Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Council of the Law Society of NSW v McHugh [2014] NSWCATOD 37 Hearing dates: 19 March 2014 Decision date: 23 April 2014 Before: M Chesterman, Principal Member G Mullane, Senior Member J Butlin, General Member Decision: 1. The Respondent is guilty of professional misconduct. 2. The Respondent is reprimanded. 3. The Respondent is to pay a fine of $10,000. 4. The Respondent is to pay the Applicant's costs, as agreed or assessed. 5. The claim for compensation made by Bronwyn Horton against the Respondent is set down for directions at 10 a.m. on 7 May 2014. The Applicant is to notify Ms Horton of this directions hearing, but is not required to attend it. Catchwords: Solicitor - disciplinary application - instrument of consent - breaches of trust account requirements - failure to pay tax and superannuation contributions - penalty Legislation Cited: Administrative Decisions Tribunal Act 1997 Civil and Administrative Tribunal Act 2013 Legal Profession Act 2004 Legal Profession Regulation 2005 Cases Cited: Council of the Law Society of New South Wales v Adams [2011] NSWADT 177 Council of the Law Society of New South Wales v Kingston [2014] NSWCAT 20 Council of the Law Society of New South Wales v Vaughan [2011] NSWADT 118 Council of the Law Society of NSW v Simpson [2011] NSWADT 242 Re Mayes and the Legal Practitioners Act [1974] 1 NSWLR 20 New South Wales Bar Association v Murphy [2001] NSWCA 138; 55 NSWLR 23 Category: Principal judgment Parties: Council of the Law Society of New South Wales (Applicant) Michael Robert McHugh (Respondent) Legal Services Commissioner (Intervener) Representation: Counsel N Beaumont SC (Applicant) R Withana (Applicant) T Berberian (Respondent) A-M Foord (Applicant) Stacks Business (Respondent) L Muston (Intervener) File Number(s): 112037 reasons for decision 1On 23 December 2011, the Council of the Law Society ('the Law Society') filed an Application in the Legal Services Division of the Administrative Decisions Tribunal ('the ADT') alleging that the Respondent, Michael Robert McHugh ('the Solicitor' or 'the Legal Practitioner'), had been guilty of professional misconduct on nine grounds. It sought orders that his name be removed from the Roll and that he pay the Law Society's costs. It also stated as follows: 'Compensation, the nature of which is to [be] advised, is claimed by Bronwyn Horton.' 2On the same day, the Law Society also filed a number of affidavits, including the standard affidavit sworn by its solicitor, Anne-Marie Foord. 3In a Reply filed on 25 March 2013 and an Amended Reply filed on 30 September 2013, the Solicitor admitted some of the matters alleged in the Application, but denied other matters. 4A hearing set down to commence on 8 October 2013 was adjourned to 19 March 2014 due to the Solicitor's being unfit to attend. 5On 1 January 2014, the ADT was abolished and its functions were taken over by the Civil and Administrative Tribunal of New South Wales ('NCAT'). The present proceedings became 'unheard proceedings' as defined in clause 6(1) of Schedule 1 of the Civil and Administrative Tribunal Act 2013. Clauses 7 and 13 of this Schedule stipulate that they should be heard in the Occupational Division of NCAT, but should be determined as if the Civil and Administrative Tribunal Act 2013 had not been enacted. 6By the time of the hearing on 19 March 2014, the Law Society had filed six affidavits and the Solicitor had filed 19 affidavits. A number of these affidavits were accompanied by exhibited material. The expected duration of the hearing was five days. 7On 18 March 2014, however, an Instrument of Consent, signed by each of the parties and by the Legal Services Commissioner, was filed. In accordance with section 564(5) of the Legal Profession Act 2004 (hereafter 'the Act'), it included an Agreed Statement of Facts. 8The orders sought in the Instrument of Consent were as follows:- (1)The Legal Practitioner is guilty of professional misconduct. (2)The Legal Practitioner is reprimanded. (3)The Legal Practitioner pay a fine of $10,000. (4)The Legal Practitioner pay the Applicant's costs. 9In addition, it was noted in the Instrument that the parties agreed that any consequent application for compensation by Bronwyn Horton would be dealt with separately by the Tribunal, without the participation of the Law Society. 10At the hearing before us on 19 March 2014, Mr N Beaumont SC and Ms Withana of counsel appeared on behalf of the Law Society and Ms T Berberian of counsel on behalf of the Solicitor. Ms L Muston appeared on behalf of the Legal Services Commissioner, who was an Intervener in the proceedings pursuant to section 559 of the Act. 11The Law Society tendered three documents: (a) the Instrument of Consent, in a form incorporating a few minor amendments to the filed version; (b) a report dated 17 November 2009 by John Mitchell, who had been appointed by the Law Society as Supervisor of the trust money of an incorporated legal practice of which the Solicitor had been the sole solicitor-director; and (c) a copy of email correspondence during February 2009 between Mr Mitchell and an investigator (Mr Tony Fairbairn) in the employ of the Law Society. These documents were admitted with no opposition. The Solicitor did not tender any evidence. 12Mr Beaumont then requested, with support from Ms Berberian and Ms Muston, that we make the orders sought in the Instrument of Consent. 13After hearing submissions from these three legal representatives, we stated that we would not proceed to conduct a hearing into the matters alleged against the Solicitor (this being a course of action authorised by subsection (10) of section 564), but that we would reserve our decision as to the order(s) that we should make by way of penalty under section 562. The Grounds stated in the Application and in the Instrument of Consent 14In the Application, the nine Grounds on which the Law Society alleged professional misconduct on the part of the Solicitor were (in short form): misappropriation of trust monies; breaches of sections 255, 260, 261, 262 and 264 of the Act; delay in paying counsel's fees; failure to remit instalments of goods and services tax and Pay As You Go tax to the Australian Taxation Office; and failure to make compulsory superannuation payments in respect of employees of his incorporated legal practice. 15In the Agreed Statement of Facts forming part of the Instrument of Consent, the claim of professional misconduct was retained but the number of Grounds was reduced to six. Significantly, one of the Grounds no longer alleged was the misappropriation of trust moneys. 16In this Agreed Statement, these six Grounds, together with the sections of accompanying Particulars to which each of them referred, were set out as follows:- (1)The Solicitor breached s.255 of the Legal Profession Act, 2004 ["the Act"] [Particulars A-L inclusive]. (2)The Solicitor breached s.260 of the Act [Particulars A - L inclusive]. (3)The Solicitor breached s.262 of the Act [Particulars C, E, F, H, J, K & L]. (4)The Solicitor breached s.264 of the Act [Particulars B, C, D, E, F, H, I, J, K & L]. (5)The Solicitor failed to remit to the Australian Taxation Office instalments of Goods and Services Tax [ "GST" ] and Pay As You Go Taxation [ "PAYG" ] [Particular M]. (6)The Solicitor failed to make Compulsory Superannuation payments in respect of employees of his Incorporated Legal Practice [Particular N]. The agreed Particulars 17The Particulars to these six Grounds were set out in the Agreed Statement of Facts as follows:- In these Particulars: 'the Solicitor' means MICHAEL ROBERT McHUGH 'the Society' means The Law Society of New South Wales (1)The Solicitor was admitted to practice on 3 July 1987. (2)On 1 July 1989 the Solicitor became a principal in a firm known as 'Locke O'Reilly McHugh'. (3)Since 1995, the Solicitor has been an Accredited Specialist in Property Law. (4)On 1 April 2003 the Solicitor commenced practice on his own account under the firm name 'Michael McHugh Lawyers' ["the Practice"]. (5)On 1 July 2004 the Practice became an Incorporated Legal Practice named The Law Company Pty Limited ["the Company"]. The Solicitor was the sole director except for the period from 10/09/2007 until 07/03/2008 when Simon Crowther was also a director. At all material times the Solicitor was the sole solicitor-director of the Company having an unrestricted practising certificate, and the legal practitioner director for the purposes of ss 140 and 141 of the Act and the principal of the Company for the purposes of s 250 of the Act. (6)On 21 July 2004 the Practice opened both a Trust and Office Account with the National Australia Bank at Tamworth. (7)On 24 April 2008 the Practice opened another Office Account with Suncorp Metway. A. CLIENT:BASHAM - FILE NO 60200 (8)This matter was handled at the North Sydney office of The Law Company by a senior solicitor Simon Crowther who became a director in September of that year. (9)On 24 May 2007 funds totalling $70,000.00 were received from the client and deposited into the Trust Account. (10)On 27 June 2007 Tax Invoice number 3313 was issued to the client in a total sum of $91,859.51 constituted as follows: (a)Costs: $11,100.00 (b)Disbursements: 72,408.64 (c)GST: 8,350.87 (11)On 27 June 2007 $12,210.00 was transferred from the Trust Account to the Office Account for payment of costs and GST thereon. (12)On 16 July 2007, the client sent an email to Simon Crowther in which he stated "please have your accounts departments deduct Invoice 3313 from the monies held in trust. Please have them also advise me of the balance still remaining, so I can zero the account." (13)On 17 July 2007 the balance of the Trust ledger in the sum of $52,509.60 was transferred to the Office Account, at which time the Office Account had a debit balance of $54,738.71. (14)On 26 July 2007 2 Office Account cheques were drawn payable to Mr Washington in a total amount of $27,362.50. (15)On 30 July 2007 $27,139.91 was received from the client and deposited into the Trust Account, at which time the Office Account was $133,744.60 into debit. (16)On 10 August 2007 an Office Account cheque was drawn payable to Mr Steirn SC in the sum of $25,000. (17)On 28 August 2007 an Office Account cheque was drawn payable to Mr Steirn SC for the balance of his fees in the sum of $25,480. (18)Neither counsel complained about the delay in payment of fees and the delay charge is not pressed. B. CLIENT: MAUGHAN FILE NO 71440 (19)This matter involved the purchase of a property where the Company acted for one of two purchasers. (20)A letter dated 16 January 2008 was sent from the Company to Borthwick and Butler solicitors who acted for the second purchaser requesting payment of stamp duty. The letter directed payment of the stamp duty in the sum of $46,655.00 by direct deposit as cleared funds by 18 January 2008 to the Trust Account, National Australia Bank, BSB 082 842, Account no. 57133 2121. (21)Account no. 57133 2121 was in fact the general account and not the Trust account of the Company. (22)That letter was signed by Carol Purdey, one of the Company's conveyancers who had commenced working at the Company as a conveyancer in July 2007. (23)On 17 January 2008 $46,655.00 was received on account of Stamp Duty. In accordance with the direction in the letter referred to above, that sum was deposited to the Office Account. (24)On 29 January 2008 cheque number 2899 was drawn on the Office Account payable to the Office of State Revenue in the sum of $46,655.00. That cheque was dishonoured upon presentation on 30 January 2008. (25)The Combined Ledger Card did not accurately record either the withdrawal from the office account on 29 January 2008 or the reversal of the amount on 30 January 2008. (26)Cheque number 2899 was signed by Bronwyn Horton, who had authority to sign cheques on the general account. (27)Following receipt of the notice of dishonour a replacement cheque number 2960, also signed by Bronwyn Horton, was drawn on the Office Account on 13 February 2008 payable to the Office of State Revenue in the sum of $46,655. C. CLIENT:DONG - FILE NO 60767 (28)On 26 June 2008 the sum of $4769.00 was received from the client in payment of tax invoice 5556 and deposited into the Office Account. (29)The Trust ledger was also wrongly credited in the same amount and the sum of $4769.00 was transferred to the Office Account thereby causing a deficiency in Trust monies to that extent. (30)Cheque Number 3791 in the sum of $4769 dated 26 June 2008 drawn on the Trust Account of the Company and paid into the Office Account was signed by Tony Young, an authorised signatory to the Trust Account. The Trust Requisition for this cheque was prepared by Bronwyn Horton and approved by Tony Young. (31)Tony Young was a senior solicitor in the employ of the Company having been admitted to practice in 1990 and having been a partner in law firms in Tamworth from 1994 until April 2007 when Egan Murphy (of which he was a partner) was taken over by the Company. D. CLIENT: SADEEK & ABDNOOR - FILE NO 71638 (32)On 2 July 2008 a tax invoice was issued by the Company to the client in the sum of $114,226.63. (33)No objection was received by the Company within 7 days of 2 July 2008 to the withdrawal of the amount referred to in that invoice from the Trust Account. (34)On 14 August 2008 the sum of $50,000.00 was transferred from the Trust Account to the Office Account by way of Trust Account cheque in payment of costs and disbursements. (35)The Trust ledger incorrectly describes the transaction as occurring on 20 August 2008 by which date the Practice had instructions to effect the transfer of funds. E. CLIENT: McHUGH - FILE NO 80062 (36)On 3 September 2008 the Office Account was $346,000.00 in debit. (37)On 3 September 2008 the Trust ledger was credited in the sum of $10,000.00 although no deposit was in fact made. (38)$10,000.00 was then transferred from the Trust Account to the Office Account thereby causing a deficiency in Trust monies to that extent. (39)Cheque Number 5297 in the sum of $10,000 dated 03 September 2008 drawn on the Trust Account of the Company and paid into the Office Account was signed by Tony Young, an authorised signatory to the Trust account. The Trust Requisition for this cheque was prepared by Amanda Brodbeck and approved by Tony Young. F. CLIENT: THE LAW COMPANY - FILE NO 1003 (40)At the close of business of 9 September 2008 the Office Account was $348,398.94 in debit. (41)On 10 September 2008 a deposit slip was stamped by the Suncorp Bank indicating that $15,000 had been paid into the Office Account from the Solicitors credit card. (42)No such payment was received into the Company's Office Account. (43)On 10 September 2008 a sum of $15,000.00 was receipted to the Trust Account and described as a loan from the Solicitor to the Practice. In fact no such funds were received. (44)On 10 September 2008 Trust cheque 53134 in the sum of $15,000.00 was drawn and deposited to the Office Account, thereby causing a deficiency in Trust monies to that extent. (45)On 11 September 2008 Office cheque 1330 dated 10 September 2008 in the sum of $15,000.00 was deposited to the Trust Account. (46)Cheque number 5313 in the sum of $15,000 dated 10 September 2008 drawn on the Trust Account of the Company and paid into the Office Account was signed by the Solicitor. The trust requisition for this cheque was requested by Bronwyn Horton and signed by the Solicitor. CLIENT:WALL - FILE NO 80725 (47)On 18 September 2008 the sum of $33,125.00 was deposited into the Trust Account for the purpose of being placed in a Controlled Money Account in the client's name. (48)On 18 September 2008 the sum of $33,125.00 was transferred without authority from the Trust Account to the Office Account. (49)Prior to the transfer the balance of the Office Account was $363,906.75 in debit. (50)On 23 September 2008 $33,125.00 was transferred from the Office Account to the client's Controlled Money Account. (51)Cheque Number 5342 in the sum of $33,125 dated 18 September 2008 drawn on the Trust Account and paid into the Office Account was signed by Tony Young, an authorised signatory to the Trust Account. The Trust Requisition for this cheque was prepared by Bronwyn Horton and approved by Tony Young. H. CLIENT:THE LAW COMPANY - FILE NO 1099 (52)At the close of business on 24 September 2008 the Office Account balance was $281,266.15 in debit. (53)On 25 September 2008 $6709.50 was receipted to the Trust Account and described on the receipt as 'Loan to company'. In fact, no such funds were received. (54)On 25 September 2008, a sum of $6709.50 was transferred from the Trust Account to the Office Account thereby causing a deficiency in Trust monies to that extent. (55)The Trust receipt number 4312CN in the sum of $6709.50 was completed by Bronwyn Horton. (56)Cheque Number 5367 in the sum of $6709.50 dated 25 September 2008 drawn on the Trust Account and paid into the Office Account was signed by Tony Young, an authorised signatory to the Trust account. The Trust Requisition for this cheque was prepared by Bronwyn Horton and approved by Tony Young. I. CLIENT:BEGG - FILE NO 70935 (57)On 25 September 2008 a sum of $20,839.90 was transferred from a Controlled Money Account in the client's name to the Trust Account. (58)On 25 September 2008 the trust ledger recorded a payment to the client in the sum of $10,690.65. (59)In fact that payment was not made to the client. Instead an amount of $10,690.65 was transferred without authority from the Trust Account to the Office Account thereby reducing the Office Account debit balance from $364,411.15 to $358,720.50. (60)On 20 April 2009 the sum of $7406.85 was credited to the trust ledger by way of debit from the Office Account. That sum was paid to the client on 22 April 2009. (61)Cheque Number 5371 in the sum of $10,690.65 dated 25 September 2008 drawn on the Trust Account in favour of the client was signed by the Solicitor. The trust cheque requisition for $10,690.65 was prepared by Bronwyn Horton and approved by the Solicitor. (62)The Solicitor signed the cheque and requisition, however, the Solicitor denies initialling the alteration on the cheque of the payee. (63)The payment to the client referred to in paragraph 46 followed an earlier payment to the client of $3,098.23 on 12 January 2009, following the original reconciliation of the Suncorp Trust account by Sue Leys, the book keeper who replaced Bronwyn Horton. J. CLIENT:FLEMMING - FILE NO 70532 (64)At close of business on 16 October 2008 the Office Account was $352,794.00 in debit. (65)File number 70532 was handled by Rod Stevenson an experienced solicitor at the Tamworth office of the Company. (66)On 17 October 2008 the sum of $25,000.00 was receipted to the Trust Account and described on the receipt as ' Payment of account'. In fact no such funds were received. (67)On 17 October 2008 $25,000.00 was transferred from the Trust Account to the Office Account, thereby causing a deficiency in trust monies to that extent. (68)Rod Stevenson did not request the transfer of $25,000 from Trust to general on account of costs or otherwise nor was he informed of any such transfer. (69)Bronwyn Horton issued receipt number 43708 dated 17 October 2008 on the Trust Account in the sum of $25,000. (70)Cheque Number 5450 in the sum of $25,000 dated 17 October 2008 drawn on the Trust Account and paid into the Office Account was signed by Tony Young, an authorised signatory to the Trust Account. The Trust Requisition for this cheque as "Monies t/f on account" was prepared by Bronwyn Horton and approved by Tony Young. K. CLIENT:ABERDEEN - FILE NO: 1025 (71)In October 2008, the Solicitor was requested by Mark Aberdeen, a solicitor in the employ of the Tweed Head office of the Company to assist him in payment of $3750.00 which Mr Aberdeen was required to pay following receipt of a letter of demand from an insurer as a result of an accident. (72)On 24 October 2008 a sum of $3750.00 was receipted to the Trust Account and described on the receipt as 'MEA MV expenses foregone to pay debt'. In fact no such funds were received. (73)On 24 October 2008 a Trust cheque in the sum of $3750.00 was drawn payable to 'RACQ Insurance Pty Ltd', thereby causing a deficiency in trust monies to that extent. (74)Bronwyn Horton issued receipt number 4384 dated 24 October 2008 on the Trust Account in the sum of $3750. (75)Cheque Number 5467 in the sum of $3750 dated 24 October 2008 drawn on the Trust Account and payable to RACQ Insurance Pty Ltd was signed by Tony Young, an authorised signatory to the Trust Account. The Trust Requisition for this cheque was prepared by Bronwyn Horton and approved by Tony Young. L. CLIENT:O'DELL, FILE NO: 70139 (76)On 2 December 2008 a sum of $200.00 was receipted to the Trust Account and described as 'Pay ace'. In fact no such funds were received. (77)On 2 December 2008 the sum of $200.00 was transferred from the Trust Account to the Office Account thereby causing a deficiency in trust monies to that extent. (78)The Solicitor has no recollection of the matter and is of the firm belief that if he did sign the trust account cheque it would have been because of an understanding that the funds were in trust and that there was an entitlement to transfer them. M. FAILURE TO PAY GST/PAYG (79)On 5 August 2010 Joint and Several Liquidators were appointed to the Company. (80)As at 31 August 2010 the Company owed the Australian Taxation Office a sum of $879,886.15 in respect of GST and PAYG instalments not remitted by the Company. (81)On 4 January 2011 the ATO wrote off $474,713.51 effective from 24 December 2010, leaving a net balance of $455,172.64 owing. (82)Tax and GST returns were lodged with the ATO each quarter until the Company ceased trading and all income tax returns were lodged for the Company except for the year ended 30 June 2009 which had not been finalised at the time the Company ceased trading and for the year ended 30 June 2010 which was the responsibility of the liquidator. (83)There was no loss of revenue to the ATO for the financial years ended 2009 and 2010 as the Company made a substantial loss. (84)During the relevant period, there was considerable communication between the Company (and its accountants) and the ATO; various arrangements were made from time to time for the payment of arrears by instalments. (85)During the period to 30 June 2009, lump sum payments to the ATO by the Company in reduction of indebtedness included payments of $20,000 on 7 March 2008, 14 March 2008 and 25 March 2008, payment of $10,000 on 28 March, payment of $10,000 on 11 April 2008, 18 April 2008, 28 April 2008, 2 May 2008 and 9 May 2008, $50,000 on 15 August 2008, $15,000 on 16 September 2008, $25,000 on 20 October 2008, $63,900 on 25 August 2008 and $5000 on 27 February 2009. (86)From 1 July 2009 lump-sum payments to the ATO by the Company in reduction of its indebtedness included payments of $2500 on 3 August 2009, $5000 on 4 August 2009, 4 August 2009, 5 August 2009 and 17 August 2009, payments of $2500 on 1 September 2009, 7 September 2009 11 September 2009 21 September 2009 and 18 November 2009, payments of $1500 on 23 November 2009 and 26 November 2009 payment of $1000 on to December 2009, payments of $2500 on 7 December 2009, 18 December 2009, 4 January 2010 and 18 January 2010. (87)The failure to pay income tax was the consequence of the financial inability of the Company to meet all its commitments. (88)In an attempt to assist the Company to meet its commitments, the Solicitor sold all of the realty owned by himself and his wife - effectively all of their assets -including their family home in Tamworth and five other investment properties. (89)During this period, the Solicitor's marriage also broke down resulting in the solicitor's wife moving to Brisbane to live in 2010 and the marriage was dissolved in November 2013. (90)The proceeds of sale of those six properties (between 9 June 2009 and 23 April 2010) were used entirely to pay off mortgages and debtors of the Company but the properties had to be sold during the economic downturn following the Global Financial Crisis and the net $1,509,000 recovered- after repayment of mortgages principally to the Suncorp Bank, the Company's banker - was insufficient to meet the debts of the Company. (91)In an attempt to address the financial problems of the Company, the Solicitor embarked on a large scale program to reduce expenses of the Company and during the year ended 30 June 2009 expenses were reduced by $1,356,884. (92)Debtors of the Company failed to meet their obligations and as at December 2009 debtors over 120 days were $723,000. (93)The Agreement for Sale of Debtors dated 1 July 2010 signed by the Solicitor on behalf of the Company provided for the immediate payment of holiday pay and long service leave entitlements of the current employees of the Company other than the Solicitor himself. N. FAILURE TO PAY COMPULSORY SUPERANNUATION (94)As at 31 August 2010 the Company owed the Australian Taxation Office a sum of up to $168,996.57 in respect of compulsory superannuation payments not made by the Company in respect of the Company's employees. (95)Superannuation was paid in full until December 2006 and from 1 July 2009 to 30 June 2010 when the Company ceased trading. (96)The failure to pay compulsory superannuation was the consequence of the financial inability of the Company to meet all of its commitments. (97)The substantial payments to the ATO referred to above up to 30 June 2009 impaired the ability of the Company to pay superannuation; the payment in full of superannuation from 1 July 2009 impaired the ability of the Company to continue to make large payments to the ATO after that time. (98)Employees of the Company were made aware of the fact that superannuation was not able to be paid by the Company. (99)The exact amount of the unpaid superannuation cannot now be quantified as a number of payments which were to be superannuation contributions were wrongly noted by the ATO as credits against the income tax liability of the Company. (100)The unpaid superannuation includes a substantial amount owing to the Solicitor personally. GENERALLY (101)In about 2006, the Company employed Bronwyn Horton at the Tamworth Office and in early 2007, she was appointed to the position of Practice Manager. Ms Horton had an Arts Degree with a major in accounting from Macquarie University and an Associate Diploma in accounting from TAFE but was not a certified practising accountant or chartered accountant. At the time of her employment with the Company as practice manager she was undertaking a Legal Practice Management degree course at the University of New England. In about late 2007, Ms Horton had completed the Law Society Trust accounting course and was a member of the Australian legal Practice Management Association. (102)Ms Horton, in her capacity as the practice manager, was the person responsible for the day to day accounting operations of the Company. (103)In about May 2008 the Company, at the cost of in excess of $200,000 upgraded its office and accounting software to the Locus affinity Software and throughout the balance of 2008 there were serious problems with implementation of the software upgrade. (104)The accounting software upgrade resulted in serious problems in the operation of both the General and Trust Accounts. (105)Throughout May to December 2008, "Preview Bank Reconciliation Reports" and "Trust Overdraw Reports" prepared through the Locus Affinity system showed the Trust account to be in balance. (106)The Solicitor had no personal knowledge of the deficiencies created in the Trust Account until the visit of the Law Society Trust Inspector in December 2008. (107)The Solicitor acknowledges that: (a)he was mistaken in: (i)relying too much on his staff without adequately recognising that in an incorporated legal practice ultimate responsibility for the accounts and ensuring that the Company could pay its bills stops with the legal practitioner director; (ii)allowing a situation to develop under which Bronwyn Horton, the practice manager, saw no other option than to deal with trust account money to remedy the cash flow problems of the Company; and (b)as the legal practitioner director of the Company at the relevant times is the person legally responsible for breaches of ss 255, 260, 262 and 264 of the Act. (108)The Trust cheques in each case were not signed by the Solicitor personally except in respect of: (a)particular F where the Solicitor understood that funds had been deposited from his credit card; (b)particular I where the payee on the cheque signed by the Solicitor was altered without his knowledge; and (c)particular L where the Solicitor has no recollection of the matter and is of the firm belief that if he did sign the trust account cheque it would have been because of an understanding that the funds were in trust and that there was an entitlement to transfer them. (109)In December 2008 following the inspection of trust account investigator Tony Fairbaim, the Solicitor arranged for a manual reconciliation of the Trust Account. (110)That reconciliation was completed in early February 2009 and revealed that the reports were in fact wrong and the Trust Account was not in balance. It revealed that the Trust Account was overdrawn by $46,678.50 in respect of matters dating back to 26 June 2008. (111)The Solicitor immediately arranged payment of $46,678.50 into the Trust Account and on 6 February 2009 and 25 February 2009 notified the Law Society of the results of the Trust Account reconciliation. (112)No clients suffered any ultimate loss as a result of the Trust Account not being in balance during May to December 2008. (113)In relation to the financial difficulties of the Company, the Company had sufficient WIP and debtors (ignoring provision for doubtful debts, which the Solicitor acknowledges was inadequate) to pay its tax and superannuation obligations, however, failure of payment of fees rendered created a cash flow problem with the Company resulting in its inability to pay its tax and the staff superannuation payments. (114)The Solicitor recognises: (a)that the problems with the cash flow were such that the Company should have ceased trading a long time before it did; (b)his failure to ensure that superannuation payments to staff were given priority before 1 July 2009; (c)he should have recognised a lot earlier that outstanding debts and WIP in satisfaction of the indebtedness to the ATO had become irrecoverable; (d)that he should not have treated superannuation as if it was just another debt of the firm and should have accorded priority to payment of superannuation; and (e)that his belief that the Company would trade out of its problems was misguided and unreasonable. (115)The Solicitor engaged a number of experts at considerable cost to avoid the placement of the Company into liquidation including (a)Harasty Consulting - business consultants; (b)Crossing Financial Services - chartered accountants; (c)Nicholls & Co - chartered accountant specialising in insolvency; (d)Tim Gillespie Business Solutions - insolvency expert; (e)Dwyer Heath - LawCover consultants. (116)Since July 2010, the Solicitor has been the sole solicitor director at TamLaw and has been operating trust and office accounts using Locus Affinity Practice Management software. All of the ordinary shares of Tamlaw are owned by Hocana Pty Ltd, which is a company under control of the Stack family. (117)TamLaw employs 10 staff including 5 solicitors with over 426 matters. (118)The GST and PAYG BAS returns for TamLaw have been in order since 2010 and all staff superannuation payments have been paid to date. Relevant provisions of the Act 18It is useful first to refer to some definitional provisions in the Act. Under section 4, the definition of a 'law practice' includes an incorporated legal practice. Under section 7(3)(c), the definition of a 'principal' of a law practice includes an Australian legal practitioner who is 'a legal practitioner director in the law practice (in the case of an incorporated legal practice)'. Under section 133, a 'legal practitioner director' means 'a director of an incorporated legal practice who is an Australian legal practitioner holding an unrestricted practising certificate'. 19The four sections of the Act that are mentioned in the first four of the agreed Grounds all relate to the management of trust accounts. Their content can be summarised as follows. 20Section 255 states that a law practice must 'hold trust money deposited in a general trust account of the practice exclusively for the person on whose behalf it is received' and must disburse it 'only in accordance with a direction' given by that person. 21Subject to an exception which is not relevant in these proceedings, section 260 prohibits law practices from mixing trust money with other money. 22Under section 262, it is an offence for an Australian legal practitioner, without reasonable excuse, to cause a deficiency in any trust account or trust ledger account, or a failure to pay or deliver any trust money. The term 'cause' is defined to include 'be responsible for' and the term 'deficiency' is defined to include 'the non-inclusion or exclusion of the whole or any part of an amount that is required to be included in the account'. 23Section 264, so far as relevant here, requires law practices to keep trust records in relation to trust money received by the practice 'in accordance with the regulations' and 'in a way that at all times discloses the true position in relation to' such money. The relevant regulations are clauses 60 - 74 of the Legal Profession Regulation 2005. 24Section 250, which appears within the same Part of the Act (Part 3.1) as these four sections, is in the following terms:- 250 Liability of principals of law practice (1)A provision of this Part or the regulations made for the purposes of this Part expressed as imposing an obligation on a law practice imposes the same obligation on the principals of the law practice jointly and severally, but discharge of the practice's obligation also discharges the corresponding obligation imposed on the principals. (2)References in this Part and the regulations made for the purposes of this Part to a law practice include references to the principals of the law practice. 25 Sections 140(1) - (5) and 141 of the Act should also be quoted:- 140 Incorporated legal practice must have legal practitioner director (1)An incorporated legal practice is required to have at least one legal practitioner director. (2)Each legal practitioner director of an incorporated legal practice is, for the purposes of this Act only, responsible for the management of the legal services provided in this jurisdiction by the incorporated legal practice. (3)Each legal practitioner director of an incorporated legal practice must ensure that appropriate management systems are implemented and maintained to enable the provision of legal services by the incorporated legal practice: (a)in accordance with the professional obligations of Australian legal practitioners and other obligations imposed by or under this Act, the regulations or the legal profession rules, and (b)so that those obligations of Australian legal practitioners who are officers or employees of the practice are not affected by other officers or employees of the practice. (4)If it ought reasonably to be apparent to a legal practitioner director of an incorporated legal practice that the provision of legal services by the practice will result in breaches of the professional obligations of Australian legal practitioners or other obligations imposed by or under this Act, the regulations or the legal profession rules, the director must take all reasonable action available to the director to ensure that: (a)the breaches do not occur, and (b)appropriate remedial action is taken in respect of breaches that do occur. (5)A contravention of subsection (3) or (4) or both by a legal practitioner director is capable of being professional misconduct. 141 Obligations of legal practitioner director relating to misconduct (1)Each of the following is capable of being unsatisfactory professional conduct or professional misconduct by a legal practitioner director: (a)unsatisfactory professional conduct or professional misconduct of an Australian legal practitioner employed by the incorporated legal practice, (b)conduct of any other director (not being an Australian legal practitioner) of the incorporated legal practice that adversely affects the provision of legal services by the practice, (c)the unsuitability of any other director (not being an Australian legal practitioner) of the incorporated legal practice to be a director of a corporation that provides legal services. (1A) A legal practitioner director is not guilty of unsatisfactory professional conduct or professional misconduct under subsection (1) if the director establishes that he or she took all reasonable steps to ensure that: (a)Australian legal practitioners employed by the incorporated legal practice did not engage in conduct or misconduct referred to in subsection (1) (a), or (b)directors (not being Australian legal practitioners) of the incorporated legal practice did not engage in conduct referred to in subsection (1) (b), or (c)unsuitable directors (not being Australian legal practitioners) of the incorporated legal practice were not appointed or holding office as referred to in subsection (1) (c), as the case requires. (2)A legal practitioner director of an incorporated legal practice must ensure that all reasonable action available to the legal practitioner director is taken to deal with any unsatisfactory professional conduct or professional misconduct of an Australian legal practitioner employed by the practice. 26Finally, we will reproduce relevant parts of sections 497 and 498 of the Act:- 497 Professional misconduct (1)For the purposes of this Act: professional misconduct includes: (a)unsatisfactory professional conduct of an Australian legal practitioner, where the conduct involves a substantial or consistent failure to reach or maintain a reasonable standard of competence and diligence, and (b)conduct of an Australian legal practitioner whether occurring in connection with the practice of law or occurring otherwise than in connection with the practice of law that would, if established, justify a finding that the practitioner is not a fit and proper person to engage in legal practice. 498 Conduct capable of being unsatisfactory professional conduct or professional misconduct (1)Without limiting section 496 or 497, the following conduct is capable of being unsatisfactory professional conduct or professional misconduct: (a)conduct consisting of a contravention of this Act, the regulations or the legal profession rules... Whether the Solicitor's conduct amounted to professional misconduct 27As Mr Beaumont pointed out in his submissions, the conduct of the Solicitor with which we are concerned fell into two broad categories. We will discuss these categories separately 28Breaches of trust account requirements. First, as a principal and solicitor-director (and for most of the relevant period the sole principal and solicitor-director) of an incorporated law firm ('the Law Company'), the Solicitor bore responsibility for a series of breaches by this firm of statutory provisions governing the management of trust accounts. These related to twelve transactions taking place between May 2007 and December 2008. They are summarised in sections A to L of the agreed Particulars. Although responsible for these breaches, the Solicitor was not personally implicated in them and was not aware of them at the time when they took place. 29Mr Beaumont explained that although at the time of filing the Application the Law Society believed on reasonable grounds that it could prove the Solicitor to have had personal knowledge of these breaches, it had subsequently ceased to hold this belief. It was for this reason that the Society no longer pressed the first and most serious Ground alleged in the Application: namely, misappropriation of trust monies. 30We agree with Mr Beaumont's submission, however, that the continuing failure by the Solicitor to supervise the management of the Law Company's trust account, thereby permitting the trust account breaches to take place over a period of about 18 months, amounted to professional misconduct. The Solicitor was particularly at fault in allowing a situation to develop in which this firm's practice manager, unsupervised, frequently withdrew funds from the trust account in order to pay wages and other outgoings of the firm. A Court of Appeal case that Mr Beaumont cited - Re Mayes and the Legal Practitioners Act [1974] 1 NSWLR 20 - amply illustrates this proposition. 31We consider that the scale and duration of the Solicitor's breaches of his professional responsibilities with regard to the Law Company's trust account were so substantial as to amount to professional misconduct at common law. The same conclusion with reference to admittedly more serious behaviour was reached by two out of the three judges of the Court of Appeal in Re Mayes: see the report at p 26. In addition, the Solicitor's conduct was statutory misconduct through the combined operation of the four sections of the Act cited in the Agreed Statement of Facts - sections 255, 260, 262 and 264 - and the other provisions (most of which relate to incorporated law practices) that we have reproduced above. 32Tax and superannuation obligations. Secondly, the Solicitor failed, in his role as principal and solicitor-director of the Law Company, to ensure that this firm discharged its obligations to pay GST and PAYG tax to the Australian Tax Office ('the ATO') and to pay superannuation contributions to its employees or to the ATO. These failures are outlined in sections M and N of the agreed Particulars. The consequence was that the Law Company, as at 31 August 2010, owed $879, 886.15 to the ATO on account of GST and PAYG tax and $168, 996.57 on account of the superannuation guarantee charge. 33It has been held more than once that when failures of his nature occur over a substantial period of time and involve substantial amounts of money, a finding of common law professional misconduct is warranted. In this context, Mr Beaumont cited the ADT's decision in Council of the Law Society of New South Wales v Adams [2011] NSWADT 177. A very recent decision of NCAT, Council of the Law Society of New South Wales v Kingston [2014] NSWCAT 20, is to similar effect: see the discussion at [25 - 37]. 34We accordingly find that the Solicitor's failures in this regard amounted to professional misconduct at common law. The parties' submissions as to penalty 35Mr Beaumont submitted that, in determining what order or orders we should make by way of penalty, we should adopt the approach described by the ADT in Council of the Law Society of New South Wales v Vaughan [2011] NSWADT 118 at [19 - 20]:- 19 The Tribunal's decision in Council of the New South Wales Bar Association v Butland [2009] NSWADT 177 (see [29 - 31], [33] and [35]) provides useful guidance as to the matters to be taken into account in deciding whether to make consent orders suggested in an instrument of consent filed under section 564. 20 An important principle stated in that case by the Tribunal (at [31]) is that where the parties have jointly proposed an order or orders by way of penalty, it will not be useful to investigate whether the Tribunal would have arrived at that precise outcome in the absence of agreement. The question is whether that outcome, in the Tribunal's opinion, is appropriate in the circumstances of the case. In answering this question, the Tribunal should not reject the agreed outcome simply because it would have been inclined to make some other order or orders. The outcome proposed will be appropriate if it is 'within the permissible range'. 36Mr Beaumont invited us to take particular account of the matters elaborated in paragraphs 101 to 108 of the agreed Particulars. The principal grounds on which he maintained, with support from Ms Muston and Ms Berberian, that despite the seriousness of the Solicitor's misconduct, there should be no striking-off order in this case were as follows. 37First, the Solicitor was neither aware of, nor personally implicated in, the trust account breaches. He had been guilty of a serious failure to take responsibility for the management of the funds that had been entrusted to the Law Company, but not of dishonesty. In a number of statements made by the Solicitor since he became aware of these breaches of statutory duty, he had displayed 'insight' into the nature and implications of such breaches. 38Secondly, a significant period of time - more than five years - had elapsed since the date of the last of the trust account breaches. This had occurred on 2 December 2008 (see paragraph 77 of the agreed Particulars). 39Thirdly, there were good reasons for believing that the Solicitor was both competent and diligent to a sufficient degree to manage, or supervise the management of, trust accounts. These included the following. The Supervisor of the trust money of the Law Company (Mr Mitchell) had stated (at paragraph 28 of his report to the Law Society dated 17 November 2009) that during the period of his supervision the accounting staff had 'maintained the trust records to a high level' and that the operation of the trust account could now be returned to the Solicitor as the firm's solicitor-director. Mr Mitchell had also recommended (at paragraph 30) that his own appointment as Supervisor should be terminated as at 30 November 2009. Since July 2010, the Solicitor, in the capacity of sole solicitor-director, had been operating trust and office accounts at a firm called Tamlaw, without giving rise to any complaints (see paragraph 116 of the agreed Particulars). 40Fourthly, the Solicitor's breaches of obligations imposed by tax and superannuation laws had not involved failure to file tax returns or any deliberate strategy for evading these obligations. He had instead been guilty of 'financial incompetence'. After realising the scale of the Law Company's deficit, he had decided unwisely and unreasonably that, instead of going into liquidation, it should attempt to trade its way out of its problems. The ATO had refrained from commencing proceedings against it, thereby permitting it to adopt this course of action. In order to reduce the Law Company's indebtedness, the Solicitor had reduced the scale of its operations and had sold six properties of his own. Since he became sole solicitor-director at Tamlaw during 2010, the GST and PAYG returns for this firm had been in order and all staff superannuation payments had been made. Finally, he had once more displayed 'insight' into the nature and implications of his breaches of revenue obligations. 41According to Mr Beaumont, the Solicitor's behaviour in this context did not compel the conclusion that he was permanently unfit to remain on the Roll. In support of this proposition, Mr Beaumont cited some observations about comparable conduct on a barrister's part contained in the judgment of Giles JA in New South Wales Bar Association v Murphy [2001] NSWCA 138; 55 NSWLR 23 at [160 - 173]. In this case, the Court of Appeal upheld a decision by McLellan J in the Supreme Court overturning the appellant's cancellation of the respondent's practising certificate. This cancellation occurred after the respondent had gone bankrupt, because he had failed to pay all the tax for which he was liable and the appellant, apparently believing that he had chosen to spend his money on other expenditure 'of a private nature', found that he was not a fit and proper person to hold a practising certificate. 42It is sufficient to quote the following extracts from the passage in Giles JA's judgment cited by Mr Beaumont:- 162. The respondent did not meet his taxation obligations. But it is necessary to ask why he did not meet them, and what was done and could have been done about addressing them. 163 The appellant's submissions came down to failure to address taxation obligations in three respects. First, the respondent had failed properly to manage his finances to provide for payment of tax, and provisional tax, ahead of the assessments in the early 1990's. Secondly, the respondent had failed to pay more after the assessments were made. Thirdly, and perhaps inconsistently, the respondent had failed to go bankrupt in 1993 when his position became hopeless. All this, in the appellant's submission, was while the respondent had paid other creditors and discharged other debts... 170. McLellan J's finding that there was no dishonesty does not of itself answer the statutory test, but it is relevant to the answer. The respondent was not indifferent to his taxation obligations. There was not the regard to compliance with the taxation laws which there should have been in 1990, but apart from that the respondent's failings were not in the probity required of a legal practitioner, but in the ability properly to order his affairs and cope with the taxation consequences of fluctuations in income. He could have been more questioning of his accountant's performance, and more resolute in attempting to come to an arrangement with the Australian Taxation Office rather than let the situation overwhelm him... 171. The determination is of fitness to hold a practising certificate at the time of the determination... McLellan J accepted as genuine the respondent's acknowledgment that he was wrong to delay lodgement of his taxation returns and that he should have addressed his problems at an earlier time. If the respondent were to be judged unfit to hold a practising certificate, it would be because his failings so reflected upon his ability to act in the affairs of his clients that protection of the public warranted cancellation of his practising certificate. 172. I do not think that they do. In my judgment the circumstances as found do not reveal such deficiency in character or competence as a legal practitioner that the respondent is not fit to practise as a barrister... 43With reference to the amount of the fine proposed in the Instrument of Consent ($10,000), Mr Beaumont indicated that the Solicitor at the present time had an income of about $80,000 and virtually no assets. For these reasons, he suggested that the amount of any fine should be lower than would otherwise be appropriate. 44Ms Muston and Ms Berberian advised us that their respective clients wished to adopt Mr Beaumont's submissions on penalty. 45Ms Berberian made the following additional submissions: (a) we should take account of the fact that the Solicitor's willingness to make numerous admissions, with the consequence that an Instrument of Consent could be prepared and signed, had dispensed with the necessity for a long hearing; (b) it was recognised (for example in Council of the Law Society of NSW v Simpson [2011] NSWADT 242 at [57]) that on the matter of penalty significant weight should be given to the opinion of the Law Society, in its role as a representative of the legal profession; (c) when determining the amount of any fine imposed, we should bear in mind that, as stated in the agreed Particulars at paragraph 109, the Solicitor had arranged, at significant cost, for manual reconciliation of the trust account records of the Law Company; and (d) we should bear in mind also that he faced a costs order in these proceedings. Our conclusions on penalty 46We have decided, after careful consideration, that the orders by way of penalty proposed in the Instrument of Consent are 'within the permissible range' and that we should make these orders under section 562 of the Act. 47The principal factors underpinning this conclusion are the following aspects of the facts summarised in the agreed Particulars: (a) the Solicitor did not participate in, or have direct knowledge of, the breaches of trust account requirements; (b) when he became aware of these, he took steps to rectify the trust account records and remedy the deficit in the trust account; (c) his decision that the Law Company should try to trade its way of its financial difficulties, while misguided, was not made with any view to evading its obligations with regard to tax or superannuation; (d) he sold a number of properties owned by him in an effort to assist the Law Company to meet these obligations; and (e) he has demonstrated that since 2010 he has been able to manage, or supervise the management of, the trust accounts of an incorporated legal practice (TamLaw) to an acceptable standard and has ensured that its tax and superannuation obligations have been discharged. 48In determining the question of penalty, we have considered a number of additional or other orders that are available to us under section 562. These include removal of the Solicitor's name from the Roll (as initially sought by the Law Society), an order requiring him to attend one or more courses of further education and the imposition of a condition on his practising certificate permitting him to practise only under supervision or as an employed solicitor. The criterion that we have applied is whether any of these orders are required in order to protect the public, protect the reputation of the profession and/or discourage other practitioners from misconduct such as the Solicitor committed. We are satisfied, however, that in light of the events occurring since this misconduct and in the context of the fine and the order for costs proposed, such orders are not justified. 49Towards the end of the hearing on 19 March 2014, we described a specific order under section 562 that we had under consideration. This was that within a specified period the Solicitor should attend and pass an appropriate course in the management of trust accounts. Counsel for the parties advised that they would not oppose such a course. 50On reconsideration, however, we have decided that this additional order was not warranted. Our specific reason is that the Solicitor has demonstrated that since 2010 he has been able to manage, or supervise the management of, the trust accounts of an incorporated legal practice to an acceptable standard. 51Under section 566(1) of the Act, a legal practitioner who has been found guilty of professional misconduct in proceedings such as these must pay the applicant's costs of those proceedings unless 'exceptional circumstances' exist. No such circumstances were demonstrated. We accordingly order that the Solicitor pay the Law Society's costs of these proceedings, as agreed or assessed. 52Finally, we direct that the claim for compensation made by Bronwyn Horton be listed for directions at 10 a.m. on 7 May 2014. In conformity with standard practice, we direct further that the Law Society is to notify Ms Horton of this directions hearing, but is not required to attend it. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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. Decision last updated: 23 April 2014