Hannan v Zindilis
[2016] VSC 723
•30 November 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY & PROBATE LIST
S CI 2016 03297
| NEIL FRANCIS HANNAN (as manager of Zindilis Lawyers) | Plaintiff |
| v | |
| GEORGE ZINDILIS | Defendant |
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JUDGE: | McMillan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | Plaintiff’s written submissions dated 1 and 8 September 2016, further submissions dated 4 November 2016. Written submissions dated 4 November 2016 by the non-party, the Victorian Legal Services Board, pursuant to the leave of the Court granted 27 October 2016. |
DATE OF JUDGMENT: | 30 November 2016 |
CASE MAY BE CITED AS: | Hannan v Zindilis |
MEDIUM NEUTRAL CITATION: | [2016] VSC 723 |
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TRUSTS — Where plaintiff appointed manager to defendant’s legal practice — Where shortfall in funds held in legal practice’s trust accounts — Where manager seeks directions to distribute remaining funds to clients — Which method of distribution most appropriate in the circumstances — Pari passu method of distribution applied — Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337 — Australian Securities and Investments Commission v Letten (No 7) (2010) 190 FCR 59 — Legal Profession Uniform Law (Victoria), s 334
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P J Pascoe of counsel and Ms N L Papaleo of counsel | Thomson Geer |
| For the non-party, the Victorian Legal Services Board | Mr E Moran PSM QC and Ms L H Kirwan of counsel | Victorian Legal Services Board and Commissioner |
HER HONOUR:
Introduction
On 6 May 2016, the Victorian Legal Services Board (‘the Board’) resolved to appoint the plaintiff as manager of the legal practices operated variously as Zindilis Lawyers, Zindilis Lawyers Footscray, AEMG Pty Ltd and/or Paul Shaba and Associates Lawyers (‘the law practice’) as a result of issues with the management of the law practice and, in particular, certain dealings with trust money. An instrument of appointment was executed on 9 May 2016, pursuant to s 334 of the Legal Profession Uniform Law (Victoria) (‘the Uniform Law’).
The Court has been provided with an outline of the statutory scheme and the relevant provisions of the Uniform Law relating to external intervention and the obligations of legal practitioners in respect of trust money. Consistent with the obligations of a manager of a law practice, the plaintiff has provided regular written reports to the Board relating to the management of the law practice and advised, inter alia, that:
(a) the law practice had previously operated a branch office at Box Hill, which had been closed and the files and other documents transferred to the law practice’s office at Footscray, but no provision had been made for the proper closure of the trust account of the Box Hill office;
(b) he had updated records of the Box Hill account with the assistance of an external consultant and found it was deficient with several transactions conducted on the Box Hill account not properly recorded in the law practice’s records; and
(c) the defendant, Mr Zindilis, had made representations to the effect that he would restore the deficiency within one to two months using the proceeds from the sale of a property.
Mr Zindilis has not restored the deficiency in the Box Hill account nor has it been restored by any other means. The maximum potential trust shortfall is $50,144.78.[1] The main component of the shortfall results from a payment of $39,000 by counter cheque obtained and signed by Mr Zindilis at the National Australia Bank at Footscray and drawn in favour of a Mr Ngan Nguyen. The plaintiff’s enquiries revealed that Mr Nguyen was never a client of the law practice and a trust account was not and ought not have been opened for him. The plaintiff continues to make further enquiries of the payee bank into which this cheque was deposited.
[1]Counsel for the plaintiff calculated the sum to be $50,144.78 as follows: $1,451.15 being negative trial balances, plus $48,643.63 being unidentified payments, plus $50 held by the firm in respect of file numbered BH121617.
According to the calculations of the plaintiff, a total of $368,071.94 should be held on trust for clients of the Box Hill office. There are inadequate funds to enable the plaintiff to return the entirety of the money that ought to be held for each of them. Taking into account the maximum potential trust shortfall of $50,144.78, the financial effect of the directions and orders sought by the plaintiff is that, save for a de minimis exception for clients of the Box Hill office with a trust balance of less than $50, all other clients would receive 86.4 per cent each of the balance attributable to them in the trust trial balance.
Since the plaintiff’s appointment as manager, the trust account of the Box Hill office remains frozen. Save for the finalisation of the Box Hill account, the plaintiff has effectively wound up the affairs of the law practice. The plaintiff wishes to facilitate the lawful winding up of the Box Hill account and disburse the funds held in the Box Hill account in an expeditious and cost effective manner.
Application
By originating motion filed 17 August 2016, the plaintiff sought orders pursuant to s 63 of the Trustee Act 1958 and Order 52.02 (sic)[2] of the Supreme Court (General Civil Procedure) Rules 2015 (‘the Rules’) that, inter alia:
… it is appropriate for the plaintiff to distribute money held in the trust account of Zindilis Lawyers (Box Hill) upon the following basis:
(a)the sum of $166.85 be distributed to the clients set out in paragraph 46 of the affidavit of [the plaintiff] sworn 16 August 2016;
(b)the balance of funds held be distributed to each client recorded as having a positive trust ledger balance in exhibit ‘NFH3’, other than those clients set out in paragraph 46 of the affidavit of [the plaintiff] sworn 16 August 2016 on a pari passu basis based on the balances recorded in exhibit ‘NFH3’.
[2]The correct reference should be to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015.
The Court questioned the applicability of orders being sought pursuant to s 63 of the Trustee Act. No written reasons for judgment where s 63 had been the basis of orders for distribution of a mixed trust fund on a pari passu basis as sought by the plaintiff could be provided to the Court. The Court was informed that s 63 had been relied upon on two occasions in this Court to authorise distributions of trust funds on a pari passu basis: the first occasion by the plaintiff as manager of another legal practice and the second by a different practitioner as receiver of another legal practice.[3] In both proceedings, written reasons for the decision were not sought and none were given.
[3]The first occasion was in proceeding Hannan v Kotsifas with orders made 18 December 2015. The second was in a proceeding brought by Mr Alan Alpass as receiver of the law practice, Hardys, with orders made 14 June 2016: Alpass v O’Brien.
In order to finalise the winding up of the law practice and in the interests of minimising costs, the plaintiff confined his application to directions as sought in a proposed amended originating motion, rather than proceed with his application pursuant to s 63 of the Trustee Act. The Board endorsed the plaintiff’s approach.
The significance of seeking directions from the Court instead of orders is set out in Re Magarey Farlam Lawyers Trust Accounts (No 2)[4] in circumstances where a supervisor of the trust accounts of the legal firm of Magarey Farlam sought directions as to how she should distribute the remaining trust moneys after defalcations had occurred and where there were three competing claimants. Debelle J explained that where directions are sought, the party applying for them may act in accordance with directions given and not incur personal liability to the parties in whose interests they are acting, provided full and fair disclosure is made to the Court. In giving directions, the Court does not as a general rule enable the determination of rights as between parties. Where it is necessary or desirable to obtain a final determination of the rights of parties, there must be a proceeding inter partes.[5] The Court will not generally permit a proceeding commenced as an application for directions to be changed into a proceeding for determining substantive rights unless it is satisfied that those affected consent to that course or will not suffer injustice in consequence of the change in the nature of the proceedings.[6] As it happened in Magarey Farlam (No 2), the supervisor and the three competing claimants did seek orders to bind all the parties to the proceeding and representative orders were made so that those who were not parties to the proceeding were also bound. This meant that the initial application for directions could be changed into a proceeding for the determination of substantive rights.
[4]Re Magarey Farlam Lawyers Trust Accounts (No 2) (2006) 96 SASR 323 (‘Magarey Farlam (No 2)’).
[5]Ibid 330–1 [27].
[6]Ibid 331 [29].
Reverting to the circumstances in this proceeding, the clients of the Box Hill practice were advised of the appointment of the plaintiff as manager and were notified of their trust balance held by the practice by letter dated 30 June 2016. No client of the Box Hill practice sought to be heard on the application at the first directions hearing on 2 September 2016, although a person describing himself as an interested party did address the Court briefly, but it was soon clear that he did not have an interest in the proceeding.
A client of the law practice, Middle Mist Pty Ltd, informed the plaintiff that it was to settle the sale of a property to a purchaser, Baker and O. S. Services Pty Ltd, in the near future. On 21 October 2016, the solicitor for the purchaser, Mr Michael Witt of Findlay Arthur Phillips, informed the Court that his client is the purchaser under an off the plan contract of sale due to settle approximately three to four weeks from 21 October, and in respect of which the deposit of $180,000 is held in the trust account. Mr Witt reserved his client’s right to be heard on any matters arising out of the additional written submissions made by the plaintiff or any altered circumstances.
Mr Witt was provided with the written submissions of the plaintiff and those of the Board so that his client could make a determination about whether or not it wished to be heard.
Leave was granted to the plaintiff to file an amended originating motion reflecting the proposed amendments to seek directions, rather than orders under s 63 of the Trustee Act. The plaintiff sought that the orders in the amended application be made urgently, and that written reasons for the decision be provided later. The Board supported this approach.
Preliminary matter
The Court questioned whether the manager should accept the representations made by Mr Zindilis that he would restore the shortfall of the trust account at the Box Hill office before proceeding further with the directions. The plaintiff deposed to these issues as follows:
… I was advised by Mr Zindilis that he could not pay all the outstanding creditors including the shortfall in the Box Hill Trust account. Mr Zindilis also advised me that as a result of his discussions with the Legal Service Board that he would not have a practising certificate post 30 June 2016. As a result Mr Zindilis agreed that the most appropriate course was to sell the practice with settlement to occur on 30 June 2016.
…
There is [sic] insufficient funds held in the Box Hill trust account for the legal practice to offset this potential shortfall. I have been advised by Mr Zindilis that after taking account of his other creditors he does not have the capacity to top up this trust account.
The plaintiff did not refer to any evidence of the quantum of outstanding creditors. In respect of negative balances in trust ledgers of the Glenroy practice, the plaintiff deposed that:
On 22 July 2016 after receiving confirmation from Mr George Zindilis that the amount held in the firm's name for Zedlaw Footscray and Glenroy were the legal practice’s money and represented money previously contributed to top up the trust account.
The Court’s question was answered by reference to the relevant legislation which provides that the plaintiff, as manager, lacks the power to take recovery action against Mr Zindilis. That power lies within the province of a receiver appointed pursuant to s 341 of the Uniform Law,[7] alternatively, by the Board exercising powers of subrogation after payment from the fidelity fund of claims made by clients of the law practice.[8]
[7] A receiver's powers include a power to require documents or information pursuant to s 348 and a power pursuant to s 349 to make application to the designated tribunal for an order directed against an associate of a law practice to appear before it for examination on oath in relation to regulated property of the law practice, which includes, inter alia, trust money.
[8] The Board is subrogated to the rights and remedies of any clients of a law practice against ‘any person in relation to the default to which the claim relates’ pursuant to s 246 of the Uniform Law and s 14 of the Legal Profession Uniform Law Application Act 2014.
The Board noted that wherever a trust account deficiency is detected, there is a prima facie argument for the appointment of a receiver, if only because a receiver may be able to seek the Court’s direction, pursuant to s 359 of the Uniform Law. The Board noted that a receiver’s role is a more serious form of external intervention compared to that of a manager, as there is an underlying premise with the appointment of a receiver that the law practice ought be wound up and terminated. The Board takes the view, however, that an application for a receivership is often undesirable and does not address the often pressing need to return trust money to clients.
The appointment of a receiver in this case is unlikely to affect the need for the Court’s direction to distribute the funds in the Box Hill account. The plaintiff has accepted the ‘top up’ by Mr Zindilis in respect of the accounts at the Footscray and Glenroy offices and sees the need to act quickly in the circumstances, particularly with the opportunity cost to the clients, including the fact that the Box Hill account is not an interest bearing account and where one of the clients owes $3,520 to counsel. In making the decision to seek directions, I am satisfied that the plaintiff as manager is making a commercial judgment that will facilitate the expeditious winding up of the law practice in a cost effective manner.
Standing of the plaintiff
A manager appointed under the Uniform Law is empowered to carry on the law practice to which he or she is appointed and to do all things the legal practice or a legal practitioner associate of the practice may do, including dealing with trust money or trust property and winding up the affairs of the law practice.[9] Generally speaking, a manager is required to deal with trust money of a law practice in the same way as a law practice is required to deal with trust money.[10]
[9]Uniform Law, s 336.
[10]Uniform Law, s 33, save that there is a need to deal separately with post appointment records and accounts or any records and accounts of any other practice in respect of which he has been appointed as an external intervener.
A legal practitioner stands in a fiduciary relationship to his or her client.[11] Money in a legal practitioner’s client’s account is considered to be money held on trust for the client.[12] In TargetHoldings Ltd v Redferns, Lord Browne-Wilkinson stated:
I do not intend to cast any doubt on the fact that moneys held by solicitors on client account are trust moneys or that the basic equitable principles apply to any breach of such trust by solicitors … the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach.[13]
[11]Nocton v Lord Ashburton [1914] AC 932; Boardman v Phipps [1967] 2 AC 46.
[12]Re a Solicitor [1952] Ch 328, 333 (Roxburgh J); Johns v Law Society of New South Wales [1982] 2 NSWLR 1, 21 (Hope JA); TargetHoldings Ltd v Redferns [1996] AC 421, 436 (Lord Browne-Wilkinson); Keefe v Law Society of New South Wales (1998) 44 NSWLR 451, 460 (Priestley JA); Twinsectra Ltd v Yardley [2002] 2 AC 164, 168 [12] (Lord Hoffmann).
[13]TargetHoldings Ltd v Redferns [1996] AC 421, 436.
The plaintiff as manager of the law practice, including its Box Hill office, is a trustee of the moneys held in the clients’ account of the law practice. A client of a law practice has a beneficial interest in money paid into the mixed fund trust account of the law practice on his or her behalf, which is supported by a charge or lien in the client’s favour.[14]
[14]Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337, 371 [117] (Debelle J) (‘Magarey Farlam (No 3)’).
As trustee of the moneys of clients of the law practice, pursuant to r 54.02 of the Rules, the plaintiff has standing to seek directions as well as to obtain judicial advice from the Court. Although unnecessary to decide, the Board submitted that a manager has standing to apply to the Court by the combined operation of s 337(2) and s 138(1)(b) and (2) of the Uniform Law.
The different methods for the allocation of funds
Where trust funds have been mixed, the courts have traditionally applied one of two approaches in allocating funds, although there is no principle of universal application. The two main approaches are the pari passu or pro rata approach and the ’first in, first out’ rule, otherwise known as the rule in Clayton’s case.[15] Other approaches are the ‘lowest intermediate balance rule’, the ‘North American model’, otherwise known as the ‘rolling charge rule’, and ‘the distribution according to intention’ rule. A helpful description of the various approaches is summarised by Gordon J in the Federal Court decision of Australian Securities and Investments Commission v Letten (No 7).[16]
[15]Devaynes v Noble (1816) 1 Mer 572; 35 ER 781 (‘Clayton’s case’).
[16]Australian Securities and Investments Commission v Letten (No 7) (2010) 190 FCR 59, 119–22 (‘Letten’). Her Honour was dealing with distributions as a result of a failed unregistered investment scheme.
The pari passu approach is in accordance with the general rule that the beneficiaries of the several trusts have an interest in the mixed fund in proportion to their contribution to it. This approach suits cases where there are a large number of contributors where the whole body bears the loss rather than a particular individual.
The rule in Clayton’s case provides that the beneficiaries do not share proportionately but may be subject to a ‘first in, first out’ rule. This approach allocates the first payment out of a fund to the first payment made into it. Recent Australian authorities have declined to apply Clayton’s case to allocate entitlements where beneficiaries’ moneys have been deposited into a mixed trust fund, with the cases preferring the application of the pari passu rule.[17]
[17]Australian Securities and Investments Commission v Nelson (2003) 44 ACSR 719, 723 [24] (Austin J); Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361, 416–7 [169] (Campbell J); Magarey Farlam (No 3) (2007) 96 SASR 337, 376–7 (Debelle J).
The ‘lowest intermediate balance rule’ is based on the premise that tracing rights are predicated on the model of property rights. The rule provides that tracing through a mixed fund cannot occur for any sum that exceeds the lowest intermediate balance in the fund during the interval between the original contribution and the time when a claim with respect to that contribution is being made against the fund.[18] The lowest intermediate balance rule has been criticised for its complexity and difficulty to apply in situations involving more than just a small number of competing beneficiaries. Indeed, the mechanics of the rule appear better suited to resolving competition between beneficiaries and a defaulting trustee, rather than the claims of competing innocent beneficiaries.[19]
[18]James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62.
[19]Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353, 365 [26] (Blair J)
The ‘North American model’ or ‘rolling charge rule’ is where a withdrawal from the mixed fund is allocated in the same proportions as the different beneficiaries bear to each other at the moment before the withdrawal is made. It has been described as a slightly modified version of the lowest intermediate balance rule.[20] It has not found favour in Australia.[21]
[20]Ibid 364 [25] (Blair J).
[21]The ‘North American model’ was considered, but not applied, by McLure J in Re Global Finance Group Pty Ltd (in liq) (supervisor appointed); Ex parte Read (2002) 26 WAR 385, 408–10, 430–1.
The ‘distribution according to intention’ rule provides that the balance remaining in the mixed fund is distributed among the beneficiaries pro rata in proportion to the contribution of each beneficiary. It operates according to the presumed intention in Clayton’s case with the presumption rebutted where the trustee of a mixed fund has removed his own money from the fund and applied it for his own purposes. If this occurs, the trustee is presumed to have acted honestly, withdrawing money that was his own, not that of the beneficiary. That presumption may be rebutted by proof of a contrary intention.[22]
[22]Letten (2010) 190 FCR 59, 121 [281] (Gordon J).
In Magarey Farlam (No 3), Debelle J supported a pari passu distribution in cases where moneys have been misappropriated from the trust account but not debited against the ledger of any particular client or clients.[23] However, he declined to apply the pari passu approach in the circumstances because, in the major part, the Court could rely on the trust account records and the trust account ledgers of the firm. This meant it was possible to conclude that the defalcations were limited to 42 clients whose ledgers were debited with the misappropriated monies and all of the other clients were not affected by the misappropriations. The result was to leave the loss where it fell rather than be distributed pari passu to the corrected balances of all the clients who had moneys in a trust account as at the relevant time.
[23]Magarey Farlam (No 3) (2007) 96 SASR 337, 373 [123].
Support for the application of the pari passu approach where trust funds have been mixed can also be found in Keefe v Law Society of New South Wales in which the question arose whether the clients entitled to the trust moneys were entitled to the available funds on a pari passu basis or whether the shortfall should be allocated on a first in, first out basis. Priestly JA, with whom Sheller and Powell JJA agreed, referred favourably to the pari passu approach and the academic consideration of the approach as follows:
The point was the subject of academic consideration by D A McConville (1963) 79 LQR 388 in an article entitled “Tracing and the Rule in Clayton's Case”. The author advances powerful arguments for the rateable solution (at 403 and following). The same view is taken in the 6th ed (by Meagher and Gummow) of Jacob's Law of Trusts in Australia (1997) Butterworths, pars 2711 and 2712 at 749–51. At the level of legal precedent, the same view was adopted by Kearney J in Hagan v Waterhouse (1991) 34 NSWLR 308 at 358–9. His decision should, in my opinion, be approved by this Court. (The application of the rateable approach can itself be subject to complication depending on the timing of deposits to and wrongful withdrawals from a trust account in which the funds of different beneficiaries are held, as was pointed out by Learned Hand J in Re Walter J Schmidt & Co.; Ex parte Feverbach 298 F 314 (1923). That does not however detract from the soundness of its application in straightforward situations.)[24]
[24]Keefe v Law Society of New South Wales (1998) 44 NSWLR 451, 460–1.
The plaintiff also referred the Court to two decisions outside Australia, the first being an English decision and the second being a Canadian decision of the Ontario Court of Appeal, both of which involved the issue of the appropriate method to implement for distribution of diminished trust fund balances of solicitors.
The English decision of Ahmed & Co, Biebuyck Solicitors, Dixon & Co & Ors, Re Solicitors Act 1974 highlights the fact that there is no principle of universal application. Although based on a different statutory regime, had Lawrence Collins J found that the Law Society was a private law trustee rather than a statutory trustee, he would have approved the pro rata method of allocating loss in Biebuyck Solicitors and Dixon & Co and the application of the first in, first out rule in Zoi & Co. Importantly, in the context of the matters before his Lordship, he stated as follows:
… Alternatively, the solicitor may have been dishonest and withdrawn money, to which he was not entitled, for himself or others and either posted such withdrawals dishonestly to named clients, or not bothered posting the withdrawals to any ledger.
…
Accordingly, the pro rata approach is, in most cases, likely to be the most appropriate approach, simply because of the very nature of a solicitor’s general client account. In addition, attempting to allocate a deficit on the basis of the "first in first out" rule would also be extremely impracticable.[25]
[25]Ahmed & Co, Biebuyck Solicitors, Dixon & Co & Ors, Re Solicitors Act 1974 [2006] EWHC 480 (Ch) (14 March 2006) [132], [135].
The Canadian decision of Law Society of Upper Canada v Toronto-Dominion Bank is also illustrative of support for the application of the pari passu method over the ‘lowest intermediate balance rule’. The facts taken from the headnote are as follows:
A solicitor misappropriated monies from his trust account at a bank. One day after the last misappropriation, the bank deposited moneys into the account to be used by the solicitor to advance mortgage funds to a client of the bank and the solicitor. Shortly thereafter the account was frozen. It contained insufficient moneys to pay the more than 100 claimants. There had been many misappropriations over a period of time. In proceedings to determine entitlement to the moneys in the account, the bank argued that the other claimants could only claim the amount in the account after the last misappropriation and were unable to claim the moneys the bank deposited later. The bank, thus, argued that the lowest intermediate balance rule should be applied. The rule is that a claimant to a mixed fund cannot assert a proprietary interest in the fund in excess of the smallest balance in the fund during the interval between the original contribution and the time when a claim with respect to that contribution is being made against the fund. The trial judge rejected the application of the rule. The bank appealed.[26]
[26]Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353, 354 (emphasis added).
The appeal was unsuccessful. Blair J delivered the judgement of the Ontario Court of Appeal. His Honour stated what he described as ‘the governing principle’ in the following terms:
In my view, the method which should generally be followed in cases of pro rata sharing as between beneficiaries is not the LIBR [lowest intermediate balance rule] approach but the pari passu ex post facto approach, which has the advantage of relative simplicity. This approach involves taking the claim or contribution of the individual beneficiary to the mixed fund as a percentage of the total contributions of all those with claims against the fund at the time of distribution, and multiplying that factor against the total assets available for distribution, in order to determine the claimant's pro rata share of those remaining funds.
This solution is the type of resolution which has been adopted, on a practical basis, in most cases involving more than two or three competing beneficiaries. It is the solution applied by this Court in Greymac and by the English Court of Appeal in Barlow Clowes International. It is the solution applied in a number of other recent decisions at the superior court level in this Province involving mixed trust funds, and it is the solution applied by Farley J in the case under appeal. But it is not LIBR.
It is, however, the approach which I favour.
My conclusion in this regard is based both upon the “convenience” aspect (or the “workability” aspect, as Morden JA characterised it in Greymac) pertaining to the application of the LIBR principle, and upon my analysis of the concept of a mixed trust account and of its nature and purpose.[27]
Pari passu method of distribution applied
[27]Ibid 367 [34]–[37] (citations omitted).
In this proceeding, the maximum potential shortfall in the law practice’s Box Hill office trust account is approximately $50,144.78. As stated, the principal component of the shortfall in the trust account has arisen as a result of a payment of $39,000 by counter cheque obtained and signed by the defendant at the National Australia Bank, Footscray, and drawn in favour of a non-client, Mr Nguyen. The remainder is made up of payments and transfers of money which the plaintiff has not been able to connect with any particular client account. As a result of the shortfall, the total amount of trust funds held by the Box Hill office is less than the total amount owed to the clients of that office.
Having regard to the various approaches that may be taken to allocate the remaining funds and the relevant authorities, I was satisfied that the pari passu method was the preferable approach as all of the contributors to the fund will bear the loss in proportion to their respective contributions. The pari passu method offers the most equitable distribution of the remaining trust funds given the impossibility of assigning the shortfall to any one or more clients of the law practice. In my view, the circumstances of this case fall squarely within the relevant examples identified by Debelle J in Magarey Farlam (No 3):
There are instances where a pro rata distribution is appropriate. I have already mentioned the case where money has been misappropriated from a trust account but not debited against the ledger of any particular client or clients. In that case, there is no other course available. It is also the only available course where records are not available so that it is impossible to identify the money belonging to each person who has contributed to a common or mixed fund.[28]
[28]Magarey Farlam (No 3) (2007) 96 SASR 337, 373 [123].
Further, in the circumstances, the de minimis quantum of the amounts proposed to be paid in full was a sensible departure from the application of the pari passu method of distribution.
Accordingly, I was satisfied that the plaintiff would be justified in distributing the available trust moneys of the Box Hill office on a pari passu basis as follows:
(a) the sum of $166.85 be distributed to the clients set out in paragraph 46 of the affidavit of Neil Francis Hannan sworn 16 August 2016 (‘the Hannan affidavit’); and
(b) the balance of the funds held be distributed to each client recorded as having a positive trust ledger balance in exhibit ‘NFH3’ of the Hannan affidavit (other than those clients set out in paragraph 46 of the Hannan affidavit) pro rata based on the balances recorded therein.
I also ordered that, by 16 November 2016, the solicitors for the plaintiff serve a copy of the Victorian Legal Services Board and Commissioner’s publication dated July 2015 and titled ‘Making a claim against the Fidelity Fund’ on each client or other party for whom moneys are held in the trust account of the law practice’s Box Hill office.
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