Law Society of Tasmania v Turner
[2001] TASSC 129
•8 November 2001
[2001] TASSC 129
CITATION: Law Society of Tasmania v Turner and Kench [2001] TASSC 129
PARTIES: LAW SOCIETY OF TASMANIA, THE
v
TURNER, John Thomas
KENCH, Grant Edward
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: M165/2000
M166/2000
DELIVERED ON: 8 November 2001
DELIVERED AT: Hobart
HEARING DATES: 14 June 2001
JUDGMENT OF: Crawford J
CATCHWORDS:
Professions and Trades - Lawyers - Misconduct, unfitness and discipline - Disciplinary proceedings - Statutory proceedings - Tasmania - Professional misconduct - Unprofessional conduct - What constitutes - Mortgage scheme - Advancing interest to lenders when borrowers had defaulted - Lending clients' funds to defaulting borrowers - Lenders not kept informed.
Legal Profession Act 1993 (Tas), s56, "professional misconduct" and "unprofessional conduct".
In re a Solicitor [1912] 1 KB 302; Grahame v Attorney-General of Fiji [1936] 2 All ER 992; Myers v Elman [1940] AC 282; Re Thom; ex parte the Prothonotary (1962) 80 WN (NSW) 968; Re Veron; ex parte Law Society of New South Wales (1966) 84 WN (Pt1) (NSW) 136; In re Three Solicitors [1949] VLR 72; Re a Solicitor [1960] VR 617; In re a Legal Practitioner 105/1982; Dickens v Law Society 42/1981, applied.
Pillai v Messiter (No 2) (1989) 16 NSWLR 197; A & B, Legal Practitioners v Disciplinary Tribunal [2001] TASSC 55; Law Society of Tasmania v Walker 56/1988, considered.
Aust Dig Professions and Trades [134]
REPRESENTATION:
Counsel:
Applicant: D J Porter QC
Respondent John Thomas Turner: A J Abbott
Respondent Grant Edward Kench: S P Estcourt QC and S J Cooper
Solicitors:
Applicant: Simmons Wolfhagen
Respondent John Thomas Turner: E R Henry Wherrett & Benjamin
Respondent Grant Edward Kench: Ogilvie McKenna
Judgment Number: [2001] TASSC 129
Number of Paragraphs: 62
Serial No 129/2001
File No M165/2000M166/2000
THE LAW SOCIETY OF TASMANIA v JOHN THOMAS TURNER
THE LAW SOCIETY OF TASMANIA v GRANT EDWARD KENCH
REASONS FOR JUDGMENT CRAWFORD J
8 November 2001
The Society's applications
The Law Society made two applications which, by consent, were heard together. One was against John Thomas Turner and the other against Grant Edward Kench. At all relevant times, they were two of the partners of Piggott Wood & Baker, a firm of legal practitioners.
The applications amount to complaints of professional misconduct under the Legal Profession Act 1993, s80(1). Both seek orders under s76(1), which provides the Court with many choices, such as removal of the respondents' names from the role of legal practitioners, suspension from practising, fine, admonishment and reprimand, dismissal of the complaint, and many others. The applications almost entirely concern the same matters. The application against Mr Turner particularises the allegation of professional misconduct in the following respects:
"Particulars of misconduct
That being one of two partners in charge of the contributory mortgage fund of the firm of Piggott Wood & Baker ('the firm') between 31 December 1994 and 30 October 1998;
(a)the respondent failed to devise or enforce any or any adequate system, guideline or mechanism to identify, take steps to rectify and quarantine from further investment, such of the funds mortgage loans as had defaulted in the sense that due payments had not been made in a satisfactory or timely way;
(b)on the dates, to the loans and in the amount shown in a document entitled 'piggott wood & baker - Substitutions for period from date of first non-payment of interest to 30 October 1998', the respondent placed clients' funds in contributory mortgage loans where the mortgagors had defaulted in the payment of interest, without those clients being informed of the status of the loan;
(c)the respondent failed to advise the existing investors in the mortgage loans set out in the document referred to in sub-paragraph (b) hereof that there had been default in the payment of interest;
(d)on 16 and 17 October 1997 the respondent caused or permitted the withdrawal by him, or entities controlled by him for his or his family's benefit, sums of money totalling $478,000.00 from defaulting mortgages namely those described as Maxwell Loan No 952709 and Smith Loan No 942289, such monies being replaced by the money of clients of the firm who were unaware of the state of the performance of the loans;
(e)The respondent failed to exercise a proper level of control and supervision in that he failed to take reasonable steps to prevent the following:
on and about 28 and 29 May 1998, the withdrawal by the PWB Superannuation fund, an entity in which the partners of the firm had an interest, of sums totalling $77,500 from default mortgage loans, namely that described as the Maxwell loan, no952709 and the Dunster loan, no962296, such monies being replaced by the money of clients of the firm who were unaware of the state of the performance of the loan."
The application against Mr Kench is identical, except for par(d) which is in these terms:
"(d)the respondent failed to exercise a proper level of control and supervision in that he failed to take reasonable steps to prevent the following:
On 16 and 17 October 1997 John Thomas Turner caused or permitted the withdrawal by him, or entities controlled by him for his or his family's benefit, sums of money totalling $478,000.00 from defaulting mortgages namely those described as Maxwell Loan No 952709 and Smith Loan No 942289, such monies being replaced by the money of clients of the firm who were unaware of the state of the performance of the loans;"
It should be emphasised that the nature of the proceedings is disciplinary and the Court's inquiry has been restricted to what has been raised by the applications and those particulars of alleged misconduct. It is my understanding that some of the moneys of investors placed with the firm's mortgage fund may not be recoverable from defaulting borrowers after the realisation of securities has been completed. The causes of consequential losses to investors may be many. They may extend to security valuations which can be said to have been wrong with or without the benefit of hindsight, to other factors which are common risks of mortgage lending, to poor lending practices and controls on the part of the firm and to other matters. However, for the resolution of the Society's complaints the Court's task has not been to analyse and determine the extent of the losses suffered by investors in the mortgage fund and the causes of those losses. The evidence would not enable the Court do so, in any event.
The firm's contributory mortgage fund
On 4 January 1995, the firm of Piggott Wood & Baker was registered by the Society as a controlled fund operator under the Rules of Practice 1994, Pt5. However, the firm had operated a mortgage fund for many years before that. Between 1967 and 1980, there was a steady but slow growth in the fund. Some time after 1980, the amount of money being received for investment began to increase markedly, possibly because of growth in the superannuation industry. By the end of 1998, the fund amounted to approximately $60,000,000.
For the purpose of investing in a mortgage, money was lodged with the firm, usually by investors in person, but sometimes by third parties such as accountants and investment advisers. The investor would generally sign an application form. The money was receipted by the accounts' staff of the firm. It was not usual for the investor to see a partner or one of the firm's professional staff.
The investor was given a form entitled "pwb mortgage register information sheet" which explained the following matters. Sums would be invested in first mortgages over real estate in Tasmania in accordance with the Rules of Practice 1994. The interest rate would be determined by market forces and would be subject to variation during the term of the loan. Interest would be payable on or about the 20th days of February, May, August and November in each year. Investors would be notified in writing of changes in interest rates. First mortgage advances would be limited to 66 per cent of the security valuation if the mortgage was not insured, 80 per cent of the security valuation if the mortgage was insured and 50 per cent of Government valuation if there was no independent security valuation. Mortgage loans would be made on an interest only basis and would be repayable on demand, although capital repayments would be accepted, subject to notice. Upon deposit of funds by an investor, the funds would be lodged in a trust account at Westpac or Perpetual Trustees, earning the current at call rate, and would be allocated to a contributory mortgage investment when a suitable one became available. Generally, the waiting period was four weeks. All mortgages would be held on the investor's behalf in the name of two members of the firm. Finally, investors were advised that they would need to give one month's notice if they wished to withdraw their funds totally or partially.
The application form that was generally signed by the investors contained some conditions of investment, including one which referred to overdue interest:
"I further acknowledge that in some instances payment of interest is not received by your office on the due date. To cover the contingency of late payment of interest to me, I request you to consider advancing, in that event, the amount of interest."
I was informed by the Society's counsel that during the period encompassed by the applications, 31 December 1994 to 30 October 1998, there were either seven or eight partners of the firm. By arrangement with the other partners, the respondents had the overall control and management of the operations of the firm's mortgage register. The firm's accountant and office manager, Michael Burke, was in charge of its day to day operations. The respondents were responsible for establishing his duties and responsibilities in respect of the mortgage register. He worked generally under their oversight and was answerable to them.
Money from investors was receipted and placed into the firm's trust account and then invested in "at call" accounts with Westpac or Perpetual Trustees, or possibly also the Trust Bank, depending upon which offered the best rate of interest at the time. Each of the respondents had authority to approve mortgage loans. In or about mid-1997, the firm adopted the practice of requiring both of them to approve loans greater than $300,000. Apart from that, they did not consult with each other to review the composition and mix of loans made from the fund and each had his own portfolio of loans for which he was responsible. Once a loan was approved by either or both of them, the details of the loan were forwarded to Mr Burke to consider the amount of money required and advise the partner concerned of the availability of funds and the likely date of the loan and he would eventually allocate the necessary money to the loan. His practice was to first use money from loan capital repayments and then money from the "at call" accounts. It was his responsibility to allocate investors' money to loans and he was not required by either of the respondents to advise them of the identity of the investors in particular loans.
Overdue interest
If a borrower did not pay interest by the due date, a letter of demand issued after seven days and, if required, a further letter at the expiration of 14 to 21 days. If the interest remained outstanding, the matter was then referred to Mr Turner or Mr Kench, depending on which of them was the partner who had responsibility for the loan, and he would contact the borrower. During the period in which a borrower was in default concerning an interest payment, it was the firm's practice to advance the unpaid amount to the investor. The possibility of the firm doing so was of course referred to in the application forms which were generally signed by investors, in terms that the investor requested the firm, in the event of a borrower failing to pay interest by the due date, "to consider advancing … the amount of interest due". However, until November 1998, investors were never informed that the borrower of their money was in default, if that was the case. They were sent quarterly or annual reports stating only the borrower's name, the amount invested and the interest represented as having been paid for each loan in which their money was invested. It may be inferred that most, if not all, of them were induced to believe as a result that the borrower of their money had promptly paid the interest due in accordance with his or her obligation to do so, notwithstanding that in many cases that was not true.
Spreadsheets in evidence reveal that in respect of the 15 quarterly interest payments due for the quarters ending 15 February 1995 to 15 August 1998, interest remaining unpaid totalled $2,570,706.75, which the firm advanced without notice to the investors concerned. The number of defaulting borrowers was 48. In many cases they had defaulted for many consecutive quarters, 15 in one case. As at 11 April 2001 outstanding interest totalling $2,780,435 was due to investors. I was informed by counsel for the respondents that the amount of interest advanced by the firm which had not been recovered by the date of the hearing of the application was about $1.4 million which, particularly in view of the firm's policy of repaying investors first from mortgage sale proceeds, will be lost to the firm. Additionally it has suffered a loss of some $400,000 incurred by way of disbursements associated with recovery actions taken under mortgagee powers.
Substitutions of invested funds and further advances into defaulting loans
If an investor wanted to withdraw part or all of his or her invested money from the fund, it was arranged by Mr Burke. He was authorised to do so without reference to a partner of the firm. He would usually pay withdrawals out of new investment money held in the "at call" accounts. That would commonly involve the money of an investor which was "at call" being substituted for the money of the withdrawing investor which was the subject of a mortgage loan. By way of example, I refer to a mortgage loan of $20,000 to F. Of that amount, $10,000 belonged to an investor D, who was permitted to withdraw it on 30 May 1997. The amount was substituted by $7,000 from investor V, $1,000 from investor D and $2,000 from investor I. Withdrawals also required the re-arrangement of investors' funds in mortgage loans from time to time. In a number of cases of fresh money being substituted for other money in a mortgage loan, the borrowers were in default with their interest payments but the owners of the substituting money were not advised of that fact.
Also from time to time, further advances were made to existing borrowers, applying money belonging to investors. A number of those further advances were made to defaulting borrowers and once again, it was the practice of the firm not to advise the investors that their money would be or had been advanced to an investor who was in default with his or her payments or who had defaulted in the past.
Between 24 May 1995 and 30 October 1998, a few days before the firm reported its difficulties to the Society and stopped what had been its practice with regard to substitutions and further advances into defaulting mortgages as I have just explained, the total amount of investors' funds which were so substituted or advanced into defaulting loans was $3,992,500. However, of that sum, $2,578,000 was repaid to investors by 30 October 1998, leaving remaining on investment in mortgages $1,414,500 of investors' funds which had been invested into loans when they were in default. In this regard, the criterion for a default is merely that the payment of interest was at least one day overdue, but the parties have agreed that if instead the criterion was that the interest was at least one month overdue, there would be very little change to the above figures. As at 11 April 2001, the amount of $1,414,500 just referred to had been reduced to $927,861.95.
It is important to observe that until November 1998, the firm had no system in place for quarantining loans that were in default so as to prevent substitutions and further advances being made to the borrowers in question. It is the Society's case that the respondents ought to have ensured that the design of the scheme of the firm's mortgage register and the level of their supervision was such that substitutions and further advances into defaulting loans could not take place.
As mentioned previously, by arrangement with the other partners of the firm, the respondents had the overall control and management of the operations of the mortgage register. Mr Turner was more actively engaged in matters arising out of the firm's mortgage register than Mr Kench. He estimated that by 1995, matters concerned either directly or indirectly with the register accounted for approximately 40 per cent of his practice. He had the larger portfolio of loans which were his direct responsibility. The loans in Mr Kench's smaller portfolio were likewise his direct responsibility. There was no evidence of the number of loans contained within the firm's mortgage register at any one time. The evidence was confined to loans in respect of which default had been made by borrowers in the payment of interest. It revealed that of 71 loans in default (which concerned 40 borrowers), as reported to the Society by the firm in November 1998 and with regard to which capital or interest was owing on 11 April 2001, 55 loans (29 borrowers) were in Mr Turner's portfolio and 16 loans (11 borrowers) were in Mr Kench's portfolio. Of those 29 borrowers in Mr Turner's portfolio, substitutions had been made with respect to 17 of them after defaults had first been made. Of the 11 borrowers in Mr Kench's portfolio, substitutions had been made with respect to five of them after defaults had first been made.
The Turner moneys
I deal next with the matter referred to in par(d) of the particulars. To be fair to Mr Turner, and to Mr Kench, it is appropriate to repeat that Mr Burke was in charge of the day to day operations of the mortgage register and in most cases he was the person who decided, without consulting the respondents or any of the other partners of the firm, whose money would be paid by way of loan to a borrower, not only originally but also by way of substitutions and further advances.
Prior to the start of October 1997, money belonging to two entities controlled by Mr Turner and of which he was a beneficiary, known as the J T Turner Trust and the W J and N M Turner Family Trust (hereinafter referred to as "the Turner moneys"), had been invested with the mortgage fund. As at the commencement of October 1997, the Turner moneys, which then totalled about $1,343,000, had been invested across a wide range of mortgage loans. At that time, Mr Turner spoke to Mr Burke in respect of a mortgage loan reference No 962265. Mr Turner said that the loan was out of ratio, or about to go out of ratio, in that the investors' funds exceeded or were about to exceed two-thirds of the current valuation of the security (and the mortgage therefore failed to comply with the requirements for a first mortgage). He instructed Mr Burke to use available Turner moneys to rectify the position, so that the loan would be put in the correct ratio.
It was Mr Turner's evidence that the reason he asked Mr Burke to attend to the matter was that the loan was out of ratio, or was about to become so, because of advances necessary for the borrower to complete building works associated with a particular development. From time to time the Turner moneys were invested in "special loans", being loans where the amount advanced exceeded two-thirds of the security valuation. Those investments in special loans were made on Mr Turner's authority in circumstances where he considered that the loan of extra moneys would assist in the completion of a development and the loan as a whole. In those circumstances, the Turner moneys would be treated as if they were second mortgage moneys, that is to say, the funds of investors other than the Turner interests would be treated as being secured first and the Turner moneys in special loans "were relegated in priority in respect of the other investors in these loans", Mr Turner said. There was however, no evidence of documentation of such an arrangement.
Mr Burke determined that the amount required was $828,000. To obtain that sum it was necessary for him to withdraw Turner moneys totalling it from among various mortgages in which Turner moneys were then invested. Mr Turner gave no instructions to Mr Burke and did not discuss with him how that should be achieved. Mr Burke decided to withdraw $55,000 of Turner moneys from a mortgage loan reference No 952709 and $423,000 of Turner moneys from a mortgage loan reference No 942289, with the balance coming from other sources. The total of $828,000 was raised in that way and paid, in substitution of existing advances, to loan No 962265.
However, at that time, the borrowers of loans 952709 and 942289 were in default with their interest payments. To enable the total of $478,000 of Turner moneys to be withdrawn from those defaulting loans, Mr Burke substituted the funds of other investors and, as was the case with other substitutions, those investors were not told that their funds had been advanced to a defaulting borrower. The amount of the substitutions is included in the sum of $3,992,500 referred to earlier in these reasons as the total of amounts substituted and advanced into defaulting loans. Mr Burke moved the moneys between loans in the way I have described without reference to Mr Turner, Mr Kench or any other partner of the firm.
Mr Turner was the partner who had overall responsibility for loans No 962265, 952709 and 942289. Mr Turner conceded that, having regard to the firm's system in place, he ought to have known that the transaction would involve a real possibility of substituting clients' money into non-performing loans without their knowledge.
Some time later Mr Turner told Mr Burke that he had noticed for the first time that $423,000 had been withdrawn from loan 942289 and transferred to loan 962265. He advised Mr Burke that that should not have occurred as loan 942289 was also a special loan and should have been noted as such in the mortgage register. It was Mr Turner's evidence that he was advised by Mr Burke, and I infer that the information was correct, that (some of) the funds of investors that were taken out of loan 962265 and replaced with the Turner moneys, were then substituted for the Turner moneys into loans 957209 and 942289. Although it now appears that the investors in all three loans may suffer a loss of part of their investments, the evidence of Mr Turner was that as a result of all the substitutions between the three loans, $478,000 of Turner moneys was lost in loan 962265 and the owners of the funds which were withdrawn from that loan and substituted into the other two loans have recovered or are likely to recover, more than 70 per cent of their investment, whereas if their funds had remained in loan 962265, their recovery to date would be approximately 14 per cent.
PWB superannuation fund moneys
I turn to the matter referred to in par(e) of the particulars of misconduct in both applications. On 29 May 1998, Mr Burke, on the general authority of the partnership, caused $77,500 invested in the name of PWB Superannuation Fund, an entity in which the partners of the firm had an interest, to be withdrawn as to $27,500 from mortgage loan No 952709, which had been in default since 15 November 1996, and as to $50,000 from mortgage loan No 962296, which had been in default since 15 February 1997. Pursuant to a decision of the partnership, the funds were to be applied in the purchase of the firm's current premises. In substitution, the funds of other investors were advanced by Mr Burke to those defaulting loans. The investors were not informed that their funds had been advanced to defaulting borrowers.
It was Mr Burke who decided, upon an examination of the records, from which loans the superannuation fund's money was available. He arranged the withdrawals and substitutions as he saw appropriate and without reference to either of the respondents or any of the other partners.
Mr Turner was the partner who had overall responsibility for loan No 952709 and Mr Kench was the partner who had overall responsibility for loan No 962296. It is the Society's case that both of them ought to have known that the withdrawal of the PWB Superannuation funds would be likely to involve the substitution of clients' money in non-performing loans without the knowledge of the clients. Mr Turner conceded that and I find it to be the case with Mr Kench.
Disclosure to the Society and to investors
By November 1998, a decision was made by the firm that it could not continue to advance interest to investors. The firm voluntarily reported to the Law Society that it was experiencing problems with its mortgage register. On 2 November 1998 Mr Kench, on behalf of the firm, sent a letter to the Society, attaching a list of mortgage loans in arrears with respect to interest. There were 83 loans on the list and 49 different borrowers. It showed that principal amounts totalling $18,385,200 had been advanced to them and that they had failed to pay interest totalling $1,143,588.61. The letter claimed that there had been no breach of the Rules of Practice 1994, r62 or, if there had been a breach, it was only a technical one. That rule defines (inter alia) a first mortgage as one under which the amount advanced does not exceed two-thirds of the security valuation if the mortgage is insured. The letter's reference to the rule was upon the basis that the firm had advanced the unpaid interest to the investors and if there was a breach of the rule in respect to any mortgage, it was only because the outstanding interest caused the amount secured to exceed two-thirds of the security valuation. The list disclosed 28 loans where that ratio might be said to have been exceeded. It also disclosed the first date upon which the respective borrowers had made default in paying interest and the date upon which the firm had last made a substitution with respect of each of the loans on the list. The letter advised that the firm intended to engage a chartered accountant, Mr Vern Robinson, and a valuer and estate agent, Mr Ian Wells, to act as independent advisers to the firm with respect to that portion of the mortgage fund in arrears. The firm invited the Society to appoint a representative to join with those advisers if it was desired. The letter contained an undertaking to regularly report to the Society and to act under the Society's reasonable direction.
If the mortgage fund then totalled about $60,000,000, as I was informed without objection by the Society's counsel, then the list revealed that a total approaching one-third of that sum was secured by mortgages to borrowers who were in default in their interest payments. For reasons which I have explained, the investors in those mortgages knew nothing of the borrowers' defaults.
On or about 6 November 1998, the firm sent a notice to those investors who had funds secured by mortgages to borrowers who were in default with their interest payments. It explained that interest on their investment would ordinarily be paid on 20 November 1998, but the firm had reason to believe that the borrowers might not make the payment of interest which was due on 16 November. It further stated that although in the past it had been the practice of the firm to advance unpaid interest to investors and to then seek to recover the unpaid amount from the borrower (there is no reason for me to think that the investors had previous knowledge of such a practice), advice had been received from the firm's accountants that, "given the present economic climate, the practice is not commercially realistic" and the practice would cease. The investors were advised that they would not receive interest unless and until it had been paid by the borrower. The notice went on to explain steps the firm was taking to review loans where there had been default and to consider whether mortgage properties should be sold or whether instead particular borrowers should be allowed additional time within which to either refinance or bring the loan into order. Finally, the notice explained that so long as interest payments on any loan were in arrears, the firm was unable to substitute other investors' funds, which, in turn, meant that current investors would not be able to withdraw their funds until either the firm was satisfied that the borrower had and would continue to meet its obligations under the loan or until the mortgaged property or properties securing the loan had been sold. On 10 November 1998, the Society was advised by the firm of what it had done, including that it had briefed Mr Wells to prepare a report in relation to security properties, together with recommendations as to their realisation. I was advised by the Society's counsel, without objection, that some action had already been taken to sell some of the properties, but there were many in respect of which no action had been taken in that regard.
Consequential losses
Losses which have to date been suffered by clients with respect to the firm's mortgage register or which will be suffered once necessary mortgage sales and other processes have been completed, cannot be confidently predicted at this time. As stated earlier in these reasons, some losses may prove to be attributable to erroneous security valuations or other causes. The extent to which some may prove to be attributable to the firm's practice of substituting clients' money for that of other investors in defaulting loans has not been established by the evidence. Although I find the evidence difficult to comprehend, I understand, in accordance with submissions from counsel for Mr Kench, that with regard to substitutions made with respect to defaulting borrowers in his portfolio, as at 1 July 2001, about $35,000 of the substituted funds had not been recovered from the borrowers. Counsel added that $18,912.39 interest was also owed to the owners of the substituted funds. I do not understand how that sum was arrived at, but it was not challenged by counsel for the Society.
Of course, Mr Kench's responsibility for what has taken place is not confined to what occurred with respect to loans in his portfolio. He shares responsibility with Mr Turner with regard to all substitutions and further advances into defaulting loans which were made in accordance with the firm's systems in place.
Facts and matters relied upon by the respondents
A mortgage fund operated by the firm commenced many years ago, well before Mr Kench joined the firm as a partner in 1983 and before Mr Turner became a partner in 1969. The basic system of operating the fund was not designed by them and was put in place by legal practitioners of good reputation and inherited by them. However the practice of the firm advancing interest to investors commenced in about 1987. I have no reason to doubt that for most of the life of the firm's mortgage register from at least as early as the 1960s, the partners of the firm honestly believed that they were acting responsibly in the performance of their duties to their clients in the way in which they managed and operated the fund.
It was asserted for the respondents that the practice of advancing interest worked well until November 1998, but I do not understand what was meant by that. According to the evidence, the firm was advancing interest from February 1995 in increasing amounts. With respect to interest due for the quarter to February 1996, the amount advanced was $110,459.02. In 1997, it was $151,746.20 and in 1998, it was $217,970.61. The last quarter with respect to which interest was advanced by the firm was the one ending in August 1998 and the amount advanced was $320,980.24. By November 1998, a number of mortgages, substantial in the total amount they secured, had fallen into arrears and the firm was financially incapable of sustaining interest advances and had ceased making them, disclosing to its investor clients for the first time something of the truth concerning the poor state of some of the mortgage investments.
Counsel for the respondents sought to rely on a claimed fact that it was made clear to clients who signed the investors' application form that there might be occasions when borrowers would default in paying interest and the firm would advance it. I do not understand that to assist the respondents, having regard to the consistent failure of the firm to advise borrowers whenever such an occasion did arise. Counsel expressed as his principal submission that the firm was not obliged to inform the investors that their respective borrowers had failed to pay interest, so long as the firm advanced the amount in default. Except with regard to brief periods of default, I do not agree. The clients entrusted their funds to the firm for mortgage investment. Extended periods of default in paying interest amounted to relatively serious breaches of mortgage conditions and ought to have raised concerns for the safety of investments about which the clients were entitled to be informed.
The respondents also asserted that after the firm had decided to stop the advancement of interest, it was realised, I presume by the partners of the firm, that substitutions into loans that were in default were inappropriate and it was decided to report the problems the firm had to the Society. I find it difficult to comprehend how it came to pass that the eight or so partners of the firm failed to come to that realisation at a much earlier point of time. I can understand that many legal practitioners might not consider there to be a problem of much significance if defaults in paying interest are low in number and amount and temporary, but a considerable number of the borrowers from the firm's mortgage fund had been in default, and substantially so, for periods which could not be regarded as temporary. In my opinion, a competent legal practitioner, paying proper regard to a practitioner's duty to investor clients, would have realised long before November 1998 that the firm's practice of substituting clients' funds into defaulting loans, without the authority of the clients, amounted to a breach of that duty.
The firm's mortgage fund was a "controlled fund" as that expression is used in the Rules of Practice 1994. The firm was registered with the Society as a controlled fund operator, as required by r67(1). For the respondents, the point was made that the firm's books of account were regularly inspected by the Society's trust account inspectors, and no adverse comment was ever made concerning the practices of substituting investors' funds in loans when interest was in arrears and failing to advise investors if interest became in arrears. It was also pointed out that the mortgage register was regularly audited by the firm's own auditors, who reported to the Society, and no adverse comment was ever made about substitutions or lack of advice as to borrower default until after the firm had raised those matters with the Society in November 1998. It was further raised that the Society, as regulator of such mortgage funds, had never published guidelines or provided advice to its members that practices such as those, that is of substitutions and failures to advise investors as to borrower defaults, were inappropriate. The Society admits as a fact that in the past other reputable Tasmanian legal firms (I was given no idea how many) commonly advanced interest to investor clients whose funds were invested in mortgages, failed to advise those clients that the borrowers were in arrears with interest and made substitutions of investor clients' funds into mortgages at times when interest was unpaid. The point was made by the respondents that the Society had not sought to produce evidence that at a material time there were practitioners of good repute and competence who regarded such practices as disgraceful or dishonourable, or even improper.
It was submitted for the respondents that a relevant consideration in their favour is that although the firm ceased advancing interest, thereby removing the protection which was enjoyed by investors whose funds were substituted into defaulting loans, the firm remains committed to taking all possible steps to ensure that no such investor suffers a loss. However, such a commitment is irrelevant to the determination of whether the allegations in the applications constitute professional misconduct or unprofessional conduct.
It was also submitted for the respondents concerning "original" as opposed to "substituted" investors, that there is no suggestion that the firm has not at any time pursued defaulting borrowers in a timely and vigorous fashion as the investors would have wished had they been notified of the defaults as they occurred. I do not regard that to be mitigatory, although I accept that if the contrary had been the case, the extent and degree of any misconduct would have been aggravated.
The particulars have been proved
The facts alleged in pars(a) and (b) of each application have been established. A prudent investor would usually wish not to advance money, or further money, to borrowers who had in the past failed, and continued to fail, to pay interest due on borrowed funds. The respondents, who had accepted responsibility for the overall control and management of the operations of the firm's mortgage register, allowed such imprudent investing practices to systematically occur. It is my judgment that having regard to their plain duty to their clients to take reasonable care for the security and safe investment of their funds, they ought to have had in place, but did not, a system which identified and in most cases, isolated or quarantined from further investment, those borrowers who had failed to make their interest payments in a satisfactory and timely way. Clients' funds should not have been advanced, by way of substitutions or further advances, to mortgagors who had made substantial defaults in the payment of interest, without the clients being fully informed of the state of the loan in question and the possible risks and, at the very least, given the opportunity of deciding not to make the advance. The firm's system was a dangerous one for the investors. Inherent in it was the practice of keeping secret from investors information which prudent investors would wish to know and would usually take into account when determining whether or not to make particular advances or to call in particular loans. Without informing clients, the firm systematically advanced investors' funds to defaulting borrowers without proper regard to the obvious risks that were involved.
Particular (c) has also been established. In my view the firm owed a duty to its clients to inform them if circumstances had arisen which indicated that their funds might be at risk. The firm's practice of advancing unpaid interest was a perfectly proper one, but because of the system in place, it caused there to be concealed from the clients the true position regarding the possible unsafeness of their investments and the fact that the firm had in place a system which was inadequate in the sense I have explained.
The matters alleged in particulars (d) and (e) of each application have also been established. However I propose to treat them as examples of what is alleged in par(b). There was no reason why the firm or its partners should not have invested in the mortgage scheme. That they did so arguably afforded to the clients a greater level of protection than they might otherwise have had. An intended purpose of the movement of the Turner moneys was to afford protection to particular investors. It and the withdrawal of the firm's superannuation funds accorded with the system that applied to all investors and was not carried out with the intention of benefiting the Turner interests or the firm at the expense of clients.
Professional misconduct and unprofessional conduct
Under the Act, s56, the expressions "professional misconduct" and "unprofessional conduct" are defined. But the definitions are inclusive, not exclusive. "Professional misconduct" is said to include conduct on the part of a legal practitioner which results in:
"(a)a contravention or failure to comply with ¾
(i)any provision of the Act or any regulations, rules or by-laws made under it; or
(ii)any terms and conditions imposed under Part 8 of the Act; or
(b)fiduciary default; or
(c)any serious neglect or undue delay; or
(d)the charging of excessive fees or costs; or
(e)consistent or substantial failure to reach reasonable standards of competence and diligence."
The expression "unprofessional conduct" is said to include:
(a)professional conduct that falls short of a standard of conduct that a member of the public is entitled to expect of a practitioner of good repute and competency; and
(b)conduct of a kind referred to in pars(c), (d) and (e) of the definition of "professional misconduct" but of a lesser degree of seriousness.
Apart from the statute's inclusionary meanings, professional misconduct consists in behaviour on the part of a legal practitioner which would reasonably be regarded as disgraceful or dishonourable by legal practitioners of good repute and competency. In re a Solicitor [1912] 1 KB 302 at 311, 312; Grahame v Attorney-General of Fiji [1936] 2 All ER 992 at 1002; Myers v Elman [1940] AC 282 at 288, 289; Re Thom; ex parte the Prothonotary (1962) 80 WN (NSW) 968 at 969; Re Veron; ex parte Law Society of New South Wales (1966) 84 WN (Pt1) (NSW) 136 at 143; In re Three Solicitors [1949] VLR 72 at 73; Re a Solicitor [1960] VR 617 at 620. That definition or test has been accepted in unreported decisions of this Court which concerned complaints made under the Legal Practitioners Act 1959. See, for example, In re a Legal Practitioner 105/1982 at 9; Law Society of Tasmania v Walker 56/1988, per Cox J at 22. It is derived from a case which concerned a member of the medical profession. Allinson v General Medical Council [1894] 1 QB 750. It is not an exhaustive definition. See Prothonotary of the Supreme Court of New South Wales v Costello [1984] 3 NSWLR 201 at 207. Counsel for the Society accepted that to be so, adding that it is his essential submission that professional misconduct is, simply speaking, grave conduct which in the Court's judgment would warrant reprobation and condemnation from reasonable legal practitioners of good repute and competency. I think there is some danger involved in searching for words to further define the term and I will not do so.
Counsel for the respondents submitted that because it was an admitted fact that other reputable practitioners had commonly engaged in the same practices as complained of here by the Society, and there was no evidence put before the Court that there were reputable practitioners who regarded such practices as disgraceful or dishonourable, or even improper, the practices in question cannot be categorised as amounting to professional misconduct. However, the submission ignored two matters. The first is that the admitted fact was that (some) other reputable firms had commonly engaged in the same practices, but it was not an agreed fact that those reputable firms were competent. The second is that it was not an agreed fact that those firms were reasonably of the view that the practices were not disgraceful or dishonourable. Ignoring for a moment the paragraphs of the definition in s56 of "professional misconduct", the relevant test to be applied by the Court pursuant to the authorities to which I have referred is whether the behaviour of the respondents would reasonably be regarded as disgraceful or dishonourable by legal practitioners of good repute and competency. Whilst the Court may have regard to evidence of what some reputable practitioners might think, it remains the duty of the Court to consider the appropriateness of the behaviour upon the Court's determination of what not only a reputable practitioner might think, but what a reputable and competent practitioner might reasonably think.
There is authority for the proposition that mere negligence or incompetence cannot amount to "misconduct in a professional respect". Something more is required. The subject was discussed in Pillai v Messiter (No 2) (1989) 16 NSWLR 197, which concerned a medical practitioner. Samuels JA, with whom Clarke JA agreed, accepted, at 210, that it was not every departure, even if gross, from proper standards of care and competence which amounted to misconduct. His Honour appeared to accept at 208 that acts or omissions in the course of professional practice, if so grossly negligent as to attract the strong reprobation of professional brethren of good repute and competence, might amount to misconduct in a professional respect although wholly lacking in moral obliquity. However, his Honour also appeared to accept as necessary in such a case that professional reprobation be established by the evidence of an appropriately qualified person or persons. Such evidence may well be necessary in medical cases, but I have difficulty accepting that a Court is incapable of adequately assessing the quality of a legal practitioner's misconduct without evidence of such a kind in every case. Kirby P, at 200, determined that for the statutory test of "misconduct in a professional respect" to be met, something more was required than mere professional incompetence or deficiencies in the practice of the profession. It included a deliberate departure from accepted standards or such serious negligence as, although not deliberate, portrayed indifference and an abuse of the privileges which accompany registration as a medical practitioner.
I do not propose to determine whether or not the dicta in Pillai v Messiter(No 2) (supra) should be applied to the concept of professional misconduct which operates in this State under the Act without regard to the inclusionary paragraphs of the definition in s56. The inclusion in pars(c) and (e) of conduct on the part of a legal practitioner which results in "serious neglect" or in "consistent or substantial failure to reach reasonable standards of competence and diligence" as conduct amounting to "professional misconduct" renders such a determination unnecessary. In my opinion, terms such as abuse of privileges, deliberate departure from accepted standards, infamous conduct or gross or serious negligence, should not be imported into those paragraphs, although they may in a particular case be expressions which are appropriate to describe a practitioner's conduct and which assist in determining whether in the circumstances of the case, the conduct in question resulted in "serious neglect" or "consistent or substantial failure to reach reasonable standards of competence and diligence" and therefore deserves to be categorised as professional misconduct in the judgment of the Court.
In Re R, A Practitioner of the Supreme Court [1927] SASR 58 at 60, 61, the Supreme Court, in banco, regarded the expression "unprofessional conduct" as wider than "professional misconduct". The court said that whereas "professional misconduct" when undefined by statute, referred to anything done by a practitioner, in the pursuit of his or her profession, that would reasonably be regarded as disgraceful or dishonourable by his professional brethren of good repute and competency, "unprofessional conduct" was not necessarily limited to conduct which was "disgraceful or dishonourable", in the ordinary sense of those terms. It included, in the court's view, conduct which might reasonably be held to violate, or to fall short of, to a substantial degree, the standard of professional conduct observed or approved of by members of the profession of good repute and competency. That view was approved by the Western Australian Full Court in Fordham v Legal Practitioners' Complaints Committee (1997) 18 WAR 467.
In A & B, Legal Practitioners v Disciplinary Tribunal [2001] TASSC 55, Underwood J at par42 expressed the view that the definition of unprofessional conduct in s56 is virtually on all fours with what he referred to as the common law meaning as propounded in those two cases. With respect, I do not agree. By providing that "unprofessional conduct" includes what is set out in pars(a) and (b), Parliament should be taken to have enlarged the ordinary meaning as articulated in the South Australian and Western Australian cases, to include what is stated in those paragraphs. It follows that in this State, unprofessional conduct extends to conduct which might reasonably be held to violate, or to fall short of, to a substantial degree, the standard of professional conduct observed or approved of by members of the profession who are of good repute and competency (the so called common law test); professional conduct that falls short of a standard of conduct that a member of the public is entitled to expect of a practitioner of good repute and competency (par(a) of the definition in s56); and conduct which results in any serious neglect or undue delay, or in the charging of excessive fees or costs, or in consistent or substantial failure to reach reasonable standards of competence and diligence, but of a lesser degree of seriousness than conduct of that nature which would amount to professional misconduct (par(b) of the definition in s56).
In a general sense, professional misconduct should be regarded in this State as a more grave form of misconduct than unprofessional conduct. There may well be an overlap and the same conduct might in some cases amount to both of those things. However, the view expressed by Nettlefold J in the Full Court in Law Society of Tasmania v Walker 56/1988 at 7, that "unprofessional conduct" should not be regarded as a less heinous category of conduct, is no longer a generally correct view, having regard to what is contained in par(b) of the definition of unprofessional conduct in s56. The Full Court was of course concerned with a disciplinary complaint under the previous legislation, the Legal Practitioners Act 1959, which did not contain the terms "professional misconduct" and "unprofessional conduct", let alone define them. The view I have expressed accords with what was said by the Attorney-General in his second reading speech concerning the Legal Profession Bill in the House of Assembly on 12 May 1993 when he referred to "the less serious 'unprofessional conduct' complaints" and to "the more serious complaints involving 'professional misconduct'."
Counsel for Mr Kench submitted that notwithstanding that s56 includes within the definition of unprofessional conduct what is contained in par(a), that is to say "professional conduct that falls short of a standard of conduct that a member of the public is entitled to expect of a practitioner of good repute and competency", in a case in which no iniquity or moral turpitude or obliquity is involved, if the conduct does not amount to professional misconduct it is impossible for it to amount to unprofessional conduct, because practitioners of good repute and competency could not possibly regard the conduct as falling short of a standard the public are entitled to expect. I reject that submission because the definition of unprofessional conduct says no such thing. In my view par(a) should be given its literal meaning and that professional conduct that falls short of a standard of conduct that a member of the public is entitled to expect of a practitioner of good repute and competency amounts to unprofessional conduct under the Act. I am mindful that the literal meaning of the words may mean that all manner of human errors, mistakes and shortcomings on the part of practitioners in the course of their professional work may render them liable to disciplinary proceedings. However, if complaints are made alleging unprofessional conduct of a relatively trivial or minor character so far as gravity is concerned, then the consequence may only be one of admonishment or reprimand by the Council under s61(2)(a), or reprimand, caution or determination that the practitioner should apologise by the Council under s65B(2)(a), (b) or (f), dismissal of the complaint, admonishment or reprimand by the Disciplinary Tribunal under s76(1)(a) or (b), or dismissal of the complaint, admonishment or reprimand by the Court under s81(b). Although there is merit in an argument that only relatively serious transgressions should render legal practitioners liable to complaints and disciplinary proceedings, it is, in my view, one better addressed to Parliament, rather than by the Court adding words by implication to the statutory definition of unprofessional conduct.
The Society's case for professional misconduct and unprofessional conduct
It is the Society's case that all of the conduct particularised in the applications amounted to professional misconduct because:
(a)it would reasonably be regarded as disgraceful or dishonourable by legal practitioners of good repute and competency (so called common law professional misconduct); and
(b)it amounted to a consistent and substantial failure to reach reasonable standards of competence and diligence (within par(e) of the definition of professional misconduct in s56).
In the alternative, it is the Society's case that if the Court takes the view that the particularised conduct did not amount to professional misconduct, it amounted to unprofessional conduct because:
(c)it amounted to professional conduct that fell short of a standard of conduct that a member of the public was entitled to expect of a practitioner of good repute and competency (within par(a) of the definition of unprofessional conduct in s56); and
(d)it amounted to conduct within par(b) above, but was of a lesser degree of seriousness (within par(b) of the definition of unprofessional conduct in s56).
Determination
With no hesitation, I have concluded that the respondents' conduct amounted to unprofessional conduct upon the basis that it fell short of a standard of conduct that the clients of the firm, as members of the public, were entitled to expect of practitioners of good repute and competency. My reasons for that conclusion are, I think, sufficiently explained earlier. I did not understand counsel for the respondents to submit otherwise, in the event that I rejected their submissions concerning the need for proof of moral turpitude and the like.
It is also my conclusion that the respondents' conduct amounted to a consistent and substantial failure to reach reasonable standards of competence and diligence, within par(e) of the definition of professional misconduct in s56. In particular, I regard the practice for which the respondents are to be held responsible, of making substitutions and further advances of clients' funds into defaulting loans on a considerable number of occasions throughout a period extending for more than three years, and involving almost $4,000,000, without reference to their clients, as falling within such a description.
Nevertheless, I am not persuaded that the respondents are guilty of professional misconduct, as opposed to unprofessional conduct, within the meaning of those expressions as I have determined them to be. I have not reached a state of satisfaction that, without the benefit of hindsight, legal practitioners of good repute and competency would have regarded the respondents' conduct as disgraceful or dishonourable. Insofar as their conduct amounted, as I have said, to a consistent and substantial failure to reach reasonable standards of competence and diligence, I place it in a lesser degree of seriousness than professional misconduct and determine it to be unprofessional conduct. My reasons are various and essentially the following. The basic system of operating the mortgage fund was not designed by the respondents and was put in place by legal practitioners of good reputation and inherited by them. Other reputable firms had in the past commonly engaged in the same conduct without any expression of disapproval by the Society, which was the regulator of such mortgage funds. I have no evidence of how many, but assume it was a not insignificant number of such firms. The Society has not suggested otherwise. There is no evidence that there were practitioners of good repute and competency who regarded such practices as disgraceful or dishonourable. The evidence tends to suggest that a not insignificant number of members of the profession regarded it as acceptable until this sorry story became public knowledge. It is an unfortunate human tendency to come to a conclusion, particularly over a period of time, that if other, and importantly in the circumstances of this case, reputable people engage in a practice, it is acceptable. Further, the Society's trust account inspectors and the firm's auditors had regularly inspected the firm's records and books and made no adverse comment concerning the system and the practices in which the firm engaged with respect to its mortgage register. By advancing interest to clients, which borrowers had not paid, the firm may be said to have been acting generously towards the clients. At the date of the hearing of the applications, it was out of pocket as a result to the extent of some $1.4m. The respondents did not act dishonestly. I am not persuaded that they acted with wilful and reprehensible disregard for the interests of their clients or that they deliberately departed from what they understood to be accepted standards. Notwithstanding what occurred with the Turner moneys, and the firm's superannuation funds, I do not see this as a case which can fairly be described as one where the respondents preferred their own interests to those of their clients. Certainly they did not do so knowingly.
For the reasons I have given, I find both respondents to be guilty of unprofessional conduct, but not of professional misconduct.
Penalty
I have very little information concerning Mr Kench. My searches reveal that he was admitted to practice in 1980. He joined Piggott Wood & Baker in 1983. Nothing adverse to him has been put before me by the Society, apart from the conduct which is the subject of the application against him. He was a partner of the firm until he resigned upon his appointment to the position of Crown Solicitor. The fact that he was so appointed reflects the high regard for his skill and integrity that others must have had in him. He lost that position as a result of the prosecution of these proceedings. At the time of the hearing he was a consultant to the firm.
Mr Turner was aged 62 years at the time of the hearing. He was admitted to practice in 1961. After practising on his own account for approximately four years, he commenced employment with Piggott Wood & Baker in about 1967 and became a partner in about 1969. For the whole of his professional life he has practised as a solicitor in the areas of conveyancing and general commercial law. He retired from the partnership of Piggott Wood & Baker on 30 June 2000 and from working at the firm on 1 June 2001. Nothing adverse to him has been put before me by the Society, apart from the conduct which is the subject of the applications. For a legal practitioner who has been practising for 40 years, the only conclusion I can come to is that he is also well regarded for his skill and integrity. That is verified by character references put before the Court.
Mr Turner and his family interests have lost heavily in financial terms as a result of the losses suffered with respect to mortgages within the firm's operation of the mortgage register. Both he and Mr Kench, and the other members of the firm, have suffered further and substantial financial loss and expense for the same reason. Those losses and expenses may well increase. To what extent they were caused by the unprofessional conduct that I have determined they committed is impossible to assess on the evidence before the Court. Equally, it is impossible to assess from that evidence to what extent investors in the mortgage fund have suffered or will suffer loss as a result of their unprofessional conduct.
As observed by Cosgrove J in Dickens v Law Society 42/1981 at 15, 16, there is high authority for the proposition that the powers to discipline a practitioner are entirely protective in character and no element of punishment is involved. See Ziems v Prothonotary of the Supreme Court of New South Wales (1957) 97 CLR 279 at 286; Clyne v New South Wales Bar Association (1960 - 1961) 104 CLR 186 at 201 - 202; New South Wales Bar Association v Evatt (1968) 117 CLR 177 at 183 - 184; Ex parte Attorney-General for the Commonwealth; re a Barrister and Solicitor (1972) 20 FLR 234 at 244. The powers of the Court are to be exercised for the purpose of, and in a manner seen to be likely to achieve, the maintenance of that high standard of conduct within the profession which will continue its good reputation, and so protect, not only the future of the profession, but also its clients from harm. The Court's task is to uphold the dignity and standards of the profession and to enable it to do so, it has many powers, including the power to impose a fine not exceeding $20,000, to order payment of costs, to suspend and to strike off. Such orders are, of course, of a punitive nature but their imposition should not be regarded as sentences as for crimes and offences. The order the Court makes should be one "which, in its opinion, is necessary, and no more than is necessary, to maintain professional discipline and high standards of conduct". Dickens v Law Society at 16.
Having regard to the findings I have made and in particular that the respondents did not act with wilful and reprehensible disregard for the interests of their clients and did not deliberately depart from what they understood to be acceptable standards, and having particular regard to their good character and reputation, apart from the conduct which is the subject of the proceedings, I conclude that the appropriate penalty in each case is an order directing the respondents to pay a fine of $10,000 and an order that the respondents pay the costs incurred by the Society's Council in investigating and hearing the complaints to be taxed in accordance with the Supreme Court Rules 2000. I was informed that those costs are likely to amount to a sum in the order of $60,000 to $65,000.
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