LEO JOHN REYNOLDS No. SCCIV-02-657
[2002] SASC 223
•26 August 2002
IN THE MATTER OF THE LEGAL PRACTITIONERS ACT 1981:
RE: LEO JOHN REYNOLDS[2002] SASC 223
GRAY J. This is an application by a legal practitioner to continue to practise the profession of the law after bankruptcy.
Background
Leo John Reynolds has been a legal practitioner for more than 10 years. He is 48 years of age. He has practised more recently under the name Reynolds Lawyers in partnership with Linda Joanne Gross. Mr Reynolds and Ms Gross are married. On 7 May 2002 Mr Reynolds lodged an application for his own bankruptcy. He now seeks this court’s authority to continue to practise the profession of the law.
When Mr Reynolds made his bankruptcy application in May 2002 he had unsecured debts of $505,000 comprising $327,000 in bank loans, $120,000 in personal loans and $58,000 in credit card debts. The circumstances which led to Mr Reynolds’ bankruptcy are not entirely clear. However the following general picture emerges.
In 1995 Mr Reynolds and his then de facto partner Kerry Margaret Hallett purchased a property at Stonyfell. The property was subject to a first mortgage. At around this time Mr Reynolds became a partner with Mr Townsend initially practising under the name Morcombe and Townsend and later under the name Townsends Barristers.
In 1996 a company owned and controlled by Mr Townsend and Mr Reynolds purchased an office building in Halifax Street Adelaide. The property was financed by Westpac. Part of the security for the purchase was a second mortgage over the Stonyfell property and Mr Reynolds’ personal guarantee.
Apparently in early 1998 Westpac called up all loans relating to the Townsends practice and the office building. Mr Townsend and Mr Reynolds arranged for refinancing through the National Australian Bank (“N.A.B.”) In September of that year the Townsends partnership was dissolved and the NAB terminated the loans. At that time Mr Reynolds was jointly indebted to the NAB in the amount of $160,000 and had a further liability of $20,000 for legal fees. The NAB called on the guarantees and sought to enforce the second mortgage on the Stonyfell property. As a result Mr Reynolds arranged for that Stonyfell property to be refinanced.
The Australia and New Zealand Banking Group Ltd (“ANZ”) agreed to refinance Mr Reynolds. That commitment by the ANZ was in turn secured by the Stonyfell property. Mr Reynolds’ affidavit does not clearly demonstrate the extent of his indebtedness to bankers and others at this time.
Mr Reynolds’ relationship with Ms Hallett terminated and she lodged a caveat to protect her claimed interest in the Stonyfell property. The papers indicate that Mr Reynolds’ transferred his interest in the Stonyfell property to Ms Hallett in March 2000.
In March 2002 Mr Reynolds was in practice with Ms Gross operating under the name Reynolds Lawyers. At that time the ANZ issued a notice of demand claiming $160,140.71. Mr Reynolds had no capacity to pay. His statement of affairs disclosed the following unsecured creditors:
NAB personal loans $ 17,000 NAB credit card debt $ 8,000 Commonwealth Bank personal loan $ 150,000 Commonwealth Bank credit card debt $ 4,500 ANZ personal loan $ 160,000 ANZ credit card debt $ 7,500 Westpac Bank credit card debt $ 15,000 Citibank credit card debt $ 22,000 American Express credit card debt $ 11,000 MA & CD Reynolds personal debt to parents $ 100,000
No real explanation has been offered by Mr Reynolds for his borrowings. A likely reason was the need to service existing debts and then the incurring of further debt. Mr Reynolds appears to have been conducting his affairs in a manner that was beyond his means.
Mr Reynolds had two matters pending before the Legal Practitioners Conduct Board (“the Conduct Board”). One related to accounts and the structure which was used to hold clients’ funds in a class action of which Mr Reynolds had the responsibility for the day to day running of the trust accounts. The other was a complaint by an unsuccessful litigant about the appropriateness of advice given by Mr Reynolds and others.
With respect to other complaints before the Conduct Board, counsel for the Law Society was unable to provide information about their substance. Mr Reynolds informed the court that those complaints had not resulted in any findings of unprofessional or unsatisfactory conduct on his part. The Law Society accepted that the complaints did not involve allegations of dishonesty.
Applicant’s Submissions
Counsel submitted that it would be appropriate to allow Mr Reynolds to continue to practise. It was accepted that conditions including supervision would be required.
Ms Gross was nominated as a suitable supervising practitioner. It was said that as the principal of Reynolds Lawyers she could provide adequate supervision notwithstanding that a possible conflict arose from her personal relationship with Mr Reynolds. Ms Gross informed the court that she had “been solely responsible for the trust account for the last six months.” She also informed the court that Mr Reynolds was unable to sign any trust account cheques and was unable to access trust moneys. Ms Gross said that she was able to supervise Mr Reynolds and saw no difficulty in performing that task despite her relationship with him.
It was submitted that both existing and new clients at Reynolds Lawyers could be informed that Mr Reynolds was not a principal of the firm but an employed solicitor. It was said that this would adequately protect the public without the need for them to be told about Mr Reynold’s bankruptcy.
The Law Society’s Submission
Counsel for the Law Society did not oppose either the application or Ms Gross’ appointment as supervisor. It was submitted that if steps were taken to ensure that Mr Reynolds did not use the firm trust account and was not a principal of the practice disclosure of the fact of bankruptcy to clients was unnecessary. It was said that strict supervisory conditions preventing Mr Reynolds dealing with trust moneys would provide adequate protection to the public. Disciplinary supervision was not sought. It was accepted that the name Reynolds Lawyers could still be used, but only if written notice was given to each existing and new client. It was said that they should be informed that Mr Reynolds was an employed solicitor and not a principal in the firm.
The Legislative Scheme
The Legal Practitioners Act 1981 (SA) (“the Act”) established the Legal Practitioners Education and Admission Council (“LPEAC”) to make rules prescribing the qualifications for admission to legal practice. Applicants must have completed the necessary educational qualifications and have complied with the LPEAC rules. In addition they must be of good character.
Persons seeking to practise must be approved by the Supreme Court. Public confidence must be maintained in the legal system. Accordingly, high standards from practitioners are expected. Significant responsibilities are involved.
Anything which has the potential to erode the high standard demanded of legal practitioners or bring the legal profession into disrepute must be viewed seriously. The Act recognised this by providing the Supreme Court with the responsibility of deciding who does and does not practise the profession. Applicants seeking to practise for the first time need an order of the Supreme Court to be admitted to practice. In the same way practitioners who have become bankrupt need the Supreme Court’s authority if they wish to continue practising.
Admission to practice can only be achieved pursuant to an order of the Supreme Court. This process involves the public statement that the court considers the applicant to be a suitably qualified and appropriate person to give advice on legal matters.
The Act makes it an offence for a person to practise the profession of the law when not admitted. The maximum fine is $10,000. In order to maintain the standard of service demanded by the public, the Act continues to strictly regulate practitioners once admission has been effected.
The Act provides for disciplinary procedures. The Conduct Board investigates suspected unprofessional or unsatisfactory conduct. The Conduct Board has the power to commence disciplinary proceedings in the Supreme Court on the recommendation of the Legal Practitioners Disciplinary Tribunal (“the Tribunal”). If unprofessional or unsatisfactory conduct is more serious it will be dealt with by the tribunal. The tribunal also has the power to recommend that disciplinary proceedings be commenced against a practitioner in the Supreme Court.
Section 49 of the Act is in the following terms:
“(1) A legal practitioner-
(a) who has become bankrupt or subject to a composition or deed of arrangement or assignment with or for the benefit of creditors;
…
must not, without the authority of the Supreme Court, practise the profession of the law.
Maximum penalty: $10 000.
(1a)Authority may be granted under this section on the application of a legal practitioner who is or is about to become bankrupt or subject to a composition or deed of arrangement or assignment with or for the benefit of creditors or who is or has been a director of an incorporated legal practitioner that is being or is about to be wound up for the benefit of creditors.
(2)The Supreme Court may grant an authority under this section on such conditions as it thinks fit.
(3)A legal practitioner must not contravene or fail to comply with any condition of an authority granted by the Supreme Court under this section.
Maximum penalty: $10 000.”
Consideration of the Issue
Section 49 provides that a legal practitioner who has become bankrupt must not practise the profession of the law without the Supreme Court’s authority. Parliament has not entrusted the Conduct Board or the Tribunal with the discretion to grant this authority. It has expressly provided that it can only be granted by a judge of the Supreme Court. This demonstrates the seriousness with which Parliament views the fact of bankruptcy of legal practitioners.
Section 49 of the Act is intended to provide protection to the public. It ensures that bankrupt practitioners only practise with the authority of the Supreme Court on such terms as the court considers appropriate. The interests of the public and the maintenance of the integrity of the profession are matters of primary concern.
Bankruptcy has the potential to arise in many different circumstances. It may result for example from incompetence, poor decision making, misfortune, addiction, being over zealous with financial commitments, greed and financial ambition, dishonesty or unsatisfactory or unprofessional conduct. Bankruptcy may be suggestive of any or all of the above factors and may involve aspersions on the practitioner’s character. It may indicate that a practitioner is not competent or suitable to continue to practise as a legal practitioner. These matters are likely to affect the way in which the practitioner is viewed by their clients and the public.
In this case there was no suggestion that the debt incurred by Mr Reynolds was indicative of dishonesty. He failed to adequately manage his business and domestic affairs. However given that he has been a practitioner for more than 10 years and he is approaching 50 years of age this is of concern.
Mr Reynold’s application came on for hearing as a matter of urgency. He wished to continue to provide legal services. On 15 May 2002 Mr Reynolds was granted authority to practise. Undertakings were provided and conditions imposed.
Ms Gross undertook:
-to alter the letterhead of Reynolds Lawyers to remove Mr Reynolds’ name and show Ms Gross as principal
-that all existing clients would receive written notice in a form approved by the Law Society which would advise that the applicant is an employed solicitor and not a principal
The conditions imposed were as follows:
-the practitioner’s right to practise is limited to that of an employed practitioner with no right of private practice
- the practitioner be supervised by Ms Gross
-the practitioner must not establish or maintain a solicitor’s trust account in his own name
-the practitioner must not receive or deal with money paid to him by his employer’s clients other than to pay such moneys into the trust account maintained by the practitioner’s employer
-the practitioner must request that the Official Trustee appointed to administer the practitioner’s estate provide to the court on the conclusion of the administration a report as to the administration
-the practitioner must ensure that all clients that he may act for are provided with written notice that he is not a principal of the firm Reynolds Lawyers and that his status is that of an employed solicitor. The notice is to be in a form approved by the Law Society.
On 31 May 2002 submissions were made about the need to provide notice of Mr Reynolds’ bankruptcy to new and existing clients. Counsel for Mr Reynolds opposed such a requirement. It was contended that no issue of Mr Reynolds’ integrity or competence arose. It was said to be unnecessary.
Counsel for the Law Society submitted that there was no need for Mr Reynolds’ bankruptcy to be disclosed. It was pointed out that in similar cases the court had not required that notice of bankruptcy be given to clients[1]. The Law Society was unaware of any complaint or concern that had arisen from bankrupt practitioners failing to notify their clients. Informal enquiries indicated that notice was not required in other jurisdictions.
[1] Re John Sandford Hynd, unreported, S 5042, 7 April 1995; Re Stephen Harry MacFarlane, unreported, S 4939, 16 January 1995.
In many instances the provision of legal advice to clients will involve some form of related financial advice. The provision of legal advice may impact on a client’s financial affairs. A client may confide in the practitioner matters of financial concern or act on advice that the client would not otherwise have acted upon if the client had knowledge of the practitioner’s bankruptcy. Ultimately the interests of an existing or intended client must prevail over the interests of the practitioner. At the core of the solicitor-client relationship is the need for confidence and trust. The relationship is fiduciary. That obligation extends to informing a client of relevant matters that may affect their decision to retain or continue to retain Mr Reynolds. If he provides legal advice to his client in a way that may impact materially upon their financial affairs or in a situation where a client may legitimately expect to know of his bankruptcy then his fiduciary obligation requires disclosure of the fact of bankruptcy. There may be aspects of Mr Reynold’s practice that would not call for disclosure although if he is in doubt it would be prudent for disclosure to be made.[2]
[2] The practitioner is well aware of his obligations in this regard as he informed the court “I understand that it’s my obligation to advise all client’s that I’m bankrupt.”
As a bankrupt Mr Reynolds has a statutory obligation pursuant to section 269 of the Bankruptcy Act 1966 (Cth) to disclose the fact of his bankruptcy in specified circumstances. Those circumstances may arise during the course of his work as a solicitor. A breach can lead to imprisonment for a maximum period of three years.
Mr Reynolds remains at all times subject to his statutory, fiduciary and common law obligations. Having regard to these obligations the public are adequately protected without the making of an order for disclosure in this case.
LIST OF CITATIONS IN THE ORDER OF APPEARANCE IN THE JUDGMENT
1 Re John Sandford Hynd, unreported, S 5042, 7 April 1995; Re Stephen Harry MacFarlane, unreported, S 4939, 16 January 1995.
2 The practitioner is well aware of his obligations in this regard as he informed the court “I understand that it’s my obligation to advise all client’s that I’m bankrupt.”
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