Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Council of the Law Society of NSW v Etherington [2016] NSWCATOD 31 Hearing dates: 2 May 2016 Date of orders: 30 May 2016 Decision date: 30 May 2016 Jurisdiction: Occupational Division Before: D Fairlie, Senior Member N Isenberg, Senior Member E Hayes, General Member Decision: (1) Paul Martin Etherington is reprimanded (2) Paul Martin Etherington is to pay the costs of the Council of the Law Society of NSW as agreed or assessed Catchwords: Solicitor – failure to pay superannuation contributions for employees – whether amounts to professional misconduct Legislation Cited: Civil and Administrative Tribunal Act 2013 Legal Profession Act 2004 Superannuation Guarantee (Administration) Act 1992 Superannuation Guarantee Charge Act 1992 Cases Cited: Allinson v General Council of Medical Education and Registration [1894] 1QB 750 De Pardo v Legal Practitioners Complaints Committee [2000] FCA 335 Council of the Law Society of NSW v Dalla [2011] NSW ADT 130 Council of the Law Society of NSW v Kingston [2014] NSWCATOD 21 Kennedy v Incorporated Law Institute of NSW (1939) 13 ALJ 563 Myers v Elman [1940] AC 282 Law Society of NSW v Bouzanis [2006] NSW ADT 55 Law Society of NSW v Delpopolo [2014] NSWCATOD 55 Law Society of NSW v Gillroy [2010] NSW ADT 232 Law Society of NSW v Koffel [2010] NSW ADT149 Law Society of NSW v Starky NSW CA (unreported) 13 August 1979 Re a Solicitor; Ex parte Law Society [1912]1 KB 30 Roy Morgan Research v Commissioner of Taxation [2011] HCA 35 Texts Cited: Edmonds - Misconduct of Australian Lawyers Monash University Law Review Vol 39 No 3 801 Category: Principal judgment Parties: Council of the Law Society of NSW (Applicant) Paul Martin Etherington (Respondent) Representation: Counsel: P Madigan (Applicant) N Beaumont SC and R Withana (Respondent) Solicitors: Council of the Law Society of NSW (Applicant in person) Eakin McCaffery Cox (Respondent) File Number(s): 1520155 REASONS FOR DECISION 1. This is an application by the Council of the Law Society of NSW ("the Law Society") seeking a finding that Paul Martin Etherington ("the Solicitor"), is guilty of professional misconduct and that he: (i) be fined: (ii) be reprimanded; (iii) pay the costs of and incidental to the proceedings; and (iv) undertake at his own expense, within 6 months, a course in legal ethics that is approved by the Manager of the Professional Standards Department of the Law Society and achieve a pass mark of not less than 50%. 1. The matter concerns the Solicitor's failure to pay the superannuation entitlements for eleven of his employees for various periods of time, the longest period being between June 2012 and February 2014 for two of those employees. The payments due in June 2012 related to the preceding 12 months. The Factual Background 1. There was no significant disagreement between the parties about the relevant facts. Just prior to the hearing an Agreed Statement of Facts was filed. Set out below are paragraphs from the Agreed Statement: 2. The Solicitor was aware in the period 2012 to 2013 that the Firm (that is the Solicitor's legal practice) was experiencing difficulties in cash flow. 3. As consequence of the Firm's cash flow problems, the Office Manager, with the agreement of the Solicitor, commenced a process of prioritising the use of available funds. 4. The Solicitor instructed the Office Manager to send the outstanding cheques as soon as the Firm had sufficient funds. 5. The following cheques were drawn payable to employee superannuation providers from the Firm's office account as set out in the table below (Superannuation Cheques): CHEQUE No PAYEE DATE DRAWN PERIOD COVERED AMOUNT 100430 Skandia 30 June 2012 1 July 2011-30 June 2012 $14,513 94 100826 First State 30 June 2013 1 July 2012-30 June 2013 $14,753.47 100827 Hesta 30 June 2013 1 July 2012-30 June 2013 $6,750.11 100835 Skandia 30 June 2013 1 July 2012-30 June 2013 $17,397.67 100836 Spectrum 30 June 2013 1 July 2012-30 June 2013 $21,184.98 100832 PSSAP 30 June 2013 1 July 2012-30 June 2013 $199.61 $74,799.78 1. A routine investigation of the Firm's accounts was conducted by Mr House (the Law Society's trust account inspector) on 14 January 2014 2. During the investigation, Mr House discovered that the office bank account reconciliation as at 31 December recorded 27 old unpresented cheques totalling $88,803.74. Six of the 27 unpresented cheques were the Superannuation Cheques (totalling $74,799.78). 3. The Agreed Statement also sets out the dates on which each of these cheques were then paid, or new cheques were drawn in favour of the relevant superannuation funds. A replacement cheque for cheque No 100826 in the amount of $10,841.43 (which was the correct amount payable in respect of this employee), was paid on 20 September 2013 - that is before Mr House's random inspection. The other outstanding contributions were all paid between 31 January 2014 and 20 February 2014. Interest on these amounts was the paid by the Solicitor in December 2014. We have not reproduced these paragraphs in full as they contain the names of the relevant employees. At the request of the parties we made an order under s64(1) of the Civil and Administrative Tribunal Act 2013, that their names not be disclosed. 4. A spreadsheet was also tendered on behalf of the Solicitor which set out the actual amounts payable to each employee. The Solicitor continued to pay the contributions for other of his employees. Professional Misconduct under the Common Law 1. The Law Society put its case on the basis that the failure to pay his employees' superannuation on time amounted to professional misconduct under the common law. It did not submit that the conduct came within the definition of professional misconduct in s497 of the Legal Profession Act 2004. Common law professional misconduct is said to be conduct which would be regarded as disgraceful and dishonourable by reputable members of the legal profession. 2. This form of words, commonly described as the Allinson test, was adapted from the decision of Lopes LJ in Allinson v General Council of Medical Education and Registration [1894] 1QB 750 (at 763). The formulation was first applied to professional misconduct on the part of a solicitor in Re a Solicitor; Ex parte Law Society [1912] 1KB 30, and restated more broadly in the decision of the House of Lords in Myers v Elman [1940] AC 282, where Viscount Brougham said: Apart from statutory grounds……a solicitor may be struck off the rolls or suspended on the grounds of professional misconduct, words which have been properly defined as conduct which would be regarded as disgraceful or dishonourable by solicitors of good repute and competency. 1. In Australia the principle was confirmed by the High Court in Kennedy v Council of the Incorporated Law Institute of New South Wales (1939)13 ALJ 563, where Dixon J said; fitness to continue on the roll must be judged by his conduct and his conduct must be judged by the rules and standards of his profession; his unfitness appeared when he did what solicitors of good repute and competency would consider disgraceful or dishonourable. 1. And in different language, but to the same effect by Rich J who said: A charge of misconduct as relating to a solicitor need not fall within any legal definition of wrong doing. It need not amount to an offence under the law. It was enough that it amounted to grave impropriety affecting the Practitioner's professional character and was indicative of a failure either to understand or to practise the precepts of honesty or fair dealing in relation to the courts, clients or the public. 1. The appropriateness of the Allinson test in relation to current professional standards for the legal profession has been questioned. First the rather formal Victorian language of "disgraceful or dishonourable" has been described as "a ritualistic formula" - Edmonds Misconduct of Australian Lawyers, Monash University Law Review (Vol 39, No3 801). Secondly when the test was propounded in 1894, and until the decisions in Kennedy and Myers v Elman, the legal profession was almost completely self- regulating, unlike the position today. 2. Nevertheless the Allison test continues to be used as the test for professional misconduct under the general law, and it has been applied in all of the recent cases before this Tribunal and its predecessor, to which we refer below, relating to the failure by practitioners to pay employee superannuation contributions. 3. The parties also agreed that this was an "all or nothing" case, in the sense that either there should be a finding of professional misconduct or the complaint should be dismissed. We were not invited to consider whether, in the alternative, a finding of unsatisfactory professional conduct under the general law, according to the formulation set out most recently in De Pardo v Legal Practitioners Complaints Committee [2000] FCA 335, might be appropriate. The Statutory Framework regarding Employer Superannuation Contributions 1. Employers' obligations to make employee superannuation contributions are contained in the Superannuation Guarantee (Administration) Act 1992 (the Administration Act") and the Superannuation Guarantee Charge Act 1992 ("the Charge Act"). In Council of the Law Society of NSW v Kingston [2014] NSW CATOD 21, the following statements from the judgment of Heydon J in Roy Morgan Research Pty Limited v Commissioner of Taxation [2011] HCA 35 about the operation of this legislation, are set out at paragraph 116: 53 There is no general duty on private employers to pay superannuation contributions to superannuation funds for the benefit of their employees. But particular obligations to pay superannuation contributions can arise in various ways. They may be created by an award or certified agreement. They may be created by contract. 54 Section 5 and 6 of the (Charge Act), impose a superannuation guarantee charge on all employers. It is calculated by reference to an employer's "superannuation guarantee shortfall" as defined in the Administration Act (s17). That shortfall is the difference between nine percent of a given employer's total salary or wages for a quarter and what the employer contributed to a retirement account or certain types of superannuation fund for the employee's benefit, plus a nominal interest component and an administration component. The function of the interest component is to compensate for fund earnings foregone by the failure to pay the nine percent. The function of the administration component is to recover expenses associated with administering the superannuation guarantee charge. The legislation creates an obligation on the employer to pay the charge to the Commissioner of Taxation which is enforceable as a debt due to the Commonwealth…. . 57 The superannuation guarantee charge provides an incentive to employers to make superannuation contributions at the rate of nine percent of employees' wages. It ensures that in relation to employees of employers who fail to do so there will be payments into approved superannuation funds equivalent to those which the employers did not make. There are significant factors influencing employers to make superannuation contributions directly to superannuation funds for their employees' benefit rather than paying the superannuation guarantee charge. Direct superannuation contributions are tax deductible; payments of the superannuation guarantee charge are not. Payments of direct superannuation contributions avoid the nominal interest and the administration component of the superannuation guarantee shortfall…. Earlier Decisions of this Tribunal and the ADT 1. The following decisions of this Tribunal and its predecessor were considered by us to be relevant to our determination: Law Society of New South Wales v Bouzanis [2006] NSW ADT 55, Law Society of NSW v Gillroy [2010] NSW ADT 232, Law Society of NSW v Koffel [2010] NSW ADT 149, Council of the Law Society of NSW v Dalla [2011] NSW ADT 130, Law Society of NSW v Delpopolo [2014] NSWCATOD 55, and Council of the Law Society of NSW v Kingston [2014] NSWCATOD 21. 2. In each of these cases the issue was whether the solicitor's conduct in not paying employee contributions amounted to professional misconduct. In all but Koffel there was a finding of professional misconduct under the Allinson test. The following passage in Koffel was accepted by both parties as the correct statement of the principle to be applied: The mere failure to pay superannuation guarantee contributions on time does not of itself constitute professional misconduct. It is the circumstances surrounding the failure, the consequences of the failure, and the actions subsequently taken by the solicitor, that determine whether the conduct constitutes professional misconduct. Counsel for the Law Society added that it was the Society's view that the surrounding circumstances in Koffel could have led to the opposite result, and that the circumstances in this matter before us supported a finding of professional misconduct. 1. Counsel for the Law Society also directed our attention to the following passage in a joint judgment of the NSW Court of Appeal in Law Society of New South Wales v Starky (unreported) 13 August 1979: A transaction by a solicitor with his client is either proper at the time it was entered into or carried out, or it is improper. 1. That proposition as a general statement is self evident in relation to a solicitor borrowing money from his clients but we found it only barely relevant to the matter before us. The Surrounding Circumstances - delay 1. Senior counsel for the Solicitor referred us to those circumstances which he submitted supported a finding that this complaint should be dismissed. First he said that this was not a complete failure by the Solicitor to pay the contributions, only a delay in payment. He directed our attention to paragraph 7 of the Agreed Statement of Facts, where the Solicitor had instructed his Office Manager to send the outstanding cheques as soon as the firm had sufficient funds. 2. Senior Counsel said that in Bouzanis, unlike in the matter before us, the solicitor at no time had any intention of making the payments until complaints were received from the employee and subsequently the Law Society, and that the contributions remained outstanding for four years. This he said was the basis of the finding of professional misconduct in that matter, notwithstanding that the outstanding contributions related to one employee only – not six as is the case here. 3. However as we read the evidence in Bouzanis, the solicitor's position was that he had not paid the contributions because; Well I needed the money for other things, but I intend to pay him in the next few weeks (Paragraph 3). 1. This evidence appears to have been accepted by the Tribunal. 2. In our view this position is indistinguishable from the present case. In fact we could not identify in any of the decisions to which we have referred above, a finding that a solicitor made a deliberate decision never to pay the contributions. In each case it appears that the issue was lack of available funds and the preference to pay other creditors first. The Timing of the Payments 1. Senior counsel for the Solicitor next drew our attention to the timing of the payments. The first payment of an outstanding contribution in respect of one of his employees, in the amount of $10,842.43, was made in September 2013 - that is well before Mr House's inspection. The evidence did not disclose what prompted the Solicitor to make the payment for this employee first, as it was not the longest outstanding. It followed a recalculation of that employee's entitlements. 2. The balance of the payments were made between 31 January and 20 February 2014, that is between two and five weeks after Mr House had spoken to the Solicitor about the unpresented cheques. In this respect, the circumstances appear no different to that disclosed in the other decisions (except for Gillroy), in that the payments, apart from the first, were only made after the solicitor had received an enquiry or request or a demand. 3. In Gillroy, the solicitor had already entered into negotiations with the Australian Taxation Office for the payment of the outstanding monies before the Law Society commenced any investigation. Nevertheless the Tribunal there found that the circumstances amounted to professional misconduct on the part of the solicitor. The Solicitor's Financial Position 1. Senior counsel then submitted that we should consider as a relevant circumstance, the Solicitor's overall financial position during the relevant period. There was a considerable amount of evidence in relation to this issue contained in the Solicitor's two affidavits filed in the proceedings. He also was cross-examined on these matters by the Law Society's counsel. 2. The following matters were raised: (a) His practice had conducted two large litigation matters commencing in 2003 and 2005 respectively, on a speculative fee basis, such that the practice would not be paid until they had been satisfactorily concluded; (b) The departure of his partner in 2008 to enter politics, which required the Solicitor to take on greater administrative and practice management responsibilities and to undergo less fee paying work following his departure; (c) The unexpected departure of an employed solicitor, which led to the loss of a major client; 1. The first of those speculative litigation matters, the Mead proceedings, was settled on 12 December 2013, and the Solicitor received approximately $245,000 soon thereafter. After payment of loans to the St George Bank in respect of the debts of the pre 2008 partnership, the balance of this money was used to pay the outstanding employee contributions. It was submitted that the Solicitor had no other funds available to him to make the superannuation entitlements until that time, and that this was the reason for the payments being made at that time, not the inspection by Mr House. 2. The Solicitor's affidavits also disclosed that his wife, a medical practitioner, had made loans of $200,000 to the practice in May 2010, $20,000 in June 2011, and a further $400,000 in October 2012, to assist the firm's cash flow problems. The first two loans were used reduce the firm's overdraft and the third to pay the Solicitor's personal taxation liabilities. 3. The Solicitor had paid back $20,000 in respect of the first loans by July 2013. In May 2013 he also paid back $124,658.81, in relation to the third loan from a distribution from his late mother's estate. He later repaid a further amount of that loan, so that by August 2013, $151,658.81 had been repaid. There was no evidence that these repayments were made pursuant to any demand. When cross-examined the Solicitor said the balance of the loans remained outstanding but no interest was accruing on them. 4. There was also evidence that during this period that the unit trust which owned the strata unit in which his firm carried on its business, was significantly in arrears in relation to the payment of its strata levies. The Solicitor, who was a beneficiary of that unit trust, said that by withholding payment of part of these levies, he was able to divert money towards the payment of the wages for his employees, even if not their superannuation contributions. The Law Society's counsel submitted that the Solicitor had no direct liability to pay the levies. When cross examined the Solicitor said the unit trust had no other income or assets. In any event the Tribunal does not consider that this issue directly assists us in our determination of the matter, as there was no suggestion that any of the moneys that were paid as strata levies during this period, came from the practice. 5. Thirdly in the relevant period, the Solicitor's made some personal drawings to himself were said to be "modest". They amounted to: June 2011 $74,336.47 June 2012 $70,711.26 June 2013 $49,485.49 June 2014 $164,313.74 1. No other evidence was provided about the Solicitor's personal wealth or what other real estate, if any, he owned. 2. Senior counsel submitted that all this material showed that the Solicitor's cash flow problems were not the result of "his engaging in profligate spending for his own benefit ahead of his statutory tax obligations". We accept that there was no evidence of profligate spending but we remain unconvinced that some of the $151,658.81 used to repay the third loan provided by his wife and/or the personal drawings that he took out of the practice in 2012 and 2013, could not have been used instead to pay the employee superannuation contributions as they fell due. 3. We have come to the view, that to some extent at least, in the words of the Law Society's Counsel "he preferred the continuing conduct of his business and his finances over the legal rights and interests of his staff". Similar sentiments were expressed in Delpopolo where the Tribunal said: In contrast to Koffel, we are not comfortably satisfied that the practitioner has done all that she could reasonably do to satisfy the statutory obligations of the employer to pay the superannuation guarantee levies in respect of the complainant (paragraph 48). 1. In Koffel one of the mitigating features was that the solicitor and his wife had taken steps to sell their home to meet their outstanding contributions. Did the Solicitor Notify his Employees? 1. The final circumstance to be considered was whether and when the Solicitor notified his employees that contributions were not being made on their behalf. There was no notification during the period the contributions were outstanding, nor when the payments were eventually made. Apart from the Office Manager who obviously knew what was happening, the other ten employees were not aware that their contributions were not being made until each received a letter from the Solicitor to that effect dated 21 April 2016, that is, only a fortnight before the hearing. 2. We regard this belated disclosure as inadequate. In Kingston one of the aggravating factors was held to be the failure to disclose the default to the solicitor's employees, and we so regard it here. We have also taken note of Heydon J's comments in Roy Morgan Research referred to above, that not paying the contributions is likely to be a breach of an express or at the least, an implied term of the employer/employee relationship. 3. The Solicitor is not assisted by the continued payment of contributions for other employees. In our view that was an additional reason for him immediately to inform the subject employees that their payments were no longer being made. Our Conclusions 1. Having regard to the number of employees in question, the length of time the contributions were outstanding, the failure to inform his employees and our view that the Solicitor could have taken steps in the management of his financial affairs to ensure that the contributions did not fall into default, we have come to view that a finding of professional misconduct against him is warranted. Penalty 1. The Law Society submitted that if a finding of professional misconduct were made, the Solicitor should receive a reprimand and be fined, and that he should also attend a course in legal ethics run by the Law Society's Professional Conduct Department and pay costs. 2. In our view the Solicitor's conduct in this instance, whilst amounting to professional misconduct, is less serious that the conduct of other solicitors who have come before this Tribunal in similar matters. Many of the matters put forward by his Senior counsel as reasons why there should be not a finding of professional misconduct, we have taken into account in relation to penalty. 3. We have also noted that the Solicitor has been practising for 33 years and has not previously had a disciplinary finding made against him. In his affidavit he also said that he deeply regretted his conduct. 4. Two character affidavits were tendered from fellow practitioners. One said that he found the Solicitor to be "highly honest, competent and diligent" and that his conduct here was "completely out of character". The other said that notwithstanding the complaint, he still considered him to be "wholly professional, diligent, and competent" and that he held him in high regard as a lawyer and as a trusted and respected colleague. 5. In our view the Solicitor should receive a reprimand but should not receive a fine. With regard to the ethics course, we questioned whether a practice management course might not be more appropriate. We were informed by the Law Society's counsel that the course would effectively be designed by the Department specifically for this Solicitor. In any event we do not believe that his attending any course is necessary. We have come to the view that the Solicitor is now fully aware of his obligations in relation to these matters. 6. The Solicitor conceded that if a finding of professional misconduct were made against him, he should pay the Law Society's costs. Our Findings and Orders 1. We are comfortably satisfied that the conduct of the Solicitor amounts to professional misconduct. 2. The Tribunal makes the following orders: 1. The Solicitor be reprimanded; 2. The Solicitor pay the costs of the Law Society as agreed or assessed. 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: 30 May 2016