Brereton v Legal Services Commissioner
[2010] VSC 378
•25 August 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
JUDICIAL APPEALS AND REVIEW LIST
S CI 2008 9528
| MICHAEL BRERETON | Appellant |
| v | |
| LEGAL SERVICES COMMISSIONER | Respondent |
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JUDGE: | BELL J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 19 July 2010 | |
DATE OF JUDGMENT: | 25 August 2010 | |
CASE MAY BE CITED AS: | Brereton v Legal Services Commissioner | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 378 | |
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ADMINISTRATIVE LAW – appeal from orders of Victorian Civil and Administrative Appeals Tribunal – discipline of lawyers – charge of common law misconduct by misappropriation – found proven on what lawyer ‘well knew (or ought to have known)’ – no finding of dishonesty – whether tribunal erred in law – whether charge should be remitted for rehearing – ‘misconduct’, ‘misappropriation’ and ‘dishonesty’ – LegalPractice Act 1996, ss 137, 174(3), Victorian Civil and Administrative Tribunal Act 1998, s 148(1), (7).
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APPEARANCES: | Counsel | Solicitors |
| For the appellant | Mr J. Burnside QC with Mr A. Kirby | Tony Hargreaves & Partners |
| For the respondent | Ms K. Judd SC with Ms K. Anderson | Ms C O’Shanassy, solicitor for the Legal Services Commissioner |
HIS HONOUR:
INTRODUCTION
Michael Brereton was a legal practitioner under the Legal Practice Act 1996. The Legal Services Commissioner brought 19 disciplinary charges against him under that Act. The charges were heard and determined by the Victorian Civil and Administrative Tribunal,[1] which found proven certain charges of misconduct and unsatisfactory conduct.
[1]Constituted by Mark Dwyer, Deputy President, Lillian Cooney, Member and Fiona Harrison, Member.
For the misconduct charges, the tribunal barred Mr Brereton from applying for a practising certificate for five years and from receiving and dealing with trust moneys for 10 years. If he wanted to resume practice, he would have to undertake professional development in the fields of ethics, professional responsibility and practice management. In view of those penalties, the tribunal imposed nothing more in respect of the unsatisfactory conduct charges, but it did order him to pay the commissioner’s substantial costs of the proceedings in the tribunal.
The most serious charge which was found proven was that Mr Brereton was guilty of misconduct at common law in that he had misappropriated trust moneys in connection with a property development project. To find Mr Brereton guilty of that charge, the tribunal had to find he had acted dishonestly in his dealings with those moneys. The tribunal did not expressly do so. Rather, it found he had acted contrary to responsibilities which ‘he well knew (or ought to have known)’.
Mr Brereton contends the tribunal erred in law in finding him guilty of this charge without finding he had acted dishonestly. On that ground, he appeals to this court under s 148(1)(a) of the Victorian Civil and Administrative Tribunal Act 1998. He seeks orders quashing the finding of guilt on that charge. As this charge was central to the all-up penalty which was imposed for the charges found proven, he also seeks orders quashing that penalty and remitting the case back to the tribunal for reconsideration of the penalty to be imposed in respect of the other charges.
PROPERTY DEVELOPMENT PROJECT
I will describe the factual circumstances only as they relate to the charge and findings under appeal. Those circumstances concern a property development relating to the purchase and development of land at Collendina in Victoria for a retirement village.
The tribunal found the land was bought by GDK Financial Services Pty Ltd, which was controlled by David McLeod and two associates. It was on‑sold to Seachange Management Pty Ltd for $1,000,000, which was controlled by Mr Brereton (through a company which he controlled) and GDK. As the only two directors of Seachange Management, Mr Brereton and Mr McLeod controlled that company.
The land was almost immediately on‑sold again for $31,370,000 to Seachange Village Nominees Pty Ltd, the difference in price reflecting the consideration to be paid to Seachange Management for developing the retirement village. The contract required that company to do no more than commence the development ‘as soon as practicable’ and to proceed with each stage ‘generally in an expeditious manner’. In the words of the tribunal, the conditions were ‘loosely worded and provide[d] no absolute time line’.
The funding for the project was to come from private investors who the promoters organised into partnerships. As contractually required by the investment arrangements, in late March 2000 and the following months, investors paid approximately $5,800,000 in various amounts to Mr Brereton as the solicitor for Seachange Management.
The contract for the purchase of the land by Seachange Management was settled on or about 23 May 2000. The contract for the purchase of the land by Seachange Village was never settled. The development has not gone ahead and the investors have received no return. Of the $5,800,000 paid by the investors to Mr Brereton, some $4,436,010.52 was paid by him to various persons for purposes associated with land development and for retainers (and the like) to himself and Mr McLeod (or their companies) in the amount of approximately $1,150,000 each.
These circumstances led to charges being laid by the commissioner against Mr Brereton.
CHARGES BROUGHT AGAINST MR BRERETON
After investigating the circumstances of the Collendina project, the commissioner brought seven charges against Mr Brereton in respect of the project, along with 12 other charges unconnected with that project, making the total 19. I will summarise only the former.
Charge 1 related to failing to maintain separate ledger accounts in Mr Brereton’s trust ledger in respect of each client or person for whom he received trust money. The commissioner alleged this was misconduct within the definition in paragraph (a)(i) of s 137 of the Legal Practice Act because it was a wilful or reckless contravention of r 19(1) of the Trust Account Practice Rules.
Charge 2 related to failing to maintain separate ledger accounts with respect to the purchase of the Collendina land by Seachange Management. It was alleged that this constituted misconduct on the same basis.
Charge 3 related to the application of deposit moneys held by Mr Brereton as a statutory stakeholder before those moneys were released by the purchaser. It was alleged this was misconduct at common law within the meaning of the definition in paragraph (a) of s 137 of the Legal Practice Act.
Charges 4 and 5 are central to the issues raised in this appeal. Here they are in full:
CHARGE 4
The conduct referred to in paragraphs 1 to 18, 21 to 23 and 25 to 26 [of the Notice of Charges] constitutes misconduct within the meaning of paragraph (a)(i) of the definition of misconduct in section 137 of the Legal Practice Act 1996 in that, in the course of engaging in legal practice, between 30 March 2000 and 25 September 2000 you engaged in a course of conduct being a wilful or reckless contravention of section 174(3) of the Legal Practice Act 1996 by withdrawing money from your trust account held for the purpose of the Collendina project and applying such money for another purpose without the consent or direction of the persons for whom you held that money on trust.
CHARGE 5
Further, the conduct described in paragraphs 1 to 18, 21 to 23 and 25 to 26 [of the Notice of Charges] constitutes misconduct at common law within the meaning of paragraph (a) of the definition of misconduct in section 137 of the Legal Practice Act 1996 in that you misappropriated trust moneys.
Charge 6 related to a deficiency in Mr Brereton’s trust account alleged to be without reasonable cause. The commissioner alleged this was misconduct within the definition of paragraph (a)(i) of s 137 of the Legal Practice Act as being a wilful and reckless contravention of s 188(1).
Charge 7 related to failing to notify Mr Brereton’s auditor of that trust account deficiency, which was alleged to be misconduct within the definition in paragraph (a)(i) of s 137 of the Act as being a wilful and reckless contravention of r 32 of the Trust Account Practice Rules.
I go now to the findings made by the tribunal with respect to those charges.
FINDINGS OF THE TRIBUNAL
It was fundamental to the case put by the commissioner that the moneys paid by the investors to Mr Brereton were kept on trust by him on their behalf. On that case, they were his clients and the vice in what Mr Brereton did was to make payments out of money held on trust by him for them without their necessary authority, including the retainer payments to himself and Mr McLeod.
It is just as fundamental to the outcome of this appeal that the tribunal did not accept the commissioner’s case as so put. The tribunal found the investors were not Mr Brereton’s clients. It found the money had been paid by the investors to Mr Brereton as the solicitor for Seachange Management to whom the money was due under the investment arrangements. It found Seachange Management was Mr Brereton’s client. The money was received by Mr Brereton from the investors for it, not them.[2]
[2]Reasons for decision dated 13 August 2008, [45] – [46].
Charges 1 and 2 were dismissed in consequence.[3]
[3]Ibid [448].
Charge 3 was found proven, but it has no bearing on this appeal.
The tribunal considered charges 4 and 5 under the same heading. The commissioner submitted in the appeal that I should treat the tribunal’s analysis of these charges as independent, with the analysis of charge 5 not being connected with the analysis of charge 4. I reject that submission. The tribunal’s consideration of these two charges was inextricably interrelated, and necessarily so.
There is a difficulty in the drafting of charges 4 and 5. On the conduct particularised, charge 4 alleges statutory misconduct constituted by ‘wilful or reckless’ contravention of s 174(3) of the Legal Practice Act. The state of mind alleged, rightly, is wilfulness or recklessness. Dishonesty is neither alleged nor necessary for that charge. On the same conduct, charge 5 alleges common law misconduct because Mr Brereton ‘misappropriated trust moneys’. No state of mind is expressly alleged. Dishonesty is a necessary element of that charge. Wilful or reckless disregard is not sufficient. I think the tribunal erred with respect to charge 5 mainly because it failed to appreciate this distinction.
Section 174(3)(a) of the Legal Practice Act permits a practitioner to withdraw trust money from a trust account only ‘for payment to the person for or on behalf of whom the money was received or in accordance with that person’s direction’. Charges 4 and 5 were based on the commissioner’s fundamental proposition that Mr Brereton was holding the investors’ money on their account. Therefore, on the commissioner’s case, s 174(3)(a) required any payment of these moneys to be to the investors or on their behalf or direction.
Because this was the way the case was put by the commissioner, the tribunal had to determine whether s 174(3)(a) had been breached on the basis that Mr Brereton had to obtain consent for the payments from the investors. Referring to its earlier finding in this regard, the tribunal rejected that proposition:[4]
Given our finding under Charge 1 (i.e. that the investors were not Brereton’s client, nor the persons ‘for whom’ the trust money had been received), we are not convinced that the investors, individually, needed to consent or direct to each transfer of funds. Through the multi‑layered corporate structure, they had in our view collectively ceded this responsibility to Seachange Management Pty Ltd and Seachange Village Nominees Pty Ltd as the nominated vendor/developer and purchaser.
[4]Ibid [65].
Having rejected this proposition, the tribunal very properly considered the evidence as to who the payments were made ‘for’. As the payments were made by but not for the investors, on account of whom were they received? That was the person from whom Mr Brereton needed the consent required by s 174(3).
After carefully analysing the evidence, the tribunal found the payments had to be broken into two groups, based on their timing. The first was those made from 30 May 2000 to 11 May 2000. The second was those made from 25 May 2000. In the first group, the money was paid by the investors ‘for’ Seachange Village, who was Mr Brereton’s client. In the second group, the payments were made ‘for’ Seachange Management, who was also Mr Brereton’s client.[5] That conclusion depended on the tribunal’s analysis of the contractual arrangements, which is not under challenge.
[5]Ibid [68]–[69].
The tribunal found charge 4 to be proven with respect to the payments made in the first period. That was because, although consent had been given for the payments by Seachange Village, Mr Brereton was a statutory stakeholder and the company could not alone give consent for the payments made in that period. That left Mr Brereton in the position of not having obtained the authority required by s 174(3) of the Legal Practice Act for the payments which he made in that period.[6]
[6]Ibid [68].
The tribunal found charge 4 not proven with respect to the payments made in the second period. It found that, after 25 May 2000, Seachange Management had the legal capacity alone to consent to the payments which were made in that period.[7] The tribunal received evidence specifically dealing with that subject, which it accepted with some understandable misgivings. The evidence was that Mr McLeod, on behalf of Seachange Management, had authorised all of the payments referred to in the charges, including the payments made during the second period.[8] Mr Brereton was the only other director of the company and on its behalf must be taken to have authorised the payments which he made to himself. The tribunal therefore dismissed charge 4 in respect of those payments. That decision is not under challenge in this appeal. Nor is the reasoning on which it is based.
[7]Ibid [69].
[8]Ibid [74].
The tribunal then considered charge 5, which it described in these terms:[9]
Charge 5 is more general in nature, alleging misappropriation by Brereton of these trust moneys. It thus gets more to the substance of the payments, rather than whether or not there was technical consent or direction from Seachange Management Pty Ltd.
[9]Ibid [75].
This statement is troubling. As I explain below, misappropriation is the dishonest misapplication of property (including money) held on behalf of another. The difference between charges 4 and 5, which were based on the same conduct, was the dishonesty requirement in the latter Therefore I am not sure what the tribunal meant by saying that charge was ‘more general’. With misappropriation, the focus must be on whether there was property held on behalf of another, a misapplication of that property and the state of mind of the trustee. Those elements are not well captured by the phrase ‘substance of the payments’. If Mr Brereton had the consent of the owner of the money (Seachange Management) for the payments, and that consent extended to payments made to himself, or even if he had an honest and reasonable belief that he had that consent, there could be no misappropriation under charge 5 (see below). Therefore, as regards the operation of s 174(3)(a) and the law governing misappropriation, it is seriously distracting to speak of ‘technical’ consent. Absent fraud, the question is whether there was consent (or an honest and reasonable belief in it) or not.
At no point in the tribunal’s analysis of charge 5 did it refer to the dishonesty element of the misappropriation which was alleged. Regrettably, it appears the tribunal was not given any assistance on this matter in the submissions of the parties. On the other hand, the parties were not to know the tribunal would reject the commissioner’s ‘primary assertion’[10] that authority for the payments was required from the individual investors and go on to decide the case on a different basis.
[10]Ibid [72].
As regards the payments made in the second period, the tribunal accepted Mr McLeod’s ‘plausible’ evidence that the payments with respect to ‘other actual development projects’ were authorised by Seachange Management, which he and Mr Brereton controlled.[11] The understandable tenor of this finding was that the tribunal was accepting this blatantly ‘self‑serving evidence’ with misgivings. But accept it the tribunal did.
[11]Ibid [76].
We now arrive at a critical point in the tribunal’s analysis of the issues raised in the appeal with respect to charge 5. To repeat, the evidence given by Mr McLeod was that he had authorised all of the payments made by Mr Brereton, including the retainer payments which were made to Mr McLeod and Mr Brereton. While the tribunal accepted that evidence with respect to the land development payments, it rejected it with respect to the retainer payments.[12]
[12]Ibid [78].
While I understand and share the tribunal’s concerns about the unsatisfactory nature of the investment arrangements, I cannot see how this distinction was open. I think it was based on a misunderstanding of the relevant legal relationships. If the payments were made for Seachange Management and not the investors, the money was being held by Mr Brereton on its behalf. It was not asserted by the commissioner, nor found by the tribunal, that the arrangements, and the legal relations which were created, were a sham. The company was therefore legally entitled to give whatever consent it chose to Mr Brereton with respect to the making of payments, including those involving the payment of retainers to Mr Brereton and Mr McLeod,
The tribunal then proceeded to reason that, ‘in relation to the more general charge of misappropriation’, Mr Brereton could not ‘hide behind the corporate veil’ of Seachange Management, which he and Mr McLeod ‘essentially controlled’. The reasoning seems to be that, because Mr Brereton and Mr McLeod controlled Seachange Management, Mr Brereton could not act (with Mr McLeod) in his capacity as a director of the company to give himself consent in his capacity as the lawyer for the company to make retainer payments to himself and Mr McLeod. This reasoning seems to be based upon the proposition that there is some legal barrier preventing Mr Brereton from acting in this way. I am not aware of any such rule. Absent fraud, if the money belonged to the company, which the tribunal had found to be the case, then the two persons (as directors) could lawfully decide the company would consent to the payment of retainers to themselves, and Mr Brereton could act on that consent as the company’s lawyer to pay the money accordingly.
In an important passage during the course of its reasoning, the tribunal twice referred to the state of mind which it was applying:[13]
Given McLeod and Brereton essentially controlled Seachange Management Pty Ltd, we do not believe Mr Brereton can hide behind the ‘corporate veil’ of that entity (and the ‘consent’ of that company to the payments via Mr McLeod) in relation to this more general charge of misappropriation. Given the intermingling of his business interests and his role as a lawyer responsible for trust money, he well knew (or ought to have known) his legal and fiduciary responsibilities to those beneficially entitled to the invested funds, and on whose behalf he and GDK were ostensibly managing those funds. He also well knew (or ought to have known) his obligations to properly account for the trust money. Brereton should not therefore have paid himself retainers from the project without clear contractual arrangements in place, clear authority and transparent disclosure. There is nothing in the material discovered in the course of Mr Hall’s investigation that provides any evidence at all of such arrangement, authority or disclosure, or that indicates that Brereton had performed work for which a retainer was payable. A similar situation prevails in relation to the GDK retainers (emphasis added).
[13]Ibid [80].
For reasons which I will give when I consider the issue of dishonest belief, it is a very different thing to say that a person had a dishonest belief or ‘well knew’ something on the one hand, and that a person ‘ought to have known’ something on the other. The two states of mind are of a different order and legal character and mark the boundary between incompetent or negligent administration on the one hand and misappropriation on the other.
In argument before me, there was discussion about the entities to which the tribunal was referring in the above passage, particularly ‘those beneficially entitled to the invested funds, on whose behalf’ etc. It is not clear who the entities were and what legal relationships existed between them and Mr Brereton, and it needed to be clear for the proper consideration of the misappropriation charge.
On the facts as found, Mr Brereton was the lawyer for Seachange Management. He had no lawyer-client relationship with the investors. He had no legal or equitable relationship with the investors and the tribunal found none. Seachange Management had legal (and probably fiduciary) relationships with the investors, but these relationships did not encompass the directors personally. As the directors of Seachange Management, Mr Brereton and Mr McLeod had certain legal responsibilities towards the company. The beneficial entitlements referred to in the passage were not identified. The facts as found were that, under the investment arrangements, the money paid by the investors was due to Seachange Management on whose behalf it was received and paid into trust by Mr Brereton. Taking all these relations into account, I cannot fit the legal and possibly equitable relationships which were created by the making of the payments by the investors to Mr Brereton on behalf of Seachange Management, and by Mr Brereton to himself and Mr McLeod, also on behalf of Seachange Management, into the framework described in the tribunal’s reasoning.
The tribunal’s conclusion on charge 5 is to be found in the following passage:[14]
As we have indicated elsewhere in these reasons, Mr Brereton was perhaps under a ‘heavier burden’ in properly managing his trust account in circumstances where he was intermingling his role as a lawyer with his business interests, and where he was dealing with a client entity in which he had a personal interest and was managing significant trust funds beneficially belonging to others. Irrespective of this, his conduct in misappropriating over $2,300,000 in investor funds from his trust account (albeit held in the name of Seachange Management Pty Ltd) is disgraceful and dishonourable and clearly constitutes misconduct at common law.
[14]Ibid [82].
The commissioner submitted I should conclude from this passage that the tribunal did apply a dishonesty standard to its finding that Mr Brereton had misappropriated trust money. There is no mention of dishonesty in this passage or anywhere else in the tribunal’s reasoning. The tribunal had earlier twice referred to a different and lesser state of mind (‘ought to have known’). It had earlier found that the investors had paid the money to Mr Brereton for Seachange Management on whose behalf he had received it and kept it on trust. I can see no evidence in this passage, nor anywhere else in the tribunal’s reasoning, of it applying a dishonesty standard to the misappropriation charge.
Moreover, I am unable to see how the tribunal could, in the above passage, describe the moneys as ‘investor funds’. On the tribunal’s own findings, the money paid by the investors to Mr Brereton was paid for Seachange Management. When those payments were made, the legal character of the moneys changed from being moneys of the investors to moneys of Seachange Management which Mr Brereton received for that company and was holding in trust on its behalf. The legal character of the money in Mr Brereton’s hands (being money held on trust for Seachange Management) was not determined by the source of the funds (being payments made by the investors), but by the payments being made as due by the investors to Seachange Management under the investment arrangements. On that basis, the money was received by Mr Brereton in his capacity as the solicitor for that company and (absent fraud) it could direct how the money was to be applied thereafter. Therefore, the tribunal’s reference to Mr Brereton’s ‘conduct in misappropriating over $2,300,000 in investor funds from his trust account (albeit held in the name of Seachange Management Pty Ltd)’ betrays conceptual confusion.
The commissioner did not press for a finding that charge 7 be found proven, and it was dismissed.
That takes me to the legal character of ‘misappropriation’.
WHAT IS MISAPPROPRIATION?
A term like misappropriation can have a particular meaning depending on the context. In the present case, the term was used in charge 5 by which the commissioner alleged that Mr Brereton, a practising lawyer, had committed misconduct at common law in that he had ‘misappropriated trust moneys’. Misappropriation has been used here to describe the legal character of conduct which, because it had that character, allegedly constituted misconduct at common law. The term is not used here in any special sense. No statutory definition of the term applies. Thus ‘misappropriated’ here refers to what would be misappropriation according to the ordinary meaning of that word.
The ordinary meaning of ‘misappropriate’ is to ‘appropriate to wrong uses; chiefly, to apply dishonestly to one’s own use (money belonging to another)’ (OED). Likewise, ‘misappropriation’ is appropriation to wrong uses (OED).
The legal dictionaries define ‘misappropriation’ consistently with that ordinary meaning. According to Jowitt’s Dictionary of English Law,[15] misappropriation is:[16]
the misdemeanour which is committed by a banker, factor, agent, trustee, etc., who fraudulently deals with money, goods, securities, etc., entrusted to him, or by a director or public officer of a corporation or company who fraudulently misapplies any of its property.
In Stroud’s Judicial Dictionary of Words and Phrases,[17] ‘misappropriate’ is defined to mean ‘the wrongful conversion of or dealing with anything by the person to whom it was entrusted‘.[18]
[15]John Burke, Jowitt’s Dictionary of English Law (2nd ed, 1977).
[16]Ibid 1189.
[17]Daniel Greenberg, Stroud’s Judicial Dictionary of Words and Phrases (7th ed, 2006).
[18]Ibid 1689 (references omitted).
It follows that the word ‘misappropriation’ in its ordinary sense involves a mental element. Misappropriation is dishonestly misapplying property, including money, held on behalf of another. In the criminal context, misappropriation by and to the trustee personally is not a crime at common law because the trustee already has the property; but it is conduct which, but for that, would be theft.[19] It is ‘stealing’ in another guise[20] because it is wrongful appropriation by the trustee of property being held for another.
[19]Macleod v R (2003) 214 CLR 230, 238 per Gleeson CJ, Gummow and Hayne JJ.
[20]Gladstone City Council v The Local Government Superannuation Board [1980] Qd R 48, 50 per Demack J.
Because dishonesty is a mental element of misappropriation in its common law sense, it is necessary to consider what dishonesty means, remembering here we will be doing so in a civil context. The Court of Appeal examined what dishonesty meant in that context in Harle v Legal Practitioners Liability Committee.[21] At issue was whether a solicitor was entitled to indemnity under an insurance policy which did not cover the ‘dishonesty or fraudulent act or omission of any insured’.[22]
[21](2004) 13 ANZ Insurance Cases 61 – 605.
[22]Ibid 77, 301, [25].
As to the meaning of ‘dishonesty’, Chernov JA (Callaway and Buchanan JJA agreeing) held:[23]
It seems clear enough that where, as here, dishonesty is not used in a special sense in relation to statutory offences, it is not a term of art and is to be given its ordinary meaning.[24] It embraces deliberate conduct[25] which is considered to be dishonest by the standard of ordinary decent people,[26] or, put another way, the ordinary standards of reasonable and honest people.[27]Whether particular conduct amounts to dishonesty involves the consideration of the mental state – the knowledge, belief or intention - of the person whose conduct is impugned.[28]
[23]Ibid 77, 302, [29] – [30].
[24]McCann v Switzerland Insurance Australia Limited (2001) 11 ANZ Insurance Cases ¶61-479; (2000) CLR 579 at 596 per Gaudron, J, Peters v R (1998) 192 CLR 493 at 504 per Toohey and Gaudron, JJ, Macleod v R (2003) 197 ALR 333 at [36] per Gleeson, CJ, Gummow and Hayne, JJ, McMillan v Joseph (1987) 4 ANZ Insurance Cases ¶60-822 at 75,054 per Cooke, P, at 75,055 per Somers, J and at 74,056 per Casey, J.
[25]H and R Nominees v Fava [1997] 2 VR 368 at 421 per J.D. Phillips, J.
[26]Peters at 504 per Toohey and Gaudron, JJ (unless the word “dishonesty” is used in a special sense in legislation that creates an offence). Approved in Macleod at [36] – [37] per Gleeson, CJ, Gummow and Hayne, JJ at [36] – [37] and at [100] per McHugh, J. See also McMillan at 75,055 per Somers, J and at 75,056 per Casey, J. Their Honours considered that conduct would amount to dishonesty if it is dishonest according to the ordinary professional, in that particular case a solicitor.
[27]R v Lawrence [1997] 1 VR 459 at 470-471 per Callaway, JA. See also R v Goash [1982] QB 1053 at 1064 per Lord Lane, CJ.
[28]McCann at 596 per Gaudron, J.
While an allegation of dishonesty requires consideration of the person’s mental state, in neither the criminal nor the civil context is it necessary to establish that the person subjectively knew or believed that the actions concerned were dishonest. What must be established is that the person subjectively intended to do the acts which are said to be objectively dishonest by the ordinary standards of reasonable and honest people.[29] Thus the course to be adopted in determining whether conduct is dishonest was explained by Toohey and Gaudron JJ in Peters v R[30] as follows:[31]
In a case in which it is necessary for a jury to decide whether an act is dishonest, the proper course is for the trial judge to identify the knowledge, belief or intent which is said to render that act dishonest and to instruct the jury to decide whether the accused had that knowledge, belief or intent and, if so, to determine whether, on that account, the act was dishonest … If the question is whether the act was dishonest according to ordinary notions, it is sufficient that the jury be instructed that that is to be decided by the standards of ordinary, decent people.
[29]Peters v R (1998) 192 CLR 493, 503-504 per Toohey and Gaudron, JJ; McLeod v R (2003) 214 CLR 230, 242 per Gleeson, CJ., Gummow and Hayne, JJ; Harle v Legal Practitioners Liability Committee (2004) 13 ANZ Insurance Cases 61-605, 77, 302, [30] per Chernov, JA, Callaway and Buchanan, JJA agreeing.
[30](1998) 192 CLR 493, 503-504 per Toohey and Gaudron, JJ.
[31]Ibid 504.
The steps involved in this formulation are: (1) identify the knowledge, belief or intent which is said to render the acts dishonest; (2) determine whether the accused (or defendant in the civil context) subjectively had that knowledge, belief or intent; and (3) determine whether, on that account, the acts were objectively dishonest according to the standards of ordinary and decent (that is reasonable and honest) people.
When applying these principles in a civil case, the civil standard of proof on the balance of probabilities applies. Of course, where the allegation in a civil case is of misappropriation, a high standard of probability is required, due to the gravity of the allegation.[32] In a criminal case, the criminal standard of proof beyond reasonable doubt applies.
[32]Brigginshaw v Brigginshaw (1938) 60 CLR 336, 361-363 per Dixon, J.
This approach to identifying whether alleged conduct was dishonest was applied by the Court of Appeal in the civil insurance context in Harle v Legal Practitioners Liability Committee[33] and by Layton J in the Supreme Court of South Australia in the lawyers’ disciplinary context in Legal Practitioners Conduct Board v Jones.[34]
[33]Harle v Legal Practitioners Liability Committee (2004) 13 ANZ Insurance Cases 61-605, 77, 302, [30] – [32].
[34][2009] SASC 347, [25] – [26].
In the present case, the tribunal did not address the dishonesty issue. It did not identify the knowledge, belief or intent said to render the making of the payments by Mr Brereton dishonest. It did not determine whether he subjectively had that knowledge, belief or intent. It did not judge his actions in making the payments against the objective standard of dishonesty of reasonable and honest people. It found that Mr Brereton was guilty of misconduct at common law by having ‘misappropriated trust moneys’ and that he ‘well knew (or ought to have known)’ what his responsibilities were.[35] It is the alternative state of mind – ‘ought to have known’ – that is the problem.
[35]Reasons for decision, [80]-[82].
Generally, professional misconduct at common law is conduct which ‘would reasonably be regarded as disgraceful or dishonourable by solicitors of good repute and competency … Mere negligence, even of a serious character, will not suffice.’[36] Therefore the tribunal could not have found Mr Brereton guilty of misconduct at common law because he had failed to act in accordance with what he ‘ought to have known’. There had to be more than that. Yet the tribunal did not base its misconduct finding only on what Mr Brereton ‘well knew’, but on that and the alternative finding about what he ‘ought to have known’.
[36]Myers v Elman [1940] AC 282, 288-289 per Viscount Maugham; see also 319 per Lord Atkin. See also Re Hodgekiss (1959) 62 SR (NSW) 340, 351 per Hardie, J; and Re a Solicitor [1960] VR 617, 620 per Deane, J.
The state of knowledge, belief or intent associated with being negligent, incompetent and in reckless disregard of professional responsibilities is less than, and does not amount to, dishonesty, and is not sufficient to establish that a lawyer is guilty of misappropriation. Therefore, to find Mr Brereton guilty of misconduct based on misappropriation, the tribunal had to be satisfied to a high standard of proof that he knew he did not have authority to make the relevant payments, even assuming for present purposes that he did not have that authority. The tribunal did not do so, which was an error of law. In fact the reasoning of the tribunal under charge 4 compels the conclusion that he did have that authority, but I will deal with that under the next heading.
WHAT ORDERS SHOULD BE MADE ON APPEAL?
As the tribunal erred in law in finding Mr Brereton guilty of misconduct at common law under charge 5, the tribunal’s orders in regard to that charge must be set aside. The parties are not in dispute about that issue. The parties are in dispute about the other orders which should be made.
Mr Brereton submits I should set aside the tribunal’s orders regarding charge 5 and all of the tribunal’s orders on penalty. Then I should remit back to a differently constituted tribunal the question of penalty on the other charges, absent charge 5.
The commissioner submits I should remit charge 5 back to the tribunal for rehearing, and before the same tribunal. Alternatively, after setting aside the orders regarding charge 5 and penalty overall, the issue of penalty should be remitted back to the tribunal for reconsideration, absent charge 5.
Under s 148(7) of the Victorian Civil and Administrative Tribunal Act, I can make orders setting aside the orders of the tribunal, any orders the tribunal could have made in the proceeding, orders remitting the proceeding back to the tribunal for reconsideration and other orders which I think are appropriate. As a matter of jurisdiction, I can therefore make orders of the kind referred to in the submissions of the parties.
I reject the commissioner’s submission that I should remit charge 5 back to the tribunal for rehearing. It would not be appropriate to do so for two independently sufficient reasons.
First, the charge is one of misappropriation. This charge was based on the commissioner’s contention that the relevant money was held on trust by Mr Brereton for the investors. The tribunal rejected that contention. It held the money was held on trust for Seachange Management. Mr Brereton appealed. The commissioner filed no notice of contention challenging the lawful basis of the tribunal’s reasoning. In the appeal, it defended that reasoning. The tribunal made an error of law in finding Mr Brereton guilty of charge 5. It would be gravely unfair to Mr Brereton to remit the matter back to the tribunal for rehearing on some reformulated basis, especially because the commissioner did not put their case on the alternative basis on which the tribunal ultimately found charge 5 to be proven.
Secondly, as I have decided, charges 4 and 5 are interrelated. Charge 4 alleges statutory misconduct as regards certain payments. Charge 5 alleges common law misconduct by misappropriation as regards the same payments. In dealing with charge 4, the tribunal did not distinguish between land development payments and retainer payments. For the period after 25 May 2000, it held all of the payments to have been authorised and dismissed charge 4 to that extent. Applying correct legal principles, the tribunal could not, consistently with that finding, find the retainer payments not to have been authorised under charge 5.[37]
[37]As regards charge 5, the difference between the two time periods was not explored much in argument on the appeal. The argument focused on the second period, and I have considered the matter on that basis. As regards the first period, as the tribunal found Mr Brereton needed the statutory clearance to make the payments, whether he was guilty of misappropriation in respect of that period would depend on whether he had an honest and reasonable belief in his authority to make the payments. The tribunal did not address that issue, which would itself be an error of law. Having regard to the way the matter was argued, I do not need to explore that issue.
The additional element in charge 5 was the alleged misappropriation. As a matter of law, for reasons I have given, that required proof of dishonesty. Having regard to the tribunal’s finding under charge 4, I do not think it would be open for it to find that Mr Brereton acted dishonestly under charge 5.
Moreover, there has been no challenge by either side to the tribunal’s findings under charge 4. I cannot see how charge 5 can be extricated from its relationship with charge 4 such that it is now viable and fair to rehear charge 5 alone.
That brings me to the constitution of the tribunal on the remitter. I do not accept Mr Brereton’s submission that the tribunal needs to be reconstituted for the rehearing of the remitted penalty proceeding. There is nothing to justify a reasonable apprehension that it might not impartially conduct that rehearing, and there are many practical reasons why it should do so.
Accordingly, there will be orders setting aside paragraph 1a of the order of the tribunal dated 13 August 2008 in so far as it relates to charge 5 and setting aside all of the orders dated 7 October 2008 (I will hear the parties on whether that should include the costs order). The issue of penalty for the other charges found proven (and possibly costs) will be remitted back to the tribunal for reconsideration.
CONCLUSION
Mr Brereton has established that the tribunal made an error of law in the way that it dealt with charge 5, which alleged that, as a lawyer, he was guilty of common law misconduct by misappropriation.
The tribunal should have approached that charge on the basis that misappropriation is only made out when a lawyer dishonestly misapplies funds being held on behalf of another. It did not. The tribunal found Mr Brereton guilty on the legally incorrect basis that he ‘well knew (or ought to have known)’ of his responsibilities. The alternative (‘ought to have known’) involves a different and lesser state of mind than dishonesty.
There will be orders setting aside the finding of guilt in relation to charge 5. Because Mr Brereton was penalised on an all-up basis for charge 5 and other charges found proven which have not been appealed, there will also be orders setting aside the tribunal’s orders on penalty generally and orders remitting the issue of penalty on the other charges found proven back to the tribunal for reconsideration.
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