FEDERAL COURT OF AUSTRALIA Shortall v Keily [2005] FCA 1930 BANKRUPTCY – sequestration order – review of registrar's order – nature of proceeding for review before federal magistrate – whether federal magistrate carried out function – further evidence on appeal – whether debt was judgment debtor's or his brother's Federal Court of Australia Act 1976 (Cth) s 27 Federal Court Rules O 80 Keily & Anor v Shortall [2004] FMCA 609 affirmed MARK ANTHONY SHORTALL v KRISTIAN KEILY AND SAMANTHA HILL VID 1231 of 2004 GRAY J 1 DECEMBER 2005 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 1231 of 2004 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: MARK ANTHONY SHORTALL APPELLANT AND: KRISTIAN KEILY FIRST RESPONDENT SAMANTHA HILL SECOND RESPONDENT JUDGE: GRAY J DATE OF ORDER: 1 DECEMBER 2005 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The respondents' costs of the appeal be taxed and, when taxed, be paid out of the bankrupt estate of the appellant as costs of the petitioning creditors. 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 1231 of 2004 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: MARK ANTHONY SHORTALL APPELLANT AND: KRISTIAN KEILY FIRST RESPONDENT SAMANTHA HILL SECOND RESPONDENT JUDGE: GRAY J DATE: 1 DECEMBER 2005 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This appeal is from a judgment of the Federal Magistrates Court given on 6 September 2004. See Keily & Anor v Shortall [2004] FMCA 609. The federal magistrate dismissed an application for review of a decision of a registrar, who made a sequestration order against the estate of the appellant, Mark Anthony Shortall. 2 The foundation for the sequestration order was a judgment of the Melbourne Magistrates' Court in a proceeding in which Kristian Keily and Samantha Hill, the respondents to this appeal, sued the appellant seeking to recover what they alleged was a debt. The judgment was entered on 10 May 2004, in the sum of $9007.90, plus interest of $538.62 and costs of $2166.20. In turn, the judgment of the Melbourne Magistrates' Court was the foundation for a bankruptcy notice, served on the appellant on 23 May 2004. The appellant did not pay the amount of the judgment in response to the bankruptcy notice, and thereby committed an act of bankruptcy on the expiration of the period specified in the bankruptcy notice. 3 On 27 June 2004, a creditors' petition was served on the appellant. That came before Registrar Bardsley on 22 July 2004. The registrar adjourned the hearing of the creditors' petition until 24 August 2004, and ordered that the appellant pay the costs of the adjournment. The appellant himself says that the purpose of the adjournment was to enable him to apply to the Melbourne Magistrates' Court to have the default judgment set aside. 4 On 24 August 2004, the registrar made the sequestration order against him. On 30 August 2004, the appellant filed in the Federal Magistrates Court an application for review, which came before McInnis FM on 6 September 2004. On that date, the federal magistrate dismissed the application for review and ordered that the respondent pay the creditors' costs out of the bankrupt estate. 5 I have examined the reasons for judgment of the federal magistrate, to determine for myself whether there is error in them, because the parties have all appeared before me today without representation. I have some concern as to whether the federal magistrate understood his function in dealing with a review of this nature. It is widely understood that the basis on which a registrar of a court created under ch III of the Constitution exercises the delegated power to do things such as making sequestration orders, is that there must always be open to a person affected adversely by such an order a right to have a review, and consequently to the exercise of the judicial power of the Commonwealth. The review is to be by what the High Court of Australia has described as a 'hearing de novo'. It is true, as the federal magistrate pointed out, that the application for review that was lodged did not give any details as to the order that had been made, or as to the orders that were sought on review. Nevertheless, it seems to me to be clear enough that the function of the federal magistrate was to deal with the creditors' petition as if he were dealing with it for the first time, and to determine whether he should make a sequestration order, without regard to what the registrar had done. 6 The federal magistrate certainly acknowledged that this was a possible view of the proceeding before him, although he also suggested that it was possible to regard the application as an application for annulment of the bankruptcy. It is also unclear, from his Honour's reasons for judgment, whether he was dismissing the application for review summarily or on the merits, but it appears sufficiently clear from [9] of those reasons that his Honour dealt briefly with the merits. Somewhat disturbingly, he said that there was 'no material' before him which would justify the court going behind the judgment of the Melbourne Magistrates' Court, despite concerns raised by the debtor in relation to the judgment. In fact, the appellant had sworn an affidavit, which had been filed in the Federal Magistrates Court, in which he swore that the debt in question was not his debt, but was a matter between Mr Keily, Ms Hill and the appellant's brother, Jason Shortall. The debt was for parking fines paid by Mr Keily and Ms Hill for Jason Shortall and the appellant swore that he was in no way responsible for it. It must be said that there was some material before the federal magistrate that might have assisted him in the exercise of what is undoubtedly a discretion to determine whether to go behind the judgment of the Melbourne Magistrates' Court. 7 After the appellant appealed to this Court, because he wished to agitate matters of fact before me, I made orders allowing for the filing of affidavits, on the assumption that an application might be made for the Court to exercise the power given to it by s 27 of the Federal Court of Australia Act 1976 (Cth) to receive further evidence on appeal. As a result, there were affidavits filed of the appellant, his brother Jason Shortall, and his father Hugh Shortall. Affidavits of Mr Keily and Ms Hill were filed as well. 8 In addition to making those orders, I granted a certificate under O 80 of the Federal Court Rules, to enable the appellant to receive advice and assistance from a barrister without charge. It is apparent from the affidavits filed on behalf of the appellant that he did receive assistance from counsel, appointed under O 80, in the preparation of those affidavits. Subsequently, the counsel to whom the referral was made sought to discharge the referral, on the ground that he was unable to contact the appellant further, and a registrar of the Court gave him leave to discharge his referral. Mr Keily and Ms Hill had legal representation for a time but, because of the expense of that, they have appeared before me in person today. 9 There was some difficulty in communicating with the appellant as to the listing of the appeal. The letter from the Court to the address that was shown on the court file was returned unclaimed. My associate made several attempts to contact the appellant by the mobile telephone number on the court file, only to have it ring out on each occasion. Finally, this morning, a message reached the appellant through his father and he made contact with the Court and eventually arrived, without bringing any papers with him, to prosecute his appeal. He did not bring either his brother Jason or his father Hugh with him. 10 After some discussion it seemed to me that I ought to exercise the power to allow further evidence to be given on appeal, and ought to attempt to resolve the situation, if only to save the parties further money and further involvement. 11 The facts of the case are, to some extent, common but there is a crucial difference between the evidence of the two parties. In essence, the events took place in the week following Sunday 25 May 2003. At that stage, Jason Shortall, who played in a pennant golf team representing the Devilbend Golf Club on the Mornington Peninsula, had accumulated a significant debt for parking fines in the City of Melbourne. The debt amounted to some thousands of dollars. He had discussed privately with his friend, Mr Keily, who was then a professional at the Devilbend golf course, the prospect that he might seek to be made bankrupt, in the hope of avoiding these fines. In fact, Jason Shortall was made bankrupt but, as it turned out, his bankruptcy did not annul the parking fines and he remained indebted for them. Jason Shortall indicated to Mr Keily that he was required to attend court on 26 May 2003, and may have to go to prison, in consequence of his inability to pay the outstanding fines. Mr Keily was somewhat concerned about his friend having to go to jail. 12 There is some variance between the evidence of the respective parties as to the precise dates on which events occurred. What does seem to be clear is that, on 30 May 2003, which was a Friday, a sum of money was paid to the Melbourne Magistrates' Court. The receipt for that payment bears that date. In consequence of that, on that day, Jason Shortall was released from prison, his fines having been discharged. 13 It appears most likely that, on Wednesday 28 May 2003, a conversation occurred between Mr Keily and Mark Shortall, the appellant, in the golf shop at the Devilbend golf course. It was then that Mr Keily learnt that his friend Jason was in prison. A discussion occurred between Mr Keily and Mark Shortall as to how his release might be procured, before he was required to serve the full term (something like 107 days' imprisonment), in order to discharge the obligation to pay the fines. In the course of that discussion, I find that Mr Keily had at least one telephone conversation with his partner, Ms Hill, as to whether they could assist in the raising of the requisite amount of money. Mr Keily and Ms Hill gave no commitment on that occasion to contribute money but, at the end of the conversation between the appellant and Mr Keily, it was clear that that possibility was under consideration. 14 The possibility was further discussed overnight between Mr Keily and Ms Hill. On the following day, 29 May 2003, the appellant, Mr Keily and Ms Hill met in the car park of the Devilbend golf course. In consequence of what was said there, Mr Keily and Ms Hill went to Hastings, first to his bank and then to her bank, assembling such funds as they could by borrowing up to the limit on their respective credit cards. At Ms Hill's bank, they purchased a bank cheque for $7800, made out to the Melbourne Magistrates' Court. They then travelled with the appellant to a business called Hastings Panels in Hastings, where a friend of the appellant's, Troy Smith, worked. Mr Smith gave the appellant $1000. In his cross-examination, the appellant was initially reluctant to concede that that was a debt he owed to Mr Smith, but eventually he did concede that he had borrowed that money from Mr Smith. 15 The parties then proceeded to drive towards the city, for the purpose of going to the Melbourne Magistrates' Court to make a payment towards the discharge of the fines. At some stage, contact was lost between the two vehicles, the appellant in his car and Mr Keily and Ms Hill in Mr Keily's vehicle. It turns out that the appellant's vehicle broke down at Dingley. Mr Keily and Ms Hill proceeded into the city. There was telephone contact between them and Hugh Shortall. They eventually met Hugh Shortall in La Trobe Street near William Street, and handed over the cheque to him. Hugh Shortall attempted to pay the fines, but had some difficulty; they would not be accepted at the Melbourne Assessment Prison, where Jason Shortall was imprisoned, and it was too late to pay them on that day at the Melbourne Magistrates' Court. Eventually, the sum of $8303.70 was paid and a receipt was given for that on 30 May 2003 and, on 30 May 2003, Jason Shortall was released. On that evening, he and Mr Keily dined together at the Kings Creek Hotel in Hastings. Jason Shortall thanked Mr Keily for what he had done. 16 The crucial issue that I have to determine, in order to decide whether the federal magistrate ought to have allowed the appellant to go behind the judgment of the Melbourne Magistrates' Court, is whether on 29 May 2003 the appellant agreed to repay the money that Mr Keily and Ms Hill were jointly putting up in order to discharge a large part of the fines of the appellant's brother. On that evidence the parties have given conflicting accounts. 17 The appellant not only contended that he never agreed or undertook to repay the amount, but said that he made it absolutely clear that any repayment would be his brother Jason's responsibility, and that Mr Keily and Ms Hill would have to look to his brother to have the funds returned. Jason Shortall's affidavit says that he made it clear to Mr Keily on the evening when he was released from jail that he was responsible for the debt and would do what he could to pay it. 18 Mr Keily says that the appellant made an express commitment to repay the money. So does Ms Hill. Indeed, in her cross-examination, she characterised herself as someone who was not particularly trusting, and said that she wanted to have it clearly stated by the appellant, at the time she was agreeing to pay over the money, that he would be responsible for its repayment. 19 This is not a situation in which it is possible for me to say that anyone has fabricated evidence. The process of recollection of events in all of us is a process largely of reconstruction. Whether we like it or not, we suffer the human failing of reconstructing so as to place ourselves in the best light. Even attempting to be absolutely honest, anyone may easily end up giving evidence which might be at variance with what actually occurred. The Court's task is, in effect, to reconstruct its own version of the facts from the evidence given to it, and in doing so to apply the standard of the balance of probabilities. My task is to ask myself what was more probable than not. Was it more probable that the appellant committed himself to repaying the money that was lent? Or was it more probable that Mr Keily and Ms Hill simply handed it over, because of their earnest desire to help a friend who was in dire trouble? 20 I am satisfied that, on 29 May 2003, in the conversation in the car park, there was some discussion about the appellant's financial situation, and that he did indicate at some stage that he expected to get some funds from a refinancing of his house. This was important to Mr Keily and Ms Hill, because they were both proposing to borrow to the limit of their respective credit cards, and they were aware that there would be substantial interest to be paid. They were therefore keen to ensure that they were able to pay off the cash advances on their credit cards as soon as they would be able to do so. In fact, the appellant did make attempts to refinance his house, but he says that he was unable to do so and eventually a mortgagee sold it. It appears that there was nothing of substance left out of the proceeds of sale after the discharge of the mortgage and the expenses of the mortgagee's sale. 21 In the weeks and months following the release of Jason Shortall from prison, Mr Keily, and to some extent Ms Hill, made substantial attempts to procure repayment. I am satisfied that initially they did so by approaching the appellant, particularly in relation to the possible refinancing of his house. They reached the point at which the appellant authorised a finance broker, with which he was dealing, Areca Finance, to give information to Mr Keily and Ms Hill about the progress in refinancing. On 5 September 2003 Areca Finance faxed Mr Keily and Ms Hill, informing them that: 'This letter is to confirm that we are currently in the process of refinancing Mr Shortall's mortgage. The Valuation was completed today. At this stage we have an indicative approval. We are expecting unconditional in the next 7–10 working days. If you have any further questions please call me on the number below. Regards, [signed] Michael La Motte Director.' 22 It seems to me that taking such a step to reassure Mr Keily and Ms Hill that the refinancing was in progress was at least consistent with the assumption by the appellant that he had some obligation to find the money out of the refinancing to repay the money that they had advanced. The appellant points out that both his brother and his father were bankrupt at the time, that the issues of finance in the family were largely his responsibility, and that the refinancing was not necessarily related to an obligation on his part to repay the advance by Mr Keily and Ms Hill. So it might be. 23 Things also proceeded to the stage where they appear to have become somewhat less than friendly between the parties on the respective sides. The phone calls from Mr Keily to the appellant were described as abusive. Mr Keily was frustrated that he was not getting any response. A significant fact is that Mr Keily and Ms Hill began to attempt to persuade Jason Shortall that he ought to repay the money. They also made an attempt to persuade Hugh Shortall that he should do something. 24 The appellant says these attempts are inconsistent with the assumption that the appellant was the debtor. They might be said to be so, but they are also consistent with desperation on the part of, particularly, Mr Keily, and also Ms Hill, because they were not achieving repayment from the appellant, and they were forced to turn their attention to other members of the family. There was a ring of truth in what Mr Keily said about his phone conversation with Hugh Shortall, who said that he would get his sons together and sort it out. I can understand why, on 24 January 2004, Ms Hill confronted Jason Shortall, when he had been caddying at the Victorian Open golf tournament at Woodlands Golf Club and, in front of others, sought to embarrass him over the fact that she and Mr Keily had advanced money to get him out of prison and that nothing had been done to repay it. I cannot take those attempts, however, to be definitive of the proposition that it was Jason Shortall who owed the debt. 25 It is also relevant, as I see it, to look at the appellant's behaviour. He received from a debt collector a letter of demand, and he had a solicitor respond to that letter of demand. When the initiating process from the Melbourne Magistrates' Court was served on him, he had a solicitor file a written defence to the claim. An appointment was then made for a pre-trial conference, at which mediation was to take place. The appellant did not attend that conference. A date was fixed for trial. He did not attend the trial. A judgment was therefore entered against him in default. At any stage, the appellant could have returned to the Melbourne Magistrates' Court and sought to set aside that judgment. He did not do so until it was too late. His explanation was that he did not take the matter seriously because he thought that Mr Keily and Ms Hill would be unable to swear that he owed them money and therefore he felt that he did not have to worry about it. But matters advanced to a stage where they must have seemed much more serious to him. Not only was judgment entered, but as I have said, the bankruptcy notice was served on him. He took no step to set aside the judgment. The creditors' petition was served on him. He took no step to set aside the judgment. On 22 July 2004, Registrar Bardsley expressly adjourned the hearing of the creditors' petition to give the appellant the opportunity to return to the Melbourne Magistrates' Court and to set aside the judgment. The appellant said that he had other things on his mind that seemed to him to be more important. He said that, although both his brother and his father were then bankrupt, he was unacquainted with the seriousness of bankruptcy and was still not taking the matter seriously. Only after the sequestration order was made by the registrar, on 24 August 2004, did the appellant return to the Melbourne Magistrates' Court and seek to set aside the judgment. At that point, he discovered that he could not do so, because any right that he had to make such an application had become vested in his trustee in bankruptcy on the making of the sequestration order, and without the support of the trustee in bankruptcy he was unable to set it aside. 26 I find it a little difficult to accept the appellant's explanation that he was simply not taking things seriously. It seems to me that his behaviour in relation to the proceeding in the Melbourne Magistrates' Court, and in failing to apply to set aside the judgment, amounts to an admission that the debt was his and it was simply not worth his while to contest it or to seek to set aside the judgment for it. I appreciate that this involves a finding that he has changed his mind after the event. It may be that the discovery of the seriousness of bankruptcy has brought about that change of mind, and that he has now reconstructed the events of May 2003 so as to exclude in his mind any possibility that he ever made a commitment to repay the money. 27 One of the factors that I find strongly persuasive that the appellant did commit himself to repay the money is that I do not find it likely that Mr Keily and Ms Hill would have been prepared to borrow to the limit on their credit cards, and to hand over the funds, without having some degree of assurance that they would receive the money back. As I have said, they had an awareness that the appellant was proposing to refinance his home, and they could see that that might well be a source of funds from which they could be repaid. I do not accept that the appellant made it clear to them, on 29 May 2003 in the car park, that he was under no circumstances liable to repay them. My finding is that what the appellant said gave Mr Keily and Ms Hill both to understand that he was committed to repaying the money they were advancing to them, together with the interest that they incurred by borrowing it on their credit cards, out of the proceeds of refinancing his house. On the balance of probabilities, therefore, I find that the appellant was indebted to Mr Keily and Ms Hill, and that he rightly had a judgment pronounced against him in that respect. 28 I might say also that one of the things that concerned me was whether anyone knowing that Jason Shortall was bankrupt would have been prepared to advance money to secure his release from prison, without having someone who was not bankrupt agree to repay the money. Both Mr Keily and Ms Hill have told me very honestly that they were not aware, on 29 May 2003, that Jason Shortall was in fact bankrupt. He had discussed the possibility of bankruptcy with Mr Keily before that, but Mr Keily and Ms Hill were both unaware that he had taken that step. It is to their credit that they have not claimed knowledge of the bankruptcy at that stage, because to do so might have been helpful to them. 29 Nevertheless, I am of the view that it is more probable than not that they would not have handed over the money without some assurance from the appellant that he would repay the money. One of the tragedies of making this finding is that Mr Keily and Ms Hill may well be disadvantaged by it. What it means is that I will dismiss the appeal. It is unlikely, as I understand it, that they will get anything out of the bankrupt estate of the appellant, so their debt will remain unsatisfied. Had I allowed the appeal and set aside the sequestration order, it would still have been open to them to enforce, by whatever means might be available, the judgment of the Melbourne Magistrates' Court, just as it would have been open to the appellant to return to that court and seek to set aside the judgment. It is both ironic and sad that victory for Mr Keily and Ms Hill in this appeal will mean that the possibility of securing the repayment of the debt from the appellant will disappear effectively. 30 While I was in the course of pronouncing my reasons for judgment, when I pronounced my finding that the appellant was indebted to Mr Keily and Ms Hill, the appellant left the courtroom. It will be necessary for me to make an order that the appeal be dismissed. It will also be necessary for me to make some order as to costs. I should have wished to hear from the appellant in relation to what that order should be, but I am not able to do so. I will hear from Mr Keily and Ms Hill. The best that I can do in relation to an order for costs is to say that Mr Keily and Ms Hill's costs of this appeal, incurred in filing affidavits and such like, even if they have not had lawyers acting for them, should be paid out of the bankrupt estate as costs of the petitioning creditors. The result will be that those costs are given some priority in the bankrupt estate. I do not think there is much point in ordering costs directly against the bankrupt, because he is unlikely to be able to have any assets from which to pay. 31 The orders that I make are that: 1. The appeal be dismissed. 2. The respondents' costs of the appeal be taxed and, when taxed, be paid out of the bankrupt estate of the appellant as costs of the petitioning creditors. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gray. Associate: Dated: 25 January 2006 Counsel for the appellant: The appellant appeared in person Counsel for the respondents: The respondents appeared in person Date of Hearing: 1 December 2005 Date of Judgment: 1 December 2005