Re Michael Christoper Gianacas Ex Parte the Official Receiver

[1983] FCA 186

Re: MICHAEL CHRISTOPHER GIANACAS
Ex parte: THE OFFICIAL RECEIVER (1983) 77 FLR 345
No. W1082 of 1981
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Sheppard J.(1)

CATCHWORDS

Bankruptcy - application for discharge prior to statutory period - bankrupt a solicitor in failed legal practice - innocent of dishonesty but ingenuous and naive - application claimed by trustee to be premature - no question of principle -

Bankruptcy Act 1966, ss.149 and 150.

Bankruptcy - Discharge - Application for early discharge - Whether application premature - Bankruptcy Act 1966 (Cth), ss 55, 58, 116, 149, 150, 269.

HEADNOTE

The applicant became a bankrupt in December 1981 upon a petition presented by himself. He would have been discharged in any event by the operation of law in December 1984, unless an objection was entered. He applied for an earlier discharge.

Held: In the circumstances of the instant case and pursuant to s 150(9)(c) of the Bankruptcy Act 1966 (Cth) an order of discharge should be suspended up to and including 31 December 1983.

HEARING

Sydney, 1983, June 27; July 29; August 12. #DATE 12:8:1983

APPLICATION

Application for an early discharge by a bankrupt.

T L Thomas, for the applicant.

D J N Bluett, for the Official Receiver.

F A Frischer, for the Law Society of New South Wales.

Cur adv vult

Solicitor for the Official Receiver: B J O'Donovan, Deputy Commonwealth Crown Solicitor.

EFF

ORDER

The Court makes an order of discharge suspended up to and including 31 December, 1983.

Orders accordingly

JUDGE1

This is an application for discharge made by a bankrupt pursuant to s.150 of the Bankruptcy Act 1966 ("the Act"). The applicant became bankrupt on 11 December, 1981, pursuant to s.55 of the Act upon a petition presented by himself. Unless an objection be entered pursuant to sub-sec.(3) of s.149, the applicant will, in any event, be discharged by force of that section on 12 December, 1984.

The applicant was a partner in a firm of solicitors which practised in Newcastle. He had been admitted to practice as a solicitor in 1973. On 1 July, 1974, when 26 years of age, he became a partner in the firm which was known as Charlton, Kafer & Sanders. The applicant was one of two junior partners. The senior partners were Messrs. Sanders, Kafer and Dickson.

In 1965 Messrs. Kafer and Sanders had had incorporated a company, Thirty Watt Pty. Limited. The name came from the address of the firm, 30 Watt Street, Newcastle. Originally the company was incorporated so that it might acquire the firm's office space when it became available for purchase as a lot on a strata plan. However, from about 1973 the company was used for the investment of clients' and other funds. It operated as an investment company and a real estate developer. Its operations were managed by Mr. Sanders. The bulk of its funds came from clients who deposited their moneys in the firm's trust account for the purpose of investment.

The other junior partner who had joined the firm in 1974 left it in 1976.

In September 1978 a random check by accountants from the Law Society of New South Wales discovered discrepancies in the firm's trust account. In November 1978 a receiver was appointed. Also in November 1978 official managers of the company were appointed. A statement of affairs disclosed that it owed unsecured creditors sums totalling $5,690,258. The creditors included both trade creditors and clients of the firm who had deposited moneys with the company, many, as I understand the evidence, not understanding that their moneys had been dealt with in this way.

The official management of the company has been reasonably successful. The position is not yet finalised but already a general distribution has been made of 80 cents in the dollar except in the case of six claimants who have received a distribution of only 50 cents in the dollar.

The clients whose moneys had been invested in the company made claims upon the Fidelity Fund administered by the Law Society pursuant to the provisions of the Legal Practitioners Act 1898 (N.S.W.). Their claims totalled $2,667,936.24. Payments amounting to $569,704.90 have been made. These payments constitute a payment at the rate of 20 cents in the dollar to all but six creditors. In their case the payment has been 50 cents in the dollar. They received 50 cents, rather than 80 cents in the dollar from the company. In the result clients have thus received the entirety of what was due to them by the firm except for interest.

Disciplinary proceedings were taken against the four partners of the firm. These came before the Statutory Committee constituted pursuant to the Legal Practitioners Act on 18 February, 1980. The Committee announced its decision on 27 November, 1980, over twelve months before the applicant became bankrupt. It ordered that the names of Messrs. Sanders and Kafer be struck off the Roll of Solicitors of the Supreme Court of New South Wales. I was informed by counsel that criminal proceedings are pending against Mr. Sanders. Mr. Dickson was suspended from practice for a period of two years. The order made in respect of the applicant was that he be suspended from practice until 30 June, 1981, "provided that the order for suspension shall be stayed upon the Solicitor's undertaking in writing . . . . that he will not practice as a solicitor on his own account or in partnership until 1 July, 1982". The applicant gave the undertaking and was thus able to continue in practice as an employed solicitor during the period up to 1 July, 1982. Thereafter he has been able to engage in practice on his own account. The fact that he has been since that time an undischarged bankrupt is not seen by the Law Society as providing a reason why he should not be entitled to practice fully as a solicitor.

Six creditors have lodged proofs of debt against the applicant's estate. The proofs total $541,331. By far the largest creditor is the Law Society of New South Wales which has proved, at the moment, in the sum of $523,204. No doubt proofs for the same amount have been lodged in the estates of the other partners, all of whom are bankrupt.

It is quite unlikely that any sum of any consequence will be brought to the credit of the estate.

In an affidavit made in support of the application the applicant has referred to his youth and inexperience at the time he joined the firm. He said that the conduct of the partnership "was dominated by Messrs. Kafer and Sanders". He said that he was not in a position to give any significant attention to the management of the partnership business because of the domination of his senior partners. They did not consult him and were not prepared to give him opportunities to participate in the making of "significant decisions". He said that he regarded his seniors with great respect and did not question their control of the partnership affairs or see the need to exercise any vigilance over what they did. He attended to a large volume of conveyancing and probate business in the office and to the work of a personal clientele of his own which arose from connections he had in the Newcastle "sporting world" and in its Greek community. He had a large number of Greeks as clients no doubt because he was the only solicitor in Newcastle who spoke Greek.

The firm employed staff to carry out accounting and bookkeeping duties. They worked under the supervision of Mr. Sanders and appeared to the applicant, so he said, to be efficient and effective. He did not concern himself with the details of their work.

Even before the collapse of the company the applicant was experiencing financial difficulties. His returns from the practice were not apparently large enough for his and his family's needs.

The applicant's affidavit concludes with the following paragraph:

"As a result of my involvement in the firm I worked for some 4 years for very modest returns and was then involved for several years after October, 1978 in personal turmoil as a result of the investigations of the Law Society, the action of the Receiver appointed under the Legal Practitioners Act to the firm, the liquidation of Thirty Watt Pty Limited, the proceedings before the Statutory Committee and my suspension from practice. In my own belief this position was not brought about by my own misconduct and I respectfully submit this to be the true position. I am now the holder of an unrestricted Practising Certificate under the Legal Practitioners Act, 1898 and I have recently, with the consent of the Council of the Law Society, commenced a practice on my own account as a solicitor. I now seek to be discharged from bankruptcy so that I will be able to make a completely new beginning of my professional life without being impeded by the misconduct of my former partners."

In his oral evidence the applicant said that he was now 35 years of age. He had commenced a legal practice on his own account on 1 June, 1983. One of his clients is a Mr. W. L. Peters who pays him a monthly retainer of $1,252 for legal work done for Mr. Peters and companies and persons associated with him. The applicant is not in partnership. He maintains a trust account and has been given a full practising certificate by the Law Society.

The applicant was asked why he wished to be discharged from his bankruptcy. He said:

"Well, I feel that I have now got the opportunity to commence legal practice by myself. I think that I have suffered enough at the hands of other people, and their indiscretions, and I really feel that if given the chance I could make some part of my life - I have got a good clientele in Newcastle. I am the only Greek solicitor in Newcastle and consequently a lot of Greek people come to me for help and assistance, and I think that, if given the chance today, I could start a whole new life."

The applicant said he had no difficulty operating a bank account or trust account as an undischarged bankrupt. The fact that he is undischarged has been told to his bank manager. He does not require credit for the purposes of the practice. According to his evidence Mr. Peters has been able to help him in setting it up. He has one employee, a secretary. He said, "I do not have any law books at this stage, but Mr. Peters has arranged funding of this practice. I have not put one cent toward it".

In an affidavit Mr. Peters confirmed the evidence given by the applicant. He is the managing director of two companies one of which is a crane hiring company in Newcastle having a turnover of "several hundred thousand dollars per year". Mr. Peters said that the applicant had been his companies' solicitor and his personal solicitor since 1976 when he was still with the firm. He said that the applicant had handled many legal matters for him and that he had always found him to be completely reliable, honest and trustworthy. He did not lose faith in the applicant following the insolvency of the company and the failure of the firm. Thereafter he "followed" the applicant to three other law firms where he was employed between 1979 and 1982. Mr. Peters claims to be fully aware of the circumstances surrounding the applicant's involvement in the company and the firm.

Mr. Peters employed the applicant, through one of his companies, from the end of 1982 until the applicant commenced his own practice on 1 June. Mr. Peters has confirmed that the funds necessary to enable the applicant to commence practice were provided by him. The applicant is continuing to do all Mr. Peters' company and personal legal work. He supports the application for discharge which is made.

In its decision given on 27 November, 1980, the Statutory Committee said:

"The Committee accepts Mr Gianacas as a truthful witness and accepts that he was not knowingly a party to the advances apparently made to him by Thirty Watt Pty. Limited (except in relation to the sale of his home above-mentioned) nor was he otherwise knowingly a party to the operations of the company. The Committee finds that the Solicitor was at fault in failing to adequately discharge "his responsibilities to his clients. It recognises that his culpability is qualified to a significant degree by reason of the circumstances disclosed in evidence as to his ingenuous and trusting nature and his subordinate position in relation to his senior partners."

The trustee opposes the application principally on the ground that it is premature. He does not however claim that the application should be refused for any reason associated with the administration of the applicant's estate. Notwithstanding that the administration of it is incomplete, it will apparently be sufficient for the trustee to have the assistance which the applicant is obliged to give even though he be discharged. Nor does the trustee suggest that the discharge should be delayed because there is any real prospect of his being able to make any significant contribution to the estate. Rather his submission is based upon the overall circumstances of the case, the conduct of the applicant and his view that a period of a little over 18 months as an undischarged bankrupt is quite insufficient in a case such as this.

No creditor opposes the application. The only creditor to appear was the Law Society which appeared by a solicitor on the second occasion the matter was in the list, at my request. The solicitor stated that the Law Society neither consented to nor opposed the application.

An affidavit was filed by Mr. Maynard, the manager of the Fidelity Fund, but this was intended only to give me an up to date account of the claims it had had and the present position of the former clients of the firm so far as their claims against the Fund and the company were concerned. It appears not unlikely that the Law Society will recover from the company approximately $250,000 of the amount it has paid out. But I was informed that its claim will nevertheless amount to a figure of the order of $400,000 once all claims are taken into account along with its receiver's expenses.

The position is, therefore, that the ultimate deficiency will be for an amount of between $400,000 and $500,000. Nothing of consequence will be brought to the credit of the estate. It is true, as I have mentioned, that the same claim will be made against the bankrupt estates of the other partners of the firm.

I must confess that I have found the case an extraordinarily difficult one to determine. I admit to some astonishment at learning that an undischarged bankrupt is regarded as a satisfactory person to practice as a solicitor on his own account in a sole practice. But I was informed by the solicitor for the Law Society that the applicant in this case is not the only undischarged bankrupt presently practising in the community as a solicitor. I would have thought that difficulties might have arisen in relation to the obtaining of credit for amounts of $500 or more (s.269). That is not a particularly large sum for which a solicitor might obtain credit in his day to day practice, for example, in relation to fees to be charged by other solicitors acting as his agents and other professional people including, perhaps, counsel. I would also have thought that there may have been problems in relation to after-acquired property (ss.58 and 116) notwithstanding that after-acquired income does not form part of a bankrupt's estate (s.131). There may be other difficulties as well. Be that as it may, none of these matters seems to be a problem in the present case.

Disciplinary action having been taken before the appropriate tribunal, it would seem to me that I should not take any different view of the explanation for the bankruptcy or the part played in the affairs of the company and the firm by the applicant. In any event there was no cross-examination of him which would lead me not to accept his evidence given in respect of these matters. On the other hand, I must say that whilst the evidence which the applicant has given and the findings of the Statutory Committee explain and excuse the applicant's conduct and the predicament in which he finds himself, they do not come to grips with the plain fact that the applicant was grossly recreant in his duties as a solicitor in leaving it to his senior partners to control the firm and the company in the way that they did. It may sound hard, but the public generally and clients of solicitors in particular, are entitled to think that a person entrusted with the privilege of practising as a solicitor, however young, will be watchful of their interests and will apply his or her own mind to questions concerning the proper administration of trust funds and the proper investment of clients' moneys.

I bear very much in mind the junior position of the applicant. One needs, I know, to be realistic. But solicitors at whatever stage of their career have an obligation to satisfy themselves that their firms' trust accounts are in proper order. They are not in the position of junior executives in a commercial undertaking. In relation to the keeping of trust accounts and the proper care of clients' funds each partner has a primary obligation to ensure that proper procedures are taken.

The tenor of the applicant's evidence is that he has been the victim of circumstances. He is bitter and resentful over what has happened to him. Whilst I understand that completely, and whilst the entirety of the circumstances are most relevant, there are other considerations. These stem from the applicant's duties as a solicitor, particularly duties to the clients for whom he acts. For my own part, upon the evidence which has been before me, I do not have the same satisfaction that the applicant understands his duties in this respect as the Statutory Committee apparently had.

Its members spoke of the applicant's naivety and ingenuousness. No doubt these traits in his character help to explain what occurred. But they are traits which are in themselves dangerous for a solicitor at any stage of his career. They can be as much the cause of financial disaster as downright dishonesty. Furthermore, the fact that disaster may overtake a solicitor is undoubtedly inherent in the case of a solicitor conducting a sole practice. In its discussion paper on Solicitors' Trust Accounts and the Solicitors Fidelity Fund (Discussion Paper No.6, 1981) the New South Wales Law Reform Commission said (pp.22-23):

"As we see it, it is a regrettable necessity to single out sole practitioners. We say regrettable because many solicitors who would never deliberately wrong a client practise as sole practitioners and they may view this attention as unnecessary and insulting. The fact remains that significantly more sole practitioners are found to have committed offences in relation to trust accounts than any other group of practitioners. We are told by the Law Society that of the 82 solicitors "who were struck off the Roll of Solicitors between 1st January, 1968 and 30th June, 1981, 67 (81.7%) were sole practitioners, and 7 (8.5%) were members of two-person partnerships. During the years in question, of all the solicitors practising in this State only about one-third were sole practitioners. These figures are not peculiar to this State. In England, for example, there was some pressure on the Law Society in recent years to make it obligatory to practise in partnership. This was backed by allegations that where defalcation occurred it was most often by sole practitioners. No study will isolate all the reasons why sole practitioners constitute a disproportionately high proportion of those practitioners who are found to have committed trust account offences. Many reasons can be suggested. These include the low professional incomes of some sole practitioners, the absence of the informal and formal control mechanisms, ranging from loyalty to colleagues to internal audit systems, which are found in many practices, and a general reluctance on the part of solicitors to practise in partnership with any solicitor whose honesty is suspect. But, whatever the reasons, it seems clear that the law relating to solicitors' trust accounts ought to have regard to the fact that sole practitioners are more likely to be found to have breached that law than any other class of practitioners."

All these matters would incline me to the view that I should refuse this application for the reason advanced by the trustee, namely, that it is premature. But then I have to consider that no order which I make or refuse will affect in any degree the applicant's ability to carry on practice as a solicitor on his own account. He will do this whatever the outcome of this application may be. Furthermore, he has been dealt with by the appropriate disciplinary tribunal and he has suffered the penalty which it thought appropriate to his case. He has available the guidance and financial help from Mr. Peters and, one would hope, he will be able to take a more objective view of the lesson which life has endeavoured to teach him as the years go by.

In all the circumstances I have reached the conclusion that the appropriate order is an order pursuant to paragraph 150(9)(c), namely an order of discharge suspended up to and including 31 December, 1983. I attach no conditions to the order.