Wheeler & Reynolds, Re Kerr & Anor v, Ex Parte Crowe, J.B.

[1988] FCA 663

- _

. JUDGMENT No. ... 6Jb3dL ... ........

C A T C H W O R D S

BANKRUPTCY - originating process - bankruptcy notice issued

against partnership - new proprietor of firm - application by new

owner to have bankruptcy notice against firm set aside.

LEGAL PRACTITIONERS - legal practioners' guarantee funds -
Queensland - claim against fund - payment made - subrogation of law society to rights of claimants against practitioner -

bankruptcy notice issued against innocent partner of dissolved

which benefits innocent partner creates a right of subrogation in

partnership - whether voluntary payment by fund to claimants

Law Society against that partner

practitioners' guarantee fund - subrogation of Law Society to	STATUTES - interpretation - Queensland - Act concerning legal
rights of persons paid out of fund	- recovery against

practitioner in question "or any other person in respect of the

act" - whether partner of fraudulent practitioner an "other person"

Bankruptcy Act 1966, ss. 5(1), 45, and 307

Bankruptcy Rules 1966, r.7

Queensland Law Society Act 1952-1985 ss. 12, 17, 18, 24, 25, and

27.

2 NOVEMBER 1980.

RE: WHEELER and REYNOLDS (a firm); EX PARTE: DOUGLAS ANTHONY KERR
& ANOR.(Applicants); JEREMY B R I M CROWE & ANOR. (Respondents)

QLD. B/N N0.1642 Of 1987

SPENDER J.
BRISBANE

.

IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION N0.1642 ) B/N QLD Of 1987

BANKRUPTCY DISTRICT OF THE SOUTHERN	)
DISTRICT OF THE STATE OF QUEENSLAND

RE:  WHEELER and REYNOLDS (a firm)

Judgment Debtor

EX PARTE:

DOUGLAS ANTHONY KERR AND

DONALD OAKLEY LOUIS REYNOLDS

Applicants

JEREMY BRIAN CROWE AND

MEROLYN DAWN CROWE

Respondents

MINUTE OF ORDER

JUDGE MAKING ORDER:	SPENDER J.
DATE OF ORDER:	2 November 1988
WHERE MADE:	BRISBANE
THE COURT ORDERS THAT:

the application to set aside the bankruptcy

notice be dismissed with costs.

- NOTE^-- Settlement and entry of orders is dealt with by

Bankruptcy Rule 124.

a!

IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION ) B/N QLD No.1642 of 1987

BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND )

RE: WHEELER and REYNOLDS (a firm)

Judgment Debtor

EX PARTE:

DOUGLAS ANTHONY KERR AND

DONALD OAKLEY LOUIS REYNOLDS

Applicants

JEREMY BRIAN CROWE AND

MEROLYN DAWN CROWE

Respondents

SPENDER J.

BRISBANE

2 NOVEMBER 1988.

REASONS FOR JUDGMENT

This is an appllcatlon by Douglas Anthony KerK and

Donald Oakley Louis Reynolds to set aside a Bankruptcy Notice

No.1642 of 1987. The notlce is addressed to Wheeler & Reynolds

(a firm) and the judgment credltors in the notice are Jeremy

Brian Crowe and Merolyn Dawn Crowe. The notice is a fourteen day notice and is dated 15 September 1987.

The application raises a question as to the liability of

a solicitor in a partnership.

Mr. Reynolds was served with the bankruptcy notice in

this matter on 18 November 1987. The notice therefore called for

compliance by 2 December 1987. This application was filed	on	11
December 1987.

The bankruptcy notice came to be issued in this way: On

19th June 1986, after a contested hearing, Mr. Justice McPherson

in the Supreme Court of Queensland gave judgment for Mr. and Mrs.

Crowe against "Messrs. Wheeler L Reynolds (a firm)" for

$244,371.20 and interest at 15.25% per annum until paymjnt,

together	with	costs	and	reserved	costs.	[The	proceedings	at
first	instance	are	reported,	only	on	a procedural	point,	at

[l9861 2 pd. R. 841. At all times material to that action, a Mr.

Donald Reynolds, one of the present applicants, and	a Mr.	John
Wheeler carried on	a	solicitors' practice at Surfers' Paradise.

The reasons for judgment of McPherson J. commence:-

"This action is brought by Mr and Mrs Crowe to recover damages arising out of loss of a sum of $200.000 placed by them with the defendants for

investment in December 1981. The defendants

Wheeler and Reynolds are partners in a firm of solicitors of that name who conduct their practice in Surfers Paradise. The defendants have brought in as third parties a number of insurers against whom they claim indemnity under the terms of a policy of professional indemnity insurance issued pursuant to the scheme administered by Queensland

Law Society pursuant to S. 5(9)(i)(ha) of the

Queensland Law Society Act 1952-1980."

From the reasons for judgment of McPherson J., it

appears Mr. Crowe had dealings with Mr. wheeler and on 3

December 1981, delivered to Mr. Wheeler a certified cheque for

$200,000.00. Later in December 1981, he received a document

described as 'Epitome of Mortgage' signed by Mr. Wheeler on

behalf of Wheeler L Reynolds, setting out details of the loan and

y

3 .   -

mortgage. A further such epitome signed by Hr. Reynolds under

cover of a letter dated 15 January 1982 was received. The loan

was not duly repaid. In telephone conversations with Wheeler	&
Reynolds, Hr.	Crowe was told that the recipient of the funds was

unable to produce the funds and needed a three to six months

extension in order to repay the principal. The principal of the

loan has never been repaid and no mortgage to secure	it was ever
obtained by the defendants.

On 10 September 1987, Messrs. Cannan & Peterson, on

t

behalf of the Queensland Law Society, wrote to the Registrar in

Bankruptcy in relation to the application for the issue of a

bankruptcy notice against Wheeler and Reynolds (a firm),

enclosing an affidavit of	Hr. Peter Griffin, a law clerk employed
by that firm.	Mr. Griffin advances the claim that:-

"The said Queensland Law Society Incorporated is

subrogated by virtue of section 27(1) of the
Queensland Law Society Act 1952-1985 to all legal rights of the Plalntiffs resulting from the misappropriation of the Plaintiffs' funds by the Defendant limited to the extent of the said

Queensland Law Society Incorporated's payments to

the Plaintiffs from the fund known as 'Legal

Practitioners Fidelity Guarantee Fund'."

Corporate Affairs records indicate that the firm

'Wheeler & Reynolds' commenced business as solicitors on 1 Hay

1981, and that the proprietors as at that date were Hr. Wheeler

and Hr. Reynolds. The records are not entirely consonant with

the affidavit evidence, but I am satisfied that at all times

material to the action by Mr. and Hrs. Crowe against Wheeler and Reynolds, Hr. Wheeler and Mr. Reynolds were the partners of that

firm, and further, that Mr. Kerr became the sole proprietor of

that business on 1 July 1986.

The basis of Mr. Kerr's complaint is that since 30 June

l

1986, he has been the sole proprietor of the firm Wheeler &

Reynolds, that he has learned that a bankruptcy notice has been served on Mr. Reynolds, a former proprietor of the firm 'Wheeler

m & Reynolds', and that:-

"I apprehend that should the existence of such

notice become known or a bankruptcy petition

issued in respect of such notice then serious

damage could be caused to my reputation as

proprietor of the said firm and to the goodwill

attached to the said name."

I

Mr. Rerr, on 23 November 1987, wrote to Messrs. Cahnan

and Peterson advising that he was the sole proprietor of the
business name of Wheeler & Reynolds, having acquired the firm on

1 July 1986. That letter claims:-

"If your client was ever entitled to recover

against the firm of Wheeler h Reynolds, which is

not admitted, such rights ceased when the	firm was
acquired by me."

The letter sought the withdrawal of the bankruptcy notice issued against Wheeler & Reynolds.

On 30 November 1987, Messrs. Cannan & Peterson reelled:-

"We refer to your letter of	23 November 1987 and
our telephone conversation of	25 November 1987.
As we advised you, we are	of the opinion that our

client is entitled to issue a Bankruptcy Notice
against Wheeler S Reynolds (a firm). We refer you

to the case of Re: Wenham, Ex parte: Battams

[l9001 2 O.B. 698, 705.

We further acknowledge that our client cannot

proceed against assets of the partnership which have been acquired by you. We point out that the Bankruptcy Notice has not been served on you and

that any Sequestration Orders made will be made
against Wheeler and Reynolds individually."

In May 1985, Mr. and Mrs. Crowe had lodged a claim with

the Society for reimbursement of $200,000.00, the claim having

been made pursuant to s.24 of the Act. The claim recited:-

"1. We have suffered pecuniary loss through

stealing or fraudulent misappropriation committed by JOHN LESLIE WHEELER and DONALD OAKLEY LOUIS

REYNOLDS of Messrs Wheeler h Reynolds, Solicitors,

of Suite 10 'Centrepoint', 3290 Gold Coast

Highway, Surfers Paradise in the State of

Queensland, or by their clerk or servant in that on the 3rd December, 1981 we deposited the sum of

TWO HUNDRED THOUSAND DOLLARS ($200,000.00) with

them with instructions and on a trust to lend the	i
said sum on first mortgage security repayable in twelve months at interest at the rates of eighteen per centum per annum, and on the further basis

that not all the money be lent on the one

mortgage. Contrary t o those instructions, JOHN

L E S L I E WHEELER and DONALD OAKLEY LOUIS REYN0LDS:-

(a) did not disclose to us that the recipient of

the funds to be invested was a company,

namely WOLMRIE PTY. LTD. , of which DONALD OAKLEY LOUIS REYNOLDS was the Secretary, and

which was a client of JOHN L E S L I E WHEELER and DONALD OAKLEY LOUIS REYNOLDS;
(b)	lent the funds on the purported security of one mortgage;
...

(h) failed to register the mortgage obtained

from the borrower:

...

(j)	agreed to permit MIDLAND CREDIT LIMITED to
have a first mortgage over the said land in priority to their purported mortgage;
...

I,

and made further allegations against the firm of solicitors.

On 2 October 1986, the claim was admitted and passed for

payment in that sum.	The Queensland Law Society approved payment
of the claim and interest thereon and costs of the action to	Mr.
and Mrs. Crowe pursuant to s.25	of the Act. The Society paid to

Mr. and Mrs. Crowe $200,000.00 on 8 October 1986, and $53,812.64

. .

I 6 .

on 17 November 1986, representing interest at 15.25% on

$200,000.00 for the period from 3 January 1985 to 8 October 1986.

The sum of these amounts is the amount in the bankruptcy notice. The Society then paid a further $28,023.60 on 20 November 1986 in payment of Mr. and Mrs. Crowe's costs of the action.

Mr. Reynolds deposes to a conversation with Mr. Crowe on

11 December 1987, wherein	Mr. Crowe informed Mr. Reynolds that he
and his wife had been paid in full in respect of the judgment and	-
that it was satisfied.	i

Mr. Thompson, the solicitor to the Legal Practitioners'

Fidelity Guarantee Fund, claims on behalf of the Society that, pursuant to s.27 of the Act, the Society is subrogated, to the

extent of the payments to Mr. and Mrs. Crowe, to all the rights

and remedles of Mr. and Mrs. Crowe against 'the Defendants'. The claim is that at all times material to the action Mr. Wheeler and

Mr. Reynolds were the partners of the firm wheeler & Reynolds and

that neither of them appeared in the Supreme Court action in his

own name, or admitted on the pleadings that he was a partner.

The princlpal features of the indemnlty insurance scheme

for solicitors administered in Queensland by Law Clams on behalf

of the Law Society were described by McPherson J. in - Giles v.

Woodward [l9851 2 Qd. R. 91. Clause	5 of the certificate in the
present matter contains	a number of 'general exclusions', of
which that in clause 5(b)(iv) is	as follows:-

I .

7.

"(b) This insurance shall not indemnify the Assured

in respect of any loss arising out of any claim:

.	..
(iv) brought about by the dishonesty or fraudulent	(i) ...

act or omission of the Practitioner or any

Partner..."

After a detailed analysis, his Honour reached the conclusion:-

"...that	Wheeler stole the Crowes' money when he
applied	i t contrary to his clients' instructions

on December 3 , 1981."

-.

This was in the context of s.391 of the Queensland Criminal Code.

i

His Honour further concluded that what was done by

Mr. Wheeler amounted at least to "dishonesty" or to a "fraudulent

act or omission" within the meaning of clause 5(b)(iv) of the

insurance certificate, and as a consequence the defendants were

not entitled to be indemnlfled by the third parties. This

conclusion was affirmed by the Full Court	of the Supreme Court:
[l9881 1 Qd. R. 40.

For the resolution of this application, it is necessary to refer in some detail to some relevant statutory provisions.

Section 45 of the Bankruptcy Act 1966 provides:-
"(1) A creditor of a partnership may present	a
petition against the partnership	if he is entitled

to present a petition against any one of the

members of the partnership in	respect	of	a
partnership debt.

(2) A creditor who is entitled to present a

petition against a partnership may present a

petition against any of the members of the

partnership without including the others."
Section 307 provides:-

"Any person or persons carrying on business under a

firm name may take proceedings or be proceeded
against under this Act in the firm name, but in
that case the Court may, on the application of an
interested person, order the name of the person or
the names of the persons so carrying on business
to be disclosed and verified in such manner as the

Court directs."

The reference in that section to persons carrying on

business under a firm name is a reference to the persons who were

carrying on the business at the relevant time: in this case to

i

Messrs. Reynolds and Wheeler. In In	re Wenham. Ex parte Battams
[l9001 2 Q.B.	698 at p. 705, Lord Alverstone M.R. said:-

"...so far as the bankruptcy proceedings are

concerned, I think there was no objection to the

bankruptcy notice being addressed to 'Wenham

Brothers,' although as	a matter of fact at the
time when the notice was issued 'Wenham	Brothers'
was no longer a partnership. It does not	matter

for this purpose whether the CreditOK knew of the

dissolution or not, but i t would be	a strange
thing i f a secret dissolution could put an end	to
the right of the partnership creditor. The claim

in the action was in respect of a liability

incurred by the members of the	firm while they
were partners.''
In my view there is no basis upon whlch	Mr. Kerr, as the

present proprietor of the business name Wheeler & Reynolds, may

be exposed to any of the consequences of the Bankruptcy Act 1966,
which may flow from the judgment of McPherson J..	The fact that

a bankruptcy notice is issued based on a judgment obtained

against Wheeler h Reynolds	(a firm), being the business name of
which he is now the proprietor, is not	a ground on which Mr. Kerr

may have the bankruptcy notice set aside. The Queensland Law

Society has expressly disclaimed any intention to proceed against

i

I ,

9.

him or assets of the firm acquired by him, and in my view, there

is no basis on which it is competent for Mr. Kerr to have the

bankruptcy notice No. 1642 of 1987 set aside.

By s.5(1), a 'proceeding' is defined as a 'proceeding

under this Act'.

The issue of a bankruptcy notice is a proceeding under

the Bankruptcy Act 1966. Part I1 of the Bankruptcy Rules 1966 has

the heading 'PROCEEDINGS IN CONNEXION WITH BANKRUPTCY",

iand

Division 1 of that Part deals with bankruptcy notices; rule 7	in
that division is directed to the application for issue of a bankruptcy notice.

Although the registrar's act in issuing the notice is an

administrative rather than a judicial act, it is nonetheless a

proceeding as contemplated by s.307. It is a proceeding under

the Act but is not a step in any proceeding in the court: - Re

Moss; Ex parte Tour Finance Ltd. (1968) 13 F.L.R. 101 per Gibbs

J., as he then was, at p. 105; Re Maddox; Ex parte The Debtor

(1979) 36 F.L.R. 392; and In re A Judgment Debtor [l9391 1 Ch.

601 at p. 607; cf. Ex parte Johnson. In re Johnson [l8841 25 Ch.

112 at p. 115 per Cotton L.J. and p. 117 per Lindley L.J..

Section 12 of the Queensland Law Society Act 1952-1985

(Qld.) establishes the Legal Practitioners' Fidelity Guarantee
Fund ("the Fund") to vest in the Society for the purposes of the

Act. The Fund is administered by the Council on behalf of the

Society and the Council can delegate its powers	in relation to
the Fund to a committee	of management (ss.17 and 18).

Section 24 of the Act provides	that:-
"...the Fund	shall be held and applied for the
purpose of	reimbursing persons who may suffer

pecuniary loss through stealing or fraudulent

misappropriation committed by practising a

practitioner, or by his	clerk or servant, of any
money or other property entrusted	to him or to his
clerk or servant in Queensland	-

(i) In the course of his practice;

It

...

Section 25 provides:-

"The Council may receive and settle any claim	f
against the Fund at any time after the commission of the stealing or fraudulent misappropriation in
respect of which such claim	arose..."

Section 27 is crucial to this application. It deals

with subrogation of rights of action and provides:-

"(1) Upon payment out of the Fund of moneys in

settlement, in whole or in part, of a claim under this Part arising from the act or omission of a practitioner or a clerk or servant employed in relation to a practitioner's practice, the Society

shall be subrogated, to the xtent of that

payment, to all the rights and remedies of the

claimant against the practitioner or clerk or

servant (including any person e titled to

administer the estate of any such practitioner or clerk or servant who dies or is bankrupt or under

a disability) or any other person in respect of

the act or omission.

(2) Where the Society is subrogated under

subsection (1) -

(a) the Society may exercise those rights and

remedies in its own	name or in the name of
the claimant;

(b) the claimant shall, upon request by the

Society, provide all necessary information and documentation and give all necessary assistance to enable the Society to exercise

all rights and remedies subrogated	to i t	by
virtue of this section; and

(c) moneys recovered by the Society in the

exercise of those rights and remedies shall
be paid into the Fund.

11.   I

(3) The Society shall indemnify a claimant against

any costs awarded against the claimant in any

proceedings brought by the Society in the name of

the claimant to enforce the rights and remedies of

the claimant subrogated to the Society under

subsection (l)."

The submission on behalf of Hr. Reynolds is that there

is no right of subrogation conferred on the Law Society against

him in respect of the payment made out of the Fund to Hr. and

Mrs. Crowe. The submission is that, if there is no right of

subrogation, and the debt has been satisfied, then there is no

basis on which the bankruptcy notice can properly issue.

i

Implicit in the submission is that 5.27 does not expand

the normal concept of the right of subrogation to persons who are

not persons specified in s.24(1). It is said that as between

Hr. Reynolds and the Law Society, the payment by the Law Society

to Hr. and	Hrs. Crowe was a	voluntary payment and conferred on
the Law Society no rights	of subrogation.	No point based on

constitutional law is advanced.

In - Exall v. Partridge [l7991 8 T.R. 308, 101 E.R.

1405, Lord Kenyon, Ch.J., said at p.1406:-

"It has been said, that where one person is

benefited by the payment of money by another, the law raises an assumpsit against the former; but that I deny: if that were so, and I owed a sum of money to a friend, and an enemy chose to pay that

debt, the latter might convert himself into my

debtor, nolens volens."

In Leigh v. Dickeson (1884) 15 Q.B.D. 60, the Haster of

the Rolls, Brett L.J., in the Court of Appeal, said at p.64:-

!

"...it has	been	always	clear	that	a purely
voluntary	payment	cannot	be	recovered	back.

Voluntary payments may be divided into two

classes. Sometimes money has been expended for

the benefit of another person under such

circumstances that an option is allowed to	him to
adopt or decline the benefit: in this case,	if he

exercises his option to adopt the benefit, he will

be liable to repay the money expended; but if he

declines the benefit he will not be liable. But
sometimes the money is expended for the benefit of
another person under such circumstances, that he

cannot help accepting the benefit, in fact that he

is bound to accept it: in this case he has no

opportunity of exercising any option, and he will

be under no liability."

In Goff and Jones The Law of Restitution 3 ed., at

f

p.505 the learned authors note:-

"Where the offeror has rendered services to the

offeree, as, for example, by improving his land	or
chattels, without the knowledge of the offeree	so
that he has no option 'to adopt or decline the

benefit,' the offeror will not ordinarily be

entitled to recompense."

See also see the judgments of the Court of Appeal in - Owen v. - Tate

[l9761 1 Q.B. 402 , and an article by P. Birks: Unrequested

Payment of Another's Debt [l9761 Law Quarterly Review 188.

However, it seems to me clear that the claims made by

the Law Society are based on the Act and that no claim	to
subrogation under any principle of the general law is sought to
be relied on.

It is submitted on behalf of the Law Society that

Mr. Reynolds was both 'the practitioner' and the 'other person'

in terms of As to the first basis, it is alleged that the s.27 of the Act.

Society's

receipt, consideration and passing of the claim, of necessity,

involved an administrative determination by the Society that Mr. and Mrs. Crowe did suffer pecuniary loss through stealing or fraudulent misappropriation by Reynolds.

Even if that submission be correct, (a matter in respect of which I express no opinion), the effect of the section is to

subrogate the Law Society to 'the rights and remedies' of M r . and -

Mrs . Crowe in respect of 'that	act'.	The judgment of McPhe+.on
J. gave no rights to the Crowes in respect of that	act.	There

was no claim made in the Supreme Court proceedings before

McPherson J. that the Crowes suffered pecuniary	loss through the
stealing or fraudulent misappropriation committed	by Reynolds,

and McPherson J.	expressed no findings in terms	of stealing	or
fraud against M r .	Reynolds.

I am, however, satisfied that Mr. Reynolds is an 'other

person' in terms of s.27 of the Act.

I am satisfied in the terms of s . 2 4 that Mr. and M r s .

Crowe were persons who suffered pecuniary loss through stealing

or fraudulent misappropriation committed by a practising

practitioner, namely Mr. Wl?&eler, in the course of Mr. Wheeler's

practice and that that act of misappropriation was the subject of

a claim under Part	I11 of the Queensland Law Society Act, in
respect of which a payment was made to	Mr. and Mrs. Crowe out of

the Fund established by s.12 of the Act in settlement of that

claim. It was that act of misappropriation of Mr. Wheeler which

gave to Mr. and Mrs. Crowe the right of action against both M r .

wheeler and Mr.	Reynolds and which founded the judgment against
the firm.	By virtue of that judgment, Mr. and Mrs. Crowe had

remedies against, inter alios, M r . Reynolds and the Society is

subrogated to the remedies of M r . and Mrs. Crowe against M r .

Reynolds, arising out of that judgment.

The conclusion to which I come is of serious

significance for practitioners, in that a practitioner may	be	-
liable to indemnify the Fund of the Law Society in respect of

f

payments made by the Society out of the Fidelity Fund based on

a stealing or fraudulent misappropriation of funds by that

practitioner's partner.

For the reasons I have given, the application to set

aside the bankruptcy notice is dismissed.

l certify that thls axi the /3 p:ecci!ng

pages are a vue ccpy of the reasons for
judgment herein of His Honour

Xssociate

Counsel for applicants:  Nr. N.J. Thompson

instructed by:  Bowdens

Counsel for respondents:  Hr. R.N. Wensley

instructed by:  Cannan c Peterson

Date of Hearing:	10 Narch 1988
Date of Judgment:

~ 2 November 1988