Re the Legal Practitioners Act 1970 and Re An Application Between A Solicitor and the Law Society of the Australian Capital Territory [1991] ACTSC 33; (1991) 103 ACTR 1; (1991) 104 FLR 212 (29 May 1991)

SUPREME COURT OF THE ACT

IN THE MATTER OF THE LEGAL PRACTITIONERS ACT 1970
AND IN THE MATTER OF AN APPLICATION BETWEEN A SOLICITOR and THE LAW SOCIETY OF
THE AUSTRALIAN CAPITAL TERRITORY
S.C. No. 784 of 1990
Legal Practitioners
[1991] ACTSC 33; (1991) 103 ACTR 1
(1991) 104 FLR 212

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Miles C.J.(1)

CATCHWORDS

Legal Practitioners - Accounts and Trust Moneys - defalcation of trust moneys by solicitor - obligations of solicitor receiving moneys from or on behalf of client - litigation loans with bank arranged by solicitor for clients - whether solicitor entitled to appropriate to himself or herself the proceeds of such loans - client's authority to deal with loan fund did not distinguish between professional costs and disbursements - onus on solicitor to show what part of loan fund was received "for or on account of his legal costs".

Legal Practitioners - litigation loan accounts - conflict of interest of solicitors in relation to such accounts.

Legal Practitioners - Legal Practitioners Act 1970, s.46(2) - whether solicitor's "legal costs" includes disbursements.

Legal Practitioners Act 1970, s.46, s.93

Stewart v Strevens (1976) 2 NSWLR 321

NSW Solicitors Manual

HEARING

CANBERRA
29:5:1991

Counsel for the applicant: Mr G. Stretton

Solicitor for the applicant: -

Counsel for the respondent: Mr D. Harper

Solicitors for the respondent: Abbott Tout Russell Kennedy

DECISION

On 11 December 1990 the Law Society of the Australian Capital Territory (the Law Society) had before it a report by Ms. Jean Sayer dated 3 December 1990 made pursuant to Division 6 of Part VII of the Legal Practitioners Act 1970 (the Act). That report disclosed deficiencies in trust moneys held by a solicitor of this Court. In the opinion of the Council the deficiencies appeared to be not excusable and they were not made good before the date of the report. Accordingly, the Council resolved that the Law Society cancel the unrestricted practising certificate of the solicitor. Subsequently the Law Society applied to the Court for the appointment of a receiver of the trust property of the solicitor. The solicitor applied for an order that the cancellation of his practising certificate be revoked. On 14 December 1990 I ordered that, pending the determination of the application to revoke the cancellation of the applicant's practising certificate, the solicitor be deemed to be a person who held an unrestricted practising certificate.

2. The dispute narrows down to the particular question whether the solicitor was entitled to appropriate to himself the proceeds of a so-called litigation loan which he had arranged on a client's behalf with Westpac Banking Corporation (the Bank). Mr Stretton who appeared for the solicitor submitted that the proceeds had been received by the solicitor "for or on account of his legal costs" pursuant to s.46(2) of the Act and that the solicitor was therefore not bound to hold those proceeds in trust as required by sub-s.46(1).

3. The relevant sub-sections provide as follows:
"46(1) All moneys received by a solicitor, in

connexion with his practice in the Territory, from,
or on behalf of, a client of the solicitor shall,
for all purposes, be deemed to be held in trust for
that client to be disbursed, or otherwise dealt
with, by the solicitor in accordance with the
instructions of the client.
.....
(2) Sub-section (1) of this section does
not apply to moneys received by a solicitor for or
on account of his legal costs, whether already due
or to become due."

4. There was no dispute that if the funds in question were trust moneys, then s.93(1) applied and the Court was empowered to make the order to appoint a receiver of the trust property of the solicitor. The relevant portion of that sub-section is as follows:

"93(1) Where the Court is satisfied -
(a) that there are reasonable grounds for believing that a defalcation

of

trust of a solicitor or of solicitors practising in partnership
has been committed or that an offence
involving fraud or dishonesty has been
committed in relation to trust moneys;
.....
the Court may by order appoint a person
specified in the order to be receiver of the trust
property of the solicitor or of the partnership."

5. Ms Sayer's report of 3 December 1990 is in evidence. I was referred to only those parts of it that were relied upon as relevant to the present application. The report shows that at 31 August 1986 the cash book balance of the solicitor's office account was overdrawn in the sum of $112,723.18. The solicitor had a standing arrangement with the Bank in relation to a so-called litigation lending scheme. On 17 September 1986 the proceeds of several litigation loans from the Bank to various clients of the solicitor were deposited to the solicitor's office account. The proceeds totalled $40,000. The deposit had the effect of substantially reducing the solicitor's overdraft with the bank.

6. For the purposes of the present application the Law Society relied only on the facts relating to the litigation loan to one particular client. It is not necessary to name the client. The payment into the solicitor's office account on 17 September 1986 came about in the following way. The solicitor acted for the client concerned in an action for damages for personal injuries arising out of a motor vehicle collision. On 26 March 1986 the solicitor wrote what appears to be a pro forma letter of application to the Bank on behalf of the client for "an advance for $6,000 plus interest to cover disbursement/legal expenses incurred by us on his behalf". The letter continued:

"Should the advance be approved, the balance of such advance, together
with interest and fees thereon, will become due and payable by (name of
client) or failing him, ourselves upon the happening of any one of the
following events:
i) Receipt of settlement proceeds;
ii) Termination of the litigation without sufficient proceeds to clear

the

advance;
iii) If during the course of proceedings, we cease to be solicitors

acting
behalf of (namen of client) (upon our ceasing to so act we will immediately

advise the Bank thereof);
iv) The expiration of four years from the date of drawing the advance."

7. The letter of 26 March 1986 bears the signature of the client in confirmation of its contents. The letter attaches an authority from the client to the Bank of the same date and in the following terms:

"Re: Advances to Cover Disbursements/Legal Expenses
You are hereby irrevocably authorised and directed to pay all moneys
advanced to me by your Bank in respect of disbursements/legal
expenses required for the conduct of my matter to my Solicitors,
(name of solicitors' firm), or as they may direct.
My Solicitors have full discretion in respect of the disbursement of
proceeds of the advance and the Bank has no responsibility
whatsoever in respect of such disbursement."

8. On the same day, 26 March 1986, the client signed an authority addressed to the solicitor in the following terms:

"Re: Advances to Cover Disbursements/Legal Expenses
On completion of this matter, I hereby irrevocably authorise and direct
you or such other Solicitor as I may instruct herein to pay any
settlement or verdict moneys I may receive in relation to the above
claim as follows:
i) To Westpac Banking Corporation, ............ Branch, the amount of my
fully advance on account of disbursements/legal expenses together with
interest thereon.
ii) To my solicitors in respect of all unpaid costs and disbursements.
iii) (The residue) to the credit of my Advantage Saver account with

Westpac

Savings Bank Limited, .............. Branch.
This authority is for valuable consideration received, is irrevocable
and cannot be cancelled without the prior written consent of Westpac
Banking Corporation."

9. There is no evidence of any acceptance by the Bank of the application for the litigation loan. However, on 17 September 1986 the sum of $4,000 was received by the solicitor from the Bank, being the whole or part (it is not clear which) of the litigation loan moneys available to the client from the Bank. That sum was placed initially in the litigation loan account kept in the client's name by the solicitor, and on the same day the same amount was transferred from the client's litigation loan account into the solicitor's office account. It was part of the $40,000 which found its way into the solicitor's office account. A memorandum of fees was placed on the solicitor's file in the following terms:

"Re: Accident
To our professional services rendered
in connection with this matter -
Interim Account Only $3,850.00
Disbursements:
Court filing fee 115.00
Postage, stationery and
telephone calls 35.00
150.00
$4,000.00
========="

10. There is no evidence that the memorandum or a copy of it was sent to the client. The amount shown on the memorandum was debited to the litigation loan account and the balance of that account at that stage shown as nil.

11. Subsequent events, insofar as they are relevant, may be summarised briefly. The client later instructed another firm of legal practitioners to act for him. They obtained the file from the solicitor only after paying to the solicitor on 28 March 1989 the sum of $5,314.50 which the solicitor noted as his costs and disbursements to 24 November 1988. That sum is shown as a credit balance in the client's litigation loan account kept by the solicitor. The loan from the Bank was not repaid as at 23 November 1990. At that date the total principal and interest owing by the client to the Bank was $9,285.50.

12. A draft itemised account in the solicitor's instruction file for all work done up until October 1988 showed the profit costs of the solicitor up to 17 September 1986 amounting to $1,362.92. That of course is an amount well short of the amount shown for profit costs in the interim account of 17 September 1986 when the solicitor transferred the whole of the moneys in the client's litigation loan account to his own office account.

13. It was submitted on behalf of the Law Society that the $4,000, which was received by the solicitor as the proceeds of the litigation loan and which was transferred by the solicitor into his office account on the same day as received, was, in accordance with sub-s.46(1) of the Act, deemed to be held in trust for the client. However, it was submitted on behalf of the solicitor that the moneys so received were received by him "for or on account of his legal costs" pursuant to sub-s.46(2) and that there was no obligation to deal with them as trust moneys under sub-s.46(1).

14. Reference was made to the decision of Helsham J. in Stewart v Strevens (1976) 2 NSWLR 321. The decision, however, is not quite in point, because the facts were different and the New South Wales legislation is not identical. Indeed Helsham J. expressly found at p 325 that there was nothing in the evidence that would enable it to be said of the moneys received by the solicitor in that case that they were receivable for or on account of legal costs. His Honour concluded that it was unnecessary to determine what was meant by moneys receivable by a solicitor for and on account of legal costs, what was meant by legal costs, or how this portion of the section of the New South Wales Act might operate, if at all, before the solicitor had rendered a bill to his client. His Honour went on to say this:

"It would seem that the intention is that any moneys "receivable"
for or on account of legal costs are not to be categorized when
received as client's money, i.e. not received for and on behalf of
the client; here, as I have said, I think the evidence compels the
conclusion that the moneys received were client's money, and so this
exception does not apply."

15. It might be noted that the word "receivable" is used in the New South Wales Act, whereas it is the word "received" which is used in both sub-sections of the ACT Act. Nevertheless, I would think, with respect, that the approach of Helsham J. is an appropriate one where on the facts of the case money received by the solicitor is received as the client's money, that is to say, "for and on behalf of the client", and not "for or on account of" the solicitor's legal costs.

16. It was submitted by Mr Stretton on behalf of the solicitor that the legal costs referred to in sub-s.46(2) included not only the solicitor's fees for professional services but extended to disbursements. In my view, the sub-section should not be read in this way. To do so would be inconsistent with the requirements of sub-s.46(1), which is a general provision to which sub-s.46(2) provides a limited exception. The general provision lays down in express terms what has long been understood to be the obligation of any solicitor who receives money from or on behalf of a client during the solicitor-client relationship. Because of the special relationship between a solicitor and client, which is of a fiduciary nature, the solicitor is bound to hold such moneys on trust and to deal with them, or disburse them, only in accordance with the instructions of the client. To remove from the moneys to which such an obligation attaches those disbursements which are to be regarded as part of a solicitor's legal costs, as contrasted with such disbursements as are not part of the solicitor's legal costs, is, in my view, to introduce a wholly artificial distinction which would rob the obligation of its significance.

17. Furthermore, as Helsham J. observed in Stewart v Strevens, the right to transfer to a general account moneys received by a solicitor for and on behalf of a client and paid into a trust account, and any right of the solicitor to pay moneys to himself or herself out of moneys so received, goes no further than the general lien which gives a right not to pay money claimed for costs to or at the direction of the client until the solicitor's own claim for costs is satisfied.

18. It is true that sub-s.46(2) authorises the solicitor to be paid out of moneys received from a client, whether the solicitor's costs are already due or are to become due. That is to say, the law does not stand completely in the way of a client paying a solicitor and the solicitor accepting payment in advance of services to be rendered. But because of the special relationship between client and solicitor to which I have made reference, the law will not rush to find such an agreement between the client and the solicitor unless it is in clear terms.

19. In the present case it is to be emphasised, in my view, that there was no express agreement between the client and the solicitor authorising the solicitor to receive payment for services rendered, whether rendered in the past or to be rendered in the future, in the documents which passed between them. The authority addressed to the solicitor is restricted to the authorisation of payment out of "any settlement or verdict moneys". The application to the Bank for the litigation loan made by the solicitor on the client's behalf was accompanied by an authority signed by the client authorising and directing the Bank to pay all moneys advanced to the solicitor "in respect of disbursements/legal expenses required for the conduct of my matter", and the authority acknowledged that the solicitor had "full discretion in respect of the disbursement of proceeds of the advance". The solicitor obtained the authority from the client in order to forward it to the Bank, and I am prepared to find that the express authority to the Bank contained an implied authority to the solicitor to call upon the moneys available for loan for the payment of "disbursements/legal expenses" for the conduct of the matter in respect of which the Bank granted the loan. Further, it conferred on the solicitor "full discretion in respect of the proceeds of the loan".

20. However, the authority to the solicitor, and it is a point of critical importance, did not distinguish between what the solicitor was to be paid in respect of the solicitor's costs for the solicitor's own professional services and what the solicitor was to be paid to be held on account to be disbursed in connection with the expenses of conducting the client's case. In other words, the authority did not distinguish between what the solicitor might properly receive by way of payment for his own past or future services pursuant to sub-s.46(2) and what he was to receive to hold or expend on behalf of the client in accordance with sub-s.46(1). It is clear that the solicitor himself made no such distinction when he transferred the full amount of the moneys advanced from the client's litigation loan account to the solicitor's office account on 17 September 1986. It is not to the point, in my view, that a memorandum of fees, styled "Interim Account Only" was placed on the file noting professional costs in the sum of $3,850 and disbursements of a court filing fee of $115 and postage, stationery and telephone calls at $35, whereby the total figure happened to arrive at $4,000. There is no evidence that the interim account was ever rendered to the client, and it is not necessary to decide what effect that might have had if it had happened. The fact was that the solicitor had obtained from the client an authority to pay both the solicitor's professional costs and the client's disbursements out of the one fund, without specifying how much it was that was to be paid in respect of the solicitor's own costs. In those circumstances, the solicitor brought about a situation whereby it was and is impossible to distinguish between what part of the litigation loan proceeds was to be treated as trust moneys under sub-s.46(1) and what part was to be treated as available to the solicitor for his own costs under sub-s.46(2). The onus lies on the solicitor to show what part of the moneys received by him from the client's litigation loan account were received "for or on account of his legal costs". He has failed to discharge that onus. For that reason the moneys received must be regarded as trust moneys under sub-s.46(1) and the appropriation by the solicitor of $3,850 for his own costs provides a reasonable ground for believing that there has been a defalcation of trust moneys by the solicitor. The first ground specified in sub-s.93(1) has been made out.

21. The making of an order to appoint a receiver of the solicitor's trust property is a discretionary one, but nothing has been placed before me to suggest that the discretion should not be exercised. The $5,314.50 paid to the solicitor by those subsequently acting for the client to enable the subsequent practitioners to obtain the client's file from the solicitor was shown simply as a credit in the client's litigation loan account. In the meantime, the litigation loan to the client from the Bank remained unpaid at the time of hearing and the client's indebtedness to the Bank, with interest, had grown to $9,285.50. A receiver of the solicitor's trust property might attend to these matters and properly account to the client. I therefore make an order appointing Jean Sayer receiver of the trust property of the solicitor. It follows that I dismiss the motion seeking a revocation of the cancellation of the solicitor's practising certificate by the Law Society on 14 December 1990. I vacate the interim order made on 14 December 1990 that, pending the determination of the application that the cancellation of the solicitor's practising certificate be revoked, the applicant be deemed to be a person who holds an unrestricted practising certificate. I will hear counsel on whether I should continue the order made on 14 December 1990 that the name of the solicitor be not published until further order.

22. Unless the parties wish to be heard on the point, I propose to order that the solicitor pay the costs of the Law Society in respect of both applications.

23. During the course of argument I was referred to directions of the Council of the New South Wales Law Society relating to litigation lending accounts and other matters relating to litigation loans (see NSW Solicitors Manual para. 11415). The matters raised are not without importance, but I have decided that for the purposes of these applications, it is neither necessary nor desirable to discuss them except to say that a solicitor who is a party to an arrangement with a lending institution for the advance of funds to the solicitor on the client's behalf is placed in a situation of a direct conflict of interests, at least when seeking to withdraw funds from the litigation loan account for costs not yet due, and may face a conflict of interests in advising the client in relation to the loan itself. In the absence of such formal directions in the Australian Capital Territory, practitioners would be prudent in giving attention to the directions of the Council of the New South Wales Law Society.
ADDENDUM

24. After handing down these reasons for judgment and after hearing further from counsel for the Law Society and from the solicitor in person, I make the following orders:
1. As from 5 p.m. this day Jean Sayer is appointed receiver of the trust property of the solicitor.
2. I adjourn until 18 June 1991 the motion by the solicitor seeking a revocation of the cancellation of the solicitor's practising certificate by the Law Society.
3. I continue until 18 June 1991 the interim order made on 14 December 1990 that, pending the determination of the application that the cancellation of the solicitor's practising certificate be revoked, the applicant be deemed to be a person who holds an unrestricted practising certificate.
4. I continue until 18 June 1991 the interim order made on 14 December 1990 that the name of the solicitor be not published until further order.
5. I order the solicitor to pay the costs of the Law Society in respect of both applications on a solicitor and client basis.