LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, MASON P and SHEPPARD AJA 18 March 1998, 6 May 1998 [1998] NSWCA 130 LEGAL PRACTITIONERS — Legal Profession Act 1987 s61 — Whether, in the circumstances of the case, disbursement of moneys in bust account at direction of client breach by solicitor of s61 of Legal Profession Act. The Law Society of New South Wales instituted proceedings before the Legal Services Tribunal alleging that the appellant, who practises as a solicitor, was in breach of s61 of the Legal Profession Act. Essentially the section provides that, if a solicitor, in the course of practising as a solicitor, receives money on behalf of another person, the solicitor shall hold the money exclusively for the other person and disburse the money as directed by the person upon whose behalf it is held. The question in this case was whether on the facts found by the Tribunal, the appellant was in breach of the section. The facts of the matter were that the appellant acted for Mr and Mrs Lindsay-Field. Mr Lindsay-Field was an undischarged bankrupt. He was the owner of a property at Tarcutta which was the subject of a mortgage to a bank. The bank had agrees to discharge the mortgage on payment of a sum of $210,000 to it and on certain other conditions. Mr Lindsay-Field's bankruptcy made it difficult for the parties to deal with the matter on this basis. It was thought that a part of $15,000 to the petitioning creditor, the Australian Taxation Office, which had obtained the sequestration order, would enable the bankruptcy to be annulled or Mr Lindsay-Field to obtain an early discharge. He borrowed money from his sister and her husband Mrs and Mr McArthur. The money was lent by them on condition that the amount lent be applies to procure the annulment of the bankruptcy or Mr Lindsay-Field's discharge from bankruptcy thus putting him in a position to deal with the bank in order to have the mortgage discharged. The appellant was well aware of the conditions on which the money had been lent although the McArthurs were not his client. Notwithstanding that to have been the case, the appellant, upon the authorisation of Mr Lindsay-Field, drew a cheque on his trust account for the bulk of the moneys he had received knowing that they were to be applied for a purpose other than that of procuring the annulment of the bankruptcy or the discharge of Mr Lindsay-Field from bankruptcy. The amount of the payment was debited to the Lindsay-Fields' account in the appellant's trust account. The Court expressed no view on what, if any, legal or equitable obligations the appellant may have owed to the McArthurs. It decided that whatever the correct position was, there was no breach of s61 because the moneys had been received as moneys borrowed by Mr Lindsay-Field from the McArthurs and were thus to be regarded as his moneys with the consequence that he had the right to direct payment of them for a purpose other than that contemplated at the time the money was lent. Gleeson CJ I have had the benefit of reading in draft form the judgment of Sheppard AJA. I agree with that judgment and with the orders proposed and would make only the following additional brief observations. The Legal Services Tribunal dismissed a complaint that the appellant had knowingly participated in a fraud upon Mr and Mrs McArthur. The Tribunal upheld a complaint that the appellant wilfully breached s61 of the Legal Profession Act 1987. In so doing the Tribunal noted that the Law Society conceded that this complaint could only succeed if the moneys paid to the 2 UNREPORTED JUDGMENTS appellant's trust account were held by him on trust for Mr and Mrs McArthur and not Mr and Mrs Lindsay-Field. The critical finding of the Tribunal which was challenged in this appeal, was that the moneys were held by the appellant upon trust for Mr and Mrs McArthur, to be paid out in accordance with certain conditions which were not satisfied. There may be cases where a solicitor for a borrower receives and holds money on trust, not for the borrower, but for the lender, or, perhaps, for both parties. However, for the reasons given by Sheppard AJA, that was not this case. Mr and Mrs McArthur had their own solicitor. The appellant was not acting for them. In return for a mortgage, they made a loan to Mr Lindsay-Field and paid the amount of the loan to Mr Lindsay-Field's solicitor. The appellant received and held the money on behalf of his clients, not on behalf of Mr and Mrs McArthur. That being so, the premise on which the complaint under consideration was laid has not been established. Mason P I have had the benefit of reading the judgments of the Chief Justice and Sheppard AJA. I agree with each of them. Sheppard AJA The principal question which arises for determination in this appeal is whether the appellant was guilty of the breach of s61 of the Legal Profession Act 1987 ("the Act") found against him by the Legal Services Tribunal. It is from the decision of that Tribunal that the appeal is brought. S61 provides in subs(1) that, if a solicitor, in the course of practising as a solicitor, receives money on behalf of another person, the solicitor shall hold the money exclusively for the other person and ensure that subs(2) and the regulations are complied with in relation to the money. S61(2)(a) requires that money received on behalf of another person by a solicitor in the course of practising as a solicitor shall, except where the person on whose behalf the money is received otherwise directs, be paid to the credit of a general trust account at a bank. There are variations of this general obligation provided for in s61(2)(b) and s61(2)(c). These are not material for present purposes. S61(2) requires that the money be disbursed as directed by the person on whose behalf it is held. Subs61(7) provides that a "wilful contravention" of subs(1) is professional misconduct. S61 is to be found in Pt6 of the Act which deals with trust accounts. As mentioned, the primary question which arises for consideration on the appeal is whether the appellant was in breach of s61(1). If so, the further question arises whether the breach was "wilful" within the meaning of s61(7). The complaint relied upon by the Law Society was that the appellant wilfully breached s61 of the Act. Particulars of that ground were that at all material times the appellant acted for a Mr Tim Lindsay-Field who was the brother of a Mrs John McArthur. Mr Lindsay-Field was the proprietor of a property known as "Tarcutta" or "Tarcutta House" situated on the Hume Highway at Tarcutta. The property was subject to a mortgage to the National Australia Bank. Mr Lindsay-Field was made bankrupt on the petition of the Australian Taxation Office ("ATO") on 13 April 1994. Mr and Mrs McArthur were informed by a company, First State Group Pty Ltd ("First State''), that upon payment to the ATO of $15,250, Mr Lindsay-Field would be discharged from bankruptcy. First State provided financial advice to Mr Lindsay-Field. Although "discharge" is the word used in the particulars, the evidence suggests that the proposal was more correctly one pursuant to which the bankruptcy would, if possible, be annulled. In some of the material and in the Tribunal's decision the two concepts are sometimes used interchangeably. Nothing turns on this. URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 3 The particulars allege that Mr and Mrs McArthur borrowed $15,250 from the ANZ Bank at Brisbane. It is claimed that at all relevant times, the appellant was aware that the moneys to be provided by Mr and Mrs McArthur were to be paid only to the ATO and only if such payment would procure the discharge from bankruptcy of Mr Lindsay-Field. On 28 July 1994 Mrs McArthur caused $15,250 to be transferred telegraphically into the appellant's trust account. On 28 July 1994 Mr Lindsay-Field gave the appellant an authority which authorised payment of $15,000 from his trust account to a company, Benoma Pty Ltd ("Benoma") on behalf of Ivymere Pty Ltd ("Ivymere"). On 29 July 1994 the appellant drew a trust account cheque in the sum of $15,750 in favour of the Office of State Revenue. The cheque was covered as to $15,000 or $15,250 by the transfer of the latter amount by Mrs McArthur. The cheque was used to discharge a land tax obligation of Ivymere. The particulars finally alleged that, when the appellant made the payment, he was aware that: (a) Mr and Mrs McArthur had not authorised the payment; (b) the payment was inconsistent with the instructions of Mr and Mrs McArthur; (c) settlement discussions with the first mortgagee, the National Australia Bank, had broken down; (d) a payment of $15,000 or thereabouts to the ATO would not bring about the discharge of Mr Lindsay-Field from his bankruptcy; (e) the transaction was a fraud upon Mr and Mrs McArthur. The material facts of the matter are recounted in the Tribunal's decision. The Tribunal found that on 13 April 1994 the estate of Mr Lindsay-Field was sequestrated on the application of the ATO in respect of a debt of approximately $26,000. At all material times Mr Lindsay-Field was the registered proprietor of the whole of the land upon which Tarcutta House was erected. It was subject to a registered mortgage to the National Australia Bank. An amount of approximately $662,000 was outstanding under that mortgage. Tarcutta House was valued (at an unknown date) for mortgage purposes at $430,000. An agreement was reached between the bank and Mr Lindsay-Field on or about 1 March 1993, the effect of which was that the bank would provide a discharge of its mortgage over Tarcutta House on receipt of payment in the sum of $210,000 and, in addition, on condition that it receive fifty per cent of the proceeds of litigation in which Mr Lindsay-Field was involved in the United States of America up to a maximum of $450,000. The Tribunal found that Mr Lindsay-Field had not, by 24 February 1994, arranged refinancing of Tarcutta House to enable the agreed sum of $210,000 to be paid to the bank. On 24 February 1994 the solicitors for the bank advised that the bank would adhere to the agreement provided the sum of $210,000 was received within seven days. Mr Lindsay-Field did not comply with the bank's time limit and further negotiations took place between the bank and First State who were representing Mr Lindsay-Field in respect of the refinancing. In April 1994, First State arranged for refinancing to be obtained from Anbac Finance. Early in May 1994 Mr Michael Howarth, the managing director of First State, had discussions with Mr Lindsay-Field's brother-in-law and sister, Mr John and Mrs Felicity McArthur, about providing financial assistance to him. On 3 May 1994 First State advised Mr and Mrs McArthur inter alia that First State had instructed the appellant to prepare a mortgage to secure an advance to be made by Mr and Mrs McArthur over Tarcutta House. First State advised Mr and Mrs 4 UNREPORTED JUDGMENTS McArthur that, upon settlement with the National Bank, their mortgage would be registered second over Tarcutta House behind the first mortgage of $236,000. On 11 May 1994 the appellant wrote to First State concerning the proposed loan advance of $230,000. In that letter he noted that the solicitors for the bank were aware that the estate of Mr Lindsay-Field had recently been sequestrated and that the bank would be an unsecured creditor for any balance over and above the sum of $210,000. It also advised that Mrs Lindsay-Field's brother-in-law (ie Mr McArthur) was prepared to make a sum of $10,000 available for the purpose of discharging Mr Lindsay-Field's indebtedness to the ATO. The appellant said in a letter, "However, we reiterate that should the bank lodge any Proof of Debt then the early discharge will be somewhat impossible". On 16 May 1994 the appellant wrote to the bank's solicitors seeking to reaffirm the earlier agreement with the bank subject to an extension of time in which the refinancing was to occur. He also confirmed earlier advice that a relative had indicated that he was prepared to make $16,000 available in order to discharge the debt to the ATO. Reference was made to the bankruptcy thereafter being annulled. On 17 May 1994 the appellant received $500 cash from First State which was deposited in his trust account and posted to the ledger account of Mr Lindsay-Field entitled "Lindsay-Field T& M - refinance, Tarcutta House, Tarcutta'". The title of the account would suggest that it was in the joint names of Mr and Mrs Lindsay-Field. Shortly after 25 May 1994 the appellant was provided with a copy of a letter from First State to the bank which said that a loan of $15,000 from Mr Lindsay-Field's brother-in-law and sister, Mr and Mrs McArthur of Brisbane, had been arranged and that they were prepared to pay out the ATO on Mr Lindsay-Field's behalf. On 26 May 1994 the bank's solicitors wrote to the appellant concerning the proposed refinancing by Anbac and noted that in a telephone conversation between the bank's solicitor and the appellant on 24 May, "you informed him that the mortgagee was not aware your client had been declared bankrupt on 13 April". It was said that, clearly, the proposed mortgagee would adopt a different position if he were aware of that fact. The letter said that, until the issue of Mr Lindsay-Field's bankruptcy was addressed and an annulment application was successfully made, Mr Lindsay-Field was not in a position to tender any moneys to the bank in discharge of the mortgage over the property. What reduced sum, if any, the bank would be prepared to accept in satisfaction of Mr Lindsay-Field's liabilities was a matter that could be addressed in the context of that annulment application. On 3 June 1994 First State forwarded a draft letter to the appellant to "proof read". The draft was a proposed letter to Mr Lindsay-Field's creditors and stated inter alia that the Official Receiver in bankruptcy had agreed to settle for $15,000 "which sum can be loaned to Timothy Lindsay-Field by his brother-in-law". The draft also said that an attached agreement signed by Mr Lindsay-Field irrevocably instructed "their" [sic] solicitor to pay in full "all creditors who consent to the debt deferred". The meaning of that statement is quite unclear. On 29 June 1994 the appellant wrote to the Insolvency and Trustee Service of Australia ("ITSA") advising that he acted for Mrs Lindsay-Field. The solicitor said that the previous advice that a relative had indicated that he would be prepared to pay the sum of $15,000 on the proviso that the bankruptcy order was annulled was confirmed. In late June, the appellant received documents from URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 5 solicitors acting on behalf of the Animal Welfare League (said to be a proposed financier) including mortgage documents and requisitions on title. Those documents were returned to the Animal Welfare League's solicitors on 21 July 1994. On 22 July the appellant received a facsimile from those solicitors advising that it might not be possible to settle the matter as early as the following week. On 8 July 1994 the appellant wrote to the solicitors for the bank advising that his firm acted on behalf of Mr Howarth who would be making an offer on behalf of Ivymere to purchase Tarcutta House for the purchase price of $215,000. Mr Howarth appears to have been in a position to control the business and affairs of First State, Benoma and Ivymere. On 22 July 1994 the appellant received written instructions from First State to draw up a second mortgage over Tarcutta House in favour of Mr and Mrs McArthur. The instructions provided that the principal was to be the sum of $15,250 with interest at the rate of twelve per cent per annum. No term was specified for the mortgage. The Tribunal found that on 27 July 1994 Mr Howarth, on behalf of First State, travelled to Melbourne to negotiate an extension of time for refinancing the bank's mortgage over Tarcutta House. He was advised that the bank required settlement the following day, ie 28 July 1994. On 27 July 1994 Mrs McArthur received a mortgage document prepared by the appellant. The mortgagor shown on the mortgage was Mr Lindsay-Field. On 28 July 1994 the appellant, in response to a query raised by Mrs McArthur with First State about the mortgage document, telephoned Mrs McArthur at her home and subsequently at her place of employment. Mrs McArthur was concerned about the veracity of Mr Lindsay-Field's signature on the mortgage and also with the question whether his signature had been witnessed. The appellant asked Mrs McArthur to fax the relevant page of the mortgage document to him so that he could query the failure to have the document witnessed correctly and the veracity of Mr Lindsay-Field's signature. The appellant gave Mrs McArthur details of his bank and trust account number to enable her to pay the sum of $15,250 into that account. The Tribunal said that Mrs McArthur alleged that the appellant advised her that the sum of $15,250 was to be paid into his trust account as "cleared funds" by 4:00pm that afternoon. That statement was disputed by the appellant. Mrs McArthur deposited $15,250 into the appellant's trust account and the funds were noted in the trust account ledger as having been paid to the credit of the earlier mentioned account "Lindsay-Field T& M - refinance Tarcutta House, Tarcutta'. No consideration appears to have been given by the Tribunal to the question whether it was appropriate for the appellant to credit the amount to the Lindsay-Field account. In this respect, it may be observed that s61 of the Act proceeds upon the footing that it applies where a solicitor in the course of practising as a solicitor receives money on behalf of another person. The section does not apply only to cases where money is received on behalf of a client although that will no doubt usually be the case. On 28 July 1994 the bank indicated that it would proceed with its mortgagee sale the next day and on 29 July 1994 the appellant obtained instructions from Mr Lindsay-Field and Mr Howarth to commence proceedings for injunctive relief in the Supreme Court. In the course of those proceedings, the appellant swore an affidavit in which he deposed that proceedings were on foot to have the appellant's bankruptcy annulled. In fact no such proceedings had been formally commenced although there had been discussions and correspondence about them with ITSA. On 26 July 1994, ITSA wrote a letter to the ATO about it. This shows 6 UNREPORTED JUDGMENTS that the matter, although well under consideration, had not progressed far enough to enable there to be an annulment or a discharge before a date in August at the earliest. In any event, the matter was quite uncertain because of a change in the attitude of the bank, which had developed after knowledge of the bankruptcy, and the uncertainty that there must have been about the reaction of other creditors to an annulment application. The appellant became aware that the bankruptcy proceedings could be annulled administratively but this could not occur at the earliest before 9 August 1994 being the date specified for creditors to prove in the bankruptcy pursuant to an advertisement in that behalf placed in the Government Gazette. A consideration of the provisions of s153A of the Bankruptcy Act 1966 (C' wlth) leads me to wonder whether, in the circumstances of this case, an administrative solution was possible. The position may have been different, although perhaps more complicated, if a discharge were being sought. I have not examined this matter with any care but I refer generally to the provisions of Subdivision B of Division 3 of PtVII of that Act. The subdivision deals with applications for early discharges. In the result Mr Lindsay-Field's bankruptcy was not annulled and he did not obtain, at least so far as the evidence discloses, an early discharge. On 28 July 1994 the appellant received by facsimile a letter signed by Mr Lindsay-Field. It was dated 28 July 1994 and said, "I hereby authorise payment of $15,000 from your trust account to Benoma Pty Ltd on behalf of Ivymere Pty Ltd". It may be observed that the letter uses the word "authorise" not "direct" which is the word used in s61 of the Act. Nothing, however, turns on this. On 29 July 1994 the appellant drew a cheque from the funds deposited in his trust account in the name of Mr and Mrs Lindsay-Field in favour of the Office of State Revenue in the sum of $15,750. The sum of $750 was noted in the trust account ledger as received from a company, Northern Hardwood Sales, on 29 July 1994. How that statement reconciles with the earlier statement that Mr Howarth paid $500 into the account or with the fact that the amount paid by the McArthurs was $15,250, not $15,000, is not explained. Presumably there would have remained a balance of $750 in the account. The relevant part of the trust account ledger does not appear to be part of the record. The cheque for $15,750 was handed to Mr Howarth in order that he could discharge the debt that "one of his companies" had to the Office of State Revenue. The company was apparently Ivymere. The Tribunal found that that payment would in turn allow Mr Howarth to borrow sufficient funds to allow Mrs Lindsay-Field to complete the purchase of Tarcutta House if she were successful at the auction. Apparently the idea was that Mr Howarth would, after payment of the land tax, be able to put forward one of Ivymere's assets, or perhaps the whole of its undertaking, as security for the advance of the money required to enable the bid to be made. By then the proposal that the McArthurs' money be used to procure the annulment of the bankruptcy or a discharge of the bankruptcy seems to have been discarded or at least to have been very much in the background. A new plan was thus on foot. The purchaser of the property would be Mrs Lindsay-Field, not her husband who was bankrupt. The trouble is that the McArthurs were not told of this. They would have assumed that it was intended to proceed as they had been informed, namely by procuring the annulment of the bankruptcy thus making it possible for Mr Lindsay-Field to purchase the property. On 29 July 1994 Tarcutta House was sold at auction for a price of $251,000. Mrs Lindsay-Field was not the successful bidder. URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 7 The appellant in his statutory declaration filed in the proceedings before the Tribunal said that at the time he drew the cheque to the Office of State Revenue, Mr Howarth had given Mrs Lindsay-Field his cheque to purchase Tarcutta House at the auction. The appellant said that he was subsequently advised by Mrs Lindsay-Field and Mr Howarth that Mrs Lindsay-Field did not attend the auction. Instead, a friend of hers bid on her behalf. She had authority to purchase Tarcutta House at a price of up to $250,000. The bidding passed that figure and the property was sold to another purchaser. Mr and Mrs McArthur were not repaid the sum of $15,250 although Mr Howarth acknowledged a debt to them for that amount. Subsequently Mr Howarth himself became bankrupt. So their money would appear to have been lost. Moreover, Mr Lindsay-Field remained an undischarged bankrupt and the property passed into other hands. From the McArthurs' point of view the purpose of the advance by them of $15,250 had wholly failed. The money which they had advanced was paid for an entirely different purpose, namely to discharge an indebtedness of one of Mr Howarth's companies, something which, as the events which happened reveal, proved to be of no benefit whatsoever to the McArthurs or, for that matter, to Mr Lindsay-Field. The Tribunal referred to two statutory declarations sworn by Mrs McArthur and to a statement made by her. In her statutory declaration made on 7 November 1996, Mrs McArthur said that at all relevant times, "I understood that the $15,250 was to be paid to my brother's trustee in bankruptcy for the purpose of bringing about his discharge from bankruptcy. I did not ever authorise Mr Licardy to use the funds for any other purpose". In his statutory declaration, the appellant said that Mrs McArthur did not tell him the purpose of the loan moneys and did not say that the loan moneys could be used only for one purpose and no other. He said that nothing had been said about conditions. The appellant relied on the report of a Mr Napper of the Law Society. The report was annexed to his affidavit. Mr Napper had said that he asked the appellant whether he had any discussions with the McArthurs. The appellant advised that there may have been one instance where the McArthurs rang up. On that occasion they spoke with his secretary and requested details of his trust account in order to remit the sum of $15,250. He asserted that he had never been advised by the McArthurs as to what the moneys could and could not be used for. The Tribunal referred to the appellant's oral evidence in which he deposed to a telephone conversation with Mrs McArthur on 28 July 1994. He said that to the best of his recollection he remembered her saying words to the effect, "I am endeavouring to help Tim in whatever way I can. I know he's in financial difficulties and I don't wish to hold anything up because of the signature". That was no doubt a reference to the earlier mentioned query that she had about the genuineness of the signature which appeared on the mortgage document sent up to her in Brisbane. The Tribunal said that it would appear that neither Mrs McArthur nor the appellant had a precise recollection or record of the words spoken, but the appellant did indicate in his evidence that there was a discussion of Mr Lindsay-Field's financial difficulties. The Tribunal referred to a dispute in the evidence of Mrs McArthur and the appellant concerning Mrs McArthur's statement that the appellant advised her that funds had to be in his trust account by 4:00pm on 28 July 1994. The Tribunal accepted Mrs McArthur's evidence in that regard. 8 UNREPORTED JUDGMENTS The Tribunal then referred to what the appellant had said in his statutory declaration concerning a conversation with Mr Howarth. He said that Mr Howarth had told him that the loan moneys were to be applied to the refinancing of Tarcutta House and to the annulment of Mr Lindsay-Field's bankruptcy. In para56 of his declaration, the appellant said that, when he made the payment on behalf of Mr Lindsay-Field, "I was not aware that there were any strings or conditions attached to Mrs McArthur's loan". He also said that neither Mr Lindsay-Field nor Mr Howarth informed him that there were any conditions "on the loan". The Tribunal referred to the appellant's cross-examination in which, so it said, he conceded that the loan was advanced for two purposes, namely the discharge of the bankruptcy and to save Tarcutta House. The Tribunal said that the appellant accepted that there were conditions to the agreement. This was in contrast to the statement made in his statutory declaration to the effect that, when he made the payment on behalf of Mr Lindsay-Field (ie of the moneys to the Office of State Revenue) he was not aware that there were strings or conditions attached to Mrs McArthur's loan. He said, "I believed I was entitled, if not obliged, to draw the cheque on my client's instructions". He added that at no time did Mrs McArthur inform him that the loan was to be applied to discharge the bankruptcy or was only to be applied for that purpose. Neither Mr Lindsay-Field nor Mr Howarth informed him that these were conditions of the loan. Later he said that, at all times, in respect of the moneys received into his trust account from Mr and Mrs McArthur he believed that he held such moneys in trust for his client Mr Lindsay-Field. He disbursed them upon Mr Lindsay-Field's instructions confirmed to him in writing by him. The cross-examination to which reference was made by the Tribunal was as follows: "Q: Is this as you understood [the position], that there would be a second mortgage given to the McArthurs to secure the loan? A: Yes. Q: That the loan was being advanced for two purposes? A: Yes. Q: Those purposes were (1) to procure the discharge of Mr Lindsay-Field from bankruptcy? A: Yes Q: And the other was to save Tarcutta House? A: Yes. Q: So it would be quite untrue to say that there were no strings attached to the advance, wouldn't it? A: Other than those you have mentioned, there were no other conditions. Q: I put to you what I suggest were the conditions of the agreement. Do you accept that that is what you understood them to be? A: Yes. Q: Then I repeat it would be quite untrue to say, would it not, there were no strings attached to the advance? A: Well, none other than what I understood to be my instructions, no. Q: Mr Licardy, with respect, I will put it to you again. There were conditions on the advance, weren't there? A: Well, not as I was instructed." Further questions and answers were: URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 9 Q: You understood that the McArthurs were advancing the moneys to Mr Lindsay-Field on the basis that it would procure his discharge from bankruptcy? A: Yes. Q: That was a condition? 5 A: Yes. Q: And you understood that the McArthurs were advancing the money in order to preserve Tarcutta. A: Yes. Q: That was a condition? 10 A: Yes. Q: So there were at least three conditions you understood? A: Yes. Q: As at July 22? A: Yes. 15 Q: Now between July 22 and July 29, no-one said to you, "Those conditions have been waived by the McArthurs", did they? A: No. Q: Would you please go to p9 of your declaration, para56. Do you see in 20 para56 what you have said is, "When I made the payment on behalf of Mr Lindsay-Field I was not aware that there were strings or conditions attached to Mrs McArthur's loan"? A: Yes. Q: Is that statement true or false? 25 A: It is true. Q: Well, is the evidence you have just given the Tribunal about your knowledge of the three conditions attached to the loan true or false? A: It is true. Q: They are both true, are they? 30 A: Yes. Q: So that you invite the Tribunal to believe that as you understood it the loan had three conditions at least? Yes. But there were no conditions? Well, I don't read it that way. 'You don't read what - I don't read 56 that way. How do you read 56? In Mrs McArthur's declaration - I didn't ask you that. How do you read 56? : Well, I suppose I was not aware there were strings or conditions other than the three you have mentioned attached to the loan. Q: So you invite the Tribunal to read it as if the words "other than the three 45 crucial conditions" were read into the sentence? A: Yes. Q: So that, in any event, you don't adhere to what you say literally in the first sentence of para56? A: No. 50 —Q: That is wrong as it stands? A: Yes." FOPOPOPOE 10 UNREPORTED JUDGMENTS The third condition mentioned in the cross-examination was the giving of the mortgage by Mr Lindsay-Field to the McArthurs to secure the repayment of their advance. The Tribunal next referred to letters written by the appellant to the solicitors for the bank on 16 May 1994 and to ITSA on 29 June 1994 and also to correspondence from First State. The Tribunal said that these corroborated the appellant's concessions in cross-examination that he was aware that the advance was subject to conditions and that para56 of his affidavit [sic] should be amended to read "other than the three crucial conditions". The Tribunal said, "The Tribunal finds that the Solicitor was aware that the loan was subject to the three conditions alleged by the Society at the time he made the payment from his trust account". The loan referred to is the loan to Mr Lindsay-Field by the McArthurs. The appellant's letter to the solicitors for the National Bank dated 16 May 1994 refers, inter alia, to the sequestration of Mr Lindsay-Field's estate. He said that his advice that a relative had indicated that he was prepared to make a sum available in order to discharge the debt to the ATO which was the petitioning creditor and thereafter have the bankruptcy annulled was confirmed. Reference was also made to the bank's solicitors' advice that the bank intended to lodge a proof of debt as an unsecured creditor in Mr Lindsay-Field's estate. The appellant said that, in the event of that occurring, such action would prevent an early discharge of his bankruptcy. This in turn would prevent Mr Lindsay-Field from continuing litigation in Los Angeles which would in turn preclude the bank from receiving any moneys from that action. The bank's co-operation was asked with a view to resolving the matter "immediately". The letter from the appellant to ITSA dated 29 June 1994 said that previous advice that relatives had indicated that they would be prepared to pay the sum of $15,000 on the proviso that the bankruptcy order was annulled was confirmed. In the course of his submissions, senior counsel for the appellant, Mr Porter QC relied, however, on the terms of the statutory declarations made by Mr and Mrs McArthur, the statement made by Mrs McArthur and Mrs McArthur's oral evidence. Mr McArthur was not called to give oral evidence. In counsel's submission there was no reference in the evidence of either Mr or Mrs McArthur to the effect that it had been made clear to the appellant that the money was being paid on condition that it be applied in order to obtain the annulment of Mr Lindsay-Field's bankruptcy. There is no statement in the Tribunal's decision which suggests that either of the McArthurs had any conversation about this matter with the appellant. There is, however, evidence of conversations Mr McArthur had with Mr Howarth. Mr McArthur said in his statutory declaration: "9 During the many telephone conversations I had with Howarth during May and June 1994 I explained to Howarth my concerns that:- (a) my wife and I did not have $15,000 spare to assist Tim, we would have to borrow from our bank and our financial situation meant that we would have to receive the money back by the end of August 1994 to repay it to our bank; (b) we were not prepared to borrow the money unless we were quite sure both that it would be used for the sole purpose of obtaining for Tim a release from his bankruptcy and that $15,000.00 would be a sufficient sum to achieve that purpose; URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 11 (c) we were not prepared to borrow the money unless we were quite sure that doing so would achieve not only a release of Tim's bankruptcy but also his ability to refinance the Tarcutta property and sell it himself instead of the mortgagee selling it, and (d) if we were satisfied as to the conditions listed above, we would only be prepared to advance the $15,000 if its repayment to us was secured by a registered mortgage over the Tarcutta property." Mr McArthur was not called to give oral evidence. He was not cross-examined. In the light of these conversations Mr Howarth, who did not give evidence, seems to have been a likely source of the appellant's knowledge which enabled him to give the evidence he did about the conditions which applied in relation to the money and accounts also for the statements he made in the two letters above referred to. Another source was no doubt the Lindsay-Fields themselves, but whether they descended into the detail which appears in Mr McArthur's declaration is not a matter which appears to have been addressed. Mr McArthur also said that he had believed that Mr Howarth was a wealthy financier. In September 1994 he discovered that a judgment had been recovered against him in the Federal Court of Australia in the sum of $750,000. He also learnt that a bankruptcy notice had been issued against him on 22 December 1993 and that he was declared bankrupt on 23 September 1994, that is approximately two months after the McArthurs' money was paid to discharge the land tax indebtedness of one of Mr Howarth's companies. In the first of her statutory declarations, Mrs McArthur said that, during a telephone conversation with her on 28 July 1994, the appellant told her that the sum of $15,250 had to be in his trust account as cleared funds by 4:00pm that afternoon. By that time the appellant was aware of the conditions upon which the money was being lent although not as the consequence of any direct instructions given to him by the McArthurs. Upon the basis of what emerged from his cross-examination, he knew that they believed that it was to be paid in order to procure the discharge of Mr Lindsay-Field from bankruptcy or the annulment of the sequestration order made against him. The clear impression that he gave to Mrs McArthur was that the funds were needed urgently in order to enable the application for annulment to proceed. The McArthurs were given no inkling that the moneys were to be used for an entirely different purpose albeit that in an indirect way that purpose would, if fulfilled, enable Mrs Lindsay-Field to make a limited bid at the auction. If she had been successful, the property would have been acquired from the bank. Her husband would have remained an undischarged bankrupt but the property, although heavily mortgaged, would have been restored to the family. In the second of her statutory declarations Mrs McArthur said that Mr Howarth also rang her on 28 July 1994 and told her that it was vital that the $15,250 be deposited into the appellant's trust account before the bank closed that afternoon. She said that at all relevant times she understood that the money was to be paid to her brother's trustee in bankruptcy for the purpose of bringing about his discharge. She said that she did not authorise the appellant to use the funds for any other purpose. This matter is again referred to in her statement but I find it unnecessary to refer to the detail of it. Mrs McArthur was cross-examined. I do not refer to very much of the cross-examination. She did say, however, that the essence of the conversation which occurred on 28 July 1994 was that "I do get it in by the close 12 UNREPORTED JUDGMENTS of day to enable Tim to be released from bankruptcy and if I didn't it would be...". Mrs McArthur did not complete her answer. She also said that the appellant stressed that it was important that she get the money in "regardless" that day. Mrs McArthur was cross-examined about the fact that she had retained a solicitor, Mr Heatley who practises in Brisbane. She said that he was not happy "with the whole situation at all". She referred to a conversation in which he had said to her that she "did not have to do this if you do not want to". She said that he was not happy with the way the mortgage was "written up". He spoke of there being too many holes in it and Mrs McArthur said she replied, "I have to do this to help my brother". She added, "I was quite determined to do it". This case involves the question whether a solicitor was guilty of professional misconduct in relation to the management of his trust account. At the heart of it are therefore trust relationships. It is the appellant's case that at all material times the sum of $15,250 was held on trust, not for the McArthurs, but for Mr Lindsay-Field, or more accurately, Mr and Mrs Lindsay-Field, the account being in their joint names. It is the appellant's case that he was not entitled to observe any instruction or direction other than those given to him by Mr Lindsay-Field as the person on whose behalf the money was held; the law, including the provisions of s61(2) of the Act, obliged him to give effect to whatever directions were given to him by his client on whose behalf he held the money. There is a matter not arising out of the submissions of either party which needs to be mentioned. It was not the subject of any consideration before the Tribunal. It concerns the fact that, at the time the appellant received the moneys, Mr Lindsay-Field was an undischarged bankrupt. His case is that the moneys became Mr Lindsay-Field's property and that he was not concerned with any debtor/creditor relationship which there might be in relation to the money or with any contractual obligation on the part of Mr Lindsay-Field to use the money for a particular purpose. That was so notwithstanding his belief as revealed by his cross-examination that the purpose of the advance by the McArthurs was to enable Mr Lindsay-Field to be released from bankruptcy. If that be right, the beneficial interest in the sum of money vested, not in Mr Lindsay-Field, but in the Official Trustee in bankruptcy. The relevant provisions of the Bankruptcy Act are to be found in s58, s116 and s126. Para58(1)(b) of that Act provides that, subject to the Act, where a debtor becomes a bankrupt, after- acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee, or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee. S116 of the Bankruptcy Act deals with property divisible among creditors. Paral16(1)(a) provides that all property that belonged to or was vested in a bankrupt at the commencement of the bankruptcy or has been or is acquired by him or her or has devolved or devolves on him or her after the commencement of the bankruptcy and before his or her discharge is property divisible among the creditors of the bankrupt. $126 contains provisions in relation to dealings with an undischarged bankrupt in respect of after-acquired property. Subs126(1) provides that a transaction by a bankrupt with a person dealing with him or her in good faith and for valuable consideration in respect of property acquired by the bankrupt on or after the day on which he or she became a bankrupt is, if completed before any intervention by the trustee, valid against the trustee, and any estate or interest in that property which, by virtue of the Act is vested in the trustee shall determine and pass in such manner and to such extent as is necessary for giving effect to the transaction. URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 13 This matter was not the subject of argument or submission. The parties appeared to be content to leave the matter as one in which the principal issue was whether the moneys were held on trust for the McArthurs or Mr Lindsay-Field and, if the latter, whether that trust was subject to a condition or obligation that the moneys were not to be disbursed except for the purposes acknowledged by the appellant. That being the case, it is not appropriate to do more than notice the existence of a possible problem. Mr Porter relied on s126. But there is a question whether the payment made to the Office of State Revenue at the request of Mr Howarth, although with the authority of Mr Lindsay-Field, would be protected. There would be a question whether the appellant was acting in good faith; see the notes to s126 in McDonald Henry and Meek, Australian Bankruptcy Law & Practice, Sth ed, 1996, at 4714-5. Plainly the Office of State Revenue would have the benefit of the protection afforded by the section. Whether the appellant would be entitled to it is a question for another day in proceedings, if there be any, which would need to be instituted by the Official Trustee. The question whether there was a breach of s61 needs, therefore, to be determined upon the assumption that the appellant was, so far as the operation of the Bankruptcy Act is concerned, free to give effect to the direction given him by Mr Lindsay-Field to pay the money to the Office of State Revenue. In the light of what has happened here, I would, however, make this observation. There was no need for the McArthurs to put their money at risk. They could have retained control over it and yet expeditiously paid it out for the purpose for which it was intended if that is what they wished to do. It would not have been difficult to devise a procedure whereby this could have been done in such a way that there would have been no risk of it being said that an undischarged bankrupt had acquired some interest in the moneys. In due course the payment could have been made direct to the ATO or to ITSA or to another person or body if the McArthurs thought that the payment would achieve Mr Lindsay-Field's release from bankruptcy. Importantly, they need not have lost control of their money. Transactions of the kind which this case involves are not uncommon but problems such as exist here are rare. Whether, when Mrs McArthur was imposed upon on 28 July 1994 for immediate payment of the money, she sought advice from her solicitor in relation to that specific matter, does not appear. The matter is irrelevant for present purposes and I say no more about it. I turn then to the resolution of the issues which this case raises for determination. In summary, the submissions of counsel for the appellant are: (1) The case was one where: (a) the money had been borrowed by Mr Lindsay-Field who was the appellant's client; (b) it was secured by mortgage which contained no conditions as to the use of the money; (c) the lenders had their own independent solicitor; (d) the lenders did not make the appellant aware of any conditions that the loan was to be used for a particular purpose, that is they themselves had no conversation with him in which their purpose was made known; (e) Mrs McArthur said in cross-examination that the arrangements with First State were made by Mr McArthur who was not called to give evidence and had no communication with the appellant. 14 UNREPORTED JUDGMENTS 2 The normal rule applied, that is, money borrowed becomes an asset of the borrower and once it was paid into a solicitor's trust account, would be held on behalf of the borrower. 3 The mortgage had been signed prior to the transmitting of the money to the trust account. Accordingly, any prior oral terms between the parties merged in the written mortgage. 4 The authority pursuant to which the appellant acted was in effect a direction - I have indicated that I agree with this. 5 On its findings of fact and on the uncontested evidence, the Tribunal should have found that the solicitor was not in breach of s61 of the Act. In his submissions Mr Wales, of counsel for the Law Society, referred at length to the evidence to which reference has been made. He submitted that the Tribunal had found as a fact that the appellant gave no thought to his obligation to obtain instructions from the McArthurs nor any thought as to whether he was in breach of s61 of the Act. Counsel said that this finding could not be successfully challenged in the appeal. He contended that it amply justified the finding of the Tribunal that the appellant's failure to obtain instructions from the McArthurs was so recklessly careless as to constitute a breach of s61 of the Act so that he was guilty of professional misconduct. The essential submission made on behalf of the Law Society was that the finding of the Tribunal that the appellant gave no thought to his obligation to obtain instructions from the McArthurs nor any thought as to whether he was in breach of s61 of the Act being a factual finding was in some way determinative of the outcome. I do not accept this submission. The statement "gave no thought to his obligation to obtain instructions" from the McArthurs proceeds upon the assumption that there was such an obligation. That is the question which is essentially raised by the submissions made on behalf of the appellant. The evidence accepted by the Tribunal does not establish that there was any solicitor/client relationship between the appellant and the McArthurs. There is no evidence of any retainer. Nevertheless, there is running through their evidence, considered as a whole, an underlying assumption either that they retained an overriding control over the moneys or at least that the appellant was obliged not to disburse the moneys otherwise than in accordance with their understanding that the moneys were being advanced to enable the bankruptcy to be brought to an end and the property acquired at the auction. That is the purport of Mr McArthur's conversation with Mr Howarth. This emerges from a consideration of what Mr McArthur said in the earlier quoted subpara9(b) and subpara9(c) of his statutory declaration. Fundamentally, the cross-examination of the appellant establishes that this was the understanding he himself had of the conditions upon which the McArthurs had advanced the money. It is to be observed that Mr McArthur puts the two main objectives together, that is the conditions were termination of the bankruptcy and the acquisition of the property. The acquisition of the property appeared a distinct possibility at that stage because of the bank's willingness to accept $210,000 (or $215,000) in payment for it so long as it were entitled to a share in the proceeds of any moneys recovered as a consequence of the proceedings taken in the United States. An analysis of the appellant's cross-examination shows that his understanding was the same. In the way that the matter was thought about, the two may not have been achievable. It would have been possible for there to be a situation in which the bankruptcy was terminated, but the property was not acquired. The object of acquiring the property could not be pursued until the URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 15 termination of the bankruptcy but so long as the bank was willing to deal on the basis of a sale at $210,000 or $215,000 (a figure which appears in some of the evidence) and no auction there was reality in the proposal. It followed that the parties, if those had remained the facts, would have been justified in thinking that the termination of the bankruptcy would be likely to achieve the acquisition of the property. The trouble appears to have been that the National Bank and its advisers began to have second thoughts about the bank's original offer once the bankruptcy occurred. The offer to accept $215,000 and a share in the proceeds of the American litigation was withdrawn. The bank went ahead with a mortgagee's sale. At that stage, no application for an annulment or a discharge was on foot. But it must have been thought by Mr Lindsay-Field and Mr Howarth, and possibly also the appellant, that a realistic bid could still be made at the auction if Mr Howarth were able to raise the money to put Mrs Lindsay-Field in funds. The way to achieve this was, so far as one can judge from the evidence, the payment of Ivymere's land tax. So the McArthurs' advance was used for this purpose. But, on his own admissions, the appellant must have known that such an application of the money was not within the conditions upon which the McArthurs had agreed to lend it. That is probably why, in the only contact he had with them, that is the contact he had with Mrs McArthur on 28 July 1994, he neglected to tell her of the purpose for which the money was being applied. All he did in his conversations with Mrs McArthur on 28 July 1994 was to insist on immediate payment. He stressed the urgency of the matter. She would have not unnaturally thought that the termination of her brother's bankruptcy was imminent. In this way she and her husband were misled as much by the appellant's silence as by anything else. I say that not unmindful of the evidence given by the appellant that. when he made the payment to the Office of State Revenue "on behalf of Mr Lindsay-Field" he was not aware that there were "strings or conditions" attached to the McArthurs' loan. That statement, to use a neutral expression, was simply wrong as the cross-examination earlier referred to reveals. The appellant was well aware of "the strings and conditions". He said so. Although what I have said explains how matters turned out as they did, nothing I have said comes to grips with the strength of the submissions relied upon by counsel for the appellant. There could not be, and indeed there was not, any suggestion that the relationship of solicitor and client existed between the appellant and the McArthurs. Nevertheless, as earlier pointed out, s61 of the Act contemplates that money may be received by a solicitor on behalf of a person who is not a client. In the run of the oral submissions made by counsel for the Law Society, that possibility was raised. The difficulty I have with it is, however, that it is common ground that the moneys were advanced to Mr Lindsay-Field by way of loan. One of the McArthurs' conditions was that there be a mortgage securing the repayment of the moneys. The appellant knew that the mortgage had been given; Mrs McArthur's concern about her brother's signature on it is testimony to this. There being a loan, the appellant was justified in treating the moneys as he did. He placed them in his trust account to the credit of an account in the joint names of the Lindsay-Fields. Counsel for the appellant is, therefore, correct in submitting that the moneys were, subject to the conditions concerning termination of the bankruptcy and the acquisition of the property, his to dispose of in whatever way Mr Lindsay-Field thought appropriate. 16 UNREPORTED JUDGMENTS There is a question, however, whether the trust on which the appellant held the moneys for Mr Lindsay-Field was itself subject to the conditions in question. Is it correct to say that the two conditions were but terms of a contractual arrangement made by Mr Lindsay-Field and the McArthurs so that they were of no concern to the appellant? Or is the position one under which the appellant was bound by an equitable obligation binding him not to permit the moneys to be disposed of other than for the purpose of terminating the bankruptcy, this if it occurred, enabling the property to be acquired by Mr Lindsay-Field? In order that the answer to the second question might be in the affirmative, it would be necessary for it to be established that, although the moneys were held on trust for Mr Lindsay-Field, the trust upon which they were held was impressed with a condition, the beneficiaries of which were Mr Lindsay-Field himself and the McArthurs who had provided the money. The condition, of which the appellant was well aware, was that the moneys should be disbursed only to procure the termination of the bankruptcy and the acquisition of the property. Certainly that was the extent of the entitlement of Mr Lindsay-Field to deal with them, at least without the McArthurs' consent. In my opinion, there is much difficulty in answering the second of the questions I have posed otherwise than in the negative. But let it be assumed that it should receive an affirmative answer. Where would that lead in this case? The case is based on s61 of the Act. That section makes two essential provisions. The first is that if money is received by a solicitor on behalf of another, he must hold the money exclusively for that person in a general trust account. The second is that the moneys are not to be disbursed otherwise than as directed by the person on whose behalf they are held. For the reasons given, the moneys were received on behalf of the appellant's client, Mr Lindsay-Field. They were disbursed pursuant to his direction. The appellant made that disbursement well aware that, in doing so, Mr Lindsay-Field was acting contrary to the terms and conditions upon which the moneys had been advanced. But, assuming for the moment that the appellant's knowledge of the conditions upon which the moneys had been advanced in some way resulted in his being placed under an equitable obligation to the McArthurs not to disburse the moneys otherwise than for the purposes for which it was lent, I find it difficult to understand how it could be said that the appellant was in breach of s61. What he allowed to happen may have involved him in serious breaches of legal and equitable obligations he owed to the McArthurs. I express no opinion on these matters. In the view I take of the matter, it is not relevant to do so. That is because it is my opinion that, whatever breaches of obligation may have been committed by the appellant (and there may not have been any), the evidence does not establish that he was in breach of s61 of the Act. A positive answer to the question earlier posed would not affect that conclusion. That being my conclusion, the question of wilful contravention under s61(7) of the Act does not arise. In the result, I would allow the appeal and set aside the orders made by the Tribunal on 15 September 1997. In lieu thereof, I would order that the complaint made against the appellant be dismissed. The Law Society should pay the appellant's costs of the proceedings before the Tribunal and of the appeal. 1 The appeal be allowed. 2 The orders made by the Legal Services Tribunal on 15 September 1997 be set aside. URJ LICARDY v THE LAW SOCIETY OF NEW SOUTH WALES (Sheppard AJA) 17 3 In lieu thereof, it be ordered that the complaint made against the appellant be dismissed. 4 The Law Society of New South Wales pay to the appellant his costs of the proceedings before the Tribunal and of the appeal. Counsel for the appellant: C A Porter QC; JB Bishop Solicitor for the appellant: Douglas Knaggs Counsel for the respondent: I M Wales Solicitor for the respondent: Gary James Still