FEDERAL COURT OF AUSTRALIA Conlan v Mladenis [2007] FCA 1129 BANKRUPTCY – creditor's petition – costs of dismissal – whether respondent delayed in having default judgment set aside – Registrar found for debtor APPEAL – from decision of Registrar – whether Magistrate conducted hearing de novo – exercise of discretion – whether Magistrate failed to take into account material consideration HELD: the Magistrate correctly conducted a hearing de novo, but failed to take into account a material consideration Pattison v Hadjimouratis [2006] FCAFC 153 applied Australian Coal and Shale Employees' Federation v Commonwealth (1953) 94 CLR 621 applied House v The King 55 CLR 499 applied Norbis v Norbis (1986) 161 CLR 513 cited Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1987) 17 FCR 211 applied Oshlack v Richmond River Council (1998) 193 CLR 72 cited Hogg v J Isherwood‑Hicks Pty Ltd (1992) 108 FLR 62 cited Microsoft (International) Pty Ltd v Total Peripherals Pty Ltd [1998] VSC 50 cited GERARD ANTHONY CONLAN v CHRIS MLADENIS VID 1170 OF 2006 SUNDBERG J 3 AUGUST 2007 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 1170 OF 2006 BETWEEN: GERARD ANTHONY CONLAN Appellant AND: CHRIS MLADENIS Respondent JUDGE: SUNDBERG J DATE OF ORDER: 3 AUGUST 2007 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The orders of Federal Magistrate Hughes made on 5 October 2006 be set aside. 3. The matter be remitted to the Federal Magistrates Court for further hearing in accordance with the reasons herein. 4. The costs of the review before Federal Magistrate Hughes and of the appeal be reserved for determination on the remitter. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 1170 OF 2006 BETWEEN: GERARD ANTHONY CONLAN Appellant AND: CHRIS MLADENIS Respondent JUDGE: SUNDBERG J DATE: 3 AUGUST 2007 PLACE: MELBOURNE REASONS FOR JUDGMENT BACKGROUND 1 On 10 September 2004 the appellant, who is a solicitor, obtained a default judgment against the respondent, a former client, for $4,548.63 in the Melbourne Magistrates Court (the State Court). A bankruptcy notice was issued on 6 April 2005 and was served on the respondent on 9 April. He did not comply with the demand made by the notice, and thus committed an act of bankruptcy on 2 May 2005. The appellant filed a creditor's petition on 3 May 2005. On 25 May 2005 the respondent filed in the State Court an "application for leave to defend after order made" seeking to have the judgment set aside and leave to defend. The "special circumstances" on which the respondent relied for this relief were that the complaint had never been served on him, he did not owe the amount claimed in the complaint, and he had made the application as soon as practicable after becoming aware of the judgment. On 8 June 2005 the respondent filed a notice of intention to oppose the petition on the grounds that the complaint on which the judgment was based had not been served, he was able to pay his debts, and an application to set aside the judgment had been made in the State Court. On 10 June 2005 the respondent filed an affidavit of solvency. On 27 June the State Court set aside the judgment and granted the respondent leave to defend the complaint. On 25 October 2005 the creditor's petition was dismissed by the Federal Magistrates Court, and orders were made for the filing of submissions as to costs. On 5 April 2006 a Registrar of that Court ordered that the appellant pay the respondent's costs to be taxed in default of agreement. The appellant's application for review of the costs order pursuant to s 104 of the Federal Magistrates Act 1999 (the Act) was dismissed, and the appellant was ordered to pay the respondent's costs. The appellant appeals from those orders. Pursuant to s 25(1A) of the Federal Court of Australia Act 1976 the Chief Justice determined that the appellate jurisdiction of the Court be exercised by a single judge. THE FEDERAL MAGISTRATE'S REASONS 2 Under the heading "Delay by the respondent after notice of bankruptcy proceedings" the Magistrate said: "53. This is the real issue in the proceedings. 54. Counsel for the applicant … submitted that it was perfectly reasonable for the creditor to proceed with bankruptcy proceedings …. Counsel for the respondent submitted that the creditor was too hasty in pursuing bankruptcy and incurred costs unnecessarily. 55. [The applicant] submitted that there were two periods of unreasonable delay on the part of the respondent; firstly, the period between 16 March 2005 when the respondent became aware of the judgment debt and 6 April 2005, which was the date of the issue of [the] bankruptcy notice, and, secondly, between service of the bankruptcy notice on 9 April 2005 and the application by the respondent on 25 May 2005 to set aside the default judgment. In the meantime the creditor's petition had been issued and was served on the respondent on 3 May 2005. It was submitted that the issuing of the petition involved no prejudice to Chris Mladenis as fair warning had been given in the letter of 14 April 2005 that further steps to enforce the judgment were imminent. … 57. The applicant sought costs on the basis that the petition was a legitimate step to take in relation to a judgment properly obtained, notwithstanding that the petition was ultimately dismissed. 3 In rejecting the appellant's submissions and dismissing the application for review, the Magistrate said: "63. … On the evidence before me, the firm representing the applicant creditor was contacted by Mr Mladenis' daughter, Ms Dimitrijevski, on the same day that Mr Mladenis was made aware of the judgment against him, namely, 16 March 2005. Mr Ferguson, to whom Ms Dimitrijevski spoke, does not take issue with her evidence that she requested a copy of the judgment and documents evidencing the claim against her father but that those documents were not provided to her. 64. The bankruptcy notice was served on the respondent on Saturday 9 April 2005. The respondent's legal representatives wrote to the applicant on Wednesday 13 April 2005, requesting a copy of the relevant documents concerning the default judgment. In that letter they specifically requested that the applicant refrain from taking any further steps to enforce the judgment, foreshadowing an application to set aside the judgment. They specifically foreshadowed an application for costs in the event that the applicant continued with bankruptcy proceedings and the default judgment and bankruptcy were set aside. 65. It was not reasonable in those circumstances for the applicant to proceed without further notice to the respondent. Once on notice of a bona fide intention to defend the action, it was incumbent on the applicant to engage appropriately with the respondent. 66. The applicant argued that the defendant was on notice the applicant would strictly enforce the debt. He relied on the statement in the responding letter of 14 April 2005 that the judgment was properly obtained and that the applicant would not refrain from taking further steps. This is insufficient in the context of the respondent contacting the applicant within three business days of service upon him of the proceedings and indicating a likely application to defend the original claim as well as the bankruptcy proceedings. 67. The applicant, as a result of acting for the defendant previously, was aware of the solvency of the respondent. He knew that the respondent had a fulltime job and owned his own home. By being too keen to prosecute the bankruptcy the applicant caused unnecessary cost to himself and to the defendant. It is appropriate in those circumstances that he bears the costs of those actions." HEARING DE NOVO 4 A review under s 104 is a hearing de novo. Rule 20.03 of the Federal Magistrates Court Rules provides: "The review of an exercise of power by a Registrar: (a) must proceed by way of a hearing de novo; and (b) may receive as evidence any affidavit or exhibit tendered before the Registrar; and (c) may with leave receive further evidence; and (d) may receive as evidence: (i) any transcript of the proceeding before the Registrar; or (ii) if there is no transcript, an affidavit sworn by a person who was present at the proceeding before the Registrar as a record of the proceeding." 5 An applicant for review under s 104(2) is under no obligation to demonstrate error on the part of the Registrar, and does not need to establish that the Registrar's exercise of discretion miscarried in the sense described in House v The King (1936) 55 CLR 499 at 505: Pattison v Hadjimouratis [2006] FCAFC 153 at [153]‑[154]. The Magistrate must exercise any discretion on the material before him or her unaffected by how the Registrar may have exercised the discretion. THE DE NOVO GROUND OF APPEAL 6 The first ground of appeal is that the Magistrate did not conduct a hearing de novo. It was submitted that the review was conducted as if it were an appeal, and that the Magistrate did not exercise her own discretion but rather considered whether the exercise of the Registrar's discretion had miscarried. Reliance was placed upon the following things said or done by the Magistrate in the course of her reasons: (a) "These proceedings involve an application for review of two costs orders of Registrar Mussett"; (b) "The history of the proceedings is well set out in the reasons for decision of Registrar Mussett"; (c) quoting some of the reasoning and conclusions of the Registrar and restating the orders she made; (d) quoting the Registrar's summary of the issue to be decided; and (e) concluding that "the orders made by Registrar Mussett were appropriate". It was also said that the Registrar did not have before her current affidavits dealing with the facts and issues in the rehearing to enable her to make her own findings of fact. (The reference in (a) to two costs orders reflects the fact that the Magistrate heard another application for review of a costs order made by another person at the same time as the appellant's application.) 7 The Magistrate recorded at [39] that the review was a hearing de novo: "All parties filed affidavit material and written submissions for the purpose of the cost argument before the Registrar. The proceedings before me were conducted as a hearing de novo. The parties relied upon the same affidavit material and written submissions and, through Counsel, made further oral submissions. Neither of the applicants sought to cross examine Mr Mladenis." 8 The first indicator relied on by the appellant, namely that the Magistrate said she had before her "an application for review of two costs orders of Registrar Mussett", does not indicate or even suggest that the Magistrate was proceeding as though she had before her an appeal rather than a hearing de novo. The Magistrate has used the words of s 104 of the Act – "may … apply to the Federal Magistrates Court for review of that exercise of power". See also Rule 20.03. As indicated at [7], the Magistrate was aware that she was conducting a hearing de novo. 9 The Magistrate's statement that the history of the proceedings is well set out in the Registrar's decision does not stand alone. It is followed by seventeen paragraphs which record uncontroversial events, amongst them the provision of legal services by the appellant, the complaint in the State Court, the default judgment, the bankruptcy notice, non‑compliance, the creditor's petition, orders of the State Court and dismissal of the creditor's petition. These are simply background matters which the Magistrate has adopted as an accurate record of the events that led up to the costs application ("well set out"). 10 The seventeen paragraphs also contain extracts from affidavits and exhibits that had been before the Registrar and were before the Magistrate. This scene setting of uncontroversial matters does not indicate that the Magistrate proceeded as though she was entertaining an appeal as opposed to a hearing de novo. 11 At [33] to [35] of the Magistrate's reasons she quoted passages from the Registrar's reasons which explain why it was that the Registrar declined to depart from the general rule that costs follow the event. Had this part of the reasons (pars [32] to [38]) been accorded a heading, as are all other parts, it would have been "Proceedings before the Registrar" or "What the Registrar did". It is again part of the background. Mere recitation of these matters does not amount to a departure from the requirement that the Magistrate exercise her own discretion. Nor does it indicate that she was erroneously enquiring whether any error was apparent in what the Registrar had done. 12 While it is true that the Magistrate "restated the orders" made by the Registrar, there is no substance in the claim that this was a departure from the Magistrate's assigned task. It is unavoidable that the Magistrate inform the reader what the proceeding before her is about; what the order the subject of the review is. The fact that it is said twice, once in the opening paragraphs and later at the conclusion of the factual exposition, is neither here nor there. 13 Under the heading "Delay by the respondent after notice of bankruptcy proceedings", which the Magistrate described as "the real issue in the proceedings", she quoted the Registrar's summary of the issue: "The question I have to decide is should Mr Mladenis, as a successful respondent, get his costs of opposing the petition; or should Mr Conlan get his costs despite having his petition dismissed because Mr Mladenis 'sat on his hands', as the saying goes, and did nothing to either defend the original complaint or try and have it set aside until the creditor had expended time and money pursuing him the in the Magistrates Court of Victoria and in this Court." The Magistrate went on, in the remaining seventeen paragraphs, to examine decided cases relied on by the respondent, the affidavit evidence before her, and the submissions of the parties, before announcing her decision. 14 In adopting as her own statement of the delay issue the words used by the Registrar, the Magistrate has not in my view shown that she was departing from her proper function of deciding what order should be made in the exercise of her own discretion. The adopted passage must be read in its context. The passage is an introduction to the Magistrate's own assessment of the case. When so understood, it is essentially the same as if she had said "As the Registrar said, the question for decision is ….". 15 After examining the matters recorded in the last part of [13], the Magistrate said that in her view "the orders made by Registrar Mussett were appropriate". In a de novo review, care is required in the formulation of a decision. On the one hand, to say that "no error has been shown in the Registrar's reasons" would be strongly suggestive of a failure to carry out the task entrusted to the Magistrate. Perhaps at the other extreme would be "In the exercise of my discretion, I think the order that should be made is …", whether or not that happens to be the same as the Registrar's order. The present case lies between these extremes. To say that the Registrar's orders were "appropriate" is perhaps a trifle incautious. However, when read in the context to which I have earlier referred, the sentence in question really amounts to no more than "I propose to make the same orders as those made by the Registrar". 16 Finally, I am quite unable to see how the fact that the Magistrate did not have before her current affidavits indicates that she was treating the review as an appeal rather than a hearing de novo. Her Honour could only proceed on the basis of the material placed before her by the parties. Rule 20.03, set out at [4], shows that a review may be conducted, as it was here, on the basis of the material before the Registrar. Paragraph (c) of the Rule enables the Court to grant leave to file further evidence. The parties did not seek to rely on additional evidence. As the Magistrate said, the proceedings before her were conducted as a hearing de novo upon the same affidavit material and written submissions as were before the Registrar. There is no substance in this complaint. 17 I have necessarily dealt with the indicators relied on by the appellant one at a time. Even if they are considered in globo they do not assist him. 18 Accordingly, I reject the first ground of appeal. ATTACK ON THE EXERCISE OF DISCRETION 19 The remaining grounds of appeal attack the Magistrate's exercise of discretion. The appellant acknowledged the obstacles that lie in the way of such an attack. It must be shown that an error has been made in the exercise of the discretion. There is a strong presumption in favour of the correctness of the decision appealed from, which must be affirmed unless the court of appeal is satisfied that it is clearly wrong: Australian Coal and Shale Employees' Federation v Commonwealth (1953) 94 CLR 621 at 627. 20 The circumstance is which error may be established in connection with an exercise of discretion are described in House v The King 55 CLR at 504‑505: "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." 21 In Norbis v Norbis (1986) 161 CLR 513 at 518 Mason and Deane JJ said: "If the questions involved lend themselves to differences of opinion which, within a given range, are legitimate and reasonable answers to the questions, it would be wrong to allow a court of appeal to set aside a judgment at first instance merely because there exists just such a difference of opinion between the judges on appeal and the judge at first instance." 22 The above principles apply to an appeal against an order for costs: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1987) 17 FCR 211 at 222. The starting point is that costs normally follow the event. In Oshlack v Richmond River Council (1998) 193 CLR 72 at 97‑98 McHugh J with whom Brennan CJ agreed, said: "The traditional exceptions to the usual order as to costs focus on the conduct of the successful party which disentitles it to the beneficial exercise of the discretion …. 'Misconduct' in this context means misconduct relating to the litigation, or the circumstances leading up to the litigation. Thus, the court may properly depart from the usual order as to costs when the successful party by its lax conduct effectively invites the litigation; unnecessarily protracts the proceedings; succeeds on a point not argued before a lower court; prosecutes the matter solely for the purpose of increasing the costs recoverable; or obtains relief which the unsuccessful party had already offered in settlement of the dispute." 23 The first complaint about the exercise of the discretion to depart from the general rule and award costs against the appellant is that the Magistrate erred by failing to take into account, sufficiently or at all, the fact that the complaint in the State Court had been served on the respondent on 16 July 2004 and he had failed to take any steps to defend the claim. The appellant takes issue with the Magistrate's statement that "whether or not the complaint was served … was a matter in dispute". There was evidence that a process server had served the complaint on the respondent on 16 July 2004 by "leaving it with him personally". There was also evidence from the respondent's solicitor that he had filed an application in the State Court for leave to defend in which he set out the special circumstances upon which the respondent relied, including the fact that the complaint was never served on him. He exhibited an affidavit sworn in the State Court in which the respondent deposed that he was never served with the complaint. The respondent referred to the process server's affidavit and denied the correctness of its contents. He noted that the process server did not depose to having asked the identity of the person with whom he left the documents. In those circumstances the Magistrate was entitled to say that there was a dispute as to whether the respondent had been served with the complaint. She said: "the affidavit of service … was inadequate as the person served was not properly identified. The defendant's son, Paul Mladenis, filed an affidavit in which he deposed that he was given documents by a process server at his father's house but that he put them in the bin, hoping to deal with the matter without involving his father." There is no substance in this complaint, or in the related one that the Magistrate failed to take into account that the respondent failed to take steps to defend the claim. The Magistrate recorded the "issue in these proceedings" as the "tardiness or otherwise" of the steps taken by the respondent, and noted the two periods of alleged unreasonable delay on his part. Of course, if he was never served, he would not be expected to file a defence. 24 The appellant then claims that the Magistrate failed to take into account that the appellant had written to the respondent on 17 September 2004 advising him that default judgment had been entered against him. The Magistrate did not refer to this letter. She accepted the respondent's evidence that he only became aware of the fact that judgment had been entered against him when on 16 March 2005 he received a letter from Anthony Peterson & Co, a firm of solicitors unconnected with the parties. I will call this letter the Peterson letter. The respondent's account was verified by his daughter, whose affidavit in the State Court stated that her father had faxed the Peterson letter to her on that day. This led her to contact the appellant's associate, Mr Ferguson, to enquire what the judgment was about. She asked him for copies of the relevant documents, which she never received. The Magistrate appears to have accepted this evidence. I will return to this complaint at [32]. 25 It is then said that the Magistrate placed "too much weight" on the respondent's evidence that he had no knowledge of the judgment until he received the Peterson letter. The appellant says that the Magistrate's finding, accepting the respondent's evidence, is contrary to his (the appellant's) evidence. He also draws attention to the fact that the Peterson letter is dated 27 November 2004, three and a half months before its alleged receipt. The Peterson letter appears to be a standard form letter sent to judgment debtors. It describes itself as a courtesy letter to inform the recipient that judgment has been entered against him, that the firm is not involved in the matter "other than to offer our services to you", and that it has vast experience in dealing with credit matters and providing services to those who have been affected by court judgments. I will return to this complaint at [32]. 26 It is next asserted that the Magistrate relied "too heavily" on the actions and statements as to the possible future conduct of the respondent's former solicitors, GSM, and thereby failed to consider properly the actions and conduct of the appellant. On 13 April 2005 GSM wrote to the appellant advising that the respondent knew nothing about the debt. They requested a copy of the State Court summons and the affidavit of service. They said: "In the circumstances, we suggest that you refrain from taking any further steps to enforce the judgment obtained, as it may be that our client will provide us with instructions to set aside the judgment that has been obtained against him. If you continue with bankruptcy proceedings despite our request, and an application is then made to set aside the judgment and set aside the bankruptcy proceedings, we will produce this letter on the question of costs. We trust this will not be necessary." The appellant's response by letter of 14 April 2005 was that he would not refrain from taking steps to enforce the judgment. These matters are recorded at [64] and [66] of the Magistrate's reasons set out at [3]. 27 The Magistrate relied on the GSM letter in answering the appellant's case on the respondent's delay between service of the bankruptcy notice (9 April 2005) and the application to set aside the default judgment (25 May 2005). What she said about the GSM letter is at [65] and [66] of her reasons set out at [3]. 28 Whether someone has behaved unreasonably in particular circumstances involves a value judgment. It is a matter about which minds may well differ. In this case the appellant's conduct in response to the request in the GSM letter was relevant to the exercise of the Magistrate's discretion. The complaint that the Magistrate "relied too heavily" on that letter as opposed to other material does not demonstrate error in the exercise of the discretion. It simply argues about the end result of its exercise. See the passage from Norbis quoted at [21]. Nor does it mean, as the appellant submitted, that the Magistrate "thereby failed to consider properly the actions and conduct of the appellant". 29 The appellant claims the Magistrate erred by relying on two earlier decisions: Hogg v J Isherwood‑Hicks Pty Ltd (1992) 108 FLR 62 and Microsoft (International) Pty Ltd v Total Peripherals Pty Ltd [1998] VSC 50. It is said that they are distinguishable. In my view the appellant mistakes the use the Magistrate was making of these cases. She accepted that they were distinguishable. She was deprecating precipitate action on the part of the appellant, as were the judges in the two cases relied on. The Magistrate did not commit an appealable error by relying on what was said in those cases about precipitate action, as a relevant consideration, simply because the cases are distinguishable on their facts. 30 The appellant then assailed part of what the Magistrate said at [67] of her reasons set out at [3]. No exception is taken to the first two sentences. But it is said that the Magistrate erred in concluding that the appellant was too keen to prosecute the bankruptcy. That too is a value judgment about which minds may reasonably differ. No error has been shown. 31 It was submitted that the Magistrate had wrongly characterised the GSM letter as giving notice of a "bona fide intention to defend". It is true that the Magistrate thus overstates the import of the letter. Nevertheless it was a sensible letter drawing attention to the appellant's lack of awareness of the alleged debt, asking for copies of the summons and affidavit of service, and containing a reasonable request that the appellant stay his hand on continuing with bankruptcy proceedings. In my view the overstatement does not disclose an error such as to infect the overall exercise of discretion to award costs against the appellant. 32 I return now to the matters held over from [24] and [25]. They are related. As appears from [55] and [63] of the Magistrate's reasons set out at [2] and [3], she found, and attached importance to the finding, that the respondent became aware of the judgment on 16 March 2005 when he received the Peterson letter. The 17 September 2004 letter bears on the legitimacy of this finding. Mr Ferguson deposed to having sent the letter. It is addressed to the respondent's home address. The respondent does not advert to it in his affidavit. The Magistrate did not refer to it. A failure in reasons for decision to refer to a particular piece of evidence does not necessarily indicate that it has been overlooked. However, in the present case a central matter for decision was the time at which the respondent became aware of the judgment against him. The material directly bearing on that included the process server's affidavit, Mr Ferguson's evidence, the respondent's account of receipt of the Peterson letter, and the respondent's son's evidence (see [23]). The Magistrate referred to the first, third and fourth of these. She also referred to Mr Ferguson's affidavit, but not to the presently relevant part of it. The adequacy of the affidavit of service was in question. The content of Mr Ferguson's letter was clear. The respondent's account is questionable, both because he failed to address the 17 September letter and because he offered no explanation as to why the Peterson letter, dated 27 November 2004, did not reach him until 16 March 2005, or why such a form letter was hand‑delivered. Further, the status of his affidavit is uncertain. It was sworn for use in proceedings in the State Court, and was before the Magistrate only as an exhibit to his solicitor's affidavit in support of his application for costs. 33 In those circumstances, the 17 September letter cried out for consideration. The first of the periods of allegedly unreasonable delay noted by the Magistrate at [55] of her reasons set out at [2] was of three weeks duration. If the respondent became aware of the judgment soon after the 17 September letter was posted, the duration of the period was twenty eight weeks. I am compelled to the conclusion that the Magistrate overlooked the letter or did not appreciate its significance. Because it bore so directly on the duration of the first period of delay, when delay was the very matter relied on by the appellant as justifying the costs order he sought, the 17 September letter was a material consideration which she failed to take into account. 34 The notice of appeal contains grounds that did not feature in the appellant's 20 page Contentions or in counsel's oral argument, and I have treated them as not having been pursued. In any event, the orders in [35] make it unnecessary to deal with those grounds. 35 The appeal must be allowed. I will remit the matter to the Federal Magistrates Court for further hearing. This will be a resumption of the de novo hearing; as to which see rule 20.03(c), set out at [4]. Any orders the Magistrate may make should include orders dealing with the costs of this appeal and of the review before Federal Magistrate Hughes. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate: Dated: 3 August 2007 Counsel for the Appellant: D Turner Solicitor for the Appellant: Law 554 Counsel for the Respondent: S Marks and S Jacobson Solicitor for the Respondent: Tanya Cirkovic & Associates Date of Hearing: 26 July 2007 Date of Judgment: 3 August 2007