Victorian Legal Services Board v Delahunty
[2016] VCC 1829
•2 December 2016
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-15-01750
| VICTORIAN LEGAL SERVICES BOARD | Plaintiff |
| v | |
| ROSS DELAHUNTY | Defendant |
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JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 14 November 2016 | |
DATE OF JUDGMENT: | 2 December 2016 | |
CASE MAY BE CITED AS: | Victorian Legal Services Board v Delahunty | |
MEDIUM NEUTRAL CITATION: | [2016] VCC 1829 | |
REASONS FOR JUDGMENT
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Subject: COMMERCIAL LAW; LEGAL PRACTITIONER; SUBROGATION
Catchwords: Claim on Fidelity Fund for loss caused by solicitor’s alleged default; determination of claim by Legal Services Board in favour of claimant; Board’s power of subrogation to recover against solicitor; whether proof of dishonesty required; statutory interpretation; case law distinguished.
Legislation Cited: Part 3.6; s1.2.4(1)(a)(i) s5.2.1; s6.7.15; s6.7.16 Legal Profession Act 2004; Legal Profession Uniform Law Application Act 2014; s140 Evidence Act 2008; Order 56 of the County Court Rules; Administrative Law Act 1978; s3, s208, s211, s217 Legal Profession Act 1996; s61 Legal Practitioners Act 1898 (NSW); s79A, s79B, s90A Legal Profession Act 1987 (NSW); s43(3), s71, s84, s127 Real Property Act 1900 (NSW)
Cases Cited:Thiess v Collector of Customs [2014] 250 CLR 664, 671; Baini v R (2012) 246 CLR 469; Legal Services Board v Gillespie Jones (2013) 249 CLR 49; Commissioner of State Revenue v EHL Burgess Properties Pty Ltd [2015] VSCA 269; Legal Services Board v Werden [2011] VSC 74; Registrar General v Gill, 16 August 1994 (unreported); Law Society of New South Wales v Bruce (1996) 40 NSWLR 77; R v Murphy (1985) 158 CLR 596; Briginshaw v Briginshaw (1938) 60 CLR 336; Perpetual Trustees Victoria Ltd v Dunlop [2009] VSC 31; Jones v John Fairfax Publications Pty Ltd [2002] NSWSC 1210; Commissioner of State Revenue v EHL Burgess Properties Pty Ltd [2015] VSCA 269; Lygon Nominees Pty Ltd v Commissioner of State Revenue [2007] 23 VR 474; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; Secretary to the Department of Justice and Regulation v Century 21 Australia Pty Ltd (ACN 159 923 743) [2016] VSC 590
Judgment: (1) Within 14 days of this day the parties must bring in short Minutes to give effect to these reasons and to provide for the further conduct of this proceeding; (2) Costs reserved
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr Moran QC with Ms Kirwan | Law Institute Victoria |
| For the Defendant | Mr Juebner | Obst Legal |
HIS HONOUR:
Background
1 In this proceeding the plaintiff, Victorian Legal Services Board (“the Board”), seeks an order that Mr Delahunty pay the sum of $126,548.30 plus statutory interest and costs. According to the Board’s Amended Statement of Claim, it conducts a Fidelity Fund to compensate clients of Victorian legal practices for loss arising out of defaults by those practising – “arising from certain acts or omissions of associates”.
2 Mr Delahunty was the sole practitioner carrying on practice under the name “Legal Rite” and operated a Trust as part of his practice. Kyrou J (as he then was) appointed a receiver to the practice of Legal Rite by order made 14 September 2011.
3 Again, according to the Board’s Amended Statement of Claim, on 29 August 2012, executors of the Estate of the late Marjory Cook made a claim on the Fidelity Fund conducted by the Board for certain pecuniary loss said to have been suffered by Mrs Cook’s Estate. The claim was allowed by the Board and it paid $126,548.30. The Board says that upon payment and by virtue of s3.6.19(1) of the Legal Profession Act 2004, it was subrogated to the executors’ rights and remedies “against any person in relation to the default to which the claim relates”.
4 According to the Amended Statement of Claim, Mr Delahunty was “the associate in respect of whom the claim [was] made”. The Board, it was said, made payment of the claim on 14 November 2013 in the sum of $130,883.74, being the sum of $126,548.30 plus interest of $4,335.44. On 14 October 2014, the Board demanded that Mr Delahunty reimburse it, which has not occurred. The Board seeks to bring its claim against Mr Delahunty pursuant to subrogation.
5 The Amended Statement of Claim makes a series of allegations relative to deposits and withdrawals from the Legal Rite Trust Account in relation to Mrs Cook’s affairs, debits under a joint power of attorney, and debits to the Trust which it said were purportedly made in payment of legal costs for the provision of services by Legal Rite in circumstances where Mr Delahunty had no entitlement to recover those costs.
6 The matter was before Judicial Registrar Tran for directions on 29 August 2016 and the learned Judicial Registrar ordered that a preliminary or separate question be tried. The question for determination was as follows:
“In this proceeding where the Board:
(a) alleges the claimants [viz the executors of Ms Cook’s Estate](as defined in paragraph 4 of the Statement of Claim) made a claim on the Fidelity Fund in respect of pecuniary loss arising from the acts or omissions of the defendant (‘the claim’); and
(b) asserts that it has been subrogated under s3.6.19(1) of the Legal Profession Act 2004 (Vic) (‘the Act’) to the rights and remedies of the claimants against any person in relation to the default to which the claim relates;
does the Board need to establish that any alleged default to which the claim relates arose from or was constituted by an act of [sic] omission that involved dishonesty (as referred to in the definition of ‘default’ in s3.6.2 of the Act)?”
7 The proceeding came on for hearing before me to determine this separate question and the Board, represented by Mr Moran QC and Ms Kirwan of counsel, submitted that the question should be answered “no”. Mr Juebner of counsel on behalf of Mr Delahunty, submitted that the proper answer was “yes”. It is apparently common ground that if the matter is determined, as Mr Delahunty contends it should be, the Board will not pursue its claim.
8 In his judgment appointing a receiver to Legal Rite, Kyrou J (as he then was) found that due to her declining health, Mrs Cook’s residence was sold and she was placed in an aged care facility. Mr Delahunty, acting upon a joint enduring power of attorney, paid her bills whilst, according to his Honour, she was “comatose”. His Honour found that Mr Delahunty debited her with two amounts totalling $102,960 out of monies held in trust by Legal Rite representing the proceeds of sale of Mrs Cook’s home. These amounts were exhausted by a series of debits for legal costs for services said to have been rendered by Legal Rite.
9 In his Honour’s view, in the absence of Legal Rite’s rendering of a bill or bills of costs with respect to those amounts, what occurred created a deficiency in Legal Rite’s Trust Account. ([2011] VSC 453 at [23]-[84])
The Legal Profession Act 2004
10 The Legal Profession Act 2004 governed the practice of law in Victoria from its initial enactment and commencement until being superseded by the Legal Profession Uniform Law Application Act 2014, which came into operation on 1 July 2015. Transitional provision continued the existence of the former Legal Services Board as the “Victorian Legal Services Board”.
11 Under the 2004 Act, the Board maintained the Legal Practitioners Fidelity Fund under Part 3.6 of the Act, the purpose of which, according to s.3.6.1 was to “compensate clients for loss arising out of defaults by law practices arising from acts or omissions of associates and defaults by approved clerks”. The statute defined “associate” as including an Australian legal practitioner who was a sole practitioner. (Section 1.2.4(1)(a)(i))
12 The word “default” was defined in relation to a law practice as follows:
“(i) a failure of the practice to pay or deliver trust money or trust property that was received by the practice in the course of legal practice by the practice, where the failure arises from or is constituted by an act or omission of an associate that involves dishonesty; or
(ii) a fraudulent dealing with trust property that was received by the practice in the course of legal practice by the practice, where the fraudulent dealing arises from or is constituted by an act or omission of an associate that involves dishonesty;”
13 It will be seen that both limbs of the definition entail a finding of dishonesty. According to s3.6.5(1), the provisions of Part 3.6 apply inter alia to “a default of the law practice arising from or constituted by an act or omission of one or more associates of the practice…”. Section 3.6.7 of the Act authorised a person who suffered pecuniary loss because of a default “to which this part applies” to “make a claim against the Fidelity Fund to the Board about the default”. Pecuniary loss was defined by s3.6.2 as follows:
“(a) the amount of trust money, or the value of trust property, that is not paid or delivered; or
(b) the amount of money that a person loses or is deprived of, or the loss of value of trust property;”
14 The Board’s powers of determination relative to claims were to be found in s3.6.14, which provided inter alia:
“(1) The Board may determine a claim by wholly or partly allowing or disallowing it, or otherwise settling it.
(2) The Board may disallow a claim to the extent that the claim does not relate to a default for which the Fidelity Fund is liable.”
15 Sub-section (3) provided a series of grounds whereby the Board “wholly or partly disallow a claim without prejudice to any other grounds which it may think proper for disallowance. The power of subrogation on the basis of which this proceeding is brought is to be found at s3.6.19, which provided inter alia:
“(1) On payment of a claim from the Fidelity Fund, the Board is subrogated to the rights and remedies of the claimant against any person in relation to the default to which the claim relates.
(2) Without limiting subsection (1), that subsection extends to a right or remedy against—
(a)the associate or person in respect of whom the claim is made; or
…
…
(4) The Board may exercise its rights and remedies under this section in its own name or in the name of the claimant.
…
(7) The Board must pay into the Fidelity Fund any money recovered in exercising its rights and remedies under this section.”
Submissions on behalf of the plaintiff
16 Mr Moran QC and Ms Kirwan submitted on behalf of the Board that in the circumstances of the present proceeding, the Board made good its claims by proof of the following:
(a) the breach of duties and breach of trust as alleged in the Statement of Claim in the same way and to the same standard as the executors would have had to prove those breaches had they commenced the proceeding against Mr Delahunty rather than making a claim on the Fidelity Fund;
(b) that the claimant suffered a pecuniary loss because of those breaches;
(c) that the pecuniary loss was the subject of the claim and made against the Fidelity Fund;
(d) that in satisfaction of that claim a payment was made by the plaintiff out of the Fidelity Fund.
17 They said it had been established both by the Victorian Court of Appeal and the High Court of Australia that the task of statutory interpretation begins and ends with the words that Parliament has used. They referred to Thiess v Collector of Customs [2014] 250 CLR 664, 671 [22]; Baini v R (2012) 246 CLR 469, 476 [14]; Legal Services Board v Gillespie Jones (2013) 249 CLR 493, 509 [49], [511], [59]. Further, the construction of the language must not be undertaken in isolation but rather by having reference to the purpose of the provision and the mischief which it is designed to overcome – Commissioner of State Revenue v EHL Burgess Properties Pty Ltd [2015] VSCA 269, [53].
18 They said answering the question “no” was supported by the decision of Beach J (as he then was) in Legal Services Board v Werden [2011] VSC 74 [81]-[82]. They submitted that whilst his Honour’s determination related to the corresponding provisions under the Legal Practice Act 1996 they were, nevertheless, applicable to the provisions of the 2004 Act. They said that s3.6.19 of the 2004 Act was substantially and relevantly in the same terms as s217 of the 1996 Act, which his Honour considered in Werden’s case.
19 Next, they relied upon an unreported decision of the New South Wales Court of Appeal in Registrar General v Gill, 16 August 1994 where, they said, Gleeson CJ (as Chief Justice of New South Wales) and Priestley JA held that the corresponding subrogation provisions in the Legal Practitioners Act 1898 effected “in substance, a statutory assignment to the Law Society of the rights and remedies which the client had at the time of payment out of the Fund”.
20 Their Honours continued by stating:
“The equitable principles relating to subrogation aim to adjust the interests of three parties, such as a creditor, a debtor and an insurer or surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor. (Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 3rd ed, para 951) Here what is involved is a question of the meaning and effect of a statutory provision, but the statute ought to be construed so as to achieve the same end.”
21 Next, they referred to a decision of Giles CJ Comm D in Law Society of New South Wales v Bruce (1996) 40 NSWLR 77 where his Honour considered the operation of s90A of the Legal Profession Act 1987 of New South Wales. His Honour noted that that section subrogated the Law Society to the rights and remedies of the claimant on the Fund against any person in relation to the failure to account or dishonest default. He continued:
“The control upon the width of ‘any person’, and upon the extent of the rights and remedies to which the Law Society is subrogated, is that the rights and remedies against the person must be ‘in relation to the failure to account or dishonest default’…In examining the control earlier mentioned, the failure to account or dishonest default must be identified, the rights and remedies against a person must be identified, and it must be asked whether the latter are ‘in relation to’ the former.” Law Society of New South Wales v Bruce (1996) 40 NSWLR 77 at 84
22 His Honour noted the breadth of the phrase “in relation to” as denoting merely a connection or association between two subject matters and as a wide phrase which should not be read down unless there was a compelling reason to do so. His Honour referred to R v Murphy (1985) 158 CLR 596, 611. Mr Moran QC and Ms Kirwan noted that his Honour concluded that the rights and remedies to which the Law Society was subrogated in that case could “be in connection or association with a failure to account even if a finding of a failure to account, as such, is not an element in the case to enforce a right or obtain a remedy”. ((1996) 40 NSWLR 77, 84)
23 They continued:
“The fallacy evident in the defendant’s contention, namely that the Board be required to characterise the defendant’s failure to pay the claimants as a default, rather than as a breach of trust, is illustrated in the case where the Board decides to sue in the name of the claimant: in that case, would the claimant need to establish dishonesty in order to exercise his or her own rights or remedies against the practitioner? The answer to that question must obviously be no. The fallacy can also be illustrated by the following hypothetical: if the defendant had been in a partnership, but the other partners had not acted dishonestly, in exercising the claimants’ right to sue the co-partners, would the Board (whether in its own name or in the claimants’ names) be required to prove the defendant’s dishonesty in an action against his co-partners? The plaintiff submits that as a matter of practicality and logic, it cannot have been Parliament’s intention to require such matters to be proved. Further, nothing in the words of the Act requires, or even hints, that proof of dishonesty is a necessary pre-condition to exercising the right of subrogation. Payment is clearly the only necessary precondition.”
24 They referred next to the various matters in s3.6.14(3) which might lead to a claim being rejected and asked:
“…would the Board then be required to negative each of the matters set out in [that sub-section] … For instance, would the Board need to establish that a claimant’s negligence had not contributed to the pecuniary loss? Plainly, the construction is not open.”
25 Next, they submitted that proof of dishonesty would require proof to the standard required in Briginshaw v Briginshaw (1938) 60 CLR 336 and s140 of the Evidence Act 2008. They submitted that the Board should not be put to the risk cost and expense of prove matters “which the claimants themselves would not have had to proving had they not had first resort to the Fidelity Fund”.
26 They noted the rationale for subrogation stated by Meagher, Gummow and Lehane and referred to in Gill’s case, namely, avoidance of the inequitable discharge of liability of the debtor. They said this consideration should be taken into account in construing s3.6.19.
27 They added that in contending that dishonesty must be proven against him, Mr Delahunty was seeking what the 2004 Act did not provide, namely, a right of merits review relative to the Board’s determination in allowing a claim against the Fund. They submitted that Order 56 of the Rules and the Administrative Law Act 1978 would grant Mr Delahunty a right of judicial review of the Board’s determination to accept the claim but that he was not provided by the 2004 statute with a right of merits review.
Defendant’s submissions
28 Mr Juebner on behalf of Mr Delahunty submitted, first, that the Board’s position in this proceeding might be explicable based upon the lack of any finding of dishonesty by Kyrou J in his determination to appoint a receiver to the firm, Legal Rite.
29 Mr Juebner referred to the definition of “default”, which he submitted was central to the operational Part 3.6 of the 2004 Act. Both limbs of that definition, he noted, had a built-in requirement of dishonesty. He said, “There must be causal connection between the relevant dealing in trust money/property and the mental state of dishonesty; absent dishonesty there can be ‘default’.” Part 3.6 of the Act applied only to defaults.
30 He noted that the Fidelity Fund is required to be maintained by the Board pursuant to s6.7.15 of the 2004 Act and that s6.7.16 provided that the Fidelity Fund was to be applied by the Board for the purposes of compensating payments in respect of claims allowed under Part 3.6 in respect of defaults, to which that part applied. Section 3.6.7 provided that a person who suffered pecuniary loss because of a default might make a claim on the Fidelity Fund about the default. He continued:
“The Parliamentary intention is abundantly clear: the Fidelity Fund is established to meet claims for pecuniary loss arising from defaults (ie claims which rest on dishonesty by a legal practitioner).”
31 He noted that the right of subrogation granted by s.3.6.19(1) of the 2004 Act to the Board was to “the rights and remedies of the claimant against any person in relation to the default to which the claim relates”. (Emphasis by Mr Juebner)
32 Next, he said that subrogation may only occur on payment of a claim which, by tracing the definition, must arise from pecuniary loss which requires that there be a “default” to which Part 3.6 applied. He concluded, “It follows that ‘a claim’ concerns a claim that there was dishonest conduct”. He submitted that the subrogation goes to the right which a claimant had in respect of dishonest conduct by a practitioner and the phrase “the default to which the claim relates” is vital to the proper meaning and scope of the right of subrogation and ought not be ignored.
33 According to Mr Juebner, for the Board to succeed “it must squarely allege (and fully particularise) that there was a ‘default’ (relevantly, dishonesty on the part of Mr Delahunty).” He noted the general rule that where fraud or dishonesty is alleged, “it must be pleaded with full particulars”. He referred to Perpetual Trustees Victoria Ltd v Dunlop [2009] VSC 31, 24 (J Forrest J), Jones v John Fairfax Publications Pty Ltd [2002] NSWSC 1210 [26] (Levine J).
34 The logic of the Board’s position, Mr Juebner submitted, was that the claim by the executors of Mrs Cook must arise out of the default, and those matters must necessarily be pleaded entailing an allegation of dishonesty.
35 Mr Juebner said the construction for which he contends was:
“Consistent with the apparent policy objective in creating a fund to be applied to compensate claimants in respect of loss arising from dishonest dealings in trust money/property. Such dishonest dealings are not covered by the professional indemnity insurance which solicitors must maintain. Insofar as reference is made to equitable subrogation, such reference is misplaced. Here the right of subrogation is governed by statute, not equity. Hence, it is the language of the statute that dictates the circumstances in which subrogation arises. There is nothing unconscionable or equitable about such construction.”
36 Mr Juebner noted the Board’s power to disallow a claim under s3.16.14 “`to the extent that the claim does not relate to a default for which the Fidelity Fund is liable’”. This meant, he submitted, that claimants were only compensated from the Fidelity Fund for defaults. “That being so, there is no sound policy reason why the Board should be entitled to pursue claims on behalf of claimants (either in the Board’s name or in the name of a claimant) that do not constitute ‘defaults’.”
37 This created a “symmetry” which he said could be found in the statutory scheme. He noted that in the formulation by plaintiff’s counsel of the matters which the Board would have to prove success, various terms such as pecuniary loss are used which are defined in the 2004 statute as necessarily entailing the existence of defaults on the part of the relevant practitioner and, therefore, of dishonesty on his part.
38 As to the principles of statutory interpretation, he said it was necessary to give primacy to the text of the statute and to avoid construing it by asserting the existence of any purpose or legislative intention unless that purpose or intention is reflected in the provisions of the Act.
39 He referred to the joint judgment of Tate and Kyrou JJA and Robson AJA in Commissioner of State Revenue v EHL Burgess Properties Pty Ltd [2015] VSCA 269 and Lygon Nominees Pty Ltd v Commissioner of State Revenue [2007] 23 VR 474. He said phrases should not be ignored or treated as superfluous or insignificant as, he submitted, was necessarily entailed in the plaintiff’s case. He referred to Pearce and Geddes, Statutory Interpretation in Australia, 7th ed [2.26], Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, 382 (McHugh, Gummow, Kirby and Hayne JJ).
40 According to Mr Juebner, Werden’s case was distinguishable. First, it was decided under a different statute, namely, the Legal Practice Act 1996. Secondly, Mr Werden had been convicted and sentenced to a term of imprisonment. There were defalcations alleged and admitted by him. The term “defalcation” was defined in s3 of the 1996 Act as necessarily entailing dishonest conduct. There was therefore no question of any lack of dishonesty. Mr Juebner continued:
“That stands in stark contrast to the present proceeding where the Board neither alleges that Mr Delahunty has engaged in dishonest conduct and any such allegation, if made, would be denied by Mr Delahunty.”
41 Mr Juebner noted that Beach J was considering an argument by Mr Werden that he should not be liable to the Board relative to payment made by it which it was not obliged to make. His Honour observed that it was not the obligation of the Board to negative every exception to liability of the Fund contained in s208 of the 1996 Act.
42 Mr Juebner noted that, according to footnote 36 in Werden’s case, the outcome would have been different if the claims upon the Fund had been merely “colourable”. He continued, “What Beach J there referred to was the possibility that the outcome might have been different had the Fidelity Fund made payments other than in respect of defalcation.”
43 As to Gill’s case, Mr Juebner noted the width of the language used in s61 of the Legal Practitioners Act 1898 of New South Wales, which granted the right of subrogation in respect of any payment by the Fund arising from “`the act or omission of a solicitor’”. He said there was no requirement that it had any particular qualities such as dishonesty. This was relied upon, he said, by Gleeson CJ and Priestley JA when they concluded that there was, in substance, a statutory assignment of the claimant’s cause of action.
44 In the present case, he submitted, the right of subrogation was governed by s3.6.19 of the 2004 Act which, he said, “delineates the scope of the subrogated rights by reference to rights and remedies arising from certain dishonest conduct”.
45 As to Bruce’s case, Mr Juebner noted that the right of subrogation under s90A of the Legal Profession Act 1987 applied “`in relation to the failure to account or dishonest default’”, which phrase as defined under s79A [& s79B] as requiring conviction of a crime or an offence involving dishonesty or an act or omission which the Law Society Council had found to be dishonest. He noted that a finding by the Law Society Council of dishonesty was stated to be “final and conclusive”. He said that Giles CJ Comm D stated that a claim would only be paid where the Law Society had formed the view that there was a failure to account or a dishonest default and that there must be a nexus between the rights and remedies of the claimant against any person and the failure to account or dishonest default.
46 He said a relationship cannot be established with a default as defined in the statute if the default is not identified and established. He continued:
“On the Board’s construction, it seeks to pursue Mr Delahunty in respect of allegedly subrogated rights without establishing that such rights related to the dishonest conduct of Mr Delahunty. That construction flies in the face of the statutory language and against common sense. There is no valid policy reason for stretching the language to achieve such outcome.”
47 Mr Juebner said the Fidelity Fund was not established for the purpose of satisfying claims that do not come within the definition of default. The claims, therefore, must rest on allegations of dishonesty. Therefore, he said, despite the Board’s submission to the contrary, it would be wrong for the Board and that the Board would not be permitted to pursue a claim in the name of a claimant for breach of trust where the breach of trust fell short of a default under Part 3.6 in the 2004 Act.
48 If a claim were being pressed against honest co-partners of a dishonest partner, it would be necessary for the Board, as part of such a claim in right of subrogation, to establish dishonesty on the part of the other partner. He said, “if the Board makes payment to a claimant from the Fidelity Fund … it is entirely unsurprising that the Board should establish in any recovery proceeding (whether in the name of the Board or the claimant) that there was in fact a default. That is the safeguard to ensure that monies in the Fidelity Fund are applied in respect of defaults and will result in the symmetry [to which he previously referred].”
49 He submitted if the Board took the view that a claim amounts to a claim for a breach of duty without dishonesty, it ought to refuse the claim and no question of subrogation would arise. He submitted that a practitioner in relation to whom a successful claim was made on the Fidelity Fund should be entitled to put the Board to proof that his conduct was so serious as to amount to dishonesty:
“The reputational impact on a practitioner in respect of whose conduct a claim against the Fidelity Fund has been allowed must not be underestimated. That is all the more so … where determinations are made by the Board to allow claims without a formal hearing in which the practitioner has the opportunity to defend himself from such serious allegations.”
50 If the Board cannot make good the allegation of dishonesty, he submitted, it has taken a risk which must be regarded as its own responsibility. He said there is little risk of any `inequitable discharge’ of a debtor, “provided that the Board allows only those claims for which the Fidelity Fund is in fact established; claims arising from a default.”
Conclusions
51 I deal first with the defendant’s suggestion that the plaintiff’s course in this proceeding is somehow dictated by a failure to obtain a finding of dishonesty from Kyrou J when he appointed a receiver to the practice, Legal Rite.
52 Mr Moran QC and Ms Kirwan submitted that the circumstances in which the Board is entitled to apply to the Supreme Court for the appointment of a receiver or some other form of “external intervention” are set out in s5.2.1 of the 2004 Act. These are multifarious and might or might not entail an element of dishonesty in the case of a firm conducted by a sole practitioner. They submitted that in making the receivership appointment, Kyrou J was not obliged to make any finding of dishonesty and the Board was not obliged to contend that Mr Delahunty was guilty of any dishonesty or secure any such finding from the court. Given the appropriate caution which the law applies, both to allegations and findings of dishonesty, it was unsurprising that his Honour’s judgment did not venture into that field, they said. I accept the Board’s submissions on this point.
53 It was common ground that there is no relevant authority upon the particular point which arises for my determination here. In Gill’s case, it was a “given” that there was dishonesty on the part of the practitioner. There can be no doubt that his actions in forging a mortgage in his client’s name was an act of dishonesty. In Bruce’s case, the subrogation which the Law Society sought to avail of was based upon the existence of a failure to account or a dishonest default on the part of a practitioner. (Section 90A of the Legal Profession Act 1987)
54 By virtue of s79A(2), these provisions applied
“Only to a failure to account that arises from an act or omission of the solicitor …
(a) for which the solicitor … has been convicted of a crime or an offence involving dishonesty; or
(b) which the Law Society has found to be dishonest.”
Once again, the existence of dishonesty was a “given”.
55 In Gill’s case, the Court of Appeal had to consider arguments such as that insofar as s61 of the Legal Practitioners Act 1898 gave the Law Society a right of subrogation relative to rights “against any other person”, the Registrar General could not be regarded as “any other person”.
56 Gleeson CJ and Priestley JA remarked that this was “a somewhat ambitious argument” which unsurprisingly failed.
57 Again, it was submitted that the right to claim compensation under s127 of the Real Property Act 1900 (NSW) against the Registrar General was not a right or remedy in respect of the act of the solicitor but were rights and remedies in respect of the act of the mortgagee under the forged mortgage and the Registrar General.
58 In Bruce’s case, the Law Society, by the use of subrogation, sought to recover damages in the name of the claimants against a stockbroking firm and investment adviser which had been involved in the same transaction as the legal practitioner. The question for the judge, Giles CJ Comm D, was whether these remedies were “in relation to” a solicitor’s failure to account as required under the Legal Profession Act 1987.
59 It follows that Bruce’s case and Gill’s case can provide only indirect guidance in the determination of the question before me.
60 In broad terms, the Board’s contention is that once a claim is made against the Fund and is met by the Fund, the right of subrogation is enlivened so long as the claimant executors have rights against Mr Delahunty which could lead to a judgment in their favour. The Board is entitled by subrogation to enforce those rights without proving against the practitioner or former practitioner every element, including dishonesty, which it was necessary for the claimants to prove to the satisfaction of the Board for their claim to be successful.
61 The case closest to the present is the judgment of Beach J (as he then was) in Legal Services Board v Werden [2011] VSC 74. As previously noted, there is no question that dishonesty was involved. The basis for subrogation under the Legal Practice Act 1996 was a “defalcation” by the practitioner. Amongst the arguments urged against subrogation there, was that at least some of the claims which were sought to be the subject of subrogation were excluded from coverage by the Fidelity Fund. Section 208 of the 1996 Act set out the requirements for a valid claim against the Fidelity Fund. Sub-section (3) included a number of express exclusions and provided, inter alia:
“A claim does not lie against the Fidelity Fund-
(a) in respect of a defalcation arising out of anything done or omitted to be done by a practitioner, a firm or a partner of a firm in connection with a nominee mortgage; or
(b) in respect of a defalcation of, or in relation to, any money given to a practitioner, a firm or a partner of a firm for the purpose of investment or re-investment by the practitioner, firm or partner, other than an investment or re-investment that is-
(i)merely incidental to the legal practice of the practitioner, firm or partner; or
(ii)made or to be made in the course of or in connection with the administration of the estate of a deceased person or of a represented person or protected person within the meaning of the Guardianship and Administration Act 1986; or
…”
62 His Honour remarked at [79]: “The defendant contended that $628,000 of the claims paid out of the Fidelity Fund were for the purpose of investment and reinvestment `other than investment or reinvestment that is merely incidental to [his] legal practice’.” The effect of this contention was to say that since the claims were within the exclusionary provisions of s208(3), the payment out of the Fidelity Fund should not have been made.
63 His Honour went on to be critical of the defendant for his failure to give evidence in support of this contention. Section 211(3) of the 1996 Act provided, “The Board must disallow a claim against the Fidelity Fund if the claim does not lie under s208”. His Honour noted, however, that the Board was empowered by s211(1) to “allow and settle” claims against the Fidelity Fund. He continued:
“The power to settle claims against the Fidelity Fund must include a power to settle claims where it is arguable that a claim does not lie against the Fidelity Fund. The fact that it might be arguable that a claim does not lie against the Fidelity Fund does not make a settlement entered into in reliance on the power in s211(1) invalid or of no effect.” [80]
64 At paragraph 81, his Honour said:
“Further, the right of subrogation given by s217 is not predicated upon the Legal Practice Board having to negative every exception contained in s208. Rather, the right is predicated upon payment out of the Fidelity Fund of any money in satisfaction of a claim made under Division 2 of Part 7 of the Legal Practice Act. That is, what the plaintiff must establish in order to succeed is not the negative of any exception in s208, but rather, the fact that a payment or payments were made out of the Fidelity Fund in satisfaction of a claim for compensation under Division 2 of Part 7 of the Legal Practice Act. The question of what right is conferred by s217 on the Legal Practice Board, is answered by construing s217(1). Specifically, construing s217(1), the Legal Practice Board becomes subrogated, to the extent of a payment, upon payment out of the Fidelity Fund of that amount in satisfaction of a claim for compensation under Division 2 of Part 7.”
65 This last statement is accompanied by a footnote to which Mr Juebner made particular reference:
“Whilst the position might be different if the Legal Practice Board’s payment against the Fidelity Fund was ‘colourable’ in the sense used in Burgundy Royal Pty Ltd v Westpac Banking Corporation (1987) 18 FCR 2112 at 219, no such suggestion was made in this case – nor could it have been on the evidence.”
66 His Honour’s analysis, as I have just summarised it, is strongly supportive of the Board’s position here. It is subversive of the fundamental contention advanced by Mr Juebner on behalf of Mr Delahunty that there must be a symmetry between the proofs necessary, on the one hand, to establish a claim for payment out of the Fidelity Fund and, on the other hand, to make good a claim against the practitioner involved under the Board’s powers of subrogation.
67 The Board’s position is also supported by the views expressed by Gleeson CJ and Priestley JA in Gill’s case that the subrogation regime with which they were dealing under the Legal Practitioners Act 1898 amounted, in substance, to a statutory assignment of the claimant’s rights in relation to the claim. Whilst an element of dishonesty might be essential to the success of the claim against the Fund, the claim might go much wider than that and one may ask, why should the Board not be able to avail of those wider rights which do not involve dishonesty where the generality of the subrogation provision would appear to allow for that and there is no express exclusion of such reliance?
68 Again, in Bruce’s case, the rights which were available under the subrogation were found to extend to rights against stockbrokers and advisers under the Corporations Law because these rights and remedies were “in relation to” the relevant claim.
69 In both Bruce’s case and Gill’s case, the facts disclosed dishonesty by the relevant practitioner, but effective claims against the Registrar General under the Real Property Act or stockbrokers and advisers under the Corporations Law, do not, by their nature, require dishonesty on the part of a legal practitioner.
70 As to the points of distinction urged on behalf of Mr Delahunty, it does not seem to me that either Gill’s case or Bruce’s case turned upon the Law Society’s power under both statutes to make conclusive findings of dishonesty. The statutes in question in Gill’s case and Bruce’s case were plainly different from the 2004 Act, but not in matters which are material to the present question.
71 In at least one respect, the 2004 Act is stronger in favour of the Board’s position than was the 1996 Act considered by Beach J in Werden’s case. Section 3.6.14(2) provides:
“The Board may disallow a claim to the extent that the claim does not relate to a default for which the Fidelity Fund is liable.”
72 The corresponding provision in the 1996 Act obliged the Board to disallow claims in circumstances where, according to s208(3), no claim “lay”. The word “may” in Victorian statutes denotes a discretion (section 45 of the Interpretation of Legislation Act 1984). The earlier law to the effect that “may” can frequently mean “must” has been abolished. Sub-section (2) therefore implies a positive discretion to the Board to allow a claim even if it “does not relate to a default for which the Fidelity Fund is liable”.
73 The Board, by s3.6.14, has the same power as the Board under the 1996 Act, which was remarked upon by Beach J in Werden’s case to “settle and allow”. In 3.6.14(1), the power is to “determine a claim by wholly or partly allowing or disallowing it, or otherwise settling it”.
74 As his Honour noted in the passage which I have quoted above, this carries with it a power to make a payment where it is arguable that the claim does not arise because of a default to which s3.6 applies (cf 3.6.7(1)).
75 Nor am I satisfied in terms of the footnoted proviso to the reason of Beach J in Werden’s case that it could be said that the claim relative to Mrs Cook’s Estate was “colourable” in the relevant sense in light of the findings by Kyrou J and the matters alleged by the Board in its Amended Statement of Claim, which would have to be made out for its claim in this proceeding to be successful.
76 For these reasons, I answer the posited question “no”.
Disposition
77 I will direct the parties to bring in short Minutes to give effect to these reasons and to make whatever directions are necessary for the further conduct of this proceeding.
Costs
78 I have heard no submissions on the question of costs and so will reserve them.
Postscript
79 After I dictated the above, my associate received an email from the solicitor for the Board stating:
“The plaintiff wishes to provide to the Court a reference to the attached case, which concerns (in part) a subrogation provision in the Estate Agents Act 1980 (Vic). There is no objection by the defendant whose solicitors are copied into this email.”
80 The decision in question is the judgment of Ginnane J in Secretary to the Department of Justice and Regulation v Century 21 Australia Pty Ltd (ACN 159 923 743) [2016] VSC 590. His Honour’s judgment was published on 29 September this year.
81 The dispute arose out of a claim by the Secretary as the person administering the Victorian Property Fund under the Estate Agents Act 1980 which, inter alia, meets claims for losses suffered by the customers of estate agents in Victoria for “defalcations”. The pattern of the Fund and the provision for the meeting of claims is generally similar to the framework with which we are concerned here and with which the courts in the decisions referred to above were concerned.
82 As in the cases referred to above, dishonesty was “a given”. Defalcation is defined in s71 of the Act as:
“Any theft, embezzlement, failure to account, fraudulent misappropriation or other act punishable by imprisonment of or in relation to any money or other property.”
83 A crucial difference between the scheme dealt with by his Honour and the one we are concerned with here, is that by s43(3)(a) of the Act, where an estate agent operated under a franchising agreement, “each party to the agreement” was rendered “jointly and severally liable for any defalcation by the estate agent”. The Secretary, as administrator of the relevant Fund, had made payments to customers of an estate agent, VRG, relative to defalcations in the sum of $109,150.06. The matters for his Honour’s determination were, first, whether the agreement between Century 21 and VRG was a “franchise agreement” within the meaning of the Estate Agents Act so as to engage s43(3)(a) of that Act and render Century 21 liable for VRG’s defalcations and secondly, if so, was the Secretary, as the administrator of the Fund, subrogated to the claim which the customers had against Century 21 under s43 of the Act.
84 His Honour determined that the agreement between Century 21 and VRG was not a franchise agreement for the purposes of the statute. Accordingly, Century 21 was not under any statutory liability to VRG’s customers for its defalcations. This meant that the views which he expressed on the subrogation issue were both obiter and based upon a legal hypothesis which his Honour had already rejected.
85 Subrogation was dealt with in s84, which is to be found in Part VII of the Act and is in the following terms:
“On payment out of the Fund of any moneys in respect of a claim under this Part, the Secretary shall be deemed to be subrogated to the extent of that payment to all the rights and remedies of the claimant in relation to the loss suffered by him from the defalcation including the right to benefit from any order made under section 86 of the Sentencing Act 1991.”
86 Century 21 submitted that s84 subrogated the Secretary to the customers’ rights against VRG but not against it. It noted that s43, which was the source of any liability of Century 21 for VRG’s defalcations, was to be found in Part IV of the Act. Century 21 submitted:
“Section 43 is a penal provision and it would be contrary to principle to read it as rendering the franchisor liable to the Secretary. Instead, s84 provides a means for the replenishment of the Fund when it recompenses clients who have suffered from defalcations, by the Secretary suing the delinquent estate agents.” [130]
87 Century 21 concluded that any right of action bestowed on the Secretary against a franchisor “must be found in Part VII”. His Honour rejected those submissions, saying that the submissions advanced by Century 21 departed from s84’s plain words. He said:
“I see no reason why those plain words should be read down as contended. The words are clear and are words of amplitude: ‘all the rights and remedies of the claimant(s) in relation to the loss suffered by [them] from the defalcation’.” [138]
88 The Century 21 case does not provide direct guidance as to the questions for determination in this proceeding. Insofar as it is another example of a court giving a right of subrogation similar to the one with which we are concerned here, an ample construction and declining to read the words down by reference to any structural consideration, it is supportive of the plaintiff’s position which I have upheld for the reasons stated above.
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