Reported Decision : 73 NSWLR 233 New South Wales Supreme Court CITATION : The Law Society of New South Wales v Berro [2008] NSWSC 1135 HEARING DATE(S) : 27 October 2008 JUDGMENT DATE : 29 October 2008 JUDGMENT OF : Harrison J DECISION : 1. Order that Bruce Gleeson the Official Liquidator of Millennium Investments Australia Pty Ltd forthwith pay to Jean Sayer pursuant to s 642 of the Legal Profession Act 2004 the sum of $126,763.99 and interest earned thereon since receipt of that sum on 29 January 2008. 2. I will hear the parties on the question of costs. CATCHWORDS : SOLICITORS – breach of trust by solicitor - appointment of a receiver of a law practice – claim by receiver for funds held by official liquidator of company in possession of regulated property - whether receiver required to prove as an unsecured creditor – receiver entitled to funds to exclusion of creditors of the company Corporations Act 2001 LEGISLATION CITED : Legal Profession Act 2004 Uniform Civil Procedure Rules 2005 CATEGORY : Principal judgment CASES CITED : Pearl Bay Corporation Pty Ltd v Lodur Pty Ltd [2000] WASC 315; (2001) ACLC 982 PARTIES : The Law Society of New South Wales (Plaintiff) Brian Ibrahim Berro (Defendant) FILE NUMBER(S) : SC 13338 of 2006 COUNSEL : R R Stitt QC (Plaintiff) A M Combe (Defendant) SOLICITORS : L W Pierotti (Plaintiff) Matthews Folbigg Pty Ltd (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION HARRISON J 29 October 2008 13338 of 2006 The Law Society of New South Wales v Brian Ibrahim Berro JUDGMENT 1 HIS HONOUR: By order of this Court on 12 July 2006 Jean Sayer was appointed as the receiver for the law practice known as Hayes Waterman Lawyers pursuant to the provisions of s 630(2) of the Legal Profession Act 2004 ("the Act"). Brian Ibrahim Berro ("the solicitor") was the principal of the law practice. He was a sole practitioner and did not employ any other solicitor. The solicitor was also the sole director and shareholder, and the secretary, of Millennium Investments Australia Pty Ltd ("the company"). By contract for sale of land dated 20 March 2006 the company, as trustee for the Millennium Trust, purchased a property at Breakfast Point ("the property") for the sum of $635,000. The company performed no role other than as trustee for the Millennium Trust and had no bank account and did not trade. The company was incorporated on 15 March 2006. Completion of the purchase occurred on 7 April 2006. 2 Between 24 February 2006 and 31 May 2006 the solicitor misappropriated sums totalling $364,531.20 from trust monies received and deposited to the trust account of the law practice kept with the National Australia Bank at Parramatta. Furthermore, the solicitor misappropriated from the trust account of the law practice sums totalling $224,894.18 in payment of the deposit and part of the balance of the purchase monies paid on settlement of the property. That amount formed part of the total deficiency in the trust account of the law practice of $364,531.20. 3 On 24 November 2006 this Court made orders and declarations in these proceedings as follows: "1. The amount of $224,894.18 is trust money misappropriated by Brian Ibrahim Berro. 2. The amount of $224,894.18 is recoverable by the Receiver from Millennium Investments Australia Pty Ltd pursuant to Section 642 of the Legal Profession Act, 2004. 3. The balance of the proceeds of sale of the property … Breakfast Point, after payment to the mortgagee, Perpetual Trustees Victoria Limited, of all monies due pursuant to Registered Mortgage No. … be paid to the Receiver pursuant to Section 642 of the Legal Profession Act , 2004. 4. The costs of this Order be costs in the receivership. 5. The service of the Notice of Motion, the affidavit and the order be dispensed with." 4 On 24 July 2007 the company was placed into liquidation on the petition of the Office of State Revenue. Bruce Gleeson was appointed as the liquidator of the company. The solicitor had fraudulently stamped the memorandum of transfer registered by the mortgagee and he failed to pay to the Office of State Revenue stamp duty of $24,069. That sum is the subject of the claim by the Office of State Revenue as the petitioning creditor. There are no other creditors of the company. 5 The plaintiff paid sums from the Solicitors' Fidelity Fund in satisfaction of claims made against the solicitor with respect to deficiencies in the trust account of the law practice. These payments included $137,691.50 that was paid to the Office of State Revenue for claims by clients of the law practice for the non-payment of stamp duty in respect of the false stamping of instruments. The sum claimed is separate from the $137,691.50, as that sum did not represent a valid claim against the Solicitors' Fidelity Fund. 6 Perpetual Trustees Victoria Limited sold the property pursuant to its power of sale. Mr Gleeson was paid $126,763.99 on or about 29 January 2008 in his capacity as liquidator of the company representing the balance of the proceeds of the sale of the property. 7 Ms Sayer, in her capacity as receiver of the law practice, has made a demand upon Mr Gleeson for the payment to her of the sum of $126,763.99 together with such interest as may have accrued on that sum. That demand was made in purported pursuance of the orders made by this Court on 24 November 2006 referred to earlier. Mr Gleeson has not complied with that demand. 8 By notice of motion filed in this Court on 17 October 2008 the plaintiff now seeks orders against Mr Gleeson in his capacity as liquidator of the company in the following terms: "1. An order that Bruce Gleeson the Official Liquidator of Millennium Investments Australia Pty Ltd pay forthwith to the Receiver pursuant to Section 642 of the Legal Profession Act, 2004 the sum of $126,763.99 and interest earned thereon since the receipt on 29 January 2008. 2. An Order that the costs of this Notice of Motion be paid personally by the Official Liquidator of Millennium Investments Australia Pty Ltd (in Liquidation) Bruce Gleeson. 3. Such further or other costs as this Honourable Court seems meet (sic)." 9 Mr Gleeson appears and opposes the making of those orders. He seeks an adjournment of the proceedings in anticipation that in the period between now and any adjourned date some resolution of the impasse that exists in relation to disposition of the funds held by him might be reached. That adjournment is opposed by the plaintiff upon the basis that nothing short of payment to Ms Sayer of the whole of the amount held by Mr Gleeson will be acceptable. 10 This matter came before me at 10.00am on Monday 27 October 2008 in the duty judge list. As the matters referred to already reveal, no particular urgency attaches to the plaintiff's claims for relief in the notice of motion. I reserved my decision on that day until today. Consideration 11 Mr Gleeson submits that the orders of which the plaintiff has the benefit place it in no stronger position than any ordinary unsecured creditor. He relies upon ss 553 to 555 of the Corporations Act 2001 which are in the following relevant terms: " 553. Debts or claims that are provable in winding up (1) Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company. (1A) Even though the circumstances giving rise to a debt payable by the company, or a claim against the company, occur on or after the relevant date, the debt or claim is admissible to proof against the company in the winding up if: (a) the circumstances occur at a time when the company is under a deed of company arrangement; and (b) the company is under the deed immediately before the resolution or court order that the company be wound up. This subsection has effect subject to the other sections in this Division. 554. General rule - compute amount as at relevant date (1) The amount of a debt or claim of a company (including a debt or claim that is for or includes interest) is to be computed for the purposes of the winding up as at the relevant date. (2) Subsection (1) does not apply to an amount admissible to proof under subsection 553(2). 555. Debts and claims proved to rank equally except as otherwise provided Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately." 12 Mr Gleeson contends that the plaintiff is not entitled to the specific sum referred to in the order made by this Court on 24 November 2006, but only to such sum as may become payable upon a distribution by the liquidator after his consideration and treatment of all creditors' claims, including his entitlement to professional costs in that capacity. He relies upon rule 36.11 of the Uniform Civil Procedure Rules 2005 and the principles discussed in Pearl Bay Corporation Pty Ltd v Lodur Pty Ltd [2000] WASC 315; (2001) ACLC 982. Mr Gleeson refers to and relies upon the fact that Ms Sayer lodged a proof of debt with him on 10 June 2008 and that such action bespeaks a recognition, if not an admission, by her that the only claim that she has to the monies held by him is as an unsecured creditor and not otherwise. 13 The plaintiff contends that by reason of a combination of provisions in the Legal Profession Act 2004 upon which it relies, Ms Sayer is not to be treated as a creditor at all. Those provisions are relevantly as follows: " 611. Definitions (1) In this Chapter: "regulated property", in relation to a law practice, means the following: (a) trust money or trust property received, receivable or held by the practice, (b) interest, dividends or other income or anything else derived from or acquired with money or property referred to in paragraph (a), (c) documents or records of any description relating to anything referred to in paragraph (a) or (b), (d) any computer hardware or software, or other device, in the custody or control of the practice or an associate of the practice by which any records referred to in paragraph (c) may be produced or reproduced in visible form. 635. Power of receiver to take possession of regulated property (1) A receiver for a law practice may take possession of regulated property of the practice. (2) A person in possession or having control of regulated property of the law practice must permit the receiver to take possession of the regulated property if required by the receiver to do so. (3) If a person contravenes subsection (2), the Supreme Court may, on application by the receiver, order the person to deliver the regulated property to the receiver. (4) . . . 642. Recovery of regulated property where there has been a breach of trust etc (1) This section applies if regulated property of or under the control of a law practice has, before or after the appointment of a receiver for the practice, been taken by, paid to, or transferred to, a person ("the transferee") in breach of trust, improperly or unlawfully and the transferee: (a) knew or believed at the time of the taking, payment or transfer that it was done in breach of trust, improperly or unlawfully, or (b) did not provide to the practice or any other person any or any adequate consideration for the taking, payment or transfer, or (c) because of the taking, payment or transfer, became indebted or otherwise liable to the practice or to a client of the practice in the amount of the payment or in another amount. (2) The receiver is entitled to recover from the transferee: (a) if subsection (1) (a) applies-the amount of the payment or the value of the regulated property taken or transferred, or (b) if subsection (1) (b) applies-the amount of the inadequacy of the consideration or, if there was no consideration, the amount of the payment or the value of the regulated property taken or transferred, or (c) if subsection (1) (c) applies-the amount of the debt or liability, and, on the recovery of that amount from the transferee, the transferee ceases to be liable for it to any other person. (3). . ." 14 The plaintiff's proposition is that an order for the recovery of regulated property, where there has been a breach of trust, does not create a "debt" in the company that is provable on a winding-up. This submission is no doubt made upon the basis that the proof of debt lodged by Ms Sayer was a mistake that is both irrelevant and casts no light on the proper characterisation of the claim that is made. The letter from Ms Sayer to Mr Gleeson, which is in evidence before me, and which enclosed the proof of debt to which it referred, does not indicate what the terms of the proof of debt were and the proof of debt is not itself in evidence. 15 The plaintiff's argument is in essence that the assets of the company of which Mr Gleeson became possessed in his capacity as official liquidator were impressed with a trust in favour of the former clients of the solicitor or the plaintiff subrogated to their rights following payment of claims by the Solicitors' Fidelity Fund. The plaintiff contends that the proceeds of sale that were paid to Mr Gleeson were never the assets of the company strictly so called with which he was entitled, and indeed obliged, to deal as its liquidator. It follows from this analysis that the claim of the Office of State Revenue as the petitioning (and only) creditor does not and cannot extend to the funds impressed with this trust because the company was never beneficially entitled to them. 16 This argument has a statutory foundation. The plaintiff contends that the money held by Mr Gleeson is regulated property as defined in s 611 of the Act because it is trust money or trust property that was received or is receivable or held by the practice of the solicitor. Ms Sayer is a receiver for the solicitor's law practice and may take possession of regulated property of the practice in accordance with s 635(1) of the Act. Mr Gleeson is a person in possession or having control of regulated property of the solicitor's law practice and must permit her to take possession of the regulated property if required by her to do so in accordance with s 635(2) of the Act. The demand that Ms Sayer has already made is to be treated as a requirement with which Mr Gleeson is obliged by the terms of s 635(2) of the Act to comply. The present proceedings are presumably commenced under s 635(3) of the Act. 17 Furthermore, the money is regulated property that was paid to the company in breach of trust, improperly or unlawfully when the company either knew or believed at the time of the taking, payment or transfer that it was done in breach of trust, improperly or unlawfully, or the company did not provide to the practice or any other person any or any adequate consideration for the taking, payment or transfer, or because of the taking, payment or transfer, the company became indebted or otherwise liable to the practice or to a client of the practice in the amount of the payment as provided in one or more of the paragraphs of s 642(1) of the Act. In those circumstances Ms Sayer is entitled to recover from the company as transferee, or Mr Gleeson in the events that have occurred, the amount of the payment or the value of the regulated property taken or transferred or, if there was no consideration, the amount of the payment or the value of the regulated property taken or transferred, or the amount of the debt or liability, in accordance with one or more of the paragraphs of s 642(2) of the Act. Conclusion 18 In my opinion there is no answer to the plaintiff's contentions. Mr Gleeson's rights to deal with the assets of the company are constrained by his relationship to those assets as properly understood. The proceeds in Mr Gleeson's hands are not now and never were the assets of the company. The statutory regime that is in place protects the wrongful disposal of the trust property of a solicitor's law practice in certain circumstances. The proceeds of the sale of the property in the hands of the company never became the property of the company and Mr Gleeson's appointment, as official liquidator of the company, did not empower him to deal with regulated property as if it were the company's property. The funds in question are in Mr Gleeson's hands as a matter of practical convenience only and that limited capacity in which he retains the funds is coextensive with his obligation to pay them to the plaintiff. 19 Mr Gleeson argued that there was an inconsistency between a law of the Commonwealth and a law of a state and that the law of the Commonwealth ought to prevail in the circumstances. There is no inconsistency and that argument requires no further consideration. Orders 20 The plaintiff is entitled to Order 1 in its notice of motion. Accordingly, I make the following order: 1. Order that Bruce Gleeson the Official Liquidator of Millennium Investments Australia Pty Ltd forthwith pay to Jean Sayer pursuant to Section 642 of the Legal Profession Act 2004 the sum of $126,763.99 and interest earned thereon since receipt of that sum on 29 January 2008. 21 I will hear the parties on the question of costs. ************* DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.