Forster v Legal Services Board
[2013] VSCA 131
•30 May 2013
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2011 0099
| DAVID BRIAN FORSTER | |
| Appellant | |
| v | |
| LEGAL SERVICES BOARD (ABN 82 518 945 610) | Respondent |
S APCI 2012 0044
| DAVID BRIAN FORSTER | |
| Appellant | |
| v | |
| LEGAL SERVICES BOARD (ABN 82 518 945 610) and | First Respondent |
| NOEL BATROUNEY and ANDREW LYLE (in their capacity as Receivers of the law practice known as Hollows) | Second Respondents |
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JUDGES: | WEINBERG and HARPER JJA and KYROU AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 5 and 6 February 2013 | |
DATE OF JUDGMENT: | 30 May 2013 | |
MEDIUM NEUTRAL CITATION: | [2013] VSCA 131 | |
JUDGMENTS APPEALED FROM: | Two rulings 23 June 2011 (Emerton J) (S APCI 2011 0099); | |
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LEGAL PRACTITIONERS – External intervention into a legal practice – Deficiencies in trust account – Appointment of receivers – Sale of office premises by appellant – Application to wind up and terminate the affairs of the law practice – Freezing orders – Whether trial judge erred in refusing to set aside freezing order – Whether trial judge erred in extending the receivership – Leave to appeal against orders for extension of receivership refused – Appeal against refusal to set aside freezing order dismissed.
Legal Profession Act 2004, ss 5.2.1 and 5.5.4(1)(b).
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr D Forster in person | Whistleblowers Lawyers |
| For the Legal Services Board | Dr K P Hanscombe SC with Mr S R Senathirajah | Corrs Chambers Westgarth |
| For the Receivers | Mr P D Corbett SC with Mr S P Woolley | Hall & Wilcox |
WEINBERG JA:
I agree with Harper JA.
HARPER JA:
Introduction
At 8.56pm on 10 February 1964, the flagship of the Australian Navy, the aircraft carrier HMAS Melbourne, collided with another naval vessel, the destroyer HMAS Voyager. Struck amidships, the Voyager was sliced in half. Bow and stern both sank within seconds. Eighty-one members of her crew, together with a naval dockyard employee named Horace Porter, were killed. The ramifications were, of course, enormous. They included a multiplicity of disputes resulting in much difficult litigation. This appeal is an example.
It has its (distant) source in the events of that evening. But, although distant, it may be helpful to capture at this early point something of the trauma of the collision, if only because it puts the litigation which followed into a broad contextual framework; and it seems clear that it was – and continues to be – through the prism of this framework that David Forster (to whom I shall refer as ‘the appellant’) saw and sees his role as solicitor for a large number of those who sought to recover from the Commonwealth damages for injuries they suffered as a result of the disaster.
Apart from the 82 deaths, many others on the Voyager were physically injured, while crew from both vessels suffered, or claimed to have suffered, psychological damage. A moment’s reflection about the consequences of a warship being severed in two when on exercises at sea would, without more, explain why physical and mental injuries among the survivors were common.
Post-accident reflection and the then immediate reality are, in this case, a ready match. Dr Tom Frame, a naval historian, a former naval officer and a former Anglican Bishop to the Armed Services, described the crisis which unfolded in the
Voyager’s bow. The only possibility of escape for some 60 crew members was through a hatch which could not be fully opened; and so only those physically small enough to crawl though had any chance of survival. In Dr Frame’s words:
Chief Petty Officer ... Rogers was the most senior sailor in Voyager. He was also a large man ... . Radar Plotter Peter Low recalls that Rogers ‘was telling everyone not to panic and we would all get out if they came through one at a time.’ ... Able Seaman ... Matthews recounted how he ‘could hear ... Rogers ... organising the escape of all the young fellows on the ship. ... Later I heard him say to Leading Seaman ... Rich, “I can’t get out. You get all the young fellows out of the hatch”.’[1]
[1]Thomas Frame, The Cruel Legacy: The HMAS Voyager Tragedy (Allen & Unwin , 2005) 2.
Rogers went down with his ship, and was posthumously awarded the George Cross. Those who did climb through that hatch, and survived the experience, could hardly have avoided severely adverse psychological impacts.
The consequential litigation was fraught. It was also drawn out far beyond the normally applicable parameters. The law practice which the appellant carried on under the firm name of ‘Hollows Lawyers’[2] handled more than 82 of the claims. His conduct of the files has since been called into question. Emerton J was the trial judge in the proceedings in which that conduct was first challenged. She continued to manage the litigation thereafter. In her Honour’s initial judgment, which she delivered on 31 March 2010, the judge noted the considerable demands which the appellant had to meet:
By any measure, the proceedings arising from the claims were difficult and protracted. The files to which the Court was referred and which formed the basis of this application [for the appointment of a receiver to the practice] were opened in 2000 [that is, 36 years after the collision] and many were not concluded before 2008, when the Commonwealth appointed Mr Gormly QC to settle the claims. There was a flurry of settlements in early to mid 2008, according to the evidence of the [appellant]. Understandably, the [appellant] and his staff at the law practice were placed under considerable pressure during this period.[3]
[2]I shall variously refer to the practice conducted by the appellant as ‘the practice’ or ‘the firm’ or ‘Hollows Lawyers’ as best befits the narrative of the judgment.
[3]Legal Services Board v Forster (2010) 29 VR 277, [3]; [2010] VSC 102, [3] (‘Forster’). The Victorian Report does not include the entirety of her Honour’s judgment. When a reference is made below to an unreported passage, the media neutral citation is added.
That pressure must have been, in part, a consequence both of the seriousness of the collision and the length of the intervening delay. In her 31 March judgment, Emerton J noted the appellant’s assertion, which one can accept as reflecting his sincerely-held view of things, that ‘the law practice provided valuable support for the litigants in the Melbourne-Voyager cases (‘a David and Goliath battle’).’[4] It was also plain during the course of the hearing of this appeal that the appellant sees himself as the victim of circumstances which, despite his earnest efforts to act in the best interests of both his clients and his firm, conspired against him with potentially grave consequences.
[4]Ibid [5].
One of the difficulties faced by the Melbourne and Voyager litigants arose out of proceedings taken by the widow of Horace Parker, the dockyard employee who was the only civilian to die in the collision. Mrs Parker sued the Commonwealth in negligence.[5] The trial was heard in the High Court before Windeyer J. Mrs Parker was successful. This was in part because her late husband was not a sailor. In the words of the judge:
[A]s I see the matter at present, the law does not enable a serving member of any of Her Majesty’s forces to recover damages from a fellow member because acts done by him in the course of his duty were negligently done. And if the negligent person is not himself liable, the Commonwealth in my opinion cannot be liable.[6]
[5]Parker v Commonwealth (1965) 112 CLR 295.
[6]Ibid 301-302.
It is not surprising that this statement, although obiter, influenced legal opinion. Many proceedings which would otherwise have been pursued went into hibernation, or were not commenced at all. Then, in Groves v The Commonwealth,[7] the High Court disapproved the Windeyer dictum. The gates were thus opened to much subsequent litigation in which the Commonwealth was the defendant.
[7](1982) 150 CLR 113, 118-119, 133-134, 136, 137.
The prelude to the present appeals
In the present case, however, the Commonwealth is not a party. Now it is the conduct of the appellant in acting for his Melbourne and Voyager clients which is the subject of protracted litigation of its own. On 2 June 2009, the Legal Services Board filed an originating motion in this Court, seeking external intervention (in the form of the appointment of, and the subsequent performance of the functions of, a receiver) to the appellant’s practice. The statutory provision upon which the Board relied was s 5.2.1 of the Legal Profession Act2004 (‘the Act’), by which external intervention may take place in relation to a law practice in a number of circumstances, including:
(d) in any case—where the Board forms a belief on reasonable grounds that the practice or an associate of the practice—
(i) is not dealing adequately with trust money or trust property or is not properly attending to the affairs of the practice; or
(ii) has committed a serious irregularity, or a serious irregularity has occurred, in relation to trust money or trust property or the affairs of the practice; or
(iii)has failed properly to account in a timely manner to any person for trust money or trust property received by the practice for or on behalf of that person; or
(iv)has failed properly to make a payment of trust money or a transfer of trust property when required to do so by a person entitled to that money or property or entitled to give a direction for payment or transfer; or
(v) is in contravention of the regulations or legal profession rules with the result that the record-keeping for the practice’s trust account is inadequate; or
(vi) has been or is likely to be found guilty of an offence relating to trust money or trust property; or
(vii) is the subject of a complaint relating to trust money or trust property received by the practice; or
…
(e) where any other proper cause exists in relation to the practice.
The Board may in certain circumstances proceed of its own motion to appoint a supervisor of the trust money of a solicitor’s practice. These circumstances arise if the Board is of the opinion (i) that external intervention is required (again because of issues relating to the trust account records) and (ii) that it is nevertheless not appropriate that the practice be wound up.[8] If, however, the Board is of the opinion not only that (i) external intervention is required because of issues relating to the trust account records of a practice, but also (ii) that the appointment of a manager for the practice ‘is necessary to protect the interests of clients in relation to trust money or trust property’ or (iii) that ‘there is a need for an independent person to be appointed to take over professional and operational responsibility for the practice’ then the Board may of its own motion ‘appoint a manager for the law practice’.[9]
[8]Act, s 5.2.2(2)(a).
[9]Ibid s 5.2.2(2)(b).
One of the consequences of the appointment of a manager is that a legal practitioner associate of the practice must not participate in the affairs of the practice except under the direct supervision of the manager.[10]
[10]Ibid s 5.4.3(1).
If, on the other hand, the Board is of the opinion that it would be undesirable for a legal practitioner associate of the practice to participate in its affairs at all, and either ‘(i) that the appointment [of a receiver] is necessary to protect the interests of clients in relation to trust money or trust property, or (ii) that it may be appropriate that the provision of legal services by the practice be wound up and terminated’ then the Board may determine ‘to apply to the Supreme Court for the appointment of a receiver for the ... practice’.[11]
[11]Ibid s 5.2.2(2)(c) when read with s 5.5.3(1).
The Board’s application for the appointment of receivers to the firm followed the Law Institute of Victoria’s appointment, on 28 October 2008, of two inspectors to examine the firm’s trust account. In the opinion of the inspectors, 12 of the 82 Melbourne/Voyager files disclosed a number of trust account deficiencies and breaches of the Act and the Legal Profession Regulations 2005 (‘the regulations’).
The alleged breaches and deficiencies, assuming their proper identification by the Institute’s two inspectors, were serious. For example, two instances were identified in which, although counsel briefed by the firm had agreed upon a discount, the firm had nevertheless billed the relevant clients for, and subsequently received and retained, the full amount of counsel’s fees. In one such case, according to the inspectors’ report, the discount was $26,775.00; in the other, $3,525.00.[12] The client paid the practice the undiscounted fee, while the practice paid counsel the discounted amount and pocketed the difference.
[12]Forster, [2010] VSC 102, [174].
Another – it seems more commonly recurrent – breach was the duplicated payment of disbursements from the trust account. One payment went to the person or entity entitled to it, whereupon the client’s interest in the funds held in trust was diminished accordingly. Then, when the firm recouped to itself the amount shown as outstanding in its own bill of costs – something which it did by again drawing on the funds in the trust account – the disbursement was paid out again. The original payment not having been properly accounted for in the firm’s accounting process, the bill upon which the firm based the amount it deducted from the trust account and paid to itself included the disbursement which, in effect and reality, the client had already paid. So the client paid twice, and Hollows Lawyers was the beneficiary. In one case alone, the sum involved was $53,375.70. But that was only one instance of many.
The Board’s application for the appointment of receivers, which was based upon the findings of the inspectors, was heard by Emerton J in a trial which occupied 16 days. The Board was successful. Her Honour, in the judgment delivered on 31 March 2010 (the initial judgment), said this about the allegation of trust account deficiencies:
Having carefully considered the Chun Report and heard extensive evidence in relation to the 12 files that were examined by the inspectors, I am satisfied that the law practice has –
(a)committed serious irregularities in relation to trust money. The double payment of disbursements in particular created deficiencies in the firm’s trust account of significant proportions;
(b)failed properly to account in a timely manner to clients for trust money received by the practice on their behalf; and
(c)contravened the Act and Regulations, in particular, s 3.3.31 of the Act [which requires, among other things, a law practice to produce its records to an inspector].
…
Although the major problems identified in the Chun Report – the double payment and double billing of disbursements – were most likely inadvertent, they occurred because the law practice did not pay sufficiently close attention to its trust accounting obligations when settlement monies started to flow in from the Commonwealth. I do not accept that these problems were caused by a defect in the accounting software used by the law practice, as submitted by the defendant.
…
It appears … that once settlement took place and settlement moneys were paid by the Commonwealth, the defendant may have been unduly hasty in taking his professional fees. I have come to the conclusion that the defendant was careless in dealing with settlement moneys, and that many of the problems that arose could and should have been avoided by careful trust account management as required by the Act and Regulations. The problems experienced were inextricably bound up with the failure by the law practice to prepare and furnish final trust statements as required [by regulation 3.3.28, which provides that a trust account statement must be furnished as soon as practicable after completion of the matter to which the ledger account or record relates].
…
I find that the defendant has not given a satisfactory explanation of how the double payment of disbursements occurred. Moreover, the defendant did not properly turn his mind to the requirement to send out final trust account statements, which reflects a poor appreciation of his obligations and the importance of that requirement. His explanations for not passing on the benefit of creditor discounts, for the double billing of disbursements and for failing to pay trust moneys as directed were unsatisfactory. Furthermore, his treatment of [a particular client named Rann] displayed disregard for his obligation to give a proper accounting and, more generally, to the interests of Mr Rann as his client. This gives cause for concern about the rectification measures undertaken by the law practice, which principally involved raising new invoices and reversing previous write-offs to offset amounts that the law practice had appropriated in error.
…
… The task of the receiver will be to examine the Melbourne/Voyager files held by the law practice to ensure that all irregularities in relation to trust money, trust property or the affairs of the practice have been fully identified and rectified and, in particular, that all trust deficiencies have been properly restored. Depending on what is found, the task may involve recovering moneys or property taken in breach of trust, improperly or unlawfully. Ultimately, it may be necessary to wind up the law practice, but this is a matter for further investigation.[13]
[13]Forster, [295], [298], [300], [304], [310].
Her Honour also found that the appellant employed unorthodox measures by which to rectify the problems once they had been made known to him. She said:
… the manner in which the trust account irregularities were remedied by the law practice gives rise to concern because –
(i)trust moneys that were appropriated in breach of the Act and Regulations were actually restored to the trust account in only a very small number of cases;
(ii)in the majority of cases, to deal with the deficiencies identified, amounts ‘written off’ were ‘written back in’ or new invoices were raised, even though many of the matters had been finalised some time earlier;
(iii)in the matter of Rann, the new invoice that was raised to partially offset the deficiencies identified included fees for professional services that the defendant was not able to properly explain;
(iv)the review conducted by the law practice to identify deficiencies in its Melbourne/Voyager files looked only for deficiencies created by one means (the double payment of disbursements) and did not look for errors of other kinds, such as those identified by the inspectors in the files that were reviewed by them.
Accordingly, I cannot be confident that trust account deficiencies have been properly identified and restored or that the errors that gave rise to them have been rectified. It is necessary for the protection of clients and former clients of the law practice that a suitably qualified person … be appointed to examine the Melbourne/Voyager files held by the law practice to ensure that all irregularities in relation to trust money, trust property or the affairs of the practice have been fully identified and rectified and, in particular, that all trust deficiencies have been properly restored.
…
It may well be that, from an accounting point of view, there were or are no deficiencies in the practice’s accounts where amounts paid by the law practice to itself in error can be offset by moneys owing to the law practice by the client for unbilled work or work that has been written off. As a matter of simple mathematics, so much is clear. That does not, however, address the problem that has been identified relating to the creation of deficiencies in the first place, nor does it mean that the deficiencies have been restored in compliance with trust accounting requirements …[14]
[14]Forster, [6], [7]; [2010] VSC 102, [189].
In short, her Honour found that there were deficiencies in the trust account of the practice which were sufficiently serious to warrant the appointment of a receiver or receivers who would ‘ensure that all irregularities in relation to trust money, trust property or the affairs of the practice have been fully identified and rectified and, in particular, that all trust deficiencies have been properly restored.’[15] Her Honour continued:
Accordingly, a receiver will be appointed on condition that he or she does not, without further order from the Court, move to wind up the practice. I am also minded to limit the term of appointment, because the law practice would be financially ruined by a lengthy receivership, which would amount to a de facto winding up.[16]
[15]Forster, [310].
[16]Ibid [311].
Her Honour added that she would on a subsequent day hear the parties on the form of the instrument of appointment, and on the conditions which she should impose.
The hearing foreshadowed by her Honour on 31 March took place on 12 April 2010. It resulted in the appointment of Noel Batrouney and Andrew Lyle as the receivers of the firm’s ‘regulated property’ – a term defined in s 5.1.2 of the Act as meaning (I paraphrase) trust money or trust property received, receivable or held by the practice; anything derived from or acquired with such money or property; records of any description relating to either of the aforementioned classes or things; and any device (such as, for example, a computer) in the custody or control of the practice by which such records may be produced or reproduced. The appointment was for an initial period of six months, expiring on 12 October 2010.
The appellant instituted, but then withdrew, an appeal against these orders. That is a point of significance for present purposes. Of equivalent significance, the appellant on 9 April 2010 entered into a contract for the sale of the premises in Frankston from which he had conducted the practice. On 13 April 2010, when the receivers took possession of the Frankston premises, they found letters and emails to clients transferring files to another law practice; a checklist of things to do, which referred to the closure of all files, the preparation of disconnection letters for all services and the preparation of data ‘for accountant for ceasing business operation’; and a letter prepared in February 2010 terminating the employment of the appellant’s practice manager (Peter Scott) on the basis that it was not viable to employ a practice manager.[17]
[17]I am indebted to Kyrou AJA for the contents of this paragraph, which have been drawn from his Honour’s judgment (with which I agreed) in Forster v Legal Services Board [2013] VSCA 73, [68].
Seventeen days later, on 30 April, the appellant applied to Emerton J for a stay of the receivership. The transcript of that proceeding reveals that the appellant told the judge that the receivership was causing ‘mortal damage to the practice’. Given the circumstances, this statement was seriously misleading.
It was not until 6 May 2010 that the receivers and the Board discovered that, a month beforehand, the appellant had sold the Frankston premises, and had by his own hand inflicted mortal wounds on the firm’s practice. The discovery caused the receivers, by summons dated 17 May 2010, to apply to Emerton J for ’leave to wind up and terminate the affairs of the law practice in accordance with s 5.5.4(1)(b) of the Legal Profession Act 2004’ and for an order that the appellant ‘be directed to pay the net proceeds of the sale of the land and improvements known as Suite 13, 395 Nepean Highway, Frankston … after deduction of all settlement adjustments agreed with the purchaser, into an interest bearing deposit account to be held in the names of the receivers until further order of the Court.’ The first, but not the only, basis for the application was that, by judgment of the Costs Court delivered on 16 May 2011, the appellant was ordered to pay to the Board its costs of its successful application for the appointment of the receivers.
In broad conjunction with the action thus taken by the receivers, the Board by summons dated 18 May 2010 applied to her Honour for orders that the appellant be restrained from ‘disposing of, dissipating or otherwise dealing with, the net proceeds of the sale of’ the premises from which the firm conducted its business, and that those proceeds be paid ‘into an interest bearing account to be held jointly in the names of the [Board] and the receivers’.
These applications were granted by her Honour on 21 May 2010. In her ruling, the judge said in relation to the freezing order:
In circumstances where the sale of the office premises took place on the Friday before the Monday on which the receivers were to be appointed and the defendant knew that such an appointment was going to be made because reasons had already been handed down, the purchaser was expressly asked not to say anything about the sale to the receivers, and there were two subsequent occasions on which the defendant could have informed the receivers (and indeed the Court) of the sale and did not but instead made loud complaint that the receivership was putting the practice in mortal danger, there is in my view a basis for an apprehension that the proceeds of sale may be dissipated by the defendant.
The battle thereafter moved temporarily to other fronts. By successive applications, which the appellant successively opposed but which Emerton J successively granted, the receivership was extended to 30 June 2011. The appellant’s own applications for orders terminating the receivership, made on, respectively, 5 November 2010 and 11 February 2011, were each dismissed.
Nevertheless, summons continued to follow summons. One to which particular notice should be given was issued by the appellant. It was amended by order of Emerton J on 29 March 2011, and re-issued on 12 April. Then, by letter dated 27 May 2011 and addressed to the solicitors for the Board, the appellant’s solicitors foreshadowed an application to add a further paragraph to it. This, it was suggested, should be numbered 10A. As formulated in the letter, it read:
A direction that the funds being the net proceeds of the sale of the [appellant’s] property at suite 13, 395 Nepean Highway Frankston presently held in an interest bearing bank account in the names of the [Board] and the receivers pursuant to the order of the Honourable Justice Emerton made 21 May 2010 be paid to the [Board] forthwith in reduction of the sum due to it pursuant to orders made by the Costs Court on 16 May 2011.[18]
[18]Appeal Book, Vol 1, A16-A17.
The summons was returnable on 23 June 2011. So too was a summons filed by the receivers on 21 June seeking an extension of the receivership until 29 February 2012. In separate rulings, each of which was made on the day of hearing (23 June), Emerton J published her reasons for decision in both matters. Her Honour gave leave to the appellant to insert paragraph 10A into (and make further amendments to) his re-issued summons of 12 April. But she then dismissed the appellant’s application that the funds in the joint account be released to the Board. The term of the receivership was extended as requested.
In declining to set the freezing order aside, Emerton J held that:
In effect, nothing has changed [since the freezing order was made on 21 May 2010] except that a figure has now been put on the judgment debt owing by Mr Forster to the Board and it is payable. In the absence of cogent information from Mr Forster as to his financial position, I do not propose to make the order that has been sought, which is effectively to discharge the freezing order. Mr Forster does not assert that he cannot pay the Board’s costs by other means; indeed, he says that it is irrelevant whether or not he can do so. I disagree.
Given the conduct which led to the making of the freezing order, the absence of proper material by Mr Forster to satisfy the Court that he can meet orders that may be made in relation to the receivers’ costs and, most importantly, for the recovery of funds by former clients of the law practice following the receivers’ investigations, there remains the concern that future orders of the Court will be frustrated.[19]
[19]Ruling 23 June 2011, [60] and [61].
By 12 April 2011, the receivership had been in operation for exactly one year. That period had, by the date of her Honour’s rulings on 23 June, been extended by almost two and a half months. The appellant seized on those facts as the basis for a submission that no further extension should be granted, at least unless the Court was furnished with a satisfactory explanation for the receivers’ failure to complete their work within the time already available to them.
Her Honour did not accept this argument. One matter of significance was the appellant’s failure to challenge the evidence that $2,730,475 was taken in breach of trust accounting requirements. This is a very large sum. Although, as her Honour found, the errors were inadvertent rather than deliberate, any investigation into the amount properly attributable to the accounts of individual clients, and any decisions about the measures required to rectify trust account discrepancies, would necessarily take time. Her Honour noted in this context that the receivers had ‘put forward a plan involving the repayment of the adjusted amounts totalling [$2,730,475] to the Hollows trust account and the receivers then issuing invoices in respect of costs which they find were written off and which they believe can and should be re-instated’. Emerton J also recorded that ‘[t]he Court has been actively supervising the receivership since its inception, and is well aware of the difficulties that the receivers have faced moving the receivership forward.’ The judge continued:
Some delay has been necessitated by the Court requiring steps to be taken discretely and, indeed, by its request to the receivers to ‘down tools’ over a particular period. Other delays have been caused by the repeated challenges to the receivers and the receivership brought by Mr Forster himself. However, I am satisfied that significant work has been done, in particular through the forensic accounting process … and it is now time to move to the next stage.
In any event, the clients and former clients of the firm are entitled to have monies impressed with a trust in their favour properly accounted for and restored to them if they were paid to the law practice unlawfully in the first place.[20]
[20]Ruling 23 June 2011, T 361.
A second significant consideration in the decision to further extend the receivership was the appellant’s entirely inappropriate attempts to remedy the trust accounting breaches. As Emerton J found in her judgment of 31 March 2010, in the majority of cases in which deficiencies had been identified, amounts which had previously been written off by the practice were simply written back in, or new invoices were raised, with the result that, by a series of book entries, the deficiencies were made to disappear without the clients having first been given an opportunity to make an informed choice about whether or not they approved of their affairs being dealt with in this way.
The receivers have taken the view that a quite different approach should be adopted in rectifying the firm’s accounting irregularities. They have now instituted in this court a proceeding (‘the recovery proceeding’ – proceeding S CI 2012 0732) to recover from the practice the deficiencies which they have identified in the trust account. With this in mind, they applied by summons dated 27 January 2012 for an order that the receivership be extended until the determination of the recovery proceeding. Emerton J granted the application on 1 March 2012.
The recovery proceeding was foreshadowed by the receivers in the ‘plan’ to which her Honour referred in her ruling of 23 June 2011. It had been spelt out in a document dated 21 June 2011 and headed ‘Recommendations’. This document was exhibited as exhibit ‘NJB1’ to an affidavit sworn by one of the receivers, Noel James Batrouney, on the same day (21 June). In paragraph [27] of the exhibit, under the heading ‘Further Steps’, the receivers proposed that the recovery proceeding (to which, in exhibit NJB1, they referred as an ‘application’) be instituted. The action they recommended was described as follows:
(a) The receivers bring an application seeking orders that:
(i)Mr Forster pay the adjusted amount of $2,730,475 to the receivers, to be held in the trust account; and
(ii)Mr Forster provide the receivers with all requested documents and information regarding his financial affairs …
(b)If the Court makes an order in favour of the receivers’ application, the receivers will seek to immediately enforce the order against Mr Forster.
(c)Once the adjusted amount is returned to the trust account, the receivers are then to issue the following invoices:
(i)lump sum invoices based on scale for files where there is a costs agreement that stipulates costs are recoverable on a scale basis; and
(ii)lump sum costed invoices for files where there is a costs agreement that stipulates costs are to be recoverable on a time-costed basis.
(d)If any clients object to the invoices, then they are able to exercise their rights available under the Act.
(e)If any client does not object to the invoices, then after seven days (or such longer period as may be appropriate) of issuing the invoice, the receivers are able to transfer the money from the trust account to Hollows’ office account.
When arguing for the extension sought by their summons of 27 January 2012, the receivers (as was to be expected, given that their application was for an extension of the receivership until the determination of the recovery proceeding) gave as their principal reason for that extension the fact that, were it not granted, the recovery proceeding could not be continued. The appellant’s response was to contend that, the onus being on the receivers, they had not shown that its prospects of success were sufficient to justify the time and expense involved. Indeed, as her Honour understood the appellant’s argument, ‘even if the recovery proceeding results in the payment or repayment of moneys into the trust account, those moneys (and possibly much more) will have to be paid back out to the law practice for legal fees in any event.’[21]
[21]Ruling 1 March 2012, T 54.
Although Emerton J accepted that the Court should be satisfied that the recovery proceeding had utility, she rejected the proposition that the receivers bore any onus of proof.
Her Honour was satisfied of the utility of the recovery proceeding. She recorded what she referred to as the ‘beginnings of a complex and apparently novel – at least in this proceeding – argument that the double payment of disbursements did not involve the payment of trust moneys in breach of trust account requirements’[22] and noted that ‘[s]uch an argument might, if successful, constitute a defence to part of the recovery proceeding.’ Her Honour continued:
It is not for the Court on this application to adjudicate on the merits of the recovery proceeding. That will be a matter for the judge hearing the recovery proceeding or any preliminary application to strike out the statement of claim in whole or in part that may be made.[23]
[22]Ibid T 55.
[23]Ibid T 56.
Emerton J was satisfied not only that the recovery proceeding had utility, but also that (i) while it was not for her on the hearing of the receivers’ application for an extension of the receivership to adjudicate on the merits of the recovery proceeding, nevertheless that proceeding ‘advances the purpose for which the receivers were appointed’ and (ii) ‘there is a sound basis for the recovery proceeding to be pursued, and that the receivership should be extended to enable that to occur.’[24]
[24]Ibid T 56.
The current position
The appellant now seeks to appeal not only against each of the extensions of the receivers’ term ordered by Emerton J on, respectively, 23 June 2011 and 1 March 2012, but also against the judge’s ruling of 23 June 2011 that the moneys received from the sale of the premises in which the firm of Hollows Lawyers conducted its practice not be released from the freezing order. For their part, both the Board and the receivers seek to uphold each decision.
Is leave to appeal required?
The appellant has proceeded on the assumption that leave to appeal is required in relation both to the extension of the term of the receivership and in relation to the dismissal of paragraph 10A of the summons of 12 April 2011. The Board and the Receivers contend that the appellant is correct in taking this position.
The freezing order is in the nature of an injunction.[25] With an exception not here relevant, s 17A(4) of the Supreme Court Act 1986 provides that, unless leave is granted, an appeal does not lie to the Court of Appeal ‘from a judgment or order in an interlocutory application, being a judgment or order given by the Trial Division constituted by a judge of the Court … except in … cases of granting or refusing an injunction or appointing a receiver’. The word ‘receiver’ is not defined in the Act. Leave may be granted by either the trial judge or the Court of Appeal.
[25]I C F Spry, The Principles of Equitable Remedies (Law Book Co, 6th ed, 2001) 514.
In my opinion, the exception applies to the grant by Emerton J on 21 May 2010 of the application to ‘freeze’ the net proceeds of the sale of the premises from which the practice of Hollows Lawyers was previously conducted. Her Honour’s rejection of the appellant’s application to have those funds paid to the Board is, I think, of the same character. If that is correct, leave is not required.
The appellant does, however, require leave in relation to the extensions granted by her Honour to the period of the receivership. In her ruling of 1 March 2012, Emerton J restated the view which her Honour had previously expressed:
…that the receivers may make an extension application of this kind under s 5.6.5 of the Legal Profession Act 2004 [which provides that the Court may, on the application of a receiver (or other external intervener), give directions in relation to any matter affecting the intervention]. It is a convenient way to bring before the Court a matter that it must deal with in any event, given the imminent expiry of the period of the receivership.[26]
[26]Ruling 1 March 2012, T 53.
In my opinion, her Honour was correct in this conclusion. No party has suggested to the contrary. In any event, it seems to me that the extension applications were interlocutory whether or not they properly shelter under the umbrella of s 5.6.5.
The distinction between an interlocutory and a final order or decision is not necessarily easy to draw. Speaking broadly, a final order is ‘the determination by which the court grants or refuses to grant the plaintiff relief in redress of the grievance for which the proceeding was brought.’[27] By contrast, an interlocutory decision is ‘a direction given by the court in relation to the conduct of a proceeding’.[28] An order made after the conclusion of a proceeding may be interlocutory.[29]
[27]LexisNexis Butterworths, Civil Procedure: Victoria, vol 1 (at Service 255)[I 64.01.420].
[28]Ibid.
[29]Ibid.
In the present instance, the judgment handed down by Emerton J on 31 March 2010, and the consequential orders made by her Honour on 12 April, determined the relief for which the Board brought the proceeding. The orders extending the term of appointment of the receivers were made in relation to the conduct of a receivership which, by the orders of 12 April, was already in place. The fact that they were made after the making of the primary orders does not affect their interlocutory status.
It follows that the appellant cannot proceed with an appeal against the orders granting the extensions unless he first obtains the leave of the Court to do so.
The grounds of appeal – the freezing order
The appellant relies upon two grounds. The first is that the judge ‘was in error in failing to hold that the justification for the freezing order was satisfied by payment of the whole of the frozen amount to the only judgment creditor of the [appellant].’ The second is that her Honour ‘was in error in failing to hold that the [appellant], as the sole owner of the funds, was entitled to pay them to his only judgment creditor as such payment was incapable of frustrating the processes of the Court.’
In his written outline of submissions dated 16 December 2011, which bear the names of two (junior) counsel as being responsible for them, the appellant did not seek to support the grounds. Indeed, he did no more than repeat them, in effect verbatim.
The receivers, in their written outline of submissions, point out that the appellant did not appeal against the original freezing order of 21 May 2010. That of itself does not, in my opinion, preclude an appeal against the judge’s refusal to accede to the appellant’s application that the moneys in the joint account be paid to the Board. Nevertheless, in declining to set the freezing order aside, Emerton J found that, in effect, nothing had changed since the freezing order was originally made. That finding has not been disputed by the appellant. In these circumstances, the appellant is, by a backdoor means, seeking to appeal out of time against the original order. That is something which this Court cannot allow.
The appellant faces the further difficulty that he has not sought to challenge a point made by the receivers and the Board: namely, that the freezing order was made for three purposes, only one of which was to ensure so far as possible the payment of the judgment debt owed by the appellant to the Board for its costs of its successful application for the appointment of the receivers.
The two other purposes were similar. They were to ensure, again so far as possible: (i) payment of such costs orders as may be made in relation to the receivers’ costs and, most importantly, (ii) the recovery of such funds as, following the receivers’ investigations, were found to be owing by the firm to its former clients. The appellant’s submissions failed to address these other purposes. Yet it is entirely proper that the Board resist the payment to it of moneys the first call upon which may turn out to lie elsewhere.
For these reasons, the appeal against the order declining to set the freezing order aside must be dismissed.
The proposed grounds of appeal against the orders extending the term of the receivership
The relevant orders were made on, respectively, 23 June 2011 and 1 March 2012. Each extended the term of the receivership: the first, until 29 February the following year, and the second until the determination of the recovery proceeding.
The amended notice of appeal against the orders made by Emerton J on 23 June 2011 is dated 28 October 2011. It supersedes the original notice, which is dated 7 July that year. The amended notice puts forward 13 proposed grounds of appeal (1-13) in relation to the extension of the term of the receivership until 29 February 2012, and two (14 and 15) in relation to the freezing order. No reference is made in the appellant’s written outline to proposed ground 1, which was not otherwise pursued during the hearing in this Court.
The 12 proposed grounds which were the subject of the appellant’s written outlines of submission in relation to the first extension of the term of the receivership may be placed in one or other of six categories. First, that the receivers bore an onus to satisfy the judge that the term of the receivership should be extended; secondly, that any irregularities in the accounts maintained by the firm were confined to its office account, and did not extend to its trust account; thirdly, that the measures adopted by the firm to rectify those irregularities were entirely appropriate; fourthly, that the recovery proceedings were unsustainable, and bound to fail; fifthly, that the expenses associated with the receivership were disproportionate to any possible benefits which it might produce; and, finally, a category which I have labelled as ‘miscellaneous’.
Because the final category may be dealt with quickly, I turn to it first. I have included in it grounds which do not fit neatly into any of the other five categories. Grounds 12 and 13 are examples. Ground 12 asserts that her Honour was in error in (i) disregarding a lien which the appellant claims to have over, presumably, the regulated property, and (ii) in excluding the appellant ‘from involvement in recalculation or taxation of costs and fees due to the [appellant]’. Ground 13 asserts, in part, that the judge was in error in concluding ‘that the receivers have had ample time to commence’ a proceeding under s 5.5.14 of the Act, and to adduce evidence in such a proceeding, and ‘that the receivers ought to have explained their failure to take either step before any extension of the receivership be granted.’
I have considered each of the grounds which I have included under the ‘miscellaneous’ heading. Some were not the subject of oral submissions, others were but faintly argued, and none had or have any merit. In my opinion, they should be put to one side.
The notice of appeal against the extension granted on 1 March 2012 included 22 proposed grounds of appeal. In the copy filed with the Court, their numbering is muddled. Those which were pressed in both the appellant’s written outline of submissions and orally on the hearing of the appeal can be grouped into the same five categories as the grounds proposed in the notice of appeal dated 28 October 2011.
Should leave to appeal be granted?
The decisions from which these appeals are sought to be taken involved the exercise of her Honour’s discretion. Unless that exercise is shown to be vitiated by error (or at least to be attended with sufficient doubt to justify granting leave), and that substantial injustice will be done unless the error is corrected, courts of appeal have no warrant to interfere with it.[30]
[30]Niemann v Electronic Industries Ltd [1978] VR 431.
In my opinion, none of these proposed grounds in either notice of appeal is reasonably arguable. Accordingly, leave to appeal should be refused. I turn, in support of this conclusion, to each of the five categories of the proposed grounds of appeal.
Upon the decision to order external intervention having been made, and once the time for appeal against that order has expired, the interests of the public and, more particularly, those of the clients of the law practice in question, lie in the protection of the integrity of the firms’ trust accounts, and of any other property held by the practice on its clients’ behalf. It is not appropriate in such circumstances to impose an onus on those who wish to extend that protection until it is no longer required. Of course the Court should, before ordering an extension of the term of the intervention, be satisfied that it continues to have utility; but there cannot be any presumption that it does not. It follows that there cannot be an onus upon those who seek an extension. In my opinion, furthermore, Emerton J was right to conclude that the utility of the receivership had not been exhausted.
The investigations of the inspectors engaged by the Law Institute, and those of the receivers, all point to there being irregularities in the trust account of Hollows Lawyers. Indeed, in his written outline of submissions dated 9 October 2012, the appellant states (at page 6) that ‘her Honour erred in ignoring that Hollows created sufficient adjustment notes and write-offs to cover all trust account irregularities discovered by [the Law Institute]’. The proposition that the receivers’ investigations should continue until their proper completion, which point has not yet been reached, is – on the evidence available to this Court – unanswerable.
It is, I think, relevant to note at this point a proposition upon which the appellant placed considerable reliance. It is that there cannot be a deficiency in the trust account of a law practice unless a breach of trust, causing loss to a client, has been committed.
This proposition is fallacious. Section 3.3.21(3) of the Act defines a deficiency in a trust account as including ‘the non-inclusion or exclusion of the whole or any part of an amount that is required to be included in the account.’ The evidence before her Honour pointed strongly to deficiencies of this kind in the trust account of Hollows Lawyers. It is the existence of these very deficiencies which the receivers are required to confirm or refute and, if confirmed, to identify with precision.
The evidence that the appellant adopted inappropriate measures to rectify the already identified irregularities is likewise such as to compel the conclusion that the effect of those measures on the trust account should be thoroughly investigated. Emerton J was fully entitled to conclude that that investigation is also incomplete.
Any issues surrounding the conduct, efficacy and management of the recovery proceedings are for the judge or judges who manage any relevant interlocutory proceedings, and for the trial judge, to determine. They are not to be determined by this Court, and were not to be determined by Emerton J in any of the proceedings before her Honour.
Emerton J was well acquainted with the costs of the receivership and with its conduct generally. Nothing put before this Court suggests that the conclusions to which her Honour has come concerning its efficacy are wrong.
I add a further reason why leave to appeal should be refused. In essence, all that has been put by the appellant in support of his case on this appeal was either put to her Honour in the hearing which culminated in her judgment of 31 March 2010, and rejected by her, or amounts to an attack on the findings of fact which her Honour then made. Not only were those findings open to her Honour, but the appellant abandoned the appeal which he once had on foot against that judgment. By the appellant’s proposed appeals presently before us, the appellant seeks impermissibly to re-agitate the issues which (subject to the now abandoned appeal)
were settled by her Honour.
An example is readily to hand. In the judgment of 31 March 2010, Emerton J held (as recorded in the passages set out at [18] above) that the appellant’s explanation for the double billing of disbursements was unsatisfactory. The explanation was based upon the proposition that, were it not for an inadequate software package, for which the appellant was not responsible, the errors would never have occurred. Her Honour found, correctly, that responsibility could not be shifted as the appellant submitted it could. She also found, equally correctly, that had the appellant met his obligation to furnish his clients with a final trust account statement in accordance with regulation 3.3.28, the mistakes would have been discovered as those statements were being prepared.
Despite these findings, the appellant persisted in the present proceedings with the arguments which had rightly failed before her Honour in March 2010.
In my opinion, for the reasons given above, the appeal against the refusal of Emerton J to lift the freezing order should be dismissed; and the applications for leave to appeal against the orders made by her Honour on, respectively, 23 June 2011 and 1 March 2012, should be refused.
KYROU AJA:
I agree with Harper JA.
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