Re Magarey Farlam Lawyers Trust Accounts (No 2) - [2006] SASC 382

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
RE MAGAREY FARLAM LAWYERS TRUST ACCOUNTS (No 2)
[2006] SASC 382
Judgment of The Honourable Justice Debelle
15 December 2006
PROFESSIONS AND TRADES - LAWYERS - ACCOUNTS AND TRUST MONEY - STATUTORY PROVISIONS
Misappropriation of trust monies – application under s 47(1) of the Legal Practitioners Act 1981 seeking directions as to disbursements of monies remaining in trust accounts – s 47(2) provides that costs of application are payable out of guarantee fund - whether the costs incurred by claimants on supervisor’s application under s 47(1) are payable out of the Guarantee Fund.
Administration and Probate Act 1919 s 69; Corporations Act 2001 (Cth) s 479; Legal Practitioners Act 1981 s 44, s 45, s 47, s 48, s 57, s 60; Trustee Act 1936 s 91; An Act to amend the law of property and for other purposes 1860 s 35; Administration and Probate Act 1891 s 99; Law of Property Amendment Act 1859 (UK) (22 and 23 Vict. c 35) s 30; Public Trustee Act 1880 s 28; Pulbic Trustee Act 1995 s 37; Trustee Act 1893 s 78; Trustee Act 1936 s 90, s 91; Legal Practitioners Act Amendment Act 1969 s 24p, s 24w, referred to.
Anmi Pty Ltd v Williams [1981] 2 NSWLR 138; Harrison v Mills [1976] 1 NSWLR 42; In the Estate of Hunter, deceased [1957] SASR 194; Murdoch v Crawford [1986] VR 97; re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674; re Mallen [1929] SASR 154; re Staff Benefits Pty Ltd (in liq) and the Companies Act [1979] 1 NSWLR 207; re Standard Insurance Co Pty Ltd (in liq) (1963) 5 FLR 292; Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32, considered.

WORDS AND PHRASES CONSIDERED/DEFINED
"payable"

RE MAGAREY FARLAM LAWYERS TRUST ACCOUNTS (No 2)
[2006] SASC 382
Civil

DEBELLE J. This is an application in the nature of a construction summons. It seeks a determination 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 moneys 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 application has been made in the course of proceedings on an application for directions made by a supervisor appointed to the practice of Magarey Farlam Lawyers. Before addressing the question, I set out the facts leading to the supervisor’s application for directions and to this application.
A Misappropriation of Trust Moneys
Magarey Farlam Lawyers (“Magarey Farlam”) is a firm of solicitors practising in Adelaide. It is a successor to the firm of Magarey & Magarey.
Magarey Farlam and its predecessor Magarey & Magarey operated a trust account pursuant to the provisions of the Legal Practitioners Act 1981 and the Legal Practitioners Regulations 1994. On 22 March 2004, Magarey Farlam opened a second trust account to facilitate the receipt of electronic funds.
Magarey & Magarey caused Gimalo Administrators Pty (“Gimalo”), an unlimited liability company, to be incorporated. Gimalo held bank accounts with three banks, Bank SA, the Commonwealth Bank of Australia, and the Adelaide Bank. Funds were invested in those accounts on behalf of clients of the firm.
Magarey & Magarey and Magarey Farlam had for a long time employed Mr Brenton Willoughby. He was employed in various capacities as a tax agent, a probate clerk, an accountant and trust account officer. In his later years he was responsible for a wide range of duties within the firm and was entrusted with the management of the trust accounts of clients. He was secretary of Gimalo.
In June 2005 Mr Willoughby informed the partners of Magarey Farlam that he intended to resign. On 1 July 2005 the partners asked the firm’s auditor, Mr Owens, to expedite the annual audit of the firm’s trust accounts. Mr Owens reported in a letter dated 24 July 2005. He had identified misappropriations totalling some $674,000. Later investigations disclosed payments from the firm’s trust accounts to a bank account in the name of Mr Willoughby or into another bank account in the name of Jackwill Pty Ltd which was an account controlled by Mr Willoughby. Magarey Farlam informed the Law Society of South Australia of the defalcations.
A Supervisor is Appointed
On 1 August 2005, the Council of the Law Society acting pursuant to s 44 of the Legal Practitioners Act resolved to appoint a supervisor of the trust accounts of Magarey Farlam. Ms S. R. Bishop is the supervisor.
On 1 February 2006 the Council of the Law Society acting pursuant to s 45 of the Legal Practitioners Act resolved to appoint a manager to the practice of Magarey Farlam. Ms K. N. Thomas is the manager.
Ms Bishop as supervisor has caused an accountant to undertake an examination of the trust accounts and the defalcations. That examination has disclosed that the defalcations are considerably larger than had been ascertained by Mr Owens. The defalcations have affected in different ways those clients of Magarey Farlam who have moneys deposited in trust accounts of the firm and those who have moneys invested in Gimalo. For convenience, I will refer to the trust accounts of the firm and the accounts of Gimalo at the banks collectively as “the trust moneys”. It appears that there are at least two classes of claimants to the trust moneys among the clients of Magarey Farlam. They have been called for convenience “the pooling claimants” and “the tracing claimants”.
Three Classes of Claimants
Ms Bishop has obtained the opinion of senior counsel. Having considered that opinion, Ms Bishop believes that the most fair, expeditious, and least costly means of distributing the moneys still held in the trust accounts (including the investment accounts of Gimalo) is to aggregate all moneys under her control and distribute the fund in proportion to the amount or amounts which each claimant has contributed to the trust accounts. The pooling claimants support that proposal.
The tracing claimants assert that it is possible to trace the whole of the moneys which each member of that class has deposited into the trust accounts. Obviously, if the tracing claimants succeed, there will be a corresponding reduction in the pooled funds.
The first defalcation which was identified by the partners of Magarey Farlam was in the sum of $108,000. The partners of Magarey Farlam attempted to make good the loss by themselves depositing $93,000 into the firm’s trust account and making the necessary accounting entries to restore the moneys lost by the defalcations. After they had ascertained that the amount of the defalcations was far more extensive than the initial sum of $108,000, the partners of Magarey Farlam have claimed repayment of the sum of $93,000. There are, therefore, three classes of claimants to the trust moneys, the pooling claimants, the tracing claimants and the partners of Magarey Farlam.
Application for Directions
On 15 September 2005 Ms Bishop applied to this Court for directions upon matters affecting her duties as supervisor. The application was made pursuant to s 47(1) of the Legal Practitioners Act. The Court has made orders and directions upon a number of matters from time to time.
Included in the directions which Ms Bishop has sought, are directions as to how she should call for claims on the trust accounts, administer those claims, determine the number and type of claimants, and make a distribution among the claimants. Thus, on 5 December 2005, Ms Bishop applied
●for directions so that she might give notice by letter and advertisement to obtain details from claimants to their claim to moneys held in the trust accounts of Magarey Farlam and to make a determination as to the nature and extent of such claims;
●for directions as to press advertisements for claims;
●directions regarding the process to be adopted by the court for hearing submissions from the supervisor, claimants and other interested parties as to the nature of claims on the trust accounts, including directions as to how to deal with legal representation for claimants;
●a direction that upon hearing submissions from the supervisor, claimants and other interested parties, the Court determine the number and type of categories of competing claimants; and
●a direction that the supervisor make a determination about how the claimants are to be allocated to the various categories.
She also sought ancillary directions. On 31 August 2006, Ms Bishop applied for directions as to how she should distribute the funds in the trust accounts and for determination of the competing claims of the classes of claimants. The orders and directions which the Court has made have to a large extent been concerned to ensure that all claimants are identified, that all classes of claimants and all other interested parties are before the Court, that the opinion of counsel obtained by Ms Bishop was made available to all claimants, and for the hearing of the supervisor’s application as to how the funds in the trust accounts and held by Gimalo should be disbursed among the claimants. The application has been set down for hearing on 19 and 20 December 2006.
A Concern as to Costs
A number of the clients of Magarey Farlam are concerned with the costs being incurred by them in recovering what they claim is due to them from the trust accounts. It is for that reason that the parties before the Court joined in seeking a determination of the question as to the meaning of s 47(2).
The supervisor and the manager have both informed the Court that they will abide the order of the Court. Neither made any submissions as to the meaning and operation of s 47(2). The Attorney General has had notice of the supervisor’s application since October 2005. He has not appeared on any directions hearing or other hearing in respect of the supervisor’s application. He was given notice of the hearing to determine the meaning of s 47(2). The Attorney General was represented at the hearing to determine that question. The protagonists on the hearing of the application were the tracing claimants, the pooling claimants and the partners of Magarey Farlam on the one hand who contended for an affirmative answer to the question, and, on the other hand, the Attorney General, who submitted that the question should be answered in the negative.
A Plain Meaning
Section 47 of the Legal Practitioners Act provides:
47. (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.
The meaning and operation of s 47(2) is clear. It invests this Court with a discretion to order that the costs of any application be paid out of the guarantee fund. Those costs are not limited to the costs of the supervisor or manager. They include the costs of other parties to the application for directions. 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.
A Well-established Procedure
Section 47 recognises that, in the course of the exercise of their duties and functions, a supervisor or manager might seek directions as to how they should discharge those duties and functions. The ability to apply for directions is a well-established procedure available to those administering the affairs of others. Two well-known instances of the procedure are the ability of liquidators of a company to apply for directions pursuant to s 479 of the Corporations Act 2001 (Cth) and the ability of a trustee, executor or administrator of the estate of a deceased person to apply for advice and directions: s 69 of the Administration and Probate Act 1919 and s 91 of the Trustee Act 1936.
The application for directions has a long pedigree. In re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674 McLelland J examined the historical development of the various statutory provisions for directions in England and in New South Wales. I gratefully adopt his analysis and add a note on the development of the procedure in South Australia.
A statutory procedure for application for directions by a trustee, executor or administrator was introduced by s 30 of the Law Property Amendment Act 1859 (UK) (22 and 23 Vict. c 35). Those provisions developed 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. The two main classes of such persons were, firstly, 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, secondly, receivers (and managers) appointed by the Court in respect of property the subject of litigation. McLelland J said (at 677):
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.
Section 30 of the 1859 Act in the United Kingdom was soon adopted and enacted in South Australia. Section 25 of the Act No. 6 of 1860 entitled An Act to amend the Law of Property and for other purposes was a provision in almost identical terms of s 30 of the 1859 Act. It provided:
25. Any trustee, executor, or administrator shall be at liberty, without the institution of a suit, to apply by petition to the Court for the opinion, advice, or direction of the Court, on any question respecting the management or administration of the trust, property, or the assets of any testator or intestate, such application to be served upon, or the hearing thereof to be attended by all persons interested in such application, or such of them as the Court shall think expedient, and the trustee, executor, or administrator, acting upon the opinion, advice, or direction given by the Court, shall be deemed, so far as regards his own responsibility, to have discharged his duty as such trustee, executor, or administrator, in the subject matter of the said application: Provided, nevertheless, that such application shall not extend to indemnify any trustee, executor, or administrator in respect of any act done in accordance with such opinion, advice, or direction as aforesaid, if such trustee, executor, or administrator shall have been guilty of any fraud, or wilful concealment, or misrepresentation, in obtaining such opinion, advice, or direction; and the costs of such application shall be in the discretion of the Court.
Section 25 (and s 30 of the 1859 Act) made the protection of the official administrator explicit in terms which broadly reflected the position under the general law following a decree for general administration. The proviso to s 25 was particularly relevant. The official administrator was protected only if full disclosure had been made.
In 1880 the ability to obtain the advice and direction of this Court was extended to Public Trustee by s 28 of the Public Trustee Act 1880. The terms of s 28 were, however, more similar to what is now s 69 of the Administration and Probate Act 1919. The predecessor of s 69 was s 99 of the Administration and Probate Act 1891. It was in identical terms to what is now s 69 save that s 69 is now set out in six subsections which correspond to the four subsections in s 99 of the 1891 Act.
In 1893 the Trustee Act 1893 repealed, among other provisions, s 25 of the Act No. 6 of 1860. Section 78 of the Trustee Act 1893 provided a power for a trustee to obtain the advice and direction of the Court in terms which are very similar to what is now s 91 of the Trustee Act 1936.
These are the legislative antecedents of what is now s 69 of the Administration of Probate Act 1919 and s 90 of the Trustee Act 1936 and of s 37 of the Public Trustee Act 1995 which preserves the ability of Public Trustee to apply to the Court for directions. It is unnecessary for present purposes to examine the history of what is now s 479 of the Corporations Act. It is sufficient to refer to Nathan at 677.
Section 47 of the Legal Practitioners Act is but another instance of a statutory procedure for application for directions based on s 30 of the 1859 Act of the United Kingdom and the other provisions in this State which have since been enacted.
Some Limits on the Procedure

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 of 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).
Where the procedures of the Court are sufficiently flexible to enable proceedings commenced as an application for directions to be changed in proceedings for determining substantive rights, the Court will on occasions make orders binding on the parties to those proceedings. The Court will do so where the parties consent and the Court has, where necessary, made representative orders for the purpose: Nathan at 679; Harrison v Mills [1976] 1 NSWLR 42 at 45 to 46; re Staff Benefits Pty Ltd (in liq) and the Companies Act [1979] 1 NSWLR 207. It is a convenient course which avoids the need to commence further proceedings involving additional costs and delay: Anmi Pty Ltd v Williams [1981] 2 NSWLR 138 at 156 to 157. Nevertheless, it is important that the distinction between an application for directions and proceedings where it is intended to obtain orders which bind the parties to the proceedings, is recognised and not blurred: Nathan at 680; re Standard Insurance Co Pty Ltd (in liq) (1963) 5 FLR 292 and Murdoch v Crawford [1986] VR 97 at 100 to 101; Estate of Hunter at 196.
Thus, generally speaking, the Court will not permit proceedings commenced as an application for directions to be changed into proceedings for determining substantive rights unless it is satisfied that those affected are to consent to that course or will not suffer injustice in consequence of the change in the nature of the proceedings: Nathan at 680.
The initial application by the supervisor has caused each of the three classes of claimants to make an application for the determination of their substantive rights. The applications are a direct consequence of the fact that the supervisor applied for directions as to how she should distribute the trust moneys remaining after the defalcations. However, notwithstanding that orders with binding effect are sought and orders have been made so that all parties will be bound, the proceedings remain the supervisor’s application.
The Meaning of s 47(2)
That background informs the meaning and operation of s 47(2). The fact that s 47(2) expressly provides for the fund from which costs might be paid is somewhat unusual. As a general rule, statutory provisions conferring the power to apply for directions simply provide that costs are in the discretion of the court: see, for example, s 69(4) of the Administration and Probate Act, or are silent both as to costs and as to the fund out of which costs will be paid: see, for example, s 479 of the Corporations Act. Given that a supervisor or manager is appointed when a legal practice is not being properly managed or a legal practitioner has committed a serious irregularity in the course of the practice and given that the supervisor or manager may have to act in respect of the trust account of the practice (see ss 44 and 45 of the Legal Practitioners Act), it is apparent that the purpose of the Parliament is to enact a provision which will provide a fund out of which costs might be paid. The guarantee fund was established in 1969 to compensate clients where there had been defalcations in a trust account. That is readily apparent from both the terms of s 24p to s 24w introduced by s 8 of the Legal Practitioners Act Amendment Act 1969 and from the second reading speech which introduced the bill to amend the Act. Similarly, when the Legal Practitioners Act 1981 repealed and replaced the Legal Practitioners Act 1936, it was intended that the guarantee fund would be available for a number of purposes including the provision of a fund to satisfy at least in part claims made on a default by a practitioner. That is apparent from the terms of Division 3 of the 1981 Act. Such a provision is clearly intended to achieve the object of avoiding the clients of a firm incurring loss or any further loss by way of legal costs.
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. For example, if in this case each member of the class constituted by the tracing claimants had prosecuted his or her own individual claim, it is highly unlikely that any order as to costs would have been made except an order in favour of the class as a whole and in an amount equivalent to one person prosecuting the claim on behalf of the whole class. In this way control can be exercised over improper or excessive claims for costs and costs will not be awarded in the case of claims which have no reasonable prospects of success.
In ordinary usage, the primary meaning of the word “payable” denotes that which is owed or is to be paid as in the expression “due and payable”. The secondary meaning is “capable of being paid”: see Oxford English Dictionary and The Macquarie Dictionary. When regard is had to the purpose of the application for directions and to the need for the Court to retain a discretion as to costs, it is clear that when “payable” is used in subsection (2), it is being used in its secondary sense. Thus, the use of word “payable” in subsection (2) signifies that the costs of any application under subsection (1) are capable of being paid out of the guarantee fund. In addition, s 47(2) contains no words of compulsion. It does not state that the costs of the application shall be paid out of the guarantee fund or that costs must be paid out of that fund. The Court is not under any obligation to order that the costs be paid out of the guarantee fund. The meaning and effect of s 47(2) is that the Court may in the exercise of its discretion order that the costs be paid out of the guarantee fund.
These proceedings began as an application for directions by the supervisor. As the investigation by the supervisor of the facts and circumstances associated with the defalcations and other dealings in the trust accounts proceeded, it became apparent that there are at least three classes of claimants to the trust moneys. They are the tracing claimants, the pooling claimants, and the partners of Magarey Farlam Lawyers in respect of the payment by them of $93,000 into the trust account. The supervisor seeks directions as to the manner in which she should distribute the trust funds. Both the supervisor and those three classes of claimants seek orders which bind all parties to the proceedings. Representative orders have been made so that those who are not a party to the proceedings are bound. Thus, all those with claims against the trust accounts will be bound. There will be no injustice in proceeding in this way. Indeed, the interests of justice are best served by proceeding in this way. In addition to these considerations, as the application for directions concerns competing claims to a fund, it is desirable for each claimant or class of claimants to be heard. That has the advantage of ensuring that all aspects of the issue are canvassed by a proponent and one or more contradictors.
For all of these reasons, it has been convenient to permit the initial application by the supervisor to be changed into proceedings for the determination of substantive rights. In addition, unnecessary cost and delay has been avoided. Many of the persons affected by the defalcations were already before the Court. The relevant facts and issues were being canvassed in the directions hearing. It would have been pointless to require the parties to issue fresh inter partes proceedings. It was not only convenient but manifestly sensible to proceed in that way. To require the parties to issue separate inter partes proceedings would have led to additional cost and delay. These proceedings have already been protracted by the need for a proper inquiry into the defalcations and their manner and extent as well as by the practical and legal complexity of the matter. The costs incurred by the parties are already substantial. In many cases, the amounts deposited in the trust account by an individual client is not large. A number of clients have expressed their frustration with the cost and delay of these proceedings. Some clients who initially had instructed solicitors to act for them have had to terminate their instructions because the cost involved was exceeding the amount that they had deposited in the trust account. In every respect it was sensible and convenient to adapt the applications for directions to enable the determination of the rights of the parties as between themselves.
The costs incurred by the parties are, therefore, costs occasioned by the supervisor’s application. The Court has power in the exercise of its discretion to make orders that the costs of those who are party to the proceedings are the costs which are capable of being paid out of the guarantee fund. For these reasons, the Court has power in the exercise of its discretion to order that the costs be paid out of the guarantee fund.
The position might be shortly stated in these terms. The costs incurred by both the tracing claimants and the pooling claimants are costs which are a direct and immediate consequence of the directions sought in these proceedings by the supervisor. The supervisor wishes to be directed as to how she should distribute the funds remaining in the trust accounts after the defalcations having regard to the competing claims of the claimants. Any directions which are given will have to have regard to the actual dealings in the trust accounts, the manner in which those dealings affected the moneys held in each trust account and to the legal principles relating to the movement of moneys in and out of accounts, principles which give rise to the competing classes of claimants. There are real and important questions for determination and, given the existence of competing claims, it is necessary for each class of claimants to propound the grounds of its claim and defend its claim against those who seek to deny it. From its earliest stages, the application by the supervisor for directions has required detailed examination of questions of practical and legal complexity.
At this stage, the issues between the parties have not been determined. It would not, therefore, be proper for the Court to make any order as to costs. Such an order should only be made after the questions asked by the parties have been heard and determined. The Court can do no more at this stage in the proceedings than determine that the costs incurred by the claimants in these proceedings who have moneys in trust accounts of either Magarey Farlam Lawyers or Gimalo 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. Whether such an order will be made will depend on the outcome of the proceedings.
Further Reasons for the Conclusion
A consideration of other provisions of the Legal Practitioners Act reinforces this conclusion.
Section 60 of the Act provides for claims against the guarantee fund where a person has suffered loss as a result of a fiduciary or professional default. For present purposes, it is necessary to consider only subsection (1) and (2) of s 60:
60.(1) Subject to this Part, where –
(a)a person suffers a 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.
Section 60(2)(a) limits the amount that may be recovered to the actual pecuniary loss suffered including the reasonable costs of making the claim. It is unnecessary for present purposes to consider paragraph (b) of s 60(2).
The claimants before the Court include the tracing claimants. That class of claimants contends that they are able to trace the whole of the funds deposited by them into the trust accounts of Magarey Farlam Lawyers or Gimalo. If the tracing claimants succeed in that contention, they will not suffer any loss of the amount held in those accounts. However, those claimants will have incurred legal expenses (and, I suspect, substantial legal expenses) in prosecuting their tracing claim. There is a real question whether the tracing claimants would be entitled to recover their legal costs because they will have recovered the full amount of the funds in the trust accounts. By contrast, the pooling claimants will be entitled to recover their reasonable costs of prosecuting their claims because, whether or not the tracing claimants succeed, the pooling claimants will not have been able to recover the full amount which each member of that class has lost. There is a manifest inequity if one group of claimants is entitled to recover its costs but another is not. That inequity is avoided if both classes recover their costs pursuant to s 47(2).
Mr Parker, who appeared for the Attorney General, contended that the purpose and intent of s 47(2) was simply to provide a means of reimbursing the supervisor or manager for costs incurred by them on an application for directions. There is some force in that contention, especially if “payable” is understood in its primary sense. However, to construe s 47(2) in that way is to fail to have regard to the purpose of establishing the guarantee fund. It was common ground that one of the purposes of the fund is to protect clients of firms of legal practitioners from incurring loss occasioned by fiduciary or professional default. If Mr Parker’s contention were to prevail, clients of firms who incur legal costs in seeking to recover funds in a trust account would have to bear those costs unless they fall within the terms of s 60 of the Legal Practitioners Act.
There is a further answer to Mr Parker’s contention. Section 47 is but one of a number of provisions in this part of the Legal Practitioners Act designed to assist clients of legal firms being compensated should there be a defalcation or some other fiduciary or professional default. It is one of a number of provisions in a legislative scheme which is remedial in character. As such, it should be construed so as to give the fullest relief which the fair meaning of the language of the section will allow: Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32 at 44. Although on one view s 47(2) could be limited to the costs of the supervisor or manager, a fair meaning of the provision allows all who are parties to the application to have their costs paid out of the guarantee fund, subject to the overriding discretion of the court.
The conclusion that the Court may order the claimants to the trust moneys be paid out of the guarantee fund also produces a fairer result among those who will be entitled to a distribution of the trust moneys. Not all of the claimants to the trust moneys have obtained legal representation. Others are not formally before the Court so that it has been necessary to make representation orders to bind them. Thus, while some in the two classes of claimants, the pooling claimants and the tracing claimants, are incurring the cost of prosecuting the interests of their respective classes, others in those two classes are not but, by reason of representation orders, will have the benefit of the orders. It is manifestly inequitable that some will benefit without having to incur any costs while others in that same class will have to pay those costs. Such a result would be avoided if the costs of those who have legal representation are paid out of the guarantee fund pursuant to an order made under s 47(2).
Conclusion
For these reasons I would answer the question in these terms. The costs in these proceedings incurred by the claimants who had moneys in the trust accounts of either Magarey Farlam Lawyers or Gimalo Administrator 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.
In relation to the costs of Magarey Farlam on the supervisor’s application, there might be a further issue. Section 48(5) of the Legal Practitioners Act permits the Law Society to recover from a legal practitioner expenditure from the guarantee fund in consequence of the appointment of the supervisor or manager for that practitioner. There is no evidence that the Law Society has made a demand pursuant to s 48(5). That is an issue which might have to be addressed on any claim for costs by the partners of Magarey Farlam Lawyers.