Dobson v The Solicitors' Trust
[2001] TASSC 99
•22 August 2001
[2001] TASSC 99
CITATION: Dobson v The Solicitors' Trust [2001] TASSC 99
PARTIES: DOBSON, Peter Henry
v
THE SOLICITORS' TRUST
TITLE OF COURT: SUPREME COURT OF TASMANIA (FULL COURT)
JURISDICTION: APPELLATE
FILE NO/S: FCA 24/2000
DELIVERED ON: 22 August 2001
DELIVERED AT: Hobart
HEARING DATE/S: 29 May 2001
JUDGMENT OF: Crawford, Evans and Blow JJ
CATCHWORDS:
Professions and Trades - Lawyers - Legal Practitioners' Guarantee Funds - Other States or Territories - Tasmania - Who may claim - Default orders made with respect to nominated clients - Court fund established with trust account funds of those clients - Right of others to access fund.
Legal Profession Act 1993 (Tas), ss111, 112, 113 and 114.
Aust Dig Professions and Trades [103]
REPRESENTATION:
Counsel:
Appellant: P W Tree
Respondent: D J Porter QC
Solicitors:
Appellant: Toomey Maning & Co
Respondent: Tony Davis
Judgment ID Number: [2001] TASSC 99
Number of paragraphs: 63
Serial No 99/2001
File No FCA 24/2000
PETER HENRY DOBSON v THE SOLICITORS' TRUST
REASONS FOR JUDGMENT FULL COURT
CRAWFORD J
EVANS J
BLOW J
22 August 2001
Order of the Court
Appeal dismissed
Serial No 99/2001
File No FCA 24/2000
PETER HENRY DOBSON v THE SOLICITORS' TRUST
REASONS FOR JUDGMENT FULL COURT
CRAWFORD J
22 August 2001
The facts and circumstances leading to the appeal coming to this Court are set out in the reasons of the other members of the Court, as are the relevant provisions of the Legal Profession Act 1993. I agree that there are considerable deficiencies in those provisions. The task of the Court is to interpret them notwithstanding those deficiencies.
It is a significant aspect of the legislation that under s111(1) an application for an order declaring a legal practitioner or firm to be in default (a "default order") may be made by a person who claims to have suffered loss as a result of a fiduciary default of the practitioner. It may be expected that such an applicant will normally be interested only in securing recovery of his or her particular loss. The circumstances may include that the applicant is the only person who has suffered loss through the default of the practitioner in question. For example, the practitioner may have stolen money which was held in trust for the applicant. That money may never have been paid into a trust financial institution account required to be established and maintained by the practitioner by s101. In such an isolated case it would usually be an inappropriate course for the Court to take to also order, under s111(5), that all of the monies standing to the credit of other clients of the practitioner in the practitioner's trust financial institution account, those monies being intact and no default having been committed with respect to them, be paid into a Court fund. The Court fund would appropriately be established for the benefit of the applicant alone and there would be no need for the other clients to have recourse to it.
On the other hand, if the application is made by the Law Society and the circumstances of default involve a general deficit in the practitioner's trust financial institution account, with consequent great difficulty, if not impossibility, in identifying which clients' funds are missing and the precise amount of the losses suffered by particular clients by reason of the practitioner's default, it might well be appropriate to order payment of all of the remaining funds in the trust financial institution account into the Court fund and to produce a situation where all of the clients of the practitioner would be expected to recover the money to which they were entitled by recourse to the Court fund.
The key to the answer to the central issue in this case is to be found in the control which the legislation has given to the Court in all cases of a fiduciary default having been made by a practitioner. Under s111(5)(a) the Court is empowered to determine whether all or some only of the money standing to the credit of any trust financial institution account and trust deposit account of the practitioner be paid into the Court fund. It is only the money which is paid into the Court fund pursuant to the Court's order that is thereby "free from any equity which may affect a trust account or any property from which the money was derived". See s111(10). By s112(1) the Court fund is to be applied by way of compensation for loss of trust money or other property suffered by clients as a result of a fiduciary default, "as the Supreme Court directs". The provision does not require that all clients, or all clients who have suffered as a result of a fiduciary default, will be entitled to be paid out of the Court fund. Entitlement to payment out of the fund will depend on the direction of the Court. Further, for the purpose of determining the persons for whose benefit the Court may order be compensated out of the Court fund, s114(1) empowers the Court to order the Solicitor's Trust to advertise for claims "in such manner as the Supreme Court directs". It will be a matter for the Court to determine in the circumstances of each case whether there should be advertising for claims and it will be a matter for the Court to determine the method and content of the advertisements.
Having regard to the provisions which give control and direction to the Court in all cases, and to the fact that the circumstances of one case may substantially vary from others, I have concluded that the learned judge at first instance was correct when he determined that the appellant had no right to claim on the Court fund in this case. It is apparent from the course of the proceedings and the orders that were made at first instance, that the fund was not established for the benefit of the appellant.
I would dismiss the appeal.
File No FCA 24/2001
PETER HENRY DOBSON v THE SOLICITORS' TRUST
REASONS FOR JUDGMENT FULL COURT
EVANS J
22 August 2001
The following paragraphs, from the decision which is the subject of this appeal, set out the relevant background:
"1 On 7 November 1997, upon the application of the Law Society of Tasmania, this Court declared:
'… pursuant to section 111 of the Legal Profession Act 1993 … that the said McCulloch & McCulloch is in default.'
and relevantly ordered:
'1That a Court fund be established in accordance with subsection (2) of Section 111 of the Act.
2That any money standing to the credit of any trust bank account or trust deposit account of the said firm relating to loans numbered 930221, 930225, 930226 and 950250 in its mortgage register be paid into the said fund.'
The declaration and orders were made in relation to a firm of legal practitioners which had been engaged in the management of clients' funds, in particular the lending of those funds secured by mortgage. The second order identified those loans identified by number corresponding with a mortgage register.
2 On 29 March 1999, again upon the application of the Law Society and with the consent of the Solicitors' Trust, a further order was made in the same matter:
'… that any money standing to the credit of any trust bank account or trust deposit account of McCulloch & McCulloch (a firm) relating to loan number 950251 and loan number 940223 in its mortgage register be paid into the Court fund established pursuant to the order made by this Court on 7th day of November, 1997 …'.
3 On 17 September 1999, the solicitors for the applicant wrote to the Solicitors' Trust seeking to make a claim against the Court fund established by the order made on 7 November 1997. The applicant had placed money into the trust account of McCulloch & McCulloch ('the firm') which money had been lent on mortgage to the purchaser of real estate. Default had been made and after the exercise of the power of sale, the applicant was left with a short fall of principal which, together with interest, amounted, as of the date of the letter, to $42,000. In their letter, the solicitors stated that the applicant had a right to claim damages from the firm 'on the basis of negligence and breach of trust'. The Solicitors' Trust rejected the claim on a number of bases, including that:
'… the Trust is of the view that as the Default Order made 7th November 1997 and 29th March 1999 are specific in respect of a number of mortgages, and that in which your client was a contributor is not one of them, it is only those persons who are contributors to the mortgages the subject of the Orders, who have a right to claim against the Court fund.'
By an originating application dated 5 November, the applicant sought orders which included:
'1An order pursuant to section 115 of the Legal Profession Act 1993 that the decision by The Solicitors' Trust, conveyed to the applicant by letter dated 6 October 1999 to reject the applicant's claim against the Court fund established pursuant to an order made by this court on 7 November 1997 be quashed.
2An order that the Solicitors' Trust accept the applicant's claim annexed to his letter to the Solicitors' Trust dated 17 September 1999.'
4 The parties seek determination of the preliminary question of whether, as a matter of statutory interpretation, the course adopted entitles the applicant to be accepted as a claimant to the fund. Resolution of a second issue, namely whether the loss was occasioned by a breach of fiduciary trust, is dependent on affirmation of a statutory right."
The learned primary judge dismissed the originating application as he, in substance, found that Mr Dobson, the applicant before him and the appellant before this Court, could not be accepted as a claimant against the Court fund as his claim did not arise from a loss incurred in respect of which the default order was made. The appellant has appealed this decision.
The Legislation
Before referring to the grounds of appeal, I will make some observations on the Legal Profession Act 1993 ("the Act"), Pt9, Div5, which governs the making of an application for a default order, the creation of a Court fund and the administration of the same. A key section in the division is s111 which relevantly provides:
"111(1) The following persons may apply to the Supreme Court for an order declaring a firm or legal practitioner corporation to be in default:
(a) the Society;
(b)a person who claims to have suffered loss or incurred liability of a kind referred to in section 112 as a result of a fiduciary default;
(c) a firm or legal practitioner corporation who -
(i) has paid money to a person referred to in paragraph (b) or
(ii) has incurred liability as a result of a fiduciary default.
(2) If a default order is made, a Court fund is to be established in the Supreme Court.
(3)If a Court fund is established in respect of a firm or legal practitioner corporation, a right to claim against the firm or legal practitioner corporation is a right to claim against that Court fund.
(4) If a Court fund is established in respect of a firm or legal practitioner corporation, the Supreme Court may make any order specified under section 119(2).
(5) There is to be paid into a Court fund established in respect of a firm or legal practitioner corporation -
(a)such money standing to the credit of any trust financial institution account and trust deposit account of that firm or legal practitioner corporation as the Supreme Court orders; and
(b)such money from the Guarantee Fund as the Supreme Court orders to meet the requirements specified in section 112.
(6) The Trust may but is not required to pay into a Court fund any amount which exceeds the sum standing to the credit of the Guarantee Fund as at the close of business on the day on which an application was made for a default order in respect of which the Court fund was established.
(7)If there is a deficiency in a Court fund after the application under subsection (5), any claim made on the fund under section 114 is to be met rateably out of that Court fund."
Whilst there are innumerable drafting deficiencies in the Act, Pt9, Div5, it is possible to discern from its provisions the circumstances in which a default order should be made and the form the order should follow. A Court fund must be created upon the making of a default order; s111(2). Section 112(1), which governs the way in which a Court fund may be applied, provides some guidance on the circumstances which warrant the making of a default order upon the application of the Society. Section 112(1) is as follows:
"112(1) A Court fund in respect of a firm or legal practitioner corporation is to be applied as the Supreme Court directs in -
(a)the compensation for the loss of trust money or other property suffered by a client as a result of a fiduciary default; and
(b)the exoneration of any property of a client which the firm, a member of the firm or a member of a legal practitioner corporation mortgaged, pledged or charged without the authority of the client and otherwise than for the benefit of the client; and
(c)the compensation for a firm or legal practitioner corporation who has paid money because of liability incurred as a result of a fiduciary default."
As to a fiduciary default, s3 provides:
"3 In this Act, unless the contrary intention appears 'fiduciary default' means -
(a)a defalcation, misappropriation or misapplication of money or other property held on trust by a legal firm or legal practitioner corporation; or
(b)the failure of a firm or legal practitioner corporation to account for that money or property held on trust by that firm or legal practitioner corporation;"
Section 112(1) provides that a Court fund is to be applied as the Supreme Court directs in compensation for, or the exoneration of, the type of losses there specified. That a Court fund may only benefit those who suffer a loss of the type specified by s112(1) suggests that the court should only grant a default order where there has been such a loss, as it is only in that situation that a claimant will be able to derive a benefit from the fund. Whilst it is conceivable that it would be desirable to make a default order in some other circumstances I note that, regardless of whether a default order has been made, in appropriate circumstances, the Council of the Law Society can apply to the court for an order giving it control over a legal practice; s119.
Sections 111(3) and 113 are graphic illustrations of the drafting deficiencies in the division. Section 111(3) provides that when a Court fund is established, a right to claim against the firm or legal practitioner corporation in respect of which the fund is created, is a right to claim against that fund. Hereafter I will use "firm" to refer to a "firm or legal practitioner corporation". A Court fund is established when a default order is made. Upon that occurring, s113 comes into operation. It provides:
"113 On the making of a default order in respect of a firm or legal practitioner corporation, the rights and interests of any person arising from any loss incurred in respect of which the default order was made are assigned to the Trust."
On the face of s113, upon a default order being made (and in consequence a Court fund being formed), the right created by s111(3) to make a claim on the Court fund is amongst the rights and interests of a claimant assigned to the Solicitors' Trust ("the Trust") pursuant to s113. As drafted, s113 appears to strip a claimant of the right to make a claim against a Court fund immediately that right arises. No provision is made for a claimant to receive anything in return for the rights and interests assigned to the Trust by force of s113. In consequence, a claimant would be left with no remedy for the loss suffered in respect of which the default order was made. On a stricter reading of s113, it is to be noted that it provides that the rights and interests of a claimant are assigned to the Trust upon the making of a default order. As this precedes the creation of a Court fund, if s113 is applied literally, the rights and interests of potential claimants are assigned to the Trust even before a Court fund is established. It is inconceivable that outcomes such as these are intended. The purpose of the division is to provide a mechanism which enables those who suffer loss as a consequence of a firm's fiduciary default, to recover the loss out of funds provided by the Trust from the Solicitors' Guarantee Fund. Where that objective is achieved, it is reasonable that a claimant's rights against the firm should be assigned to the Trust to the extent that it, via the Court fund, has indemnified that claimant against loss. In order for s113 to achieve that objective, it must be construed as only operating after a loss has been met out of the Court fund.
I turn to s111(3). As drafted, no limit is placed on the claims against a firm which are covered by this subsection. It is drawn widely enough to include claims by a firm's trade creditors and the like. It is also not clear whether such claims as are covered by the subsection are converted into a claim against the Court fund, with the result that the right to make a claim against the firm is lost, or whether the right to claim against the Court fund is an additional entitlement. My tentative view is that the latter is the case, although I note that Zeeman J appears to express a contrary view in Re Hurburgh 49/1997 at 3. As to the claims against a firm which come within the subsection, I am of the view that the only claims covered are those arising from a loss incurred in respect of which the default order, which brought about the creation of the Court fund, was made. Arguably, this qualification should not be placed on s111(3) as it has not been included in it, whilst a qualification to the same effect has been expressly included in s113. Ordinarily, a divergence such as this would suggest that the qualification was not intended to apply to s111(3). In this instance, it does not influence my construction of the subsection because the division is riddled with inexplicable inconsistencies.
The existing Court fund
When making the initial default order, Wright J found that there had been fiduciary defaults in relation to the four loans which are the subject of his order; In the Matter of the Legal Profession Act 1993, and in the Matter of McCulloch & McCulloch (a firm); Ex Parte The Law Society of Tasmania 130/1997 at 6.
It was necessary that Wright J specify the default or defaults in respect of which the order was made, in such a way as to make it possible to identify those suffering a loss in respect of which the default order was made. This enables the Trust to determine whether claims on the Court fund should be accepted or rejected. This task is vested in the Trust by s114, subject to the right of a person who is aggrieved by the decision of the Trust to reject a claim to seek a review of the Trust's decision by this Court, pursuant to s115. Additionally, unless the default is indicated in a manner which enables the loss which is the basis for the order to be identified, it is not possible to determine whose and what rights and interests arising from that loss are assigned to the Trust pursuant to s113.
Section 111(5)(a) requires that there be paid into a Court fund such money standing to the credit of any trust financial institution account and trust deposit account ("the relevant accounts") of the firm as the Supreme Court orders. These accounts are defined in s3. The trust financial institution account ("the trust account") is an account which s101 requires a firm to maintain in a bank, building society or credit union and into which the firm must pay any money received for, or on behalf of, any person by the firm, until paid out or disbursed as that person directs. The trust deposit account is an account established by the Trust pursuant to s98 into which, inter alia, the firm must deposit two-thirds of the lowest balance in its trust account during a prescribed period.
Consistent with s111(5)(a), Wright J made an order referable to the relevant accounts of McCulloch & McCulloch. His Honour ordered that such money standing to the credit of these accounts relating to the loans which were the subject of his order be paid into the Court fund. It was appropriate that his Honour so confined the order. There was no suggestion of any defalcation from, or shortfall in, the firm's trust account. At 4 of his above mentioned decision Wright J noted that the Society did not claim that there had been any defalcation, misappropriation or dishonesty by the partnership. Substantial amounts of money may have been held in the trust account to the credit of clients of the partnership who had no interest in the loans which were the subject of the default order. It would have been wrong for Wright J to have ordered that money held in the trust account for clients who had not suffered a loss in respect of which the default order had been made, be paid into the Court fund. Such an order would have been quite unreasonable as the clients entitled to that money have no right to make a claim against the Court fund. That fund may only be applied to those who have suffered loss of a type specified in s112(1).
Again, consistent with s111(5)(a), when Crawford J made an order which had the effect of making the contributors to two further loans claimants against the Court fund, his Honour ordered that any moneys standing to the credit of the relevant accounts relating to those loans be paid into the Court fund. Subsequently an order was made by Wright J pursuant to s111(5)(b), that the Trust pay $1,234,701.11 into the Court fund. That payment, when added to the moneys held in the Court fund, provided a sufficient amount to pay off all those then entitled to make a claim against the fund. Some time after those claims were met, a declaration was made by Slicer J as to a default in relation to another loan, and an order was made that any moneys standing to the credit of the relevant accounts of the partnership relating to that loan be paid into the Court fund established on 7 November 1997.
The learned primary judge concluded that consistent with the procedure followed to date in relation to the Court fund, if a further default was established in relation to the partnership, it was open to the Court to enlarge the number of claimants who may look to the existing Court fund. I agree with him. When considering an application to add new claimants to an to the existing Court fund, the Court, having satisfied itself that a further default has occurred, should consider whether a new Court fund should be created or whether new claimants can be added to the existing Court fund without prejudicing any claimants. No claimant would suffer prejudice where an order was made that sufficient money to meet all claims be paid into the Court fund from the Guarantee Fund, provided that the Guarantee Fund can satisfy the order. Should there be any doubt about such an order being made and satisfied, the Court should consider what money had been and was to be paid into the existing Court fund before adding new claimants to the fund. If there is a deficiency in a Court fund, claims on it are to be met rateably; s111(7). If there is a risk of a deficiency in a fund, it would only be fair to add to it claimants who contribute to it in the same rateable proportions. To do otherwise would result in some claimants subsidising others.
The appeal
The first ground of appeal pressed by the appellant is that the learned judge erred in law in finding that in the case of an order being made that a firm or legal practitioner is in default at the behest of a person defined by s111(1)(b), it is not part of the statutory scheme that all of the trust moneys, property or financial transactions of the firm or legal practitioner become susceptible to inclusion within the Court fund, or that other persons of the same category could seek to become admitted to the fund without further court process.
The appellant submits that the ruling which ought to have been made includes a ruling that:
"Any person who lodges a claim with the Trust pursuant to section 114(2) is entitled to be admitted to the (existing) Court fund without further court process if that person has suffered the loss of trust money or other property as a result of a fiduciary default within the meaning of section 112(1)(a)."
The validity of this submission is fundamental to the arguments advanced in support of the appeal.
On behalf of the appellant it is contended that an order pursuant to s111(1), declaring a firm to be in default, is of general application and is not specific to the default or defaults which are the basis of the order. In consequence, it is submitted that claims may be made against a Court fund created upon the making of a default order, by any persons who have suffered loss of the kind referred to in s112(1). The appellant's counsel submits that the effect of a default order against a firm is analogous to that of a sequestration order in bankruptcy, with the Trust occupying the same role as the Trustee in Bankruptcy and a claim against the Court fund being equitable to a claim against the estate of the bankrupt. This submission involves the proposition that the procedure for dealing with a claim against a Court fund is the same as that which applies when dealing with a claim against the estate of a bankrupt.
Some support for these contentions can be derived from s112(1) which does not in its terms limit the application of a Court fund to compensating losses resulting from the default in respect of which it was made. The subsection, in substance, simply provides that the fund is to be applied in compensating losses arising from a fiduciary default, or in consequence of property being wrongly encumbered. It does not require that these losses be linked to the default which gave rise to the creation of the Court fund. The appellant submits that if it was intended that the application of a Court fund was to be confined to the default in respect of which it was made, this would have been stated in the subsection in much the same way as s113 contains words expressly confining its application to the rights and interests of any person arising from any loss in respect of which the default order was made. The appellant also claims support from s111(3), which does not limit the right it creates to make claims against a Court fund to claims for a loss in respect of which the default order which gave rise to the Court fund was made.
A benefit advanced in support of construing the division in the manner contended for on behalf of the appellant is that it would enable some claimants to obtain access to an existing Court fund by applying to the Trust, without the Court first being satisfied that they had suffered a loss which warranted the making of a default order. Whilst this would save the difference between the costs of establishing that matter to the satisfaction of the Court and the costs of establishing it to the satisfaction of the Trust, I am dubious that the saving would be significant. In any event, application would have to be made to the Court for orders pursuant to s111(5)(a) and (b). Whilst any saving of costs is desirable, I am unable to construe the division in a manner which achieves the result contended for by the appellant.
It is apparent from a number of sections in the division that there is a nexus between the basis for a default order and those who can make a claim on a Court fund created as a consequence of the order. The claimants need to be identified in order to determine whose and what rights and interests arising from any loss incurred in respect of which the default order was made are assigned to the Trust for the purposes of s113. When exercising its discretion as to the money to be paid into a Court fund pursuant to s111(5), the Court needs to be able to identify claimants on the fund. It would plainly be wrong for the Court to order that money held in the relevant accounts of a firm for non-claimants be paid into the fund. This shows how necessary it is to identify and confine those who can make a claim against a Court fund. It also explains why a default order cannot be of a general character in the sense that it allows anyone who can establish a s112(1) claim against a firm, to make a claim against a Court fund referable to the firm.
The analogy which the appellant seeks to draw between a bankruptcy and a default order is misconceived. In broad terms, a sequestration order relates to all of the bankrupt's property, but not property held on trust by the bankrupt, whilst a default order does not relate to all of the property of the members of the partnership to which it relates, but may, subject to an order of the Court, impact on all or part of the partnership's trust account. The property available to a claimant against a Court fund will also ordinarily include money paid into the Court fund from the Guarantee Fund. In addition, pursuant to s117, the Court could order that the proceeds of sale of the practice of the partnership and its personal property used in connection with the practice be paid into the Court fund. As the Court fund may be comprised of trust property and there is no power to order that all of the property of the members of the partnership be paid into the Court fund, there is no basis for the proposition that the procedure which follows upon the creation of a Court fund should be similar to that which follows the making of a sequestration order.
I reject the first ground of appeal and the submission put in support of it, which I consider to be fundamental to the success of the appeal, that is, that any person who lodges a claim with the Trust pursuant to s114(2) is entitled to be admitted to the Court fund without further court process, if that person had suffered the loss of trust money or other property as a result of a fiduciary default within the meaning of s112(1)(a). Relating the views I have formed to the originating application of the appellant, I conclude that the Trust properly rejected the appellant's application for acceptance as a claimant against the Court fund. The Trust could not properly have acceded to the appellant's claim, as the fiduciary default asserted by the appellant had not been the basis of a default order to which the Court fund related.
My conclusions in relation to the first ground of appeal dispose of the appeal and it is not necessary for me to deal with the appellant's five further grounds of appeal. However, in deference to those grounds, I set out the following summary of my views:
·Before making a default order upon the application of the Society, the Court should be satisfied that a claimant has suffered a loss covered by s112(1). As to other applicants, s112(b) and (c) govern the circumstances in which a default order will be made.
·The basis for a default order, that is, the s112(1) loss, should be identified sufficiently:
(a) to enable the Court to confine any order it makes for the payment of money into the Court fund from the relevant accounts of the firm pursuant to s111(5)(a) to money due to those who have a claim on the fund; and
(b) to make it possible to establish whose and what rights and interests arising from the loss incurred in respect of which the default order was made are assigned to the Trust pursuant to s113.
hOnly those who have suffered a loss incurred in respect of which the default order was made have a claim on the Court fund.
hWhere a Court fund in respect of a firm is in existence, upon the hearing of an application as to a further default, the Court, if satisfied that a further default order is warranted, may establish a new Court fund or make an order including the subject of the further default order in an existing Court fund.
I would dismiss the appeal.
File No FCA 24/2000
PETER HENRY DOBSON v THE SOLICITORS' TRUST
REASONS FOR JUDGMENT FULL COURT
BLOW J
22 August 2001
This appeal concerns the interpretation of provisions in the Legal Profession Act 1993 ("the Act") concerning claims against the Solicitors' Guarantee Fund ("the Guarantee Fund") and trust moneys held by legal practitioners who have committed breaches of fiduciary duties. The provisions in question have been very poorly drafted. They are full of ambiguities and anomalies. They need to be amended or rewritten in order to overcome those ambiguities and anomalies, and to avoid further litigation concerning their meaning.
The facts
This appeal concerns a legal firm named McCulloch & McCulloch ("the firm"). It was constituted by two brothers ("the partners"). Part of their practice involved contributory mortgages of real estate in Tasmania. They routinely accepted moneys from investor clients, held them on trust, and loaned them to borrower clients on the security of such mortgages. They were named as the mortgagees. Such contributory mortgage schemes have been common within the legal professions of Tasmania and many other places for many years. Solicitors administering such schemes are of course trustees, and owe their investor clients fiduciary duties accordingly. Normally the proper discharge of a solicitor's fiduciary duty in such circumstances will require him or her to have received a satisfactory valuation of a proposed security property before advancing any money upon the security of a mortgage over it.
At some time before 27 February 1996, the appellant, as the trustee of a family trust, paid $50,000 to the firm for investment under its contributory mortgage scheme. The firm loaned that money, together with $402,000 invested by other clients, to a man named Baron who was buying a property named "Kidbrook" near Sorell. Mr Baron was then a solicitor. He had his own practice. He paid $535,000 for Kidbrook. It appears that the purchase was settled on 27 February 1996. The purchase was funded in part from the sums of $50,000 and $402,000 that I have referred to. A first mortgage in favour of the partners was registered. The sum secured thereby was specified as $450,000. I do not know why the sum specified was not $452,000. If $2,000 of the sum advanced was not secured, there may well have been a breach of trust by the partners, but it is not appropriate to make any determination to that effect in determining this appeal.
It appears that a registered valuer named Mark E Johnson, writing under the letterhead of M E Johnson & Associates, provided the firm with a report dated 16 February 1996. He valued Kidbrook at $675,000, some $140,000 more than the price Mr Baron was soon to pay for it. The area of Kidbrook was 63.82 hectares. Mr Johnson's report did not mention the Government valuation of the property. It contained assertions as to the applicable zoning, and the possible uses of the property, which might well form the basis for an argument that no solicitor/trustee could properly have advanced clients' moneys on the security of the property in reliance upon the valuation report, at least without obtaining reliable confirmation of what Mr Johnson asserted.
Under the terms of the mortgage, the principal sum was payable on demand. On 13 March 1997, the firm gave notice to Mr Baron demanding the payment of the principal sum of $452,000 together with all interest payable under the mortgage, to be paid no later than 20 March 1997. Mr Baron defaulted.
By November 1997, the firm was in trouble. The Law Society of Tasmania ("the Society") made an application to this Court for orders in relation to its trust account. On 7 November 1997, Wright J declared, pursuant to the Act, s111, that the firm was in default, and ordered that a court fund be established in accordance with s111(2), and that "any money standing to the credit of any trust bank account or trust deposit account of the said firm relating to loans numbered 930221, 930225, 930226, and 950250 in its mortgage register be paid into the said Fund". The loan of $452,000 to which this appeal relates was not one of those mentioned. It was loan number 960067.
A further order in those proceedings was made by Cox CJ on 20 April 1998. The partners were ordered to execute transfers of four mortgages in favour of The Solicitors' Trust ("the Trust"), and to deliver to the Trust any file or document in their possession, custody or control, relating to the same four loans as specified in the order of Wright J. Further, it was ordered as follows:
"that the solicitors' trust take whatever action may be necessary to ascertain any prospective Claimants against the Court fund and to notify those prospective Claimants that claims may be made against the Court fund."
On 29 March 1999, Crawford J made a further order in those proceedings. He ordered that any money standing to the credit of any trust bank account or trust deposit account of the firm relating to loan number 950251 and loan number 940223 in its mortgage register be paid into the court fund established by the order of Wright J.
On 6 December 1999, Wright J ordered that pursuant to the Act, s111(5)(b), the Trust pay from the Guarantee Fund into the court fund the sum of $1,234,701.15. Further, he ordered that payments totalling $1,473,062.20 be paid from the court fund to various individuals.
I return to the saga of the Kidbrook loan. With the consent of all the other investors whose money had been lent to Mr Baron on the security of the Kidbrook mortgage, the appellant persuaded the partners to assign the mortgage debt to him, and to transfer the mortgage to him. A deed of assignment of debt dated 30 March 1998 and a transfer of mortgage of the same date were executed and registered. The appellant executed a declaration of trust dated 31 March 1998 by which he declared the mortgage debt ¾by then $518,885.44 inclusive of interest ¾to be held by him in trust for himself and the other contributors in proportion to their contributions. Shortly thereafter, he sold Kidbrook for $211,000, exercising his power of sale as the mortgagee. That sale was settled on 5 June 1998. The net proceeds of the sale were distributed to the contributors in proportion to their contributions. Thus each investor recovered less than half of the amount originally invested.
On 17 September 1999, the appellant's solicitors wrote to the Trust claiming the balance of the principal sum of $50,000 originally invested by him, interest, and the appropriate proportion of a procuration fee said to have been paid by Mr Baron to the firm in respect of the Kidbrook loan.
On 6 October 1999, the chairman of the Trust wrote to the appellant's solicitors rejecting that claim. His letter included the following:
"It is the view of the Trust your claims against the firm and/or its members, is not a claim of the type provided for in Division 5 of Part 9 of the Legal Profession Act 1993.
Further the Trust is of the view that as the Default Order [sic] made 7th November 1997 and 29th March 1999 are specific in respect of a number or mortgages, and that in which your client was a contributor is not one of them, it is only those persons who are contributors to the mortgages the subject of the Orders, who have a right to claim against the court fund.
Further, the Trust understands the mortgage in which your client is a contributor was, on legal advice, transferred or assigned to the contributors, who in turn became the mortgagees personally. Although not stated in your letter, the Trust understands the transfer or assignment occurred on a date somewhere between the date of the two Default Orders.
As a consequence the Trust is of the view the mortgage in which your client is a mortgagee is not a mortgage which is provided for by the Legal Profession Act 1993.
Accordingly and for those reasons, the Trust rejects your client's claim."
The originating application
On 5 November 1999, the appellant applied, by means of an originating application, for orders in the following terms:
"1 An order pursuant to section 115 of the Legal Profession Act 1993 that the decision by The Solicitors' Trust, conveyed to the applicant by letter dated 6 October 1999 to reject the applicant's claim against the court fund established pursuant to an order made by this court on 7 November 1997 be quashed.
2 An order that the Solicitors' Trust accept the applicant's claim annexed to his letter to the Solicitors' Trust dated 17 September 1999.
3 An order declaring that McCulloch & McCulloch (a firm) in respect of loan number 960067 in its mortgage register being the loan to Thomas Peter Baron secured by mortgage over the property known as 'Kidbrook' has committed a fiduciary default under the Legal Profession Act 1993.
4 An order pursuant to section 111(5) that any money standing to the credit of any trust financial institution account or trust deposit account of McCulloch & McCulloch (a firm) relating to loan number 960067 in its mortgage register be paid into the court fund established pursuant to the order made by this court on 7 November 1997.
5 Alternatively an order pursuant to section 119(2)(e) that any money standing to the credit of any trust financial institution account or trust deposit account of McCulloch & McCulloch (a firm) relating to loan number 960067 in its mortgage register be paid into the court fund established."
Paragraphs 1 and 2 of the originating application raised the question of whether the applicant was entitled to lodge a claim with the Trust in respect of the Kidbrook mortgage. The parties agreed to treat that as a preliminary point, and to seek a determination of that issue prior to the determination of any other issues, such as the issue of whether the appellant's loss was occasioned by a breach of the partners' fiduciary duty. After hearing argument, the learned primary judge held that the appellant was not entitled to make a claim on the court fund through the Trust, and dismissed pars1 and 2 of the originating application. This is an appeal from the order dismissing those paragraphs.
The legislation
The Solicitors' Guarantee Fund was established under the Legal Practitioners Act 1959 and continued under the Act for the primary purpose of providing compensation for losses suffered as a result of fraudulent and improper activity on the part of legal practitioners. The Trust was also established under the 1959 Act and continued under the Act. Its sole function is "to administer and manage the Guarantee Fund": s97(1). Under s97(2), it "may do all things necessary or convenient to perform its function".
If a legal practitioner misappropriates trust money or other property, the only mechanism for obtaining money from the Guarantee Fund to compensate those who have suffered losses or incurred liabilities is that prescribed by s111. The relevant subsections read as follows:
"111 ¾ (1) The following persons may apply to the Supreme Court for an order declaring a firm or legal practitioner corporation to be in default:
(a)the Society;
(b)a person who claims to have suffered loss or incurred liability of a kind referred to in section 112 as a result of a fiduciary default;
(c)a firm or legal practitioner corporation who ¾
(i) has paid money to a person referred to in paragraph (b); or
(ii) has incurred liability as a result of a fiduciary default.
(2) If a default order is made, a Court fund is to be established in the Supreme Court.
…
(5) There is to be paid into a Court fund established in respect of a firm or legal practitioner corporation –
(a)such money standing to the credit of any trust financial institution account and trust deposit account of that firm or legal practitioner corporation as the Supreme Court orders; and
(b)such money from the Guarantee Fund as the Supreme Court orders to meet the requirements specified in section 112".
The purposes for which money in a s111 court fund may be used are listed in s112(1) and (3), which read as follows:
"112 ¾ (1) A Court fund in respect of a firm or legal practitioner corporation is to be applied as the Supreme Court directs in ¾
(a) the compensation for the loss of trust money or other property suffered by a client as a result of a fiduciary default; and
(b) the exoneration of any property of a client which the firm, a member of the firm or a member of a legal practitioner corporation mortgaged, pledged or charged without the authority of the client and otherwise than for the benefit of the client; and
(c) the compensation for a firm or legal practitioner corporation who has paid money because of liability incurred as a result of a fiduciary default.
(3) A Court fund in respect of a firm or legal practitioner corporation may be applied as the Supreme Court directs after taking into account any recommendations of the Society in ¾
(a) the payment of the costs incurred by any person ¾
(i)in connection with any application relating to the making of a default order pursuant to which the Court fund was established; and
(ii)in any proceedings consequential to the making of the default order; and
(iii)in connection with any application in respect of the Court fund; and
(b) the payment of compensation for the loss of interest."
The term "fiduciary default" is defined in s3 as follows:
"'fiduciary default' means ¾
(a)a defalcation, misappropriation or misapplication of money or other property held on trust by a legal firm or legal practitioner corporation; or
(b) the failure of a firm or legal practitioner corporation to account for that money or property held on trust by that firm or legal practitioner corporation."
The reference in s111(1) to "an order declaring a firm or legal practitioner corporation to be in default" and the reference in s111(2) to "a default order" are confusing. Both refer to the same sort of order. The only possible effect of the order referred to is that, without the need for any further order, s111(2) operates to require a court fund to be established. When the Society is the applicant, and a judge is satisfied that it is appropriate for a court fund to be established, it is not necessary that there be a finding that any person or entity is "in default" in any sense. It would have been far simpler for s111(1) to have authorised the appropriate persons to apply for "an order that a Court fund be established", and for s111(2) to refer to "a Court fund order". That is what the words in those subsections really mean.
It can be seen that three sources of money are referred to in s111(5). Firstly, s111(5)(a) refers to money in any trust account with a financial institution. Next, it refers to money in any "trust deposit account" of the relevant firm or corporation. That is a reference to the trust deposit accounts established by the Trust in accordance with s98(1). All firms are required to deposit a fixed proportion of their "core" trust account moneys with the Trust, which in turn invests such moneys to earn interest. The income thus generated is used to meet the expenses of the Trust under s99(2)(a), and to build up the Guarantee Fund pursuant to s99(2)(b). The third source of funds referred to in s111(5) is the Guarantee Fund.
Depending on the nature of the activities of a solicitor who has breached his fiduciary duty, it may sometimes be appropriate for a court fund to be established (by means of a s111(1) default order) without any order being made pursuant to s111(5)(a) for the payment into that court fund of money from a trust account with a financial institution or from a trust deposit account established by the Trust. That would be appropriate if, for example, a solicitor with a small non-commercial practice had so little money that none was placed in a trust deposit account kept by the Trust; and if he or she then misappropriated all the money in his or her trust account, together with a large sum paid by a client for some purpose. It would also be appropriate if it were decided to "quarantine" a small number of "problem loans", forming part of a firm's mortgage practice, from other loans involving no irregularities and from the rest of the firm's trust account, if it too was unaffected by any irregularities. In such a situation, if the firm was not holding the proceeds of any interest payments in relation to the problem loans, or any other money relating to the problem loans, it would be inappropriate to make any order for payment into the court fund of money standing to the credit of any trust account or "trust deposit account" relating to such problem loans, there being no such money. All that would be needed in such a situation would be a s111(1) order declaring the firm to be "in default", and an order under s111(5)(b) that a specified sum be paid into the court fund from the Guarantee Fund. Such an order would have to be based upon a finding that the amount ordered to be paid was necessary to "meet the requirement specified in section 112". Section 112 does not impose requirements that are met by the transfer of money, but I think it is clear that the words "to meet the requirements specified in section 112" must mean "to make payments for the purposes authorised by s112".
Thus, on an application under s111(1), the Court can make an order, the effect of which is to establish a court fund; it can order money to be paid into that fund from any of the three sources I have mentioned; and it can order (inter alia) the payment of compensation, costs and interest out of the court fund.
In order to obtain an order for the payment of moneys out of the Guarantee Fund, it is not sufficient to establish that a client has suffered loss due to the negligence of a solicitor, or due to default on the part of a borrower of contributory mortgage moneys, or due to the price obtained on a mortgagee's sale being insufficient for the full recovery and principal and interest moneys outstanding under a contributory mortgage. Only such losses as have resulted from fiduciary defaults, as defined, can be recouped from the Guarantee Fund via a court fund.
When an order resulting in the establishment of a court fund is made under s111(1), it does not follow that all trust moneys of the relevant firm must be administered through that court fund. This is clear from the discretion given to the Court by s111(5)(a), the effect of which is to empower the Court to order that some, all or none of the firm's trust account moneys, and/or trust deposit account moneys, are to be paid into the court fund. How then is the scope of the claims that may be made for payments from the court fund to be limited or defined? And by what mechanism are claimants able to seek compensation from the Guarantee Fund?
Ordinarily if orders under s111 were needed in order for a former client of a legal practitioner to obtain compensation for losses resulting from that practitioner's breach of his or her fiduciary duties, one would expect the Society or the Trust to look after the interests of the claimant or former client. One would expect the Society or the Trust to identify the clients who should receive compensation, establish what amount of compensation would be appropriate, and apply to the Court for appropriate orders under ss111(1), 111(5) and 112, presenting appropriate evidence. However, there may be cases where the identities of some claimants are not readily ascertainable, or where there is some controversy as to whether a claimant has suffered a loss as a result of a fiduciary default, or is otherwise eligible for a payment pursuant to s112. There may also be cases where a claimant might want to apply to the Court directly, possibly as a result of the Society and/or the Trust being slow or unwilling to do so. Thus any person who claims to have suffered a loss or incurred a liability, within the scope of s112, may apply for a default order pursuant to s111(1)(b).
The Act limits the possible applicants for s111(1) default orders to the persons or classes of persons listed in that subsection. However, it does not contain any restriction as to who may apply under s111(5) for moneys to be paid into a court fund, nor as to who may apply under s112 for moneys to be paid out of a court fund. I think it must follow that after a s111(1) default order has been made, no matter who the original applicant was, any person claiming to have suffered a loss or incurred a liability within the scope of s112 must be entitled to apply to the Court, by means of an interlocutory application, for orders for the payment of further money into the court fund pursuant to s111(5), and for the payment of money from that fund to him or her pursuant to s112. A similar application could be made by the Society, for the benefit of a claimant, at any time.
The only statutory basis for the lodging of claims with the Trust is to be found in s114, which reads as follows:
"114 ¾ (1) If a Court fund is established, the Supreme Court may order the Trust ¾
(a)to advertise in such manner as the Supreme Court directs for claims to be made against the Court fund within such period as the Supreme Court may specify; and
(b)to ascertain any prospective claimants and notify them that claims may be made against the Court fund.
(2) A claim is to be lodged with the Trust.
(3) On receipt of a claim, the Trust may ¾
(a)accept the claim; or
(b)reject the claim in part or in whole.
(4) If the Trust rejects a claim, it must notify in writing the person lodging the claim of the grounds of the rejection."
A right of review of a decision made by the Trust under s114 is conferred by s115, which reads as follows:
"115 ¾ (1) A person who is aggrieved by the decision of the Trust to reject a claim under section 114 may apply to a judge to review the decision.
(2) An application is to be made within a period of one month after receipt of a notification of the rejection of a claim under section 114, or within any further period the judge determines.
(3) On the hearing of an application, a judge may –
(a) affirm the decision of the Trust to reject the claim in part or in whole; or
(b) quash that decision; or
(c) substitute another decision in place of that decision.
(4) A judge, in determining an application, may make such order for costs as the judge considers just.
(5) If an order for costs is made, the costs are recoverable only out of the Court fund in respect of which the application is made."
The critical question in this appeal is whether the claim lodged by the appellant with the Trust was one authorised by s114(2). That subsection simply provides, "A claim is to be lodged with the Trust", without specifying what sort of claim is referred to, or in what circumstances the subsection is applicable. It must be read in context. It follows immediately after s114(1), which empowers the Court to order the Trust to advertise for claims to be made against a court fund, or to notify prospective claimants that claims may be made against the court fund. Read in that context, I do not think s114(2) should be interpreted as allowing or requiring a claim to be lodged with the Trust by any claimant who wishes to seek money from a court fund established in respect of a legal practitioner, whatever the basis for the claim is. Rather, I think s114(2) should be interpreted as applying only to claims of the sort that the Trust is authorised to advertise for, or to solicit, pursuant to an order made under s114(1). If a claimant within a class of claimants that the Trust was ordered to advertise for, or to give notification to, happened to lodge a claim before receiving such notification or before the publication of the appropriate advertisement, I think such a claim should be regarded as falling within the scope of s114(2). But otherwise I think that only claims lodged in response to such advertisements or notifications would fall within the scope of s114(2). Anyone wishing to obtain moneys from a court fund, but not entitled to lodge a claim with the Trust under s114(2), would have to either persuade the Society to make an appropriate interlocutory application for his or her benefit, or else make his or her own interlocutory application.
I think it is clear from the wording of s114(3) and (4) that the Trust was intended to have a fact-finding role in relation to claims lodged pursuant to s114(2). It is true that it was not given any of the powers usually conferred upon administrative tribunals, such as the power to summons witnesses, the power to administer oaths and affirmations, the power to compel the production of documents, and the power to require answers to questions. However, I do not think it follows that s114 was intended to limit the scope of decisions that the Trust could make under s114(3). Subject to any limitation upon the class of claimants resulting from, or implicit in, a s114(1) order for advertising and/or notification, I think the Trust has the power to make decisions as to whether claimants have suffered losses or incurred liabilities which would make them eligible for orders in their favour under s112, and perhaps even to make discretionary decisions as to whether persons eligible for s112 orders should have their claims rejected, wholly or in part.
Application of the legislation in this case
The only order ever made in respect of the firm that enlivened s114(2), and thus authorised claims to be lodged with the Trust, was the order made by Cox CJ on 20 April 1998. That order was in general terms. It related to "any prospective Claimants against the Court fund". It followed immediately upon a series of orders relating to the four specific loan accounts that had been mentioned in the order of Wright J on 7 November 1997. It is clear from the reasons for judgment published by Wright J (Re McCulloch & McCulloch (a firm); ex parte Law Society of Tasmania, 130/1997) that he intended the court fund to relate only to the four specific loan accounts mentioned in his orders, and that his order for the payment into the court fund of any trust account moneys or trust deposit account moneys held in relation to those four loans was made just in case any moneys were held in relation to them. This was not a situation where moneys were held in relation to some loans but not others, and orders made accordingly. It was a situation where the orders reflected the full scope of a series of fiduciary defaults that had been made known to the Court. There was nothing in the order of Cox CJ, nor in the evidence before the learned primary judge, to suggest that the order authorising the Trust to ascertain and notify prospective claimants related to claimants other than investors whose money had been applied towards the four specified loans. It follows that that order must be interpreted as relating only to those four loans.
As the appellant's claim relates to a different loan, he was not entitled to lodge a claim with the Trust pursuant to s114, nor to apply pursuant to s115 for a review of the decision made by the Trust to reject his claim. In my view the appropriate course, if he could not persuade the Society to make an application to the Court for his benefit, was for him to apply for orders under ss111 and 112 in respect of the loan that concerns him. I would dismiss the appeal.
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