragraph 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was finally being determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined. A debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the Bankruptcy Notice by payment or to commit an act of bankruptcy: Re Glew; Glew v Harrowell (2003) 198 ALR 331; [2003] FCA 373 at [10]-[12].

(6)    The applicant must satisfy the Court of three interrelated, and sometimes overlapping matters: first that he or she has a “prima facie case”, even if evidence is not adduced which would be admissible on a final hearing; second, that he or she has a “fair chance of success”; third, that the claim is “genuine” or “bona fide”: Dekkan v Evans [2008] FCA 1004 at [52] (Jacobsen J), citing Re Glew; Glew v Harrowell at [9].

28    In addition to these considerations, the debtor must show that his or her counter-claim, set-off or cross-demand was one that could not have been set up in the action or proceeding in which the final judgment or final order was obtained.

29    I turn now to the facts in this case.

The Four Judgments

30    On 14 September 2005 the respondent commenced an action in the Adelaide Magistrates Court seeking to recover from the appellant the sum of $4,235.21 for unpaid legal fees. Although the appellant attended a directions hearing in the action on 26 October 2005, he failed to attend at the trial of the action on 23 February 2006. A default judgment for $4,578.21 was entered against the appellant. That sum included further legal costs.

31    On 4 June 2010 the appellant issued an application in the Magistrates Court to have the default judgment set aside. His application was heard on 7 July 2010 and it was dismissed.

32    On 8 July 2010 the appellant commenced an action in the District Court for a review of the decision to dismiss his application to set aside the default judgment. On 17 August 2010 a judge of the District Court set aside the default judgment obtained in the Adelaide Magistrates Court on discretionary grounds. On 24 August 2010 the judge, having heard submissions and having received evidence from both the appellant and the respondent, found that the appellant was liable to the respondent for legal fees, but that the quantum of those legal fees had to be determined by the Supreme Court. The judge held that the Supreme Court had exclusive jurisdiction to determine the legal fees which were payable by the appellant to the respondent. The application for review was adjourned to allow the taxation of costs to occur.

33    The judge made the following observations during the course of delivering her reasons:

Accordingly, in circumstances where he was not notified of the application for a new trial or the new trial date, or that default judgment had been entered, it is my view the court should exercise its discretion and set aside the default judgment allowing Mr Kedem an opportunity to argue his case, which is what I did last week.

It is to be noted Mr Kedem disputes he is liable to pay legal fees at all. Mr Kedem agrees he signed a retainer agreement with Johnson Lawyers. He maintains that he paid money in cash to Mr Johnson, some money by way of cheque and some directly to Mr Lazarevich. He also maintained that he obtained an agreement from one of the solicitors employed by Johnson Lawyers, namely Mr Leventis, to reduce legal fees. I adjourned the hearing last week in order that Johnson Lawyers could provide the court with copies of the relevant entries in the trust account and practice accounts together with retainer letters.

Amongst the further documents forwarded by Johnson Lawyers under cover of letter dated 18 August 2010 to Mr Kedem is a copy of the signed retainer letter between Johnson Lawyers and Mr Kedem dated 30 June 2005.

After hearing submissions from Mr Kedem and Mr James, for Johnson Lawyers, and considering documents handed to me during the course of the hearing, and having regard to the copy of the retainer agreement signed by Mr Kedem dated 30 June 2005, there is no doubt there is a liability to pay Johnson Lawyers’ legal fees.

Having determined that Mr Kedem is liable to pay the legal fees, the issue now is the quantum or how much of those legal fees he has to pay. Now, the Supreme Court is the only forum, that is it is the only court that can determine disputes regarding quantum of legal costs between client and solicitor. So, that is the only court that can consider how much of that bill you have to pay.

…

So, in my view, it is now appropriate I adjourn these proceedings allowing either Johnson Lawyers or Mr Kedem the opportunity to apply for taxation in the Supreme Court and once taxation has taken place, the matter is to be brought back on before me for judgment to be entered for the amount of the legal costs certified by the Supreme Court taxing master.

(Emphasis added.)

34    The passages which I have emphasised are important because they make it clear that after a contested hearing the District Court held that the appellant was liable to pay legal fees to the respondent. It will be seen that that circumstance underpins all the events which follow and it means the appellant can only succeed in his argument that the Federal Magistrates Court should have refused to recognise the final judgments if there was evidence that they were obtained as a result of fraud, collusion or a miscarriage of justice.

35    On 10 December 2010 the respondent commenced proceedings in the Supreme Court for the taxation of its outstanding accounts. On 17 May 2011 the respondent’s application for the taxation of its costs was heard. The appellant did not attend the hearing. Judge Lunn QC made a summary determination of the quantum of the fees payable by the appellant to the respondent in the sum of $2,800. His Honour certified that the fees were payable in that amount. Judge Lunn also made an order on 17 May 2011 that the costs of the taxation be fixed in the sum of $1,000 and be payable by the appellant to the respondent. This is the first judgment. It is an order for costs made by a court. Assuming the result of the taxation is correct, there is nothing to suggest that any error attends the order for costs.

36    On 26 May 2011 there was a further hearing of the appellant’s application for review in the District Court. The appellant did not attend the hearing. Judgment was entered in favour of the respondent against the appellant in the sum of $2,800 plus interest of $735.29 and costs of the review fixed in the sum of $1,000. This is the second judgment. As will become clear, the appellant’s complaint relates to his liability to pay legal costs to the respondent, not to the fixing of the sum of $2,800. There is no reason to think that any error attends the order for interest of $735.29 or the order for costs of $1,000.

37    On 10 June 2011 the appellant applied to have the summary determination of costs made by Judge Lunn on 17 May 2011 set aside. On 14 July 2011 Judge Lunn dismissed his application and he awarded costs against the appellant in favour of the respondent. On 3 November 2011 those costs were quantified in the sum of $814.65 and that is the third judgment. The following passages in his Honour’s reasons outline the nature of the appellant’s application and the reasons his Honour refused it:

On 10 June 2011 the respondent issued an application FDN6 in this action which in effect sought to set aside the taxation and to have a further hearing of it. He had apparently earlier on 31 May 2011 attempted to have it issued in the District Court, but this had been rejected. The application was supported by an affidavit of the respondent deposing that he had attended late on 17 May and shortly after the hearing was completed. He said that he had been in an accident and was affected by medication.

…

Subject to two possible exceptions mentioned below, all of the issues raised by the respondent as grounds why he is not liable to pay the applicant’s charges for legal costs are issues of liability and not of quantification of the costs. Thus, they are to be dealt with by the District Court under s 38(7)(d) of the MCA and not by this Court under s 42 of the LPA.

The respondent’s position is summarised in the last sentence of paragraph 13 of FDN8 where he deposes, “The amount of Johnson Lawyers accounts totals an amount equal to the sum of $3,975 and by the calculations above this amount has been settled in full either by direct payment or write off”. Questions of incorrect appropriations of payments made, waiver of liability for costs and whether there was any agreement with Mr Lazarevich, as alleged by the respondent in FDN8, are all questions of liability.

The respondent alleges that he was charged $660 for an attendance at Court which he says was a gross overcharge. However, he then alleges that the applicant waived this charge. If the District Court was to find that it was waived, then there would be no liability of the respondent for it and no basis to have it quantified. It would only be if the District Court sets aside the judgment of 10 June 2011, re-opens the issue and finds that liability for the $660 has not been waived that this Court would be called upon to quantify whether $660 was a proper charge for the work in question.

…

Accordingly on the evidence put before the Court on FDN6, even if the lump sum taxation was set aside, there is no reasonable prospect that any taxation of the costs would result in a better outcome for the respondent than the previous lump sum taxation. Hence FDN6 is to be dismissed.

It is for the respondent whether he now applies to the District Court to set aside its judgment of 10 June 2011 and determine the issues of liability raised in FDN8. Whether the District Court will set aside that judgment is entirely a matter for the District Court. However the respondent should be aware that if he applies and fails he will almost certainly be liable for the costs of the application and those thrown away by him not having properly articulated the issues at an earlier time in the action.

(Emphasis added.)

38    The passages I have emphasised make it clear that the appellant’s complaint relates to the finding of the District Court on his review that he was liable to the respondent for legal costs. There is no suggestion that any error attended the award of costs or their subsequent quantification in the sum of $814.65.

39    On 28 July 2011 the appellant made an application in the District Court to have the orders made by the District Court on the review set aside. That application was heard by another judge of the District Court on 23 August 2011. It was dismissed on that day and the respondent was awarded $250 in costs against the appellant. This is the fourth judgment. Again, there is nothing to suggest that any error attends the awarding of costs or the quantum of those costs.

40    The result of this analysis is that the appellant’s complaint relates to the finding of the District Court on the review that he was liable to the respondent for legal costs. Unless that finding can be impeached, there is no reason to think there is any error attending the other judgments. That is significant because the finding was made after a contested hearing in the District Court and was the subject of an unsuccessful application by the appellant to set it aside. It follows then that the Federal Magistrates Court was correct to refuse to go behind the judgments unless there was evidence that the finding of liability for legal costs and subsequent judgments was obtained by fraud or collusion or resulted from a miscarriage of justice.

41    The evidence before the Federal Magistrates Court and the further evidence the appellant sought to adduce on the appeal went to two matters, namely, his liability to the respondent for legal costs and his alleged claim against the respondent. The latter matter may be put to one side until later in these reasons.

42    The affidavit material put forward by the appellant asserts that the respondent’s accounts were paid or cancelled. As will be apparent from the passages from the reasons set out above (at [33] and [37]) the appellant seeks to agitate again matters that he agitated in 2011 before the District and Supreme Courts. There is nothing to suggest that the Federal Magistrates Court erred in declining to go behind the four judgments.

The Appellant’s Claim

43    On 13 July 2012 the appellant brought the proceeding in this Court which is SAD 161 of 2012. In that proceeding the appellant claimed various forms of relief against the respondent. The Federal Magistrate was aware of the proceeding and indeed, had before him the appellant’s originating application and supporting affidavit in that proceeding.

44    As it happened, shortly before the hearing of the appeal, the judge hearing that proceeding, having held a separate trial to determine certain preliminary issues, delivered judgment in that separate trial. The judgment delivered by his Honour led to an order being made that the appellant’s application be dismissed.

45    The judge noted that the appellant had made various claims against the respondent arising out of a professional relationship between the appellant and the respondent from 30 June 2005 to mid-August 2005. That professional relationship related to proceedings for possession of property between the appellant and the mortgagee of a property owned by the appellant.

46    The judge summarised his conclusions in the following passage (at [6]):

For the reasons set out below, in my view, the application of the applicant should be dismissed. The claims, in so far as they depend on the TP Act and the ASIC Act, are statute barred and there is no basis upon which the time for bringing those claims can be extended. As I have said, I am satisfied that, in the circumstances, the Court has jurisdiction to hear and determine the claims for negligence and breach of contract, but they are also statute barred; and although there is power to extend the time to bring those claims, no factual foundation for doing so is made out. In addition, to the extent that there is in the circumstances a discretion available to extend the time to bring those claims, that discretion is not exercised in favour of the applicant.

47    The appellant is appealing to the Full Court of this Court against that judgment.

48    The Federal Magistrate said that he was not satisfied that the appellant’s claim against the respondent “has merit or was likely to succeed” (at [28]). A judge of this Court has now determined that the application should be dismissed. In my opinion, there is nothing to suggest that the Federal Magistrate erred.

CONCLUSION

49    For these reasons, the appeal must be dismissed with costs.

Associate:

Dated:    30 July 2013