Garrisons Pty Ltd v Solicitors' Trust

[2004] TASSC 87

[2004] TASSC 87

CITATION:              Garrisons Pty Ltd v Solicitors' Trust [2004] TASSC 87

PARTIES:  GARRISONS PTY LTD
  v
  THE SOLICITORS' TRUST

TITLE OF COURT:  SUPREME COURT OF TASMANIA
JURISDICTION:  ORIGINAL
FILE NO/S:  M321/2003
DELIVERED ON:  24 August 2004
DELIVERED AT:  Hobart
HEARING DATES:  20 May 2004
JUDGMENT OF:  Blow J

CATCHWORDS:

Professions and Trades – Lawyers – Legal practitioners' guarantee funds – Other States or Territories – Tasmania – Who may claim – Assignee of investor clients' rights.

Legal Profession Act 1993 (Tas), s112(1)(a).
National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514, referred to.
Aust Dig Professions and Trades [103]

REPRESENTATION:

Counsel:
             Applicant:  D J Porter QC
             Respondent:  M E O'Farrell
Solicitors:
             Applicant:  Hugh Murray
             Respondent:  Creese, Crisp & Fay

Judgment Number:  [2004] TASSC 87
Number of Paragraphs:  17

Serial No 87/2004
File No M321/2003

GARRISONS PTY LTD v SOLICITORS' TRUST

REASONS FOR JUDGMENT  BLOW J

24 August 2004

1. This is an application pursuant to the Legal Profession Act 1993 ("the Act"), s115, to review three decisions of the Solicitors' Trust ("the Trust").  The applicant is licensed under the Corporations Act 2001 as a dealer in securities. In the course of its business it provides investment advice to clients. On its advice, a number of its clients invested money in solicitors' contributory mortgage funds operated by Hobart legal firms named Lewis Driscoll & Bull and Piggott Wood & Baker. Three court funds were established pursuant to the Act, s114, in respect of the mortgage schemes managed, if that is the right word, by those firms ¾two in respect of Lewis Driscoll & Bull, and one in respect of Piggott Wood & Baker. Clients of the applicant encountered difficulties in relation to the payment of interest and the recovery of capital invested by them in the mortgage schemes of the two firms. Investors and regulatory bodies threatened action against the applicant. As a result, the applicant entered into agreements with a large number of its investor clients whereby it agreed to pay them the capital sums that they had invested, together with interest at the rate of 6 per cent per annum from the date to which their interest had been paid, in consideration of those clients assigning to the applicant all their rights in relation to their investments. Dozens of deeds of assignment were executed in favour of the applicant accordingly. As the assignee pursuant to those deeds, the applicant lodged four claims with the Trust in purported pursuance of the Act, s114, seeking payments from the court funds. It thereby sought reimbursement of all the capital sums it had paid to the assignors, plus interest. The Trust rejected those four claims. This application seeks the review of the decisions rejecting the claims.

1. The Trust contends that the rights of the applicant's investor clients to make or lodge claims seeking payments from the court funds were not assignable, or alternatively that they were not validly assigned.  Further, the Trust contends that the Act does not permit the making or lodging of claims seeking payments from court funds by an assignee in the position of the applicant, nor the making of payments from court funds to an assignee in the position of the applicant.

1. The applicant contends that all relevant rights were assignable; that they were validly assigned; and that, as an assignee, it had the right to make and lodge the four claims that it made and lodged, seeking payments from the three court funds. 

1. As a result of the wording of s115, an application under that section is required to be dealt with by this Court by way of a hearing de novo.  That is common ground.  I was told during the hearing by counsel for the Trust that, in the event that I conclude that the defendant's contentions are correct, ie, that there have been valid assignments and that they entitled the applicant to make its four claims, then the Trust does not contend that any of those claims should be rejected wholly or partly on any discretionary basis. 

1. The relevant provisions of the Act can be summarised as follows. A misapplication of money held on trust by a legal firm (eg, by lending it on the security of a mortgage in such circumstances that the members of the firm have a duty not to lend the money) constitutes a "fiduciary default" as defined in the Act, s3. The failure of a firm to account for money held by it on trust also amounts to a "fiduciary default", as does a breach by a firm of any duty as trustee in relation to money held by it on trust. Under s111(1), this Court may make an order declaring a firm to be in default. By implication, such an order may be made when there has been a "fiduciary default" on the part of a firm. If such an order is made, a court fund is to be established in this Court: s111(2). If a court fund is established in respect of a firm, a right to claim against the firm gives rise to an additional right to claim against that court fund: s111(3). The Court can order money held in trust accounts of the firm to be paid into the court fund: s111(5)(a). The Trust must pay into the court fund from the Solicitors' Guarantee Fund such money as is necessary to compensate fully for certain capital losses of trust money: ss111(5)(b) and 112(1). This Court also has powers to make orders as to the payment of compensation for interest and costs: s112(2) and (3). If orders are made for the payment of compensation in respect of interest and/or costs, the Trust is required to pay from the Solicitors' Guarantee Fund into the court fund such amount as is necessary to enable such compensation to be paid: s111(5)(b). The Court may order the Trust to advertise for claims against the court fund: s114(1). Each claim is to be lodged with the Trust: s114(2). The Trust must either accept each claim, reject it in part, or reject it wholly: s114(3). When an amount is paid out of a court fund, the rights and interests of the payee arising from any loss incurred in respect of which the default order was made are assigned to the Trust, to the extent of the amount paid, by operation of s113.

1. A bare right to litigate is not assignable, and any purported assignment thereof constitutes maintenance: Clegg v Bromley [1912] 3 KB 474. Mr Porter QC submitted on behalf of the applicant that the assignors' rights to compensation under the Act were incidental to their interests in the mortgaged real estate and in the mortgage debts, which they were entitled to assign, and were therefore themselves assignable. He relied on Trendtex Trading Corporation v Credit Suisse [1982] AC 679 and First City Corporation v Downsview Nominees Ltd [1989] 3 NZLR 710 as authority for the proposition that an exception to the rule preventing the assignment of a bare right to litigate exists when the right of action is annexed to a right of property. He submitted that a far more liberal approach to the question of what was acceptable, as distinct from invalid as maintenance, was evidenced by decisions such as Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996) 72 FCR 261, Beatty v Brashs Pty Ltd [1998] 2 VR 201, and Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499.

1. However there can be no scope for the operation of the principles discussed in those cases when the statute giving rise to the right to make a claim is worded in such a way as not to permit those principles to operate.  That was held to be the situation in National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514. In that case a large number of investors had claims for damages against the first respondent (Citibank) and a number of its agents. Three of the applicants, members of the National Mutual group of companies, took assignments of the investors' causes of action against Citibank and its agents. The causes of action included statutory causes of action under the Trade Practices Act 1974 (Cth) and the Securities Industry Code (Vic).  The Trade Practices Act permitted damages to be recovered by a "person who suffers loss or damage by conduct of another person" that contravened that Act: s82(1).  Under the Securities Industry Code, s68F, damages were recoverable if a client "suffers loss or damage as a result" of acting or omitting to do a particular act in reliance on the recommendation of a securities adviser.  Lindgren J held at 539 that the causes of action under those pieces of legislation were not assignable, on the basis that only the original claimants "could possibly satisfy the statutory descriptions of being persons who suffered loss or damage caused by the conduct described in the statutes".  In this case it is necessary to consider whether the Act permits the payment of compensation out of a court fund to an assignee in the position of the applicant.  If that is not permitted, it makes no difference whether the rights of the assignors were of such a nature as not to be inherently incapable of assignment.

1. Counsel for the Trust, Mr O'Farrell, relied on the wording of the Act, s112(1). That subsection reads as follows:

"112 ¾ (1)   A Court fund in respect of a firm or legal practitioner corporation is to be applied by the Supreme Court in ¾  

(a)the compensation to a client for the loss of trust money or other property as a result of a fiduciary default if ¾  

(i)the loss occurred wholly in this State whether in the course of legal practice in this State or in a participating State by a legal practitioner; or

(ii)the loss occurred both in this State and a participating State whether in the course of legal practice in this State or in a participating State by a local legal practitioner; or

(iii)the loss occurred in this State or a participating State or both in the course of legal practice in this State or in a participating State by a local legal practitioner but it is not possible to determine where the loss occurred; 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."

1. Mr O'Farrell submitted that s112(1)(a) permitted the payment of compensation from a court fund only to "a client". He submitted that the applicant was not a client of either of the relevant legal firms, and that s112(1)(a) should not be interpreted so widely as to permit the payment of compensation to the assignee of a client. Further, he submitted that there is no "loss" to which s112(1)(a) applies since the applicant has made good all the assignors' losses.

1. Mr Porter QC pointed out that s112 was amended by the Legal Profession Amendment Act 2001. He submitted that, as originally enacted in 1993, s112 contained nothing to suggest that the class of potential recipients of compensation payments from court funds was limited to "clients". He submitted that it could not have been the intention of Parliament at the time of the 2001 amendment to have so limited the class of recipients when there had not previously been such a limitation, and that the expression "the compensation to a client" should therefore be read so widely as to include compensation to an assignee in the position of the applicant.

1. There is certainly merit in his submission that the amendment of s112 in 2001 was not intended to effect a change as to the classes of potential recipients of compensation from court funds by reference to the relationships between them and defaulting legal firms. No such change was referred to in the relevant second reading speech, nor in clause notes circulated in relation to the relevant bill. If such a significant change had been intended, I think it would have been referred to in both. It is evident that the only purpose of the amendment of s112(1) in 2001 concerned the extension of the relevant statutory scheme in relation to other States. Prior to the 2001 amendment, the subsection 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 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."

However it is very significant in my view that, in its original form, s112(1)(a) permitted compensation to be paid only for a loss "suffered by a client".

1. In my view there is nothing in any other relevant sections of the Act to indicate any limit on the classes of persons who may claim and receive compensation from a court fund. Under s111(1)(b), an application for an order declaring a firm to be in default may be made by "a person who claims to have suffered loss or incurred liability of a kind referred to in section 112 as a result of fiduciary default". Section 111(3), which provides for "an additional right to claim against" a court fund imposes no restriction as to who may make such claim. Section 113, which provides for the vesting of payees' rights in the Trust, refers to "the rights and interests of any person arising from any loss incurred in respect of which the default order was made". Section 114, which provides for advertisements for claims, the notification of prospective claimants, and the lodging and determination of claims, imposes no restriction as to who may lodge a claim. Section 116(1), which provides for interim dividends and advance payments, imposes no restriction as to who may receive either type of payment. Section 118, which grants a right of subrogation to an innocent member of a firm who has made a payment, applies in respect of "a payment to any person in respect of any loss or damages incurred by that person as a result of a fiduciary default".

1. The Acts Interpretation Act 1931, s8A, requires an interpretation that promotes the purpose or object of the Act to be preferred to one that does not promote its purpose or object. The evident purpose of the relevant provisions of the Act, before and after the 2001 amendments, has been to provide compensation to innocent persons (including solicitors' investor clients) who have suffered losses as a result of improprieties on the part of legal practitioners: Dobson v The Solicitors' Trust [2001] TASSC 99 at pars14, 46. To promote that objective, provision is made in s113 for the rights of compensation recipients to vest in the trust. That provision is obviously intended to facilitate the maintenance or replenishment of the Solicitors' Guarantee Fund. Prior to an amendment in 2002, s113 was differently worded, but I think that the same legislative purpose was still evident.

1. I think it would be inconsistent with the purposes or objectives of the relevant statutory provisions for them to be interpreted in such a way that compensation would be available to an assignee whose only loss has resulted from the payment of a consideration pursuant to a contract. When Parliament enacted the original s112(1)(a), it surely did not intend compensation for a "loss … suffered by a client" to be available to (a) an assignee who purchased a client's rights for a small fraction of the amount claimable from a court fund; or (b) an assignee that had contributed to causing the client's loss by giving bad investment advice; or (c) an assignee alleged to have done that. Such an intention would be inconsistent with the maintenance and replenishment of the Solicitors' Guarantee Fund, and would benefit persons whom it was not the Act's purpose to benefit. If s112(1)(a) was still in its original form, I would hold that the applicant has never been a client of the relevant legal firms; that only the assignors were clients for the purpose of that provision; and that none of those clients had any compensable loss because the applicant has made good all their losses.

1. I agree with Mr Porter QC that, geographical considerations aside, the 2001 amendment to s112(1) was not intended to alter the range of situations in which compensation is payable. However I reject his submission that compensation would have been payable to a claimant in the position of the applicant prior to the amendment, and must therefore now be payable to the applicant. In my view, the position prior to the amendment was that no loss would have been suffered by any client in a situation like the present. In my view the position after the amendment is that (a) compensation may only be paid "to a client", and the applicant is not one; and (b) compensation may only be paid to compensate for "a loss of trust money or other property", but the assignors have no compensable losses.

1. It was put to me in argument that Parliament could not have intended compensation from a court fund not to be available to the executor of a deceased investor, or to the trustee of the property of a bankrupt investor, or to a new trustee of a superannuation fund whose former trustee was an investor that would have been entitled to make a claim.  It may be that all of those situations are distinguishable.  It may be that some or all of them are not.  It has been held for example that a right to claim damages under the Trade Practices Act does not pass to an executor: Pritchard v Racecage Pty Ltd (1997) 72 FCR 203 at 218. I do not think I need consider those situations. I think it is at least arguable that the sorts of claimants I have referred to might constitute clients for the purposes of s112(1)(a), given the evident purpose or object of the relevant provisions. However it is my firm view that an assignee in the position of the present applicant does not constitute a client for the purpose of that provision and that no loss within the scope of that provision exists in relation to any of the assignors.

1. It follows that compensation cannot be payable to the applicant, that the decisions of the Trust now under review were correct, and that this application must be dismissed.