De Simone v Legal Services Board

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

PROFESSIONAL LIABILITY LIST

S CI 2013 01485

GIUSEPPE DE SIMONE (& ORS ACCORDING TO THE SCHEDULE)	Plaintiffs
v
LEGAL SERVICES BOARD	Defendant
MICHAEL RICHARD BRERETON AND OTHERS (according to the attached schedule)	Third Parties

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JUDGE:	MACAULAY J
WHERE HELD:	Melbourne
DATE OF HEARING:	13, 14, 15, 16, 17 & 20 February 2017
DATE OF JUDGMENT:	16 August 2017
CASE MAY BE CITED AS:	De Simone v Legal Services Board
MEDIUM NEUTRAL CITATION:	[2017] VSC 471

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LEGAL PRACTITIONERS — Appeal from decision of Legal Services Board of Victoria — Claim against Fidelity Fund for default of a legal practitioner — Whether there was a default to which Part 3.6 applies — Whether trust money received by the practice in the course of legal practice — Whether failure to pay or deliver trust money — Whether money entrusted in connection with financial service or investment — Whether plaintiffs’ claims upon the Fund defeated by releases given to the legal practitioner — Legal Services Board’s decision affirmed — Third party claims by the Legal Services Board dismissed — Legal Services Board v Gillespie-Jones (2013) 249 CLR 493 — Legal Profession Act 2004 (Vic), Pts 3.3, 3.6, 6.7.

STATUTES — Statutory interpretation — Effect of amendment on rights — Whether the plaintiffs had accrued rights before an amendment to the entitling legislation — Esber v The Commonwealth (1992) 174 CLR 430; NSW Aboriginal Land Council v Minister Administering the Crown Lands Act (1988) 14 NSWLR 685 — Interpretation of Legislation Act 1984 (Vic), s 14(2)(e).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr A Monichino QC with Mr A Sandbach and Mr R Chaile	Peter Lustig
For the Defendant	Mr C Caleo with Mr S Senathirajah	Legal Services Board
For the First Third Party	No appearance
For the Second Third Party	Mr T Stuart

TABLE OF CONTENTS

Introduction......................................................................................................................................... 1

Background......................................................................................................................................... 3

Nature of the evidence................................................................................................................. 3
Seachange Village project............................................................................................................ 5
De Simones’ investment in the Seachange Village project................................................... 12
Disbursement of the deposit money from the trust account................................................ 14
Progress of the development 2000-2004.................................................................................. 19
Events leading to the 2007 deed............................................................................................... 23
Disciplinary proceedings against Brereton............................................................................. 25
Board’s reasons for decision...................................................................................................... 26

What is the nature of the appeal?.................................................................................................. 28

Was there a ‘default’ to which Part 3.6 applies?.......................................................................... 31

(1) Which version of the Act applies?...................................................................................... 31
Conclusion: plaintiffs’ case is confined to a para (a)(i) default.................................. 43

(2) Was trust money received by the practice in the course of legal practice?.................. 44
Received in the course of legal practice......................................................................... 47
Trust money....................................................................................................................... 50

(3) Was there a failure to pay or deliver trust money?.......................................................... 52
(4) Was the money entrusted in connection with a financial service or investment?....... 58
Financial service................................................................................................................ 59
Managed investment scheme.......................................................................................... 65
Investment purposes......................................................................................................... 67

Was there a fraudulent dealing with trust money?............................................................... 69
Conclusion................................................................................................................................... 70

Did the plaintiffs suffer any pecuniary loss because of a default?........................................ 71

Are the plaintiffs’ claims defeated by the releases given in 2004 or 2007?............................ 72

2004 deed...................................................................................................................................... 72
2007 deed...................................................................................................................................... 73
Conclusion................................................................................................................................... 75

What orders should be made?....................................................................................................... 76

HIS HONOUR:

Introduction

Between 30 March 2000 and 25 September 2000 Michael Brereton, a solicitor, disbursed approximately $4.436m from his firm’s trust account—trust ledger 6998 (the trust account)—paying those monies to persons other than his client, including to himself. The money had been received into the trust account in connection with a project to build and operate a retirement village at Collendina in Victoria to be known as Seachange Village (the Seachange Village project).

Under Part 6.7 of the Legal Profession Act 2004 (the Act), the Legal Services Board of Victoria (the Board) maintains the Fidelity Fund (the Fund) to compensate persons who suffer losses arising out of defaults by law practices in connection with money passing through their trust accounts. On 26 May 2011, the Board disallowed a claim brought by the plaintiffs for compensation for the losses they claim to have suffered due to Brereton’s disbursements from the trust account which they allege amounted to defaults. This proceeding is an appeal brought by the plaintiffs against the Board’s dismissal of that claim.

The plaintiffs are two brothers, Giuseppe (Joe) De Simone and Serafino De Simone, and the two companies engaged in the Seachange Village project, Seachange Management Pty Ltd (Management) and Seachange Village Nominees Pty Ltd (Village Nominees). Joe De Simone became the sole director of Management (in 2004) and Village Nominees (in 2007) and continued holding those offices to the time of trial. However, as will be seen below, he was not involved in the management of either company during most of the period that is relevant for the purposes of this case.

The first question that arises is the true nature of this appeal? Under provisions of the Act (since repealed), a court hearing the appeal may ‘review the merits’ of the Board’s decision.[1] The court may vary the decision or set aside and substitute its own only if there are ‘sufficiently cogent’ reasons to ‘warrant [it] doing so’.[2] There are further provisions in the Act concerning the receipt of evidence on the appeal. The appeal provisions may be considered novel and do not appear to have been considered previously by this (or any other) court.
[1]The Act s 3.6.23(4).
[2]s 3.6.23(5)(b).

Secondly, under the Act the entitlement to make a claim against the Fund is granted to any ‘person who suffers pecuniary loss because of a default to which [Part 3.6] applies’.[3] ‘Default’ is defined for Part 3.6 in s 3.6.2. Section 3.6.6 of the Act specifies certain species of default to which Part 3.6 does not apply: they are defaults that occur in connection with the legal practice providing financial services, undertaking managed investment schemes or receiving money for certain investment purposes. So, for there to be a default to which Part 3.6 applies, the relevant event must fall within a definition in s 3.6.2 but outside of the circumstances described in s 3.6.6. A critical issue in this case is whether any default to which Part 3.6 applies has occurred. Further, whether any plaintiff suffered loss because of such a default is also controversial.
[3]s 3.6.7.

Thirdly, any defence that would have been available to the practitioner is available to the Board in defence of a claimant’s claim on the Fund.[4] Here, the Board relies upon releases the plaintiffs executed in favour of Brereton in 2004 and 2007 respectively which it alleges would have barred their entitlement to any relief against Brereton.
[4]s 3.6.25(b).

Fourthly, if the court finds against the Board on its review of the merits of the Board’s decision, it will be necessary to consider what order should be made having regard to the appeal provisions mentioned above. Included in this consideration, there are questions about the quantum of costs involved in making and proving the claim which the Board (and thus the court on appeal) has jurisdiction to order.[5] No dispute arose about the method of calculating interest under the Act,[6] should that point be reached.
[5]s 3.6.16.
[6]s 3.6.17.

Finally, upon paying out a claim from the Fund the Board is subrogated to the rights and remedies of a claimant in respect of the defaults.[7] The Board has joined two third parties to the proceeding.[8] The first is Brereton; the second is David McLeod, another person to whom some of the trust monies had been paid. Both were promoters of the Seachange Village project. Both filed defences to the third party claim. Brereton took no part in the trial itself. McLeod did and was represented by Counsel. Understandably, each supported the Board’s defence of the claim made by the plaintiffs but McLeod raised particular defences should the Board be found liable to any plaintiff and maintain its claim against him.
[7]s 3.6.19.
[8]Initially it had joined three, but as a result of orders made on 8 February 2017 the claim against the third party (Lyle) fell away.

So, arising from these controversies, the issues for determination are as follows:

(a) What is the nature of the appeal?

(b) On the facts that are established, was there a default to which Part 3.6 of the Act applies?

(c) Did the plaintiffs or any of them suffer any, and if so what, pecuniary loss because of the default?

(d) Are the plaintiffs’ claims defeated by the releases they signed in 2004 or 2007?

(e) If the Board’s decision was wrong, what order should be made?

(f) If the Board is ordered to pay any plaintiff from the Fund, is it entitled to recover against Brereton or McLeod and, if so, what orders should be made?

Background
Nature of the evidence

The principal actors in the story to be told below are Joe and Serafino De Simone, Brereton and McLeod. However, of those, only Joe and Serafino De Simone gave evidence at trial. McLeod was present and available to do so but chose not to give evidence; nor was he called to give evidence by the Board. Brereton has been out of Australia for many years and did not appear at trial nor, as mentioned, did he play any part in it. Shortly before the trial commenced, he applied to give evidence by video link from Thailand. For reasons that have been previously published,[9] I refused that application. The failure of McLeod and Brereton to give evidence, or to be called by the Board to do so, is potentially of some significance.
[9]Ruling on 30 January 2017.

The plaintiffs also called as a witness a former Law Institute of Victoria inspector, Ronald Hall. In that capacity, in 2004 Hall had investigated certain aspects of the operation of Brereton’s trust account. The results of his investigation were the foundation of charges filed against Brereton in the Victorian Civil and Administrative Tribunal (VCAT) by the Legal Services Commissioner on 28 June 2007. Those charges alleged contraventions of the Legal Practice Act 1996. Hall also made a report in May 2010, based on many of the documents which he had examined during the course of his investigation of Brereton’s practice, in support of the plaintiffs’ application to the Board for compensation out of the Fund, the refusal of which is the subject of this appeal. Hall’s report and exhibits thereto were, with one exception,[10] tendered in evidence in this appeal for the limited purpose of establishing the making of the claim on the Fund and the evidentiary basis upon which it was decided.
[10]Exhibit 14, CB 0237.

Other than the De Simone brothers and Hall, oral evidence was adduced from Joe De Simone’s accountant, Martin Jurblum, and the solicitor who had acted for Village Nominees in the acquisition of the land on which the Seachange Village project was to be constructed, Bruno Alderuccio. Neither the Board, Brereton or McLeod called any oral evidence.

Apart from the oral evidence and documentary evidence mentioned so far, the evidence led by the plaintiffs consisted of a large body of documents which the plaintiffs had managed to obtain relating to the transactions that are at the heart of this case. Very few if any of the central documents were originally in the possession of the De Simone brothers. Some documents came into their possession when Joe took over control of Management and Village Nominees. Many others were obtained through proceedings brought at VCAT or through discovery from Brereton and the Board in this proceeding after protracted disputes. Documents came into the possession of the Board either because of the claim made to it by the plaintiffs or because it succeeded[11] to documents held by the Legal Services Commissioner or the Law Institute of Victoria in connection with the prosecution of charges against Brereton at VCAT and the preceding investigation.
[11]Preceding the trial, there had been years of discovery disputes between the plaintiffs and the Board centering upon the Board’s responsibilities and powers to obtain relevant documents that had been acquired during the Law Institute of Victoria’s investigations reaching back to 2004. Numerous decisions were made by this Court to resolve those disputes. See, for example, De Simone v Victorian Legal Services Board (Discovery ruling)(Ruling No 4) (Unreported, Supreme Court of Victoria, Macaulay J, 15 June 2016).

The plaintiffs have consistently maintained that there are many other documents, particularly of an accounting nature, that were withheld from them by Brereton and, (if ever in their possession) by the Legal Services Commissioner or the Law Institute of Victoria. Accordingly, the plaintiffs claim that the body of evidence before the Court is necessarily incomplete. Nevertheless, as will appear, a very substantial number of documents was put into evidence to expose the relevant facts in as much detail as possible.

Seachange Village project

In late 1999 or early 2000 a document titled ‘Information Report’ was produced to describe an investment opportunity in a retirement village project at Collendina, Victoria, to be known as ‘Seachange Village’. The Information Report was a report prepared by Management to market the Seachange Village project to potential investors. As Brereton and McLeod were the directors of Management at the time, or were soon to be, I infer that they were substantially responsible for the preparation of the Information Report.

Around that time, Brereton was already involved in the promotion of various investment projects. One, for example, was a partnership to invest in a music production called the ‘Jolson Partnership’. It commenced in June 1999. Another was a further retirement village investment project, the Windsor Gardens Retirement Village project, for which Brereton had obtained (or at least was in possession of) a memorandum of advice from a tax barrister, Peter Fraser, with respect to investment in that project. Still further, Brereton was involved in another similar retirement village project in Western Australia known as The Mews at Turtle Point.

The Information Report outlined the nature of the Seachange Village project. The document is important not only because it describes the project but also because it was the document used by Brereton to promote the project to the De Simone brothers. Aspects of it were also incorporated by reference into the contracts that were ultimately put in place to implement the principal project transactions.

The Information Report stated that Management was the owner of land at Collendina and wished to construct the retirement village and thereafter manage it. The report stated that Management was prepared to offer the village (as constructed) for sale to a purchaser for a total consideration of $31,370,000. The village was to consist of a total of 190 residences of a variety of types, with a host of living and recreation facilities including a swimming pool, bowling greens, dining rooms and other amenities. The purchaser was required to outlay a deposit of $6,274,000 (20 per cent of the purchase price). The report envisaged that the deposit would be paid by 30 January 2000.

At the date of the Information Report the land was undeveloped rural land. In return for the total consideration Management was to construct the village and then manage it on behalf of the purchaser. The purchaser and Management would ultimately share the revenue returns from the operation of the village. In a section on taxation the report forecasted that the purchaser should be entitled to deductions in the income tax year in which expenses were incurred, including expenses for the acquisition of the land and buildings, marketing costs and the management and administration of the village et cetera. Specifically, the report said the purchaser —

…may be able to claim a tax deduction of around $31,532,500 (using the assumptions found in the financial summary and exclusive of interest) in the year ending 30 June 2000.[12]

As will be evident, this was a significant attraction for making an investment in the project. No reference was made to the possible application of goods and services tax (GST) which was about to be introduced in Australia. The report recommended that if there was to be more than one purchaser the parties should form a syndicate or partnership; and indeed that is what later occurred.

[12]Exhibit 32, clause 3.2(b).

Within the report there was a section headed ‘Financial results and forecasts’. Although qualified, that section forecast the earnings before interest and tax that should be realised over the life of the project. The time for completion of the village was obviously an important element in any financial modelling. Under the heading ‘4.3 Revenue surplus’ it was stated that —

It is envisaged that the construction of the Village will be completed by July 2003, and that all of the Licences will be sold within one year thereafter.[13]

[13]Ibid.

Appended to the report were various spreadsheets setting out predicted results. Based on various identified assumptions, the appendices contemplated 45 units being completed by December 2000, another 20 by July 2001, another 35 by December 2001, another 35 by July 2002 and the remaining units by July 2003. With the sale of licences to occupy those units running in tandem, it was projected that by December 2000 there would be total sales revenue of $6,735,000, a further $8,335,000 by July 2001, a further $6,375,000 by July 2002, and a final $9,925,000 by July 2003 when the village ought to have been completed.

Construction of each stage of the village assumed the sale of 80 per cent of units in the previous stage on an unconditional basis. It was hoped that the construction of the village would be largely self-funding although provision was to be allowed for Management to borrow against the land to fund development costs. Other than the payment of the $6,274,000 deposit in cash, the residue remaining under the contract was to be advanced to the purchaser by Management as a vendor loan secured by a registered mortgage granted by the purchaser over the land. Management was not to charge interest on that advance.

In summary therefore:

(a) Management was to sell the land to the purchaser for $31,370,000 upon the payment of a cash deposit of $6,274,000;

(b) the residue was to be paid by way of the purchaser mortgaging the land to Management to secure a vendor loan of the balance owing;

(c) assuming the purchaser completed the purchase in the year ending 30 June 2000, it may be entitled to claim a tax deduction of around $31,532,500;[14]

(d) the financial modelling assumed construction to be well under way by December 2000, with revenue being derived from that date and the village being completed by July 2003;

(e) the construction costs of the village were anticipated to be largely self-funding, but if necessary Management would borrow funds required to complete the buildings and works secured by a first mortgage over the property.

[14]Ibid.

In actual fact, at the date that the Information Report contemplated the deposit being paid by the purchaser of the land (i.e. 30 January 2000), Management did not exist nor did it own the land. Management was incorporated on 3 February 2000, with Brereton and McLeod as its directors. Its two shareholders were GDK Financial Solutions Pty Ltd (GDK) and Young Turks Pty Ltd. GDK was owned and controlled by McLeod and two associates, Geoff Woodham and Kevin Munro. Young Turks was owned and controlled by Brereton. The directors of Management were Brereton, McLeod and Woodham.

A few days later, on 9 February 2000, Village Nominees was incorporated with its directors being Munro and Hayden Lewis (an employee of GDK) and its shares were wholly owned by GDK.

Another week later, on 16 February 2000, Management entered a contract to purchase the land on which the Seachange Village project was to be constructed from a company called Wooddale Pty Ltd. The price payable under the contract between Wooddale and Management was $1 million with a deposit of $100,000 payable on signing of the contract and the residue of $900,000 due on 30 June 2000.

As will appear, Village Nominees was to become the purchaser of the land from Management for the price of $31,370,000 (as contemplated in the Information Report). with Management having first acquired the land from Wooddale. The difference between the two sale prices represented the construction cost of the retirement village from pasture to completion.

Village Nominees was incorporated to be the bare nominee of a hierarchy of partnerships to be composed of investors who would advance the deposit monies due under the sale contract between Management and Village Nominees. Those investors would share in the tax deduction of $31,532,500, beneficially own the Seachange Village and share in the revenue returns from the village going forward.

In readiness for this to occur, numerous agreements were prepared by the promoters of the project, namely:

(a) a contract between Management and Village Nominees for the sale and purchase of the land on which the village was to be constructed;

(b) a Marketing Management and Profit Share Agreement (for the conduct of the village) between Management and Village Nominees;

(c) a Head Partnership Agreement for execution by the various sub-partnerships which were collectively to comprise the ‘Seachange Retirement Village Partnership’ which was the vehicle for investment in the Seachange Village project; and

(d) pro forma partnership agreements for the sub-partnerships.

Each of the above agreements came to be executed with a commencement date or effective date of 10 March 2000. However, as it will appear, the actual entry of many of the investors into their respective sub-partnerships and their contributions to the payment of the deposit mostly post-dated that date.

In view of what was projected to occur by the Information Report, it is convenient to refer to the principal features of the sale contract between Management and Village Nominees (which fulfilled the role of ‘purchaser’ as contemplated in the Information Report).

The Management/Village Nominees contract was signed for Management by McLeod and Brereton and for Village Nominees by Munro and Lewis. The solicitors for Management were Michael Brereton & Co—Brereton was also the solicitor for Management in its purchase of the land from Wooddale. The price was $31,370,000 and the deposit of $6,274,000 ‘payable on the Day of Sale’, namely 10 March 2000.

The residue was stated to be $25,960,000 payment of which was to be ‘on the date determined in accordance with special condition 10’. Clause 10 of the special conditions provided that the purchaser must pay the residue to the vendor on the ‘Settlement Date’. The particulars of sale said the settlement date was ‘the date on which vacant possession of the land must be provided … namely, upon acceptance of title and payment of the whole of the residue’. ‘Settlement’ was defined to mean ‘the payment of the settlement amount by the Purchaser to the Vendor at which time the Vendor will transfer title to the Purchaser’. Ascertaining any provision that defined the date or event upon which the residue had to be paid and settlement occur proved elusive.

Clause 9 of the special conditions dealt with the deposit. It had to be paid to the vendor’s solicitors to be held in a special purpose account in accordance with

s 9AA(2)(b) of the Sale of Land Act 1962 (Vic) (the SLA). It was to be released in accordance with the provisions of that Act and, pending any release, the parties authorised the vendor’s solicitors to invest the deposit in the solicitor’s name with the trading bank on fixed deposit. The clause provided that immediately upon the registration of a plan of subdivision the purchaser was to authorise the release of the deposit to the vendor subject to disclosure of information about monies owing by the vendor to financiers at that time.

As stated, clause 10 of the special conditions required the purchaser to pay the residue on the settlement date. But clause 11 provided that funding for the payment of that residue was by means of a vendor-loan to the purchaser and a mortgage back to the vendor. In substance, no money was to change hands. The purchaser agreed (clause 11.2) to provide the vendor with an executed mortgage at the execution of the contract which the vendor would hold in escrow until settlement date. The principal sum secured by that mortgage was to be ‘the amount of the Residue calculated as at the settlement date’. The mortgage to the vendor was to rank in priority behind any mortgage remaining over the land at the settlement date given by Management to secure loans to effect the completion of works. The ‘works’ were defined by reference to ‘buildings’ which, in turn, were those described in the Information Report. The Information Report was an appendix to the contract.[15]
[15]Appendix E: although no copy of it appeared in the version of the contract in the Courtbook.

Importantly, clause 6 of the special conditions imposed on Management an obligation to proceed with ‘that portion of the Works applicable in respect of each Stage generally in an expeditious manner’. Clause 6.3 provided that the works would ‘commence as soon as practicable’ and would ‘proceed through in Stages’ numbered 1 to 5. The various ‘stages’ were defined on the contract to mean those described in Appendix 1 of the Information Report.

Clause 19 of the special conditions provided that the purchaser would pay the vendor any GST that was collectable because of the sale and purchase of the land. The possible application of GST to the price was of some importance. This transaction was being promoted immediately before the commencement of the operation of the new Commonwealth goods and services tax legislation[16] due on 1 July 2000. As will appear, it was an important consideration to investors such as the De Simones to have the transaction completed by 30 June 2000 so as not to attract GST upon the purchase price under the contract.
[16]A New Tax System ( Goods and Services Tax) Act 1999 (Cth).

De Simones’ investment in the Seachange Village project

Joe De Simone and Brereton shared the same accountant for their respective personal taxation and accounting affairs: Martin Jurblum. It was Jurblum who, in about February 2000, informed Joe De Simone that Brereton was involved in a project to develop a retirement village and suggested that Joe may wish to consider investing in it. Following that introduction, Joe and Serafino ultimately came to deposit $100,000 in the trust account in connection with the Seachange Village project. The trust account was first opened on 31 January 2000 in the name of GDK Financial Solutions. This was the account recording all of the investments deposited by individual investors in the Seachange Village project. It was also the ledger that recorded the disbursements that formed the subject of the claim made by the plaintiffs on the Fund.

The De Simones’ investment was paid on 29 March 2000 with a cheque written on the account of De Simone Consulting Pty Ltd, a company owned and controlled by the De Simone brothers. The cheque for $100,000 was drawn against their personal credit loan accounts with the company; it was not in dispute that the cheque represented payments by each of the two brothers of $50,000 respectively.

Between the Jurblum conversation in February and that payment on 29 March, Joe had two conversations with Brereton: one in person at the office of Brereton & Co and the other by telephone. In substance, Brereton provided Joe with the Information Report and they discussed the nature of the project, the investment structure, the proposed timetable for the development phase and certain taxation effects that were said to flow from an investment in the project. Joe passed on to Serafino what he had learned from Brereton.

Joe De Simone and Brereton discussed the likely tax treatment of sums invested in the project. Nothing in the models assumed a liability for GST. Joe De Simone expressed some concern to Brereton about the effects of the impending GST and Brereton told him the sale would be settled by the payment of deposit and entry into vendor’s mortgage before 30 June 2000 and, so, before the GST came into operation. Brereton warned Joe that if the investors were to settle the sale after July 2000 they would be liable for another $3 million in GST. Hence it was apparent that the financial viability of the project as it was depicted in the Information Report assumed settlement occurring before the end of the then current financial year.

Joe De Simone was shown the tax opinion for the Windsor Gardens Retirement Village project. The opinion was shown to De Simone to support the predictions in the Information Report that the investors (as the collective Purchaser of the land) would be able to claim a tax deduction for the whole $31 million purchase price. When De Simone said he wanted an opinion specific to the Seachange Village project Brereton said he would obtain one; and indeed, he later produced to De Simone a project-specific opinion of Mr Fraser dated 21 March 2000.[17]
[17]See CB3416. It was not at all clear that the taxation opinion was obtained by Brereton briefing counsel himself or whether he obtained it by other means.

The parties accepted that the monies advanced by Joe and Serafino De Simone comprised their investment in the Seachange Village project and a portion of the deposit paid by Village Nominees under the contract of sale and purchase. Investors’ contributions were paid directly and incrementally to the trust account rather than first being collected by Village Nominees and then paid on to Brereton as a single deposit payable under the contract. The precise role of Brereton in receiving and holding the money, and the character of the money itself, are matters that will need to be discussed further below.

Joe and Serafino De Simone were members of a sub-partnership within the structure of sub-partnerships that together comprised the ‘Seachange Retirement Village Partnership’. There were seven such sub-partnerships and the De Simones’ sub-partnership was known as ‘Villager Collendina Partnership’. The other sub-partnerships, better referred to by each partnership’s corporate nominee, were Jones Financial Management Pty Ltd, Ergo Management Pty Ltd, Bodero & Associates Pty Ltd, Geramata Partnerships Pty Ltd, Seachange Nominees Pty Ltd and Retirement Peridon Nominees Pty Ltd. Each of the sub-partnerships consisted of between 10 and 20 individuals or companies that contributed an identified percentage of the deposit funds under the contract.[18] It is relevant to mention these other sub-partnerships because, in time, the interests of those sub-partnerships were acquired by the Villager Collendina Partnership and, ultimately, all came to reside in the De Simones’.
[18]For example, the Villager Collendina Partnership contributed 13.25% of the deposit; each of the De Simones contributed 5.8% of the total Villager Collendina Partnership contribution.

The investments made by individual investors came in to the trust account in a trickle rather than in an avalanche. It seems that, as between Brereton and McLeod, each of them was responsible for gathering and putting together investment syndicates. McLeod was situated in Sydney and many of his investors were from New South Wales. Brereton, on the other hand, seemed to mainly gather his investors from Victoria. The trust account[19] records the first deposit made via GDK on a date in February 2000 (obscured) with further deposits, for example the De Simones’, made in March 2000. More deposits were made throughout April 2000 and others were made in May, June and even August 2000. A convenient list of the deposits recorded in the trust account (as at 24 May 2001) is found in a summary produced by Brereton’s law practice in September 2001.[20] In total the amount deposited in the trust account on behalf of investors was $5,804,859.93. It was never made clear where the remaining $469,000 to make up the total deposit of $6,274,000 went to (if it was ever collected).
[19]CB 1022-1029.
[20]CB 3587-3595.

Disbursement of the deposit money from the trust account

A critical step in the plaintiffs’ case was to establish that Brereton’s dealing with trust money—assuming for present purposes that the monies recorded in ledger 6998 of the trust account was, relevantly, trust money—amounted to a ‘default’ within the meaning of that term as defined in the Act. Focus was placed on the circumstances in which Brereton disbursed $4.436m from the trust account between 30 March 2000 and 25 September 2000.

The parties agreed that the details in Table 1 below constitute a correct representation of the 16 payments which together make up the $4.436m sum. Table 1 shows the date of each payment, the payee, a notation explaining the nature of the disbursement and the amount of the disbursement. In the middle of Table 1 is a reference to the date on which the solicitors for Village Nominees provided an authorisation under s 27 of the SLA for Brereton to release the deposit monies paid by Village Nominees to Management. That entry does not constitute any part of the table of payments but is there to record an important date for the purpose of arguments which will be analysed later.

Table 1: Disbursements from the trust account

Date	Payee	Details	Amount
30/03/00	7086 Mr Charles Morton/Bigshop	Purchase shares in bigshop.com.au.Ltd	$100,000.00
30/03/00	Michael Brereton & Co	Retainer Fee	$100,000.00
18/04/00	Michael Brereton & Co	Retainer	$200,000.00
18/04/00	National Australia Bank	Transfer funds to GDK Financial Solutions P/L as per fax 11.4.2000	$400,000.00
18/04/00	Western Retirement Village	Collendina	$600,000.00
11/05/00	Majestic Theatre Company	Payment as per clients instructions	$200,000.00
11/05/00	Michael Brereton & Co	Retainer	$300,000.00
11/05/00	National Australia Bank	Transfer funds to GDK re: Collendina	$500,000.00
25/05/00	*Village Nominees authorises release of the deposit under s 27 of the SLA* (CB 3540-3542)**
06/06/00	Michael Brereton & Co	Loan from David McLeod to Michael Brereton	$200,000.00
27/06/00	7100 GDK Financial Solutions/The Mew	Transfer funds to M/N 7100 (The Mews) as loan per KM instructions	$632,497.10
13/07/00	7100 GDK Financial Solutions/The Mew	Transfer to 7100, moneys borrowed on acc of retainer fees re: MEWS	$295,513.42
28/07/00	7100 GDK Financial Solutions/The Mew	Transfer to 7100, loan for reimbursement for turtle point	$345,000.00
07/08/00	Herman Partners (GDK)	Dep purch Collendina Hotel	$163,000.00
05/09/00	National AUstralia Bank	Retainer Fee	$50,000.00
07/09/00	GDK Financial Solutions – Collendina	Direct payment to GDK – Fees	$250,000.00
25/09/00	Michael Brereton & Co office a/c	retainer fees	$100,000.00
$4,436,010.52

As can be seen from Table 1, $2,400,000 was disbursed from the trust account before Village Nominees authorised the release of any part of the deposit to Management. A further $2,036,010.52 was disbursed from the trust account after the authorisation.

The law firm of Alderuccio & Co was appointed to act for Village Nominees (on the recommendation of Brereton & Co) from 7 March 2000. It took until 28 March 2000 for the firm to obtain direct instructions from Hayden Lewis of Village Nominees to act as its solicitor on the purchase of the land from Management. Clearly there was a close connection between those giving instructions for and acting on behalf of the two parties to the sale and purchase contract. Brereton and McLeod (through GDK) owned and controlled Management; Munro (through his corporate entity, a shareholder in GDK) and Lewis (an employee of GDK) controlled Village Nominees; and Brereton acted as solicitor for Management and stakeholder of the deposit funds received from Village Nominees. In reality, it was hardly an arm’s length transaction.

Meanwhile, on 15 March 2000, the plan of subdivision to divide the land into Lot 1 (the land on which the Collendina Hotel was situated) and Lot 2 (the land on which the retirement village was to be constructed) was registered. The effect of the registration of that plan of subdivision was twofold: first, it paved the way for settlement of the sale of the retirement village land (Lot 2) from Wooddale to Management; secondly, under the Management/Village Nominees contract it was the trigger that would oblige the purchaser to authorise the release of the deposit if requested to do so by the vendor.

On 4 April 2000 Brereton’s firm sent to Alderuccio & Co, amongst other things, a signed s 27 deposit statement to which Alderuccio promptly responded, on 6 April, by forwarding requisitions and stating the deposit was not to be released.[21] Between 6 April 2000 and 25 May 2000 when Alderuccio ultimately forwarded a signed s 27 release to Brereton & Co there was a series of emails and letters between the two firms, and between Brereton’s office and the directors of Village Nominees, pursuing authorisation for the release of the deposit. Notwithstanding that process, during that time (and preceding it) there were eight disbursements of money from the trust account out of the funds lodged by investors, that is, out of the deposit money paid by Village Nominees under the purchase contract.
[21]CB 3485.

Some of those disbursements were preceded by written ‘authorisations’ given by McLeod to Brereton, on the letterhead of GDK, for the release of part of the deposit. The disbursement of:

(a) $400,000 made on 18 April 2000 followed a letter dated 6 April 2000 signed by McLeod and Woodham (both directors of GDK);

(b) $600,000 made on 18 April 2000 followed a letter dated 18 April 2000 signed only by McLeod; and

(c) $500,000 made on 11 May 2000 followed a letter of the same date signed by both McLeod and Woodham.

There were no written ‘authorisations’ for any of the other disbursements which preceded the s 27 release from Village Nominees given on 25 May 2000. There was no evidence of any written authorisations for any of the disbursements made after 25 May 2000, nor of any other documentation supporting those disbursements.

The balance of funds in the trust account rose and fell as deposits came in from investors, increasing the funds available, and disbursements were made from it, decreasing the funds available. Curiously, the settlement of the acquisition of the retirement village land by Management from Wooddale was delayed on several occasions between 23 May 2000 and 25 May 2000 while Brereton’s office waited on Alderuccio to send the signed s 27 release to enable Brereton & Co to use around $900,000 of funds in the trust account towards that settlement. I say ‘curiously’ because Brereton & Co appeared willing to draw upon the deposit funds without a s 27 release when making other disbursements (as revealed in Table 1), although when it came to using the funds to pay for the purchase from Wooddale it insisted upon receiving the signed s 27 release first.

As seen from the disbursements in Table 1, some $950,000 of the money paid out was expressly referenced as a retainer fee for Brereton; and another $250,000 was referenced as fees for GDK. In the summary prepared by Brereton’s firm as at 24 May 2001 the payments of $400,000 and $500,000 on 18 April and 11 May respectively were also described as being for ‘fees’ for GDK.[22] If that is their correct description, the total fees paid to McLeod out of the monies represented in Table 1 was in fact $1,150,000. In any event, other than retainer fees, the objects of the disbursements appeared to include: another retirement village (18 April 2000, $600,000); the Majestic Theatre Company (11 May 2000, $200,000); The Mews project in Western Australia (27 June 2000, $632,497 – 13 July 2000, $295,513 – 28 July 2000, $345,000); and Management’s purchase of the Collendina Hotel (7 August 2000, $163,000) in which Village Nominees had no beneficial interest.
[22]CB 3587-3595.

As a result of these disbursements from the trust account, by 25 September 2000 the balance to the credit of the account was down to $15,530.66. That balance ultimately dwindled to $36.17 by 20 December 2000 as a result of the payment of a number of smaller expenses, and it stayed at that level until an influx of further investor funds in late April 2001.

The plaintiffs’ claim on the Fund for compensation, and so the amount the subject of this appeal, is confined to the sum of the disbursements that occurred in the period to 25 September 2000.

Progress of the development 2000-2004

Contrary to the expectation set out in the Information Report, none of the retirement village units had been constructed by December 2000. In fact, no construction began at the site until late 2006. Serafino De Simone described attending a ‘sod turning’ ceremony on the site in October 2006 and the first concrete slab being laid soon thereafter. A full explanation of why the project did not proceed as expected in late 2000 onwards was never really given. However, as will be briefly described below, the years of inactivity between 2000 and 2004 generated investor dissatisfaction leading to legal proceedings in this Court and the Federal Court of Australia and, ultimately, the exit of six of the sub-partnerships leaving only the Villager Collendina Partnership in a restructured form.

In late December 2000 Management settled its purchase of the Collendina Hotel site (Lot 1) from Wooddale. The residue of around $1.5 million was paid by a loan of a little over $1 million from St. George Bank secured over the hotel land and a vendor’s loan from Wooddale of $427,000 secured by a mortgage over Lot 2, the retirement village land.

Management became registered as the proprietor of the retirement village land on 16 January 2001. The Wooddale mortgage over that land was discharged about three months later. The evidence does not reveal any other significant occurrences with respect to the retirement village in 2001. There was no evidence of any complaint by investors or inquiries being made of Brereton or McLeod in that year as to what was happening with the Seachange Village project. Joe De Simone gave evidence that from time to time he received financial statements from the project for the purpose of filing his tax returns. He recalled that the financial statements showed that the transaction had settled and that Village Nominees was the owner of the land. He gave no evidence of making any enquiries or having any concerns about the project throughout 2000, 2001, 2002 or 2003.

Although the De Simones demonstrated no evident concern about the progress of the project throughout these years, not all investors were so minded. In September 2002, Brad Jones of the Jones Financial Management Pty Ltd sub-partnership met with Brereton demanding a detailed report for investors of the events of the previous two and a half years, the present status of the development and Brereton’s plan of action to start it in the near future.[23] When Brereton failed to provide what was requested Jones wrote to him implying that legal action may be taken to protect investors’ positions.
[23]CB 3605.

Although it took some time, nearly a year later six sub-partnerships (not Villager Collendina Partnership) lodged caveats over the retirement village land and commenced a proceeding against Management and Village Nominees seeking a declaration as to whether Village Nominees was entitled to the immediate transfer of the land from Management. The proceeding was settled when Management agreed to sign a transfer of Lot 2 to Village Nominees although for reasons that are not explained in the evidence that transfer was never registered.

In February 2004, having performed a routine investigation of Brereton & Co’s trust account, Hall soon became involved in investigating a complaint by an investor in the Bodero & Associates sub-partnership in relation to alleged misappropriations from the trust account. In the next month, four of the seven sub-partnerships commenced a proceeding in the Federal Court alleging misleading and deceptive conduct on the part of Brereton and McLeod that had induced investors to make their investments. The claim also alleged the dissipation of deposit monies held in the trust account.

Although Villager Collendina Nominees Pty Ltd was named as a respondent to the Federal Court proceedings it appears that none of the investors in that sub-partnership were informed of that fact until sometime later. They were first informed of it when they attended a meeting at the offices of Brereton & Co in late May 2004 at which Brereton and McLeod showed the sub-partners a draft of a settlement deed by which the Federal Court proceeding was to be settled. The deed contemplated that both Lots 1 and 2 (the hotel land and the retirement village land) would be sold and the first
$4 million of the proceeds was to be paid to a new company representing the sub-partnerships Bodero & Associates, Jones Financial Management, Ergo Management and Geramata Partnerships. These four sub-partnerships came to be referred to as the ‘disputing partners’. Thereafter, money was to be paid to the remaining sub-partnerships including the Villager Collendina Partnership and any further proceeds were to be divided between Management and the four disputing partners. Until that meeting and being shown the deed, the De Simones (and, I infer, the other Villager Collendina Partnership investors) knew nothing of the existence of the Federal Court proceeding, still less the proposed settlement.

Joe De Simone gave an account of that meeting between Brereton and the Villager Collendina Partnership investors. He said that Brereton urged the partners at the meeting to sign the deed of settlement which could not proceed without the agreement of all investor sub-partnerships. Brereton described them as disgruntled partners who had wanted to take over the project. Brereton made no mention of any allegations of misappropriation of deposit money; for their part, it seems that none of the Villager Collendina Partnership investors asked to see the claims made in the Federal Court proceeding. When asked why there had been a delay in the project Brereton apparently said that there had been some delay in obtaining planning permissions and permits and that the other investors had placed a caveat on the land. When asked whether the project was then ready to go, Brereton answered that it was ready but that the project would need to borrow money and the caveat was stopping them from doing so.

Some of the partner-investors wished to obtain advice before considering signing the deed and one announced he was not prepared to sign it at all. Sometime later, in about mid-July 2004, Brereton telephoned Joe De Simone to say that he had obtained a majority of the Villager Collendina Partnership members to agree with the terms of settlement. Joe said that he was not happy to do so and Brereton invited him to his office to discuss the matter. When Joe asked what the land was worth Brereton said it was about $12 million. Joe suggested that Brereton simply pay the disputing partners the $4 million that they wanted but Brereton said he did not have that amount. Discussion then turned to whether Joe himself was prepared to invest that amount of money from the proceeds he was due to receive from the sale of two other developments he owned. He said that he was open to doing so ‘if it stacks up’.

A proposal was then developed whereby Joe De Simone would contribute $4 million to a new entity in which he and companies owned by Brereton and McLeod would each have a one third interest. That new company would then acquire all the rights of the four disputing partners. Joe De Simone appointed an accountant to assist him to undertake a due diligence investigation of the proposal. When that accountant, Mr Rochman of Lowe Lippman, advised Joe that he was unable to give any due diligence opinion because of the deficiency of the financial material that had been provided by Brereton and Management, Joe was left to decide whether he would proceed with the proposal regardless. He and Jurblum each gave evidence of a conversation the two of them had with Brereton on 12 August 2004 in which Brereton informed Joe De Simone that all of the $6 million deposit had –
… gone towards the project … It’s gone on consulting fees, getting the permits and some of the costs of the litigation … So that’s where it’s all gone.[24]
[24]Transcript of hearing, De Simone v Legal Services Board (15 February 2017) T253.
Joe De Simone said that because of that statement made by Brereton he was sufficiently reassured that it was reasonable to invest $4 million to acquire a one third interest in the Seachange Village project. His logic appeared to be this: he estimated that the land was worth about $6 million; he added to that value the $6 million which Brereton had told him had been spent on the project out of the deposit monies; the addition of those two sums was $12 million; that amount divided by three equalled the $4 million he was asked to invest.[25] So it was that Joe De Simone then agreed to invest a further $4 million.
[25]See the evidence of Jurblum at Transcript of hearing, De Simone v Legal Services Board (16 February 2017) T361-2.

To implement the arrangement a deed of release was executed on 18 August 2004 (2004 deed).[26] Under the 2004 deed both the Federal Court and Supreme Court proceedings were settled; Galambos Pty Ltd (the new company in which Joe De Simone, Brereton and McLeod each had a one third interest) agreed to pay $4 million to the company representing the four disputing partners; and the four disputing partners agreed to transfer their partnership entitlements to Galambos. In addition, by clause 4 of the 2004 deed each party gave releases to the other parties to the deed. Joe De Simone, Management, Village Nominees and Brereton were all parties to the 2004 deed. The terms of that release will be discussed in further detail below but, in essence, the release and discharge by each party of each other party gives rise to the Board’s defence to the plaintiffs’ claim in this proceeding referred to in paragraph [6] above.’
[26]CB 1227.

On 5 November 2004 Joe De Simone became a director of Management and began to pursue from Brereton and McLeod the financial records of Management. Shortly before Christmas 2004 Joe De Simone commenced talks with a builder to discuss a construction contract only to find, early in 2005, that the existing planning permits and plans were wholly inadequate for the purposes of commencing construction. It took until August 2006 before a building permit for the first stage of the village was obtained.

In early 2006 GDK, McLeod’s company, was wound up. As a result, McLeod sought to exit the Seachange Village project and two further investors replaced him, one of which was a company associated with Jurblum.

Events leading to the 2007 deed

In late 2006 the De Simones became increasingly frustrated with the lack of any records for the project. In March 2007 Joe De Simone attended Brereton’s office while Brereton was not present seeking accounting records for the Seachange Village project. He was provided with a copy of the trust account ledger and was shocked to discover the payments which had been made out of it back in 2000. Joe De Simone confronted Brereton about this in April 2007 and discussions between them became tense and heated. He accused Brereton and McLeod of lining their own pockets and said that monies had also gone into other projects such as Western Retirement Village, The Mews and so on. Brereton claimed that the fees were all properly incurred and then said ‘in any case, I’m allowed to take them out. It’s a private company’.[27] In further justification of his position Brereton told Joe De Simone –
Look, this ledger has been checked by the Law Institute of Victoria and they’ve cleared it on a couple of occasions at least … they had looked at it a couple of times and cleared it both times.[28]
[27]See evidence of Joe De Simone at Transcript of hearing, De Simone v Legal Services Board (15 February 2017) T263.
[28]Ibid T263.
Shortly after that conversation Joe De Simone sought legal advice about making a claim against the Fund. For that purpose he sent a detailed email to a solicitor on 4 May 2007 but he also copied that email to Brereton. In the email Joe De Simone told the solicitor it was being ‘copied to Brereton in one last attempt to get him to see sense’.[29] This step led to the execution of a suite of documents on 28 May 2007 to give effect to Brereton departing the project with his interests being acquired by Alan Griffiths for payment of $1.35 million.
[29]CB 3993- 3995.

On 28 May 2007 Joe De Simone, Jurblum and Brereton all met to negotiate the signing of the documents. One of them was a statutory declaration by Brereton to the effect that the representations contained in the deed (and other documents) which he was about to sign were true and correct. Both Joe De Simone and Jurblum gave evidence that at the meeting on 28 May 2007 Brereton told De Simone (again) that the Law Institute of Victoria had fully investigated Brereton’s trust account and ‘cleared him entirely’.[30]
[30]See evidence of Joe De Simone at Transcript of hearing, De Simone v Legal Services Board (15 February 2017) T267 and evidence of Jurblum at Transcript of hearing, De Simone v Legal Services Board (16 February 2017) T367.

In the deed of release signed on that date (2007 deed), made between, amongst others, Management, Joe and Serafino De Simone (the Continuing Parties) and Brereton among the ‘Outgoing Parties’, it was provided:
2.3The Continuing Parties unconditionally and irrevocably covenant not to sue and hereby release the outgoing parties, servants and assigns, from all causes of actions, suites, courses (sic) of actions, claims, complaints, demands, damages claimed for costs and expenses whatsoever which the Outgoing Partners now have or may have hereafter against the Outgoing Parties, their servants and assigns or any one or more of them arising from or relating in any way to the Disputes [as defined].
…
4.1Subject to the parties complying with their respective obligations under this Deed and the Departure Transaction Documents, this Deed may be pleaded as a bar to any action or proceeding now or in the future commenced by or on behalf of the parties in relation to the matters referenced in the Disputes.
…
8.1The Outgoing Parties will provide to Seachange [which was Management] the originals of all documents held by any of them relating to the Seachange Retirement Village Development including the conveyancing files for the purchase of any of the land now held by Seachange, any litigation files for litigation between Seachange and the parties, invoices, bank statements, ledgers, reports by consultants, valuation reports, correspondence and the like.
The Board also relied upon the releases contained in the 2007 deed for its defence mentioned at paragraph [6] above. As will be amplified below, the plaintiffs argue that the release is ineffective by reason of the De Simones’ reliance, when executing the 2007 deed, upon the dishonest representations made by Brereton about the Law Institute of Victoria clearing him and, in addition, Brereton’s non-compliance with the obligation to provide documents (in clause 8.1 of the 2007 deed).

Disciplinary proceedings against Brereton

On 28 June 2007 the Legal Services Commissioner filed disciplinary proceedings in VCAT against Brereton. In April 2008 Management and others commenced their own proceeding against Brereton in VCAT to compel Brereton, as Management’s former solicitor, to give Management access to documents relating to the Seachange Village project that were in his possession.

On 13 August 2008 VCAT handed down its decision in the disciplinary proceedings against Brereton finding him guilty of various charges of misconduct and contraventions in respect of his dealings with trust accounts.[31] Brereton appealed VCAT’s decision to this Court.[32]
[31]Legal Services Commissioner v Brereton (Legal Practice) [2008] VCAT 1723.
[32]Brereton v Legal Services Commissioner [2010] VSC 378 (Bell J) and, on appeal, Legal Services Commissioner v Brereton (2011) 33 VR 126 (Nettle, Ashley and Tate JJA).

On 13 May 2010 the plaintiffs made their claim upon the Fund and on 1 June 2011 the Board notified the plaintiffs that their claim had been disallowed at its meeting on 26 May 2011.

Board’s reasons for decision

The Board’s notification on 1 June 2011 contained brief written reasons for the Board’s decision disallowing the plaintiffs’ claim. In those reasons the Board dealt with two allegations of default only one of which is relevant for present purposes. The disallowance of the claim that is the subject of this appeal, referred to as the ‘First Alleged Default’ in the reasons, was explained in nine paragraphs as set out below –
1.   From the beginning of 2000, Michael Brereton (“Brereton”) marketed to potential investors an investment scheme involving the acquisition and development of land in Ocean Grove, Victoria for the purposes of a retirement village (the “Investment Scheme”).
2.   Between March 2000 to September 2000, Brereton received into his trust account from time to time moneys in the form of investments from investors (including Seachange Village Nominees and Mr Guiseppe De Simone) for the purposes of the Investment Scheme.
3.   On about 10 March 2000, for the purposes of the Investment Scheme, Seachange Management Pty Ltd entered into a contract for the sale of land at Ocean Grove, Victoria with Seachange Village Nominees Pty Ltd for a sale price of $31,370,000 with a deposit payable on a day of sale of $6,274,000.
4.   The contract of sale required, amongst other things:
(a)the deposit moneys to be held by Brereton as stakeholder for both parties in compliance with section 9M(2){b) of the Sale of Land Act 1962 (Vic);
(b)the deposit moneys to be held by Brereton as stakeholder pending the registration of the plan of subdivision and not to be released by Brereton until after receipt of a consent to do so in writing from Seachange Village Nominees Pty Ltd or its solicitor;
(c)pending release of the deposit moneys in accordance with the provisions of the contract of sale, for Brereton to invest the deposit moneys in a special investment account on behalf of both Seachange Management Pty Ltd and Seachange Village Nominees Pty Ltd; and
(d)Seachange Village Nominees Pty Ltd immediately upon registration of the plan of subdivision to sign a statement under section 27 of the Sale of Land Act 1962 (Vic) authorising the release of the deposit to Seachange Management Pty Ltd.
5.   The plan of subdivision was registered on or about 15 March 2000.
6. On 25 May 2000, a signed statement under section 27 of the Sale of Land Act 1962 (Vic) was forwarded to Brereton authorising the release of the deposit under the contract of sale.
7.   Between 30 March 2000 and 25 September 2000, Brereton withdrew from his trust account investors’ moneys for various purposes.
8.   Seachange Management Pty Ltd, by its directors, authorised the release of the moneys from Brereton’s trust account for the purposes for which they were applied.
9.   On the basis of the matters set out in paragraphs 1 to 8 above, in respect of the First Alleged Default:
(a)insofar as the claim is made by Seachange Management Pty Ltd that claim cannot be maintained because there was no default as that term is defined by section 3.6.2 of the Act since Seachange Management Pty Ltd authorised the release of the moneys from Brereton’s trust account for the purposes for which they were applied; and
(b)insofar as the claim is made by the other Claimants, the claim is excluded under sections 3.6.6(1), (2) and/or (3) of the Act.[33]
[33]CB 0441-0444 (footnotes omitted).

Footnotes to paragraphs 2, 5, 6, 7 and 8 of the Board’s reasons indicated that the source for the factual findings expressed in each of those paragraphs was in whole or in part the decision by VCAT in the disciplinary proceedings referred to in [78] above. As indicated, the First Alleged Default referred to in paragraph 9 of the reasons is, in substance, the alleged default by Brereton claimed to have caused the plaintiffs a loss of $4,436,010.52.

Without making any particular comments about them at this stage, I draw attention to the following findings of the Board:

(a) in paragraph 2, that Brereton had received moneys in the trust account ‘in the form of investments from investors … for the purposes of the Investment Scheme’;

(b) in paragraph 8, that Management had ‘authorised the release of the moneys from Brereton’s trust account for the purposes for which they were applied’ (referring, implicitly, to the full sum of $4,436,010.52 the subject of the Brereton default);

(c) in paragraph 9(a), because (as the Board found) Management had authorised the release of all of the moneys, that no claim could be maintained by Management as there was no ‘default’; and

(d) in paragraph 9(b), that the claims by the other claimants (i.e. the De Simones, De Simone Nominees and Village) were defeated by the investment defences in s 3.6.6 of the Act, (perhaps implying that the Board considered that a default had been committed in respect of those claimants).

What is the nature of the appeal?

Part 6.7 of the Act provides for the maintenance of the Fund[34] to be applied by the Board to compensate claimants in respect of claims made under Part 3.6 of the Act in respect of defaults to which that Part applies.[35] The expressed purpose of Part 3.6 is to –
… compensate clients for loss arising out of defaults by law practices arising from acts or omissions of associates and defaults by approved clerks.[36]
[34]s 6.7.15.
[35]s 6.7.16.
[36]s 3.6.1 (NB the High Court held in Legal Services Board v Gillespie-Jones (2013) 249 CLR 493 at [24] – [26] that the regime in this Part is not restricted to compensating only ‘clients’) (‘Gillespie-Jones’).
Section 3.6.7 is the key provision providing an entitlement to make a claim, namely –
(1)A person who suffers pecuniary loss because of a default to which this Part applies may make a claim against the Fidelity Fund to the Board about the default.
A claim is to be made in writing and, after a claim is made, the Board may require the claimant to provide further information or to verify the claim by statutory declaration.[37] Further the Board may investigate the claim in any manner it considers appropriate.[38] Following its investigation the Board may wholly or partly allow or disallow the claim or otherwise settle it.[39] As soon as practicable thereafter, the Board must notify the claimant about the decision it makes and must give an information notice about any decision to wholly or partly disallow a claim.[40]
[37]s 3.6.7.
[38]s 3.6.12.
[39]s 3.6.14.
[40]s 3.6.22.

Within 30 days of receiving an information notice a claimant may appeal against a decision to wholly or partly disallow a claim.[41] Unless waived by the Board, an appellant must establish that the whole or part of the amount sought from the Fund is not reasonably available from other sources.[42] In this case, the Board waived that requirement.
[41]s 3.6.23(1), (2).
[42]s 3.6.23(3).

The nature and parameters of the court’s powers on appeal are set out in s 3.6.23 as follows –
(4)The appropriate court may review the merits of the Board’s decision.
(5)       The appropriate court may—
(a)       affirm the decision; or
(b)if satisfied that the reasons for varying or setting aside the Board’s decision are sufficiently cogent to warrant doing so—
(i)        vary the decision; or
(ii)set aside the decision and make a decision in substitution for the decision set aside; or
(iii)set aside the decision and remit the matter for reconsideration by the Board in accordance with any directions or recommendations of the court.
(6)       The appropriate court may make other orders as it thinks fit.
Section 3.6.25 provides for the admission of certain evidence and the availability of certain defences in an appeal proceeding. In substance, evidence of any admission or confession by an Australian legal practitioner or other person in relation to an act or omission that would give rise to a claim is admissible to prove the act or omission even though the practitioner or other person is not a defendant in or a party to the proceeding. Further, any defence that would have been available to the practitioner or other person is available to the Board.

Both parties submitted that the appeal provided by s 3.6.23 is to be conducted as a hearing de novo. Neither party suggested that there is any need for the court to identify any error (legal or factual) in the Board’s decision in order to set it aside. Equally, it was not suggested that in order to affirm the Board’s decision the court had to uphold the apparent reasoning or particular findings used or made by the Board when reaching its decision.

I am satisfied that the legislation requires a hearing de novo. That was the approach taken by the County Court of Victoria in a matter that ultimately reached the High Court of Australia, reported as Legal Services Board v Gillespie-Jones;[43] an approach that was expressly endorsed by three judges in the High Court[44] with no adverse comment made by the other four judges.[45] Allowing the court to ‘review the merits’[46] of the Board’s decision, combined with the provision for new evidence to be admitted on the appeal and/or potentially new defences to be advanced, points strongly toward a conclusion that the appeal is in the nature of a hearing de novo.
[43](2013) 249 CLR 493.
[44]Ibid 523 [111](Bell, Gageler and Keane JJ).
[45]Ibid (French CJ, Hayne, Crennan and Kiefel JJ).
[46]s 3.6.23(4).

The condition that the court must be satisfied of ‘sufficiently cogent’ reasons before varying or setting aside the Board’s decision[47] requires the court to be affirmatively persuaded that the decision should be different to what the Board decided. Such persuasion could be reached because there is new evidence which the Board had not received or because the court is simply persuaded to a different conclusion than the one which the Board reached. In any event, it is for the court to assess whether the reasons for varying or setting aside the Board’s decision are persuasive enough to justify it doing so.
[47]s 3.6.23(5)(b).

Was there a ‘default’ to which Part 3.6 applies?

As argument proceeded, it became evident that the answer to this question required answers to several sub-questions to be determined. First, in order to determine whether the events that occurred between 30 March and 25 September 2000[48] fell within the definition of ‘default’ in s 3.6.2 it was necessary to determine which terms of that definition applied: those that existed before an amendment to the Act on 9 May 2007 or those that came into force as a result of the amendment? Secondly, because the definition of ‘default’ hinges, in part, on whether there had been some dealing with ‘trust money’ or ‘trust property’ as defined, it was necessary to determine the character of the $4.436m received into and then disbursed from the trust account. Thirdly, having resolved which version of the Act applied and whether the money fell within the statutory definition of ‘trust money’ or ‘trust property’, it was then necessary to determine whether a ‘default’ as defined had occurred. Fourthly, even if a default as defined had occurred, it was necessary to determine whether it was a default relating to financial services or investments to which Part 3.6 did not apply.
[48]The period over which the disbursements from Brereton’s trust account took place: see [1] above.

Each one of these sub-questions was vigorously contested. I will deal with each, one at a time.

(1) Which version of the Act applies?

The Act commenced in operation on 12 December 2005. Certain provisions relevant to the current proceeding were amended by s 64 of Act number 12/2007 with effect from 9 May 2007. An issue has arisen as to which version of the Act applies to the plaintiffs’ claim: is it the version existing before or after the 2007 amendment?

The relevantly affected provision is the crucial definition of ‘default’ in s 3.6.2. Section 3.6.2 as it existed before the 2007 amendment provided as follows –
“default” means—
(a) in the case of a law practice—
(i)a failure of the practice to pay or deliver trust money or trust property that was received by the practice or an associate of the practice in the course of legal practice by the practice or an associate, if the failure is constituted by or arises from an act or omission of an associate that involves dishonesty; or
(ii)a fraudulent dealing with trust money or trust property that was received by the practice or an associate of the practice in the course of legal practice by the practice or an associate, if the fraudulent dealing is constituted by or arises from an act or omission of an associate that involves dishonesty; or
(b) in the case of an approved clerk—
(i)a failure of the clerk to pay or deliver trust money that was received by the clerk in his or her capacity as an approved clerk, if the failure is constituted by or arises from an act or omission of the clerk or an employee of the clerk that involves dishonesty; or
(ii)a fraudulent dealing with trust money that was received by the clerk in his or her capacity as an approved clerk, if the fraudulent dealing is constituted by or arises from an act or omission of the clerk or an employee of the clerk that involves dishonesty;
It is also worth noting the definition of ‘pecuniary loss’. It will be recalled that the right to claim against the Fund (created by s 3.6.7) arises when a pecuniary loss is suffered because of a default. Pecuniary loss was defined in s 3.6.2 in this way –
“pecuniary loss”, in relation to a default, means—
(a)the amount of trust money, or the value of trust property, that is not paid or delivered; or
(b)the amount of money that a person loses or is deprived of, or the loss of value of trust property;
Several things should be observed about the definitions of default and pecuniary loss as they were originally enacted:

(a) Default is defined first by reference to a law practice and secondly by reference to an approved clerk—in this proceeding, only the first of those classifications is relevant;

(b) In the case of a law practice, two species of default are defined: first, in subparagraph (a)(i), as a failure to pay or deliver trust money or trust property and secondly, in subparagraph (a)(ii), as a fraudulent dealing with trust money or trust property;

(c) The definition of pecuniary loss has two parts which appear to correspond with those two species of default—that is, as defined in (a), it is money or property not paid or delivered (corresponding to the first limb of the definition of default) and in (b) it is a loss of money or property value (consistently with the second limb of the definition of default);[49] and

(d) The two limbs of the definition of default, in the case of a law practice, repeatedly use the disjunctive expression ‘practice or an associate of the practice’ as if the two concepts are necessarily separate.

[49]This same observation was made by the majority in the High Court in Gillespie-Jones at 501 [15] although it is not supported by the reasoning of the minority (530 [134]). Without making any reference to why or that they were consciously doing so, the majority and minority of the High Court each applied different versions of the Act to the issue at hand. It may not have made any material difference to their decisions on the issue before them, but at [17] the majority quotes the pre-amendment definition of ‘trust money’ using the language of ‘money received in the course of or in connection with the provision of legal services’ whereas at [95] the minority quotes from the post-amendment definition that uses the language of ‘money entrusted to the law practice in the course of or in connection with the provision of legal services’.

In relation to that last mentioned observation, the term ‘law practice’ was defined in s 1.2.1 to mean, in substance, a sole legal practitioner, a law firm, a multidisciplinary practice, an incorporated legal practice or a community legal centre. Section 1.2.4 defined an ‘associate’ of a law practice to include an Australian legal practitioner who is a sole practitioner, a partner in a law practice, an employee of or consultant to a law practice, and an employee or agent of a law practice who is not an Australian legal practitioner.

Keeping in mind those definitions of law practice and associate, the disjunctive expression ‘the practice or an associate of the practice’ used in the definition of default in s 3.6.2 was seen to give rise to a problem. In particular, it appeared to suggest that an associate of a law practice could receive trust money independently of a law practice. So, in the Explanatory Memorandum to the 2007 amending Act the relevant amendments introduced by s 64 were explained as making—
… minor amendments to s 3.6.2 of the Principal Act in accordance with amendments to the national model provisions. In particular, the definition of default has been amended to remove the concept of trust money ‘received by an associate of a law practice’ as if an associate can engage in legal practice separately to a law practice.
No other change to the definition of default was mentioned.

After the amendment the definition of default in the case of a law practice read as follows –
default means—
(a) in the case of a law practice—
(i)a failure of the practice to pay or deliver trust money or trust property that was received by the practice in the course of legal practice by the practice, where the failure arises from or is constituted by an act or omission of an associate that involves dishonesty; or
(ii)a fraudulent dealing with trust property that was received by the practice in the course of legal practice by the practice, where the fraudulent dealing arises from or is constituted by an act or omission of an associate that involves dishonesty; …
A close comparison of the definitions of default before and after the 2007 amendment reveals the following differences:

(a) The amendment removed the expressions ‘or an associate of the practice’ where twice appearing in each of subparagraphs (i) and (ii);

(b) The amendment grammatically reformulated the last phrase in each limb of the definition referring to the failure arising from the act of omission of an associate; and

(c) Most significantly, the post-2007 version of (ii) omitted the words ‘trust money or’ so that the amended second limb definition applied only to a fraudulent dealing with trust property.

This last mentioned change is curious indeed. There is no explanation for it in the Explanatory Memorandum. No party in this case could proffer a reason in logic why the reference to trust money should be deliberately omitted from that limb of the definition. Moreover, the definition of pecuniary loss was unchanged and, in subparagraph (b) thereof, continued to define pecuniary loss as ‘the amount of money that a person loses or is deprived of, or the loss of value of trust property’ (emphasis added). If, as seems to be the case, that second aspect of pecuniary loss was intended to correspond to the second limb of the definition of default, it would be expected that an intended removal of reference to trust money in the default definition would be accompanied by the removal of reference to money in para (b) of the loss definition.

One cannot but be tempted to conclude that the omission of the phrase ‘trust money’ from the second limb of the definition of default was a mistake.

Mistake or not, the removal of the phrase brought about a substantive change to the operation of the definition, one that has potential significance in this particular case. In this case, although the plaintiffs have prevaricated a number of times by amendments to their pleadings, the final iteration of their statement of claim bases their claim against the Fund alternately upon a default as defined under the first limb in s 3.6.2 (i.e. failure to pay or deliver trust money or trust property) and/or as a default as defined under the second limb (i.e. fraudulent dealing).

Because of the definitions of trust property and trust money elsewhere in the Act[50] the plaintiffs are on stronger ground when arguing there was a default defined by reference to trust money rather than trust property. Furthermore, it is arguable that the plaintiffs’ case for compensation from the Fund is stronger if based upon the fraudulent dealing limb than the ‘failure to pay or deliver’ limb because of the construction given to that phrase in Gillespie-Jones and the absence of any evidence of an instruction from Management (the company entitled to the deposit money) as to where to pay the deposit money.[51]
[50]ss 1.2.1, 3.3.2: see further at paragraph[126] below.
[51]See [156] below.

Unsurprisingly, the plaintiffs argued that the pre-2007 amendment version applies to their claim; the Board argued that the post-2007 amendment version applies.

Both parties referred to s 14 of the Interpretation of Legislation Act 1984 (Vic) (the ILA), which provides –

14 Provision as to effect of repeal etc. of Acts
…
(2)       Where an Act or a provision of an Act—
(a)       is repealed or amended; or
(b)       expires, lapses or otherwise ceases to have effect—
the repeal, amendment, expiry, lapsing or ceasing to have effect of that Act or provision shall not, unless the contrary intention expressly appears—
…
(e)affect any right, privilege, obligation or liability acquired, accrued or incurred under that Act or provision;
…
(g)affect any investigation, legal proceeding or remedy in respect of anything mentioned in paragraphs (e) to (f)—

and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed, as if that Act or provision had not been repealed or amended or had not expired, lapsed or otherwise ceased to have effect.

The plaintiffs argued that prior to the 2007 amendment they had acquired or accrued to themselves a ‘right’ under the Act, namely a right make a claim under s 3.6.7(1) relying upon a ‘default’ as defined by the then existing s 3.6.2. That, of course, included a default constituted by a fraudulent dealing with trust money. They argued that through the application of s 14(2)(e), and by extension (g), their pre-existing right to make such a claim and pursue a remedy was not affected by the amendment. That was so because, as they argued, the amending Act disclosed no intention to affect their right or remedy; rather, the analysis outlined above (suggesting the omission of ‘trust money’ may have been a mistake) implied an intention to retain the right and remedy.

On the other hand, the Board first argued that upon a proper construction of the Act including the transitional provisions in Schedule 2 thereof, the terms of the Act to apply are those existing at the date the claim is made against the Fund. The Board argued that because those provisions used the date of claim as the criterion for fixing which Act applies (the new or the old), they implicitly disclose a legislative intention that the date of claim is to be the determinant generally for resolving questions about which terms of the Act should apply at any given point in time. That being the case, because the plaintiffs first made a claim against the Fund after 9 May 2007 (in fact, not until 13 May 2010) it argued that the version to apply is the post-2007 Act.

Nevertheless, the extent to which the evidence reveals that Brereton provided financial product advice goes no further than the soliciting of the $100,000 contribution made by the De Simones. Accordingly, it cannot be concluded that the bulk of the money in the trust account in respect of which the defaults allegedly occurred was entrusted to Brereton in connection with a financial service. The entrusting and the financial service must bear some relationship between one another and there is no evidence of such a relationship other than in respect of the sum of $100,000.

I conclude that s 3.6.6(2) would not apply to exclude the operation of Part 3.6 to any default in relation to the money in the trust account other than the $100,000 contributed by the De Simones.

Managed investment scheme

Section 3.6.6(2) of the Act provided –

(2)Without limiting subsection (1), this Part does not apply to a default of a law practice to the extent that the default occurs in relation to money or property that is entrusted to or held by the practice for or in connection with—
(a) a managed investment scheme undertaken by the practice; or
(b) mortgage financing undertaken by the practice.

Two matters need to be established to bring the facts of the case within that section:

(a) a managed investment scheme was undertaken by the firm; and

(b) the money was given to or held by the firm ‘for or in connection with’ that scheme.

The parties agreed—in my view correctly—that the Seachange Village project constituted a managed investment scheme. Relevantly, the project had the same features as The Mews scheme which had been found by Finkelstein J in Australian Securities & Investments Commission v GDK Financial Solutions Pty Ltd[98] to be a managed investment scheme under the CA. His Honour summarised the elements of a managed investment scheme, as defined in the CA, to require:

(1) People contribute money or money’s worth to acquire rights (the rights are referred to as “interests”) to benefits produced by the scheme; (2) The contributions are to be pooled or used in a common enterprise to produce financial benefits or benefits arising from interests in property for the contributors or those claiming through them (all of whom are called “members”); and (3) Members do not have day to day control over the operation of the scheme. A scheme, then, is the combination of these things necessarily connected by design.[99]

[98](2006) 236 ALR 699.

[99]Ibid 701 [2].

The critical debate between the parties was whether the evidence established that the managed investment scheme was ‘undertaken’ by Brereton’s legal practice. The Board argued that the scheme was undertaken by the practice because:

(a) the Information Report disclosed that Management was managing the Seachange Village project;

(b) Brereton and McLeod (through their respective corporate entities, Young Turks and GDK) were, in effect, joint venturers undertaking the managed investment scheme;

(c) Brereton’s activities in undertaking the managed investment scheme with McLeod should be attributed to his firm (conducted by him as the sole practitioner); and

(d) a managed investment scheme need not be undertaken solely by the one person.

In my opinion the evidence does not establish that Brereton’s legal practice undertook the combination of the three elements that made the Seachange Village project a managed investment scheme.

I would accept that Brereton in his capacity as the director and shareholder of Young Turks—or at least in a personal capacity—was one of two or more persons who, together, undertook the scheme. But the fact that Brereton (the person) played that role and that he was also the sole practitioner of the legal practice does not thereby lead to any logical conclusion that the legal practice necessarily undertook a managed investment scheme.

On the evidence, the role of the legal practice was somewhat confined. There was evidence that Brereton undertook some promotional activity with Joe De Simone at the premises of his practice (as noted above); that his firm acted as conveyancing solicitor for Management (but not for Village Nominees); that, in that capacity, his firm held the deposit (representing investors’ contributions) paid by Village Nominees; and that his firm disbursed the deposit money either with or without the authority of Management.

But there is no evidence that Brereton & Co (as opposed to GDK or others) drafted any of the partnership or other documents in the scheme. There is also no evidence that Brereton & Co had any involvement in the matters which would have been necessary to establish each element of the scheme (i.e. that it generally marketed the scheme, pooled the resources of each investor except by receiving the deposit, or managed the day-to-day control of the operation). Nor is there any evidence that (in 2000) Brereton had any involvement in Village Nominees or any of the sub-partnerships; rather, he took some steps to maintain distance from them by arranging separate legal representation.

I accept the plaintiffs’ argument that the meaning of ‘undertake’ should be construed narrowly to conform with the High Court’s finding in Gillespie-Jones that Part 3.6 should ‘receive as generous a construction as the actual language of those provisions permits’.[100] That requirement is met by reading down, or limiting, the ambit of the words ‘undertaken by’. It is appropriate therefore to construe it in the sense of ‘performed by’.[101] I do not accept that the Seachange Village project was undertaken by Brereton’s firm in that sense either alone or in combination with others.
[100]Gillespie-Jones at 509 [50].
[101]The Macquarie Dictionary defines ‘undertake’ to mean, relevantly, ‘to take on oneself (some task, performance etc); take in hand; essay; attempt’.

I conclude that s 3.6.6(2) would not apply to exclude the operation of Part 3.6 to any default in relation to the money in the trust account.

Investment purposes

Section 3.6.6(3) of the Act provided –

(3)Without limiting subsection (1) or (2), this Part does not apply to a default of a law practice to the extent that the default occurs in relation to money or property that is entrusted to or held by the practice for investment purposes, whether on its own account or as agent, unless—
(a)the money or property was entrusted to or held by the practice—
(i) in the ordinary course of legal practice; and
(ii)primarily in connection with the provision of legal services to or at the direction of the client; and

(b) the investment is or is to be made—
(i) in the ordinary course of legal practice; and
(ii)for the ancillary purpose of maintaining or enhancing the value of the money or property pending completion of the matter or further stages of the matter or pending payment or delivery of the money or property to or at the direction of the client.

The crucial factor in respect of the application of this exclusion to the operation of Part 3.6 is whether the money entrusted to Brereton’s firm was entrusted ‘for investment purposes’. In my opinion it was not so entrusted.

I agree with the plaintiffs’ submission that the $4.436 million deposited into the trust account was entrusted to the firm, as solicitor for Management, for the purpose of being held by the firm as a stakeholder under the Management/Village Nominees contract pending its disposition in accordance with the requirements of the SLA.

I have already discussed the Board’s argument (at [141]-[144] above) that, in reality, the money was received and held by the firm as investments in the Seachange Village project. As explained, I consider it is feasible that the entrusting of money to a legal practice may have a connection with—in the sense of bearing a relationship to—more than one objective or purpose. But, as previously noted (at [177]), to satisfy the required nexus in s 3.6.6(3) between the entrusting of the money and the investment purpose requires more than simply pointing to a relationship between the one and the other. Expressing that nexus as ‘for’ investment purposes connotes a more direct and intentional relationship than merely being ‘in connection with’. In other words, the court needs to be satisfied that the operating purpose for entrusting the money to the legal practice was for that practice to apply the money towards an investment for the contributor either on the firm’s own account or as agent for the contributor.

I am not satisfied that was the case here. The direct purpose of the money being entrusted to Brereton’s firm was for it to be held as a deposit. The evidence did not establish that it was anything other than for mere convenience that the individual investors paid their contributions towards the deposit directly to Brereton as opposed to it being a designed element of the investment scheme to do so. In theory the individual investment contributions were to be made by investors through their sub partnerships to the head partnership (Seachange Village Retirement Partnership) then on-paid by Village Nominees, as the deposit, to the solicitor for Management, Brereton & Co. Taking the route of convenience did not alter the fundamental character or purpose of those contributions. In no meaningful sense was Brereton & Co either on its own account or as agent for the individual investors to hold or apply those monies for the purpose of investment.

Accordingly I find that s 3.6.6(3) would not have excluded the application of Part 3.6 to any default.

Was there a fraudulent dealing with trust money?

On the hypothesis that a para (a)(ii) default might apply to the circumstances of this case considerable argument was advanced by the plaintiffs and the Board on the question whether there had been any fraudulent dealing with trust money. I have found that a para (a)(ii) default does not apply.

In broad terms the plaintiffs argued that the contractual arrangements were made in a context where it was (allegedly) known that the deposit had to be applied to the Seachange Village project to enable Management to perform its obligations to Village Nominees and the investors to receive the benefit of the project. The known ‘need’ for the deposit was largely to be inferred from the expected commencement date and the duration of construction; the apparent intention to avoid the incidence of GST; the financial projections in the Information Report; the absence of any obvious alternative sources of funds to be applied toward construction; and the likely insolvency of Management without the deposit money. In those circumstances, the plaintiffs argued, siphoning-off the money for other purposes was ‘fraudulent’ toward Management, alternatively to Village Nominees and investors such as the De Simones.

The Board argued that none of those propositions were correct: instead, the deposit was (or became) Management’s money; Management (at least inferentially) authorised the payments that were made; and the legal relationships created by the contractual documents imposed no obligation on Management to use the money for the project.

The extensive arguments that were put in support of the rival propositions traversed issues including the beneficial interest in the money at various points in time; whether Brereton and McLeod breached duties owed by them to Management as directors; the circumstances in which a company may ratify a decision made by its directors; whether the evidence established Management was insolvent; whether for there to be ‘fraudulent dealing’ there must first be a fiduciary duty owed; and so on.

In addition, as with a para (a)(i) default, to establish a default under para (a)(ii) it would have been necessary for the plaintiffs to demonstrate that the relevant default arose out of a dishonest act or omission.

Having decided that the plaintiffs are unable to rely upon a default constituted by a fraudulent dealing with trust money it would not be profitable to analyse and make findings in relation to the many arguments that were raised.

Conclusion

For all the reasons given above ([91]-[210]) I find that, in the events that occurred in 2000, there was no default to which Part 3.6 applied that entitled the plaintiffs to make a claim under s 3.6.7 of the Act in respect of any part of the $4.436m deposited in the trust account. There was no such default because:

(a) the plaintiffs’ claim was confined to a default of the kind described in paragraph (a)(i) of the definition in s 3.6.2; and

(b) in respect of that kind of default the evidence did not establish any failure of the practice to pay or deliver trust money.

So far as the $100,000 entrusted to the legal practice by the De Simones is concerned, there was another reason there was no default to which Part 3.6 applied. That is:

(a) the money was not trust money for the purpose of the Act because it was entrusted to the firm in connection with a financial service provided by the practice (s 3.3.3(1)(b)); and

(b) Part 3.6 was excluded from applying to a default in relation to money so entrusted (s 3.6.6(1)(b)).

For those reasons alone the Board was correct to disallow the plaintiffs’ claim.

Did the plaintiffs suffer any pecuniary loss because of a default?

Because I have determined that there was no default to which Part 3.6 applied, it is not necessary to consider in any detail the question whether any of the plaintiffs suffered a pecuniary loss because of a proven default. But I make two observations.

First, had Management established (which it did not) that it gave an instruction to Brereton & Co to pay the deposit (or some part of it) to itself after the s 27 release had been provided by Village Nominees, and that Brereton & Co had failed to comply with that instruction, Management would likely have established a pecuniary loss in the amount of the deposit (or such part of it that was the subject of the instruction). I only say ‘likely’ because one would then possibly need to grapple with the apparent requirement construed by the High Court majority in Gillespie-Jones that the instruction with which the practice failed to comply had to be an instruction to pay ‘a third person’.[102]
[102]Above [170].

Secondly, except if Village Nominees had rescinded the sale contract due to a default by Management—which it did not do—there was simply no occasion for Village Nominees (even less so the De Simones) to give Brereton & Co any instruction to deal with the deposit money, the non-compliance with which could have resulted in a pecuniary loss to them that was compensable under Part 3.6.

Are the plaintiffs’ claims defeated by the releases given in 2004 or 2007?
2004 deed

It is clear that by virtue of s 3.6.25(b) of the Act that any defence which would have been available to the legal practitioner—that is, had a claim been made against the practitioner in respect of the same loss the subject of the claim against the Fund—is also available to the Board in an appeal of this kind.

The background to the entry into the 2004 deed is set out at [63]-[69] above. Under the 2004 deed, clause 4 provided –

4 Mutual Releases
Subject to strict compliance with the terms of this Deed, each party hereto (except Galambos and De Simone to whom this clause 4 does not apply) releases and discharges each other party hereto from all actions, suites, claims, demands, causes of action, costs and expenses, legal, equitable, under statute and otherwise, and all other liabilities of any nature (whether or not the parties were or could have been aware of them) which that party:
a.     now has;
b.     at any time had;
c.     may have; or
d.    but for this deed, could or might have had,
against any other party in any way related to the Proceedings or the circumstances recited in this Deed or allegations arising out of or in any way related to the Proceedings, the circumstances recited in this Deed or anything in any way related to them.

The ‘Proceedings’ included the Federal Court proceeding described in [63] above and that proceeding included, amongst other things, a claim in respect of the alleged dissipation of the deposit monies held in the trust account. Brereton was a party to the deed as was Management, Village Nominees and Joe De Simone. It is clear from its terms that clause 4 of the deed does not operate as a release against Joe De Simone; it only operates, relevantly, against Management and Village Nominees.

Aside from the plaintiffs’ argument about the proper construction of ‘party’ in the clause, there is no dispute that the ambit of the liabilities released by clause 4 would have embraced the subject matter of any claim against Brereton that inheres in the plaintiffs’ claim against the Fund.

The plaintiffs’ argument is that whereas clause 4 provides that –

…each party hereto… releases and discharges each other party hereto from all actions [etc]… against any other party…

it cannot be read so literally. That is, the plaintiffs contend that the release only operated where one party (the releasing party) had an existing dispute or claim against another party (the released party). Because the 2004 deed was executed in the context of a dispute between Brereton/McLeod and the four ‘disputing partners’ (see [64] above) and that at that time Management and Village Nominees were, in effect, on Brereton’s ‘side’, the plaintiffs argue that Management and Village Nominees could not sensibly be construed as being included within any ‘releasing party’ that was providing a release to Brereton as the ‘released party’.

Rather elaborate appeals were made to purposive construction principles and contextual anomalies. I am not persuaded by them to adopt anything other than the plain meaning of the words set out in the clause. It is self-evident from the express words of the clause that it was intended to release claims and demands which were both then in existence or which might later come into existence. Had the parties only intended that certain select parties would only release other select parties that could readily have been expressed. Instead, each of them executed a comprehensive set of mutual releases embracing all parties to the 2004 deed without qualification (except Galambos and Joe De Simone).

Accordingly, by the terms of the 2004 deed Management and Village Nominees comprehensively released Brereton from liability for the subject matter of their claim against the Fund. That deed, in conjunction with s 3.6.25 of the Act, stands as a further reason why the Board was correct in disallowing the claims by Management and Village Nominees against the Fund.

2007 deed

The background to the 2007 deed, the terms of the release relied upon by the Board and the principal arguments raised by the plaintiffs against its application to them are set out at [72] to [76] above.

The Board submitted that by the 2007 deed, entered into by G and S De Simone, DS Nominees, Seachange Management and Galambos on the one hand, and Brereton and Brereton & Co and others on the other hand, the former entities released and covenanted not to sue the latter in respect of various matters including the claims relating to the Brereton ‘default’ (see clause 2.3).

For their part, the plaintiffs argued that the release contained in the 2007 deed is not binding on them because Brereton has not complied with other the terms of that deed, in particular the obligations preserved in the Departure Transaction Documents referred to in clauses 2.1 and 4.1. There are a number of reasons why that argument should not be accepted.

First, even if Brereton had not complied with the terms of the 2007 deed,[103] that did not affect the efficacy of the release given by the relevant plaintiffs to Brereton under clause 2.3. That release, on its terms, came into effect on execution of the 2007 deed (i.e. 28 May 2007). That is clear because clause 2.3 provides that the release operates ‘hereby’. In addition, the covenant not to sue was expressed to be given ‘unconditionally and irrevocably’. In sum, the 2007 deed did not impose any conditions precedent to the coming into effect of the release it contained.
[103]The only non-compliance alleged relates to clause 8.1 of the 2007 deed. The evidence does not establish any non-compliance as it does not address what original documents were “held by” Brereton in May 2007 such that non-delivery could constitute non-compliance with the obligation imposed.

Secondly, in contrast with the release given in clause 2.3 that is expressed to be both unconditional and irrevocable and to operate upon the coming into effect of the 2007 deed, clause 2.1 explicitly provides that the waiver of further performance that is given in that clause is qualified by, or subject to, the obligations set out in the Departure Transaction Documents. So, it may be inferred from the explicit difference between those two clauses that the intention of the parties was that the clause 2.3 release not be qualified by any condition of compliance with the obligations in the Departure Transaction Documents.

Thirdly, the bar to action provided for in clause 4.1 of the 2007 deed is a separate matter, and does not affect the release contained in clause 2.3. Conceptually, a ‘release’ and a ‘bar to enforcement’ are different.[104] I agree with the Board’s submission that examination of clause 2.3 and clause 4 discloses that the parties intended the release in clause 2.3 to operate on its terms independently of the bar provided for in clause 4.1.
[104]Roberts v Gippsland Agricultural & Earth Moving Contracting Co Pty Ltd [1956] VLR 555; see also Koutsouradis v Koutsouradis [1983] 2 VR 487.

The plaintiffs also argued that the release is ineffective because their entry into the 2007 deed was procured by representations made by Brereton which were material and false. But they have not had the 2007 deed set aside; it continues to be valid and effective. Even so, the degree of suspicion and distrust which Joe De Simone held toward Brereton by that time would make the assertion he had entered the 2007 deed in reliance upon any representation made by Brereton unlikely. That argument does not assist the plaintiffs.

Although the 2007 deed contemplated execution by Serafino De Simone, and he was named as one of the Continuing Parties, there is no evidence that he in fact executed the 2007 deed. In those circumstances I am not prepared to hold that deed as a defence to the claim which he has made against the Fund. Otherwise, I find that s 3.6.25(b) entitles the Board to rely upon the 2007 deed in defence of the claims made by Joe De Simone and Management.

Conclusion

I find that the combined effect of the releases contained in the 2004 deed and the 2007 deed was to release Brereton from any claim which any of the plaintiffs except Serafino De Simone had against him for the losses for which they claim compensation from the Fund. The Board is therefore entitled to rely upon those releases as a defence against the claims of those plaintiffs.

What orders should be made?

Given the findings I have made there is no occasion to consider whether there are any reasons to vary or set aside the Board’s decision or to consider any order for interest. Instead, the plaintiffs’ appeal must be dismissed and I affirm the Board’s decision. In affirming the Board’s decision I reiterate that the appeal was a hearing de novo. Affirming the Board’s decision does not imply that I reach the decision for the same reasons given by the Board; indeed a comparison between these reasons and the brief reasons given by the Board reveals significant differences.

Further, given the findings I have made there is no occasion to consider whether Brereton or McLeod are liable to the Board in respect of the Board’s liability to the plaintiffs pursuant to rights of subrogation under s 3.6.19 of the Act. I will dismiss the third party claims brought by the Board.

On an appeal of this kind the prima facie position is that no order as to costs is to be made.[105] That position is only displaced if the court is satisfied it is in the interests of justice to do so. If it is necessary I will hear from any party who seeks to have that prima facie position displaced.

[105]s 3.6.23(7).

SCHEDULE OF PARTIES

S CI 2013 01485

GIUSEPPE DE SIMONE First Plaintiff

SERAFINO DE SIMONE Second Plaintiff

DE SIMONE NOMINEES PTY LTD (ACN 006 463 421) Third Plaintiff

SEACHANGE MANAGEMENT PTY LTD (ACN 091 443 211) Fourth Plaintiff

SEACHANGE PROJECT NOMINEES PTY LTD (ACN 149 258 033) Fifth Plaintiff

SEACHANGE VILLAGE NOMINEES PTY LTD (ACN 091 526 215) Sixth Plaintiff

- and -

LEGAL SERVICES BOARD Defendant

- and -

MICHAEL RICHARD BRERETON First Third Party

DAVID MCLEOD Second Third Party

GIUSEPPE DE SIMONE	First Plaintiff
SERAFINO DE SIMONE	Second Plaintiff
DE SIMONE NOMINEES PTY LTD (ACN 006 463 421)	Third Plaintiff
SEACHANGE MANAGEMENT PTY LTD (ACN 091 443 211)	Fourth Plaintiff
SEACHANGE PROJECT NOMINEES PTY LTD (ACN 149 258 033)	Fifth Plaintiff
SEACHANGE VILLAGE NOMINEES PTY LTD (ACN 091 526 215)	Sixth Plaintiff
- and -
LEGAL SERVICES BOARD	Defendant
- and -
MICHAEL RICHARD BRERETON	First Third Party
DAVID MCLEOD	Second Third Party

[2017] VSC 471

16 August 2017