Gippsreal Limited v ACN 106 693 565 Pty Ltd (formerly MJ Leonard Pty Ltd trading as Leonard Legal)
[2017] FCA 1414
•13 November 2017
FEDERAL COURT OF AUSTRALIA
Gippsreal Limited v ACN 106 693 565 Pty Ltd (formerly MJ Leonard Pty Ltd trading as Leonard Legal) [2017] FCA 1414
File number: VID 268 of 2016 Judge: NORTH J Date of judgment: 13 November 2017 Date of hearing: 13 November 2017 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: No Catchwords Number of paragraphs: 18 Counsel for the Applicant: Mr J L Evans QC Solicitor for the Applicant: Oakleys Legal Counsel for the Respondent: Mr P Jopling AM QC with Ms J Collins Solicitor for the Respondent: K & L Gates ORDERS
VID 268 of 2016 BETWEEN: GIPPSREAL LIMITED
Applicant
AND: ACN 106 693 565 PTY LTD (FORMERLY MJ LEONARD PTY LTD TRADING AS LEONARD LEGAL)
Respondent
JUDGE:
NORTH J
DATE OF ORDER:
13 NOVEMBER 2017
THE COURT ORDERS THAT:
1.Oakleys Legal are restrained from continuing to act for Gippsreal.
2.By 8 December 2017, Gippsreal must give discovery by list of documents verified by affidavit of the documents directly relevant to the issues raised by the pleadings which have not already been discovered, including the following categories:
(a)Gippsreal’s financial accounts and notes for the financial years ended 30 June 2007 to 30 June 2008.
(b)Documents recording Gippsreal’s conflict management arrangements, as contemplated by section 11.6.1 of Gippsreal’s Compliance Plan.
(c)Internal monitoring records recording compliance with Gippsreal’s conflict management obligations, and disclosures to the Individual Investors about conflicts of interest, as contemplated by section 11.6.1 of the Compliance Plan.
(d)Gippsreal's register of licence breaches as contemplated by section 2 of Gippsreal’s Compliance Manual.
(e)Any notice of breach prepared by Gippsreal's personnel in relation to the Loans as contemplated by section 2.9 of Gippsreal’s Compliance Manual.
(f)Any board papers or board minutes referring to a breach by Gippsreal in relation to the Loans as contemplated by section 2.9 of the Compliance Manual.
(g)Any report to ASIC in respect of a breach of Gippsreal's obligations in connection with the Loans as contemplated by section 2.11 of the Compliance Manual.
(h)Any incident report and any breach report prepared in connection with the Loans to Strategic the subject of Proceeding as contemplated by section 2.11 of the Compliance Manual.
(i)Gippsreal's internal monitoring records of the extent of Gippsreal's compliance with its Compliance Plan, and the reports to Gippsreal's board, contemplated by section 2.11 of the Compliance Manual, in the period 1 June 2008 to present.
(j)Documents that identify Gippsreal's Responsible Officer, Investment Manager and Loan Manager in the period from 1 July 2006 to present.
(k)All records of communications between Gippsreal and Individual Investors (including file notes of telephone calls to investors and correspondence with them) in connection with Strategic's defaults under the Loans.
(l)All retainers between Gippsreal and Oakleys pursuant to which Oakleys rendered invoices to Gippsreal for work in connection with the Loans.
(m)Any request for legal advice sought by Gippsreal, and any legal advice provided to Gippsreal, in the period from 1 July 2008 to present, about the extent of compliance by Gippsreal or its related entities with their obligations under the Compliance Plan or the Corporations Act 2001(Cth) in connection with the lending practices they adopted at the time of the Loans. where:
(i) “Loans” means all or any of the five loans to Strategic Projects Pty Ltd that are the subject of this proceeding, defined in Gippsreal’s amended statement of claim as the “First Bega Loan”, the “First Glen Innes Loan”, the “First Temora Loan”, the “Second Bega Loan”, and the “Glen Innes & Temora Loan”.
(ii) “Individual Investors” means all or any of the persons who invested in the loans, being the persons referred to at paragraphs 12(14), 26(11), 40(11), 54(14) and 68(12) of the amended statement of claim.
3.Gippsreal has leave to file, by 16 November 2017, a further amended statement of claim in the form served on Leonard Legal on 23 October 2017.
4.Leonard Legal has leave to file, by 23 November 2017, a defence to Gippsreal’s further amended statement of claim incorporating amendments substantially in the form served on Gippsreal on 3 November 2017.
5.Gippsreal pay the costs of and incidental to the application.
6.Leonard Legal pay any costs of Gippsreal thrown away as a result of the amendments to the defence referred to in [4] which results from the amended interlocutory application filed on 14 September 2017.
7.A case management hearing is fixed for 10.15 am on 1 February 2018.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
NORTH J:
Before the Court is an amended interlocutory application filed on 14 September 2017, brought by the respondent in the proceeding, Leonard Legal, for an injunction preventing Oakleys Legal, the solicitor representing the applicant in the proceeding, Gippsreal Limited (Gippsreal), from continuing to act as the solicitor for Gippsreal in the proceeding.
The application is supported by an affidavit, sworn on 23 August 2017, by Christien William Corns, a solicitor acting for Leonard Legal. Affidavits in opposition to the application were sworn by Trevor John Rickard on 10 October 2017 and 10 November 2017. Written submissions were filed by Leonard Legal and Gippsreal, and submissions were made orally.
Gippsreal is the responsible entity of the Gippsreal mortgage investment scheme, which is a registered management investment scheme under part 5C of the Corporations Act 2001 (Cth). The business of Gippsreal is lending money on the security of registered mortgages. Trevor Rickard is the managing director, majority shareholder and responsible officer of Gippsreal. Mr Rickard is also a solicitor, practicing in Leongatha under the name Oakleys Legal.
The claim by Gippsreal concerns five transactions in which it lent money to Strategic Projects Proprietary Limited (Strategic). On 12 October 2006, Gippsreal lent $1.105 million on the security of the Bega property. On 15 February 2007, it lent $1.425 million on the security of the Glen Innes property. On 31 May 2007, it lent $1.38 million on the security of the Temora property. On 29 June 2007, it lent $2.95 million on the extended Bega property. On 27 November 2007, it refinanced the Glen Innes and Temora loans by lending $3.605 million on the security of those properties. Gippsreal operates in Gippsland, in Victoria. Because the properties in question were in New South Wales, Gippsreal and/or Oakleys Legal engaged Leonard Legal to act on the transaction. In each case a valuation was obtained, it seems, by Strategic, from Langshaw Valuations Proprietary Limited. The valuations proved to be substantially above the actual value of the properties.
Strategic defaulted on repayments of the loans. Gippsreal took possession, and, in the case of the Glen Innes and Temora properties, sold them at a substantial loss. Thus, Gippsreal originally advanced $1.425 million on the security of the Glen Innes property. Langshaw Valuations valued it at $2.375 million but it sold, on 16 December 2013, for $195,000. Gippsreal originally advanced $1.38 million on the security of the Temora property. Langshaw Valuations valued it at $2.3 million but it was sold, on 18 December 2013, for $85,000. That is the general picture. It is unnecessary to dwell further on the facts concerning the transactions. The circumstances of the Bega properties were not relevantly different, save that those properties have not yet been sold.
In this proceeding, Gippsreal claims that Leonard Legal bears responsibility for the losses incurred. Again, using the Glen Innes and Temora properties as the example, Gippsreal makes the following claim in its statement of claim filed on 31 March 2016:
62. In about November 2007, Gippsreal retained Leonard Legal to:
(1)provide legal services necessary to ensure that Gippsreal obtained a valid, enforceable, registrable security over the Glen Innes Property and the Temora Property.
(2) conduct full title, rate and planning inquiries in respect of the Glen Innes Property and the Temora Property;
(3) advise Gippsreal of any irregularities arising from those inquiries; and
(4) attend settlement of the Glen Innes & Temora Loan, if it proceeded;
(the "Glen Innes & Temora Loan Retainer").
PARTICULARS
The Glen Innes & Temora Loan Retainer was partly in writing and partly to be implied.
In so far as it was in writing, the Glen Innes & Temora Loan Retainer was contained in a letter dated 2 November 2007, which enclosed:
(a) the December Glen Innes Valuation;
(b) Deed of Offer of Finance dated 11 October 2007 between Gippsreal and Strategic;
(c) Copy certificates of title of the Glen Innes Property and the Temora Property;
(d) Copy individual credit report dated 30 April 2007.
A copy of the letter is in the possession of the solicitors for Gippsreal and may be inspected by appointment.
In so far as it was to be implied, it was implied by:
(1) the preparation and registration by Leonard Legal on behalf of Gippsreal of the Glen Innes & Temora Mortgage;
(2) the attendance by Leonard Legal at settlement of the Glen Innes & Temora Loan;
(3) the operation of law, including section 74 of the Trade Practices Act 1974 (Cth), as it then was.
63.Pursuant to the Glen Innes & Temora Loan Retainer, Leonard Legal owed Gippsreal a duty ("Glen Innes & Temora Loan Duty") to pass on to Gippsreal information that was obtained by Leonard Legal, or ought to have been obtained by Leonard Legal during the course of investigating the title of the Glen Innes Property and the Temora Property, or at any time prior to settlement of the Glen Innes & Temora Loan, which might have caused Gippsreal to doubt the correctness of any valuation which had been or was obtained by Gippsreal in relation to the Glen Innes Property and the Temora Property, or to doubt Gippsreal's belief as to the uses to which the Glen Innes Property and the Temora Property might lawfully be put, being an ingredient of Gippsreal's decision to make the Glen Innes & Temora Loan to Strategic.
PARTICULARS
The Glen Innes & Temora Loan Duty was implied by law.
Further the obligation was implied by reason of the following matters:
By reason of the contents of the letter dated 2 November 2007, including its enclosures, and by reason of the fact that on many occasions prior to November 2007 Gippsreal had engaged Leonard Legal to act on Gippsreal's behalf to prepare mortgage documentation and attend to all matters in respect of loans to be made by Gippsreal in its capacity as responsible entity of the Scheme, and secured against real estate property located in New South Wales and Queensland, Leonard Legal knew that:
(1) Gippsreal required the Glen Innes & Temora Loan to be secured by the Glen Innes Property and the Temora Property;
(2)Gippsreal did not intend to loan to Strategic more than 60% of the value of the Glen Innes Property and the Temora Property;
(3) Gippsreal had obtained valuations from Langshaw Valuations valuing the Glen Innes Property at $2,375,000 and the Temora Property at $2,300,000 respectively;
(4) The valuations of the Glen Innes Property at $2,375,000 and the Temora Property at $2,300,000 were each predicated on the basis that the Glen Innes Property and the Temora Property could each be developed with local council consent as a Seniors Living development under the State Environmental Planning Policy (Senior Living) Act (NSW);
(5) Gippsreal expected that Leonard Legal would read each of the valuations and check that the property described in the valuations corresponded to the Glen Innes Property and the Temora Property;
(6) Gippsreal was the responsible entity of the Scheme and had compliance obligations in relation to investigating and approving loans to be made by Gippsreal in that capacity;
(7) Gippsreal's business involved lending in the non-conforming "second tier" lending market, which frequently involved lending based on the values of security property, rather than serviceability of loans;
(8) Gippsreal was offering to lend large sums of money to Strategic, which was a recently incorporated company with no obvious trading history and minimal paid-up share capital;
(9) Gippsreal had engaged Leonard Legal as an experienced commercial firm operating in New South Wales to do all things necessary to protect Gippsreal's interest as proposed mortgagee over the Glen Innes Property and the Temora Property to avoid financial loss to Gippsreal in the event of Strategic defaulting on the Glen Innes & Temora Loan;
(10) Gippsreal would rely on the Glen Innes Property and the Temora Property being adequate and appropriate security to enable Gippsreal to sell the Glen Innes Property and the Temora Property in the event of default by Strategic and to recover the monies due under the Glen Innes & Temora Loan;
(11) Gippsreal was relying on the accuracy of the valuations of the Glen Innes Property and the Temora Property in making any loan to Strategic;
(12) Gippsreal required details of Leonard Legal's investigation of the title, rate and planning status of the Glen Innes Property and the Temora Property.
64.In or about November 2007, and in performance of the Glen Innes & Temora Loan Retainer, Leonard Legal provided Gippsreal with the proposed mortgages of the Glen Innes Property and the Temora Property to Strategic.
65. At the time of providing Gippsreal with the proposed mortgage of the Glen Innes Property and the Temora Property to Strategic, and prior to Gippsreal making the Glen Innes & Temora Loan, Leonard Legal failed to report to Gippsreal with respect to the following matters which Leonard Legal discovered, or ought to have discovered, as part of the perfommnce of the Glen Innes & Temora Loan Retainer:
(1)The fact that there was no special value attributable to the development of the Glen Innes Property as a Seniors Living development site given the amendments to the State Environmental Planning Policy (Seniors Living) 2004.
(2) The fact that Langshaw Valuations had by the December Glen Innes Valuation determined the alternative highest and best use of the Glen Innes Property to be use as a Seniors Living Development, and that the feasibility of that use was adversely affected by the matters referred to in (1) above.
(3) The fact that the land tax certificate that ought to have been obtained would have disclosed a significantly lower taxable land value for the Glen Innes Property than the value stated in the December Glen Innes Valuation;
(4) The fact that the Temora Property was zoned "Rural A" under the Temora Local Environment Plan 1987 and was less than 40 hectares in area, and that due to the minimum lot size requirement of 40 hectares under the "Rural A" zoning it was not possible to erect any dwelling on the Temora Property, and that, therefore, the Temora Property was only able to be sold as unimproved grazing land;
(5) The fact that there was no special value attributable to the development of the Temora Property as a Seniors Living development site given the amendments made to the State Environmental Planning Policy (Seniors Living) 2004;
(6) The fact that Langshaw Valuations had by the April Temora Valuation determined the highest and best use of the Temora Property to be use as a Seniors Living Development, and that the feasibility of that use was adversely affected by the matters referred to in (I) to (2) above;
(7) The fact that the land tax certificate that ought to have been obtained disclosed significantly less taxable land value for the Temora Property than the valuation by Langshaw Valuations;
66. By failing to report to Gippsreal in respect of each of the matters referred to at paragraph 65 above at any time prior to Gippsreal making the Glen Innes & Temora Loan, Leonard Legal breached the Glen Innes & Temora Loan Duty.
67. Each of the matters referred to in paragraph 65 above were matters which Leonard Legal ought to have considered might cause Gippsreal to:
(1) doubt the correctness of the valuations by Langshaw Valuations in the December Glen Innes valuation and the April Temora Valuation;
(2) doubt the correctness of its belief as to the uses to which the Glen Innes Property might be lawfully put;
(3) doubt the correctness of its belief as to the uses to which the Temora Property might be lawfully put, namely whether it might be lawfully subdivided and developed while subject to the Rural A zoning;
(4) as a result of the matters in sub-paragraphs (1) to (3) above:
(1)make further inquiries or seek further planning, environmental or other consultants' reports with respect to the Glen Innes Property and the Temora Property;
(2) obtain further, independent valuations of the Glen Innes Property and the Temora Property.
68. By reason of Leonard Legal's breach of the Glen Innes & Temora Loan Duty, Gippsreal has suffered loss and damage.
PARTICULARS
(1) Had Leonard Legal informed Gippsreal of the matters referred to in paragraph 65 above prior to the making of the Glen Innes & Temora Loan Gippsreal would not have made that loan. Strategic was a recently incorporated company, which had no trading history, and whose only method of repayment of the Glen Innes & Temora Loan was likely to be through sale of the Glen Innes Property and the Temora Property (and the Extended Bega Property). In the event of default under that loan, Gippsreal would be required to sell the Glen Innes Property and the Temora Property in order to satisfy the Glen Innes & Temora Loan.
(2)Gippsreal received pre-paid interest for the Glen Innes & Temora Loan.
(3) Further interest payments were received from Strategic on 17 December 2007, 20 March 2008 and 12 June 2008 to reflect additional interest payments due as a result of upward variation in the interest rates payable on the Glen Innes & Temora Loan but no further payments have been made.
(4) The variable interest rate payable on the Glen Innes & Temora Loan from the commencing rate of 11% per annum was increased by notice to Strategic to 11.25% on 27 February 2008.
(5) In or about October 2008, Strategic attempted to sell the Glen Innes Property and the Temora Property by expression of interest. No offers were received.
(6) On 17 August 2010, Gippsreal obtained a judgment in the Supreme Court of Victoria against Strategic pursuant to the mortgage over the Glen Innes Property and later entered into possession of the Glen Innes Property.
(7) On 22 October 2011 Gippsreal attempted to sell the Glen Innes Property at auction. An offer of $150,000.00 was received, but not accepted. In October 2013, Gippsreal sold the Glen Innes Property at auction for $195,000.00 (net proceeds of sale after payment of outstanding land tax and rates being $87,819.57) with settlement effected on 16 December 2013.
(8) On 21 October 2011 Gippsreal attempted to sell the Temora Property by public auction the Temora Property. An offer of $35,000.00 was received at the auction, but not accepted. In October 2013, Gippsreal sold the Temora Property at public auction for $85,000.00 (net funds available to Gippsreal $79,086.49) with settlement effected on 18 December 2013.
(9) Had Gippsreal not advanced the Glen Innes & Temora Loan to Strategic, it would have advanced the amounts the subject of the Glen Innes & Temora Loan to one or more other borrowers, at a lower interest rate of approximately 10.5% per annum, on or about the dates when the Glen Innes & Temora Loan was made. Gippsreal has lost the use of those funds by virtue of having made the Glen Innes & Temora Loan to Strategic.
(10) Gippsreal has suffered a loss of reputation as a prudent fund manager.
(11) Further, Gippsreal has a suffered a loss of income by reason of Strategic's failure to pay interest on the loan and application fees on alternative loans had the loans been repaid on the due date.
(12) Further, each of the individual investors on behalf of whom Gippsreal advanced the Glen Innes & Temora Loan has suffered stress, anxiety, worry, vexation and insecurity by reason of the loss of use of their funds, and the uncertainty as to whether they will recover part or all of their investment with Gippsreal.
Further particulars will be provided prior to trial.
Leonard Legal responds to those allegations in its defence to the amended statement of claim, filed on 31 March 2017, as follows:
62. As to paragraph 62:
(a)it says that on or about 2 November 2007 Leonard Legal was retained by Oakleys to:
(i) prepare all documents required to effect a mortgage between Gippsreal and Strategic over the Glen Innes & Temora Property incorporating, amongst others, the terms expressly identified by Oakleys in their letter of instructions;
(ii) conduct full title, rate and planning enquiries in respect of the Glen Innes & Temora Property (the Glen Innes & Temora Property Searches);
(iii) forward copies of the Glen Innes & Temora Property Searches to Oakleys;
(iv) note irregularities in the Glen Innes & Temora Property Searches; and
(v) attend to stamping and lodging of documents;
(vi) attend settlement;
(the Fifth Retainer);
PARTICULARS
The Fifth Retainer was partly in writing and partly to be implied. In so far as it was in writing, it was contained in a letter from Oakleys to Leonard Legal dated 2 November 2007. A copy of the letter is in the possession of the Respondent's solicitors and may be inspected by prior appointment. In so far as it was implied, it was implied by custom or usage and/or in order to give business efficacy to the Fifth Retainer.
(b) it says that conducting full title, rate and planning enquiries required it to do the following:
(i) obtain a copy of the title search;
(ii) obtain a land tax certificate; and
(iii) obtain a section 149 certificate under the Environmental Planning & Assessment Act 1979 (NSW);
(c) it otherwise denies the allegations in paragraph 62.
63. It denies the allegations in paragraph 63 and says further that:
(a)at no time did Oakleys and/or Gippsreal request advice from Leonard Legal about any of the matters alleged in paragraph 63;
(b) if Oakleys and/or Gippsreal required advice from Leonard Legal about the matters alleged in paragraph 63 (which is denied), to enable Leonard Legal to provide such advice, it was necessary for Oakleys and/or Gippsreal to provide Leonard Legal with instructions as to Gippsreal's belief as to the uses to which the Glen Innes & Temora Property might lawfully be put and instructions to review any valuations in relation to the Temora & Glen Innes Property to assess the same in the context of Gippsreal's belief; and
(c) at no time did Oakleys and/or Gippsreal or anyone else provide Leonard Legal with any of the instructions referred to in sub-paragraph (b) above.
64. As to paragraph 64:
(a) it says that in or about November 2007, and in performance of the Fifth Retainer, Leonard Legal provided Gippsreal with the proposed mortgages of the Glen Innes Property and the Temora Property to Strategic;
(b) it otherwise does not admit paragraph 64.
65. As to paragraph 65:
(a)it says that prior to the making of the Glen Innes & Temora Loan advance, Gippsreal knew, or ought to have known, of the matters alleged in paragraphs (1), (2), (4), (5) and (6) of the SOC in that they were disclosed in the December Glen Innes Valuation, the April Temora Valuation and the May 2007 Temora Valuation, which were in the possession of, inter alia, Oakleys.
PARTICULARS
(i) The amendments to the State Environment Planning Policy (Seniors Living) 2004 are said to have been specifically taken into account by, and referred to on:
(A) page 4 of the December Glen Innes Valuation;
(B) page 4 of the April Temora Valuation; and
(C) page 4 of the May 2007 Temora Valuation;
(ii) The "Rural A" zoning is referred to throughout the:
(A) April Temora Valuation; and
(B) May 2007 Temora Valuation;
(iii) Development restrictions associated with the "Rural A" zoning are referred to on:
(A) pages 4 and 12 of the April Temora Valuation; and
(B) page 12 of the May 2007 Temora Valuation;
(iv) By email dated 15 November 2007 (10.21am), Leonard Legal provided Gippsreal with a copy rates notice in respect of the Glen Innes Property which ascribed a valuation of the Glen Innes Property of $126,000;
(v) Further particulars may be provided following discovery in this proceeding.
(b) it says that a "land tax certificate" in New South Wales does not disclose a taxable land value;
(c) it says that before Gippsreal made the Glen Innes & Temora Loan advance Gippsreal knew, or ought to have known, that Strategic was a recently incorporated company with minimal paid up share capital;
PARTICULARS
Refer to particular (8) under paragraph 7 of the SOC.
(d) On 23 November 2007:
(i) By email at 4:44pm Leonard Legal provided Gippsreal with a copy of local council development approvals in respect of the Temora & Glen Innes Property which approvals are stated to be subject to conditions described therein; and
(ii) By email at 4:58pm in reply, Gippsreal advised Leonard Legal that, "Subject to the written confirmation from our valuer in relation to the [development approvals] we should be in a position to settle on Monday" (the 23 November 2007 advice).
(e) it says that, at settlement of the Glen Innes & Temora Loan and to the knowledge of Gippsreal, $491,059.61 was advanced to Strategic for purposes other than to refinance the existing First Glen Innes Loan and the First Temora Loan;
(f) it otherwise denies paragraph 65.
66. It denies the allegations in paragraph 66 and refers to and repeats the matters alleged in paragraphs 63 to 65 above.
67. It denies the allegations in paragraph 67 and refers to and repeats the matters alleged in paragraphs 63 to 65 above.
68. It denies the allegations in paragraph 68 and says further that if Leonard Legal breached the Glen Innes & Temora Loan Duty (which is denied), by reason of the matters alleged above:
(a) it says that if Leonard Legal had provided the Glen Innes & Temora Property Searches to Oakleys before the advance was made, such searches would not have disclosed any matter material to Gippsreal's decision to make an advance to Strategic of which Oakleys and/or Gippsreal was not already aware, or ought to have been aware, by reason of being in possession of, inter alia, the December Glen Innes Valuation, the April Temora Valuation and the May 2007 Temora Valuation;
PARTICULARS
The copy of the title search would have disclosed the registered proprietor of the land, which was disclosed in the said valuations. The land tax certificate would not have disclosed the value of the land. The section 149 certificate would have disclosed the applicable zoning and planning restrictions, which were discussed in the said valuations. Further particulars may be provided after discovery.
(b) any breach of duty by Leonard Legal of the Glen Innes & Temora Loan Duty did not cause Gippsreal (or the members of a relevant sub-scheme) to suffer any loss and damage; and/or
(c) any loss and damages suffered by Gippsreal (or the members of a relevant sub-scheme) was as a result of Gippsreal's:
(i) voluntary assumption of risk; and/or
(ii) total reliance upon Langshaw pursuant to the 23 November 2007 advice.
Leonard Legal pleads that the claim is statute-barred, because Gippsreal was aware of the cause of action at least six years before the proceeding was commenced. Then, in a number of different ways, Leonard Legal contends that Gippsreal and others, including Mr Rickard, were responsible for the loss and damage. It contends that Gippsreal was guilty of contributory negligence, and sets out the relevant facts in the particulars to paragraph 78, as follows:
PARTICULARS OF CONTRIBUTORY NEGLIGENCE
(i)Advancing the loans to Strategic for the purpose of enabling Strategic to purchase land (which was in each case undeveloped rural land and described in the loan applications as "vacant land") in circumstances where the contract price payable by Strategic for such land was in each instance significantly less than the amount advanced, namely:
Loan Amount Advanced Contract Price First Bega Loan $1,105,000 $850,000 Glen Innes Loan $1,425,000 $341,000 Temora Loan $1,380,000 $280,000 Second Bega Loan $2,950,000 (refiance) $150,000 (Lot C only) (ii) Advancing the loans to Strategic for the acquisition of rural land in circumstances where each relevant loan application, which provided a space for the insertion of the purchase price of such rural land, was left blank;
(iii) Prior to making a relevant advance for the purpose of enabling Strategic to purchase land, failing to obtain a copy of each contract of sale of land by which Strategic had agreed to purchase such land.
(iv) Advancing approximately $2.5 million to Strategic in excess of the requirements to settle the contracts of sale of land in circumstances where:
1. Gippsreal only took first ranking mortgage security only over the land to be purchased;
2. Strategic was a recently incorporated company with minimal share capital (as alleged at particular (8) under paragraph 7 of the SOC);
3. the principal of Strategic, Filmer, disclosed in the loan applications to Gippsreal that:
a.he or his spouse had previously been declared bankrupt or had their estate assigned for the benefit of creditors;
b. he, or his spouse, had been shareholders or officers of a company of which a manager, receiver and/or liquidator had been appointed;
c. there was an unsatisfied judgment against him or his spouse or a company of which he or his spouse are or were a shareholder or officer;
4. Gippsreal sought to achieve an LVR of between about 60% and 65%.
(v) Failing to investigate how Strategic intended to expend the sum of approximately $2.5 million which was advanced to Strategic in excess of the requirements to settle the contracts of sale of land.
(vi) Failing to inquire of Strategic how it intended to fund the development of the land which it was purchasing.
(vii) Failing to have regard to the valuations which it obtained from Langshaw Valuations Pty Ltd and the matters disclosed therein prior to making the relevant advances which disclosed, inter alia, the following:
Date Property Matter Disclosed 14/09/06
First Bega Loan
The valuation disclosed that the $1.7 million valuation rested on a calculation of the net present value of the land assuming the land was able to be developed into a senior living facility comprising 57 retirement villages and a 12 residential lot subdivision.
15/06/07
Second Bega Loan
The valuation disclosed that the $6,050,000 valuation assumed that development consent had been obtained for the development of 102 independent living units, a 40 bed hostel and a 50 bed nursing home. No such approval had been given at that time.
6/12/06
First Glen Innes Loan
The valuation disclosed that the $2,335,000 valuation assumed that development consent had been obtained for the development of 75 independent living units and a six lot residential subdivision. No such approval had been given at that time.
4/04/07
First Temora Loan
The valuation disclosed that the $2,300,000 valuation assumed that development consent had been obtained for the development of 80 independent living units. No such approval had been given at that time.
6/11/07
First Temora Loan
The valuation disclosed that the $3 million valuation assumed that development consent had been obtained for the development of 73 independent living units and a 40 hostel unit. No such approval had been given at that time.
16/11/07
Glen Innes and Temora Loan
The two alternative valuations, namely $2,950,000 and $2,375,000, assumed that development consent had been obtained for the development either 75 independent living units and a 36 hostel unit or 80 independent living units. No such approval had been given at that time.
(viii) Advancing the loans before having received the searches which it asked Leonard Legal to provide to it.
(ix) Advancing the loans before having accurately followed its own procedures as set out in its document titled "Loan Checklist/Audit" (relevant to the First Bega Loan) or set out in its document titled "Loan Checklist" in respect of each other loan;
(x) Advancing funds for speculative development purposes, being investments not suitable for retail clients.
(xi) Failing to investigate the purpose of each loan adequately or at all.
(xii) Failing to undertake appropriate credit checks on Filmer.
(xiii) Failing to investigate Strategic's and Filmer's previous experience with these types of specialised developments.
(xiv) Making the Second Bega Loan and the Glen Innes & Temora Loan in circumstances where Gippsreal had, by that time, received the Bega s.603 certificate, which cast significant doubt on the veracity of the Langshaw valuations.
(xv) Failing to adopt appropriate lending practices, including by failing to require that:
a. the income of Strategic be verified;
b. the assets and liabilities of Strategic be verified;
c. the creditworthiness of Strategic be verified;
d. the financial records of Strategic be scrutinised;
e. the capacity of Strategic to repay the loans be verified.
(xvi)Failing to comply with its Compliance Plan and Compliance Manual (Compliance Plan) in making the loans to Strategic (which also amounted to a contravention of section 601FC(1)(h) of the Corporations Act 2001), including by failing to do each of the following:
a. performing a detailed feasibility analysis on the development proposed by Strategic;
b. assessing whether the loan to value ratio was appropriate to the risk associated with extending loans to Strategic;
c. obtaining from Strategic detailed information regarding its proposed developments;
d. ensuring that the amount extended to Strategic never exceeded the value of the secured property "as is" at any given time;
e. extending monies under the loans only as against works completed;
f. withholding sufficient monies to complete the works, to account for the eventuality that Strategic defaults;
(xvii) in its capacity as responsible entity of the relevant sub-schemes, failing to exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity's position (by doing or failing to do the matters set out in these particulars), in contravention of section 601FC(1)(b) of the Corporations Act 2001:
It further alleges that, under the Wrongs Act 1958 (Vic), Oakleys Legal and Mr Rickard were concurrent wrongdoers, so that any liability of Leonard Legal should be reduced in proportion to the liability of the other wrongdoers. In respect of Oakleys Legal, Leonard Legal alleges:
84. At all material times Oakleys engaged in legal practice in Victoria.
85. At all relevant times Gippsreal retained Oakleys to advise Gippsreal generally in relation to legal matters concerning its mortgage lending business (the general retainer).
PARTICULARS
The general retainer is to be implied from each of the five letters of instruction from Oakleys to Leonard Legal in relation to the loans the subject of this proceeding. Further particulars may be provided following discovery.
86. In the premises, Oakleys:
(a)was under a contractual obligation to Gippsreal to exercise reasonable care and diligence in performing the general retainer (Contractual Duty); and
(b) owed a duty of care to Gippsreal to exercise reasonable care and diligence in acting on behalf of Gippsreal in respect of its mortgage lending business (Duty of Care).
87. In breach of:
(a) the Contractual Duty, Oakleys did not exercise reasonable care and diligence in performing the general retainer;
(b) further or alternatively, Oakleys did not exercise reasonable care and diligence in acting on behalf of Gippsreal in respect of its mortgage lending business.
PARTICULARS
(i)Where the loan was intended to be used by Strategic to acquire land (which was in each case undeveloped rural land), failing to advise Gippsreal not to advance to Strategic an amount greater than permitted by the required LVR, based on the contract price by which Strategic agreed to acquire the relevant land.
(ii) Where the loan was intended to be used by Strategic to acquire land, failing to advise Gippsreal to obtain a copy of the relevant contract of sale, which would have disclosed the following:
Loan Contract Price First Bega Loan $850,000 Glen Innes Loan $341,000 Temora Loan $280,000 Second Bega Loan $150,000 (Lot C only) (iii) Failing to advise Gippsreal to investigate how Strategic intended to fund the development of the land which it was purchasing.
(iv) Failing to advise Gippsreal of the matters disclosed in the valuations (being the valuations which Oakleys had in its possession and which it provided to Leonard Legal), namely:
1. the matters alleged at paragraphs 9(a), 23(a), 37(a), 51(a), 65(a) above;
2. the matters alleged at paragraph (vii) of the particulars to paragraph 78 above.
(v) Failing to advise Gippsreal not to advance the funds to Strategic until Oakleys had received the searches which it asked Leonard Legal to provide to it.
(vi) Failing to advise Gippsreal that the making of advances to Strategic was not in compliance with Gippsreal's Compliance Plan, in that Gippsreal had failed to do each of the following:
1. perform a detailed feasibility analysis on the development proposed by Strategic;
2. assess whether the loan to value ratio was appropriate to the risk associated with extending loans to Strategic;
3. obtain from Strategic detailed information regarding its proposed developments;
4. ensure that the amount extended to Strategic never exceeded the value of the secured property "as is" at any given time;
5. extend monies under the loans only as against works completed; and
6. withhold sufficient monies to complete the works, to account for the eventuality that Strategic defaults.
(vii) Failing to advise Gippsreal:
1. to review the valuations which had been obtained from Langshaw for the security properties;
2. of matters that might cause doubt on:
a. the correctness of any of the Langshaw valuations; or
b. the uses to which any of the security properties might be put.
In respect of Mr Rickard, Leonard Legal alleges:
88. At all relevant times, Trevor John Rickard (Rickard) was:
(a) a director and officer of Gippsreal;
(b) the managing director of Gippsreal;
(c) the compliance officer of Gippsreal.
89. Pursuant to section 601FD(1) of the Corporations Act 2001, Rickard, as officer of Gippsreal, was required to:
(a) exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer's position;
(b) take all steps that a reasonable person would take, if they were in the officer's position, to ensure that Gippsreal complies with:
(i) the Corporations Act 2001;
(ii) the Constitution; and
(iii) the Compliance Plan.
90. In breach of his obligations under section 601FD(1) of the Corporations Act 2001, Rickard failed to:
(a) exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer's position;
(b) take all steps that a reasonable person would take, if they were in the officer's position, to ensure that Gippsreal complied with:
(i) the Corporations Act 2001;
(ii) the Constitution; and
(iii) the Compliance Plan.
PARTICULARS
At all relevant times, Rickard was the controlling mind of Gippsreal. Leonard Legal refers to and repeats the particulars to paragraph 78 above.
The principles applicable to an application for an injunction against a solicitor acting are not in dispute. They are well set out in the written submissions of Leonard Legal, filed 27 October 2017, which I adopt as follows:
62The court has inherent jurisdiction to restrain solicitors from acting as an incident of its inherent jurisdiction over its officers and to control its process in aid of the administration of justice.
63 The jurisdiction permits the court to ensure that it has the assistance of independent lawyers exercising independent judgment in litigation and that the administration of justice is not brought into disrepute by the conduct of solicitors or counsel.
64 The test to be applied is whether a fair minded, reasonably informed member of the public (a concept substantially equivalent to the reasonably informed lay observer used in the context of applications for disqualification of judicial officers for apprehended bias) would conclude that the proper administration of justice requires that a legal practitioner should be prevented from acting, in order to protect the integrity of the judicial process and the due administration of justice, including the appearance of justice.
65 The court's inherent jurisdiction to supervise the conduct of counsel in court includes the ability to intervene when counsel or solicitors appear in a matter in which they have an actual or potential conflict of interest, or where, by reason of their relationship with the client, their professional independence might be doubted. This is because the integrity of the judicial process is undermined if the lawyers do not have the independence and objectivity which they are presumed to have, and which their professional responsibilities and obligations to the court require.
66 Thus, the interests of justice will require the lawyer to be restrained from continuing to act where the lawyer has a personal stake in the outcome of the proceedings or in their conduct, beyond the recovery of proper fees for acting.
67 The most obvious case is a situation where the solicitor has some direct pecuniary interest in the outcome. It might seem to an independent observer that a solicitor, notwithstanding his best efforts to be impartial and objective, might adjust his evidence in some way to procure a result that suited his interest.
68 The same principles apply where the solicitor has a personal or reputational interest in the outcome. Such an interest arises where the solicitor's conduct or integrity may be at stake in the proceeding, or where the solicitor is likely to be called as a witness in relation to a contentious matter in the proceeding so that the solicitor's credibility may be at stake.
69 It is generally unwise for a solicitor who is likely to be a material witness to continue acting either personally or through his or her firm. The reason for this is that the lawyer would be in a position of apparent conflict between the duty to advance the interests of the client and the duty to the court to give impartial evidence.
70 Rule 27 of the Legal Profession Uniform Law Australian Solicitors' Conduct Rules 2015 (Vic) (Conduct Rules) reinforces these principles. It provides:
Solicitor as material witness in client's case
27.1 In a case in which it is known, or becomes apparent, that a solicitor will be required to give evidence material to the determination of contested issues before the court, the solicitor may not appear as advocate for the client in the hearing.
27.2 In a case in which it is known, or becomes apparent, that a solicitor will be required to give evidence material to the determination of contested issues before the court the solicitor, an associate of the solicitor or a law practice of which the solicitor is a member may act or continue to act for the client unless doing so would prejudice the administration of justice.
71 The jurisdiction to restrain a solicitor is to be exercised with caution. Due weight should be given to the public interest in a litigant not being deprived of the lawyer of his or her choice without due cause. The timing of the application may be relevant, in that the cost, inconvenience or impracticality of requiring lawyers to cease to act may provide a reason for refusing to grant relief.
[Footnotes omitted.]
As the majority shareholder in Gippsreal, Mr Rickard would benefit if the claims are successful. Gippsreal charges investors for managing the investments. Those charges are substantial. In his affidavit, Mr Corns said that fees paid to Gippsreal for managing the loans in question amounted to about $650,000. The claim of Gippsreal includes the loss of such fees on other loans which would have been arranged if Gippsreal had not advanced funds to Strategic. In his affidavit sworn on 10 November 2017, Mr Rickard disputes the amounts earned, but says the proper figure was around $295,000. In either case, the amount was substantial.
Oakleys Legal would benefit from a successful claim by payment of legal costs by Gippsreal. Oakleys Legal has agreed to payment of its costs from any award made in favour of Gippsreal. Mr Rickard’s professional and personal reputation is also under challenge in the proceeding. Leonard Legal alleges that Gippsreal failed to take reasonable care in lending money to Strategic. Mr Rickard is the managing director of Gippsreal, and he directed the lending transactions. Leonard Legal also alleges that Oakleys Legal was retained by Gippsreal to advise in relation to the transactions, and was negligent in the performance of that role. As Mr Rickard is Oakleys Legal, that allegation is a direct challenge to his professional competence. Gippsreal is a locally based Gippsland business, which depends on the trust and confidence of mum-and-dad investors in the area. The claims against Gippsreal and Mr Rickard will rightly be seen as going to the heart of Mr Rickard’s business competence, if not his integrity. Findings against him, in the context of a business reliant on trust, are likely to be very damaging to his business and financial interests. These matters were not disputed by Gippsreal. The submission filed on 30 October 2017 on its behalf stated:
5. Gippsreal accepts that Trevor Rickard is likely to be a material witness in the proceeding. He is both the managing director of Gippsreal, and the principal (and only solicitor) of Oakleys Legal, which acts for Gippsreal in this proceeding. It is also the case that in the event of a success by Gippsreal at trial, Gippsreal’s legal costs of the proceeding will be paid to Oakleys Legal (i.e. Mr Rickard as its principal) from recoveries, for the benefit of Mr Rickard. In the event of a substantial success at trial, then Gippsreal expects that Mr Rickard will indirectly benefit from such a result, after the rights of investors to repayment of their principal and interest, in accordance with Gippsreal’s Constitution, have been made (see Mr Rickard’s affidavit at paragraphs 21 to 27).
6. Gippsreal accepts that it is generally undesirable for a solicitor to act for a party to litigation where the solicitor will be a material witness in the case or has a pecuniary interest in the case which is greater than his entitlement to legal costs, and where the solicitor’s personal integrity, evidence or credit may be under attack, because of the solicitor’s personal interest potentially conflicting with the solicitor’s duty to the Court or to the client. (It is worth observing however that fee uplift agreements, based on a successful outcome to a proceeding, allowing for recovery of not only legal fees on a “no win, no fee” basis, but a percentage over and above usual fees, are permitted by statute in Victoria and elsewhere in Australia; so it cannot be said that the existence of a pecuniary benefit to lawyers being derived from successful litigation is as discouraged – as a matter of public policy - as may once have been the case.)
7. Gippsreal accepts that Mr Rickard will be a material witness, by reference to some of the defences raised by Leonard Legal in the proceeding, in particular the allegation of contributory negligence on the part of Gippsreal, and the allegations that Oakleys Legal and Mr Rickard personally are “concurrent wrongdoers” with respect to the proportionate liability defences raised by Leonard Legal to Gippsreal’s claim. However, Gippsreal (and Mr Rickard) did not at the commencement of the proceeding and still do not consider that there is likely to be any significant challenge to Mr Rickard’s evidence in respect of the claim against Leonard Legal, which is principally a “documents” case – each of the 5 retainers of Leonard Legal by Gippsreal being in writing and implied, and the allegations of negligence and misleading conduct being focussed upon Leonard Legal’s conduct in performing the retainers.
Gippsreal, however, advanced three reasons why those considerations discussed above should not govern the outcome. First, Leonard Legal knew, when it filed its defence on 30 May 2016, that Mr Rickard was the managing director of Gippsreal and the principal of Oakleys Legal. It knew that Mr Rickard would be a material witness. Yet, despite that knowledge, it engaged in the preparation of the case for trial, by seeking discovery, issuing subpoenas, amending its defence, and twice attending day-long mediations. It raised the issue of Mr Rickard acting as solicitor for Gippsreal for the first time on 12 July 2017, over 15 months after the proceeding commenced, and provided no explanation for the delay. That consideration is not a reason to refuse the injunction. The continuing role of Mr Rickard goes to the administration of justice. This was a clear case. It should not have been necessary for Leonard Legal to bring the application. Mr Rickard should not have acted from the beginning: See Brown v Guss (No 2) [2015] VSC 57 at [152] to [154].
Second, in an affidavit sworn on 10 October 2017, Mr Rickard expressed the view that the proceeding may be stifled if he was removed. He said:
82. In conducting these proceedings as solicitors for Gippsreal, Oakleys has agreed (through me) not to require payment of legal costs by Gippsreal (other than disbursements including counsel's fees) until the conclusion of the proceeding, and not to charge fees other than from amounts recovered in the proceeding. This agreement is not in writing.
83. In view of the fact that there are 200 individual investors involved in the Second Bega Loan and the Glen Innes & Temora Loan who have contributed disparate amounts ranging from $1,000 to $350,000 to these particular loans, I believe that it is unlikely that this proceeding would be able to be continued, if Oakleys was ordered to cease to act on behalf of Gippsreal. This is because I do not believe that Gippsreal would easily find another solicitor or firm of solicitors that would be acting on the deferred payment and "no win, no fee" basis that Oakleys is acting on, and because Gippsreal would not be required to, and would not, fund the proceeding from its own monies (noting that the net proceeds of the $5 million settlement of the Langshaw proceeding was distributed entirely to investors some years ago). Further, based on my knowledge of the investors and experience in dealing with them, I consider it would be difficult, if not impossible, for Gippsreal or any other person to organize those individual investors and arrange a method for them to contribute funds to a pool of funds for the payment of upfront legal costs in respect of the conduct of the proceeding.
84. Gippsreal and Oakleys are effectively funding these proceedings for the benefit of the sub-scheme members at no upfront cost to members.
Mr Rickard did not explain why he believed that no other legal firm would act for Gippsreal on a no-win-no-fee basis. If the proceeding has reasonable prospects of success, there is no obvious reason why another solicitor would not agree to act, particularly as much of the preparation has been done. Mr Rickard said that Gippsreal would not fund the case further, but again considering the preparation already done, he may have sufficient interest in the outcome to fund the case himself.
Third, Mr Rickard said that there would be additional costs of $30,000 - $40,000 incurred in briefing a new solicitor. That is, however, an unfortunate consequence of Mr Rickard failing to appreciate that it was inappropriate for him to act in the proceeding. It is not an argument against removing him.
In the result, a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that Mr Rickard should be prevented from acting, in order to protect the integrity of the judicial process and the due administration of justice, including the appearance of justice.
I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North. Associate:
Dated: 28 November 2017
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