Legal Services Commissioner v Brereton

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2010 0114

LEGAL SERVICES COMMISSIONER
	Appellant
v
MICHAEL RICHARD BRERETON
	Respondent

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JUDGES	NETTLE, ASHLEY and TATE JJA
WHERE HELD	MELBOURNE
DATE OF HEARING	9 June 2011
DATE OF JUDGMENT	19 August 2011
MEDIUM NEUTRAL CITATION	[2011] VSCA 241
JUDGMENT APPEALED FROM	Brereton v Legal Services Commissioner [2010] VSC 378 (Bell J)

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LEGAL PRACTITIONERS – Misconduct at common law – Misappropriation – Solicitor was director of vendor and acted for vendor – Accepted purchaser’s deposit monies into trust account – Solicitor disbursed significant sums to himself and associate both before and after release of deposit – Retirement Project on land not commenced – Whether actions amounted to common law misconduct by misappropriation – Whether solicitor owed fiduciary duties to investors – Whether dishonesty essential element of misappropriation – Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371, discussed – Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, discussed – Appeal dismissed.

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Appearances:	Counsel	Solicitors
For the Appellant	Ms K E Judd SC with Ms K Anderson	Ms C O’Shanassy, Solicitor for the Legal Services Commissioner
For the Respondent	Mr L Glick SC with Mr P Laskaris	Stephens Lawyers & Consultants

NETTLE JA:

I agree with Tate JA that the appeal should be dismissed.

ASHLEY JA

I have had the advantage of reading in draft the reasons for judgment of Tate JA. I respectfully agree with them. I add that, like her Honour, I prefer to leave for final decision on another day the question whether proof of dishonesty is always required when a charge of misappropriation is brought in a professional disciplinary context.

TATE JA:

This is an appeal, brought by the Legal Services Commissioner (’the Commissioner’) against Mr Brereton, from the orders made by the trial judge,[1] pursuant to leave granted by this Court.[2] It calls into question the relationship between Mr Brereton, as the solicitor for the vendor of a retirement village project, and the individual investors in that project. The critical question on which the appeal turned is this: Did Mr Brereton owe a fiduciary obligation to the individual investors?
[1]On 25 August 2010: Michael Brereton v Legal Services Commissioner [2010] VSC 378 (‘Reasons’).
[2]On 8 October 2010 (Mandie and Tate JJA).

In my opinion the critical question should be answered ‘No’ and the appeal should be dismissed.

Disciplinary Proceedings before the Tribunal

Mr Brereton had been at all material times a legal practitioner under the Legal Practice Act 1996[3] (‘the Act’) and had held a practising certificate as a principal under the Act. In disciplinary proceedings brought by the Commissioner on 19 charges

before the Victorian Civil and Administrative Tribunal (‘the Tribunal’), a finding was made that Mr Brereton was guilty on a charge of common law misconduct in the misappropriation of trust funds.[4] That charge (Charge 5) was the most serious of the charges proved against him. On an appeal brought by Mr Brereton to the Supreme Court under s 148 of the Victorian Civil and Administrative Tribunal Act 1998, the trial judge allowed the appeal and remitted the issue of penalty on the other charges the Tribunal had found proved. Remittal on penalty was necessary because the Tribunal had penalised on an all-up basis with respect to Charge 5 together with other charges it had found proved which had not been appealed. The penalty imposed by the Tribunal at first instance prohibited Mr Brereton from applying for a practising certificate before 1 July 2013, and from receiving or dealing with trust money before 1 July 2018. If this appeal is to be dismissed, the consequence is that, as the trial judge ordered, the issue of penalty will need to be revisited by the Tribunal.

[3]The Legal Practice Act has since been repealed and replaced by the Legal Profession Act 2004.

[4]On 13 August 2008: Legal Services Commissioner v Michael Brereton [2008] VCAT 1723 (‘Tribunal’s reasons’).

The retirement village project

The retirement village project consisted in the purchase of land and the purchase of a retirement village to be constructed on the land.

The land in issue was at Lot 2, Bonnyvale Road, Collendina, Victoria (’the land’). The retirement village project was sometimes also referred to as ‘the Collendina project’.[5] The land was sold under a contract of sale dated 16 February 2000 to Seachange Management Pty Ltd (‘Seachange Management’) for $1,000,000 (‘the first contract’). Seachange Management was owned by Mr Brereton (through a company which he controlled, Young Turks Pty Ltd) and GDK Financial Services Pty Ltd (‘GDK’). GDK was controlled by Mr David McLeod and two associates. As the only two directors of Seachange Management, Mr Brereton and Mr McLeod controlled that company.
[5]Many of the 19 charges related to other business interests and projects.

The land was almost immediately on-sold for $31,370,000 to Seachange Village Nominees Pty Ltd (‘Seachange Village’), under a contract of sale dated 10 March 2000 (‘the second contract’). The difference in price reflected the consideration to be paid to Seachange Management for developing a retirement village. The funding for the development project was to come from private investors. As contractually required by the investment arrangements, in late March 2000 and the following months, investors paid approximately $5,800,000 in various amounts to Mr Brereton as the solicitor for Seachange Management, the vendor. The Tribunal observed that the benefit of the retirement village project appeared to be two-fold to the individual investors, ‘an ultimate return on the development, and an immediate up-front tax deduction of the entire estimated cost in excess of $31 million’.[6] The Tribunal considered that it was reasonable to assume[7]

that the deposit was intended to fund the purchase of the land and the initial stage of development. Subsequent stages were to be funded with the proceeds of earlier stages or by borrowing via a vendor’s mortgage.

[6]Tribunals reasons, [35].

[7]Ibid fn 38.

The monies paid by the investors were paid directly into Mr Brereton’s trust account where the deposits were variously described as ‘Settlement monies’ or ‘Deposit monies’ beside the name of the investor. However, the Commissioner conceded, although the deposits were made directly by the investors into Mr Brereton’s trust account, the payments were made on behalf of Seachange Village, the purchaser.

Seachange Village was the bare nominee for the Seachange Retirement Village Partnership. This partnership comprised seven entities, at least five of which were companies as bare nominees for partnership syndicates, each comprising between nine and 20 investors.

The contract for the purchase of the land by Seachange Management was settled on or about 23 May 2000. The contract for the purchase of the land by Seachange Village was never settled. At least as at the time the disciplinary proceedings were heard by the Tribunal, July 2008, the development had not gone ahead and the investors had received no return. Of the $5,800,000 paid by the investors to Mr Brereton, some $4,436,010.52 was paid by him to various persons for purposes associated with land development. Included within that sum were payments made by Mr Brereton from his trust account to himself (or to one of the companies controlled by him, Majestic Theatre Co.) as a retainer of about $1,150,000, and payments from his trust account to Mr McLeod (or GDK) as a retainer of about the same sum (collectively ‘the retainers’).

The second contract shows Mr Brereton as the vendor’s solicitor, with Mr Bruno Alderuccio acting as the purchaser’s solicitor. Mr Alderuccio gave evidence before the Tribunal. The Tribunal considered that Mr Alderuccio was retained only for the conveyancing transaction and was largely unaware of the commercial arrangements for Seachange Village.[8] The deposit payable on the day of sale was $6,274,000. Under clause 9.1 of the special conditions of the second contract, Mr Brereton, as the vendor’s solicitor, was to hold the deposit in a special purpose account ‘for the benefit of both vendor and purchaser under the terms of the second contract, and pursuant to the Sale of Land Act 1962’[9] until authorised for release. That is, the special purpose account into which the deposit was to be paid was to be held by Mr Brereton for the benefit of Seachange Management and Seachange Village.
[8]Ibid fn 57.
[9]Ibid [68].

Section 27 of the Sale of Land Act 1962 sets out the basis upon which a vendor can obtain a release of deposit monies upon the purchaser accepting title and providing written authorisation. Unless released in accordance with s 27, the general rule is that the deposit is not released until settlement.

By letter dated 5 May 2000, Mr Alderuccio requested confirmation from Mr Brereton that the amount held in trust was the full deposit of $6,274,000. Mr Brereton did not respond. The Tribunal found that there was no record of this full amount ever being held in Mr Brereton’s trust account.

On 31 March 2000, Mr Brereton apparently forwarded a s 27 statement directly to Mr Hayden Lewis, a director of Seachange Village, seeking release of the deposit.

On 6 April 2000, Mr Alderuccio objected to the release of the deposit pending answers to requisitions and particulars in relation to mortgages and caveats. He urged Mr Lewis to forward information and clarify issues so as to protect the purchaser’s interests.

Mr Brereton continued to request, and subsequently ‘demand’ the return of an executed s 27 statement. The Tribunal found that his clear agitation was evident in his correspondence. On 23 May 2000, Mr Alderuccio wrote to Mr Brereton indicating that he was yet to receive answers to requisitions or a dated contract of sale.

On 23 May 2000, Mr Lewis faxed a signed but undated s 27 statement to Mr Alderuccio via GDK. On 24 May 2000, Mr Alderuccio confirmed his instructions by fax to Mr Lewis, noting he had not been instructed in relation to the contract documentation or the retirement village project. Mr Alderuccio then dated the s 27 statement on 25 May 2000 and forwarded it on the same day to Mr Brereton.

The Tribunal found that Mr Brereton was not entitled to release the deposit until 25 May 2000 when he received the signed written copy of the s 27 statement from Mr Alderuccio.

The Tribunal also found that, despite not being authorised to release the deposit, Mr Brereton had in fact made several payments from the deposit monies before the deposit was released. These payments included a series of transactions between 30 March 2000 and 11 May 2000, all well before the s 27 statement was signed.[10] These transactions amounted to $2,400,000 and included retainers to Mr Brereton himself totalling $600,000 as well as a payment to his company, Majestic Theatre Co, of $200,000, a transfer to another investment project ‘Western Retirement Village’ (also known as ‘the Mews’) of $600,000, and retainers to GDK totalling $900,000. I will refer to the payments withdrawn by Mr Brereton from the trust account between 30 March 2000 and 11 May 2000, before the authorisation of the release of the deposit on 25 May 2000, as ‘the early set of payments’.
[10]Ibid [62].

Mr Brereton made further payments to himself and, through GDK, to Mr McLeod after the release of the deposit was authorised, between 6 June 2000 and 25 September 2000. These payments included two further retainers to Mr Brereton, totalling $150,000, and a further retainer to GDK of $250,000, collectively ‘the later set of payments’.

The retainers, mentioned above, were included within the early and later sets of payments.

The Charges and Findings of the Tribunal

There were seven charges arising from the retirement project. While only Charge 5 was at the heart of the appeal, there were relevant and significant findings made by the Tribunal on the other charges.

Charge 1 alleged a failure by Mr Brereton to maintain a separate ledger account in his trust ledger in respect of each matter and ‘in respect of each client or person for whom trust money had been received by you’. [11]
[11]Notice of Charges, [19] (emphasis added).

Charge 2 alleged a wilful or reckless contravention of Rule 19(1) of the Trust Account Practice Rules by failing to maintain a separate ledger that specifically related to the purchase by Seachange Management of the land together with a further separate ledger relating to the sale of the land by Seachange Management to Seachange Village.

The Tribunal found Charge 2 proved but was more troubled by Charge 1. In considering Charge 1 the Tribunal was forced to grapple with the question, ‘For whom did Mr Brereton hold money on trust?’ To this question it answered, emphatically, that Mr Brereton did not hold money in his trust account on trust for the investors. It said:[12]

On its face, Rule 19(1) requires a separate ledger to be maintained for each client or person for whom trust money has been received. Unlike Charge 2, Charge 1 does not specify the particular clients or persons to whom the charge is intended to relate.
The Notice of Charges does however refer to six ‘examples’ where it is alleged that a separate trust ledger was not maintained, being the deposits made by Embridge Trial Pty Ltd $150,000, Bronak Pty Ltd $50,000, Oceaill Pty Ltd $100,000, Greg Watts $72,650, FP Bannon $109,160.46, and De Simone Consulting Pty Ltd $100,000. By reference to the structure chart, at least five of these are individual investors in the syndicates. We have therefore presumed that Charge 1 relates generally to the investors, with the allegation therefore being that a separate trust ledger ought to have been properly maintained for each investor depositing funds into the trust account for the Collendina project. This appears to accord with [the investigator] Mr Hall’s opinion where, in cross-examination, he expressed a view that there should be a separate ledger for each investor.

[12]Tribunal’s reasons, [41]-[42] (emphasis added, citations omitted).

The Tribunal thus conceived Charge 2 as a charge relating specifically to Seachange Management while Charge 1 was an allegation relating to obligations arising from Mr Brereton’s relationship with each individual investor. The Tribunal found that there was no relevant relationship between Mr Brereton and the individual investors. It said:[13]

The individual investors were not ‘clients’ of Brereton, and neither Mr Boyd nor Mr Jones (both of whom gave evidence for the Legal Services Commissioner) suggested a solicitor-client relationship existed between Brereton and themselves as individual investors.
Given the investors were not clients, for there to be a breach of Rule 19(1) it would need to be established that the investors were persons ‘for whom’ trust money had been received. … The rule uses the words ‘for whom’ not ‘from whom’, so the mere receipt of funds from the investors is not sufficient to trigger the operation of the rule. It needs to be established that Brereton received the funds from these investors to be held individually on their behalf. They must be capable of being characterised as persons ‘for whom’ the money was received.

[13]Ibid [44]-[45] (emphasis added).

The Tribunal rejected the view that GDK was the client or the person for whom money was received and went on to say:[14]

We consider it more likely that the funds were received for the ultimate benefit of Brereton’s client Seachange Management Pty Ltd as the purchaser of Lot 2 under the initial contract, and as the vendor responsible for the development under the second contract. Although not clearly recorded as such, we consider that the funds ought to be characterised as part of the deposit of $6,274,000 payable by Seachange Village Nominees Pty Ltd to Seachange Management Pty Ltd under the second contract. There is no other plausible explanation, given the documents before us. The person ‘for whom’ the funds were received was not the individual investors.

[14]Ibid [46] (emphasis added).

In concluding that Charge 1 had not been established as either misconduct or unsatisfactory conduct, the Tribunal tellingly observed:[15]

The Commissioner, for example, did not indicate who she considered was the actual person ‘for whom’ the trust money had been received – i.e. as between Seachange Management Pty Ltd and Seachange Village Nominees Pty Ltd or others. Moreover, there was no submission, evidence or authority in the context of Charge 1 that related to whether the funds received from investors might be considered to have been held in some form of ‘constructive trusteeship’ or other arrangement by Brereton that warranted them being recorded in a particular (and separate) way for the purpose of Rule 19(1). We do not consider it our role to draw such inferences in the absence of such submissions and evidence. Accordingly, Charge 1 is not established as either misconduct or unsatisfactory conduct.

[15]Ibid [48] (emphasis added). However, the Tribunal did state that it might have been prudent to record individual investors by way of separate ledger given the multi-layered structure of the retirement project.

While Charge 1 related only to a breach of Rule 19(1) of the Trust Account Practice Rules, its dismissal involved the Tribunal in making the following findings:

(1)There was no solicitor-client relationship between Mr Brereton and the individual investors;

(2) The funds which the individual investors provided to Mr Brereton:
(a)were not held for them – the investors were not the person or persons for whom Mr Brereton held the funds;
(b)were received and held by Mr Brereton for the benefit of Seachange Management, the vendor;

(3)There was no support for the proposition, at least in the context of Charge 1, that the funds were held by Mr Brereton on the basis of a constructive trust of which the investors were the beneficiaries.

These were important findings and the balance of the Tribunal’s reasons should be read in light of them. They also cast doubt on whether there was any room in the circumstances of the case for recognising that for some other reason Mr Brereton owed a fiduciary obligation to the individual investors, a position which the Commissioner continued to maintain on appeal.

It was also noteworthy that the Tribunal observed that the mere receipt of funds from the investors was not sufficient to trigger the operation of Rule 19(1). Ultimately, on appeal, the Commissioner relied upon the mere receipt of funds as sufficient in itself to give rise to a fiduciary obligation by Mr Brereton to the investors in the absence of being able to demonstrate that there was any other basis that would do so. I deal with this submission below.[16]
[16]See [106].

Charge 3 related to the unauthorised early set of payments. It was cast in the following terms:

The conduct described in paragraphs 1 to 18 and 21 to 24 [of the Notice of Charges] constitutes misconduct at common law within the meaning of paragraph (a) of the definition of misconduct in section 137 of the Legal Practice Act 1996 in that, in the course of engaging in legal practice, between 30 March 2000 and 11 May 2000 you applied deposit monies held by you in your trust account as a stakeholder pursuant to the terms of a contract of sale dated 10 March 2000 between Seachange Management Pty Ltd as vendor and Seachange Village Nominees Pty Ltd as purchaser before such deposit monies were released by the purchaser in accordance with the provisions of the contract of sale.

In finding Charge 3 proved, the Tribunal said this:[17]

Given our earlier characterisation of the payments into the trust account by individual investors of some $5,800,000 as part of the $6,274,000 deposit for Lot 2 under the second contract, and given the absence of any other substantive funds in the account, this $2,400,000 can only be considered to form part of the deposit of the purchaser Seachange Village Nominees Pty in relation to the second contract. As such, it was required to be held on trust in a stakeholder capacity in accordance with the terms of the contract of sale, and was not capable of release to the vendor Seachange Management Pty Ltd (or for any other purpose) except in accordance with that contract and the Sale of Land Act 1962. Even if the payments were capable of being authorised by GDK or Seachange Management Pty Ltd (as McLeod contends), Brereton could not legally transfer these funds out of his trust account before 25 May 2000.
We are therefore satisfied that Charge 3 is made out on the evidence. Further, we consider this to be a serious contravention amounting to wilful conduct on Brereton’s part, and consequently misconduct.

[17]Tribunal’s reasons, [58]-[59].

Charge 3 was found proved on the basis of the earlier finding that the funds were held as the deposit made by Seachange Village and could not be released except in accordance with the conditions of the second contract, that contract being one to which only Seachange Management and Seachange Village were parties.

Charge 3 thus took as its focus the contractual arrangements between the parties. The individual investors were not parties to the second contract. Nor did the second contract contain any representation that on receipt of funds from the investors, they were to be held for the investors or that the investors were to have beneficial title to the funds. Furthermore, while Seachange Management undertook to complete all the Works in accordance with the second contract, and to commence the Works ‘as soon as practicable’,[18] it is clear that a breach of that obligation (if there was any), would be a matter for Seachange Village and any claim it might seek to bring on the second contract.
[18]Clause 6.3(a).

The restraint on payments out of the Brereton trust account lay in the requirement under cl 9.1 that the deposit monies were to be held, until their authorised release, by Mr Brereton as a stakeholder for the benefit of the vendor and the purchaser, that is, the two companies, Seachange Management and Seachange Village. This requirement had its source in s 9AA(2)(b) of the Sale of Land Act 1962, to be released only in accordance with s 9AA(3). Section 9AA(2)(b) provides:

The deposit moneys paid by the purchaser prior to the registration of the plan under a prescribed contract of sale of a lot shall be paid (as the case requires)–
…
(b) into a special purpose account in the authorised deposit-taking institution in Victoria specified in the contract in the joint names of the purchaser and the vendor.

Section 9AA(3) provided:

An account established under subsection (2)(b) may be drawn upon only with the signature of both the vendor and the purchaser or the personal representative of the vendor or purchaser (as the case may be).

The basis for the finding that Charge 3 was proved lay in the non-compliance with those statutory requirements, and not in a recognition of any fiduciary obligation owed to the individual investors.

Charges 4 and 5 related to the early set of payments as well as the later set of payments.[19]
[19]Tribunal’s reasons, [62].

Charge 4 involved an allegation of statutory misconduct, directed at Mr Brereton:

The conduct referred to in paragraphs 1 to 18, 21 to 23 and 25 to 26 [of the Notice of Charges] constitutes misconduct within the meaning of paragraph (a)(i) of the definition of misconduct in section 137 of the Legal Practice Act 1996 in that, in the course of engaging in legal practice, between 30 March and 25 September 2000 you engaged in a course of conduct being a wilful or reckless contravention of section 174(3) of the Legal Practice Act 1996 by withdrawing money from your trust account held for the purpose of the Collendina project and applying such money for another purpose without the consent or direction of the persons for whom you held that money on trust.

The statutory misconduct alleged in Charge 4 was that set out in s 137 of the Act, which relevantly provided:

(a)misconduct by a legal practitioner or firm in the course of engaging in legal practice, including –
(i) wilful or reckless contravention of this Act, the regulations or practice rules that apply to the practitioner or firm or any other Act that relates to legal practice.

The contravention was alleged to be a breach of s 174(3) of the Act:

A legal practitioner or firm may withdraw trust money from the trust account only –
(a)for payment to the person for or on behalf of whom the money was received or in accordance with that person’s direction; or
(b)in accordance with this Act and the practice rules, to satisfy a claim that the practitioner or firm has against that person for legal costs; or

…
(g) as otherwise authorised by law.

The conduct relied upon to support Charges 3, 4 and 5 included the claim in paragraph 18 of the Notice of Charges that:

All monies received by you into your trust account for the purposes of the Collendina project were to be held by you in trust and withdrawn from trust and applied by you only for the purposes of the Collendina project.

Paragraph 18 thus appeared to be an allegation of an express trust created on the condition that the monies provided were to be used for a specific purpose,[20] the condition being imposed upon those funds which were deposited into Mr Brereton’s trust account. Mr Brereton rejected the allegation that there was ever a specific purpose trust and pointed to the lack of evidence supporting any such trust, in the second contract or otherwise. This issue is discussed further below. [21]
[20]See Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. However, as Gummow J said in Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491, 503: ‘To speak of a Quistclose trust as if it were a new legal institution rather than an example of the particular operation of principle upon the facts as found is to set the listener or reader off on a false path’.
[21]See [86] – [103].

The other particulars relied on for Charge 4 reveal the way in which the Commissioner put his case before the Tribunal. Paragraphs 21 – 23 related to the deposit monies and the requirement to hold them on behalf of the vendor and purchaser in accordance with the statutory duty under s 9AA(2)(b) of the Sale of Land Act, the subject-matter of Charge 3. Paragraph 25 alleged a number of transactions consisting of payments out of the Mr Brereton’s trust account between 30 March 2000 and 25 September 2000. Paragraph 26 alleged:

Each of the transactions set out in the particulars joined to paragraph 25 [including both the early and later set of payments] represented a payment or transfer by you from your trust account for purposes other than for the Collendina project without the consent or direction of the persons for whom you held that money on trust.[22]

[22]Emphasis added.

It was conceded by the Commissioner on the appeal that the ‘persons’ referred to in paragraph 26 were the individual investors. It followed that Charge 4 alleged in substance that Mr Brereton had engaged in a wilful or reckless contravention of the obligation not to withdraw trust money from his trust account save in accordance with the consent or direction of the individual investors. This was consistent with the Commissioner’s case as it had been presented before the Tribunal, before the trial judge, and on appeal, namely, that the retainers paid by Mr Brereton from his trust account to himself, Mr McLeod, or their respective companies, amounted to a breach of a fiduciary obligation Mr Brereton owed to the individual investors.

The Commissioner’s case on Charge 4 thus faced the inherent difficulty that the Tribunal, in its dismissal of Charge 1, had made the findings mentioned above[23] that the individual investors had never been Mr Brereton’s clients, that the investors were not the person or persons ‘for whom’ the money in his trust account had been received or held, and that, rather, the person ‘for whom’ the trust funds were held was Seachange Management (putting to one side the effect of the specific statutory duty under the Sale of Land Act to hold the funds, before the release of the deposit, for both Seachange Management and Seachange Village). Implicitly, the Tribunal had found that Mr Brereton had never held money for the individual investors, in a specific trust or otherwise; that is, there had been no trust created of which Mr Brereton was the trustee with the individual investors as beneficiaries, and that any fiduciary obligation he owed was owed to Seachange Management. It was also significant that there had been no contractual relationship between Mr Brereton and the individual investors.
[23]See above, [30].

The Tribunal rejected the basis upon which the Commissioner put its case in support of Charge 4. That rejection was consistent with its earlier set of findings with respect to Charge 1. It said:[24]

The Legal Services Commissioner alleges that all of these payments [that is, the early and the later set of payments] represented a payment for purposes other than the Collendina project, without the consent or direction of the persons for whom Brereton held the money on trust. Two investors (Boyd and Jones) gave evidence to the effect that they had invested money solely for the purpose of the Collendina project, that they had not authorised the money to be spent on anything other than this project, and that they had not authorised the transfer of funds to other projects or by way of retainers to Brereton or GDK.
Given our finding under Charge 1 (i.e. that the investors were not Brereton’s client, nor the persons ‘for whom’ the trust money had been received), we are not convinced that the investors, individually, needed to consent or direct to each transfer of funds. Through the multi-layered corporate structure, they [the investors] had in our view collectively ceded this responsibility to Seachange Management Pty Ltd and Seachange Village Nominees Pty Ltd as the nominated vendor/developer and purchaser.

[24]Tribunal’s reasons, [64]-[65] (citations omitted).

The Tribunal found that, after the release of the deposit, the monies were held on trust for the vendor, Seachange Management, and no breach of s 174(3) of the Act could be found when there was ‘evidence of consent or direction from Seachange Management Pty Ltd as the person for whom those funds were then held.’[25] Importantly, the Tribunal found that, once the release of the deposit had been authorised, Mr Brereton was not restricted in the purpose for which he could transfer the funds that had been deposited – he was not bound to use those funds solely for the retirement project. The Tribunal expressly put to one side whether there might be other forms of proceedings that could be brought if there had been a fraud on the investors. This may have been the case if Mr Brereton had never had the intention of completing the Works (of which neither an allegation nor a finding was made). However, the Tribunal’s legal analysis of the capacity of Mr Brereton to use the funds, after the release of the deposit, was clear:[26]

[A]fter 25 May 2000, the situation materially changes. With the release of the deposit, and the then prevailing corporate structure for the investment, Seachange Management Pty Ltd could technically consent or direct the transfer of funds other than for the purpose for which they had been initially deposited – without breaching s 174(3) of the Legal Practice Act 1996.

[25]Ibid [70].

[26]Ibid [69] (emphasis added).

Given the earlier findings on Charge 1, it was unsurprising that the Tribunal found Charge 4 to be proved in relation only to the early set of payments, but not in relation to the later set of payments.[27] With respect to the early set of payments, the Tribunal said:[28]

Mr Murley asserted that Mr McLeod, as a director of Seachange Management Pty Ltd could and did authorise the release of funds both before and after 25 May 2000. Indeed, Mr McLeod’s oral testimony was to that general effect.
We do not agree with Mr Murley in relation to this assertion for the period prior to 25 May 2000 when the deposit was released. Prior to this time, as we have found in relation to Charge 3, the trust monies formed part of the deposit paid by Seachange Village Nominees Pty Ltd and were being held in the trust account in a stakeholder capacity for the benefit of both vendor and purchaser under the terms of the second contract, and pursuant to the Sale of Land Act 1962. Mr McLeod was not a director of Seachange Village Nominees Pty Ltd. Without the section 27 statement, Seachange Management Pty Ltd could not alone consent to or direct the transfer of the part of the deposit for another purpose, and Brereton could not act upon any purported authorisation to that effect. Charge 4 is therefore made out in relation to the $2,400,000 withdrawn from the trust account between 30 March 2000 and 11 May 2000.

[27]Ibid [68], [72] respectively.

[28]Ibid [67]-[68] (citations omitted).

The most serious charge, and, as I have mentioned, the charge that lay at the heart of the appeal, was Charge 5. Charge 5 relied upon all the same particulars as Charge 4 and thus was based on an understanding of the relationship between Mr Brereton and the investors which had already been rejected by the Tribunal, in particular, the need for the early and later set of payments to have had the consent or authorisation of the individual investors.[29] Charge 5 alleged misconduct at common law through misappropriation:

[T]he conduct described in paragraphs 1 to 18, 21 to 23 and 25 to 26 [of the Notice of Charges] constitutes misconduct at common law within the meaning of paragraph (a) of the definition of misconduct in section 137 of the Legal Practice Act 1996 in that you misappropriated trust moneys.

[29]Paragraph 26 of the Notice of Charges.

The Tribunal approached Charge 5 as an allegation which ‘gets more to the substance of the payments, rather than whether or not there was technical consent or direction from Seachange Management Pty Ltd.’[30] It thus drew a distinction between ‘technical’ authorisation of payments and their ‘substance’. The distinction was curious if ‘technical’ was intended to reflect strict legal analysis because, once that legal analysis had been accepted, there were consequences which followed (as the trial judge well understood) that could not be defeated by countervailing matters of ‘substance’ unless those matters had an effect on the legal relationships between the parties.
[30]Tribunal’s reasons [74].

The Tribunal concluded that Charge 5 was made out in part. It drew a distinction not based upon the significance of the date on which the deposit was authorised to be released, or between the early and the later set of payments, but between payments out of the trust account which were directed to other actual development projects and those payments out of the trust account which constituted the retainers. With respect to the retainers, the Tribunal said in two critical paragraphs of their reasoning (paragraphs 80 and 81):[31]

Given McLeod and Brereton essentially controlled Seachange Management Pty Ltd, we do not believe Mr Brereton can hide behind the ‘corporate veil’ of that entity (and the ‘consent’ of that company to the payments via Mr McLeod) in relation to this more general charge of misappropriation. Given the intermingling of his business interests and his role as a lawyer responsible for trust money, he well knew (or ought to have known) his legal and fiduciary responsibilities to those beneficially entitled to the invested funds, and on whose behalf he and GDK were ostensibly managing those funds. He also well knew (or ought to have known) his obligations to properly account for the trust money. Brereton should not therefore have paid himself retainers from the project without clear contractual arrangements in place, clear authority and transparent disclosure. There is nothing in the material discovered in the course of Mr Hall’s investigation that provide any evidence at all of such arrangement, authority or disclosure, or that indicates that Brereton had performed work for which a retainer was payable. …
We are therefore satisfied that Charge 5 is established in relation to the payments made from Brereton’s trust account to GDK and Brereton, or to related entities of Brereton such as Majestic Theatre Co. To our mind, there has been a systematic misappropriation of funds by Brereton for his own use and benefit, and for the use [and] benefit of his business partner. This misappropriation amounts to approximately $1,150,000 to GDK and $1,150,000 to Brereton himself without reasonable explanation or excuse. We find this both on the facts and evidence before us, and by the negative inferences we are entitled to draw from the absence of any adequate explanation (indeed, no explanation at all) for these payments. Mr McLeod’s evidence after the event that he ‘would have’ authorised these payments as a director of Seachange Management Pty Ltd is no defence to this charge, particularly as his company GDK appears to have shared equally in the funds misappropriated by Brereton from the trust account.

[31]Ibid [80]-[81] (emphasis added).

Given the Tribunal’s findings on Charge 1, reinforced in relation to Charge 3, that the individual investors were not Mr Brereton’s clients,[32] that at no time did Mr Brereton hold the deposit monies on behalf of the investors (before the release of the deposit, holding it for the vendor and purchaser companies[33] and, after the release of the deposit, holding it for the vendor, Seachange Management,[34] while not being restricted at that stage to using the funds deposited only for the purpose of the retirement project[35]), the obvious questions to be addressed arising from paragraphs 80 and 81 are these: ‘To whom did the Tribunal consider Mr Brereton owed legal and fiduciary obligations? What persons did the Tribunal consider were beneficially entitled to the invested funds?’
[32]Ibid [44].
[33]Ibid [68].
[34]Ibid [69].
[35]Ibid.

In my opinion, the only analysis consistent with the Tribunal’s earlier findings is that, before the release of the deposit, the persons to whom Mr Brereton owed legal and fiduciary obligations were the vendor and purchaser companies, Seachange Management and Seachange Village respectively, and, after the release of the deposit, the person to whom Mr Brereton owed legal and fiduciary obligations was the company controlled by him and Mr McLeod, Seachange Management. The same conclusions can be drawn as to the persons who were beneficially entitled to the invested funds. The Commissioner did not put his case on the basis that Charge 5 alleged that Mr Brereton was guilty of misappropriation at common law because he breached his fiduciary obligation to Seachange Management by withdrawing funds for the purpose of paying the retainers in the knowledge that he had no legal authorisation to do so.[36] The primary and essential way in which the Commissioner’s case was put before the Tribunal was that the investors were the clients of Mr Brereton. That case was rejected unequivocally by the Tribunal and its findings in relation to Charges 1, 3 and 4 precluded, in my view, any recognition that Mr Brereton owed legal or fiduciary obligations to the individual investors or that the investors enjoyed equitable title to the funds they deposited in Mr Brereton’s trust account after ceding what rights they had in those funds to Seachange Village.[37]
[36]Whether this alternative case had ever been put was explored in the hearing of the appeal. See below, [105].
[37]Tribunal’s reasons, [65].

The construction of paragraphs 80 and 81 of the Tribunal’s reasons was a principal issue before the trial judge, and on the appeal. The Commissioner argued that when the Tribunal referred to ‘those beneficially entitled to the invested funds’, it intended to refer to the individual investors. I have already indicated that I consider this interpretation to be precluded by the analysis the Tribunal had already undertaken of the legal relationships between the parties and the findings it had made on the other charges. However, if the Tribunal intended, consistently with its earlier findings, to refer to Seachange Management as the person to whom the legal and fiduciary obligations were owed, it is difficult to understand how it could conclude that Charge 5 was proved. On what basis could it conclude, at least after the release of the deposit, that Mr Brereton was guilty of misappropriation when it had found, in its determination of Charge 4, that he was not bound to use the funds deposited only for the purpose of the retirement village project? This logical tension in the Tribunal’s reasons, together with the lack of any finding of dishonesty in the circumstances of the case, led the trial judge not only to conclude that the Tribunal’s orders with respect to Charge 5 should be set aside but also to refuse to remit the matter back to the Tribunal. He reached this conclusion partly on the ground that it was not open to the Tribunal, given its earlier findings, to uphold the allegations in Charge 5.

Charges 6 and 7 related to the existence of a deficiency in Mr Brereton’s trust account without reasonable excuse and the failure to notify his auditor of the deficiency, respectively. The Tribunal concluded that Charge 6 was made out but that the evidence did not support Charge 7.

The reasons of the trial judge

Mr Brereton appealed to the trial division of the Supreme Court[38] on the ground that the Tribunal had erred in law in finding that he had misappropriated trust monies in contravention of his legal and fiduciary responsibilities to ‘those beneficially entitled to the invested funds’ and that such conduct constituted misconduct at common law, in circumstances in which the Tribunal had:

(1) found that the deposit monies held in trust by Mr Brereton were not held for the individual investors in the Collendina project; and

(2) found that the individual investors were not Mr Brereton’s clients.

[38]Pursuant to leave granted by Associate Justice Daly on 19 June 2009.

In considering the reasons of the trial judge with respect to these issues, it is convenient to consider also the manner in which his Honour’s reasons were challenged on the appeal in this Court.

The trial judge accepted as fundamental to the outcome of the appeal before him that the Tribunal had rejected the case put by the Commissioner that the investors were Mr Brereton’s clients and that the monies paid by the investors to Mr Brereton were kept by him on their behalf. The trial judge observed that it was central to the Tribunal’s reasons that Mr Brereton’s client was Seachange Management, the vendor, and the money received by Mr Brereton from the investors was a deposit paid on behalf of Seachange Village, the purchaser.

In allowing the appeal, his Honour’s reasons rested upon two issues. The first was that Charge 5 incorporated an allegation of dishonesty that required the application of a subjective test of knowledge, belief or intent which had not been appreciated by the Tribunal. The second matter was that the Tribunal’s reasoning on Charge 5 was inconsistent with its findings on the earlier charges, as had been submitted by Mr Brereton. This second conclusion precluded any utility in remitting the matter to the Tribunal to consider whether dishonesty was made out in respect of Charge 5 because, given the findings with respect to Charge 4, a finding of dishonesty on Charge 5 was not open.

I will deal with each of these two issues in turn.

Dishonesty

With respect to the first issue, his Honour found that the Tribunal erred in failing to appreciate the distinction between wilful and reckless disregard, on the one hand, and dishonesty, on the other. He accepted that Charge 4, which was not under appeal before him, had been made out by reason of the wilful or reckless disregard shown by Mr Brereton with respect to the payments made before the deposit had been authorised for release, but not otherwise, given that Mr McLeod, on behalf of Seachange Management, had authorised the later payments. He noted that it was the same conduct which was the subject of the allegation of Charges 4 and 5 and that the difference lay only in the fault element.

He held that Charge 5 contained a requirement of dishonesty because the use of the word ‘misappropriation’ within the Act, without a statutory definition, reflected the ordinary meaning of that word, which was to ‘appropriate to wrong uses; chiefly, to apply dishonestly to one’s own use (money belonging to another)’. [39] On the appeal, the Commissioner accepted that dishonesty was implicit in the charge alleging misappropriation, particularly given the facts alleged in the particulars. However, he claimed that all that he needed to do was to plead facts establishing a ‘wrongful conversion’ and it then fell to Mr Brereton to establish a claim of right and an honest belief in such claim.
[39]Oxford English Dictionary; see also J Burke (ed), Jowitt’s Dictionary of English Law (2^nd ed, 1977).

What lay at the heart of the trial judge’s reasons as to the error committed by the Tribunal was the view that it had failed to apply the appropriate test for dishonesty. His Honour relied upon Peters v The Queen[40] as authority for the test to be applied for determining whether an act is dishonest. That test has been applied in the context of professional disciplinary conduct in Harle v Legal Practitioners Liability Committee[41] where Chernov JA stated that whether ‘particular conduct amounts to dishonesty involves the consideration of the mental state – the knowledge, belief or intention – of the person whose conduct is impugned’.[42] By reference to Harle the trial judge said:[43]

What must be established is that the person subjectively intended to do the acts which are said to be objectively dishonest by the ordinary standards of reasonable and honest people. Thus the course to be adopted in determining whether conduct is dishonest was explained by Toohey and Gaudron JJ in Peters v R as follows:
In a case in which it is necessary for a jury to decide whether an act is dishonest, the proper course is for the trial judge to identify the knowledge, belief or intent which is said to render that act dishonest and to instruct the jury to decide whether the accused had that knowledge, belief or intent and, if so, to determine whether, on that account, the act was dishonest … If the question is whether the act was dishonest according to ordinary notions, it is sufficient that the jury be instructed that that is to be decided by the standards of ordinary, decent people.

The steps involved in this formulation are: (1) identify the knowledge, belief, or intent which is said to render the acts dishonest; (2) determine whether the accused (or defendant in the civil context) subjectively had that knowledge, belief or intent; and (3) determine whether, on that account, the acts were objectively dishonest according to the standards of ordinary and decent (that is reasonable and honest) people.

[40](1998) 192 CLR 493.

[41](2004) 13 ANZ Insurance Cases 61-605 (Callaway and Buchanan JJA agreed with the reasons of Chernov JA).

[42]Ibid 77, 302, [30] (citations omitted).

[43]Reasons, [53]-[54] (citations omitted).

His Honour considered that the Tribunal had failed to apply the Peters test for dishonesty:[44]

In the present case, the tribunal did not address the dishonesty issue. It did not identify the knowledge, belief or intent said to render the making of the payments by Mr Brereton dishonest. It did not determine whether he subjectively had that knowledge, belief or intent. It did not judge his actions in making the payments against the objective standard of dishonesty of reasonable and honest people. It found that Mr Brereton was guilty of misconduct at common law by having ‘misappropriated trust moneys’ and that ‘he well knew (or ought to have known)’ what his responsibilities were. It is the alternative state of mind – ‘ought to have known’ – that is the problem.
Generally, professional misconduct at common law is conduct which ‘would reasonably be regarded as disgraceful or dishonourable by solicitors of good repute and competency … Mere negligence, even of a serious character, will not suffice.’ …
The state of knowledge, belief or intent associated with being negligent, incompetent and in reckless disregard of professional responsibilities is less than, and does not amount to, dishonesty, and is not sufficient to establish that a lawyer is guilty of misappropriation. Therefore, to find Mr Brereton guilty of misconduct based on misappropriation, the tribunal had to be satisfied to a high standard of proof that he knew he did not have authority to make the relevant payments, even assuming for present purposes that he did not have that authority. The tribunal did not do so, which was an error of law.

[44]Ibid [57]-[59] (citations omitted).

If dishonesty is a necessary element of an allegation of misappropriation, in my opinion it is clear that the Tribunal fell into error for it failed to consider whether Mr Brereton had the requisite subjective state of mind. The Tribunal failed to make any finding as to whether or not Mr Brereton subjectively knew that he did not have the authority to pay the retainers.

However, and with great respect to the trial judge, it is unclear whether dishonesty is a necessary element of misappropriation in the common law sense. In my opinion, there is room for doubt whether dishonesty is always an integral element of a charge of misappropriation, within a professional disciplinary context.[45]
[45]The Full Court of the Supreme Court of South Australia in Legal Practitioners Conduct Board v Jones [2010] SASCFC 51, [12] acknowledged the distinction between misappropriation and fraudulent misappropriation in this context. If, as Callaway JA said in R v Lawrence [1997] 1 VR 459, 466: ‘Fraud and dishonesty may be regarded as interchangeable terms in relation to the offence of misappropriating property’, the question raised is this: if an allegation of misappropriation necessarily incorporates dishonesty as an element, what is added by the ostensibly additional element of charging a practitioner with fraudulent misappropriation?

This issue was addressed indirectly by the High Court in Daly v Sydney Stock Exchange Ltd[46] in the context of an alleged defalcation by a stockbroker. The case concerned an investor who had placed money with a firm of brokers on the strength of advice by an employee of the firm that it was not a good time to buy shares and that the investor’s money should be placed on deposit with the firm until it was a good time to buy. The investor argued, inter alia, that his pecuniary loss was a defalcation within s 97(1)(b) of the Securities Industry Act 1975 (NSW). The Court held that there had been no defalcation. Gibbs CJ (with whose judgment Wilson and Dawson JJ agreed) turned to the question of whether a defalcation could occur only where there was dishonesty. He said:[47]

It was held in the Court of Appeal that the word “defalcation” within the meaning of ss. 97 and 58 imports a dishonest dealing. With all respect I think that although the typical case of defalcation will be likely to involve dishonesty, it is too narrow a view to hold that there can be no defalcation within the meaning of the sections without dishonesty. According to the Oxford English Dictionary, the relevant meaning of “defalcation” is “a monetary deficiency through breach of trust by one who has the management or charge of funds; a fraudulent deficiency in money matters”. The Macquarie Dictionary defines the word as “misappropriation of money, etc., held by a trustee or other fiduciary”. The etymology of the word supports the view that a wrongful diminution or reduction of the amount of the moneys held in trust or in a fiduciary capacity can properly be called a defalcation even if the deficiency was not due to dishonesty.

[46](1986) 160 CLR 371. See also The Council of the Law Society of NSW v Doherty [2010] NSWCA 177, [37]-[43].

[47](1986) 160 CLR 371, 380 (emphasis added).

He went on to conclude that, in the absence of a statutory definition, the meaning of ‘defalcation’, liberally construed, did not require as a necessary element that the conduct was dishonest. He considered the position in the United States:[48]

In the United States the word has been held capable of including any failure by a person acting in a fiduciary capacity to account for trust funds: see In re Herbst; First Citizens’ Bank & Trust Co. v Parker, and see the other cases cited in s. 26A Corpus Juris Secundum, at p. 125. Those cases of course depended on the statutory context in which the word “defalcation” appeared. The provisions of the Securities Industry Acts which deal with fidelity funds appear to have been intended to afford a relief which the law did not provide and should be given a liberal construction. It would seem consonant with the object of those provisions that a person who had suffered loss as a result of a failure to account for funds entrusted to a firm as trustee should be able to recover from the fund even if the failure was due, e.g., to negligence rather than dishonesty.

[48]Ibid 380-1 (emphasis added, citations omitted).

He contrasted the liberal construction of the word with those contexts in which criminality is implied:[49]

The relevant provisions of the Securities Industry Act 1970 were modelled on those of the Legal Profession Practice Act 1958 (Vict.), under which a defalcation has been held to mean a criminal act or a criminal failure to account (Eumeralla Finance Co. Pty. Ltd. v. Law Institute of Victoria), but that result depended on the words of a definition of “defalcation” which appears in the Victorian statute but was not repeated in the Securities Industry Acts.

[49]Ibid 381 (citations omitted).

‘Defalcation’ is defined in the Legal PracticeAct[50] as meaning an offence under Division 2 of Part I of the Crimes Act 1958 or various other offences, including embezzlement, failure to account and fraudulent misappropriation. What is significant about the reasoning of Gibbs CJ in Daly v Sydney Stock Exchange Ltd is he recognised that, in the absence of a statutory definition, a defalcation need not require dishonesty, even where the defalcation occurs by means of a misappropriation. This is consistent with the objectives of legislation creating civil norms governing the conduct of legal practitioners, the aim of which is the protection of the public and not the denunciation of the practitioner. That aim is furthered if the threshold for disciplinary action is lower rather than higher, with the penalty for a contravention being suitably adjusted depending on the circumstances of the case. [51] As Doyle CJ said in Law Society (SA) v Murphy:[52]

The Court is concerned to protect the public, not to punish a practitioner who has done wrong, although of course the removal of the practitioner’s name from the Roll will operate as a punishment. The Court acts to protect the public and the administration of justice by preventing a person from acting as a legal practitioner, and by demonstrating that the person is, by reason of his or her conduct, not fit to remain a member of a profession that plays an important part in the administration of justice and in which the public is entitled to place great trust.

[50]Section 3.

[51]Furthermore, dictionary definitions of the word ‘misappropriation’ vary, including those from legal definitions, sometimes referring to no more than a ‘wrongful’ conversion (eg, Daniel Greenberg (ed), Stroud’s Judicial Dictionary of Words and Phrases (7^th ed, 2009), 1689) and others referring to fraud (eg, Bouvier’s Law Dictionary and Concise Encyclopaedia (8^th ed, 1914) 2221) and criminality (eg David M Walker, The Oxford Companion to Law (1980), 843).

[52](1999) 201 LSJS 456, 460-1. See also Quinn v Law Institute of Victoria [2005] VSCA 326, [1]; Woods v Legal Ombudsman [2002] VSCA 133, [7]; Legal Practitioners Complaints Committee v Lashansky [2007] WASC 211; Law Society of New South Wales v Moulton [1981] 2 NSWLR 736, 750-1; New South Wales Bar Association v Evatt (1968) 117 CLR 177, 183-4; Clyne v The New South Wales Bar Association (1960) 104 CLR 186, 201-2; Ziems v The Prothonotary of the Supreme Court of New South Wales (1957) 97 CLR 279.

In my opinion, there remains doubt whether at law a legal practitioner can only be guilty of misappropriation if he or she has acted dishonestly. [53] However, it is unnecessary to decide the issue in this case as his Honour was correct in concluding that the particulars relied on by the Commissioner in support of its allegation of misappropriation accused Mr Brereton of dishonesty, as was accepted by the Commissioner.[54] That being so, the Tribunal erred, as the trial judge correctly found, in failing to apply the appropriate test for dishonesty as set out in Peters v The Queen.
[53] In my view the context is quite different from that considered by Demack J in Gladstone City Council v The Local Government Superannuation Board [1980] Qd R 48 where s 72(1) of the Local Government Superannuation Act 1964 provided that, when an employee was dismissed for misappropriation, the amount of the money misappropriated should be a first charge on any monies payable to the employee. He observed that the power under s 72(1) conferred an important right on a local authority and if it wished to exercise that right it should proceed strictly. Without relying on authority, he concluded that ‘in plain language the words “misappropriation of moneys” means stealing’ (at 56) and that the minute of a meeting of the Gladstone City Council failed expressly to allege stealing, merely hinting that that might be so by alleging that the dismissal of the employee occurred because of a ‘failure to account lawfully to the Council for monies under his control’.
[54]For this, paragraphs [18] and [26] of the Notice of Charges, extracted above at [44] and [46], would be particularly relevant.

There was a further difficulty with this aspect of the Commissioner’s case. This related to the question of where the onus of proof lay when an allegation of dishonesty was made. On the appeal to this Court the Commissioner submitted, relying on The Council of the Law Society of New South Wales v Doherty,[55] that all that he needed to do was to plead facts establishing a ‘wrongful conversion’, it then falling to Mr Brereton to establish a claim of right and an honest belief in such claim. I do not read Doherty’s case as supporting that conclusion.
[55][2010] NSWCA 177.

Doherty’s case involved an appeal by the New South Wales Law Society as to the adequacy of an order made by the Administrative Decisions Tribunal (‘the ADT’) in cancelling Mr Doherty’s practising certificate for twelve months rather than striking his name off the roll. The ADT found that Mr Doherty was guilty of having misappropriated $35,000 belonging to Mr Rafter and held that there was professional misconduct. The Law Society argued that certain other conduct should not have been considered to be minor but that in itself, the findings on the charge of misappropriation could lead to only one consequence, namely striking off. The New South Wales Court of Appeal disagreed. In expressing that disagreement, Young JA (with whom Tobias and Campbell JJA agreed) said:[56]

The respondent [Mr Doherty] contended that, although “technically” there was a misappropriation of Mr Rafter’s $35,000, he genuinely believed that he was entitled to use the money the way he did. …
It must be noted that in most cases of appropriation of the property of another, claim of right is a good defence and to establish a claim of right, all the accused need show is that he or she had an honest belief in the claim and not also that that belief was based on logic or reason: R v Nundah (1916) 16 SR (NSW) 482, a proposition that has never been doubted.

[56]Ibid [37], [41].

In my opinion, when Young JA said that ‘to establish a claim of right, all the accused need show is that he or she had an honest belief in the claim’, the statement was not intended to express the view that the onus lay with the defendant to disprove an allegation of dishonesty. The statement was intended to express no more than that a defendant, when faced with the allegation that he or she subjectively intended to perform actions that are objectively dishonest by the ordinary standards of reasonable and honest people, can resist that allegation by establishing an honest belief in the claim. This requires that there be something of substance for the defendant to resist. The statement in Doherty’s case does not support the proposition that a reverse onus lies on a defendant to prove a claim of right whenever an allegation in a written charge implies that a defendant has acted dishonestly, without there being any identification, or evidence in support, of the specific mental state of the defendant said to render the act dishonest or the manner in which it is contrary to the standards of ordinary and decent people. In my view, the statement cannot be properly relied upon to obviate the need for the party alleging dishonesty to prove it to the requisite standard.

The observations of the Court in Doherty’s case reflect the accepted understanding that, as explained by Callaway JA in R v Lawrence:[57]

The common law concept of dishonesty, at least in a criminal context, is subjective. If a person has a belief inconsistent with dishonesty, he cannot be convicted of an offence of which that is an element even if his belief is unreasonable. The reasonableness of the belief goes only to its plausibility: “a man may be a stupid, unreasonable, or wrong-headed man, without being a dishonest one”. See R v Nundah (1916) 16 S.R. (N.S.W.) 482 at 489. That case illustrates the cognate proposition that a genuine belief that one has a lawful claim is a defence in relation to property offences at common law and under statutes to which the common law applies. Such a bona fide claim of right may be both unreasonable and unfounded, although, if it is, it is less likely to be believed or, more correctly, to engender a reasonable doubt.

[57][1997] 1 VR 459, 466-7.

It follows that it was incumbent on the Commissioner to establish that Mr Brereton was dishonest, in the Peters sense, in the payment of the retainers. It did not fall to Mr Brereton to prove that he had acted honestly, by choosing to give evidence or otherwise, at pain of an adverse inference being drawn against him in the absence of any evidence from the Commissioner.

As I have indicated above, I agree with the trial judge that the Tribunal committed an error of law in finding that Charge 5 was proved without addressing the dishonesty issue; without identifying the knowledge, belief or intention said to render the payment of the retainers dishonest; without determining whether Mr Brereton subjectively had the required knowledge, belief or intention; and in particular without determining that he knew he did not have authority to make the relevant payments. I also agree with the trial judge that the Tribunal erred in applying a standard of negligence – ‘ought to have known’ – when, with respect to the nature of the facts alleged, it was obliged to determine Charge 5 in accordance with the requirements of Peters.

With respect to the standard of proof applicable to Charge 5, his Honour said:[58]

When applying these principles [drawn from Peters] in a civil case, the civil standard of proof on the balance of probabilities applies. Of course, where the allegation in a civil case is of misappropriation, a high standard of probability is required, due to the gravity of the allegation.

[58]Reasons, [55].

He relied upon Briginshaw v Briginshaw[59] for the second proposition and later said:[60]

[T]o find Mr Brereton guilty of misconduct based on misappropriation, the tribunal had to be satisfied to a high standard of proof that he knew he did not have authority to make the relevant payments, even assuming for present purposes that he did not have that authority.

[59](1938) 60 CLR 336.

[60]Reasons, [59], as extracted above, [67].

The Commissioner argued on the appeal that the trial judge erred by failing to make mention of such cases as Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd[61]or Ex parte New South Wales Bar Association; Re Evatt.[62] He submitted that his Honour erred by proceeding on the basis that a higher standard of proof (somewhere between the civil and criminal standards) was required as opposed to recognising simply the need for a high level of satisfaction that the balance of probabilities standard had been met.
[61](1992) 67 ALJR 170.
[62][1967] 1 NSWR 609, 610-1, 619.

In my opinion, the Commissioner’s submissions should be rejected. It was fundamental to his Honour’s reasons that the Tribunal failed to apply the Peters test as it should have done. In those circumstances, it could make no material difference what standard of satisfaction his Honour considered that the Tribunal ought to have arrived at; if the Tribunal’s analysis was flawed because it inappropriately applied a negligence standard, it could make no difference what standard of satisfaction the Tribunal reached in its application of the wrong test.

I turn to consider the logical relationship between the Tribunal’s findings on the several charges, and most particularly those made with respect to Charges 4 and 5, being mindful of the central issue at the heart of the proceedings, namely, whether Mr Brereton owed a fiduciary relationship to the investors.

The inconsistency in the Tribunal’s findings between Charges 4 and 5

The trial judge’s analysis of the legal arrangements between the parties was aimed at demonstrating that the findings made by the Tribunal in paragraph 80 of its reasons were inconsistent with its earlier findings, especially those in relation to Charge 4, and could not be supported on the evidence. It is necessary to set out much of that analysis in full:[63]
[63]Reasons, [29]-30] and [34]-[37] (citations omitted).

The tribunal found charge 4 to be proven with respect to the payments made in the first period [the early set of payments]. …
The tribunal found charge 4 not proven with respect to the payments made in the second period [the later set of payments]. It found that, after 25 May 2000, Seachange Management had the legal capacity alone to consent to the payments which were made in that period. The tribunal received evidence specifically dealing with that subject, which it accepted with some understandable misgivings. The evidence was that Mr McLeod, on behalf of Seachange Management, had authorised all of the payments referred to in the charges, including the payments made in the second period. Mr Brereton was the only other director of the company and on its behalf must be taken to have authorised the payments which he made to himself. The tribunal therefore dismissed charge 4 in respect of those payments. That decision is not under challenge in this appeal. Nor is the reasoning on which it is based.
…
As regards the payments made in the second period, the tribunal accepted Mr McLeod’s ‘plausible’ evidence that the payments with respect to ‘other actual development projects’ were authorised by Seachange Management, which he and Mr Brereton controlled. The understandable tenor of this finding was that the tribunal was accepting this blatantly ‘self-serving evidence’ with misgivings. But accept it the tribunal did.
We now arrive at a critical point in the tribunal’s analysis of the issues raised in the appeal with respect to charge 5. To repeat, the evidence given by Mr McLeod was that he had authorised all of the payments made by Mr Brereton, including the retainer payments which were made to Mr McLeod and Mr Brereton. While the tribunal accepted that evidence with respect to the land development payments, it rejected it with respect to the retainer payments.
While I understand and share the tribunal’s concerns about the unsatisfactory nature of the investment arrangements, I cannot see how this distinction was open. I think it was based on a misunderstanding of the relevant legal relationships. If the payments were made for Seachange Management and not the investors, the money was being held by Mr Brereton on its behalf. It was not asserted by the commissioner, nor found by the tribunal, that the arrangements, and the legal relations which were created, were a sham. The company was therefore legally entitled to give whatever consent it chose to Mr Brereton with respect to the making of payments, including those involving the payment of retainers to Mr Brereton and Mr McLeod.
The tribunal then proceeded to reason that, ‘in relation to the more general charge of misappropriation’, Mr Brereton could not ‘hide behind the corporate veil’ of Seachange Management, which he and Mr McLeod ‘essentially controlled’. The reasoning seems to be that, because Mr Brereton and Mr McLeod controlled Seachange Management, Mr Brereton could not act (with Mr McLeod) in his capacity as a director to give himself consent in his capacity as the lawyer for the company to make retainer payments to himself and Mr McLeod. This reasoning seems to be based upon the proposition that there is some legal barrier preventing Mr Brereton from acting in this way. I am not aware of any such rule. Absent fraud, if the money belonged to the company, which the tribunal had found to be the case, then the two persons (as directors) could lawfully decide the company would consent to the payment of retainers to themselves, and Mr Brereton could act on that consent as the company’s lawyer to pay the money accordingly.

Turning specifically to paragraph 80, his Honour said:[64]

In argument before me, there was discussion about the entities to which the tribunal was referring … particularly ‘those beneficially entitled to the invested funds, on whose behalf’ etc. It is not clear who the entities were and what legal relationships existed between them and Mr Brereton, and it needed to be clear for the proper consideration of the misappropriation charge.
On the facts as found, Mr Brereton was the lawyer for Seachange Management. He had no lawyer-client relationship with the investors. He had no legal or equitable relationship with the investors and the tribunal found none. Seachange Management had legal (and probably fiduciary) relationships with the investors, but these relationships did not encompass the directors personally. As the directors of Seachange Management, Mr Brereton and Mr McLeod had certain legal responsibilities towards the company. The beneficial entitlements referred to in the passage [in paragraph 80] were not identified. The facts as found were that, under the investment arrangements, the money paid by the investors was due to Seachange Management on whose behalf it was received and paid into trust by Mr Brereton. Taking all these relations into account, I cannot fit the legal and possibly equitable relationships which were created by the making of the payments by the investors to Mr Brereton on behalf of Seachange Management, and by Mr Brereton to himself and Mr McLeod, also on behalf of Seachange Management, into the framework described in the tribunal’s reasoning.

[64]Reasons, [40]-[41].

On appeal, the Commissioner challenged much of this reasoning principally on the basis that what was significant about Charge 5 was that its focus lay upon who was beneficially entitled to the funds and the purposes for which those funds had been entrusted to Mr Brereton, there being evidence that the investors in the retirement village project deposited money for that purpose and not otherwise. Furthermore, contrary to the assumption made by the trial judge, it had been submitted before the Tribunal that the legal arrangements between Seachange Management and Seachange Village were a sham, if they authorised payments contrary to the purposes of the retirement village project.

The existence of a fiduciary obligation between Mr Brereton and the investors was critical to the determination of Charge 5. Unless it could be shown that there was such an obligation, it could not be inferred that Mr Brereton acted beyond his authority (and in breach of that obligation) in paying the retainers, let alone inferred that he knew he did not have authority to pay the retainers, this last inference being necessary to establish his dishonesty. The failure to establish that obligation undermined the Commissioner’s case on Charge 5.

A difficulty faced by the Commissioner was what approach he should take to the contractual arrangements. On the one hand, he sought positively to rely on the contractual arrangements between the parties and the legal relationships to which they gave rise as the source of the constraint restricting Mr Brereton from lawfully being able to pay the retainers or indeed from making payments for any purpose other than the retirement village project. On this approach, the Commissioner argued that the trial judge failed to understand ‘the contractual arrangements constraining the use of the funds received from the investors’.[65] This submission sought to identify the source of a fiduciary obligation by Mr Brereton to the investors in the contractual arrangements and the legal relationships between the parties. The trial judge was argued to have failed to appreciate that:[66]

Seachange Management received those funds from the purchaser (Seachange Village) on behalf of the investors for use in the Collendina project and the legal arrangements of the project constrained how those funds could be applied.

[65]Outline of Appellant’s Submissions, dated 1 March 2011, [14].

[66]Ibid [13].

On the other hand, the Commissioner sought to argue that the legal arrangements were a sham and that the trial judge was in error in failing to see through those arrangements. At the hearing of the appeal it became apparent that the Commissioner was not seeking to argue that the investment arrangements were part of a fraudulent scheme or sham, in which Seachange Management, Seachange Village, and their respective directors aimed to take the investors’ money without ever intending to construct the retirement village project for which the contract was no more than a pretence. The charges brought against Mr Brereton certainly did not reflect any such wide-ranging claim nor did the evidence before the Tribunal support such a claim. Rather, the complaint was that Mr Brereton acted in contravention of obligations arising out of the legal relations he had established, his conduct disadvantaging the investors. For that complaint to be made out, the Commissioner needed to rely upon the contractual arrangements, not treat them as illusory.

The Commissioner’s argument, based as it was on the purpose for which the funds were invested, drew upon the evidence of some of the investors that the purpose for which they made their investment was for the development of the retirement village project and not otherwise. On the appeal, it was not put that Mr Brereton required the consent or direction of the individual investors before making the retainer payments. Although the matter had been pleaded in this way in the particulars in support of Charge 5,[67] the case put on the appeal focused upon the specific purpose for which the funds were invested, namely, the construction of the retirement village project. It was submitted that the purpose for which the funds were invested created a constraint upon the uses to which the funds could be put. The fact that the funds were invested for a specific purpose was submitted to be the origin of the duty on Mr Brereton not to make payments other than for that purpose.
[67]Paragraph 26 of the Notice of Charges (extracted above at [46]).

In my opinion, the facts of the case do not support the recognition of an express trust in which the investors’ funds were held for the purpose of the retirement village project alone nor do they support the recognition of an equitable obligation by Mr Brereton to the investors. The circumstances of this case are, in my view, far removed from those present in Barclays Bank Ltd v Quistclose Investments Ltd.[68]
[68][1970] AC 567.

In Quistclose, Rolls Razor Ltd, being in serious financial difficulties and having an overdraft with Barclays Bank Ltd of almost twice its permitted limit, obtained a loan from Quistclose Investments Ltd on the agreed condition that it would be used to meet an ordinary share dividend which it had declared on 2 July 1964. The cheque provided by Quistclose was paid into a separate account opened with Barclays Bank specially for the purpose, Barclays Bank knowing that the money was borrowed and agreeing with Rolls Razor Ltd that the account would only be used for the purpose of paying the dividend. Before the dividend was paid, Rolls Razor Ltd went into voluntary liquidation. Quistclose Investments brought proceedings against Rolls Razor Ltd and Barclays Bank Ltd claiming that the money had been held by Rolls Razor Ltd on trust for the payment of the dividend and, failing the achievement of that purpose, ought to be returned to it. The House of Lords found in favour of Quistclose Investments Ltd and held that the money advanced for the specific purpose of paying the dividend did not become part of the general assets of Rolls Razor Ltd, available for distribution following the voluntary liquidation. Lord Wilberforce, with whom Lord Reid, Lord Morris, Lord Guest and Lord Pearce agreed, said:[69]
It is not difficult to establish precisely upon what terms the money was advanced by the respondents to Rolls Razor Ltd. There is no doubt that the loan was made specifically in order to enable Rolls Razor Ltd. to pay the dividend. There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd. to pay the dividend and for no other purpose. This follows quite clearly from the terms of the letter of Rolls Razor Ltd to the bank of July 15, 1964, which letter, before transmission to the bank, was sent to the respondents under open cover in order that the cheque might be (as it was) enclosed in it. The mutual intention of the respondents and of Rolls Razor Ltd., and the essence of the bargain was that the sum advanced should not become part of the assets of Rolls Razor Ltd., but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents [Quistclose Investments]: the word “only” or “exclusively” can have no other meaning or effect.
That arrangements of this character for the payment of a person’s creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.
[69]Ibid 579-80 (emphasis added).

The Court made clear, however, that the basis of the decision rested upon the mutual intention of the parties,[70] of which the Court had unequivocal evidence. In distinguishing other cases with somewhat similar facts, Lord Wilberforce went on to say:[71]

Those are cases in which money has been paid to a company for the purpose of obtaining an allotment of shares … They are merely examples which show that, in the absence of some special arrangement creating a trust … payments of this kind are made upon the basis that they are to be included in the company’s assets. They do not negative the proposition that a trust may exist where the mutual intention is that they should not [be included in the company’s assets].

[70]See Gummow J in Re Aust Elizabethan Theatre Trust (1991) 30 FCR 491, 502 as to why, in the circumstances of the case, the mutual intention of settlor and trustee was relevant and not just, as in the ordinary case, the intention of the settlor.

[71][1970] AC 567, 581.

A Court will not readily infer that funds provided to a company are to be impressed with a primary express trust for use exclusively for a specific purpose, the failure of which creates a secondary resulting trust for the benefit of those who provided the funds.[72] It is not sufficient that funds are provided with an expectation that they will be used for a specific purpose. An expectation or general understanding falls short of the necessary mutual intention that funds have been provided on the express condition that they will be earmarked for use exclusively in accordance with an agreed purpose.
[72]Note that Gummow J, in Re Aust Elizabethan Theatre Trust (1991) 30 FCR 491 considered that the better characterisation was of two limbs of an express trust rather than a primary express trust and a resulting trust. He said (at 500): ‘Lord Wilberforce said … that a necessary consequence of the mutual intention of Quistclose and Rolls Razor to create arrangements which gave rise to a “primary” trust in favour of those entitled to the dividend was that, if the dividend could not be paid for any reason, the money, as a “secondary” trust, was to be returned to Quistclose; the intention was clear to create the secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out. This characterisation of what occurred is indicative of an express trust with two limbs rather than an express trust in favour of the shareholders and a resulting trust in favour of Quistclose which arose by reason of an incomplete disposition by Quistclose of the whole of its interest in the money lent to Rolls Razor’.

In Re Aust Elizabethan Theatre Trust,[73] Gummow J held that money provided to the Australian Elizabethan Theatre Trust (the ‘AETT’) as tax-deductible donations that were unconditional but included a request that ‘preference’ in their allocation be given to arts bodies associated with the AETT, was not held on trust. He rejected the analogy with the Quistclose case. He said:[74]

Quistclose had a beneficial interest (although not at all relevant times an exclusive beneficial interest) in the money in question. Thus, it was not merely in the position of a lender with the benefit of a promise to repay. Nor was Quistclose a settlor who had fully settled a fund upon other parties and did so not retain for itself a beneficial interest sufficient for it to ensure performance of the trust.
…
[T]he essential reason why the insolvency law did not strike at the transaction in question in Quistclose was that the monies represented by the cheque drawn by Quistclose in favour of Rolls Razor and banked in the special account of Rolls Razor never at any stage became the beneficial property of Rolls Razor. It acquired no more than what Dixon J called a dry legal interest: see Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co Ltd … On its part, Quistclose had both a contractual right to repayment out of the general assets of Rolls Razor, as a general creditor, and the beneficial interest in a fund, whether by way of resulting trust or as the second limb of an express trust.

[73](1991) 30 FCR 491.

[74]Ibid 500-1 (emphasis added, citations omitted).

His Honour rejected the view that demonstrating that monies were paid for a specific ‘purpose’ (as the tax-deductible donations to the AETT had been) was all it took to show that the monies were impressed with a trust. He said:[75]
[75]Ibid 502-3 (emphasis added, citations omitted).

[I]t was suggested that the donations were given to the AETT with a purpose in mind, and that this “purpose” characterised the trusts which allegedly arose in favour of the Opera, the Ballet and the Workshop.
However, in my view, it would be an error to treat the references by Lord Wilberforce in Quistclose (and by Gibbs ACJ in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liq))… to “purpose” as characterising an express trust which did not have to satisfy the ordinary requirements for any private (as distinct from public) trust. There was, on Lord Wilberforce’s analysis of the facts, a trust fund held by a trustee on certain terms for a class of ascertained beneficiaries, with a limitation (whether as an express or resulting trust) back to the settlor in specified circumstances. The expression “purpose” was apt to describe the end sought to be achieved by the settlor, Quistclose, and accepted by the trustee, Rolls Razor. This was formulated in the terms stipulating the conditions upon which the shareholders might take a beneficial interest in the fund. The use of the expression “purpose” should not be read as heralding a new era for the non-charitable purpose trust.

…
The question as to the existence of any express trust will always have to be answered by reference to intention.

…
The relevant intention is to be inferred from the language employed by the parties in question and to that end the court may look also to the nature of the transaction and the relevant circumstances attending the relationship between them.

Thus, reliance upon the ‘purpose’ for which an investment was made does not relieve those who assert that a trust was created from showing that the ordinary requirements for the creation of an express trust are satisfied; most particularly, it would be necessary to show that the settlor intended that the money be held on trust, and, further, that it was a condition of the settlement, as intended by both the settlor and the trustee that, in the event that the purpose was not fulfilled, a secondary trust was created for the return of the funds.[76] In order for the specification of the ‘purpose’ for which the funds are held to be legally significant, the purpose specified must be tantamount to identifying the agreed condition on which the funds were provided.
[76]Or that there had been a second limb of the express trust.

Turning to the circumstances of the case before him, Gummow J observed:[77]

The fundamental issue is whether the donations in question in this proceeding were received by the AETT, and banked by it, impressed with any of the equitable proprietary obligations contended for by counsel for the three organisations. As I have indicated, each case is to be determined in accordance with the language used as interpreted in the light of the circumstances. It is well settled that formal words are not necessary for the creation of a trust. But if the statement of “preference” by the donors upon the AETT standard form or its adaptations were but a statement of the donor’s motive or expectation, then the AETT bore no legal or equitable obligation to fulfil that expectation: see Countess of Bective v Commissioner of Taxation (Cth) … ; Dean v Cole (1921) 30 CLR 1 at 8; Scott, The Law of Trusts.

[77]Ibid 504-5.

The failure by the donors to stipulate as an express condition of their donation that the donations were to be used exclusively in a particular way, indicated to him that there was no more than an expectation. As he said:[78]

The promotion and use of the Tax Deductibility Program was premised upon donors obtaining the income tax deduction and that required gifts to be made outright. The most that was permissible if the deduction was not to be imperilled was a statement of “preference”. In the circumstances, this was to indicate motive or expectation, in the light perhaps of past experience of the handling of gifts by the AETT, but not to impose a legal or equitable obligation.[79]

[78]Ibid 506.

[79]His Honour (at 505) also relied on the fact that the cheques were placed in a general operating account and not in an ‘earmarked account’. It would seem unfair, in the circumstances of this case, to draw inferences adverse to the Commissioner from the failure of Mr Brereton to place the deposited funds in an account earmarked for construction of the retirement village project when his general accountancy practices were themselves under criticism.

Taking into account these observations, in my opinion, it cannot be concluded that, in the circumstances of this case, the investors invested their funds exclusively or solely on the condition that the money be used for the construction of the retirement project. The conditional nature of the investment contended for by the Commissioner is not reflected in any language of the documents placed before the Tribunal or the trial judge evidencing the primary source of the entitlements of the investors; that is, their legal relationship with Seachange Village, on whose behalf they deposited funds into Mr Brereton’s trust account. But even if it had been, the condition is not reflected in the contractual arrangements between Seachange Village and Seachange Management. While there may well have been an expectation, consistent with the general promotion of the retirement project, that funds invested would be only used for the construction of the retirement village project, that expectation was not reflected in an agreed condition or stipulation that the use of the funds was authorised exclusively for that specific purpose. For example, it may have been necessary for some of the funds, absorbed as part of the general assets of Seachange Management, to be used for its general operating expenses to ensure that it was in a position to commence the Works when that became opportune. The legal arrangements were not aimed at ensuring that the investors retained beneficial title to the funds they invested or at precluding those funds from becoming part of the general assets of Seachange Management.

In my opinion, it is not open to conclude that the payments made by way of deposit never became the beneficial property of Seachange Management or that Seachange Management never acquired more than a ‘dry legal interest’[80] in them. This is apparent from the findings of the Tribunal with respect to Charge 4, not under challenge before the trial judge, nor on the appeal, that, after the release of the deposit, Seachange Management had the legal capacity alone to consent to the payments which it made in that period. In particular, Seachange Management was free to expend the funds invested on other development projects without seeking any authorisation from the investors. This finding is only explicable on the basis that, after the release of the deposit, beneficial title to the funds had been transferred to Seachange Management alone and that the funds deposited became part of its general operating account. I agree with the trial judge that, given that analysis, the distinction made by the Tribunal between payments made to other development projects and the retainer payments was not open.
[80]Perpetual Trustee Co Ltdv Commissioner of Stamp Duties (NSW) (1941) 64 CLR 492, 510.

Furthermore, the Commissioner’s case failed to appreciate the context of the investment. The investors’ entitlement to an up-front tax deduction of the entire estimated cost in excess of $31 million was most probably dependent upon the investors retaining no legal or equitable title to the funds they had invested. Had they retained a beneficial interest in their funds, it would be unlikely that the funds they deposited could be treated as no longer theirs for tax purposes. For those purposes, it was necessary for the investors to have ceded their interest in the funds, which they did. In effect, the investors had parted with their money in exchange for the benefit of the tax deduction obtained.

A question was raised on the hearing of the appeal as to whether the Commissioner had put a case to the Tribunal that was an alternative to the primary case the Tribunal rejected, the primary case being that the investors were Mr Brereton’s clients. An alternative might have been to argue that Mr Brereton, when he paid the retainers, breached his fiduciary obligations to his client, Seachange Management, because he knew that the payments would be contrary to Seachange Management’s best interests. There was no doubt that Mr Brereton owed fiduciary obligations to the company of which he was a director and in respect of which he had a solicitor-client relationship. It might have been arguable, depending on the evidence, that he had breached his fiduciary obligations to Seachange Management, perhaps by knowingly making payments for an improper purpose or knowingly permitting Seachange Management to breach the obligation under the second contract to commence the Works as soon as practicable. It was conceded by the Commissioner, however, that the case put to the Tribunal had not been framed in that alternative way. Rather, the case was consistently framed on the basis that the funds belonged to the investors; the Commissioner argued that it was the investors to whom Mr Brereton owed fiduciary obligations which he had breached.[81] Moreover, Charge 5 had been drafted to reflect the primary case; this was the case of which Mr Brereton had notice and which Mr Brereton had prepared to meet. It would not now be appropriate to remit the proceeding to the Tribunal to permit this alternative case to be put.
[81]For example, paragraphs 53-4 of the Commissioner’s Closing Submissions before the Tribunal summarised his case as follows (emphasis added):
It is clear that the practitioner received investment funds into his trust account on behalf of investors … It is clear that the funds were paid into the practitioner’s trust account by investors for the purposes of the Collendina Project and nothing else. It is clear that the practitioner held the investors’ funds on trust for the investors.
In so disbursing these funds belonging to the investors without their authority, the practitioner contravened section 174(3) of the Legal Practice Act 1996 (charge 4). The fact that the funds were disbursed, not only without authority, but for the interests of McLeod and the practitioner, leads to no other conclusion than that the practitioner behaved disgracefully and dishonourably (charge 5).

Ultimately, at the hearing of the appeal, the Commissioner sought to identify the origin of the fiduciary obligations in the fact that Mr Brereton had directly received the funds from the investors. It was submitted that, because Mr Brereton was a solicitor, the receipt by him of money from the investors into his trust account was sufficient in itself to impress upon him a fiduciary obligation to the investors. This was said to be so despite the fact that the investors were not Mr Brereton’s clients and that the funds were paid by the investors on behalf of Seachange Village as the deposit under the contract. It was Mr Brereton’s status as a practising solicitor operating a trust account (albeit not one in relation to which the investors were the clients) that founded the necessary fiduciary obligation. I do not agree, for the reasons the Tribunal gave for rejecting this submission, namely, that mere receipt of funds by a solicitor is not sufficient to ground an equitable obligation; it must be established that those who gave the funds were persons ‘for whom’ the money was received and was to be held.

With respect to the question of a remitter on the question of dishonesty, the trial judge said, in refusing the remitter:[82]

First, the charge is one of misappropriation. This charge was based on the commissioner’s contention that the relevant money was held on trust by Mr Brereton for the investors. The tribunal rejected that contention. It held the money was held on trust for Seachange Management. Mr Brereton appealed. The commissioner filed no notice of contention challenging the lawful basis of the tribunal’s reasoning. In the appeal, it defended that reasoning. …
Secondly, as I have decided, charges 4 and 5 are interrelated. Charge 4 alleges statutory misconduct as regards certain payments. Charge 5 alleges common law misconduct by misappropriation as regards the same payments. In dealing with charge 4, the tribunal did not distinguish between land development projects and retainer payments. For the period after 25 may 2000, it held all of the payments to have been authorised and dismissed charge 4 to that extent. Applying correct legal principles, the tribunal could not, consistently with that finding, find the retainer payments not to have been authorised under charge 5.

[82]Reasons, [65]-[66].

I agree with his Honour that the Tribunal could not now find that Mr Brereton had acted dishonestly in paying the retainers when they could not now make a finding that the investors retained a beneficial interest in the funds they deposited, consistently with their earlier findings, after the authorised release of the deposit. With respect to the period before the authorised release of the deposit, it would not be appropriate to remit the matter on the question of dishonesty in that period as, had the Tribunal adopted a Peters inquiry in relation to the payments in that period, and been urged to do so by the Commissioner, it may have been that Mr Brereton would have adopted a different forensic approach to the case overall.

More generally, this matter is instructive in showing the primacy that must be given in disciplinary proceedings to the analysis of the legal relationships between the parties, at least with respect to matters of this type that involve complex commercial transactions, where the charge involves misconduct at common law, and where the central question at issue is whether the solicitor had the authority to make the payments he or she did out of the solicitor’s trust account. It is only when the legal relationships are clear that a tribunal can be confident in inferring what obligations a solicitor owed to whom and whether the conduct at issue amounted to a contravention of those obligations and ultimately misconduct at common law. The Commissioner may have been somewhat hamstrung in this instance because it appeared there had been great difficulty in obtaining documents from Mr Brereton’s office.[83] However, the Tribunal observed in its reasons:[84]

Both parties approached the proceeding on the basis that it was a case largely to be decided on the facts and evidence, and there was little in the way of legal contentions. The Tribunal agrees.

[83]Tribunal’s reasons, [33].

[84]Ibid [12].

The problem faced by such an approach was that there were core legal questions at the heart of the case that required resolution before the charges could be determined on the basis of the facts and the evidence. The failure to determine on a stable basis what the legal relationships were between the parties, what was the significance of the contract, what pre-contractual representations were made to the investors and by whom, and what if anything could be inferred from the direct payments into Mr Brereton’s trust account, led to a shifting analysis adopted by the Tribunal in its determination of the charges and ultimately to the consequence of an inconsistency of findings. In my opinion, the trial judge was correct to conclude that the Tribunal was inconsistent in its findings and to ascribe the importance he did to the inconsistencies in those findings.

Notice of Contention

By Notice of Contention filed on the appeal to this Court, Mr Brereton argued that the orders of the trial judge could be affirmed on an additional ground to those expressed in his Honour’s reasons, namely, that a finding of guilt under Charge 5 would be duplicitous in circumstances where there were findings of guilt under Charges 3 and 4.

The allegations of fact underpinning Charges 3 and 4 are essentially the same as those for Charge 5. Mr Brereton argued that there was a clear unfairness and duplicity in bringing the more generalised Charge 5 when the specific conduct in question was covered by Charges 3 and 4.

The Commissioner submitted that the rule against duplicity does not apply in the strict way that it does in criminal proceedings. A repetition of the factual context underlying charges is permissible in disciplinary proceedings providing that ‘on their proper analysis it is apparent that they deal with two separate instances of misconduct’[85] and ultimately there is no duplication of penalty.
[85]Woods v The Legal Ombudsman [2004] VSCA 247, [61].

The distinction which the Commissioner sought to draw between Charges 3, 4 and 5, to resist the claim of duplicity, relied upon establishing the fiduciary obligation owed by Mr Brereton to the investors. This it has been unable to do.

In any event, in the circumstances, it is unnecessary to determine the issue raised by the Notice of Contention save to say that it would have raised more doubt about the utility of a remitter on liability.

Disposition of the appeal

I would dismiss the appeal.

The orders of the trial judge remain in place including the remittal of the matter to the Tribunal for a reconsideration of the penalty in the absence of a finding that Charge 5 has been proved.

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[2011] VSCA 241

19 August 2011