Carew Counsel Pty Ltd v French [2002] VSCA 1

6. The appeal arises from a proceeding by the plaintiff/respondent (whom I will call "French") in proceedings No. 785 of 2000 in the County Court by which he alleged a negligent breach of retainer by the defendant/appellant (whom I will call "Carew Counsel"). There was a separate claim by Carew Counsel for payment of outstanding professional fees arising out of a common law proceeding by French against Guan Hy (proceedings No.9707194) for personal injuries which had been suffered by French in a transport accident on 18 August 1990. Those proceedings had been brought pursuant to the relevant provisions of the Transport Accident Act 1986 in the course of which the defendant's interests had been represented by the Transport Accident Commission (the "TAC"), which was, pursuant to the Act, the statutory insurer. In those proceedings, which had been commenced in or about 1996, Carew Counsel had acted on behalf of French both in respect of an application to a County Court judge for leave, pursuant to s.93(4) of the Transport Accident Act, to bring common law proceedings for "a serious injury" and in respect of the subsequent personal injury claim. On 21 October 1998 the common law personal injury claim was compromised on terms that included the payment by TAC to French of $185,000, retention of benefits already paid, plus costs to be taxed. Following the settlement of the claim, the settlement sum remained in the hands of the TAC abiding competing claims made in respect of it by creditors of French. Ultimately, on 5 March 1999 (and after French had been declared bankrupt), an amount of $102,582.95 was ordered by a County Court judge to be paid into court to abide the claims, including a claim by Carew Counsel for unpaid solicitor/client costs. The sum represented the balance of settlement monies (not including party/party costs) after deduction of various amounts in circumstances to which I will hereafter refer. (The amounts so paid into court on the directions of the County Court judge will be referred to as "the fund".)

9. After taking into account party/party costs payable by TAC, it was agreed that French owed solicitor/client costs of $13,600 in respect of the "leave application" and $41,500 for solicitor/client costs owing in respect of the common law proceedings which were compromised. It was also agreed that Carew Counsel had to bring to account a sum of $2,650.80 which it had applied to its costs out of funds held by it in a trust account. The net amount owing to Carew Counsel for solicitor/client costs was therefore $52,449.20. Carew Counsel claimed an equitable lien over the fund in respect of these costs. They also claimed a sum of $8,243 for costs alleged to have been incurred on behalf of French between the date of the compromise of the common law proceedings and the end of January 1999 during which competing claims were being made on the monies being held by the TAC. Carew Counsel also claimed that they had an equitable lien in respect of these costs.

12. In the separate proceeding brought by French against the solicitors, French conceded that Carew Counsel had an equitable lien in respect of its costs incurred in acting for him in the common law proceedings but not in respect of its costs incurred on the "application for leave" to bring those proceedings, or in respect of the costs incurred by Carew Counsel between the date of the settlement of the common law proceedings and the end of January 1999, when its retainer was terminated. He also alleged that he was entitled to a "set off" against the costs owed to Carew Counsel because, as he claimed, the solicitors had acted negligently in failing to protect his interests in respect of the "settlement monies" which were being held by the TAC on his behalf, and in particular by failing to take proper steps, in the circumstances, to prevent TAC from paying sums of $34,547.30 and $34,829.11 respectively to solicitors Testart Robertson Lawyers ("Testart") and Centrelink who were creditors of French. The claim in respect of the amount paid to Centrelink was abandoned at trial but the claim in respect of the monies paid to Testart was pursued. That claim arose in the circumstances which I will hereafter describe.

15. The common law proceedings brought on behalf of French were compromised, as I have said, on 21 October 1998. Thereafter the settlement monies of $185,000 remained in the hands of the TAC. In the course of seeking to recover those monies, Mr. Williams of Carew Counsel (the solicitor in charge of French's claim) became aware that Centrelink would be making a claim pursuant to s.1179 of the Social Security Act 1991 for monies paid out to French following his motor vehicle accident and, on 26 October 1998, Carew Counsel wrote to the TAC enclosing the estimate of Centrelink's claim of $34,547. On the following day, namely 27 October 1998, the TAC was served with a garnishee order made by the Magistrates' Court at Melbourne pursuant to s.111 Magistrates' Court Act 1989, ordering the TAC to pay Testart the sum of $34,829.11 in respect of costs owing to Testart by French arising from an earlier defamation action. On 30 October 1998 Centrelink served a "recovery notice" on the TAC in respect of the sum owed to it. On the same day, the TAC sent a copy of Testart's garnishee order to Carew Counsel stating that it was its view that the sum referred to in the order should be paid to Testart. The TAC also advised Carew Counsel that the repayment owing to Centrelink should be deducted from the settlement monies and, further, that it was the TAC's intention to deduct a further amount of $7,104.60 to make payment to yet another firm of solicitors, Johnson Cottier Parker ("Johnson") who had earlier acted for French in his claim on the TAC, and to whom French had given "an irrevocable authority". On 30 October 1998 Carew Counsel replied to TAC advising it that it was appropriate that the sum of money owing to Centrelink should be paid to that body but that the sums owed to Testart and Johnson should not be paid out but retained by TAC for the time being. They claimed that balance of the settlement monies be paid forthwith to them on behalf of French.

18. The events which followed happened quickly and during a week which was "Melbourne Cup week" in Melbourne. It appears that at some time between 30 October 1998 and 2 November 1998 French, who was then living in Hobart, instructed Carew Counsel that he intended to declare himself bankrupt, and that as a consequence thereof he believed his damages would be protected as far as his bankrupt estate was concerned. He conceded, however, that the monies owing to Centrelink ought to be paid. On 2 November 1998 Mr. Williams of Carew Counsel wrote to the TAC confirming his instructions to pay the sum owing to Centrelink but insisting that the TAC was not permitted to make any payment on the garnishee order in favour of Testart or any payments to Johnson on the irrevocable authority. Carew Counsel stated that they had received instructions "this morning" that their client intended during the week "to present a debtor's petition to the Official Receiver pursuant to s.55 of the Bankruptcy Act". Carew Counsel reminded the TAC of the protection afforded to damages for personal injury by s.116(2)(g) of the Bankruptcy Act, and said that it was French's instructions to them that the TAC should forward to them the monies held by TAC less the amount payable to Centrelink.

21. In fact French did not take any steps to pursue his bankruptcy until 4 November 1998. On that day he made a declaration of intention to present a debtor's petition under s.54A of the Bankruptcy Act to the Official Receiver in Hobart. By letter dated the same date Carew Counsel wrote to the TAC advising them that French would that morning attend at the office of the Insolvency and Trustee Service Australia (Tasmania Branch) to make his application. On the same day, i.e. 4 November 1998, French wrote to the TAC himself, advising the TAC that "by the time you receive this communication I will have had myself declared bankrupt". He requested the TAC not to pay out any monies which they were holding to anyone. It would appear that those instructions contradicted his previous instructions to Carew Counsel that the amount owing to Centrelink should be paid. On the same day it appears that French "faxed" to Carew Counsel a copy of his declaration under s.54A and, in turn, Carew Counsel "faxed" a copy of that declaration to the TAC as soon as they had received it from French.

24. On 6 November 1998, and notwithstanding the correspondence referred to, the TAC wrote to Carew Counsel advising them that they had that morning sent a cheque to Centrelink for the amount owing to it and had also sent a cheque to Testart for the amount of $34,829.11, being the amount referred to in the garnishee order. In the proceedings from which this appeal emanates, there was an affidavit before the court by the TAC in which it was asserted that the TAC had paid out the money to Testart "on the basis of legal advice obtained by the Commission that it was obliged to comply with (inter alia) the garnishee order as it was an order of the court". It acknowledged that it had done this notwithstanding that it had received a copy of the "s.54A declaration". The TAC nevertheless advised Carew Counsel that they were retaining the amount of $7,104 claimed by Johnson and that, unless there was progress towards resolving the "impasse" in relation to that amount within 30 days it would pay the monies into court and would seek orders allowing it to deduct its costs of doing so. It further advised that it had been served with a further garnishee summons by yet another firm of solicitors in respect of another debt and that until the issue was resolved, the TAC did not intend to release any settlement monies to French.

27. It was further agreed before his Honour that Carew Counsel did not send or otherwise provide a copy of the s.54A declaration to any creditor of French (including Testart). On 10 November 1998 French became bankrupt and on 12 November 1998 TAC was advised of this fact. On 13 November 1998 Mr. Norman Jones was appointed the Official Trustee of French's bankrupt estate and thereafter there was considerable correspondence passing between Carew Counsel, the trustee, Johnson and TAC solicitors in relation to the settlement monies which had been retained by TAC. Carew Counsel continued to act for French in the period between 22 October 1998 and 27 January 1999 in relation to the various claims being made on the settlement monies and as was agreed before the judge, "in furtherance of the retainer to procure payment of the balance of the settlement sum". It is in respect of that period that Carew Counsel incurred the costs amounting to $8,243 to which I have previously referred. It was thereafter, on 5 March 1999, that the TAC applied to have the balance of monies which it was holding paid into court resulting in the order to which I have previously referred creating the fund. At the time of the action the balance of the fund in court stood at approximately $102,582 plus interest.

31. The issues which came before his Honour for determination were as follows:

34. Was Carew Counsel entitled to an equitable lien over the fund in respect of its solicitor/client costs incurred in acting for French in the "leave application" as distinct from the common law proceedings brought pursuant to that leave? (It was conceded that they were entitled to such a lien in respect of the solicitor/client costs incurred in the latter litigation.)

37. Was Carew Counsel entitled to an equitable lien in respect of costs incurred whilst acting for French following the settlement of the common law proceedings and until their retainer was terminated on 27 January 1999 - that is the amount of $8,243?

40. Was Carew Counsel negligent and in breach of its retainer from French because it failed to provide to Testart a copy of the "declaration of intention to present a debtor's petition" accepted and endorsed by the Official Receiver on 4 November 1998? If so, at what amount should French's damages be assessed and set off against the amount owed by him to Carew Counsel on account of costs?

Entitlement to Equitable Lien over the Fund in respect of Solicitor's Work in "Obtaining Leave"

44. His Honour concluded that Carew Counsel did have an equitable lien over the fund in respect of the costs of obtaining leave to bring common law proceedings because the application for leave, as required by statute, was an integral step in securing damages for French. As his Honour said "the leave proceedings are simply part and parcel of all the matters that the solicitor has to attend to in order to achieve damages for his client". The solicitor's work in relation to the application for leave was "immediately incidental" so as "form part of the solicitor's costs which are properly payable out of the fund now in court". That finding has now been accepted and was not in dispute on this appeal.

Costs Incurred between Date of Settlement and Termination of Retainer on 27 January 1999

48. His Honour found that Carew Counsel had no equitable lien in respect of these costs because it was his view "that ... the solicitor's work following the settlement with the TAC were [sic] over and above what could fairly be said to be an incidental cost of litigation". It was his Honour's view that the work done by Carew Counsel following the settlement of the litigation was in pursuit of "further and quite separate litigation involving parties other than the defendant in the motor vehicle action" and that it was therefore "not artificial ... to say that these were separate and distinct proceedings which were being entered into. They had nothing to do with the creation of the fund and, in my view, Carew Counsel's right to have its costs paid out of the fund could not be said to extend to this type of work." Accordingly, his Honour concluded, Carew Counsel had a "general lien" in respect of those costs but did not have an equitable right to have them paid out of the fund.

52. French's claim in negligence against Carew Counsel was based on a failure by Carew Counsel to comply with the provisions of s.54E of the Bankruptcy Act 1966. As I have said that section is one of a number of sections, introduced as Division 2A of the Bankruptcy Act in 1987. S.54A provides that:

"Subject to s.54B a debtor may present to the Official Receiver a declaration in the approved form of a debtor's intention to present a debtor's petition."

S.54C empowers the Official Receiver, upon the presentation of the declaration, to "accept the declaration and endorse it accordingly" and to "forthwith sign a copy of the declaration".

S.54E is entitled "Enforcement Suspended During Stay Period".

S.54E(1) provides that:

"Where during the stay period in relation to a declaration of intention presented by a debtor, a copy of the declaration signed by the Official Receiver who accepted it is produced to a creditor to whom the debtor owes a frozen debt, sub-s. (2) has effect throughout the remainder of that period."

The "stay period" in relation to a declaration of intention presented by a debtor means, relevantly, a period of seven days beginning on the day when the declaration was accepted. A "frozen debt" means, relevantly, a debt that is "owed by a declared debtor" and "would if the debtor had become a bankrupt when the declaration of intention was accepted under s.54C, be provable in the bankruptcy".

S.54E(2) provides:

"It is not competent for the creditor: (a) to apply for the issue of enforcement process in respect of the debt; or (b) to enforce a remedy against a debtor's personal property in respect of the debt."

S.54H, which is entitled "Duties of Person Entitled to Deduct Money Owing to Declared Debtor" relevantly provides:

"(1) Where, during the stay period in relation to a declaration of intention presented by a debtor, a copy of the declaration signed by the Official Receiver who accepted it is produced to a person who is entitled under a law of ... a State ...: (a) to ... deduct money from money payable or owing ... to the debtor; and (b) to apply the ... deducted money towards discharging a frozen debt owed by the debtor to any person; Sub-ss. (2) and (3) apply."

"The person shall, throughout the remainder of that period: (a) refrain from ... deducting money; and (b) refrain from paying to a person (other than the debtor) or otherwise applying money that was so retained or deducted before the signed copy was produced to the person."

S.54L provides that:

"Nothing in this division affects the rights of a secured creditor to realize or otherwise deal with the creditor's security."

69. As the judge found, the "stay period" was seven days from the 4 November 1998 - that is the day upon which the declarationof intention was accepted. Carew Counsel admitted that it did not serve or produce a copy of the declaration of intention to anyone but the TAC. It was French's claim that as a result of the failure to serve the copy of the declaration on creditors that neither Testart nor Centrelink was made aware that the Bankruptcy Act had been invoked by French. However, the judge noted that the TAC was in possession of a copy of the declaration of intention and, notwithstanding, it decided to send cheques both to Centrelink and Testart "after considering its legal position". It was French's contention that, had Testart been advised of his declaration of intention, they would have been obliged not to accept the cheque sent to them by the TAC and/or to have returned it to the TAC. The argument was that Testart was a creditor who was owed a "frozen debt" within the meaning of s.54E, and that if the declaration of intention accepted by the Official Receiver had been produced to Testart, it would have been bound not to bank the cheque, because that amounted to "enforcing a remedy" within the meaning of sub-s.(2)(b) of s.54E. Based on this argument, it was contended by French that Carew Counsel had a duty of care to deal with the copies of declaration of intention to the advantage of French. Thus it was said that the failure to notify the creditors of the declaration was a breach of Carew Counsel's retainer and a negligent act. It was submitted to his Honour that, although there was very little time for Carew Counsel to decide what to do, a reasonably prudent solicitor, researching the relevant provisions of the Bankruptcy Act, would have realized that copies of the declaration of intention should have been served on the creditors including Testart, as well as the TAC.

72. The judge accepted this argument and concluded that Carew Counsel had negligently breached its retainer by not producing a copy of the notice of the declaration of intention to Testart. His Honour said:

"It seems clear enough to me that Testart, by 6 November 1998, was not a creditor who was by then attempting to enforce a remedy against a debtor's personal property as provided for in s.54E(2)(b) of the Bankruptcy Act. By this stage Testart had already served the garnishee order on the TAC and there was nothing more for them to do. The question then is whether they should have refrained from banking the cheque that was sent to them by the TAC during the stay period ... or, having received the cheque during the stay period, should have returned it to the TAC. Carew Counsel's action in sending a copy of the declaration to the TAC on 5 November 1998 was no doubt a prudent and reasonable act given that at the time they did not know whether the TAC had not (sic) disbursed any monies to ... Testart. However, I believe that a reasonably competent solicitor would have researched s.54E of the Bankruptcy Act 1996 in order to ascertain the provisions in relation to the consequences of the filing of a declaration of intention. Either Carew Counsel did research s.54E and decided not to serve a copy of the declaration on ... Testart or simply failed to notice the provisions of s.54E(1)."

76. His Honour went on to note that "s.54E of the Bankruptcy Act laid down a code whereby a stay is put in place of some seven days to allow a person who is considering bankruptcy to think through his position before going ahead with the petition". The section's intent, according to his Honour, is to "stop a creditor from taking steps to enforce a judgment already obtained". He concluded that Testart's action in banking the cheque from TAC "can be said to be enforcing the judgment that they had obtained". His Honour further noted that "one would not expect a firm of solicitors who were advised of the sanctions under 54E to go ahead and do such an act". Accordingly, said his Honour, "in my view Carew Counsel's failure to advise Testart that their client had taken proceedings under s.54E [sic] amounted to a negligent act". It was his Honour's view of s.54E that it was "vital that a copy of the declaration of intention be produced to the creditor during the stay period" because "if the creditor has no knowledge of the declaration then ... he is not bound by the restrictions imposed by sub-s. (2)". His Honour went on to say:

"The same principles apply in relation to the Sheriff (s.54F), the Registrar (s.54G) and other persons (s.54H). It will be seen that the hallmark of the stay in s.54 is the production of the declaration to the person concerned, and from then on they are enjoined from taking action for the remainder of the stay period."

80. His Honour concluded his reasons in respect of French's claim against Carew Counsel for negligence with the following passage:

"As far as French was concerned it would seem that his whole idea of becoming bankrupt was to protect his damages from being used as a source to pay a debt that he owed to Testart. ... It was only by using the bankruptcy laws as a shield that French could hope to stop Testart from obtaining their money from his damages. Carew Counsel's failure to prevent this happening by serving the required notice under s.54E of the Bankruptcy Act enabled Testart to recoup their money free of the provisions of the Bankruptcy Act. ... French has no claim against Testart but he does have a claim against Carew Counsel whose negligence was a cause of Testart getting that money. It is therefore proper to award French the sum of $34,829 paid out to Testart."

French had submitted that, if his Honour found that Carew Counsel was negligent in the manner suggested, then he should also find that it was not entitled to any of the costs incurred between 22 October 1998 and 27 January 1999 because those services had been rendered valueless as a consequence of the negligence. His Honour did not accept that argument in its entirety. He said:

"... despite the mistake ... made in relation to failing to give notice to Testart, it ... performed other valuable work during the period in question."

His Honour then found that "50%" of the solicitor's work had been rendered valueless and allowed French to set off $4,000 from the costs owed.

88. The major issue raised on this appeal by counsel for the appellant went to the question of whether the judge was in error in finding that Carew Counsel was negligent in failing to advise Testart of French's "declaration of intention". The facts upon which the learned judge made his findings were not in dispute and it is not suggested that this Court is not in as good a position as the trial judge to determine that issue for itself (see Warren v. Coombs & Anor.[1]). Appellant's counsel submitted that, in making his findings of negligence, the trial judge failed to address the principal argument which had been put to him on behalf of Carew Counsel in the course of the trial. Essentially that argument was that in the circumstances which obtained in this case - namely that the TAC was the person holding the monies on behalf of French and was, accordingly, the person with the capacity to do damage to the interests of French by deducting sums from the money held and paying it to creditors - the only reasonable and prudent step which a prudent solicitor acting in French's interests could and should have taken was to take advantage of s.54H of the Bankruptcy Act and to immediately send a sealed copy of the notice of declaration of intention to the TAC. The prudent solicitor was entitled to expect, so the submission ran, that the TAC would comply with the provisions of that section during the "stay period" and refrain from deducting monies from the "settlement sum" being held on behalf of French, and also refrain from paying monies retained or so deducted to Testart or, indeed, to any other person than French. The submission of Carew Counsel continued that a prudent solicitor could not be expected, in the circumstances of urgency to which I have referred, to send a copy of the intention of declaration to a creditor who, at that time, had taken all the necessary steps to enforce payment of a debt owed to it. This was so, it was submitted, because, if in defiance of the Bankruptcy Act, the person in control of the debtor's damages chose to deduct sums and pay them to such a creditor, the receipt of that sum and the banking of it by that creditor would not be an infringement of s.54E(2)(b) of the Bankruptcy Act. Further, it was submitted to this Court (although not to the judge) that s.54E did not operate to prevent Testart from banking the cheque received from the TAC because it was a "secured creditor" within the meaning of s.54L of the Act. In any event, it was submitted, the failure to provide the copy of the declaration of intention to Testart did not, relevantly, cause loss to French because, even if Testart had returned the cheque to the TAC it would (having regard to its own advices) have either sent it back to Testart or paid it into Court. Indeed, in considering French's claim for losses accruing to him on account of the negligence of Carew Counsel, his Honour had said:

"... even if the monies had been returned by Testart to the TAC upon the production of a copy of the declaration of intention, it is extremely unlikely that the TAC would have paid out the monies to French unless all the parties agreed."

Those monies, in his Honour's view, would have been paid into court to abide the "interpleader claims".

93. Counsel for the appellant contended that the trial judge, in his reasons for finding negligence on the part of Carew Counsel, had ignored the thrust of these arguments and had concentrated, almost exclusively, on the provisions of s.54E of the Act. The nearest that the judge came to grappling with the submission made to him, it was contended, was his acknowledgment that Carew Counsel's actions in sending a copy of the declaration to the TAC on the 5 November 1998 "was no doubt a prudent and reasonable act given that they at that time did not know whether the TAC had ... disbursed any monies to ... Testart." That latter proposition seems to be somewhat surprising having regard to the course of correspondence which had passed between Carew Counsel and the TAC between 30 October 1998 and 4 November 1998, to which I have referred in paragraphs [5], [6] and [7] above. The clear inference from that correspondence is that, by the time Carew Counsel produced the sealed copy of the declaration of intention to the TAC, the settlement monies were still in the hands of the TAC. That inference was, indeed, well founded because it was not until the morning of 6 November 1998 that TAC wrote to Carew Counsel informing it that it had, on that day, despatched cheques to Centrelink and to Testart. It was acknowledged and admitted that TAC had by that time received the notice of intention of declaration but said that it had "despatched the cheques" as a consequence of and "on the basis of legal advice obtained by the Commission that it was obliged to comply with" the garnishee order and the recovery notice pursuant to the Social Security Act.

96. It was against the background of these admitted facts and circumstances that counsel for the appellant contended that his Honour was in error in assessing the reasonableness of Carew Counsel's conduct by confining his attention to one particular section in Division 2A of the Bankruptcy Act, namely s.54E. His Honour said that he believed that the reasonably competent solicitor would have researched s.54E of the Act, and that either Carew Counsel had researched the section and decided not to serve a copy of the declaration on Testart or had "simply failed to notice the provisions of the section". Thereafter, as I have said, his Honour went on to find that Carew Counsel was negligent for failing to properly inform itself of the provisions of that section and, in particular, in failing to serve a copy of the notice of declaration on Testart. In the course of doing so, his Honour did note that "the same principles apply in relation to ... other persons (s.54H)". However, and this is the nub of appellant's counsel's contention, his Honour appears not to have recognised that the TAC was, or could reasonably be understood to be, "another person" who, if served with a sealed copy of the notice of declaration of intention, was obliged to comply with the injunctions contained in s.54H.

99. For my own part, I think there is force in the contention which has been made by appellant's counsel to this Court. His Honour appears not to have recognised the force of the submission made to him that the TAC was, or might reasonably be regarded as, a person entitled, inter alia, under a law of the State "to retain or deduct money from money payable or owing to the debtor" and to apply such monies towards discharging "a frozen debt" owed by a debtor to a person and, as such, was bound to refrain from (inter alia) paying monies to persons other than the debtor or applying monies so retained or deducted. In my view, the appellant's counsel is correct in contending that his Honour focussed his attention too narrowly upon the provisions of one particular section of Division 2A of the Bankruptcy Act (namely s.54E) to the exclusion of the impact of s.54H and, in doing so, assessed the reasonableness of the conduct of Carew Counsel upon an erroneous basis. In the limited time span available to the solicitor, it seems to me to have been eminently reasonable that he should send the notice of declaration of intention to the person who was in control of the settlement monies of the debtor rather than to a creditor in the position of Testart who, as his Honour recognised, "was not a creditor who was by then [i.e. 6 November 1998] attempting to enforce a remedy against a debtor's personal property as provided for by s.54E(2)(b) of the Bankruptcy Act". As his Honour said, by that stage, "Testart had already served the garnishee order on the TAC and there was nothing more for them to do". It seems to me that, in those circumstances, the reasonable and prudent step to be taken by the solicitor - acting on the instructions of his client and in accordance with those instructions - was to ensure that the person holding and controlling the settlement monies should be the person to whom the notice of declaration of intention should be produced, so that those monies were preserved intact. That person, after all, was also a lawyer who could reasonably be expected to comply with the provisions of the Bankruptcy Act. Indeed, as his Honour said when assessing the value of the work done by the solicitor after the settlement of the common law proceedings:

"[Carew Counsel] did advise the TAC of the bankruptcy proceedings and it was through no fault of [theirs] that the TAC decided to ignore its advice."

Furthermore, it seems to me to be reasonable for Carew Counsel, acting in the interests of its client, to have adopted the view that those interests would not have been further or better protected by producing a copy of the declaration of intention to the creditors, including Testart. The TAC, on the admitted facts, was aware of the notice of declaration of intention and, notwithstanding, had taken its own advice and had determined that it was none the less obliged to deduct the monies owing to Testart and to pay them to Testart in performance of those obligations. As a matter of reality, it is difficult to see how the sending of a copy of French's declaration of intention to Testart would, or could, have better advanced the interests of French. At best it might have provoked a query from Testart to the TAC as to whether, in the light of the provisions of Division 2A of the Bankruptcy Act, it was entitled to the proceeds represented by the cheque. However if that had been done, Testart would have been told by the TAC that, in accordance with their own advices, it was entitled to those proceeds. And, as his Honour noted, even if the cheque had been returned, the proceeds would not have gone to French, but would have been paid into court to abide a dispute between French and Testart. Futhermore, and despite his Honour's finding, a prudent solicitor conversant with the provisions of s.54E, might reasonably adopt the view that the mere receipt and banking of the cheque by Testart would not amount to "enforcing a remedy against the debtor's ... property in respect of the debt" within the meaning of s.54E(2)(b).

104. It was also submitted to this Court that a prudent solicitor, conversant with the provisions of Division 2A of the Bankruptcy Act, might reasonably have concluded that the provisions of s.54E could not prevent Testart from dealing with any monies sent to them by the TAC, because they were a "secured creditor" within the meaning of s.54L. As I have previously noted, s.54L of the Act provides:

"Nothing in this Division affects the right of a secured creditor to realise or otherwise deal with the creditor's security."

A "secured creditor" is defined in the Bankruptcy Act as meaning:

"In relation to a debtor ... a person holding a ... charge or lien on property of the debtor as a security for a debt due to him ... from the debtor."

110. During the hearing of this appeal counsel for the appellant referred to the decision of the High Court in Hall & Anor. v. Richards & Anor.[2] which was a case in which the appellants' claimed to be "secured creditors" of a bankrupt within the meaning of s.4 of the Bankruptcy Act 1926-1958 (Cth) which - to all intents and purposes - defined a "secured creditor" in the same terms as it is presently defined. The appellants claimed to be secured creditors by reason of caveats which they had lodged against the interests of the bankrupt in certain land of which the bankrupt was registered proprietor. Although it was the unanimous decision of the Court in that case that the caveator's interest was not a "charge or lien" within the meaning of the definition of "secured creditor", Kitto, J. (in whose judgment Dixon, C.J. and Windeyer, J. concurred) made certain comments, by way of obiter about the nature of the interest of a person claiming against the debtor's estate who had obtained a garnishee order before the bankruptcy of the judgment debtor. Kitto, J. (at pages 90-91) referred to the decision of the Court of Queen's Bench in Emanuel v. Bridger[3] and said:

"The judgment creditor was held to be a `secured creditor' for two reasons : first, the making of a garnishee order, the Court held, resembled rather an actual seizure of goods under a fi.fa. than a mere delivery of a fi.fa. to the sheriff; and secondly, the word `charge', which was considered to have a wider meaning than `lien', was held sufficient to comprehend the rights acquired by a judgment creditor upon the making of a garnishee order in his favour."

His Honour further considered the position of a person in whose favour a "garnishee order" had been made and said (at page 92):

"The analogy in the case of a garnishee order is obvious. Such an order, though not working an assignment or giving the judgment creditor any proprietary interest in the debt, yet gives him positive rights with respect to it which a creditor having no more than a judgment does not possess; not merely a negative right to prevent the judgment debtor from accepting payment of the debt or disposing of it, but positive rights for the recovery of what is owing on the judgment, namely the right to give a valid receipt and discharge for the money, and a right in case of non-payment to obtain execution against the garnishee ... ."

116. Respondent's counsel, pursuant to leave granted by the Court, advanced written submissions challenging the dicta to which I have referred. They argued firstly, that the statements were obiter and do not bind this Court. They went on boldly to submit that "more importantly [those dicta] are incorrect ... insofar as [they] suggested a garnishee order is a `security' for the purposes of the Bankruptcy Act". Respondent's counsel referred to distinctions between the provisions of the Bankruptcy Act in England and the provisions of our bankruptcy laws and also to distinctions in the procedures for obtaining "garnishee orders" between those being considered by the Court in Hall's case and those provided for in the Magistrates' Court Act in accordance with which the garnishee order had been obtained in this case. It may well be that the submissions made by counsel for the respondent have force, but the issue before the Court is not to construe the true meaning of these difficult provisions, but whether a prudent solicitor in the position of Mr. Williams acted reasonably in the circumstances by "targeting" the TAC to the exclusion of the creditors, particularly Testart.

119. The exquisite difficulty of the situation confronted by Mr. Williams of Carew Counsel in the tight time frame available to him has been underlined by the competing submissions made by counsel for the respective parties both before the judge and before us. Each counsel recognized that the provisions of Division 2A of the Bankruptcy Act are, so far as their researches have gone, "untried and untested". Counsel for French submitted that, on the proper interpretation of the Division, s.54H had no application in the circumstances of this case, but that s.54E did. Counsel for Carew Counsel contended for the opposite. Counsel for French submitted that the TAC was not "a person who [was] entitled under a law of ... the State ... to retain or deduct money from money payable or owing to the debtor"; and was not a person who was entitled under such a law to apply such money towards discharging a "frozen debt" owed by the debtor to a creditor, within the meaning of s.54H. This argument depended for its validity upon a narrow construction of the words "a person entitled under the law of a State" to deduct monies from money payable to the debtor. It was contended that the attachment of debt provisions of the Magistrates' Court Act do not, of their own force, "entitle" the TAC to deduct monies and apply them to the discharge of debts; rather they give a discretion to the Court to make a garnishee order which, if made, "compels" the garnishee to comply. The contrary argument is that, whether one looks to the procedure provided by the Magistrates' Court Act, and the Rules made under it, or the order of the court which is the product of the Act and the Rules, it is the "law of Victoria" which produces in the TAC the obligation to deduct and apply and that compulsion necessarily comprehends the "entitlement" of which s.54H speaks[4]. Furthermore, as I have said, the submissions made to his Honour and this Court as to the applicability of s.54E in the events which had occurred were again in direct conflict. Counsel for French argued that production of a copy of French's declaration of intention to the creditor would have been effective to prevent Testart from banking the cheque forwarded by the TAC because the action of "banking the cheque" was the equivalent of "enforcing its remedy against the debtor's property" within the meaning of s.54E(2). Counsel, in advancing this argument, sought to draw some comfort from the provisions of s.54F which apply to the duties of the Sheriff who is given notice of a "declaration of intention". However, counsel for Carew Counsel submitted that little comfort can be drawn from this section in interpreting the words in s.s54E(2)(b) because, in contrast, s.54F(2) specifically enjoins the Sheriff, in such an event, from "taking further action to execute or sell property under enforcement process issued" and s.54F(3) specifically enjoins the Sheriff from "paying to a person proceeds of enforcement process issued". Those injunctions, so it was submitted, are significantly different from those provided for in s.54E(2).

122. None of the issues relating to the impact of the complex of provisions in Division 2A of the Bankruptcy Act appears to have been decided by the trial judge as a result of which, as I have already said, the reasonableness or otherwise of the solicitor's conduct appears to have been considered without proper regard to all the circumstances which bore upon that conduct. As his Honour correctly noted, the solicitor's duty is to act with reasonable care and skill in the discharge of his retainer to his client. What is required for the performance of this duty in the particular case depends upon the circumstances, including the scope of the retainer and the nature of the task entrusted to and undertaken by the solicitor[5]. A solicitor who brings a reasonable degree of skill and knowledge to his task, and exercises reasonable care, in the circumstances, in carrying it out will not be liable per se for an error of judgment[6]; nor will he be liable, necessarily, for a mistake made upon a "nice and difficult point of law"[7]. In giving advice or making decisions in the exercise of the retainer, the solicitor does not warrant or guarantee the soundness of the advice or decision but only that the requisite degree of skill and care has been used in arriving at them[8]. In my view, the prudent solicitor in receipt of the novel retainer of protecting the impending bankrupt's damages from the hands of the client's creditors, and knowing what Mr. Williams knew on 4 November 1998, would have taken the steps which he did. The aim was to "freeze" the settlement monies in the hands of the TAC and to stop them from being applied in payment of debts owing by the client to the client's creditors. In my opinion, it was reasonable for the solicitor - in the urgent circumstances which confronted him, and being possessed of a working knowledge of the provisions of Division 2A of the Bankruptcy Act - to have produced the sealed copy of his client's declaration of intent to the person who was in control of the settlement monies of the client (namely the TAC) in the reasonable belief that those settlement monies would, as a consequence of s.54H, be retained by the TAC and not applied in payment of "frozen debts". Furthermore, I am of the view that the prudent solicitor, in the circumstances predicated, would not have produced such a sealed copy of the declaration of intention to Testart, because he would be reasonably entitled to take the view that, if the TAC disbursed some of those settlement monies to Testart, notwithstanding production to it of the copy of declaration, Testart would not be obliged to refrain from banking the cheque or to return it to the TAC. It cannot be assumed, as his Honour appears to have done, that the solicitor had not "researched" s.54E or that, if he had, had disregarded it contrary to the interests of his client. That was not, I think, an inference open to his Honour in the circumstances. The only reasonable inference open, in my opinion, is that the solicitor was aware of all the provisions of Division 2A of the Bankruptcy Act, and thought that the appropriate and reasonable step to take, for the purpose of keeping the settlement monies intact, was to seek to ensure that those monies remained in the hands of the TAC until paid to the solicitor or until the competing claims upon them could be determined. To expect the solicitor, in the circumstances, to go beyond what he did and to produce copies of the declaration to all competing creditors would be, in my view, imposing a "counsel of perfection" upon the solicitor because he would be entitled to assume that s.54E would not have stopped those creditors from banking the cheques sent to them by the TAC; or at the very least, he would be entitled to assume that, once the TAC had parted with the monies in favour of those creditors, they would, notice or not, be very reluctant to part with them.

125. It follows from what I have said that I am of the view that Carew Counsel was not negligent in doing what it did in the circumstances which confronted it. I would therefore allow its appeal in this respect and set aside the order which his Honour made allowing the set-off in the amount of $34,547.30 (paid to Testart) against the costs conceded to be owed to Carew Counsel. It also follows that his Honour was wrong to reduce the amount of costs owing to Carew Counsel incurred between the date of compromise and 27 January 1999 (namely $8,243) on account of that negligence.

128. That leaves the remaining issue raised in this appeal; namely whether Carew Counsel had an equitable lien over the said costs of $8,243 or - as his Honour found - a general lien only.

131. As I have previously said, the judge concluded that Carew Counsel was entitled to an equitable lien in respect of its solicitor/client costs for work done in pursuing French's application for leave to bring common law proceedings against the defendant Hy and for the solicitor/client costs in pursuing those common law proceedings until the compromise on 21 October 1998. However, it was his Honour's view that Carew Counsel did not have such an equitable lien in respect of the costs incurred in acting for French after that date, even though it was conceded that Carew Counsel was - during that period - acting for French "in furtherance of a retainer to procure payment of the balance of the settlement sum". Although it was his Honour's view that a "fruits of litigation lien" would extend to immediately incidental costs incurred by the solicitor in recovering a judgment sum awarded to his client, including the costs of any appeal brought to challenge that award, he concluded that the costs incurred by the solicitor after the date of compromise and until 27 January 1999 (when Carew Counsel ceased to act for French) could not attract such a lien because he did not "believe that the normal retainer would extend to this type of case involving the declaration of bankruptcy by French". Such matters were, in his Honour's view, "outside what could be described as the normal course of collecting the proceeds of the settlement that [Carew Counsel] had achieved on behalf of their client". The equitable lien of the solicitor, his Honour said, "hinges on the work which he has done to create the fund in the first place", but does not extend to "acting for the client in relation to potential litigation with third parties about the distribution of the fund". (I assume that his Honour is referring to the settlement monies.)

134. As a matter of general principle, a solicitor has an equitable lien over the fruits of litigation, whether obtained by way of judgment or compromise, where those "fruits" have been gained, at least in part by the solicitor's exertions on behalf of the client[9]. As Weinberg, J. noted in Colour Point Pty. Ltd. v. Markby's Communication Group Pty. Ltd.[10]:

"Though it has been said that the `so-called' lien is really only a right to ask for the intervention of the court to protect the solicitor when he finds that there is a probability of the client depriving him of his costs, and though it is correct to say that the solicitor can enforce the lien only by taking court action to prevent the property recovered from being paid or transferred to the client, the `lien' attaches by the recovery of the property. It is not dependent, for its existence, upon the judgment of the court."[11]

The essence of the solicitor's "particular" or "non-possessory" costs lien is that the solicitor has been instrumental in recovering the judgment sum (whether by way of compromise or otherwise) or, put another way, that the monies have been recovered as a result of his exertions. Thus the fund in respect of which the lien arises is the fund represented by the fruits of the labours exercised by the solicitor in recovering it[12]. The charge on the fund represented by the "particular" lien arises immediately upon the recovery of the monies through the exertions of the solicitor[13] and should be distinguished from rights which might arise through a solicitor's exertions in respect of other matters. However, for the right to arise, it must be shown that there is a sufficient causal link between the solicitor's exertions and the recovery of the fund[14]. In each case, that is a question of fact. The costs which are protected by the lien will not only include the costs incurred in recovering the judgment, but also those "immediately incidental thereto"[15]. The solicitor's lien will extend to costs incurred on appeal, either in defending the fund or in promoting it, because such costs arise from exertions in "recovering the fund"[16]. As Weinberg, J. noted in the Colour Point case (supra, at 18), the equitable non-possessory lien of a solicitor has, in some jurisdictions, been supplemented by a statutory lien by providing that the lien will attach to any property, real or personal, "recovered or preserved" through the instrumentality of the solicitor. His Honour further noted the protection conferred by such statutes is greater than that provided by the equitable lien but, in jurisdictions in which it applies, does not purport to abrogate the equitable lien which arises independently. Such a statutory lien used to exist in this State (by virtue of s.104 of the Legal Profession Practice Act 1958) but has not existed since the passage of the Legal Practice Act 1996.

139. Notwithstanding the submissions made on behalf of Carew Counsel, I am of

the view that the trial judge carefully and accurately applied the principles to which I have referred in the preceding paragraph in determining that the costs incurred by the solicitor between 21 October 1998 and 27 January 1999 were not costs incurred in "recovering" the fund, nor costs "immediately incidental" thereto. In my view, his Honour was correct to say that, fairly analysed, the exertions undertaken by the solicitor were "outside ... the course of collecting the proceeds of the settlement" and had nothing to do with the creation of the fund represented by the settlement monies. Accordingly, in my opinion, his Honour was correct in concluding that the solicitor's costs lien did not extend to the costs of $8,243 incurred by Carew Counsel between the date of compromise and the termination of their retainer.

143. It follows from my conclusions that I would uphold grounds 2, 3 and 4 of the appeal notice and dismiss ground 1. The orders made by the trial judge on the 5th and 15th day of May should be set aside. I will leave it to the parties to submit the appropriate orders which should be made in substitution, following their perusal of these reasons.

148. I have had the advantage of reading the draft reasons for judgment prepared by Winneke, P. I agree with him that grounds 2, 3 and 4 in the notice of appeal should be upheld and ground 1 dismissed.

153. I also agree that grounds 2, 3 and 4 in the notice of appeal should be upheld and ground 1 dismissed. I do so for the reasons advanced by Winneke, P. in his judgment.

[1] [1979] HCA 9; (1979) 142 C.L.R. 531.

[2] [1961] HCA 34; (1961) 108 C.L.R. 84.

[3] (1874) L.R. 9 Q.B. 286.

[4] cf. LNC Industries Ltd. v. BMW (Australia) Ltd. [1983] HCA 31; (1983) 151 C.L.R. 575 at 581.

[5] Trust Company of Australia v. Perpetual Trustees W.A. & Ors. (1997) 42 N.S.W.L.R. 237 at 247 per McClelland, C.J. in Eq.

[6] Armindale Holdings Ltd. v. Ray (1982) 36 B.C.L.R. 378 at 387 per Taylor, J.

[7] Bannerman & Co. v. Murray [1972] N.Z.L.R. 411 at 422 per North, P.; at 429 per Woodhouse, J.

[8] Boland v. Yates Property Corp. Pty. Ltd. [1999] HCA 64; (1999) 74 A.L.J.R. 209 at 272; Heydon v. N.R.M.A. Ltd. & Ors. [2000] NSWCA 374; (2001) 36 A.C.S.R. 462 at 567.

[9] Roam Australia Pty. Ltd. v. Telstra Corporation Ltd [1997] 980 F.C.A. (22 September 1997) per Lehane, J. at 3-4.

[10] [1998] 1516 FCA, 27 November 1998 at 18.

[11] See also In re Born [1900] 2 Ch. 433 at 435 per Farwell, J.

[12] Phillipa Power & Associates v. Primrose Couper, Cronin, Rudkin [1997] 2 Qd.R. 266 at 270-1 per Macrossan, C.J. and White, J.

[13] Ex parte Patience:Makinson v. The Minister (1940) 40 S.R. (NSW) 100.

[14] Roam Australia Pty. Ltd. v. Telstra Corporation Ltd., supra at 4 per Lehane, J.

[15] In re Meter Cabs Ltd. [1911] 2 Ch. 557 at 559 per Swinfen Eady, J.

[16] cf. Guy v. Churchill (1887) 35 Ch.D. 489.