Re Magarey Farlam Lawyers Trust Accounts
[2007] SASC 307
•23 August 2007
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
RE MAGAREY FARLAM LAWYERS TRUST ACCOUNTS
[2007] SASC 307
Judgment of The Full Court
(The Honourable Justice Nyland, The Honourable Justice White and The Honourable Justice Kelly)
23 August 2007
PROCEDURE - COSTS - APPEALS AS TO COSTS - MISTAKE OF LAW OR FACT
PROCEDURE - COSTS - APPEALS AS TO COSTS - DISCRETION
Appeal by Attorney-General - construction of s 47(2) of Legal Practitioners Act 1981 (SA) - whether the costs payable from the Legal Practitioners Guarantee Fund in respect of a supervisor's or manager's application for directions include costs incurred by persons other than the supervisor or manager - whether the Court has discretion with respect to such costs.
Held: appeal dismissed - costs incurred in relation to the application for directions by persons other than a supervisor or manager are payable from the Legal Practitioners Guarantee Fund - s 40 of the Supreme Court Act and r 101 of the Supreme Court Rules 1987 (SA) provide a discretion in the Court in relation to such costs.
Legal Practitioners Act 1981 (SA) s 5, s 44, s 45, s 47, s 48, s 56, s 57, s 57A, s 60, s 63, s 64; Supreme Court Rules 1987 (SA) r 63, r 101; Crown Proceedings Act 1992 (SA) s 9; Supreme Court Act 1935 (SA) s 40; Corporations Act 2001 (Cth) s 479, s 1335; Bankruptcy Act 1966 (Cth) s 134; Administration and Probate Act 1919 (SA) s 69; Trustee Act 1936 (SA) s 91; Corporations Law s 479, s 1335, referred to.
Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334; Re Magarey Farlam Lawyers Trust Account (No 2) [2006] SASC 382; (2006) 246 LSJS 306; Re Magarey Farlam Lawyers Trust Account (No 3) [2007] SASC 9; (2007) 246 LSJS 417; Re GB Nathan & Co Pty Ltd (1991) 24 NSWLR 674; Farrow Finance Co Ltd (in Liq) v ANZ Executors and Trustee Co Ltd (1997) 23 ACSR 521, discussed.
Clyne v Wrigley (1980) 1 NSWLR 599; Re JJT; Ex Parte Victoria Legal Aid [1998] HCA 44; (1998) CLR 184; Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32; Bull v Attorney-General (NSW) (1913) 17 CLR 384; Re GPI Leisure Corporation Ltd (in Liq) (1994) 130 ALR 256; Re Ansett Australia Ltd [2002] VSC 114; Paglia v Trice (1991) 56 SASR 62; Re Masureik & Allan Pty Ltd (1981) 6 ACLR 39; Re New Cap Reinsurance Corp Holdings Ltd [2001] NSWSC 1001, considered.
WORDS AND PHRASES CONSIDERED/DEFINED
"Legal Practitioners Guarantee Fund"
"Discretion as to costs"
RE MAGAREY FARLAM LAWYERS TRUST ACCOUNTS
[2007] SASC 307Full Court: Nyland, White and Kelly JJ
NYLAND J: I agree that the appeal should be dismissed for the reasons expressed by White J. I have nothing further to add.
WHITE J: By s 47(1) of the Legal Practitioners Act 1981 (SA) (“the LPA”), supervisors and managers appointed under Div 9 of Pt 3 of that Act may apply to the Supreme Court for directions in relation to any matter affecting their duties or functions. Section 47(2) provides that the costs of any such application are payable out of the Legal Practitioners Guarantee Fund (“the Guarantee Fund”) maintained by the Law Society of South Australia (“the Law Society”) under Pt 4 of the LPA.
The question on this appeal by the Attorney-General is whether the costs payable out of the Guarantee Fund under s 47(2) include costs incurred in relation to the application for directions by persons other than a supervisor or manager, and whether this Court has any discretion with respect to such costs.
A judge of this Court held at first instance that the costs of such persons are capable, subject to an exercise of discretion by the Court, of being paid from the Guarantee Fund.[1] In my opinion that decision is correct, although my reasons for that conclusion are slightly different from those of the judge.
[1] Re Magarey Farlam Lawyers Trust Accounts (No 2) [2006] SASC 382.
Background Circumstances
Magarey Farlam Lawyers (“Magarey Farlam”) was formerly a firm of legal practitioners practising in Adelaide. As well as operating two trust accounts, the partners of Magarey Farlam controlled an unlimited liability company, Gimalo Administrators Pty (“Gimalo”). Funds of clients of the firm were invested in bank accounts operated by Gimalo.
On 1 August 2005, the Council of the Law Society, acting pursuant to s 44 of the LPA, resolved to appoint a supervisor of the trust accounts of Magarey Farlam. Ms S R Bishop was appointed as Supervisor (“the Supervisor”). On 1 February 2006, the Council of the Law Society, acting pursuant to s 45 of the LPA, resolved to appoint a manager to the practice of Magarey Farlam. Ms K N Thomas was appointed as Manager. The circumstances giving rise to the respective appointments are not presently material. It is sufficient to note that they arose out of misappropriations of trust monies by William Brenton Willoughby, a non-legal employee of Magarey Farlam.
Issues arose as to the manner of distribution by the Supervisor of monies held in the trust accounts of Magarey Farlam. Again, the precise nature of those issues is not presently important. It is sufficient to note that there was an issue as to whether the monies should be distributed in proportion to the amount or amounts contributed to the trust accounts by each claimant, or whether a tracing of particular monies, when that was possible, should be permitted. The clients of Magarey Farlam who had monies in trust took opposing positions on this issue. In addition, the partners of Magarey Farlam asserted an entitlement to be repaid amounts which they had contributed to the trust accounts in an early endeavour to restore the amount lost through Willoughby’s conduct. Because of these issues, the Supervisor sought directions from the Court pursuant to s 47(1) of the LPA. Initially, the Supervisor sought directions as to the manner in which she should solicit claims on the monies in the trust accounts, the method of administration of those claims, and a determination of the number and type of claimants. Later, on 31 August 2006, the Supervisor applied for directions as to the manner of distribution of the funds in the trust accounts and for determination of the competing claims of the claimants.
Over a period of some months, the judge made orders and directions for the purpose of ensuring that all claimants were identified, that all classes of claimants and all other interested parties were present before the Court, and for the provision of relevant information to all claimants. The judge also made directions with respect to the hearing of the Supervisor’s application regarding the manner in which the monies in the trust accounts should be disbursed amongst the various claimants. The judge heard evidence and submissions concerning the manner of distribution on 19, 20 and 21 December 2006 and delivered his decision on that question on 18 January 2007.[2]
[2] Re Magarey Farlam Lawyers Trust Accounts (No 3) [2007] SASC 9; (2007) 246 LSJS 417.
Preliminary Matters
Before commencing the hearing on 19 December 2006, the judge heard and determined an issue as to the ability of the claimants who were to participate in the hearing to recover their costs from the Guarantee Fund. That issue had arisen in the following way. On 1 September 2006, the judge had ordered that the respective claimants should deliver statements of issues and, when appropriate, points of claim. Several claimants asserted their entitlement to recover the costs of their participation in the proceedings from the Guarantee Fund, pursuant to s 47(2) of the LPA. That led to the formulation during the directions hearing of the following question:
Whether upon the true construction of s 47 of the Legal Practitioners Act 1981 the costs in these proceedings incurred by the claimants in this action who had monies in the trust accounts of either Magarey Farlam Lawyers or Gimalo Administrators Pty and the costs in these proceedings of the partners of Magarey Farlam Lawyers in relation to claims arising out of the fraudulent activities of William Brenton Willoughby are costs of the Supervisor’s application under s 47(1) of the Act or are otherwise payable out of the Guarantee Fund.
The judge treated that question as having been raised on an application in the nature of a construction summons. As the Supreme Court Rules 1987 (SA) applied to this action, it had been open to any party to issue such a summons.[3] It was not suggested that anything turns on the fact that no such summons or application had been filed.
[3] Supreme Court Rules 1987, r 63.
On 15 December 2006 the judge answered the identified question as follows:
The costs in these proceedings incurred by the claimants who had monies in the trust accounts of either Magarey Farlam Lawyers or Gimalo Administrators Pty and the costs in these proceedings of the partners of Magarey Farlam Lawyers in relation to claims arising out of the fraudulent activities of William Brenton Willoughby, are costs of the supervisor’s application under s 47(1) of the Legal Practitioners Act and are capable of being paid out of the Guarantee Fund if this Court so orders.
It can be seen that the judge determined that the costs in the proceedings of the claimants were “costs of the Supervisor’s application” under s 47(1) of the LPA and were “capable” of being paid out of the Guarantee Fund “if this Court so orders”. Put slightly differently, the judge determined that the claimants’ costs incurred in relation to the Supervisor’s application were of the kind contemplated by s 47(2) and could, subject to the discretion of the Court, be paid out of the Guarantee Fund. The judge appreciated that the Supervisor’s application of 31 August 2006 had been “changed” into proceedings for the determination of substantive rights as between the claimants. He held nevertheless that the costs incurred by the claimants were costs occasioned by the Supervisor’s application.
In effect, there were two aspects to the decision of the judge. The first was the proper construction of s 47(2) and the existence of a discretion in this Court with respect to the costs contemplated by s 47(2). The second aspect was whether the costs of the participants in the “changed” proceedings could still be characterised as part of the costs of the Supervisor’s application. The judge’s conclusion on this aspect was arguably one of combined law and fact and beyond the scope of a construction summons.
On 18 January 2007 the judge determined the Supervisor’s application concerning the distribution of monies from the trust accounts. Following this, the judge ordered that the costs reasonably incurred by clients of Magarey Farlam were costs of the Supervisor’s application and were payable on a solicitor/client basis from the Guarantee Fund. The operation of that order has been stayed, apparently pending the hearing and determination of the present appeal. No order was made with respect to the costs incurred by the partners of Magarey Farlam who participated in the hearing before the judge. There has been no appeal in respect of the costs order.
This appeal is brought by the Attorney-General.[4] He had intervened[5] in the proceedings before the judge as the sole contradictor to the construction of s 47(2) proposed by the claimants. The Supervisor adopted a neutral position on this issue. By his Notice of Appeal the Attorney-General seeks to impugn only that part of the judge’s decision on 15 December 2006 which concerns the construction of s 47. The Attorney-General does not challenge the conclusion that the costs incurred in the “changed” proceedings (involving the determination of substantive rights) were costs occasioned by the Supervisor’s application. Accordingly, this Court is concerned only with an appeal from the decision of the judge concerning the construction of s 47. That is an appeal on a question of law only.
[4] See Crown Proceedings Act 1992 (SA), s 9(3).
[5] Ibid s 9(2).
Although there is no appeal from the actual costs order made by the judge; the appeal does not raise a point which is moot. That is because the judge has stayed the operation of the costs order, with liberty to the parties to apply. The judge and the parties contemplate that, depending upon the outcome of this appeal concerning the construction of s 47(2), the liberty to apply will be exercised so that the judge may make a further order either revoking the order for costs or revoking the order for a stay.
On the hearing of the appeal Mr Livesey QC, with Mr Keith, appeared for all of the claimants (the “pooling claimants” and the “tracing claimants”) who had been heard by the judge.
Statutory Provisions
Section 44 of the LPA provides for the Law Society to appoint a supervisor of a legal practitioner’s trust account. It specifies the circumstances in which an appointment may be made, the functions of the Supervisor, and the consequences of an appointment. Section 45 of the LPA provides for the Law Society to appoint a legal practitioner as manager of the practice of a practitioner or former practitioner. It too specifies the circumstances in which an appointment may be made, the powers of the Manager, and the consequences of an appointment being made. In general, a supervisor or manager may be appointed when a serious irregularity has occurred in the operation of a solicitor’s trust account, or when a practitioner is dead or is no longer willing or able to attend to the affairs of his or her practice.
Section 47 vests a power in a supervisor or manager appointed under either s 44 or s 45 to apply to the Supreme Court for directions. It provides as follows:
(1)A supervisor or manager appointed under this Division may apply to the Supreme Court for directions in relation to any matter affecting his or her duties or functions under this Division.
(2)The costs of any application under subsection (1) are payable out of the guarantee fund.
Section 47 implicitly invests the Supreme Court with jurisdiction to give directions “in relation to any matter affecting [the] duties or functions [of the supervisor or manager] under [Div 9 of Pt 3] of the LPA”. Section 47(2) provides simply that the costs of “any application” under sub-s (1) are payable out of the Guarantee Fund.
Section 48 of the LPA provides for the remuneration of supervisors and managers. It provides:
(1)A supervisor or manager appointed under this Division is, subject to subsection (3), entitled to such remuneration, allowances and expenses as may be determined by the Society.
(2)Any such remuneration, allowances and expenses will be paid out of the guarantee fund.
(3)The account of a supervisor or manager for remuneration, allowances and expenses may, on the application of the Attorney-General or the Society, be taxed and settled by the Supreme Court.
(4)The Society may recover, as a debt due to it, the costs, charges and disbursements appropriate to legal work performed by a manager appointed under this Division.
(5)The Society may recover as a debt from a legal practitioner or former legal practitioner any expenditure (other than expenditure recouped under subsection (4)) from the guarantee fund in consequence of the appointment of a supervisor or manager for the practice of that practitioner or former practitioner.
(5a)A manager must, in dealing with money in the course of the management of the practice of a legal practitioner or former legal practitioner, give priority to payment of amounts recoverable by the Society under subsections (4) or (5).
(6)Any amount recovered by the Society under subsection (4) or (5) must be paid into the guarantee fund.
(7)A supervisor or manager incurs no liability by reason of an act or omission in good faith and in the exercise of powers or functions under this Division.
Section 57 of the LPA provides that the Law Society must continue to maintain the Guarantee Fund. The Guarantee Fund consists, amongst other things, of monies paid from the statutory interest account (an account into which a portion of all monies held on trust by solicitors is paid) (s 56(5) and s 57(3)(a)), a portion of the interest earned on monies held in solicitors’ trust accounts (s 57A(2)) and a portion of certain fees paid by legal practitioners. Section 57(4) enumerates the purposes for which monies in the Guarantee Fund may be applied. A principal purpose of the Guarantee Fund is to provide a source of monies to make good losses suffered by a person due to a defalcation in a solicitor’s trust account. It also provides a source of funds by which various costs incurred in relation to the supervision and discipline of legal practitioners may be met. Section 57(4)(c) identifies “costs consequent upon the appointment of a supervisor or manager under this Act” as another purpose to which monies in the Guarantee Fund may be applied. None of the other stipulated purposes were said to be relevant to the issues on this appeal. No payment may be made from the Guarantee Fund except with the authorisation of the Attorney-General (s 57(5)).
Section 60 provides for the making of claims against the Guarantee Fund:
(1) Subject to this Part, where—
(a) a person suffers loss as a result of a fiduciary or professional default; and
(b) there is no reasonable prospect of recovering the full amount of that loss (otherwise than under this Part),
the person may, by instrument in writing served on the Society, claim compensation under this Part.
(2) The amount of a claim cannot exceed—
(a) the actual pecuniary loss suffered by the claimant in consequence of the fiduciary or professional default (including the reasonable costs of making the claim); less
(b) any amount that the claimant has received, or may reasonably be expected to recover (otherwise than under this Part) in reduction of that loss.
(3)If a valid claim has not been satisfied as provided by this Part at the expiration of 12 months from the day on which it was lodged with the Society it is then, to the extent to which it has not been satisfied, increased by interest at a prescribed rate calculated from the expiration of that period.
(4) No claim can be made under this Part—
(a) in respect of a fiduciary or professional default occurring before 4 December, 1969; or
(ab) in respect of a fiduciary or professional default occurring outside this State unless it occurs in the course of, or incidentally to—
(i)legal work arising from instructions taken in this State; or
(ii) legal work substantially carried out in this State; or
(b) in respect of a liability for which indemnity is provided under a scheme of professional indemnity insurance under Division 13 of Part 3.
(5) Despite the other provisions of this section—
(a) a claim can only be made in relation to a fiduciary or professional default by an interstate legal practitioner in circumstances provided for by an agreement or arrangement made by the Society with the approval of the Attorney-General under section 95AA; and
(b) an agreement or arrangement so made under section 95AA may prescribe limitations or conditions in respect of any such claim.
In effect, s 60 provides that, subject to the provisions of Pt 5 of the LPA, a person who suffers “loss” as a result of a “fiduciary or professional default” of a legal practitioner may be compensated from the Guarantee Fund when there is no reasonable prospect of otherwise recovering that loss.
Section 64(2) of the LPA caps the amount which may be paid from the Guarantee Fund for any one fiduciary or professional default, or a specified series of fiduciary or professional defaults.
The Law Society has the responsibility for determining claims against the Guarantee Fund. A disappointed claimant has a right of appeal to the Supreme Court (s 63). The Society must satisfy any valid claim to the extent determined by it or the Supreme Court out of the Guarantee Fund (s 64).
The Decision of the Single Judge
The judge held that s 47(2) of the LPA vests the Supreme Court with a discretion to order that the costs of any application for directions be paid out of the Guarantee Fund. Those costs are not limited to the costs of a supervisor or manager, but may include the costs of other participants in the application for directions. The judge rejected a submission that s 47(2) simply provided a means for reimbursement of supervisors or managers for the costs incurred by them on an application for directions. The judge said:
That conclusion is consistent with the fact that the supervisor or manager is appointed where there has been some fiduciary or professional default in the conduct of a legal practice and with the fact that the guarantee fund has been established with the object of seeking to ensure that clients of legal firms do not suffer loss in consequence of any fiduciary or professional default.
It is clear on the face of s 47(2) that the costs of the supervisor and the manager will, as a general rule, be paid out of the guarantee fund. The terms of s 47(2) do not limit the persons whose costs might be paid out of the guarantee fund. Had Parliament intended that the costs only of the supervisor or manager should be paid out of the guarantee fund, it could have easily have expressed that intention. The fact that it has not reinforces the conclusion that the costs of other parties before the Court in consequence of the supervisor’s application are also payable out of the guarantee fund.
A subsidiary question is whether any party has an unqualified entitlement to be paid his costs or whether the Court has its usual discretion whether to award costs. An examination of the purpose of the application for directions and of the provisions of the Legal Practitioners Act confirms the conclusion that the costs incurred by the parties before the Court on the supervisor’s application are payable out of the guarantee fund and indicates that the Court has a discretion whether to order that the costs be paid out of the guarantee fund.[6]
[6] Re Magarey Farlam Lawyers Trust Accounts (No 2) [2006] SASC 382 at [17]-[19].
After examining the purpose of an application for directions by a supervisor or manager and the purposes of the Guarantee Fund, the judge concluded that the word “payable” in s 47(2) is used in the sense of “capable of being paid” rather than “what is owed and is to be paid”.[7]
[7] Ibid at [34].
In relation to the Court’s discretion with respect to costs the judge said:
However, while Parliament has provided for the fund from which costs might be paid, I do not think it intended that any party should have an automatic entitlement for his or her costs to be paid out of the guarantee fund. Instead, it intended that the Court would retain its long established discretion as to costs. If Parliament had intended that any party to an application would have an automatic entitlement to costs, s 47(2) would have been expressed in quite different terms. As a general rule, the supervisor will be entitled to have his or her costs and the Court will order the costs to be paid out of the guarantee fund. However, the Court retains a discretion as to costs in the unlikely event that the supervisor makes an application which on any view should not have been made.
There might also be occasions where a party or parties act unreasonably or seek to advance an unmeritorious claim or a claim without any reasonable prospects of success. The Court will, in those circumstances, or in like circumstances, consider whether in the exercise of its discretion a party is entitled to all or part of its costs. There might be occasions when it is appropriate for the Court to limit the amount of the costs which should be paid. …[8]
[8] Ibid at [32]-[33].
Submissions on Appeal by the Attorney-General
The Solicitor-General, who appeared with Mr Parker for the Attorney-General, submitted that the costs to which s 47(2) refers are the costs incurred by a supervisor or manager in seeking directions from the Court. A supervisor or manager is entitled to recover those costs from the Guarantee Fund as of right. It was submitted that the judge was in error in holding that s 47(2) vests a discretion in this Court with respect to such costs. The Court’s discretion with respect to costs is to be found in s 40 of the Supreme Court Act 1935 and, relevantly to this action, in r 101 of the Supreme Court Rules 1987. Neither provision, it was submitted, authorises the Court to make an order for payment of costs from the Guarantee Fund.
The Solicitor-General submitted that the costs incurred by a claimant participating in the hearing of an application pursuant to s 47(1) were not included in the costs to which s 47(2) refers. That did not mean that a claimant could not recover those costs at all. Such costs may, in an appropriate case, consitute a “loss [sustained] as a result of a fiduciary or professional default” and recovered by the claimant pursuant to s 60 of the LPA. Any such recovery would require the claimant to satisfy the eligibility requirements for such a payment, including establishing that there was no reasonable prospect of otherwise recovering the amount of the loss. It would also require that the cap prescribed by s 64(2) had not been exceeded.
Costs “Payable” from the Guarantee Fund
As the decision of the judge and the submissions on appeal indicate, there are three inter-related aspects to the construction of s 47(2). The first is to identify what is meant by the word “payable”. The second is to identify whose costs are payable in the relevant sense. The third is the extent, if at all, to which s 47(2) vests a discretion in this Court with respect to costs. Although there is an inter-relationship between these aspects, I consider it convenient to first consider the sense in which the word “payable” is used.
The Solicitor-General submitted that the word “payable” in s 47(2) is used in the sense that costs are immediately payable, ie, costs which are due and owing. This is a sense in which the word “payable” is often used.[9] However, as the judge indicated, the word “payable” has more than one meaning. The second meaning from The Macquarie Dictionary for the word “payable” is “capable of being paid”. In my opinion, the judge was correct in holding that this is the sense in which the word “payable” is used in s 47(2). It indicates that the costs of an application by a supervisor or manager are capable of being paid from the Guarantee Fund, ie, the payment of such costs is an authorised expenditure of monies in the Guarantee Fund. In this way, s 47(2) serves to enlarge (or at least remove any uncertainty about) the purposes specified in s 57(4) of the LPA to which monies in the Guarantee Fund may be applied.
[9] Cf Paglia v Trice (1991) 56 SASR 62 at 69, per King CJ.
In my opinion, this is a more natural sense for the word “payable” than the alternative proposed by the Solicitor-General. As the submission of the Solicitor-General acknowledged, acceptance of his submission would mean that there is no discretion at all regarding the costs to which s 47(2) refers. Even if a supervisor or manager had incurred costs unreasonably or extravagantly on an application for directions, they would still, on the submission of the Solicitor-General, be immediately due and payable from the Guarantee Fund. A construction which made it possible for monies in the Guarantee Fund to be applied in such a way would be surprising. It would be inconsistent with the evident intention of the scheme established in Pts 3 and 5 of the LPA to protect and preserve the Guarantee Fund. See for example s 48(3)-(6), s 57(5) and (6) and s 60 itself.
In short, I conclude that s 47(2) indicates simply that payment of the costs to which reference is made is an authorised expenditure of monies from the Guarantee Fund.
The Costs which are Payable
The Solicitor-General submitted that there are a number of features of the LPA and of the procedure by which a supervisor or manager may apply for directions which indicate that the costs referred to in s 47(2) are the costs of a supervisor or manager only.
First, s 47(2), immediately following s 47(1), can be read naturally as referring only to the costs of a supervisor or manager in making the application.
If the costs of a claimant incurred in relation to an application for directions are payable out of the Guarantee Fund pursuant to s 47(2), those costs in a real sense are in a preferred position compared with other costs which a claimant may incur due to the legal or professional default of a practitioner. The claimant will only be entitled to recover the latter category of costs if he or she goes through the s 60 “gateway” for recovery. The Solicitor-General questioned why it should be supposed that the Act intended to make a distinction between the two categories of costs.
This submission assumed that the costs incurred by a claimant would be a relevant “loss” for the purposes of s 60. There was some debate on the hearing of the appeal about the validity of that assumption, but I do not consider it necessary to resolve it here. It would be preferable for any decision on this issue to be deferred until an actual factual dispute is presented to the Court for determination.
The submission of the Solicitor-General also assumed that in all cases the costs incurred by a claimant in relation to an application for directions by a supervisor or manager will be a loss “as a result of a fiduciary or professional default” of a legal practitioner for the purposes of s 60. That is likely to often be the case, but not always. The expression “fiduciary or professional default” is defined in s 5(1) of the LPA as follows:
(a)any defalcation, misappropriation or misapplication of trust money received in the course of legal practice by the legal practitioner or a firm of which the legal practitioner is a member; or
(b)any wrongful or negligent act or omission occurring in the course of the practice of the legal practitioner, or a firm of which the legal practitioner is a member,
whether committed by the legal practitioner, an employee of the legal practitioner or any other person;
In general, a fiduciary or professional default involves some form of wrongdoing in the course of the practice of a legal practitioner. However, a supervisor or manager may be appointed without any such wrongdoing, for example, upon the death or incapacity of a practitioner. Directions of the Court may be required in such cases with subsequent costs to a claimant unrecoverable from the Guarantee Fund. This may explain the differentiation between the costs of a supervisor’s or managers’ application and other costs.
Next, the Solicitor-General referred to the very nature of an application for directions by a supervisor or manager. He submitted that the procedure was analogous to the jurisdiction conferred on courts to give directions to liquidators,[10] trustees in bankruptcy,[11] and trustees, executors and administrators of the estates of deceased persons.[12] Extensive reference was made in this submission, as it had by the judge at first instance, to the judgment of McLelland J in Re G B Nathan & Co Pty Ltd.[13] McLelland J said of the procedure under s 479 of the former Corporations Law:
These various statutory provisions for directions were a development from the practice of the Court of Chancery under the general law in giving directions to those entrusted with the administration of property under the control of the court. Two main classes of such persons were (1) trustees of trust property, or executors or administrators of a deceased estate, under administration by the court pursuant to a decree for general administration, and (2) receivers (and managers) appointed by the court in respect of property the subject of litigation. In such cases the exercise by those persons (to whom I will collectively refer as official administrators) of administrative or managerial functions was subject to close control by the court and in many instances they could safely exercise their powers only with the approval, and in accordance with the directions, of the court see, eg, as to trustees, Re Furness [1943] Ch 415, and as to receivers and managers, Gardner v London Chatham and Dover Railway Co (No 1) (1867) LR 2 Ch App 201 at 211 and Rosanove v O’Rourke [1988] 1 Qd R 171 at 173.
Generally speaking, if the court gave a direction to an official administrator who had made a full and fair disclosure to the court of the material facts, the official administrator might act in accordance with the direction without thereby incurring personal liability to any of the persons in whose interests the administration was being conducted, for example, creditors or beneficiaries of a deceased estate: see Waller v Barrett (1857) 24 Beav 413; 53 ER 417; Dean v Allen (1855) 20 Beav 1; 52 ER 502; Williams v Headland (1864) 4 Giff 505; 66 ER 806; Pinnock v Hull (1876) 2 VLR (Eq) 18 at 24-25; and Chisholm v Gilchrist (1902) 2 SR (NSW) (Eq) 84 at 86; (1902) 19 WN (NSW) 140.[14]
[10] Corporations Act 2001 (Cth), s 479.
[11] Bankruptcy Act 1966 (Cth), s 134(4).
[12] Administration and Probate Act 1919 (SA), s 69; Trustee Act 1936 (SA), s 91.
[13] (1991) 24 NSWLR 674.
[14] Ibid at 677.
The judge noted that there were some limitations on the procedure which were equally applicable to applications for directions under s 47(1). The judge said:
While the procedure provides protection for those whom McLelland J called official administrators, be they a trustee or a receiver appointed by the Court, it does not as a general rule enable the determination of rights as between parties. So, where a trustee of the estate of a deceased person applies pursuant to s 69 of the Administration and Probate Act 1919 for the advice or the directions of the Court, those directions protect and indemnify the trustee against any claim for breach of trust, provided always that the facts have been fully and fairly disclosed but it leaves the question open as between beneficiaries who have not been cited in the proceedings: re Mallen [1929] SASR 154 at 157; In the Estate of Hunter, deceased [1957] SASR 194 at 196. Where it is desirable or necessary to obtain a final determination of the rights of parties, it is necessary to proceed inter partes: Estate of Hunter (ibid).[15]
[15] Re Magarey Farlam Lawyers Trust Accounts (No 2) [2006] SASC 382 at [27].
The judge noted that an application for directions could be changed into proceedings for determining substantive rights if the Court’s procedures were sufficiently flexible to allow that. It may be an appropriate course for the Court to adopt to avoid additional cost and delay. However, the Court should only allow that when the parties consent and when the Court has all relevant parties before it or has, when necessary, made representative orders for that purpose. When it is allowed, it is important to maintain the distinction between an application for directions and proceedings for obtaining orders which bind the parties.[16] I respectfully agree with the reasons of the judge in this respect.
[16] Ibid.
The Solicitor-General emphasised that the procedure exists to protect a supervisor or manager from personal liability provided he or she had made full disclosure of all relevant matters to the Court, and acted in accordance with the Court’s directions.[17] It is not a procedure for the determination of substantive rights or liabilities. Ordinarily, the resolution of an application for directions will not involve the determination of factual issues. Generally the costs incurred by a supervisor or manager and by interested parties will be small. Section 47(2) provides a benefit to claimants in that a supervisor’s or manager’s costs can be paid from the Guarantee Fund rather than from monies held on trust or by the claimants themselves. It was submitted that all of this suggests that the LPA did not intend to enable the costs of persons other than a supervisor or manager to be paid from the Guarantee Fund.
[17] Cf Legal Practitioners Act 1981 (SA), s 48(7).
There is force in these submissions but I do not consider them to be decisive. The fact that the costs of an application for directions are generally relatively small is, in my opinion, neutral. It could be said as easily that because the costs are likely to be small the legislature was content for those particular costs to be met from the Guarantee Fund.
Further, the legislature may have thought it appropriate that interested parties are heard by the Court on an application for directions to inform the Court further about the subject matter of the application and about the appropriate directions. The legislature may have intended that interested parties should not be deterred from participating for this purpose by considerations of costs. Of course, as submitted by the Solicitor-General, in many cases such costs may be recoverable by a claimant under s 60. However, as noted above, that may not always be the case.
The exercise of the analogous jurisdiction in other contexts does not support the conclusion for which the Solicitor-General contended. In many cases, orders have been made for payment of the costs of the parties who have participated in the hearing of the application for directions. Farrow Finance Co Ltd (in Liq) v ANZ Executors and Trustee Co Ltd[18] provides an example. Hansen J considered the appropriate cost orders in respect of directions which he had made on a liquidator’s application for directions. It was held that the costs of the participants in the application should form part of the liquidator’s costs in the winding up of the insolvent company. Hansen J approached the matter in the following way:
In my opinion, the general principles which apply to the question of costs upon an application by a liquidator for directions include these: where the application is necessitated only by the stand taken by one particular creditor, or a certain group of creditors acting only in their own interest, and the question involved is not a complex one, then costs should generally follow the event. In other words, if the position which the liquidator always intended to adopt is vindicated, and the submission of the opposing creditors is rejected, then those creditors should be liable for the liquidator’s costs of the application …
On the other hand, where the issue involved is a complex one, or one involving a relatively novel proposition in law, then the starting point is that the costs of all necessary parties are to be paid by the liquidator and counted as costs in the liquidation …[19]
Farrow indicates that in some cases it may be appropriate in principle for the costs of participants in an application for directions to be paid from a fund rather than borne by the parties themselves or by the unsuccessful party.
[18] (1997) 23 ACSR 521.
[19] Ibid at 526-527. See also Re Masureik & Allan Pty Ltd (1981) 6 ACLR 39.
This approach in principle in Farrow was followed by Santow J in Re New Cap Reinsurance Corp Holdings Ltd[20] and by Warren J in Re Ansett Australia Ltd.[21]
[20] [2001] NSWSC 1001 at [5], [11]-[12].
[21] [2002] VSC 114 at [23]-[25].
In Re GPI Leisure Corporation Ltd (in Liq),[22] Whitlam J ordered that both the liquidator and one participant in the liquidator’s application for directions under s 479(3) of the Corporations Law should have the costs of the application paid out of the assets of the insolvent company. The report of that case does not include any reasons for the order. I note also that in Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd,[23] Northrop J ordered that the costs of all persons represented on a liquidator’s application for directions should be paid on a solicitor and own client basis as part of the liquidator’s costs of the liquidation. The report, apart from referring to “the particular features of the matter before the court”, does not indicate the basis upon which that order was made.
[22] (1994) 130 ALR 256.
[23] (1994) 49 FCR 334.
Although the reports of these cases do not identify the source of the power exercised with respect to costs, it is reasonable to assume that, in each case, it was the general costs power contained in s 1335(2) of the Corporations Law or of the Corporations Act 2001 (Cth).
These authorities indicate that when an application for directions has been made for the benefit and protection of a person in the position of the present supervisor, an order for costs in favour of some or all participants in the hearing may be properly made.
The reference in the authorities to the distinction between a directions hearing and a hearing involving a determination of substantive rights may have been relevant to an appeal against the actual costs order made in this case. The distinction is, in my opinion, of limited relevance to the construction of s 47(2). I note again that there has been no appeal against the cost order made by the judge or against the decision of the judge that the costs of the determination of the substantive rights of the parties should be regarded as costs of the Supervisor’s application.
Finally, the Solicitor-General submitted that if s 47(2) was construed as including the costs of other participants in the application for directions, it would, in effect, be a charter for claimants to litigate every available point, no matter how untenable or implausible. It should not be supposed that Parliament intended such a consequence. Hence s 47(2) should be construed as referring to the costs of a supervisor and manager only. This submission was linked to the submission of the Solicitor-General that s 47(2) did not vest any discretion with respect to costs in the Court. As will be seen, I agree with that submission but consider that the usual discretion of this Court with respect to costs is applicable. It is by the exercise of that discretion that the Court can determine the liability for costs of a participant who acts unreasonably.
In summary, while the matters to which the Solicitor-General has referred are of some force, they are not conclusive of the issue of construction involved.
I consider that textual considerations provide more assistance to the proper construction of s 47(2). In this respect s 48 is important. It provides for the remuneration of supervisors and managers. A supervisor or manager is entitled to such “remuneration, allowances and expenses” as may be determined by the Law Society (s 48(1)). The remuneration, allowances and expenses are to be paid out of the Guarantee Fund (s 48(2)). In the event of a dispute, the account of a supervisor or manager may be taxed and settled by the Supreme Court (s 48(3)). As noted previously, s 57(4)(c) provides specifically that monies in the Guarantee Fund may be applied to “costs consequent on the appointment of a supervisor or manager”.
The words “remuneration” and “allowances” refer naturally to the emoluments of the supervisor or manager. The word “expenses” is a reference to the necessary outlays of a supervisor or manager. These could be of various kinds. They could include the cost of retaining a tradesperson (for example, to change locks) and of obtaining professional assistance (from, for example, an accountant or auditor). I see no reason why the word “expenses” could not also include legal expenses including solicitor and counsel fees and necessary disbursements. This means that s 48(1) and (2) provide for the recoupment from the Guarantee Fund of a supervisor’s or manager’s own costs including the costs of his or her application to this Court. On that basis, it leads naturally to the inference that the costs referred to in s 47(2) are costs other than those of a supervisor or manager. Otherwise s 47(2) would be otiose.
Further, s 47(2) is expressed in general terms. If the legislature had intended that only a supervisor’s or manager’s costs should be recoverable from the Guarantee Fund, it would have been quite easy to say so. As the judge at first instance said, the fact that the legislature has not included any words of limitation reinforces the conclusion that the costs of other parties before the Court in consequence of a supervisor’s application are also payable out of the Guarantee Fund.
Finally, I consider that s 47(2) forms part of a legislative scheme which should be construed beneficially. The provisions in Div 9 of Pt 3 of the LPA (appointment of supervisors and managers) and in Pt 5 (claims against guarantee fund) exist for the protection of clients of legal practitioners and, in particular, to provide a means of compensation in the event of defalcation or some other fiduciary or professional default. Accordingly, it is appropriate to construe s 47(2) in a manner that will give the fullest relief which a fair reading of the language will allow.[24]
[24] Bull v Attorney-General (NSW) (1913) 17 CLR 370 at 384, per Isaacs J; Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32 at 44, per Mason CJ.
For these reasons, I consider that s 47(2) should be construed as authorising the costs of all participants in a supervisor’s or manager’s application for directions to be paid from the Guarantee Fund. As will be seen, the entitlement to have costs paid from the Guarantee Fund is subject to an exercise of discretion by this Court. This means that there may be some cases (perhaps many) in which a claimant’s costs in relation to a directions application may be recoverable from the Guarantee Fund through either s 47(2) or s 60. If so, this is a consequence of the language used in the LPA.
The Discretion
As already noted, the judge at first instance considered that s 47(2) vested a discretion in this Court with respect to costs. I respectfully disagree with that conclusion. The effect of s 47(2) is as I have already outlined. I agree with the submission of the Solicitor-General that s 47(2) is not framed in terms suggesting a grant of discretion. Further, to construe the word “payable” as meaning “capable of being paid” does not lead to the inference that some discretion with respect to payment is thus reposed in the Court.
However, in my opinion, the Court may exercise its usual discretion with respect to costs in relation to an application for directions by a supervisor or manager. That discretion is vested by s 40(1) of the Supreme Court Act 1935 (SA) and by r 101 of the Supreme Court Rules 1987. Section 40(1) of the Supreme Court Act provides:
(1)Subject to the express provisions of this Act, and to the rules of court, and to the express provisions of any other Act whenever passed, the costs of and incidental to all proceedings in the court, including the administration of estates and trusts, shall be in the discretion of the court or judge, and the court or judge shall have full power to determine by whom and to what extent such costs are to be paid.
The effect of s 40(1) is that subject to the express provisions of any Act and to the Rules of Court, this Court has a full discretion with respect to costs. The Court has full power to determine by whom and to what extent costs are to be paid.
Rule 101.01(1) of the Supreme Court Rules 1987 commences with the following:
Notwithstanding the following provisions of this Rule and of the provisions of Rule 101A.01 the costs of any party, the amount thereof, the person by whom, or the fund or estate, or portion of an estate, out of which they are to be paid are in the discretion of the Court …
The generality of these words is to be noted. The Rules provide in particular that the fund or estate out of which costs are to be paid is at the discretion of the Court.
On the construction of s 47(2) which I consider to be correct, the LPA does not contain any relevant provision limiting the general discretion of this Court with respect to costs. On the contrary, the effect of s 47(2) is to remove any doubt as to the Court’s power to make an order for payment of costs from the Guarantee Fund. It was not suggested that s 57(5) of the LPA constitutes a relevant limitation on the Court’s discretion.
In my opinion, s 40 and r 101 vest the Court with discretion to make orders with respect to the costs of an application for directions pursuant to s 47(2) of the LPA. The Court may order that the costs be paid by one or more participants in a directions hearing and, having regard to the terms of s 47(2), may order that the costs be paid out of the Guarantee Fund. If, as the Solicitor-General contended, the Court lacked a discretion with respect to the costs of an application pursuant to s 47(2), it could not make an order in favour of a supervisor or manager against a claimant who had unreasonably or unmeritoriously raised the requirement for directions to be obtained or who had acted unreasonably in the course of the application for directions. This is a further reason to reject the submission of the Solicitor-General.
The Solicitor-General also submitted that the fund referred to in r 101 is the fund which is the subject of the proceedings before the Court. The Guarantee Fund was not such a fund and accordingly neither s 40 nor r 101 vested a relevant discretion in the Court. No authority was cited for the submission and none has been located. I see no reason why the general words of s 40 and r 101 should be read down in the way submitted by the Solicitor-General. On the contrary, it has been said that the grant of power to a superior court to make orders with respect to costs should not be construed narrowly and instead should be given the most liberal and ample construction.[25] The cases in which an estate or fund is in dispute may simply provide the most common circumstance in which orders for payment of costs out of a fund are made. It does not follow however that such cases define the extent of the Court’s power with respect to ordering costs from a fund. The discretion to order costs to be paid from a fund must be exercised judicially and it may be a rare case in which an order is made in respect of a fund which is not itself the subject of the proceedings. However, in the present case, on the view of s 47(2) which I prefer, it is expressly contemplated that the costs of a supervisor’s application may be paid from the Guarantee Fund.
[25] Re JJT; Ex Parte Victoria Legal Aid [1998] HCA 44 at [41]; (1998) 195 CLR 184 at [201], per Kirby J; Clyne v Wrigley (1980) 1 NSWLR 599 at 601, per Moffitt P.
Conclusion
For the reasons given above, I would dismiss the appeal.
To prevent any uncertainty, I repeat that these reasons concern only the construction of s 47(2) and the Court’s discretion with respect to costs of an application for directions under s 47(1) of the LPA. In other words, I conclude that the judge was correct in finding that the costs incurred by the claimants and by the partners in Magarey Farlam Lawyers in relation to the Supervisor’s application for directions were capable of being paid out of the Guarantee Fund if so ordered by the Court. This Court has not been asked to review the decision of the judge that the costs of the Supervisor’s application in this case did include the costs in the proceedings of the partners of Magarey Farlam Lawyers and also of the claimants who had monies in the trust accounts. Nor has the Court been asked to review the actual exercise of discretion by the judge with respect to costs.
I would hear the parties as to the costs of the appeal.
KELLY J: I agree that the appeal should be dismissed for the reasons given by White J.
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