CATCHWORDS Bankruptcy - application for discharge prior to statutory period - bankrupt a solicitor in failed legal practice - innocent of dishonesty but ingenuous and naive - application claimed by trustee to be premature - no question of principle - Bankruptcy Act 1966, ss.149 and 150. RE: MICHAEL CHRISTOPHER GIANACAS No.' W 1082 of 1981 Coram: Sheppard J. 12 August, 1983 Sydney IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF No. W 1082 of 1981 NEW SOUTH WALES AND THE AUSTRALIAN ed CAPITAL TERRITORY RE: MICHAEL CHRISTOPHER GIANACAS Ex parte THE OFFICIAL RECEIVER ORDER JUDGE MAKING ORDER: Sheppard J. DATE OF ORDER 3 12 August, 1983 WHERE MADE : Sydney The Court makes an order of discharge suspended up to and including 31 December, 1983. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF No. W 1082 of 1981 NEW SOUTH WALES AND THe AUSTRALIAN CAPITAL TERRITORY - RE: MICHAEL CHRISTOPHER GIANACAS Ex parte THE OFFICIAL RECEIVER CORAM: SHEPPARD J. , 12 August, 1983 REASONS FOR JUDGMENT This is an application for discharge made by a bankrupt pursuant to s.150 of the Bankruptcy Act 1966 ("the Act"). The applicant became bankrupt on lL December, 1981, pursuant to s.55 of the Act upon a petition presented by himself. Unless an objection be entered pursuant to sub-sec.(3) of s.149, the applicant will, in any event, be discharged by forte of that section on 12 December, 1984. The applicant was a partner in a firm of solicitors which practised in Newcastle, fe nad been admitted to practice as a solicitor in 1973. On 1 July, 1974, when 26 years of age, he became a partner in the firm which was known as Charlton, Xearer & Sanaers. The applicant was one of two junior vdartners, The senior partners were Messrs. Sanaers, xafer ana Dickson. Im 1965 Messrs. Kafer and Sanders had had incorporated a comvany, Thirty Watt Pty. Limited. The name came from the address of the firm, 30 Watt Street, Newcastle. Originally the company was incorporated so that 1t might acquire the firm's office space when it became available for purchase as a lot on 2 strata plan. However, from about 1973 the company was used for the investment of clients' and other funds, It operated as an investment company and a real estate developer. Its operations were managed by Mr. Sanders. The bulk of its funds came from clients who deposited their moneys in the firm's trust account for the purpose of investment. The other gunior partner who had joined the firm in 1974 left 1t in 1976. In September 1978 a random check by accountants from the Law Society of New South Wales discovered dis- crepancies in the firm's trust account. In November 1978 a receiver was appointed. Also in November 1978 official managers of the company were appointed. A statement of affairs disclosed that 1% owed unsecured creaitors sums totalling 35,590,258. The creditors included both trade creditors and clients of the firm who had deposited moneys with the company, many, as I understand the evidence, not understanding that their moneys had been dealt with in this way. The official management of the company has been reasonably successful. The position is not yet final- ised but already a general distribution has been made of 80 cents in the dollar except in the case of six claimants who have received a distribution of only 50 cents in the dollar. ~The clients whose moneys had been invested in the company made claims upon the Fidelity Fund administered by the Law Society pursuant to the provisions of the Legal Practitioners Act 1898 (N.S.W.). Their claims totalled $2,667,936.24. Payments amounting to $569,704.90 have been made. These payments constitute a payment at the rate of 20 cents in the dollar to all but six cred- itors. In their case the payment has been 50 cents in the dollar. They received 50 cents, rather than 80 cents in the dollar from the company. In the result clients have thus received the entirety of what was due to them by the firm except for interest, Disciplinar roceedings were taken against the = oa cS 2 firn. These came ovefore tne S four partners of t ct Statutory Committee constitutea pursu 119) nt to the Legal ad Practitioners Act on 18 February, 1980. The Committee announced its decision on 27 November, 1980, ever twelve months before the applicant became bankrupt. Et ordered that the names of Messrs. Sanders and Kafer be struck off the Roll of Solicitors of the Supreme Court of New - South Wales. I was informed by counsel that criminal proceedings are pending against Mr. Sanders. Mr. Dickson was suspended from practice for a period of two years. The order made in respect of the applicant was that he be suspended from pactice until 50 June, 1981, "provided that the order for suspension shall be stayed upon the Solicitor's undertaking in writing 7... that ne will not practice as a solicitor on his own account or in partnership until 1 July, 1982". The applicant gave the undertaking and was thus able to continue in practice as an employed solicitor during the period up to 1 July, 1982. Thereafter he has been able to engage in practice on his 'own account. The fact that ne has been since that time an undischarged bankrupt 1s not seen by the Law Society as providing a reason why me should not oe entitled to oractice fully as a solicitor. Six creditors have lodged proofs of debt against the applicant's estate. The proofs total §8541,331. By far the largest creditor is the Law Society of New South Wales which has proved, at the moment, in the sum of $523,204. No doubt proofs for the same amount have been lodged in the estates of the other partners, all of wnom are bankrupt. It is quite unlikely that any sum of any con- sequence will be brought to the credit of the estate, In an affidavit made in support of tne applic-— ation the applicant has referred to his youth and inexperience at the time he joined the firm. He said that the conduct of tne partnership "was dominated by Messrs. Kafer and Sanders", He said tnat he was not in a position to give any significant attention to the management of the partnership business because of the domination of his senior partners. They did not consult him and were not vrepared to give him opportunities to participate in the making of "Signif- icant decisions". He said tnat he regarded his seniors with great respect anc did not question their control of the partnershio affairs or see the need to exercise any vigilance over wnat they did. He attendea to a large volume of conveyancing and probate dDuSsiness in the office anc to the work of a personal J clientele of his own which arose from connections he had in the Newcastle "sporting world" and in its Greek community. He had a Large number of Greeks as clients no doubt because he was. the only solicitor in Neweastle who spoke Greek. The firm employed staff to carry out accounting and bookkeeping duties. They worked under the supervision of Mr. Sanders and appeared to the applicant, so he said, to be efficient and effective, He did not concern himself with the details of their work. Even before the collavse of the company the appiicant was experiencing financial difficulties. His returns from the practice were not apparently large enough for his and his family's needs. The applicant's affidavit concludes with the following paragraph: "As a result of my involvement in the firm I worked for some 4 years for very modest returns and was then involved for several years after Octoder, 1978 in personal turmoil as a result of the investigations of the Law Society, the action of tne Receiver apposnted under the Legal Practitioners Act to the firm, the liquidation of Thirty watt Pty Limited, the proceedings before the Statutory Committee and my suspension from vractice. In my own belief this position was not orought about "by my own misconduct and I respectfully submit this to be the true position. I am now the holder of an unrestricted Practising Certificate under the Legal Practitioners Act, 1898 and I have recently, with the consent of tne Council of the Law Society, commenced a practice on my own account as a solicitor. I now seek to be discharged from bankruptcy so that © will be able to make a completely new beginning of my professional life without being impeded by the misconduct of my former partners." In his oral evidence the applicant said that he was now 35 years of age, He had commenced a legal practice on his own account on 1 June, 19835. One of his clients 1s a Mr. w. L. Peters who pays him a monthly retainer of $1,252 for legal work done for Mr. Peters and companies and persons associated with him. The applicant is not in partnership. He Maintains a trust account and has been given a full practising certificate by the Law Society. The applicant was asked why he wished to be dis- charged from his bankruptcy. He said: Well, I feel tnat I have now got the opportunity to commence legal practice by myself. I think that I have suffered enough at the hands of other people, and their indiscretions, and I really feel that if given the chance I could make some part of my iife - I have got a good clientele an Newcastle. I am tae only Greek solicitor in Newcastle and consequently a lot of Greek people come to me for neip end essistance, and I think tnat, if given ta nence tocay, I could start 2 wnole new iife," > v3 aa The applicant said he had no difficulty operating a bank account or trust account as an undischarged bankrupt. The fact that he is undischarged has been told to his bank manager. : He does not require credit for the purposes of the practice. According to his evidence Mr.Peters has been able to help him in setting 1t up. He has one employee, a secretary. He said, "I do not have any law books at this stage, but Mr. Peters has arranged funding of this practice. I have not put one cent toward it". Im an affidavit Mr. Peters confirmed the evidence Siven by the applicant. He 1s the managing director of two companies one of which is a crane hiring company in Newcastle having a turnover of "saveral hundred thousand dollars per year". Mr. Peters said that the apolicant had been his companies' solicitor and his personal solicitor since 1976 when he was still with tne firm. He said tnat the applicant nad handled many legal matters for him and that ne had always found him to be compietely reliatie, nonest and trustwortny. He did not lose faith in tne ye applicant following the insolvency of the company and the failure of the firm. Thereafter he "followed" the applicant to three other law firms where he was employed between 1979 and 1982. Mr. Peters claims to be fully aware,of the circumstances surrounding the applicant's involvement in the company and the firm. Mr. Peters employed the applicant, through one of his companies, from the end of 1982 until the applicant commenced his own practice on 1 June. Mr. Peters has confirmed tnat the funds necessary to enable the applicant to comnence prectice were pro- vided by him. The applicant is continuing to do all Mr, Peters' company and personal legal work. He supports the application for discharge which 1s made. In its decision given on 27 November, 1980, the Statutory Committee said: "The Committee accepts Mr Gianacas asa truthful witness and accepts that he was not knowingly a party to the advances apparently made to nim by Thirty Watt Pty. Limited (except in relation to the sale of his home above-mentioned) nor was ne other- wise knowingly a party to the operations of the company. The Committee at fault in fe s th ivie) t i) oq A. ne Solicitor was uately cischar ili os C deq "his responsibilities to his clients. It recognises that his culpability is qualified to a significant degree by reason of the circumstances disclosed in evidence as to his ingenuous and trusting nature and his subordinate position in relation to his senior partners." The trustee opposes the application orincipally on the ground that it 1s premature. He does not however claim that the application snculd be refused for any reason associated with the administration of the applicant's estate. Notwithstanding that the administration of it 1s incomplete, 1t will apparently be sufficient for the trustee to have the assistance which the applicant 1s obliged to give even though he be discharged. Nor does the trustee suggest that the discharge snould be delayed because there is any real prospect of his being able to make any significant contribution to the estate. Rather his submission is based upon the overall circumstances of the case, the conduct of the applicant and his view that a period of a little over 18 months as an undischarged bankrupt is quite. insufficient in a case such as this. No creditor opposes the application. The only ereditor to appear was tne Law Society which appeared by a solicitor on the secona occasion che natt io) = iy 10) in the list, at my recuest. Tne solicitor steted that ic. the Law Soc1rety neither consented to nor opposed the application. An affidavit was filed by Mr. Maynard, the manager of the Fidelity Fund, but this was intended only to give me an up to date account of the claims it had had and the present position cf the former clients of the firm so far as their claims against the Fund and the company were concerned. It appears not unlikely that the Law Society will recover from the company approximately $250,000 of the amount it has paid out. But I was informed that its claim will nevertheless amount to a figure of the order of 3400,000 once all claims are taken into account along with its receiver's expenses. The position is, therefore, that the ultimate deficiency will be for an amount of between $400,000 and $500,000. Nothing of consequence will be brought to the credit of the estate. It is true, as I have mentioned, that the same claim will be made against the bankrupt estates of the other partners of the firm. I must confess that I have found the case an extraordinarily difficult one to determine. L admit to some astonishment at learning that an undischarged bankrupt 1s regarded as a satis- factory person to practice as a solicitor on his own account in a sole practice. But I was informed by the solicitor for the Law Society that the applicant in this case is not the only undischarged bankrupt presently practising in the community as a solicitor. I would have thought that. difficulties might have arisen in relation to the obtaining oz credit for amounts of 3500 or more (s.269). That is not a particularly large sum for which a solicitor might obtain credit in his day ta day practice, for example, in relation to fees to be charged by other solicitors acting as his agents and other professional people including, perhaps, counsel. I would also have thought that there may have been problems in relation to after- acquired property (ss.58 and 116) notwithstanding that after-acquired income does not form part of a bankrupt's estate (s.131). There may be other difficulties as well. Be tnat as 1t may, none of these matters seems to be a problem in tne present case. Disciplinary action naving been taken before the appropriate tribunal, it would seem to me that I should not take any different view of the explanation for the bankruptcy or the part played in the affairs of the company and the firm b> the applicant. In any event there was no cross-examination of him which would lead me not to accept his evidence given in respect of these matters. On the other nand, I must say that whilst the evidence which the applicant has given and the findings of the Statutory Committee explain and excuse the applicant's conduct and the predicament in which he finds himself, they do not come to grips with the plain fact that the applicant was grossly recreant in his duties as a solicitor in leaving 1t to his senior partners to control the firm and tne company in the way that they did. It may sound hard, but the public generally and clients of solicitors in particular, are entitled to think that a person entrusted with the privilege of practising as a solicitor, however ct young, will be watchful of taeir interests and will apply nis or her own mind to questions concerning the proper administration of trust funds and the proper investment. of clients' moneys. I bear very much in mind the gunior position of the applicant. One needs, I know, to be realistic. But solicitors at whatever stage of their career have an obligation to satisfy them-— selves that their firms' trust accounts are in proper order, They are not in the position of junior executives in e commercial undertaking. In relation to the keeping of trust accounts and the proper care of clients' funds each partner has a primary obligation to ensure that proper procedures are taken. The tenor of the applicant's evidence is that he has been the victim of circumstances. He is bitter and resentful over what has happened to him. Whilst I understand that completely, and whilst the entirety of the circumstances are most relevant, there are other considerations. These stem from the applicant's duties as a solicitor, particularly duties to the clients for whom he acts. For my own part, 14. upon the evidence which has been before me, I do not have the same satisfaction that the applicant understands his duties in this respect as the Statutory Committee apparently had. Its members spoke of the applicant's naivety and ingenuousness. No doubt these traits in his character help to explain what occurred. But they are traits which are in themselves dangerous for a solicitor at any stage of his career. They can be as much the cause of financial disaster as downright dishonesty. Furthermore, the fact that disaster may overtake a solicitor is undoubtedly inherent in the case of a solicitor conducting a sole practice. In its discussion paper on Solicitors' Trust Accounts and the Solicitors Fidelity Fund (Discussion Paper No.6, 1981) the New South Wales Law Reform Commission said (pp.22-23): " As we see it, 1t is a regrettable necessity to single out sole vractitioners. We say regrettable because meny solicitors who would never deliberately wrong a client practise as sole practitioners end they may view this attention as unnecessary end insulting. The fact remains that significantly more sole practitioners are founca to have committed offences in relation to trust accounts taan any other group of practitioners. We are told by the Law Society taet of the 82 solicitors "who were struck off the Roll of Solicitors between lst January, 1968 and 30th June,1981, 67 (81.7%) were sole practitioners, and 7 (8.5%) were members of two-person partnerships. During the years in question, of all the solicitors practising in this State only about one-third were sole practitioners. These figures are not peculiar to this State, In England, for example, there was some pressure on the Law Society in recent years to make it obligatory to practise in partnership. This was backed by allegations that where defal- cation occurred it was most often by sole practitioners. No study will isolate all the reasons why sole practitioners constitute a dispropvortion- ately high proportion of those practitioners who are found to have committed trust account offences. Many reasons can be suggested. These include the low professional incomes of some sole practitioners, the absence of the informal and formal control machanisms, ranging from loyalty to colleagues to internel audit systems, which are found in many practices, and a general reluctance on the part of solicitors to practise in partnership with any solicitor whose honesty is suspect. But, whatever the reasons, it seems clear that the law relating to solicitors' trust accounts ought to have regard to the fact tnat sole practitioners are more likely to be found to have breached that law than any other class of practitioners." a AIL these matters would incline me to the view that I should refuse this application for the reason advanced by the trustee, namely, that it is premature. But then I have to considex that no order which I make or refuse will affect in any degree tae apolicant's ability to carry on practice as a solicitor on his own fe ON account. He will do this whatever the outcome of this application may be. Furthermore, he has been dealt with by the appropriate disciplinary tribunal and he has suffered the penalty whicn it thought appropriate to his case. He has available the .guidance and financial help from Mr. Peters and, one would hope, he will be able to take a more objective view of the lesson which life has endeavoured to teach him as the years go by. In all the circumstances I have reached the conclusion that the appropriate order is an order pursuant to paragraph 150(9)(c), namely an order of discharge suspended up to and including 31 December, 1983. I attach no conditions to the order. AL Ths Quad Wee Ik preceding tif, aes o- obua copy of PEF asons for , ona 2engu judgement duane qn 'zcnourable usfica SHepperd. az. 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