It's 2am on Senior Constable Osvaldo Panemilla's birthday – April 20 last year - and he and his mates have just come from The Ivy nightclub in central Sydney where, on the officer's own evidence, he has had "about 15 drinks".

The Downing Centre Local Court heard on Wednesday that as the group of men horse around boorishly at the counter and then at their table, an English construction worker sitting nearby - Liam Monte - takes exception.

Chips begin sailing in the officer's direction, with one striking him on the shoulder.

An argument begins and Constable Panemilla produces the police warrant card in his pocket – telling his opponent he is a police officer and suggesting, in no uncertain terms, that they take the matter outside.

Once outside, the intoxicated officer attempts to place a bemused Mr Monte under arrest, to which the Englishman responds by declaring that the badge had come from "a Christmas cracker".

He plucks it from the officer's grasp and runs towards a waiting taxi.

Mr Monte barely makes it inside the cab before the officer's mates grab him by the ankles and drag him out. The Englishman briefly breaks free, running a short distance with the other men in hot pursuit, before they catch up and regain the badge.

Constable Panemilla, his mates and Mr Monte then begin fighting on the footpath. The Englishman is punched and kicked to the head, suffering injuries which require treatment at St Vincent's Hospital.

"The law school question is – who gets charged?" Mr Monte's barrister, Steve Boland, asked the court rhetorically on Wednesday.

The answer is Mr Monte. He was charged with stealing from a person and ordered to appear in court.

"Constable Panemilla can carry his badge around The Ivy as much as he wants, but in Maccas at 2am in the morning he doesn't have the right to pull it out and make an arrest," Mr Boland told the court.

He argued that producing the badge and seeking to arrest Mr Monte were unlawful acts and that the evidence of what happened subsequently should be ruled inadmissible.

Magistrate Michael Barnes found that the officer's arrest of Mr Monte was "unnecessary and improper" and his conduct "fell far below the standard the commissioner has reasonably set for the officers of the NSW Police Force".

"His purported exercise of the power of arrest was an unnecessary abuse of that power," Magistrate Barnes said.

However, he found that, despite the fact Constable Panemilla had acted improperly, the evidence about Mr Monte's behaviour was still relevant. His honour also rejected Mr Boland's arguments that the act of taking the badge did not involve the intention to steal it, or that it was not a criminal act because it was based on an honest mistake – namely the belief that the badge was fake.

Nevertheless, the magistrate said he was "inclined to view these proceedings as an abuse of process".

He stopped short of making this finding formally. He ruled Mr Monte had taken the badge but elected not to record a conviction against him, meaning the Englishman will not be punished in any way.