il of the Law Society of NSW [2014] NSWCA 444
Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498
Gnych v Polish Club (2015) 255 CLR 414
Kennedy v The Council of the Incorporated Law Institute of New South Wales (1939) 13 ALJ 563
Law of Society of NSW v Gillroy [2010] NSWADT 232
Law Society NSW v Moulton [1981] 2 NSWLR 736
Law Society of New South Wales v Bouzanis [2006] NSWADT 55
Law Society of New South Wales v Carvan Unreported Court of Appeal, 14 May 1981 (BC8111397)
Law Society of New South Wales v Delpopolo [2014] NSWCATOD 55
Law Society of New South Wales v Foreman (1994) 34 NSWLR 408
Law Society of New South Wales v Vosnakis [2007] NSWADT 42
Law Society of NSW v Koffel [2010] NSWADT 149
McBride v Walton [1994] NSWCA 199
Miller v Miller (2011) 242 CLR 446
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) ALR 449
New South Wales Bar Association v Cummins [2001] NSWCA 284
New South Wales Bar Association v Evatt (1968) 117 CLR 177
NSW Bar Association v Meakes [2006] NSWCA 340
NSW Bar Association v Murphy [2002] NSWCA 138
O'Reilly v Law Society (1988) 24 NSWLR 204
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Prothonotary of the Supreme Court of New South Wales v Da Rocha [2013] NSWCA 151
Prothonotary of the Supreme Court of New South Wales v Leon Nikolaidis [2010] NSWCA 73
Roy Morgan Research Pty Ltd v Commissioner of Taxation (2011) 244 CLR 97
Xu v Council of the Law Society of NSW [2009] NSWCA 430
Ziems v The Prothonotary of the Supreme Court of New South Wales (1957) 97 CLR 279
Category: Principal judgment
Parties: Council of the Law Society of New South Wales (Applicant)
Robert Joseph Wehbe (Respondent)
Representation: Counsel:
S Barnes (Applicant)
VRW Gray (Respondent)
[2]
Solicitors:
Law Society of New South Wales (Applicant)
Bobi Damcevski (Respondent)
File Number(s): 2014/00382832, 1420340
[3]
Introduction
By application filed on 13 November 2014 the Council of the Law Society of New South Wales (the Council) sought orders that Mr Wehbe:
1. Be reprimanded.
2. Pay the costs of the applicant as agreed or assessed.
3. Be subject to any other order as the Tribunal deems appropriate.
The grounds for the application were that Mr Wehbe was guilty of professional misconduct because he had failed to:
1. Pay superannuation entitlements generally.
2. Pay the superannuation entitlements of Mr Wisam Assi specifically.
3. Remit goods and services tax (GST) to the Australian Taxation Office (ATO).
4. Remit Pay as You Go withholding tax (PAYG) to the ATO.
By amended application dated 24 March 2015 and filed on 1 April 2015 the Council sought orders that:
1. The name of Robert Joseph Wehbe be removed from the Roll of local lawyers.
2. Robert Joseph Wehbe pay the costs of the applicant as agreed or assessed.
3. Robert Joseph Wehbe be subject to any other order as the Tribunal deems appropriate.
The grounds for the amended application were as follows:
"Robert Joseph Wehbe is guilty of professional misconduct because he:
1. Failed to pay superannuation entitlements generally.
2. Failed to pay the superannuation entitlements of Mr Wisam Assi specifically.
3. Failed to remit goods and services tax to the Australian Taxation Office.
4. Failed to remit Pay as You Go withholding tax to the Australian Taxation Office.
5. Failed to maintain appropriate management systems.
6. Breached his fiduciary duty to avoid a conflict of interest.
7. Caused Robert Wehbe & Partners Pty Limited [the company] as owner of the ILP known as Robert Wehbe & Partners to claim tax deductions that it was not entitled to claim.
8. Claimed as a personal tax deduction the costs of items that he did not pay for.
9. Claimed as a personal tax deduction the costs of items while simultaneously causing the company to claim as a tax deduction the costs of those same items."
At the hearing the Council did not press grounds 7, 8 and 9 of the amended application.
The amended application was generally opposed by Mr Wehbe for the reason that he was innocent of any conduct which could fairly be described as dishonest. Mr Wehbe accepted that in the relevant period a company of which he was the sole legal practitioner director, Robert Wehbe & Partners Pty Limited (the Company), which traded as an incorporated legal practice (ILP), failed to pay superannuation entitlements of employees and to remit GST and PAYG to the ATO. Whether he was subject to a professional obligation to ensure those payments by the Company was in contest and is considered in detail in the course of these reasons. Mr Wehbe did accept that if the Tribunal was satisfied that the employees of the Company generally or one employee, Mr Assi, in particular were not advised that the Company had stopped making superannuation contributions on their behalf the appropriate finding was one of unsatisfactory professional conduct for which he would accept a reprimand.
For the reasons which follow the Tribunal is satisfied that Mr Wehbe failed to ensure that the Company paid the superannuation entitlements of employees and remit GST and PAYG tax to the ATO. We are not satisfied that Mr Wehbe failed to maintain appropriate management systems or that he breached a fiduciary duty to the Company to avoid a conflict of interest.
Mr Wehbe did not give evidence. There was no evidence as to his present fitness to practise. The Tribunal is satisfied that the appropriate orders in all the circumstances are that Mr Wehbe's name be removed from the Roll of local lawyers and that he pay the Council's costs of the application.
[4]
History of the matter before the Tribunal
As we have indicated the matter proceeded on the basis of the amended application filed on 1 April 2015. The amended application included detailed particulars.
Mr Wehbe filed what was called a "Respondent's Provisional Defence to Allegations in amended application (pending availability of company MYOB data records)" on 4 September 2015.
The Council's preliminary submissions were filed on 4 February 2016. Mr Wehbe's opening submissions were filed on 5 February 2016. The matter proceeded to hearing on 7 March 2016. Although set down for 3 days it concluded on 8 March 2016 when directions were made in the following terms:
1. Applicant to file and serve written submissions on or before 22 March 2016.
2. Respondent to file and serve written submissions on or before 5 April 2016.
3. Applicant to file and serve any written submissions in reply on or before 12 April 2016.
The Council filed and served submissions on 22 March 2016. Mr Wehbe filed his closing submissions on 1 April 2016. The Council filed submissions in reply on 6 April 2016.
[5]
Reconstitution of Tribunal
The constitution of the Tribunal at hearing included Professor R Fitzgerald, general member. Professor Fitzgerald ceased to be a member of the Tribunal. On 26 May 2017 pursuant to s 52(1) of the Civil and Administrative Tribunal Act 2013 (NSW) (CAT Act) the President replaced Professor Fitzgerald with Ms E Hayes, general member.
[6]
Jurisdiction
On 9 July 2012 the Professional Conduct Committee of the Law Society of New South Wales (PCC) resolved to make a complaint against Mr Wehbe pursuant to s 504 of the Legal Profession Act 2004 (LPA) in respect of his failure to ensure payment of superannuation entitlements, GST and PAYG. On 28 April 2013, the PCC resolved that proceedings be instituted in the Tribunal with respect to the complaint. It made a similar resolution following receipt of further submissions from Mr Wehbe in response to the complaint on 15 May 2014.
As we have indicated the application was filed by the Council on 13 November 2014. On 11 December 2014 the PCC resolved to vary the order sought from a reprimand to an order that the practitioner's name be removed from the Roll. On 5 March 2015 the PCC resolved to make a further complaint and pursuant to leave granted by her Honour Judge Boland ADCJ the amended application was filed on 1 April 2015. The matter proceeded to hearing on 7 March 2016.
The Legal Profession Uniform Law 2014 (NSW) No 16A (LPUL) commenced on 1 July 2015. At the hearing the parties accepted that consistently with the savings and transitional provisions found in Schedule 4 of LPUL and Schedule 9 of the Legal Profession Uniform Law Application Act 2014 (NSW) the legislation governing the consideration of the complaint was the LPA as if it continued to apply and we have proceeded on that basis.
[7]
Evidence before the Tribunal
The Council read in its case the affidavits of Anne-Marie Foord a Solicitor and Manager of the Professional Standards Department of the Law Society of NSW sworn 5 November 2014 (and Exhibit AMF 1 thereto), 12 November 2014 and 12 January 2015 (and Exhibit AMF 2 thereto) and the affidavit of Wisam Assi, Solicitor, affirmed on 2 December 2015. Mr Wehbe read in his case the affidavits of Noel Dona, Licensed Real Estate Agent and former manager of the ILP sworn 8 September 2015 and Harold Maksoudian, accountant, sworn 24 October 2015. We shall refer to objections to the evidence as necessary in the course of these Reasons.
Ms Foord was cross-examined as were Mr Maksoudian and Mr Dona. We shall make reference to other material which was tendered and admitted into evidence as relevantly necessary.
There was annexed to Ms Foord's affidavit dated 12 November 2014 a copy of a letter from the ATO to Mr Mitchell Ball the Liquidator subsequently appointed to Samky Holdings International Pty Limited (Samky Holdings) (to which the Company had changed its name in April 2012) providing copies of case notes. Mr Gray on behalf of Mr Wehbe objected to the admission of that material into evidence upon the basis that the original disclosure of the material by the relevant officer of the ATO was unlawful. The issue was not resolved during the course of the hearing in contemplation of the parties having the opportunity to address the admissibility of the material in their written submissions which they did.
Mr Gray's position was that the file notes constituted "protected information" for the purposes of the Taxation Administration Act 1953 (Cth) (TAA) Schedule 1, Section 355 - 155. He submitted that it was a breach of that section for the Liquidator to provide the material to the Council and that the publication by the Liquidator to the Council of such protected information did not operate to exclude the application of s 355 - 155 to that information. He submitted that the file notes sought to be admitted into evidence were obtained illegally for the purposes of s 138 of the Evidence Act 1995 (NSW) (Evidence Act 1995).
Mr Barnes on behalf of the Council although not conceding that the objection had merit submitted that there was no simple answer to the question of whether an offence could be deemed by the disclosure of the file notes by the Liquidator to the Council. In the circumstances the Council did not press the tender of the letter and attachments and they were not received into evidence.
Ms Foord's affidavits and the documentary material contained in the exhibits to her affidavits were otherwise admitted into evidence.
[8]
Standard of proof
Mr Gray submitted that by application of the principle in Briginshaw v Briginshaw (1938) 60 CLR 336 the standard of proof in professional disciplinary proceedings required that the Tribunal "be very sure" of the facts alleged; Ziems v The Prothonotary of the Supreme Court of New South Wales (1957) 97 CLR 279 at [296] or that the facts be established to a "high degree of satisfaction"; O'Reilly v Law Society (1988) 24 NSWLR 204 at [208]. Mr Gray further submitted that the general principle is that the Tribunal should not act upon mere suspicion, surmise or guesswork; per Latham CJ in Briginshaw at [343]. The general principle is not contentious. We have also borne in mind the statement by Dixon J in the same decision at [361] who found that:
"[t]he truth is that, when the law requires the proof of any fact, the Tribunal must feel an actual persuasion of its occurrence or existence before it can be found."
The standard of proof by reference to the principle established in Briginshaw was considered by the High Court of Australia in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) ALR 449. Mason CJ, Brennan, Deane and Gaudron JJ at [449] - [450] stated as follows:
"The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary 'where so serious a matter as fraud is to be found'. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct."
We have evaluated the evidence in this matter having regard to the seriousness of the matters sought to be established by the Council.
[9]
Background facts, the Council's claims in the Amended Application and Mr Wehbe's response
Mr Wehbe was admitted to practise as a solicitor in New South Wales on 2 July 1993 and acquired a practising certificate on 10 March 1994. He was the sole principal of the law practice known as Robert Wehbe & Partners from 10 May 1999 to 30 September 2007. The Company was incorporated on 12 June 2007 and commenced trading on 1 October 2007. Mr Wehbe was its sole director. The Company owned and operated the business of the ILP known as Robert Wehbe & Partners from 1 October 2007 until 24 April 2014.
On 20 April 2012 Mr Wehbe resigned as a director of the Company, James Pasquale Dambrosio became a director of the Company and the Company changed its name to Samky Holdings.
On 24 April 2012 Trajan John Kukulovski was appointed liquidator of Samky Holdings. On 4 July 2012 he was replaced by Mitchell Warren Ball.
On 5 June 2014 Mr Wehbe entered into bankruptcy upon the filing of a debtor's petition.
Mr Wehbe admitted that during each of the financial years ended 30 June 2008 to 30 June 2012 the Company was obliged to remit GST and PAYG to the ATO and had employees in respect of whom superannuation entitlements were payable.
Mr Wehbe admitted that from 11 November 2009 until liquidation the Company remained in debt to the ATO in respect of unpaid GST and PAYG. He admitted that the ATO pursued Samky Holdings for satisfaction of the debt and that on 10 May 2012 the Deputy Commissioner of Taxation lodged a proof of debt with the liquidator in the sum of $201,890.53.
Mr Wehbe admitted that between 28 February 2010 and 24 April 2012 the Company failed to pay the sum of $99,130.03 in superannuation entitlements on behalf of its employees. These were particularised by the Council as follows:
DATE SUPERANNUATION DUE
BUT NOT PAID $
1 Feb 10 to 28 Feb 10 761.54
1 Mar 10 to 31 Mar 10 951.92
1 Apr 10 to 30 Apr 10 761.54
1 May 10 to 31 May 10 2,363.08
1 Jun 10 to 30 Jun 10 3,986.14
1 Jul 10 to 31 Jul 10 3,537.16
1 Aug 10 to 31 Aug 10 3,600.24
1 Sep 10 to 30 Sep 10 4,533.91
1 Oct 10 to 31 Oct 10 3,658.25
1 Nov 10 to 30 Nov 10 3,973.85
1 Dec 10 to 31 Dec 10 4,320.89
1 Jan 11 to 31 Jan 11 3,875.13
1 Feb 11 to 28 Feb 11 4,083,76
1 Mar 11 to 31 Mar 11 4,666.87
1 Apr to 30 Apr 11 3,760.70
1 May 11 to 31 May 11 4,015.23
1 Jun 11 to 30 Jun 11 5,555.09
1 Jul 11 to 31 Dec 11 24,547.71
1 Jan 12 to 31 Jan 12 3,714.18
1 Feb 12 to 29 Feb 12 4,708.76
[10]
Mr Assi was employed by the Company as a solicitor between 22 November 2010 until 18 May 2012. Mr Wehbe admitted that neither the Company nor he paid any superannuation contributions on Mr Assi's behalf. He did not admit the amount in arrears. Mr Wehbe admitted that it was a condition of Mr Assi's employment agreement that the Company would remit superannuation at the rate of $173.08 per week to a fund of his choice.
The Council alleged that by s 143(1) of the LPA Mr Wehbe was not excused from compliance with the professional obligations of an Australian legal practitioner and that by s 143(2)(b) LPA those obligations applied to him as if he was a sole practitioner and the employees of the company were his employees. It said that the professional obligations included ensuring that the Company paid its statutory revenue obligations and that Mr Wehbe had breached that obligation.
Mr Wehbe admitted that he bore the duties, obligations and responsibilities of a company director in relation to the activities and affairs of the Company but otherwise denied that he bore responsibility to ensure that either the Company or he complied with the Company's obligations to remit GST and PAYG to the ATO or pay superannuation on behalf of its employees.
The Council further alleged that in breach of s 140(3) of the LPA Mr Wehbe failed to ensure that appropriate management systems were implemented and maintained to allow and cause the Company to comply with its taxation and superannuation obligations.
Mr Wehbe admitted that he was under a legal duty to take action reasonably open to him in the circumstances to ensure that appropriate management systems were maintained by the Company to enable the Company lawfully to carry on its business of providing legal services in accordance with the LPA. He denied that he was bound to do so in accordance with the professional obligations of Australian legal practitioners. He denied that he, as distinct from the Company, was under a legal duty to maintain an appropriate management system which allowed and caused the Company to comply with its taxation and superannuation obligations.
The Council lastly alleged that Mr Wehbe received payment from the Company for personal expenses in breach of a fiduciary duty to avoid a conflict of interest between himself and the Company.
Mr Wehbe admitted that certain payments were made by the Company but denied that the payments were made for his benefit rather than the benefit of the Company. He denied that he breached any fiduciary duty to the Company to avoid a conflict of interest.
[11]
Issues for determination
The issues for determination are:
1. Whether the professional obligations from compliance with which Mr Wehbe was not excused by s 143(1) of the LPA included by reason of s 143(2)(b) LPA or otherwise ensuring the payment by the Company of each of GST, PAYG and compulsory superannuation contributions on behalf of employed staff;
2. If so whether in the circumstances which occurred Mr Wehbe breached that professional obligation;
3. Whether by reason of s 140(3) LPA Mr Wehbe as a legal practitioner director of the ILP was obliged to ensure that appropriate management systems were implemented and maintained in the ILP to allow and cause the Company to comply with its taxation and superannuation obligations and, if so, whether he breached that obligation;
4. Whether in the circumstances of causing certain payments by the Company for expenses personal to Mr Wehbe he breached a fiduciary duty to avoid a conflict of interest between his interests and those of the Company;
5. Whether any breach or failure which is established constitutes professional misconduct; and
6. If so, the appropriate orders to be made.
[12]
The operation of s 143 LPA
Section 6 LPA provided relevantly:
"6 Terms relating to legal practitioners
For the purposes of this Act:
(a) an "Australian legal practitioner" is an Australian lawyer who holds a current local practising certificate or a current interstate practising certificate, and
…"
Section 143 LPA provided:
"143 Obligations and privileges of practitioners who are officers or employees
(1) An Australian legal practitioner who provides legal services on behalf of an incorporated legal practice in the capacity of an officer or employee of the practice:
(a) is not excused from compliance with professional obligations as an Australian legal practitioner, or any obligations as an Australian legal practitioner under any law, and
(b) does not lose the professional privileges of an Australian legal practitioner.
(2) For the purposes only of subsection (1), the professional obligations and professional privileges of a practitioner apply as if:
(a) where there are 2 or more legal practitioner directors of an incorporated legal practice -the practice were a partnership of the legal practitioner directors and the employees of the practice were employees of the legal practitioner directors, or
(b) where there is only 1 legal practitioner director of an incorporated legal practice-the practice were a sole practitioner and the employees of the practice were employees of the legal practitioner director.
(3) The law relating to client legal privilege (or other legal professional privilege) is not excluded or otherwise affected because an Australian legal practitioner is acting in the capacity of an officer or employee of an incorporate legal practice.
(4) The directors of an incorporated legal practice do not breach their duties as directors merely because legal services are provided pro bono by an Australian legal practitioner employed by the practice."
Section 132 LPA provided:
"132 Purposes
The purposes of this Part are:
(a) to regulate the provision of legal services by corporations in this jurisdiction, and
(b) to regulate the provision of legal services in this jurisdiction in conjunction with the provision of other services (whether by a corporation or persons acting in partnership with each other)."
Section 133 LPA provided:
"133 Definitions
In this Part:
…
"professional obligations" of an Australian legal practitioner include:
(a) duties to the Supreme Court, and
(b) obligations in connection with conflicts of interest, and
(c) duties to clients, including disclosure, and
(d) ethical rules required to be observed by the practitioner."
Section 148 of the LPA provided:
"148 Application of legal profession rules
Legal profession rules, so far as they apply to Australian legal practitioners, also apply to Australian legal practitioners who are officers or employees of an ILP, unless the rules otherwise provide."
Section 163 of the LPA provided:
"163 Relationship of Act to Corporations legislation
(1) The regulations may declare any provision of this Act or the regulations that relates to an incorporated legal practice to be a Corporations legislation displacement provision for the purposes of section 5G of the Corporations Act 2001 of the Commonwealth.
(2) The regulations may declare any matter relating to an incorporated legal practice that is prohibited, required, authorised or permitted by or under this Act or the regulations to be an excluded matter for the purposes of section 5F of the Corporations Act 2001 of the Commonwealth in relation to:
(a) the whole of the Corporations legislation, or
(b) a specified provision of the Corporations legislation, or
(c) the Corporations legislation other than a specified provision, or
(d) the Corporations legislation otherwise than to a specified extent.
(3) In this section:
"matter" includes act, omission, body, person or thing."
Sub-sections 143(1) and (2) LPA were not declared to be a Corporations legislation displacement provision for the purposes of s 5G of the Corporations Act 2001 (Cth) (Corporations Act 2001) or an excluded matter for the purposes of s 5F of Corporations Act.
Section 181 of the LPA provided:
"181 Obligations of individual practitioners not affected
Except as provided by this Part, nothing in this Part affects any obligation imposed on:
(a) a legal practitioner director or an Australian legal practitioner who is an employee of an incorporated legal practice, or
(b) a legal practitioner partner or an Australian legal practitioner who is an employee of a multi-disciplinary partnership, or
(c) an Australian legal practitioner who is an officer or employee of, or whose services are used by, a complying community legal centre,
under this or any other Act, the regulations or the legal profession rules in his or her capacity as an Australian legal practitioner."
There was no issue between the parties that from 1 October 2007 to 20 April 2012 Mr Wehbe was an Australian legal practitioner within the meaning of s 6 LPA and the only legal practitioner director of the ILP within the meaning of s 143(2)(b) of the LPA and that he provided legal services on behalf of the ILP in the capacity of an officer or employee of the ILP.
[13]
Submissions
As we have indicated the Council's case was that by reason of s 143(1) of the LPA, Mr Wehbe was not excused from compliance with the professional obligations of an Australian legal practitioner. Mr Barnes on behalf of the Council said that pursuant to s 143(2)(b) those obligations applied to Mr Wehbe as if he was a sole practitioner and the employees of the Company were his employees. He said that the professional obligations imposed upon Mr Wehbe as if he were a sole practitioner included ensuring that the Company paid GST, PAYG and compulsory superannuation contributions on behalf of employed staff.
Mr Barnes submitted that the meaning of s 143 of the LPA was clear on its face providing that where there is a sole solicitor-director of an ILP that person is not relieved of normal professional responsibilities of a solicitor in New South Wales. He said that s 143(2)(b) expressly refers to the situation in which there is only one legal practitioner director of an ILP in which event the professional obligations apply as if the practitioner were a sole practitioner and the employees of the practice were employees of the legal practitioner director.
It was not part of Mr Barnes' case that s 143 of the LPA obliged Mr Wehbe to ensure that the Company remained solvent at all times. He did not submit that s 143 of the LPA obliged Mr Wehbe to ensure that the Company paid all of its debts. He submitted that the obligation is limited to liabilities imposed by statute including those to the ATO for GST and PAYG and in respect of employees' superannuation entitlements.
Nor was it part of the Council's case that s 143 in any way changed the general law in relation to the obligation of directors of corporations in respect of the payment of debts incurred by the corporation generally. Mr Barnes did not submit that Mr Wehbe had a legally enforceable obligation to personally pay the statutory liabilities of the Company. He said that the employees could not bring an action against Mr Wehbe personally for the Company's failure to pay superannuation. Mr Barnes relied upon the authorities which he said established that a solicitor who is running a law firm is obliged to ensure a number of things including that the firm or the solicitor, if he or she is a sole practitioner, meets its taxation obligations and superannuation obligations as an employer. He said it was a concept different to that of a personal liability for debt. His submission was that by the operation of s 143(2)(b) Mr Wehbe was under an obligation as a legal practitioner director of the ILP to ensure that it discharged its obligations in the respects claimed.
Mr Barnes said at the hearing that it was no part of the Council's case that Mr Wehbe was the subject of the proceedings because debts of the Company other than the ones referred to in the application were not paid. He said that it was because the statutory debts remained unpaid that Mr Wehbe was in breach of his professional obligations arising under s 143(2)(b) LPA to ensure they were paid.
As an aide to interpretation of the words "professional obligations" in s 143(1) the Council relied upon the Second Reading speech of the Legal Professional Amendment (Incorporated Legal Practice) Bill 2000 (NSW) made by the Attorney General on 31 October 2000. The Attorney General said relevantly:
"Mr DEBUS (Blue Mountains - Attorney General, Minister for the Environment, Minister for Emergency Services, Minister for Corrective Services, and Minister Assisting the Premier on the Arts) [9.06 p.m.], in reply:
… I shall make a few observations... The bill requires any corporations providing legal services to include on their boards one solicitor director. That person is generally responsible for the arrangement of the practice. It is professional misconduct if the solicitor director fails to discharge his or her duties properly.
These duties include establishing and maintaining proper management systems reporting to the Law Society any professional misconduct of an employed solicitor, and dealing with unsatisfactory conduct and professional misconduct of any employed solicitor. The director must also ensure that all solicitors in the practice discharge their professional obligations, and he or she can be found guilty of professional misconduct for failing to do that. The amendments make it clear that a solicitor employed by an incorporated practice is not excused from compliance with professional obligations, and these practices must carry professional indemnity insurance and contribute to the Solicitors Fidelity Fund in the same way that other law firms so contribute.
The bill provides that the Legal Profession Act prevails over the Corporations Law if there is an inconsistency. Duties to shareholders will not come first. The duties of a solicitor under the Legal Profession Act will be paramount and in that context I think it is fair to assert that the public will be adequately protected under these new arrangements. The bill protects both clients and solicitors from interference in the provision of independent legal advice. In other words, if it is asked whether owners and directors of corporations may seek to control the provision of legal services and interfere in the provision of independent legal advice, in that context one is able to assert that the bill protects both clients and solicitors from such interference."
The Council also made reference in relation to the interpretation of s 143 to the Second Reading speech on 7 December 2004 concerning the Legal Profession Bill 2004 (NSW) (Legal Profession Bill 2004) in which the Attorney General said:
"'However, differences in legislation around Australia allowing incorporated legal practices and multi-disciplinary partnerships restrict the use of these entities. The objective of the model provisions is to establish uniform provisions in all jurisdictions ensuring that incorporated legal practices and multi-disciplinary partnerships can practise across State and Territory borders with ease. Part 13 adopts the national model provisions relating to incorporated legal practices and multi-disciplinary partnerships and strengthens the regulatory requirements to ensure that clients' rights are protected and that professional obligations on legal practitioners are not affected by the business structures. An ILP must have at least one director who is a legal practitioner. Before carrying on business the corporation must notify the Law Society that it intends to provide legal services.
As corporations are separate legal entities at law, clause 143 ensures that legal practitioner employees of the practice cannot use the corporation to shield themselves from liability. The clause specifies that any breach by them of a professional obligation can amount to unsatisfactory professional conduct or professional misconduct."
Mr Barnes said that such a construction of the meaning of the words "professional obligations" in s 143 was consistent with the Second Reading speech of the Legal Profession Bill 2004, the provision being clearly directed to ensure that people who chose to practise by way of an ILP remained obliged to discharge professional obligations which would have fallen on them and did in fact fall on Mr Wehbe when he practised as a sole practitioner prior to incorporation of the ILP.
Mr Barnes said that the position adopted by the Council was one that had not previously been challenged in matters before the Tribunal involving the failure of a company trading as an ILP to pay similar debts. He was aware of no authority that a legal practitioner director was not obliged to ensure payment of relevant statutory obligations in those circumstances.
Mr Barnes submitted that it was Mr Wehbe's failure to ensure that the three categories of debt were paid by the Company which rendered him liable to, in the circumstances of this particular case, a finding of professional misconduct.
Mr Gray on behalf of Mr Wehbe made lengthy and detailed submissions on the issue of the proper construction of the words "professional obligations" in s 143. We have had close regard to these submissions in their terms.
Mr Gray firstly submitted that the alleged facts disclosed no valid complaint. He said by reference to the allegation that "the Solicitor as sole solicitor-director [of the Company] bore responsibility to ensure that either the Company or the solicitor comply with the Company's obligations …", that as s 136 of LPA provided that "any corporation" is subject to Part 2.6 Division 2 of the LPA eligible to be an ILP there is a recognition that such ILP is a legal entity distinct from its shareholders (and directors). He said that absent any statutory exception to the general rule neither shareholders nor directors were per se liable for the ILP's debts. The Council did not submit that the directors were liable in debt. Rather it said that legal practitioner directors were subject to the professional obligation to ensure payment of certain debts.
Mr Gray referred to the submissions of Council that it was "no part of the Law Society's case that section 143 … obliged the Solicitor to ensure that the Company remained solvent at all times". He said that this submission contradicted Council's submission that s 143 "obliged the Solicitor to ensure that the Company met all professional obligations that would be imposed upon him if he were a sole practitioner and the employees of the Company were his employees. Those "professional obligations" include the payment of (certain debts)." As we understand the Council's submissions they are not contradictory, the professional obligation to ensure payment of certain debts not being said to be one to ensure solvency generally.
Mr Gray submitted that the allegation that Mr Wehbe bore a personal responsibility to ensure a result, namely the payment of the Company's debts, meant that he was personally liable to pay this money. The Council does not seek to make that case.
Mr Gray submitted that the effect of what the Council contended was that it was a relevant professional obligation to pay all debts. He said it was irrational to suggest that some debts needed to be paid as a professional obligation but not others. He said it must follow on the Council's case that if "professional obligations" in subsection 143(2) meant paying debts the consequence is that every legal practitioner director of an incorporated legal entity is personally liable as a professional obligation to ensure that the entity pays the debts. In other words he said they are a guarantor. He said to read the section in this way is to convert what is a legal obligation into a professional obligation. This was not contended by the Council. It does not say that the professional obligation to which a legal practitioner director is subject gives rise to a liability to pay any or all of the debts of the Company personally.
Mr Gray then submitted that the reference to "professional obligations" is a reference to something which is peculiar to legal practitioners and that it was not a reference to the general law applying to all company directors. He said that s 143 is directed to professional obligations and privileges of lawyers as a unique breed and that is what s 143 is designed to preserve. Mr Gray said that the references to professional obligations and professional privileges were not intended to create a unilateral personal liability for debt. This is consistent with the Council's case. He said there was no basis for the complaint against Mr Wehbe personally that the payments were not made and that the application should be dismissed. This submission does not address the nature of the professional obligation contended by the Council, not being an obligation in debt but to ensure the payment of the debt by the Company.
Mr Gray further submitted that on the one hand s 143 while binding legal practitioner directors to ensure payments are made, on the other hand did not confer private rights on other parties to ensure that such payments are received and that this created in his words "an imperfect or unenforceable statutory duty". He said that if Parliament wanted a legal practitioner director to be personally liable for practice debts it could have said so. The Council did not contend that any personal liability for debt arose under s 143.
Mr Gray questioned why the asserted "professional obligation" applied with respect to some debts of the ILP but not to other debts. He said that it cannot be the case that PAYG and GST instalments and unpaid superannuation guarantee payments are in a special category because the legal practitioner director is personally liable to pay them. He says there is no personal obligation to pay these company debts on the part of a solicitor-director. He said that the solicitor-director is in the same position as every other director of the Company (not just ILP) which fails to meet such payments, namely if issued by the Commissioner a notice under schedule 1 section 269-25 of the TAA in respect of which all directors are severally liable to a penalty. He said that they are not personally liable for the Company's debt by reason of schedule 1 section 269-20 of the TAA unless and until the Commissioner issues a notice to a director the director has no personal liability for anything related to the Company's debt. We accept this submission. It is however not Council's case that the professional obligation on a legal practitioner director contemplated by s 143 is one of personal liability for debt.
Mr Gray further submitted that every director of a company including a legal practitioner director of an ILP which does not pay the debts ceases to be liable for any penalty as soon as the Company goes into liquidation; schedule 1 section 269-15(2)(c) of the TAA. He said that this applied to Mr Wehbe in the present case and did apply to him before the proceedings were instituted. Mr Gray says that in its amended application at paragraph 64 the Council accepts that Mr Wehbe was not then liable and since 24 April 2012 could not have been liable for any penalty under the TAA by reason of the liquidation.
In Mr Gray's submission it followed that if the complaint was based upon the premise that Mr Wehbe had a personal statutory liability to pay the debts or was subject to a statutory penalty equal to the amount of the total of the debts, the premise was false when the proceedings were instituted and at all times previously. He said that on that basis alone as at the date the proceedings were instituted Mr Wehbe cannot have been under any duty (or "professional obligation"), and had never been under any duty (or "professional obligation") to "ensure" payment of the debts within the meaning of s 143(1). As we have indicated it is not Council's case that Mr Wehbe had a personal liability in debt. The submission is based upon a premise that he did.
By way of his second answer to the claim, Mr Gray submitted that s 143 applies to "privileges" and "professional obligations". He said that the section does not apply to duties and liabilities to which all ILP directors and officers are subject including non-solicitors.
Mr Gray said that the Second Reading speech referred to by the Council recognised that the entity providing legal services was a separate legal entity with its own rights and duties and continued:
"Part 13 … strengthens the regulatory requirements to ensure that clients' rights are protected and that professional obligations on legal practitioners are not affected by the legal structures …. As corporations are separate legal entities at law, clause 143 ensures that legal practitioner employees of the practice cannot use the corporation to shield themselves from liability …"
Mr Gray said this has nothing to do with company liabilities owed to employees or other creditors. He says that it is concerned with "clients' rights".
Mr Gray referred us to the example of an ILP being a company with a legal liability to pay a debt. He said that the directors have no personal liability to pay the debt and it is not a "professional obligation" of a legal practitioner director to "ensure" that a company pays the debt. He said that s 143 is irrelevant to that situation.
Mr Gray further suggested a scenario in which the directors including non-solicitor-directors personally guaranteed payment of a debt by the ILP. He said that the guarantee gave rise to a personal legal liability on each director to pay the debt. He said that in those circumstances "ensuring the Company pays the debt" by the director guarantors could not be a "professional obligation" of those directors who happen to be solicitors within s 143. It followed, he submitted, that if there was a contingent statutory liability on the directors (whether solicitor-directors or not) personally to a penalty for example under schedule 1 section 269-25 of the TAA that liability did not make "ensuring" payment of the debt a "professional obligation" for those directors who happen to be solicitors. This submission did not address the contention by the Council as to the nature of the professional obligation attaching to legal practitioner directors to ensure payment of a statutory debt standing separately to any legal liability.
Mr Gray suggested a situation in which a majority of non-solicitor directors of a company determine which of its creditors to pay because of inability to pay them all in full. He said that such a decision would be a "business judgment" within 180(3) of the Corporations Act 2001 and that by virtue of s 180(2) a director making a "business judgment" and satisfying the requirements of s 180(2) "is taken to meet the requirements of subsection (1) [referring to care and diligence] and their equivalent duties at common law and in equity". He said that it is inconsistent with the operation of the Corporations Act 2001 to construe s 143(2) of the LPA in a way which would result in inhibiting the freedom of choice of solicitor-directors of an ILP. Mr Gray suggested that any culpability under s 143(2) of the LPA or indeed arising from a contingent liability of a solicitor-director to a penalty under the TAA schedule 1 section 269 would give the solicitor-director a "material personal interest" in the decision within the Corporations Act 2001 s 180(2) so as to deprive him or her of the business judgment defence to a claim for breach of the duty of care and diligence under s 180(1).
Mr Gray submitted that on the Council's construction of s 143(2) any solicitor-director would be in breach of a "professional obligation" even if the majority of directors refused to sanction appropriation of company assets to payment of a class of company debts unless the solicitor-director paid the debt from his own resources.
Mr Gray made reference to paragraph 64 in the amended application in the following terms:
"64. The disposal of the Company to Samky Holdings had the effect that the Solicitor has suffered none of the consequences that flow from being a solicitor director of an incorporated legal practice that is liquidated".
Mr Gray said that a possible implication from paragraph 64 was that the solicitor-director had a remedy to resign as a director. He asked rhetorically whether by him resigning, the Council is acknowledging that the solicitor-director extinguished his liability under s 143. He says that if this is the case as Mr Wehbe resigned as a director on 20 April 2012 his "professional obligation" to "ensure" that the relevant debts were paid by the Company was extinguished on that day and that the present proceedings must be dismissed. It is not the Council's case that the relevant professional obligation which is said to arise independently of an individual occupying the office of director of a corporation is extinguished by resignation as a director.
Mr Gray said that it was significant that the Council's construction of s 143 does not coincide with the director's liability to a penalty under the TAA schedule 1 section 269-35. He did not develop this submission. The Council's case is that the professional obligation stands separate to any legal obligation or liability to a penalty.
Mr Gray also said that the Council had failed to articulate exactly what is alleged that the "professional obligation" under s 143 of the LPA entails. He asked again, rhetorically, if they related to some company debts, which were they and why they did not relate to all company debts? The relevant debts for PAYG, GST and superannuation guarantee payments are all unsecured. He asked whether it is asserted that the "professional obligation" is to "ensure" that the Company pays some unsecured debts but not other unsecured debts. He said that if this was so the section would operate contrary to ss 555 and 559 of the Corporations Act 2001 with the consequence that if the ILP were wound up such payments within the relation-back period would be voidable against the liquidator under s 565 as undue preferences.
Mr Gray said that the Council also needed to explain s 163 of the LPA. He said that where Parliament intended to modify the Corporations Act 2001 in relation to an ILP it said so expressly, for example, LPA sections 143(4), 154(1)(a), 155(2), 156(4) and (5), 157(1), 158 and 163. He submitted that s 143(2) contains no such provision. It is not suggested by the Council that s 143(2) operates to modify the Corporations Act 2001.
Mr Gray said that it was significant that Parliament could have legislated to give special status to PAYG, GST and superannuation guarantee payments but did not so legislate. He said there were many circumstances where a business enterprise receives money for a particular purpose to pay a third party. Mr Gray submitted that unless the moneys are held in a designated account (often a trust account) the money received and held is merely part of the working capital of the enterprise. He said that if the enterprise fails the rights of those for whose benefit the party was paid are the rights of an unsecured creditor. He said that that is the position of the ATO in the case of unpaid PAYG, GST remittances and superannuation guarantee payments. He said that to attribute a special status to such unsecured ATO liabilities distinct from other unsecured liabilities "is to intrude into the fields of bankruptcy and company liquidation which is not the role of LPA section 143 …". He says that Parliament did not legislate to give such liabilities any special status beyond schedule 1 section 269 of the TAA. He says in effect that the proper construction of s 143 does not extend to a reading giving rise to a legal consequence which the Parliament did not enact. He says this is especially true having regard to the operation of s 163 of the LPA.
Mr Gray continued that it was "irrational" to contend that solicitor-directors have a "professional obligation" to "ensure" that a company makes payments which are contrary to the principles enacted in and likely to be voidable under the Corporations Act 2001. He said that if the Council was asserting that the "professional obligation" under s 143(2) related to all company debts and with the effect of maintaining solvency then there was an implausible inconsistency between that section and s 140(3) which did not require the solicitor to ensure the Company remained solvent. That is not the Council's case.
Mr Gray said that the irrationality which he identified including inconsistencies with the Corporations Act 2001 demonstrated that the Council's construction of s 143(2) cannot be correct. He referred us to decisions of the High Court of Australia in which it has been held that principles said to represent common law or equity (as distinct from statute) must be "coherent", that is, consistent with established legal norms; Miller v Miller (2011) 242 CLR 446 at 454, Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at 513[23], Gnych v Polish Club (2015) 255 CLR 414 at [72]. He said that the construction asserted by the Council is not coherent.
Mr Gray then referred to the submission by the Council (at paragraph 37) that:
"s. 143 of the [LPA] placed the solicitor in the position of a sole practitioner who employed those who worked for the Company."
Mr Gray said that this contention was manifestly wrong. He said that if it were true LPA s 150(2) would be worded differently. That section provided that an ILP (not its directors or shareholders) was vicariously liable for any debt or liability which would have been enforceable if its officers and employees were practising in partnership. Mr Gray submitted that if Parliament had intended solicitor-directors of an ILP per se to be personally liable for all or any debts of the ILP, the obvious place to enact such a provision would be s 150 or at the very least to state a provision imposing such a liability in terms corresponding to s 150(2). He says that Parliament enacted no such provision. He says that the Council's contention that Parliament achieved the result by implication from s 143(2) is a highly unlikely construction of that subsection. It is not the Council's case that s 143(2) imposes a personal liability in debt.
In paragraph 35 of its written submissions the Council made reference to an apparent denial by Mr Wehbe "that he had a personal responsibility to ensure those payments [superannuation entitlements] were made". Mr Gray assumed in his submissions that the Council equated the "personal responsibility" with the "professional obligations" in s 143. He suggested that the solicitor is a company employee and was by s 143 in the same position as the Company, that is, he had the same duties and liabilities as the Company itself. He said that the contention by the Council that s 143 "placed the Solicitor in the position of a sole practitioner who employed those who worked for the Company" is wrong. He said that s 143(2) specifically states that the subsection applies "for the purposes only of subsection (1)". He said that s 143(2) does not apply for any purpose outside s 143(1). He said that s 143(1) provides that an Australian legal practitioner (not any other employee) who in the capacity of an employee of an ILP "is not excused from compliance with professional obligations … and does not lose the privileges of an Australian legal practitioner". Mr Gray submitted that it necessarily followed that s 143 was concerned with the professional obligations and professional privileges of Australian legal practitioners and that it had nothing to do with enforcement of legal rights or discharge of legal liabilities.
Mr Gray submitted that it was irrational in those circumstances for the Council to assert that s 143(2) makes it a "professional obligation" of a solicitor-director of an ILP to "ensure" that the ILP remits PAYG and superannuation guarantee payments in respect of those of its employees who are Australian legal practitioners but not in respect of its other employees. This is not contended by the Council.
Mr Gray said that such a contention would mean that the solicitor-director of an ILP is "in the position of a sole practitioner", that is, has unlimited personal liability for all debts of the ILP. This is not contended by Council. He said that such a contention negated the concept of separate legal entity which he says is contrary to the explicit recognition of the concept in the Attorney-General's Second Reading speech. He said that it imposed personal liability on solicitor-directors who may be a minority of the board of directors. He said that it was a basic misconception to assert for the purposes of s 143(2) that it is a professional "obligation" of a solicitor-director of an ILP to "ensure" that a company debt is paid.
Mr Gray noted that the Council based this aspect of its case on s 143(2) LPA, that the allegation is as to non-payment by the Company of particular debts and that there is no allegation of dishonesty.
Mr Gray submitted that the correct construction of s 143 had not been considered in previous Tribunal decisions. He said that as a consequence previous decisions cannot be seen as authoritative. He said that the Tribunal was unconstrained by any previous Tribunal decision in determining the true construction of the statutory provision.
We note that the Tribunal in Council of the Law Society of NSW v Andreone (No 1) [2014] NSWCATOD 49 at [48] made a finding that s 143(2)(b) applied to the respondent in that case but was not called upon to construe the section. We were referred to no authority in which the meaning of the words "professional obligations" was considered in the context of s 143.
[14]
Consideration
The central issue in this aspect of the proceedings is whether the obligation alleged by the Council, namely that of Mr Wehbe to ensure that the ILP met its statutory fiscal obligations fell by reason of the operation of s 143(2)(b) or otherwise within the meaning of the words "professional obligations" in s 143(1) LPA on their proper construction.
The general principles of statutory construction require interpretation of the ordinary and grammatical sense of the words used having regard to their context in the LPA and the purpose or object underlying the LPA.
Gleeson JA with whom the other members of the Court agreed said in Smith's Snack Food Company Limited v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470 at [84]:
"84 … As the High Court has repeatedly stated, the process of statutory construction begins with a consideration of the text: Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 293 ALR 257 at 268 [39]. This requires a consideration of the ordinary and grammatical meaning of the words of the provision by reference to all the provisions of the statute. Context and legislative purpose are also important: Commissioner of Taxation v Unit Trend Services Pty Ltd [2013] HCA 16; 297 ALR 190 at [47] per French CJ, Crennan, Keifel, Gageler and Keane JJ, referring to the statement of French CJ and Hayne J in Certain Lloyd's Underwriters Subscribing to Contract No IHOOAAQS v Cross [2012] HCA 56; 293 ALR 412 at 418 [24]."
Section 133 LPA to which we have referred provided that the term "professional obligations" includes duties to the Supreme Court and clients including disclosure, obligations in connection with conflicts of interest and ethical rules. These are not identified exclusively.
The Macquarie Dictionary online (www.macquariedictionary.com.au) defines "professional" to mean as an adjective "relating or appropriate to a profession". "Obligation" is defined as a noun to mean "a binding requirement as to action; duty".
The Oxford English Dictionary (https://en.oxforddictionaries.com/) defines "professional" as an adjective to mean "relating to or belonging to a profession; worthy of or appropriate to a professional person; competent, skilful, or assured". "Obligation" is defined as a noun to mean "an act or course of action to which a person is morally or legally bound; a duty or commitment".
Contextually, s 143 was found in Division 2 of Part 2.6 of Chapter 2 of the LPA.
Chapter 2 of the LPA was headed:
"Chapter 2 - General requirements for engaging in legal practice"
Part 2.6 was headed:
"Part 2.6 - Incorporated legal practices and multi-disciplinary partnerships"
Division 2 was headed:
"Division 2 - Incorporated legal practices"
Chapter, Part and Division headings are by s 35(1) of the Interpretation Act 1987 (NSW) taken to form part of the Act.
Context to s 143 is given by the other provisions found in Division 2 of Part 2.6. Section 140(1) provided that an incorporated legal practice is required to have at least one practice director.
Section 140(2) provided that each legal practitioner director is responsible for the management of the legal services provided by the ILP. Section 140(3) required each legal practitioner director to ensure appropriate management systems are implemented to enable the provision of legal services by the ILP in accordance with the professional obligations of Australian legal practitioners and other obligations. Section 140(4) provided that if it ought reasonably be apparent to a legal practitioner director the provision of legal services by the ILP will result in breaches of professional obligations or other obligations, the director must take all reasonable action to ensure that the breaches do not occur and appropriate remedial action is taken. Section 140(5) provided that contraventions of s 140(3) or 140(4) by a legal practitioner director is capable of being professional misconduct.
Section 141(1) provided that a legal practitioner director might be liable to a finding of unsatisfactory professional conduct or professional misconduct in respect of the unsatisfactory professional conduct or professional misconduct of an Australian legal practitioner employed by the ILP; conduct of another director not being an Australian legal practitioner of the ILP that adversely affects the provision of legal services by the ILP and the unsuitability of any other director not being an Australian legal practitioner of the ILP to be a director of a corporation that provides legal services.
Section 142(1) provided that an ILP contravened the section if it did not have a legal practitioner director for a period exceeding seven days. By section 142(3) an ILP must not provide legal services during any period it is in default of director requirements. By section 142(2) the ILP must notify the Law Society as soon as possible when it ceased to have any legal practitioner directors.
Section 144(1) required both the ILP and each insurable solicitor who was a legal practitioner director or officer or employee to comply with the obligations of an insurable solicitor under Part 3.3 with respect to professional indemnity insurance. Section 144(3) provided that if subsection 143(1) was not complied with a legal practitioner director who holds a local practising certificate might have their practising certificate suspended by the Law Society where the failure continues.
Section 148 provided that professional rules which applied to Australian legal practitioners also apply to Australian legal practitioners who are officers or employees of an ILP.
Section 143 found in Division 2 of Part 2.6 is within those provisions imposing personal responsibility upon a legal practitioner director in respect of management of the provision of legal services by an ILP.
The general purposes of the LPA were set out in s 3 and included:
"3 Purposes
The purposes of this Act are as follows:
(a) to provide for the regulation of legal practice in this jurisdiction in the interests of the administration of justice and for the protection of clients of law practices and the public generally, …"
By s 132 to which we have referred one of the purposes of Part 2.6 was to regulate the provision of legal services by corporations in New South Wales.
Applying the principles of construction to which we have referred we find that the words "professional obligations" in s 143 in their ordinary meaning are duties, obligations or commitments to which a person is bound as a member of the legal profession. They are within the terms of s 143(1) duties, obligations or commitments from which a legal practitioner director of an ILP was not excused notwithstanding that the legal practice was being conducted by the ILP. The ordinary meaning of the words so construed is consistent with the other duties and obligations identified in the non-exhaustive definition of "professional obligations" in s 133. The maintaining of professional obligations under s 143 so construed is consistent with the other provisions of Part 2.6 of the LPA which provide for a regime by which a legal practitioner director remained responsible for the personal oversight, management and control of the ILP conducting the law practice. The meaning is consistent with the purpose of Part 2.6 for regulating the provision of legal services by corporations in New South Wales and within LPA more generally for the purpose of regulating legal practice in New South Wales in the interests of the administration of justice and for the protection of clients of legal practices and the public.
Such a construction is confirmed by the contents of the Second Reading speech for the Legal Profession Bill 2004 to which we have referred. Clause 143 which was introduced upon the recognition that although corporations are separate legal entities at law, practitioners, officers and employees could not use the corporation to shield themselves from their professional obligations which are preserved notwithstanding incorporation.
We find that upon the ordinary meaning of the words used in s 143(2)(b) falling within the same context in Part 2.6 and for the same purposes the professional obligations of a single legal practitioner director are those to which he or she would have been subject in sole practice as an Australian legal practitioner.
Having identified the ordinary meaning of the words "professional obligations" in s 143, we turn to consider whether the obligation of which Mr Wehbe is said to be in breach, namely that of an Australian legal practitioner to ensure payment of GST, PAYG and employees' superannuation entitlements under the general law falls within that meaning.
The authorities recognise the existence of a distinct obligation on the part of members of the profession to ensure the payment by a law practice of PAYG, GST and superannuation contributions on behalf of employees. The obligation operates whether the practitioner is in sole practice, a member of a partnership or a legal practitioner director of an ILP.
We refer firstly to those authorities concerning sole practitioners or partners in unincorporated legal practices. A number of the authorities have had regard to the decision of the New South Wales Court of Appeal in New South Wales Bar Association v Cummins (2001) 52 NSWLR 279 which concerned non-payment of tax by a barrister. The Chief Justice with whom Mason P and Handley JA agreed said at [28] - [29]:
"28 In the present case, I am satisfied that the barrister's complete disregard of his legal and civic obligations with respect to the payment of income tax was such that he must be regarded, at the present time, as permanently unfit to practice.
29 The key admission in the statement of agreed facts is that for thirty-eight years, Mr Cummins did not lodge any taxation returns relating to his professional practice, or for any other personal income. This failure was an inexcusable pattern of illegal conduct in complete defiance of his civic responsibilities. Mr Cummins put no evidence before the Court which could explain, let alone excuse, this conduct. For almost four decades, Mr Cummins took advantage of the full range of public services made available by taxation, not least in the provision of the court system in which he earned his income. He left the burden of all of this to his fellow citizens. Throughout the four decades he engaged in the rank hypocrisy of advocating that other people should perform their legal obligations, while systematically refusing to perform his own."
The Chief Justice at [66] made a finding of professional misconduct on the basis of Mr Cummins' failure to lodge returns for thirty-eight years. His Honour found in the alternative at [67]:
"67 … the extent of Mr Cummins' failure to observe his legal obligations and civic responsibilities by such a systematic course of improper conduct over such a long period of time is of such gravity as to constitute professional misconduct, for the reasons I have mentioned above in relation to fitness."
The failure to lodge tax returns was identified to be in breach of the barrister's civic responsibilities and separate to any legal obligation.
The Tribunal in Law Society of New South Wales v Bouzanis [2006] NSWADT 55 at [18] found that the failure by the solicitor to make superannuation payments on behalf of his employee was:
"a sufficiently serious abrogation of his fiscal responsibilities in the practice of law to warrant a finding by the Tribunal that the Solicitor is guilty of professional misconduct."
The decision of the Administrative Decisions Tribunal in Law Society of New South Wales v Vosnakis [2007] NSWADT 42 concerned the failure by the practitioner to make PAYG, GST and superannuation employee contributions. The Tribunal determined at [33] that such a failure comprises, by reference to Cummins at [29],:
"an inexcusable pattern of illegal conduct in complete defiance of his civic responsibilities."
The decision in Council of the Law Society of New South Wales v Dalla [2011] NSWADT 130 concerned a solicitor's failure to pay employees' superannuation entitlements. An instrument of consent under s 564 LPA was filed. The Tribunal found at [23] - [24] that the failure to pay such contributions was professional misconduct at common law and within the statutory definition in 497(1)(b) of the LPA. The Tribunal relied upon the passage in Law of Society of NSW v Gillroy [2010] NSWADT 232 at [43] to which we shall refer in the context of incorporated legal practices, which identified the breach of "very important and basic statutory obligations" in the nature of a failure to pay superannuation contributions, Group Tax and GST.
In the course of its decision the Tribunal in Dalla at [31] also referred to Gillroy at [37] where the Tribunal accepted Mr Gillroy's acknowledgement that the statutory obligation with regard to payment of superannuation contributions needed to be complied with and that its breach in that case lead to a serious breach of his professional obligations. The Tribunal in Dalla at [32] further had regard to Tribunal decisions in Council of the Law Society of New South Wales v Somerfield [2008] NSWADT 235 and Council of the Law Society of New South Wales v Nicopoulos [2011] NSWADT 84 which made reference to "professional obligations" concerning financial management in the context of failure to pay superannuation contributions.
The Tribunal in Council of the Law Society of NSW v Adams [2011] NSWADT 177 at [149] characterised non-payment of income tax in the circumstances of the case as a "systematic avoidance of [the practitioner's] legal and civic duties".
Turning to the obligations of a legal practitioner director of an incorporated legal practice the Tribunal in Law Society of NSW v Koffel [2010] NSWADT 149 at [42] which concerned non-payment of superannuation contributions noted that the solicitor accepted his "fiscal/revenue responsibilities".
Gillroy concerned complaints that solicitor-directors had failed to pay superannuation contributions, Group Tax and GST. The proceedings were dealt with by way of an instrument of consent. The Tribunal found at [43]:
"Each of the solicitors was clearly guilty of a breach of a very important basic statutory obligations as particularised in the Law Society's Application namely a failure to pay employees' superannuation contributions; a failure to pay employees' group tax and a failure to pay GST."
The Tribunal found at [44] that the conduct of the solicitors was conduct which clearly occurred in the course of the legal practice conducted by the firm, of which the solicitors were principals. As we have indicated the Tribunal at [32] noted the concession by the solicitors that their action in deferring statutory payments was not only in breach of their statutory obligations to the Commonwealth "but also a serious breach of their professional obligations, and that these failures amounted to professional misconduct". The Tribunal noted at [37] Mr Gillroy's recognition that a statutory obligation needed to be complied with and that its breach led to a serious breach of his professional obligations.
The Tribunal accepted the concessions in their terms. Ultimately the finding was made at [43] to which we have referred.
In Law Society of New South Wales v Delpopolo [2014] NSWCATOD 55 the solicitor was the principal of an incorporated legal practice which delayed or failed to make superannuation payments on behalf of an employee. The Tribunal at [47] referred to the statutory obligation of an employer to pay superannuation in respect of employees. The Tribunal found at [56]:
"Consistently with the authorities referred to we are satisfied that the failure by the practitioner to cause Axis Legal to make superannuation payments as detailed is in all the circumstances a sufficiently serious abrogation of her financial responsibilities in the practice of law to warrant a finding by the Tribunal that she is guilty of professional misconduct."
The Council of the Law Society of New South Wales v McHugh [2014] NSWCATOD 37 concerned an ILP which had failed to make compulsory superannuation payments in respect of its employees. It also failed to remit GST and PAYG instalments. The Tribunal held at [32] - [33]:
"32 Tax 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.
33 It has been held more than once that when failures of [t]his (sic) 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]."
In Andreone (No.1) [2014] the Tribunal considered a failure by an ILP to pay GST and PAYG and compulsory employer's superannuation contributions. The Tribunal proceeded on what appeared to have been common ground that both the law practice and the solicitor had failed to pay amounts due to the ATO being an obligation arising both at law and as part of the solicitor's civic duty; at [110]. A similar finding was made in respect of unpaid superannuation contributions; at [120]. The Tribunal found at [48] that s 143(2)(b) applied to the solicitor but did not consider the meaning of the words "professional obligations".
The authorities to which we have referred have determined that legal practitioners carrying out legal practice on their own account or in partnership or as legal practitioner directors of an ILP are under an obligation to ensure that certain statutory fiscal liabilities of a practice including the payment of GST, PAYG, income tax and staff superannuation contributions are met. It is plain from the authorities that such an obligation exists alongside and is to be distinguished from any legal liability for debt although in the case of sole practitioners or partnerships the practitioners are subject to both. This obligation is referred to variously as a "civic responsibility" (contrasted with a legal obligation) in Vosnakis (referring to Cummins), "fiscal responsibility" in Bouzanis, "legal and civic duty" in Adams, "fiscal/revenue responsibilities" in Koffel, "financial responsibilities" in Delpopolo and "civic duty" in Andreone (No.1) [2014]. The Tribunal's decision in Gillroy and referred to in Dalla accepted the characterisation of such an obligation as a "professional obligation" although its ultimate determination in terms referred to breach of a statutory obligation. The Tribunal in McHugh also recognised the existence of an obligation upon a legal practitioner director to ensure that an ILP satisfied its revenue obligations.
We find that the obligation identified in the authorities falls within the ordinary meaning of the words "professional obligations" in s 143 to which we have referred. It is a duty or commitment to which a person is bound as a member of the profession.
Contextually, the obligation sits consistently alongside the professional obligations specified in s 133 personal to the legal practitioner director and preserved by s 143(1) and more generally with the other provisions regulating the responsibilities and obligations of legal practitioner directors in respect of the management of incorporated legal practices set out in Part 2.6 LPA. It is consistent with the purposes of Part 2.6 set out in s 132 and more generally those of the LPA set out in s 3. That the ordinary meaning of the words "professional obligations" in s 143 includes the obligation arising at common law is confirmed by the purpose of clause 143 identified in the Second Reading speech of the Legal Profession Bill to which we have referred.
The authorities establish that the professional obligation identified is one to which a sole practitioner is subject. We find that by s 41(2)(b) the professional obligation applied to Mr Wehbe as a single legal practitioner director of an ILP. The authorities also establish that legal practitioner directors of an ILP are also subject to the obligation at common law although the Council does not put its case on that basis.
In respect of the very detailed submissions made on Mr Wehbe's behalf by Mr Gray, we agree that the professional obligation which we have identified is separate to and is not a duty or liability to which all ILP directors and officers are subject. It is an obligation on a legal practitioner in that capacity. Non-legal practitioner directors are not subject to it. Mr Gray submitted that the Second Reading speech in respect of s 143 of the LPA on 7 December 2004 was concerned with "client's rights" and that this has nothing to do with company liabilities owed to employees or other creditors. On our reading it goes further than this. The Second Reading speech makes reference to the protection of client's rights by the strengthening of regulatory requirements. It separately states that professional obligations of legal practitioners are not affected by the business structure. These include professional obligations concerning third parties.
Mr Gray submitted that having no personal liability to pay a debt, a solicitor-director does not have a professional obligation to ensure that the company pays the debt. We do not accept the submission. We have found on the proper construction of the words of s 143 and a review of the authorities that that the professional obligation exists separately to any personal legal liability in debt. The existence of the professional obligation does not affect legal obligations of legal practitioner and non-legal practitioner directors. It is a distinct obligation arising out of pre-existing professional standards which the legislature sought to preserve, as the Attorney General said in the Second Reading speech, to ensure that legal practitioner employees of the practice cannot use the corporation to shield themselves from personal responsibility including in respect of professional standards.
Mr Gray submitted that where a company had to choose which of its creditors to pay because of an inability of pay them in full it was a "business judgment" within s 180(3) of the Corporations Act 2001. He said the director making a "business judgment" and satisfying the requirements of s 180(2) is "taken to meet the requirements of subsection 1 being those of care and diligence and and their equivalent duties at common law and in equity". He said that it was plainly incoherent with this enactment to construe s 143(2) to inhibit the freedom of choice of solicitor directors of incorporated practices and thereby deprive a solicitor director of a defence to a claim for breach of statutory duty of care and diligence under s 180(1).
In Mr Gray's submission the contingent liability of a solicitor director to a penalty under the TAA Schedule 1 Section 269 for a company's failure to meet payment of statutory obligations might also give rise to a material personal interest such as to deprive a practitioner of the business judgment defence. Mr Gray did not develop the submission and the Council did not address it.
Section 180 of the Corporations Act 2001 provides:
"(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see section 1317E).
Business judgment rule
(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)--it does not operate in relation to duties under any other provision of this Act or under any other laws.
(3) In this section:
"business judgment" means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation."
In the ordinary meaning of the words used in s 180(2) the Business Judgment Rule operates only in respect of the making of a business judgment for the purposes of satisfying the duties of care and diligence provided for in s 180(1) and the equivalent duties at common law or in equity. This is confirmed by the contents of the memorandum to the Corporate Law Economic Reform Program Bill 1998 which introduced s 180 and to which regard might be had as extrinsic material under s 15AB(1) of the Acts Interpretation Act, 1901 (Cth) to confirm the ordinary meaning of the words used. The memorandum stated relevantly:
"6.3 While it is accepted that directors should be subject to a high level of accountability, a failure to expressly acknowledge that directors should not be liable for decisions made in good faith and with due care, may lead to a failure by the company and its directors to take advantage of opportunities that involve responsible risk taking.
6.4 The statutory formulation of the business judgment rule will clarify and confirm the common law position that the Courts will rarely review bona fide business decisions. However the statutory formulation will provide a clear presumption in favour of a director's judgment. In particular, while the substantive duties of directors will remain unchanged, absent fraud or bad faith, the business judgment rule will allow directors the benefit of a presumption that, in making business decisions, if they have acted on an informed basis, in good faith, and in the honest belief that the decision was taken in the best interests of the company, they will not be challenged regarding the fulfilment of their duty of care and diligence."
An individual might be subject at the same time to different duties or obligations in different capacities. These might arise as in this case by reason of him or her occupying a position as a director or officer of a corporation and at the same time being the subject of professional obligations as a legal practitioner. In its terms the section does not operate to provide a defence to a breach of any other statutory or common law obligation or duty by a person who is a director whether as a director or on any other account. In its terms the section does not operate to affect other substantive duties or obligations to which persons who are directors might be subject.
Mr Gray has pointed to no statement of principle or other authority in support of his submission as to the basis upon which a statutory provision expressed in broad and unlimited terms purporting to preserve the operation of a pre-existing professional duties to which a person who was also a director of a corporation would be subject should be construed so as to exclude any duty giving rise to a material personal interest for the limited purposes of s 180 with the effect that the provision preserving the duty would operate otherwise than upon the ordinary meaning of the words used properly construed by reference to the text, context and purposes of the Act in which they appear.
Mr Gray's submission, if accepted, would mean that no other statutory duty or obligation could be construed to operate in a way to give rise to a material personal interest so as to deprive a director of the benefit of the Business Judgment Rule for the limited purposes of s 180(2) of the Corporations Act 2001. It would follow from Mr Gray's submission that notwithstanding their terms by reference to text, context and the purpose of Part 2.6 specified in the Second Reading speech, other provisions of Part 2.6 of the LPA would be subject to the same construction. Such a construction could operate to narrow the scope of professional obligations or other obligations in respect of the provision of legal services by the ILP under s 140(4) or the nature of conduct of another director who is not an Australian legal practitioner which adversely affects the provision of legal services by the ILP under s 141 or the requirement that the ILP and each insurable solicitor comply with obligations with respect to professional indemnity insurance under s 144(1).
More particularly upon Mr Gray's submission whilst all legal practitioners including legal practitioner directors would remain subject to the professional obligations which are expressly defined in s 133 LPA including duties to the court, clients and in respect of conflicts of interest, the obligation to ensure payment of statutory creditors would not apply to legal practitioner directors of an ILP while continuing to apply to all other practitioners.
The words "professional obligations" are subject to no words of limitation. The definition in s 133 is not exhaustive . In our view there is no basis to imply the construction contended for by Mr Gray into those words in s 143 in their ordinary meaning by reference to their text, context or purpose or the purposes of the legislation as identified in the Second Reading speech.
Mr Gray further submitted that where non-solicitor directors might constitute the majority of the board of an ILP and decide which company debts would be paid and which would not be paid the result would be that any solicitor director would be in breach of a professional obligation if the majority of directors refused to sanction appropriation of company assets to payment of a special class of company debts. Such a result would however be consistent with the regime operating under Part 2.6 for the purposes identified which contemplate that a practitioner is responsible for the management of the ILP and providing sanction for breach. Consistently to the extent that the refusal by the non-practitioner directors to sanction the payment of statutory creditors could adversely affect the provision of legal services by the practice, it would have rendered the legal practitioner director liable to findings of unsatisfactory professional conduct or professional misconduct under s 141(1) of the LPA. As we have indicated to exclude the obligation to ensure payment of statutory creditors from professional obligations would result in an inconsistent application of the professional obligation between legal practitioner directors and other practitioners. It would also be inconsistent with the operation of other provisions in Part 2.6 generally and the purposes of the introduction of that part as identified in the Second Reading speech.
Mr Gray suggested that ensuring payment of some unsecured debts but not others could have the consequence that upon winding up the ILP such payments within the relation-back period would be voidable under s 565 of the Corporations Act 2001. He said that s 143(2) contains no provision by which its operation is intended to modify the Corporations Act 2001. That is so. However, in our view the professional obligation which has been identified does not affect the operation of the Corporations Act 2001 in the respect contended by Mr Gray. It is as we have identified an obligation personal to the practitioner not the corporation and stands separately. The obligation is one arising at common law from the authorities to which we have referred. Section 143 merely preserves the obligation for legal practitioner directors for the purpose of ensuring that they cannot shield themselves from professional responsibility which otherwise existed for the protection of the public. Any payment by the corporation will remain subject to the operation of the Corporations Act 2001. Nor do we accept Mr Gray's submission that any special status is afforded to unsecured ATO liabilities and intrudes into the fields of bankruptcy and company liquidation which is not the role of s 143. On a proper construction of s 143, and as Mr Barnes submitted, the section gives rise to no legal obligation in debt. There is no special status afforded to debts in respect of unsecured ATO liabilities. The obligation does not give rise to a legal consequence which Parliament did not intend.
Nor do we not accept Mr Gray's submission that the obligation under s 143 is contrary to the principles enacted in and likely to be void under the Corporations Act 2001. It does not relate to all company debts. There is no obligation upon the solicitor director to ensure that the ILP remains solvent. There is in our view no irrationality in the Council's contention. The professional obligation imposed is consistent with established authority.
Mr Gray submitted that if Parliament intended that solicitor-directors be personally liable for all or any debts of the ILP such a provision should have been included in the legislation. That is not what is contended by the Council nor does the obligation being considered impose a personal liability in debt upon the solicitor-director. We accept Mr Gray's submission that s 143 is concerned with professional obligations and that it has nothing to do with enforcement of legal rights or discharge of personal legal liabilities in the sense of debt.
It is not the Council's case, as we understand it, that the professional obligation is to ensure the ILP remits PAYG and superannuation guarantee payments in respect of those of its employees who are Australian legal practitioners but not in respect of its other employees. Nor is it a proper reading of s 143(2)(b) which refers to "employees of the legal practice director" to restrict its operation as Mr Gray suggested to those who are Australian legal practitioners. It was not contended by the Council that a sole director of an ILP has unlimited personal liability for all debts of the ILP. Nor does it arise from the proper construction of s 143 which we have undertaken.
Mr Gray also submitted that s 143(2)(b) provided that the sole legal practitioner director was responsible for the management of the legal services provided by the ILP for the purposes of the LPA only. He said that the statutory responsibility does not extend to a responsibility to third party creditors of the ILP. For the reasons already discussed we consider that on the proper construction of s 143 the professional obligations referred to include by reference to the authorities to which we have referred ensuring that statutory creditors are paid.
We do not accept Mr Gray's submission that the resignation of Mr Wehbe as a director on 20 April 2012 extinguished liability for breach of the professional obligation. Nor was it the Council's case that it does. The obligation arises as a professional matter whether the directorship is maintained or the subject company goes into liquidation; see for example Andreone (No 1) [2014] We agree that s 143(2) does not confer any right of action on an individual creditor. Council does not submit that it does.
The authorities to which we have referred identify an obligation upon an Australian legal practitioner whether as a legal practitioner director of an ILP or in sole practice or partnership arising as a professional matter to ensure that statutory debts of the legal practice to revenue authorities are paid.
We have determined that such obligation falls within the ordinary meaning of "professional obligations" under s 143 of the LPA in its proper construction. It is an obligation to which Mr Wehbe would have been subject as a sole practitioner within the operation of s 143(2)(b). It is an obligation from which he was not excused as an Australian legal practitioner providing legal services on behalf of the ILP in the capacity of an officer or employee of the practice under s 143(1). On the basis of the authorities it is also an obligation to which he was generally subject as a legal practitioner director of an ILP; see for example Delpopolo.
We are satisfied upon Mr Wehbe's admission in his provisional defence and find that the ILP failed to pay the superannuation entitlements of the Company's employees between 28 February 2010 and 24 April 2012 in the amount of $99,130.03. We are satisfied and find that by failing to ensure that the ILP made those payments Mr Wehbe was in breach of a professional obligation from which he was not excused as an Australian legal practitioner providing legal services on behalf of the ILP in the capacity of an officer or employee of the practice under s 143 of the LPA. We find that this ground of the complaint is established.
We are also satisfied upon Mr Wehbe's admission in his provisional defence and find that the superannuation entitlements due to Mr Wisam Assi were not paid. We are satisfied in that respect as well and find that by his failure to ensure that the ILP paid superannuation entitlements for the benefit of Mr Assi, Mr Wehbe was in breach of a professional obligation from which he was not excused as an Australian legal practitioner providing legal services on behalf of the ILP in the capacity of an officer or employee of the practice under s 143 of the LPA. We find that this ground of the complaint is established.
We are satisfied upon Mr Wehbe's admission in his provisional defence in respect of the proof of debt lodged with the liquidator and find that at the time of liquidation the Company trading as the ILP had a liability to the ATO in respect of unpaid GST and PAYG accruing from 11 November 2009 in the amount of $201,890.53 to 24 April 2012. We are satisfied and find that by failing to ensure that the ILP made payment of those moneys to the ATO by way of GST and PAYG Mr Wehbe was in breach of a professional obligation from which he was not excused as an Australian legal practitioner providing legal services on behalf of the ILP in the capacity of an officer or employee of the practice under s 143 of the LPA. We find that this ground of the complaint is established.
[15]
Mr Wisam Assi
Evidence was given by Mr Assi and Mr Dona. This was apparently directed to whether Mr Assi agreed to continue in employment notwithstanding the non-payment of his entitlements and the asserted disclosure of the Company's financial position. Mr Dona's evidence was also directed to whether other employees had been notified of the non-payment of superannuation entitlements and the Company's financial position. The failure to disclose the non-payment of superannuation entitlements was not a specific ground for the complaint against Mr Wehbe. Whether all staff were informed of the failure to pay superannuation entitlements and, if so, by staying in employment acquiesced to the non-payment of those entitlements is relevant to the questions of whether a finding of professional misconduct is capable of being made out in the circumstances and the appropriate orders to be made; see generally Koffel. We will accordingly make a finding on that issue.
Mr Assi was employed as a solicitor by the law practice on a full time basis from 22 November 2010 to 18 May 2012. His position was to head up the property team. He said that in the year 1 July 2010 to 30 June 2011 he and his team generated billings of more than $1 million. His evidence was that he was not told by his employer that it was in arrears of its payment of superannuation entitlements on behalf of staff when he commenced employment. He said each weekly payslip made reference to his superannuation entitlement from which he assumed that it was being paid. Mr Assi said that he believed that he attended all staff meetings and was not aware of any staff meetings that he might have missed. He had never spoken to Mr Wehbe or Mr Dona or any other person about missing a staff meeting. He said that he had no recollection of ever hearing Mr Dona announce at a staff meeting or at any other time that superannuation entitlements were not being paid to staff or that the law practice was experiencing cash flow difficulties. He said that he did not check that his superannuation entitlements were being paid because he was unaware that the Company which owned the law practice was experiencing cash flow difficulties. He said that it was not until he resigned in May 2012 that he discovered his superannuation entitlements had not being paid.
Subject to one objection which was resolved at the hearing the material in Mr Assi's affidavit was admitted into evidence and Mr Assi was not required for cross-examination. We accept his evidence in its terms.
Mr Dona's relevant affidavit evidence was in the following terms:
"4. Whilst I was at the Company more than one staff member from time to time said to me words to the effect:
"My superannuation fund has informed me that my superannuation contributions have not been paid."
5. Whilst I was at the Company I conducted staff meetings of approximately 6 to 8 week intervals. I can recall that at least two of those staff meetings I said words to the staff present to the effect:
"I know that some superannuation contributions have not been paid. There are cash flow difficulties at present. We will attend to these contribution payments as soon as we can."
6. I cannot positively remember Mr Assi being present at these staff meetings but had he been absent from staff meetings on a regular basis I would be aware of that consistent absence and I would have spoken to him about it and I would remember it today. I never had occasion to speak to Mr Assi about any failure to attend staff meetings. For these reasons I am confident that Mr Assi was at least generally if not invariably present at staff meetings.
7. I am able to say from my constant interaction with staff at the Company that it was customary for staff at the Company to speak amongst themselves about matters which concerned the staff generally. I consistently observed Mr Assi speaking to other staff members."
By way of clarifying one aspect of his evidence Mr Dona was asked by Mr Gray:
"Q. In the time that you were working in the legal practice known as Robert Wehbe & Partners were you personally a party to or present at a conversation to which Mr Wisam Assi was also a party and where the subject of non-payment of staff superannuation contributions was mentioned?
A. As much as I'd like to give you a yes or no I'm afraid I cannot. I can tell you that I've had conversations with staff members, I'm not sure with 100% certainty if Wisam was in that conversation or in the room."
(Trans D2 - 17-120 p 76 lines 3-10).
The cross examination by Mr Barnes proceeded as follows:
"Q. … Why if you were not involved in the financial side of the practice, why would you be making statements to the staff about superannuation contributions not having been paid?
A. As the general manager of the business I held staff meetings and when the first staff member came to me with it late in 2011 I raised it with Robert and I said, Robert, what's going on? He explained to me the cash flow issues. Then we had it again in 2012, another staff member, and I said to Robert, I need to address this. So at the staff meeting the first issue on the agenda item was this and I raised it to all staff."
Q. What I want to suggest to you is that at no staff meeting did you use the words, "I know that some superannuation contributions have not been paid". Do you accept that or deny it?
A. I do not accept that, I deny it.
Q. And also that you never said words at these meetings to the effect, "there are cash flow difficulties at present". Do you deny that?
A. Those words were used.
Q. And finally you never said "we will attend to these contribution payments as soon as we can", I take it you deny that as well?
A. I certainly do.
(Trans D2 - 17-120 p 72 lines 13-34).
Mr Dona was also questioned about a borrowing from a Ms Edith Bliss in the sum of $600,000 for which he had drafted the Loan Agreement and which was the subject of a conduct complaint determined by the Tribunal in Council of the Law Society of NSW v Dona [2014] NSWCATOD 27. The Tribunal found that Ms Bliss was a client of the relevant law practice and it found the complaint proven. It made orders that any law firm be prohibited under s 17 of the LPA, without approval, from employing Mr Dona or paying him in connection with the law practice.
Mr Dona agreed that his appeal from the decision of the Tribunal was considered by the New South Wales Court of Appeal in Dona v Council of the Law Society of NSW [2014] NSWCA 444 and dismissed. He agreed that in its decision the Court described his conduct as "reprehensible".
It was not submitted to the Tribunal that these matters went to a question of Mr Dona's credit or that his evidence should not be accepted. Rather where in conflict with Mr Assi's evidence we were asked to prefer that of Mr Assi who was not required for cross-examination.
We also accept Mr Dona's evidence in the terms given. Ultimately in cross-examination he did not contradict Mr Assi's evidence. There was no other basis proffered for rejecting it.
The uncontested evidence of Mr Assi and the passage from the cross-examination of Mr Dona to which we have referred establish and we find that Mr Assi was not informed by the law practice that his superannuation entitlements were not being paid or that the law practice was experiencing cash flow difficulties. We find that because he was unaware during the course of his employment that superannuation payments were not being made that he had not agreed to continue working on the condition that he would forego his superannuation entitlements.
With respect to information given to other employees, Mr Dona was cross-examined on the balance of his evidence but did not resile from it. Accepting Mr Dona's evidence at its highest the words used in our view do not reflect full disclosure by him on behalf of the law practice of its real financial position. He said to the team meetings with staff when the issue was raised that:
"I know that some superannuation contributions have not been paid" [emphasis added].
This could have led to the impression that not all staff superannuation contributions were outstanding which was the true position.
Mr Dona said:
"There are cash flow difficulties at present" [emphasis added].
This could have led to the impression that such difficulties were temporary. In fact, the cash flow difficulties evidenced by non-payment of statutory entitlements since February 2010 were long standing.
Mr Dona said:
"We will attend to these contribution payments as soon as we can."
This was capable of being taken by the employees as an indication that there was a probability or likelihood that payment would be made.
Mr Dona said that he conducted staff meetings at approximately 6 - 8 week intervals. He had worked for the Company between April 2008 and April 2012. Notwithstanding the conversation with Mr Wehbe to which he referred in late 2011 and staff inquiries received from time to time in respect of unpaid superannuation contributions to which he referred and the longstanding and continuing non-payment of entitlements, Mr Dona raised the issue with staff only twice.
Having considered the evidence, we find on the balance of probability that the infrequent and irregular raising of the issue and the words used in the two meetings referred to did not fully disclose or otherwise bring home to staff members the true position in relation to the Company's financial position, the extent of non-payment of their superannuation entitlements or the likelihood that they would be paid in the future in a way by which a decision by any of those present at the meetings to remain with the ILP was informed.
Mr Gray indicated to the Tribunal in the hearing that if there were a finding that there had been no material disclosure to employees of non-payment of superannuation entitlements the failure might well be seen as professional misconduct and that his client would not dispute a reprimand. This concession in later written submissions was made in respect of a finding of unsatisfactory professional conduct. No such ground was pressed by the Council. As we have indicated, the finding we have made is relevant to the issue which we consider below of whether the breach by Mr Wehbe of his professional obligation constitutes professional misconduct in all the circumstances and appropriate orders.
[16]
The claim in respect of the maintenance of appropriate management systems
The Council said that breach of his professional obligations by Mr Wehbe as an Australian legal practitioner is prima facie evidence of a failure by the solicitor to ensure that the appropriate management systems were maintained. It relied on s 140(5) of the LPA which provided that a contravention of s 140(3) is capable of being professional misconduct.
Section 140 of the LPA provided:
"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.
(6) Nothing in this Division derogates from the obligations or liabilities of a director of an incorporated legal practice under any other law.
(7) The reference in subsection (1) to a legal practitioner director does not include a reference to a person who is not validly appointed as a director, but this subsection does not affect the meaning of the expression "legal practitioner director" in other provisions of this Act."
The Council claimed that Mr Wehbe was duty bound to ensure that appropriate management systems were maintained to enable the provision of legal services by the ILP in accordance with the professional obligations of Australian legal practitioners.
Mr Wehbe admitted that he was under a legal duty to take action reasonably open to him in the circumstances which existed from time to time to ensure that appropriate management systems were maintained by the Company to enable the Company lawfully to carry out its business of providing legal services in accordance with the LPA but otherwise denied the claim. He denied that he as distinct from the Company was under a legal duty to maintain a management system that allowed and caused the Company to comply with its taxation and superannuation obligations.
In our view the obligations upon Mr Wehbe under s 140(2) and (3) were clear upon the ordinary meaning of the words used having regard to their text and their context in Part 2.6 and the purposes of Part 2.6 and the LPA more generally to which we have earlier referred. By s 140(2) as legal practitioner director he was responsible for the management of the legal practice by the ILP. By s 140(3) in its terms he was obliged to ensure the implementation and management of appropriate management systems.
Mr Wehbe also denied that the legal services enabled by the maintenance of an appropriate management system were to be provided in accordance with the professional obligations of Australian legal practitioners. That pleading is not made out in our view. Applying the principles of construction to which we have referred, the ordinary meaning of the words used in s 140(3) provide that the appropriate management systems to be implemented and maintained are to enable the provision of legal services by the ILP in accordance with the professional obligations of Australian legal practitioners and other obligations imposed by or under the Act, the Regulations or the Legal Profession Rules [emphasis added].
The Council also alleged that Mr Wehbe undermined whatever management system was in place after March 2008 when the Company had been complying with its taxation and superannuation obligations. Mr Wehbe denied this. The allegation was not pursued at the hearing and we make no finding.
There was in evidence a letter dated 26 March 2008 which Mr Wehbe forwarded to the Office of the Legal Services Commissioner (OLSC) comprising a self-assessment in relation to appropriate management systems in place in the law practice. One objective was identified to be the supervision of practice and staff. A key concept to consider when addressing the objective was identified as being "compliance with the Legal Profession Act, Legal Profession Regulations, Professional Conduct and Practice Rules and other statutory/tax obligations". The document provided examples of what it referred to as possible evidence or systems most likely to lead to compliance in respect of this item including:
"On a periodic basis, at least several times a year, there is a review of compliance. All personnel, both professional and support, are aware of relevant obligations and compliance standards and a record of outcomes and action taken are kept.
Evidence of compliance with withholding tax obligations e.g. PAYG, GST as well as payment of superannuation guarantee contributions."
The letter returned by Mr Wehbe to OLSC stated that the law practice was "fully compliant plus" with the concept of compliance with statutory/taxation obligations within the objective of the proper supervision of the law practice and staff.
Mr Wehbe did not give evidence. Evidence was given in his case by Harold Maksoudian a certified practising accountant who was qualified in 2004. He was the external accountant and taxation agent for the ILP for the period of its trading until 2010 financial year and the accountant and taxation agent for Mr Wehbe personally until his bankruptcy. Other than in the respects identified below, and except where it was more in the nature of a submission, we accept Mr Maksoudian's evidence in its terms. Although retained by Mr Wehbe and the ILP he was an independent professional. His evidence was largely uncontradicted. He acknowledged in cross-examination when he was unable to answer a question in respect of a matter outside his knowledge and made concessions where appropriate.
Mr Maksoudian's evidence was that he was familiar with the accounting and management systems which the Company maintained. He says that these included a system for all receivables to be recorded when invoiced, for all revenues to be recorded and banked on receipt and for all accounts payable to be collated and paid (and recorded as paid) as and when funds available allowed. He conceded that the Company paid some creditors ahead of others and in particular staff wages but said that this was "a vicissitude attributable to liquidity difficulties, not to any deficiency in management systems".
[17]
Submissions
The Council relied upon the breach by Mr Wehbe of his professional obligation to ensure payment by the Company of statutory creditors as evidence of a contravention of s 140(3). The term "management systems" is not defined in the LPA. Mr Gray submitted (by reference to the Shorter Oxford English Dictionary and The Macquarie Dictionary) that "management" means "handling, directing or controlling" what is managed. He said that "management" relates to what can be "handled, directed or controlled".
Mr Gray submitted that if what was implicit in the operation of s 140(3) is that a management system was required to cause the Company to comply with taxation and superannuation obligations, in other words to pay its debts, such a construction included the notion that the management system was to ensure solvency.
Mr Gray submitted that an ILP like any other business enterprise cannot "handle, direct or control" when its third party debtors will pay their debts to the business and cannot in that sense "manage" its inwards cash flow. He said that these decisions are made by third party debtors themselves. He said that it followed that until payment is actually received, inwards cash flow from non-paying third party debtors cannot itself be "managed" and cannot therefore be the subject of a "management system". He conceded that a management system will handle, direct or control how cash is dealt with once it is received by the enterprise and is therefore within the capacity of the enterprise to handle direct or control, but not before its receipt.
Mr Gray submitted that the Council's construction of s 140(3) which implicitly required a management system to ensure solvency cannot be correct. We accept the submission in its terms. However that such a requirement was implicit in the construction of s 140(3) was not part of the Council's case.
Mr Gray then submitted that the alleged failure to ensure that the Company maintained appropriate management systems and the Council's submissions in respect of that matter were misconceived. He said that a management system does not "cause" an enterprise to pay any of its debts. He said that it cannot therefore be a breach of s 140(3) to fail to maintain a management system that caused the Company to pay its debts.
[18]
Consideration
In its terms, the obligation under s 140(3) to ensure the implementation and maintenance of such systems is "to enable" the provision of legal services in accordance with the professional or other obligations of Australian legal practitioners. The verb "enable" is defined in the Macquarie Dictionary online to mean "to make able; give power, means, or ability to; to make competent; authorise …". There was no evidence that appropriate management systems were not implemented and maintained to provide the means or ability to authorise or make payments to creditors. The self-assessment completed by Mr Wehbe in 2008 suggests that they were at least at that time. Mr Maksoudian's uncontradicted evidence was that such systems as he identified were in place.
The Company's failure to pay superannuation entitlements, PAYG and GST and the breach by Mr Wehbe of his professional obligation to ensure those payments in our view do not of themselves evidence a failure by Mr Wehbe to implement and maintain a management system which was otherwise sufficient to enable the payment; see Adams at [70]. We find that the ground that the Mr Wehbe failed to ensure that the Company maintained appropriate management systems within the meaning of s 140(3) LPA is not made out.
[19]
Evidence as to the banking arrangements of the Company and payments made by it for certain expenses
The banking arrangements of the Company and the fact of certain payments by the Company were admitted by Mr Wehbe.
In the references to bank accounts and other personal information which follow we have redacted identifying details which were in evidence.
The Council claimed that relevant ILP credit facilities were prescribed by a NAB Market Rate Facility (MRF account) held in the name of the Company and an overdraft account being ANZ Overdraft Facility (Overdraft Facility) held in the name of the Company. Mr Wehbe admitted those facilities and said that the ILP had further facilities available, namely:
1. ANZ Banking Group corporate overdraft.
2. American Express corporate and personal credit cards.
3. American Express personal loan for superannuation contributions.
4. Credit cards said to have been used in part to provide working capital for the Company
1. American Express.
2. ANZ Bank.
3. National Australia Bank.
4. HSBC Bank.
5. Citibank.
Mr Wehbe admitted that the features of the MRF account identified in the amended application were as follows:
"37. Features of the MRF Account were as follows:
a. It was secured by:
i. A Fixed and Floating Charge over all of the present and future rights, property and undertaking of the Company
ii. An Assignment of Business, Book Debts and Goods Mortgage given by the Company over all assets of the business
iii. A Guarantee and Indemnity for $510,000 given by Robert Joseph Wehbe, Hanaa Wehbe and RWP Nominees Pty Limited acting as Trustee for the Robert and Hanaa Wehbe Family Trust supported by a:
1. Fixed and Floating Charge over all of the present and future rights, property and undertaking of RWP Nominees Pty Limited acting as Trustee for the Robert and Hanaa Wehbe Family Trust
2. Registered mortgage over property situated at 75 Isabella Street North Parramatta NSW, Certificate of Title Folio Identifier [reference provided]
3. Registered mortgage over property situated at 98 Stockton Street Nelson Bay NSW, Certificate of Title Folio Identifier [reference provided]
4. Registered mortgagee over property situated at 'Crown Towers' 1109/5 Palm Avenue Surfers Paradise Qld, Certificate of Title Reference [reference provided]
b. On 30 July 2010 the credit limit for the MRF Account was raised by $110,000.00 from $375,000.00 to $485,000.00
c. On 18 January 2011 the MRF Account balance was $468,000.00 in debit
d. On 7 May 2011 the MRF was repriced at 9.710% per annum together with a service fee of $100 per month
e. On 6 August 2011 the MRF was repriced at 9.780% per annum together with a service fee of $100 per month
f. Interest payable by the Company on the MRF Account was deducted from the Office Account
g. Between 1 July 2010 and 30 June 2011 a sum of $37,000.00 was transferred from the Office Account to the MRF Account in payment of interest"
Mr Wehbe admitted that the features of the Overdraft Facility were:
"38.
a. It had a credit limit of $35,000.00
b. From 18 January 2011 through to 18 August 2011, the available credit on the Overdraft Account was less than $298.62
c. Between 1 July 2010 and 30 June 2011 a sum of less than $6,000.00 was transferred from the Office Account to the Overdraft Account in payment of interest"
Mr Wehbe admitted that the interest expenses claimed by the ILP as an expense in its Profit and Loss Statements and Income Tax Returns for the relevant year were described as follows:
TAX YEAR PROFIT & LOSS STMT TAX RETURN
INT EXP $ INT EXP $
1 Jul 07 to 30 Jun 08 31,740.11 31,740
1 Jul 08 to 30 Jun 09 98,031.00 116,179
1 Jul 09 to 30 Jun 10 112,194.43 134,305
1 Jul 10 to 30 Jun 11 100,037.81 Not available
1 Jul 11 to 30 Jun 12 46,259.00 Not available
[20]
He pleaded that the interest expenses were accurate and lawful. He pleaded that he was unable to elaborate further without access to the Company's MYOB corporate data file not available to him in the circumstances of the liquidation.
Mr Wehbe admitted that at all material times he was the registered proprietor of the following properties:
LOCATION FOLIO ID R P/S SOL'S SHARE PURPOSE DATE SOLD
%
75 Isabella Street NTH PARRAMATTA NSW [supplied] Hanna & Robert Wehbe 99 Investment 17 May 2012
98 Stockton Street NELSON BAY NSW [supplied] Hanna & Robert Wehbe 99 Investment 20 Sept 2012
'Crown Towers'
Unit 1109 [supplied] Robert Wehbe 100 Investment Jan 2013
5 Palm Avenue
SURFERS PARADISE QLD
[21]
He admitted that the Company was not an owner or co-owner of any real property.
The Council pleaded at paragraph 43 of the amended application:
"43. In at least the period 1 December 2010 to 30 November 2011, the Solicitor caused the debit of the following items from the Office Account.
a. Mortgages
i. The sum of $3,755.78 credited monthly to the First Home Loan Account described in the Company's records as 'RW - Rental Property' [details redacted]
ii. The sum of $297.39 to 302.56 credited monthly to the Second Home Loan Account described in the Company's records as 'RW Rental Property Repayment' [details redacted]
iii. A variable sum of $1,603.91 to $1,815.09 credited monthly to the First Interest Only Home Loan Account, described in the Company's records as 'RW - Interest Charge Rental property' [details redacted]
iv. A fixed sum of $2,832.51 credited monthly to the Second Interest Only Home Loan Account, described in the Company's records as 'RW - Interest Charge Rental property' [details redacted]
v. A variable sum of $2,538.12 to 2,623.69 monthly to RAMS described in the records as 'Mortgage Payment'
b. Other Interest Payments
i. A sum of $2,500.00 monthly to Feb 2011 then $3,500.00 monthly described in the Office Account as 'Mrf Repayment Robert Wehbe Partnr Mrf To' [details redacted]
ii. A sum of $500.00 monthly credited to the overdraft facility described in the Office Account as 'Monthly Repayment'
c. Credit cards
i. American Express [details redacted], minimum monthly payment of $103.00 to $109.00
ii. American Express [details redacted], minimum monthly payment of $601.00 to $620.00
iii. American Express [details redacted], minimum monthly payment of $1,215.88 to $1,967.35
iv. American Express [details redacted], minimum monthly payment of $1,822.71
v. ANZ [details redacted], minimum monthly payment of $645.00 to $652.00
vi. ANZ [details redacted], minimum monthly payment of $95.00 to $595.00
vii. Citibank [details redacted], minimum monthly payment of $465.00 to $498.00
viii. HSBC [details redacted], minimum monthly payment of $687.00 to $692.00
ix. NAB [details redacted], minimum monthly payment of $473.93 to $483.31
x. St George Bank [details redacted], minimum monthly payment of $232.00 to $238.00
d. Car leasing
i. A sum of $3,986.30 monthly credited to MB Financial for the Solicitor's Mercedes Benz CLK63 motor vehicle, the Solicitor being the lessee
ii. A sum of $1,820.05 monthly credited to BMW Australia for a BMW motor vehicle, the Solicitor being the lessee
iii. A sum of $446.14 monthly credited to an unknown lessor for 'Lauren's car'
iv. From August 2011, the sum of $1,137.57 credited to Macquarie Leasing for a Kia Sorrento Platinum 4 WD motor vehicle, lessee unknown
e. Car insurance
i. A sum of $238.15, then $237.35 and then $175.38 monthly credited to Principal Finance described in the Company records as 'MB Car Insurance'
ii. A sum of $265.28 monthly credited to Principal Finance described in the Company records as 'BMW Insurance'
iii. A sum of $99.29 monthly credited to QPR Finance described in the Company records as 'Lauren's Car Insurance'
f. Car parking
A sum of $1,224.00 credited monthly to S&K CRA Park Mgt described in the Company records as 'Secure parking - 1 Horwood Place Parramatta' [details redacted]
g. NRMA Membership
An annual sum of $191.20 and then $171.50 for the Solicitor's NRMA Membership
h. Private Health Insurance
A sum of $281.98 credited monthly to MBF described in the Company's records as 'RW Private Health Insurance' [details redacted]
i. Other Personal Insurance
i. A sum of $748.24 then $853.98 credited monthly to Colonial Mutual described in the Company's records as 'RW various; Trauma, Income Protection, Life' [details redacted]
ii. A sum of $80.44 then $90.63 credited monthly to Tower Australia described in the Company's records as 'RW Term Life Policy' [details redacted]
iii A sum of $106.61 then $118.45 credited monthly to Asteron Life Limited described in the Company's records as 'RW Life Policy' [details redacted]
iv. A sum of $769.88 credited monthly to Colonial Mutual described in the Company's records as 'ND/various Insurance Policies' [details redacted]
j. Telephones
i. Variable sums of $1,190.30 in December 2010, $1,276.24 in January 2011 and $758.01 in February 2011 paid to Clear Telecoms
ii. Variable sums of $261.80 to $576.04 monthly credited to Telstra
iii. Variable sums of $328.07 to $2,097.08 monthly credited to Optus
iv. Variable sums of $101.75 to $304.74 monthly credited to Vodafone
k. School Fees
i. A sum of $3,250.00 in May 2011 and $3,185.00 in July 2011 paid to Our Lady of Mercy College, Parramatta
ii. A sum of $1,097.50 in June 2011 paid to Marist College, Eastwood
iii A sum of $439.00 in June 2011 and $540.50 in July 2011 paid to St Kevin's Primary School, Eastwood
l. Cable TV
i. Variable sums of $159.96 to $420.00 paid monthly for Optus TV/Net Cable
ii. A sum of $115.00 then $130.00 paid monthly to Foxtel
m. Internet provision
A sum of $250.00 to $481.00 monthly paid to Pacific Internet
n. Water
i. A sum of $310.25 paid to Sydney Water for water services to 75 Isabella Street, North Parramatta, NSW from 1 July 2011 to 30 September 2011, described as 'Office Water Usage' in the Company records
ii. Two further payments in June 2011 to Sydney Water for $142.40 and $150.80, described as 'Office Water Usage' in the Company records
iii. A variable sum of $352.08 to $404.43 paid quarterly to Hunter Water for services to Lot 1, 98 Stockton Street, Nelson Bay, NSW, described as 'Office Water Usage' in the Company's records
iv. A sum of $661.05 paid by Allconnex Water for a half year's water and wastewater charges for Unit 1109, 5-19 Palm Avenue, Surfers Paradise, Qld, described as 'Practice Expenses Office Supplies' in the Company records
o. Electricity described as 'Office Electricity Usage' in the Company's records
i. To the credit of Integral Energy: two payments of $500.00 each in June 2011; a payment of $421.20 and a payment of $530.00 in July 2011; two payments of $530.00 each, a payment of $965.23 and a payment of $515.57 in August 2011; two payments of $413.00 and a payment of $1,185.25 in November 2011
ii. To the credit of Origin Energy a payment of $124.69 in August 2011
p. Strata fees
A sum of $1,752.64 for the period 1 Feb 2011 to 31 May 2011 to Stratapay for strata levies imposed on Unit 1109, 5-19 Palm Avenue, Surfers Paradise, Qld
q. Council Rates described as 'Director fees RW loan' in the Company's records
i. A sum of $367.80 paid in February 2011 and May 2011; a sum of $393.00 paid in August 2011 and a sum of $392.90 paid in November 2011 to Parramatta City Council for rates on 75 Isabella Street North Parramatta, NSW
ii. A sum of $286.00 paid in February 2011 and May 2011; a sum of $296.64 paid in August 2011 and a sum of $296.00 paid in November 2011 to Port Stephens City Council for rates on Lot 1, 98 Stockton Street Nelson Bay, NSW
iii. Sums of $748.33 and 634.83 in February 2011 and a sum of $793.29 in August 2011 paid to Gold Coast Council for rates on Unit 1109, 5 Palm Avenue Surfers Paradise, Qld
r. Landlord Insurance
A sum of $377.02 paid monthly to Principal Insurance and described as 'Landlord Insurance' in the Company records
s. Payments into his own superannuation fund described as 'Rw Super' in the Company's records
Sums of $500.00 on 27 Jan 11, $500.00 on 29 Mar 11, $2,000.00 on 20 July 2011 were transferred to an unknown payee"
In his provisional defence Mr Wehbe traversed the pleading at paragraph 43 in the following way:
"22 Mr Wehbe admits paragraph 43 in the sense that, in the first instance, the amounts shown were paid by the Company from the moneys available to the Company in its Office Account but denies that the said payments, in the years ended 30 June 2008, 30 June 2009 and 30 June 2010 were, or , in the years ended 30 June 2011 and 30 June 2012 were to be, allocation of Company moneys for the personal benefit of Mr Wehbe as distinct from the benefit of the Company (if the latter proposition is what is intended to be alleged)."
Mr Wehbe did not deny the allegation in paragraph 43 of the amended claim that he caused the payments to be made from the general office account of the Company.
We are satisfied on the basis of the documentary evidence and the admissions made by Mr Wehbe in his provisional defence and find that the banking arrangements of the Company were as we have identified and that the Company made the payments in the amounts at the times and to the recipients referred to from its general office account. We find that Mr Wehbe caused the payments to be made.
[22]
The evidence of the treatment of expenses
In his affidavit Mr Maksoudian said that as an accountant he prepared financial statements and taxation returns and attended to taxation matters for small to medium businesses and sole traders and prepared income tax returns for businesses and private citizens. He had been undertaking this work for approximately 20 years. For the previous 10 years he had been retained to prepare financial statements and taxation returns for over 3,000 entities in different professions and industries. His evidence was that he was knowledgeable in the relevant taxation law and practice and that he prepared taxation returns which are correct in law.
Mr Maksoudian gave evidence that the accounting records for the ILP were maintained on a MYOB system and that he had regular and frequent access to these records. He said that the MYOB records maintained by the ILP in its financial transactions were kept properly and accurately.
Mr Maksoudian said that he had sought to obtain access to the MYOB records from Mr Anthony Walker the manager appointed by the Council of the Law Society to Mr Wehbe's practice and PPS Recovery the ultimate liquidator of the Company but had been unable to obtain them. He said that the unavailability of the original records denied him access to the material which would have enabled specific evidence of recorded transactions to be given with confidence. It also denied him access to financial records of previous years which would confirm that his evidence as to the practice of the Company in preparation of its annual financial statements and income tax returns was accurate.
Mr Maksoudian had produced to the Tribunal pursuant to a summons his working papers relating to the financial affairs of the ILP. These included what were described as a reconciliation of accounting taxable income and the difference between the financial profit position and the taxable income position. When asked to explain the differences Mr Maksoudian said that they referred to expenses within the profit and loss statement of the Company. He said that the expenses were not necessarily all tax deductible in the Company's accounts and that any private or non-deductible portion and adjustments for expenditures were allocated to Mr Wehbe in the year end accounts.
Mr Maksoudian was shown various ledger accounts which on their face reflected an increase in the Company's interest claims in its tax returns from $31,000 in the 2008 financial year to $116,000 in the 2009 financial year to $134,000 in the 2010 financial year. He said that without access to the MYOB data file he could not quantify whether or not the Company's borrowings increased commensurately with the increase in interest payments. Mr Maksoudian did not prepare the tax returns in respect of the 2010/2011 financial year or the 2011/2012 financial year although he did prepare returns for Mr Wehbe for that period. Mr Maksoudian was also unaware how the figure of $43,000 referred to in the amended application as "interest expenses" was calculated for the 2011 year as the financial statements and tax returns were never processed.
Mr Maksoudian accepted that he was familiar with the monthly expenses schedule for the Company which were prepared by what he said was "a combination" of "the Company" and him. He agreed that each month there was transferred from the Company's office account to the four NAB loans for the investment properties whatever interest was owing and possibly some principal payments in respect of those four loans. He accepted that the debit balances on the four loans amounted to in the order of $1.2 million.
Mr Maksoudian said that the equity in the investment properties was used as collateral security for the Company borrowing and that the National Australia Bank had taken a registered mortgage over the three investment properties as part of the extension of the MRF. This facility he said was used entirely by the Company for working capital and cash flow and not for private purposes. He said that the costs associated with the extended MRF facility and interest payable thereon and other expenses incidental to the facility were proper expenses of the Company correctly taken into account in determining its trading financial results and proper deductions from the Company's assessable income for income tax purposes.
Mr Maksoudian accepted that the monthly interest payments on the MRF were being met from the Company's office account. He was asked in those circumstances why it was necessary for the Company to make payments from its office account to the home loan accounts in the name of Mr Wehbe and his wife. Mr Maksoudian responded:
"A. Again, without referencing them on the data file and looking at the transactions I can't say with any degree of certainty as to what's transpired notwithstanding myself or my firm were not involved in the allocation or priority of payments to loan accounts that you mentioned."
(Trans D1 - 17-120 p 43 lines 34-37).
Mr Maksoudian agreed that the payments in respect of the investment properties were made on behalf of Mr Wehbe by the Company and that he was not aware of any particular reason why the Company paid expenses owing by Mr Wehbe on his investment loans.
Mr Maksoudian agreed that it was more than likely that payments in respect of the investment properties were made after the Company had ceased making compulsory superannuation payments for its employees. He agreed that at the time of the appointment of the liquidator the ATO was owed approximately $200,000 by the Company in respect of unpaid GST and PAYG and that there was an amount of approximately $100,000 unpaid by the Company for compulsory superannuation entitlements to its employees.
Mr Maksoudian agreed that Mr Wehbe's personal expenses including credit card expenses, use of motor vehicles, private health insurance, school fees and water rates for the investment properties were also paid by the Company. He confirmed that the motor vehicle leases were in Mr Wehbe's name but that the Company made the payments.
Mr Maksoudian said that in small proprietary companies it was not uncommon in his experience for personal expenses of the director or directors to be paid out of the Company's funds during the course of the given year and later brought to account.
Mr Maksoudian said in his affidavit at paragraph 3(f) and following:
"(f) It is extremely common if not universal practice in the small business world for a proprietary company to pay private expenses on behalf of directors or other senior executives or their relations and, at the end of the financial year or other financial accounting period, by journal entry to credit all those payments back to the Company and debit the director or other executive on whose behalf they were paid as being part of that director's remuneration or on account of repayment of any loan made by that director to the company (or sometimes, as loans by the company to the director).
(g) In cases failing within paragraph 3(f), when the company's income tax returns are prepared and lodged, the payments made during the course of the year on behalf of directors or others are not claimed as such expenses by the company but are either allocated as salaries paid and/or Director Fees or (if on capital account) are allocated as debits as loan repayments against the director's loan account with the company to the director.
(h) It is an extremely common practice for the proprietor of a company or business entity to borrow money on his own account and on-lend the money to the company or business entity for the business purposes of the company or business or for family members of the proprietor to do so.
(i) In cases falling within paragraph 3(h) it is extremely common if not universal practice in the small business world for any interest payable on such borrowings by the proprietor or family members to be paid by the company or business as an ordinary operating expense of the company or business in that the borrowed money on which the interest is paid is part of working capital injected into the company or business which sustains the cash flow and hence liquidity of the company's operations which allows revenue (and the profit, if any) of the company or business to be generated.
(j) On the same principle, if a company director or business proprietor or any related party owns or leases a vehicle which is used partly for business-related purposes and partly for purely private purposes, it is extremely common if not universal practice in the small business world for the company or business to pay all expenses in connection with the vehicle and then at the end of the financial year for the total of the expenses paid to be apportioned between the company or business and the proprietor and only the portion thereof apportioned to the company or business as applicable to the business operation to be recorded as a business expense in the financial accounts and taxation returns."
He concluded in paragraph 5 of his affidavit:
"5. In my opinion, it follows from what I have said in paragraph 3 that it is a fundamental error to assume that because an expense be shown in a company's unaudited internal management accounts in a particular way, that the expense will be shown in the final accounts (and taxation returns) in the same way. In the case of the Company any amounts which, as a result of end of financial year adjustments were to be debited to Mr Wehbe were debited to him, either on account of his salary or as a debit in his loan account - though without access to the Company's MYOB records I cannot now be certain how any particular sum was treated."
Mr Barnes objected to this evidence. He submitted on behalf of the Council that there had been no attempt by Mr Maksoudian to comply with NCAT Procedural Direction 3 concerning expert witnesses. He said that in circumstances in which the material went beyond a statement by him of factual matters pertaining to the Company's conduct of the legal practice then regardless of his expertise those opinions should be treated as those of a lay person and were therefore inadmissible under s 76 of the Evidence Act 1995. He said that the opinions expressed in paragraph 3(f)-(j) of the affidavit were not admissible as expert evidence.
Mr Gray submitted that Mr Maksoudian was entitled to give evidence about what he knew about the matters relevant to the application including from direct personal evidence. He said that no issue had been taken about the material and he asked that the Tribunal accept what Mr Maksoudian said about what he did and what in his experience was common practice which was evidence of a person with his background and experience.
We accept Mr Maksoudian's evidence in paragraph 3 of his affidavit to the extent that it concerned factual matters of which he was personally aware. We accept that he has first-hand experience of the practices referred to in paras 3(f)-(j). However, to the extent that he says such practices are "extremely common if not universal" it is opinion evidence and in the absence of compliance with NCAT Procedural Direction 3, we propose to exclude it under s 76 of the Evidence Act.
There was no issue between the parties that the payments referred to were debited to the Company's bank accounts. The onus is on the Council to satisfy the Tribunal that the ground to which their evidence was directed in this instance that by causing the Company to pay personal expenditure Mr Wehbe breached a fiduciary duty to avoid a conflict of interest and preferred his own interests to those of the Company is made out. By way of his defence Mr Wehbe sought to establish as factual matters how the payments were treated as between the company and himself. He bore the evidentiary onus of establishing the matters which he raised. The general practices deposed to by Mr Maksoudian based upon his experience in acting for other clients do not prove the relevant fact in the circumstances of this case. We note that it was no part of the Council's case that as a general matter payment by an ILP of a director's expenses in whole or in part which were ultimately set-off in the Company's accounts against the director's entitlements or other moneys payable by the Company to the director gave rise to a conduct issue.
Mr Maksoudian was asked whether there was a reconciliation or accounting between Mr Wehbe and the Company in respect of the private expenses as against moneys that might be owed to Mr Wehbe by the Company.
Mr Maksoudian was unsure whether any such accounting was undertaken in respect of the 2010/2011 and 2011/2012 tax years saying that the records would have gone to the liquidator. He gave evidence that at the end of earlier financial years as necessary when he prepared the Company's financial statements and taxation documents he apportioned and allocated interest payments made under various mortgages. He said that if money secured by the mortgage was in fact utilised by the Company in its business the total interest paid under the mortgage that year was apportioned and allocated between deductable and non-deductable expenses in the books of the Company so that the Company in fact claimed as an interest expense only a sum correctly quantified reflecting the amount of borrowed moneys actually used by the Company in its business. He said in respect of the Company's payment of other interest payments, credit cards, car leasing, car insurance, car parking and NRMA membership that at the end of the financial year all accounts examined and a proper apportionment was made between the Company and Mr Wehbe personally so that all expenses properly regarded as company expenses were debited to the Company. All expenses properly regarded as non-business expenses were debited to Mr Wehbe personally. He said that where necessary and appropriate apportionment was made of expenses which were partly company expenses and partly non-business expenses.
Mr Maksoudian's evidence was that some items including insurance and motor vehicle expenses were paid by the Company although not allowable as deductible items for tax purposes. He said that some items related directly to Mr Wehbe. He said that non-deductible items from the Company perspective were either adjusted in the reconciliation of accounting taxable income and not claimed by the Company but deducted in Mr Wehbe's personal tax return or debited to Mr Wehbe's director's loan account. We have taken the reference to the debiting of some of the expenses attributable to Mr Wehbe to his director's loan account to be a reference to the treatment of the payment of the expense on Mr Wehbe's behalf as a partial repayment of a debt owing by the Company to Mr Wehbe. This is consistent with the pleading in Mr Wehbe's provisional defence and evidence given by Mr Maksoudian in respect of some of the other expense payments. It has not been asserted nor were we directed to any evidence that Mr Wehbe had borrowed money from the Company and that the expenses were allocated in a way to increase such a borrowing. We were not directed to any evidence identifying the amount of expenses allocated to reductions in the loan account for any period.
Mr Maksoudian said in respect of the expenses detailed for private health insurance, other personal insurance, school fees, cable TV, water, strata fees, council rates and landlord insurance they were debited to Mr Wehbe either on account of his salary or in reduction of his loan account.
The Council had prepared a schedule of superannuation payments made from the Company's general account and identified in the relevant bank statements as "RW Super". These totalled $9,500 between 22 February 2010 and 20 July 2011. Mr Wehbe said that without access to the MYOB records he could not comment on and did not know whether all or any of the sums paid into Mr Wehbe's current superannuation fund by the Company were treated as contributions by Mr Wehbe personally as part of his salary or contributions by the Company as an employer or partly one and partly the other. He said that the financial year 2011 superannuation contributions of $4,000 were correctly recorded as employer contributions as the Company paid Mr Wehbe's minimum superannuation guarantee charge contributions. He said there were no recorded contributions in the financial year 2012 year in Mr Wehbe's self-managed superannuation fund accounts and was unaware of the alleged $2,000 amount noted in paragraph 43(s) of the amended application.
Mr Maksoudian gave evidence that at the end of the financial year adjustments, the payments for telephones and internet provision, were apportioned between the Company and Mr Wehbe on the basis of their comparative use for business and private purposes. He made no comment in respect of the electricity identified in the Company's records.
Mr Gray in re-examination asked Mr Maksoudian what, if anything, was done at the end of each financial year to relate payments made on Mr Wehbe's personal behalf to the bank in respect of the investment properties to the payments made from the office account by the Company. Mr Maksoudian's response was:
"A. From my recollection and to the best of my memory the process was a combination of myself and the bookkeeper in that the monthly payments of the investment properties, be it principal and interest and/or interest only, were allocated as debit amounts to Mr Wehbe's director loan account in the Company, they were never claimed as a tax deduction in the Company itself and they were made in lieu of salary and wages director fees for Mr Wehbe."
(Trans D1 - 17 - 120 p 59 lines 24-29).
We accept the evidence of Mr Maksoudian who was involved in the preparation of the Company's accounts to 2010 and find that up until he ceased preparing the accounts the expenses which were attributed to Mr Wehbe personally and paid by the Company including payments of principal and interest in respect of the investment properties were at the end of each relevant period set off in the Company's accounts either against salary, wages or director's fees to which Mr Wehbe was entitled or in reduction of Mr Wehbe's loan to the Company. There was no reason to doubt his evidence or evidence to the contrary. We were not directed to material by which the amounts so allocated could be precisely identified or quantified. We find that in the financial year 2011 the Company paid $4,000 employer contributions to Mr Wehbe's superannuation fund.
[23]
Evidence as to the financial management of the Company
There were in evidence profit and loss statements for the years 2008, 2009 and 2010 for the Company. The disclosed loss before tax was $49,338 in 2008, $153,689 in 2009 and $250,399 in 2010. In the notes to the accounts, current tax liabilities were noted at $26,882.49 in the 2009 year and $97,056 in the 2010. The balance sheets for 2009 and 2010 showed a deficiency in equity in 2009 of $117,109 and in 2010 of $367,508.
Mr Maksoudian agreed that as the Company's accountant he had many communications with the ATO on behalf of the Company to negotiate payment arrangements for outstanding tax debts. He said that a number of arrangements had been made from time to time. He did not recall whether the arrangements were maintained. When asked why he made a significant number of contacts with the ATO during 2012 he said that it was "to negotiate and to describe and explain the situation to the Taxation Office". He was asked whether it was the Company's inability to keep up with payment schedules that caused him to contact the Taxation Office to re-negotiate new payment schedules. He said that it was in the sense of dealing with the arrears of an arrangement but not in the sense that lodgements had been made after an arrangement and there were discussions entailing those lodgements as well.
In late May 2011 on behalf of the law practice Mr Maksoudian engaged Rhodes Consulting to conduct a financial analysis of the practice including:
To review the financial history and performance of the business of the previous three years.
Investigate the prospect of unlocking cash reserves within the business in the short term in order to immediately address arrears of taxation.
Conduct a review of cash generation processes and systems and analyse the business model and trading terms with a view to providing regular reliable positive cash flow.
Provide written recommendations and advice to improve business efficiency and profitability so that the business operates at a profit, including after paying a reasonable commercial remuneration for the two directors.
Areas to be reviewed will include credit control systems, daily WIP, management, daily cash commitments on new matters, fee targets, staff performance and financial budgets.
Follow up and monitoring over a three month period to ensure that recommendations are being implemented and their effectiveness is being measured.
Pursue options for short term financing, including utilising trade debtors as collateral for loans.
Create a system and processes to ensure the existing situation is averted in the future.
Rhodes Consulting was not engaged to "conduct a statutory audit of the financial records of any of [the solicitors] business entities" and would "not express an auditor's opinion as to the truth and fairness of the financial statements".
The Council pleaded and Mr Wehbe admitted that on 21 May 2011 the ATO rejected a payment arrangement offered by the company in April 2011. A letter from Summit Consultants, dated 2 June 2011, was faxed to the ATO on the following day outlining a further payment proposal in relation to the Company's debt to the ATO.
Mr Wehbe admitted that in or around June 2011 Summit Consultants prepared applications for refinancing and submitted them to St. George Bank and Yellow Brick Road. Neither of those applications was successful. On 27 June 2011 the ATO accepted the Company's June 2011 payment proposal.
There was in evidence a preliminary report prepared by Summit Business Consultants addressed to Mr Wehbe and Mr Dona dated 21 June 2011. It was signed by Mr Perivolaris a director of Rhodes Consulting who was also a manager of Summit Business Consultants.
The report stated:
"Our findings centre around a re-evaluation of the business model of the practice. In our observations, the business is built on providing legal services to clients many of whom are accustomed to not paying for those services until the work is completed; and alas, some not at all."
The report continued:
"As a consequence, it is our view that these non-paying clients are the types of clients who are regularly referred to you, and that your firm naturally attracts. (Non payers we define to include anyone who cannot pay a substantial deposit and/or slow payers). … and gracefully accepts these clients and immediately commits your entire resources to them, which you must fund often for months on end without compensating cash flow. The problem is that your infrastructure has a cash commitment of up to $100,000 per month that must be met.
The report recommended that the practice could only afford to have 20% non-paying clients if the other 80% pay and that until the ratio was reversed the practice take on no further non-paying matters and that deposits of up to 50% or even higher be received in every new matter. The report said:
"A pre-requisite of this change of direction would be that you will need to emphatically embrace event billing. …
It also goes to the type of work you are seeking to bring into the business. It is logically easier to get work from clients who don't have to pay until their matters settle. These clients will gravitate to you if these are your terms. The type of work to which this applies likewise will naturally gravitate to you, such as conveyances for property developments and family law cases. …
In our view this is not a sustainable model for your business unless it is well capitalized and/or heavily subsidized. You do not have the capital; and in principle we do not recommend one part of the business subsidizing another, other than through a gestation period, because subsidies lead to complacency, laziness, lack of accountability and resentment from the subsidizer. There is no incentive for the subsidized to stand on their own feet or become competitive. It is not a healthy structure. Hence we would always argue that each department should be profitable and contribute to the overheads and profit of the firm. …
The level of revenue that must be generated for each department should be set as we have discussed to provide a return of at least 3 times the salary package cost for that department. The staff numbers and qualifications/experience required in each department must be commensurate with the realistic revenues that can be achieved i.e to cost one-third of the projected revenue."
[24]
Whether Mr Wehbe breached a fiduciary duty to avoid a conflict of interest
The Council claims as a ground of the amended application that Mr Wehbe breached his fiduciary duty to avoid a conflict of interest. It is alleged in this respect that Mr Wehbe used the Company's funds for the personal expenses which have been identified and admitted by him. In particular it said that the payments for expenses continued from February 2010 while the Company's debt to the ATO in respect of PAYG and GST and unpaid superannuation contributions significantly increased. The Council says that the "direct, immediate and approximate" result of the alleged conduct was that the Company was so drained of funds that it could not meet its statutory obligations to the ATO and its obligations to pay superannuation instalments on behalf of employees.
In paragraph 45 of the particulars to the amended application the Council alleged that in the circumstances of the payments Mr Wehbe breached:
1. Sections 180 - 182 inclusive of the Corporations Act 2001;
2. His fiduciary duty as a director to avoid a conflict between his personal interests and those of the Company; and
3. His fiduciary duty as a director to act in the best interests of the Company.
These allegations were denied by Mr Wehbe. He pleaded in his provisional defence that a fully itemised dissection of the transactions required access to the Company's MYOB corporate data file which was not available to him. He pleaded generally that some items were legitimate business expense deductions for income tax purposes (for example motor vehicle expenses); that some items were debited to director's fees which the Company paid to him which were legitimate business expenses of the Company for income tax assessment purposes and formed part of his assessable income in the relevant year and that some items were debited to his loan account and constituted partial repayments of the loan moneys he had advanced to the Company.
Mr Wehbe pleaded that if the allegation is that he used Company funds to pay certain of his personal expenses and nothing more than that he admitted it. If the allegation is that he used the Company's funds for personal expenses with no benefit to the Company then he denied it.
Mr Wehbe denied that if it was alleged by reason of the payment of moneys available to the Company in its office account and for no other reason the Company was so drained of funds that it could not meet its statutory obligations. He admitted that if it was intended by the Council to allege that as a matter of historical fact if the Company had not applied the funds as it did and had they remained available to the Company to pay other creditors then such moneys could have been applied instead to pay moneys due to the ATO and superannuation instalments on behalf of the Company's employees. He pleaded that such payments have may resulted in the immediate termination of the Company's business activities and the immediate termination of the employment by the Company of the Company's employees.
[25]
Submissions
In its submission as to legal principles underpinning the ground of breach of fiduciary duty the Council submitted that it was not in the Company's best interests for the solicitor as its only director to pay items unrelated to maintaining or increasing the revenue and profitability of the Company and therefore affect its ability to remain in the business of rendering legal services. The Council asserted that Mr Wehbe had preferred his own interests to those of the Company by using funds to pay his private expenses, by not ensuring that the Company made compulsory superannuation payments on behalf of employees and by not ensuring the Company paid GST and PAYG.
No more detailed submissions were made on behalf of the Council as to the nature and scope of the fiduciary duty to avoid a conflict of interest with the interests of the Company or its operation in the circumstances of non-payment of statutory creditors where payment of the director's expenses was set off against salary, wages or director's fees otherwise payable to him or in reduction of his loan account. Nor were we referred to any authorities.
Mr Gray accepted the existence of the fiduciary duty alleged in ground 6 but submitted that no breach of fiduciary duty was established. He firstly said that interpreted literally s 145 of the LPA would have been a complete answer to the Council's allegations. Section 145 provided:
"145 Conflicts of interest
(1) For the purposes of the application of any law (including the common law) or legal profession rules relating to conflicts of interest to the conduct of an Australian legal practitioner who is:
(a) a legal practitioner director of an incorporated legal practice, or
(b) an officer or employee of an incorporated legal practice,
the interests of the incorporated legal practice or any related body corporate are also taken to be those of the practitioner (in addition to any interests that the practitioner has apart from this subsection).
(2) Legal profession rules may be made for or with respect to additional duties and obligations in connection with conflicts of interest arising out of the conduct of an incorporated legal practice.
Note : Under section 143 (Obligations and privileges of practitioners who are officers or employees), an Australian legal practitioner who is an officer or employee of an incorporated legal practice must comply with the same professional obligations as other practitioners."
The operation of s 145 was not pleaded on behalf of Mr Wehbe nor was it addressed in his original submissions or during the course of hearing. It was raised in the course of supplementary submissions. The Council did not address the submission in its submissions in reply. Mr Gray relied upon what he calls "the literal reading" of the section. Applying the principles of statutory construction to which we have earlier referred we are not satisfied that by reference to the ordinary meaning of the words used in s 145 the section operates in a way which merges the interests of the legal practitioner director and the ILP for all purposes with the effect that the statutory duty upon a solicitor director of an ILP to avoid a conflict of interest under s 180 of the Corporations Act 2001 or under the general law is abrogated.
Section 145 is not referred to in terms in the Second Reading speech nor were we directed to any consideration of the operation of s 145 in the authorities.
Section 145 falls within Part 2.6 of the LPA the purpose of which is stated in s 132 to include that of regulating the provision of legal services by corporations in New South Wales. The text of the first three lines of s 145(1) qualify the operation of the section to the application of any law or legal profession rules relating to conflicts of interest:
"to the conduct of an Australian legal practitioner who is:
(a) A legal practice director of an incorporated legal practice, or
(b) An officer or employee of an incorporated legal practice …"
[Emphasis added]
The section is directed to the application of a law relating to conflicts of interest to an issue of conduct of an Australian legal practitioner not to directors more generally. It falls within the context of Division 2 of Part 2.6 directed to making legal practitioner directors responsible for the management of an incorporated legal practice as the Second Reading speech explained more generally to preserve the existing professional obligations of legal practitioner directors and employees and for the protection of the public.
The provision is not the subject of a declaration pursuant to s 163(1) of the LPA to be a corporation's legislation displacement provision for the purposes of s 5G of the Corporations Act 2001. Nor have the Regulations declared the operation of s 45(1) to be an excluded matter for the purposes of s 5F of the Corporations Act 2001 under s 163(2) of the LPA.
The expression "Legal profession rules" in s 145(2) was defined in s 4 of the LPA to mean:
"rules made under Part 7.5 (Legal profession rules)."
Section 703 of the LPA fell within Part 7.5 and provided that the Law Society Council may make rules for or with respect to engaging in legal practice as a solicitor. The Rules in operation at the relevant time were the Revised Professional Conduct and Practice Rules 1995.
Rule 10 provided:
"10. Avoiding conflict of interest (where practitioner's own interest involved).
10.1 A practitioner must not, in any dealings with a client:
10.1.1 allow the interests of the practitioner or an associate of the practitioner to conflict with those of the client;
10.1.2 exercise any undue influence intended to dispose the client to benefit the practitioner in excess of the practitioner's fair remuneration for the legal services provided to the client;
10.2 A practitioner must not accept instructions to act for a person in any proceedings or transaction affecting or related to any legal or equitable right or entitlement or interest in property, or continue to act for a person engaged in such proceedings or transaction when the practitioner is, or becomes, aware that the person's interest in the proceedings or transaction is, or would be, in conflict with the practitioner's own interest or the interest of an associate."
Section 133 of the LPA expressly provided that the definition of "professional obligations" included obligations in connection with conflicts of interests. This included the obligations arising from the operation of Rule 10 of the Legal Profession Rules. By s 143 to which we have referred the obligation is one from which a legal practitioner director was not excused.
In our view the ordinary meaning of the words "conflicts of interest" in the context of Part 2.5 of the LPA in which they appear, having regard to the purposes of the Act and confirmed by the Second Reading speech refer to a conflict between the interests of the ILP and those of its client. Read in that way and consistently with the operation of the surrounding provisions within Part 2.6 including s 133 and Rule 10 of the Legal Profession Rules a legal practitioner director is taken to have the same interests as the ILP for the purpose of avoiding conflicts of his or her interest with those of a client.
In their ordinary meaning the words in our view do not refer to conflicts of the interests of a legal practitioner director and the interests of the corporation of which he or she is a director. The construction for which Mr Gray contends would lead to the inconsistent result that legal practitioners who are directors of an ILP would not be subject to the operation of s 180 of the Corporations Act 2001 or the common law duty to avoid a conflict of interest with the Company whereas non-legal practitioners who are directors would be so subject. We reject the submission.
Mr Gray then submitted that if funds had been appropriated for the solicitor's private purposes, thereby reducing the Company's ability to discharge its debts, there would have been a clear misappropriation of company money and breach of s 180 of the Corporations Act 2001. He said that the evidence is that it was not what the solicitor did. Mr Maksoudian's evidence was that Mr Wehbe drew no salary and that payments made on account of his salary were credited to his loan account with the Company. He said there was no evidence that the solicitor drew any funds from the Company beyond the sums appropriated as salary or credits of the company in the solicitor's loan account. We accept that there is no evidence of misappropriation. It was not a ground of the amended application.
Mr Gray submitted that as the Company could not provide legal services unless it had a solicitor-director holding an unrestricted practising certificate the Company would have ceased to trade had Mr Wehbe ceased to hold office as a solicitor-director unless it retained another solicitor holding an unrestricted practising certificate to be a director. He said that any solicitor would on appointment become subject to the duties imposed by the Corporations Act 2001 and the LPA and that it would have been implausible to assume that any solicitor would undertake the role unless remunerated with a reasonable salary.
Mr Gray said that there was no evidence that Mr Wehbe was paid any salary beyond the non-deductible (to the Company) personal expenses paid by the Company. He said that there was no evidence that the amounts credited as salary or debited to his loan account of which Mr Maksoudian gave evidence were unreasonable. He submitted in respect of the fiduciary duty that it was not one particular to legal practitioner directors. He said that such duty as existed applied to all directors of companies and that it was never suggested that directors of liquid companies or companies trading while insolvent were forbidden from drawing reasonable remuneration. He said that no breach of duty of fiduciary duty was established.
[26]
Consideration
We have found that during the period 1 December 2010 until 30 November 2011 Mr Wehbe caused the Company to make payments from its general office account of certain of Mr Wehbe's personal expenses which have been identified.
The evidence in respect of the nature and treatment of some of the payments was unsatisfactory. No evidence was given by Mr Wehbe who might reasonably have been expected to have been in the best position to give relevant evidence about the payments which he authorised or caused.
Evidence was given that payments were made out of the Company's office account to service interest and principal payments in respect of investment properties owned by Mr Wehbe and his wife. Mr Maksoudian could not explain why it was necessary for the Company to make payments to the investment home loan accounts where the interest payments on the RMF were being met from the Company's office account. He could offer no reason why the Company paid expenses owing by Mr Wehbe on the investment loans. Neither he nor his firm were involved in allocation or priority of payments to loan accounts. The appropriate person with the knowledge about how and why such payments were allocated and their priority was Mr Wehbe.
It was Mr Maksoudian's evidence that the monthly payments for the investment properties and some other expenses were allocated as debit amounts to Mr Wehbe's director's loan account in the Company. He said other expense payments were made in lieu of salary and wages or director's fees payable to Mr Wehbe. We were not referred to any breakdown of the actual amounts so attributed either to wages or salary or director's fees or Mr Wehbe's loan account.
Mr Maksoudian was unable to comment in respect of the financial year 2010 whether adjustments were made in the Company accounts debiting to Mr Wehbe expenses on account of his salary or as a debit in his loan accounts. Without access to the Company's MYOB records he could not give more detailed evidence about what happened at any particular time. Nor could he comment in respect of the financial years 2011 and 2012 when he was not the Company's accountant.
The Council asserted that the breach of fiduciary duty which it had identified comprised the payment of expenses on Mr Wehbe's account by the Company which had the effect of reducing its ability to pay statutory creditors. The ground of breach of fiduciary duty was not particularised on any other basis.
We have accepted Mr Maksoudian's evidence that at least up until the 2010 financial year such payments as were attributable to Mr Wehbe's expenses were off set against unpaid salary, wages, director's fees or moneys owing to Mr Wehbe on his loan account. There was evidence of continuing payment of Mr Wehbe's expenses in 2011 and 2012. There was no evidence as to the treatment of those expenses in the hands of the Company in that period. We accept Mr Maksoudian's evidence that relevant documentary material was in the hands of third parties and not available. In particular, there is no evidence sufficient to establish that the expenses paid on Mr Wehbe's behalf exceeded moneys to which we has otherwise entitled from the Company in the period.
We accept Mr Gray's submission that a solicitor director of an ILP is entitled to receive director's fees, wages or salary as an expense of the practice. We were referred to no statement of principle or authority to the contrary. Nor were we referred to any authority in support of the proposition that partial repayment of a director's loan account when he or she stood in the position of an unsecured creditor of the Company together with other creditors and which would have reduced the indebtedness of the Company to creditors generally has the effect of preferring the interests of a director over the interests of the Company such as to make out a breach of the fiduciary duties alleged.
Similarly we were referred to no authority in support of the proposition that the payment of superannuation entitlements to which he was entitled as an employee evidenced a breach by Mr Wehbe of his fiduciary duty to the Company to avoid a conflict of interest.
Having considered the evidence closely we are not satisfied in the sense of feeling the actual persuasion referred to by Dixon J in Briginshaw that Mr Wehbe preferred his own interests to the interests of the Company upon causing payments by the Company of his expenses. There is no evidence that the amounts so paid exceeded the amounts to which he was otherwise entitled as a director, employee or creditor. We find that the ground of breach of fiduciary duty to avoid a conflict of interest as particularised by the Council is not made out.
[27]
Whether Mr Wehbe preferred his interests over staff and statutory creditors
The Council seeks a finding that Mr Wehbe's failure to ensure payment of PAYG, GST and staff superannuation was done knowingly and for the purpose of preferring his own financial and other interests over the interests of employees and the government and those of tax payers. It seeks a finding in all the circumstances that Mr Wehbe's conduct amounts to professional misconduct. No submissions were received on behalf of Mr Wehbe on the question of whether by continuing the business or otherwise Mr Wehbe preferred his own financial and other interests over the interests of employees and statutory creditors.
It is not necessary for such a finding to be made to establish professional misconduct. The authorities to which we shall refer have found that failure by a practitioner to ensure that a law practice pays its statutory creditors is sufficient in some circumstances to constitute professional misconduct without a particular finding that the legal practitioner preferred his or her own interests over employees and statutory creditors. We have found that the failure by Mr Wehbe to cause the ILP to pay statutory creditors and staff superannuation or otherwise ensure that those payments were made was knowing, intentional and systematic. We are also satisfied on the evidence of the relevant circumstances and find that by his conduct Mr Wehbe did prefer his own interests over the interests of staff and statutory creditors.
We are satisfied on the admission in the pleading and the evidence of Mr Maksoudian and have found that during the period in which statutory creditors were not being paid Mr Wehbe's loan account was credited with at least some of the expenses paid on his behalf. We find that to the extent that any payment of expenses on Mr Wehbe's behalf was offset against his loan account it had the effect of preferring his interests as a creditor of the Company over other creditors including statutory creditors. In the absence of evidence as to the allocation of specific amounts to the loan account we are unable to make a determinative finding about the actual payments.
Mr Gray submitted that without the accounts there is no conclusive evidence that as at the date of liquidation Mr Wehbe was indebted to the Company in respect of expenses paid on his behalf or the Company was indebted to him in respect of unpaid salary or his loan account. In our view that is not an answer to the matter. Any payment (actual or in lieu) in reduction of Mr Wehbe's loan account at a time when other creditors were not being paid had the effect of preferring his interest as a creditor to theirs.
Mr Maksoudian confirmed in his evidence and we have found that superannuation contributions in the sum of $4,000 were recorded as employer contributions paid on Mr Wehbe's behalf by the Company. Mr Wehbe had a beneficial interest in the superannuation contributions made on his account. The contributions were made at a time when the Company had not met its other statutory fiscal obligations including the payment of superannuation on behalf of staff since February 2010. The evidence establishes and we find that Mr Wehbe preferred his own interests over those of the staff and creditors upon the payment on his account of superannuation contributions in the sum of $4,000 from 2 July 2010 until 29 March 2011.
The authorities have determined more generally that the continuing conduct of a business is of itself an interest of the proprietor capable of being preferred over the interests of staff and creditors. In Adams at [70] the Tribunal said:
"70 … There is no suggestion that he did not know his legal obligation to make the payments [in respect of superannuation contributions]. And he knew for a year that the payments were not being made and his staff were being denied their entitlements. His decision was to prefer the continuing conduct of his business and his finances, over the legal rights and interests of his staff."
In Andreone (No 1) [2014] at [112] the Tribunal said:
"112 The pattern of conduct of the respondent in failing to remit PAYE deductions and GST billed involved him preferring his own financial interests (including continuance of the law practice) over those of the employees of the practice and the taxpayers."
The passage in Adams was referred to in Kingston at [29].
We are also satisfied on the evidence and find in line with these authorities that Mr Wehbe preferred his own interests over those of the staff and creditors in continuing the conduct of the business and thereby receiving reductions in his loan account and other benefits in lieu of wages at a time when the Company's statutory obligations were not being met from November 2009.
Mr Maksoudian said in re-examination that had there been a failure to make payments due to the National Australia Bank under the mortgages secured by the investment properties the loans would have gone into arrears and he presumed that the bank would seek repossession of all assets to recover the moneys. That is no doubt so. However, by continuing to trade Mr Wehbe continued to receive the benefit of payment of his expenses ultimately set off against his entitlements. The mortgages over the investment properties were serviced and to the extent of capital repayments his equity in the properties increased and Mr Wehbe avoided the earlier liquidation of the properties. At the same time the Company's indebtedness to statutory creditors and in respect of staff superannuation entitlements increased. That Mr Wehbe preferred his interests in continuing the conduct of the business to payment of statutory creditors is also evident from his provisional defence. He pleaded that had moneys otherwise attributable to him not been paid such moneys could have been paid to statutory creditors but that such payments may have resulted in the immediate termination of the Company's business activities and employment of the Company's employees. In other words, where the alternative was to liquidate the Company and incur no further indebtedness to creditors Mr Wehbe preferred continuing the conduct of the business over the entitlements of statutory creditors and staff who were not paid.
We are satisfied and find that by causing the Company to make superannuation contributions on his behalf and the payment of expenses set off at least in part against his loan account with the Company and more generally receiving the benefit of the continuing operations of the Company which enabled these off setting expenses to be paid in the period in which the Company could not pay its statutory creditors, Mr Wehbe knowingly preferred his interests to the legal rights and interests of staff and the Company's creditors. The payments of expenses allocated to the reduction of Mr Wehbe's loan account and the payment of Mr Wehbe's own superannuation were intentional. Mr Wehbe caused the payments to be made. We have found that the decisions at the same time not to pay statutory creditors and staff superannuation were knowing, intentional and systematic. We also find that the failure to ensure payment was done for the purpose of preferring Mr Wehbe's financial and other interests in continuing the operations of the Company over the interests of statutory creditors and staff. His pleading alone supports such a finding. The evidence does not establish and we do not make a finding that Mr Wehbe's conduct was deliberately dishonest in causing the Company to avoid its statutory obligations.
[28]
Consideration and findings on professional misconduct
We have found that Mr Wehbe was in breach of a professional obligation from which he was not excused under s 143 LPA to ensure that the Company operating as an ILP paid superannuation entitlements, GST and PAYG. The Council seeks findings of professional misconduct against Mr Wehbe under s 497(1)(b) of the LPA and at common law. Section 497 of the LPA provided that:
"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.
(2) For finding that an Australian legal practitioner is not a fit and proper person to engage in legal practice as mentioned in subsection (1), regard may be had to the matters that would be considered under section 25 or 42 if the practitioner were an applicant for admission to the legal profession under this Act or for the grant or renewal of a local practising certificate and any other relevant matters.
Section 25 of the LPA provided:
"25 Suitability for admission
(1) In deciding if an applicant is a fit and proper person to be admitted, the Admission Board:
(a) must consider each of the suitability matters in relation to the applicant to the extent a suitability matter is appropriate, and
(b) may consider any other matter it considers relevant.
(2) However, the Admission Board may consider a person to be a fit and proper person to be admitted despite a suitability matter because of the circumstances relating to the matter."
Section 42 provided:
"42 Suitability to hold local practising certificate
(1) This section has effect for the purposes of section 48 (Grant or renewal of local practising certificate) or any other provision of this Act where the question of whether or not a person is a fit and proper person to hold a local practising certificate is relevant.
(2) A Council may, in considering whether or not the person is a fit and proper person to hold a local practising certificate, take into account any suitability matter relating to the person,:
…"
The suitability matters referred to are set out in s 9 and include at s 9(1):
"(a) whether the person is currently of good fame and character, …"
At common law professional misconduct includes conduct in pursuit of professional activities which would reasonably be regarded as disgraceful or dishonourable by professional colleagues of good repute and competency. The New South Wales Court of Appeal in Council of the New South Wales Bar Association v Sahade [2007] NSWCA 145 at [54] (per Basten JA) noted the adoption in respect of legal practitioners of the test for medical practitioners propounded in Allinson v General Council of Medical Education and Registration [1894] 1 QB 740 (at 763).
Ridge J in Kennedy v The Council of the Incorporated Law Institute of New South Wales (1939) 13 ALJ 563 considered the parameters of a charge of misconduct saying:
"… a charge of misconduct as relating to a solicitor need not fall within any legal definition of wrongdoing. It need not amount to an offence under the law. It was enough that it amounted to grave impropriety affecting his professional character and was indicative of a failure either to understand or to practice the precepts of honesty or fair dealing in relation the courts, his clients or the public. The particular transaction the subject of the charge must be judged as a whole and the conclusion whether it betokened unfitness to be held out by the court as a member of the profession in whom confidence could be placed, or on the other hand, although a lapse from propriety, was not inconsistent with general professional fitness and habitual adherence to moral standards, was to be reached by a general survey over the whole transaction."
The wide breadth of the concept might be observed from the decision of McClellan CJ at CL in Bechara v Legal Services Commissioner [2010] NSWCA 369 at [44] in which his Honour said:
"44. As Klein [Klein v NSW Bar Association (1960) 104 CLR 186] made plain, there are no fixed categories of professional misconduct. Much depends on whether the conduct falls outside 'generally accepted standard[s] of common decency and common fairness."
In particular, conduct might amount to professional misconduct even though it does not involve deliberate dishonesty; see Law Society of New South Wales v Carvan Unreported Court of Appeal, 14 May 1981 (BC8111397), Bolster v Law Society of New South Wales Unreported, Court of Appeal, 20 September 1982 (BC8211696) at 1 referred to in Council of the Law Society of New South Wales v Clapin [2011] NSWADT 83 at [200] - [201], [212].
As to the meaning of "fit and proper", Kitto J said in Ziems at 298:
"Yet it cannot be that every proof which he may give of human frailty so disqualifies him. The ends which he has to serve are lofty indeed, but it is with men and not with paragons that he is required to pursue them. It is not difficult to see in some forms of conduct, or in convictions of some kinds of offences, instant demonstration of unfitness for the Bar. Conduct may show a defect of character incompatible with membership of a self-respecting profession; or, short of that, it may show unfitness to be joined with the Bench and the Bar in the daily co-operation which the satisfactory working of the courts demands. …"
The New South Wales Court of Appeal said in Prothonotary of the Supreme Court of New South Wales v Leon Nikolaidis [2010] NSWCA 73 at [21]:
"21 The phrases "fit and proper person" used in s 497(1)(b) and "good fame and character" in s 9(a) are not defined in the Legal Profession Act, but are both well-known. As Mahoney JA said in Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 at 449, character involves, amongst other things, the acceptance of high standards of conduct and acting in accordance with them, under pressure."
The reference in 497(1)(b) to conduct justifying a finding that the practitioner is not a "fit and proper person" to engage in legal practice was considered in respect of the operation of s 127(1)(b) of the Legal Profession Act 1987 in similar terms in Sahade. Basten JA at [70] considered that the reference was to be understood as the classification of conduct according to the importance of the standard and the seriousness of the breach rather than a prediction as to the actual order the Tribunal would be likely to make. His Honour held that the reference was to misconduct which would justify a particular finding if established regardless of subsequent rehabilitation or reformation of character.
Whether a practitioner is fit and proper to remain on the Roll is, in the context of the making of dispositive orders, to be determined at the time of hearing; A Solicitor v Council of the Law Society of NSW (2004) 216 CLR 253 at 268 [21].
The authorities have held that non-payment of statutory creditors and superannuation entitlements is conduct occurring in connection with the practice of law within the meaning of s 497(1)(b). The Tribunal in Vosnakis said at [34] - [35]:
"34 Considering the meaning of the expression 'professional misconduct' in that case, involving the failure of Mr. Cummins to file tax returns for almost 4 decades, the Chief Justice said at 289:
"There is authority in favour of extending the terminology 'professional misconduct' to acts not occurring directly in the course of professional practice. That is not to say that any form of personal conduct may be regarded as professional misconduct. The authorities appear to me to suggest two kinds of relationships that justify applying the terminology in this broader way. First, acts may be sufficiently closely connected with actual practice, albeit not occurring in the course of such practice. Secondly, conduct outside the course of practice may manifest the presence or absence of qualities which are incompatible with, or essential for, the conduct of practice. In this second case, the terminology of 'professional misconduct' overlaps with and, it is usually not necessary to distinguish it from, the terminology of 'good fame and character' or 'fit and proper person'."
35 In the opinion of the Tribunal, the respondent's failure to comply with his civic obligations to make superannuation payments on behalf of his employees; to pay GST and PAYG tax at the time those obligations fell due, are of a nature encompassed by the Chief Justice's definition of the extended meaning of 'professional misconduct'. Not only did these obligations arise in the course of the conduct of his practise, but the failure to meet these obligations in that context render the respondent not a fit and proper person to remain on the roll."
For the purposes of s 497(1)(b) in considering the question of whether conduct if established would justify a finding that the practitioner is not a fit and proper person to engage in legal practice regard is to be had to the circumstances in which the conduct was committed. In Koffel the Tribunal considered the decision in the New South Wales Court of Appeal in NSW Bar Association v Murphy [2002] NSWCA 138. In particular the Tribunal said at [54]:
"54 And, at [107] the Court said that the "test of a fit and proper person to hold a practising certificate is stated as to each of act of bankruptcy, indictable offence and tax offence. But the fact of commission of an act of bankruptcy, indictable offence or a tax offence is not what matters. The Council and the Court must look to the circumstances in which the act of bankruptcy, indictable offence or tax offence was committed. If no more than the fact of commission of an act of bankruptcy, an indictable offence or a tax offence is known, an opinion as to what the circumstances of the commission showed could not be held. What matters are the circumstances of which the act of bankruptcy, indictable offence or tax offence was committed." And, at [108], the "circumstances must show that the legal practitioner is not a fit and proper person to hold a practicing certificate. The Council (Court) must be persuaded. An even balance means that the circumstances do not show what must be shown". And, at [109], what "the circumstances must show is not that the legal practitioner is not a fit and proper person to be a legal practitioner … (but rather the circumstances must show conduct that) "would justify a finding that the legal practitioner is not of good fame and character or is not a fit and proper person to remain on the roll of legal practitioners".
More specifically the Tribunal in Koffel said at [48]:
"… in our opinion, the mere fact of a failure to pay superannuation guarantee contributions on time does not, on 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."
The Council referred us to the authorities concerning conduct findings in respect of the failure of a solicitor to ensure payment of statutory financial obligations either on their own account or being an officer of an ILP. As we have indicated the Council referred in particular to the decision in Adams where the failure to pay employees' superannuation contributions and GST and PAYG done knowingly and for the purposes of continuing the conduct of the business was found to be professional misconduct. The Tribunal in Adams at [59] - [87] referred to earlier decisions where findings of professional misconduct had been made in respect of the failure to ensure payment of statutory debts (Bouzanis, Vosnakis, Somerfield, Gillroy and Dalla). The Council pointed out that the Tribunal had made similar findings in the matters of Kingston and Delpopolo.
The Council submitted in respect of the non-payment of superannuation contributions and GST and PAYG and we have found that Mr Wehbe knowingly preferred his desire to continue the conduct of his business over the interests of his employees and statutory creditors.
As we have indicated a finding in respect of whether a practitioner is of good fame and character is a suitability matter to which regard might be had under ss 25 and 42 LPA in considering whether conduct would justify a finding that the practitioner is not fit and proper to engage in legal practice under s 497(1)(b).
The meaning of the expression "good fame and character" was considered by the New South Wales Court of Appeal in Prothonotary of the Supreme Court of New South Wales v Da Rocha [2013] NSWCA 151. Ward JA delivering the judgment of the Court said at [17] - [19]:
"17 [Good fame and character"] is not defined in the Legal Profession Act. In Prothonotary of the Supreme Court of NSW v P [2003] NSWCA 320, it was said (by Young CJ in Eq, as his Honour then was, at [17]) that fame refers to a person's reputation in the relevant community, whereas character refers to a person's actual nature.
18 In Prothonotary of the Supreme Court of NSW v Alcorn [2007] NSWCA 288, Hoeben J (as his Honour then was) noted (at [57]) that the absence of good fame and character is to be determined at the time of the hearing and (at [58]) that, in determining whether a person is of good fame and character the Court must consider "matters affecting the moral standards and attitudes and qualities" of the person and not merely consider "what is his general reputation" (referring to Ex parte Tziniolis, which considered the question in the context of a medical practitioner, and Incorporated Law Institute of NSW v Meagher [1909] HCA 87; 9 CLR 655 which considered the question in the context of an admission application). His Honour went on to say (at [59]-[60]):
However the notion of good character is not at large. It must relate to the qualities relevant to practice as a professional. Kirby P described the concept as follows:
The 'good character' which is required, the absence of which may give rise to complaint leading to sanctions, must be a 'good character' relevant to the purpose for which the complaint is entertained, viz for the making of an order affecting the practice of the medical practitioner concerned as such ... The relevant function of the Tribunal is to protect the public from medical practitioners whose continued practice may cause harm to the public. (McBride v Walton (... at [15]).
Dixon J described the concept of 'good fame and character' as follows:
It would almost seem to go to without saying that conviction of a crime of dishonesty of so grave a kind as housebreaking and stealing is incompatible with the existence in a candidate for admission to the Bar of the reputation and more enduring moral qualities denoted by the expression 'good fame and character', which describes the test of his ethical fitness for the profession. (In Re: Davis at 420).
19 In McBride v Walton [1994] NSWCA 199 (at [61]-[62]) the Court noted the matters to be considered when determining whether a finding of proven misconduct should be followed by a consequential finding that the practitioner was not of good character (in the context of fitness to practise medicine) as being:
(a) whether the misconduct can be satisfactorily explained as an error of judgment rather than a defect of character;
(b) the intrinsic seriousness of the misconduct qua fitness to practise medicine;
(c) whether the misconduct should be viewed as an isolated episode and hence atypical or uncharacteristic of the practitioner's normal qualities of character;
(d) the motivation which may have given rise to the proven episode of misconduct;
(e) the underlying qualities of character shown by previous and other misconduct; and
(f) whether the practitioner's conduct post the proven episode of misconduct demonstrates that public and professional confidence may be reposed in him to uphold and observe the high standards of moral rectitude required of a medical practitioner."
Applying the criteria identified by the Court in McBride v Walton [1994] NSWCA 199 in our view the failure to ensure the payment of statutory fiscal liabilities cannot in the circumstances be satisfactorily explained as an error of judgment. It occurred from November 2009 until liquidation of the Company in April in 2012. We have found that the non-payment of statutory debts by the Company over which Mr Wehbe had control as sole legal practitioner director and his failure to ensure payment was knowing, intentional and systematic.
The misconduct insofar as it related to the fitness to practise law is serious. The Tribunal in Adams said at [108] and [114]:
""108 …The GST was taxes that he collected on payment of his bills but failed to remit to the Commonwealth. The PAYG deductions were deductions he was by law required to have made from the gross wages of his employees and remitted to the ATO. Instead, he paid the employees the net amount but failed to pay the balance of their wages. His conduct in relation to GST and in relation to PAYG amounts were breaches of the law.
...
114 He did not appear to recognise that his use of the GST he collected was a misappropriation of public funds. Nor did he seem to recognise the consequences for his staff of his failure to pay their PAYG deductions to the ATO."
The Council pleaded that the consequences of such default in payment of superannuation were:
"a. An irrecoverable loss to former employees whose salaries are sacrificed to any extent beyond the superannuation contribution figures set by statute.
b. The effort and patience required by former employees to recover the unpaid superannuation at the statutory amount either from the liquidator, from the ATO or parts of their entitlements from both …"
Ultimately the shortfall in any unsuccessful recovery is met by consolidated revenue; see Council of the Law Society of NSW v Kingston [2014] NSWCATOD 21 at [116] - [118] referring to the judgment of Heydon J in Roy Morgan Research Pty Ltd v Commissioner of Taxation (2011) 244 CLR 97 at [53], [54], and [57].
The authorities to which we have been referred indicate that the systematic failure to ensure payment of statutory fiscal obligations in most circumstances and even without dishonesty warrants a finding of professional misconduct.
The conduct cannot be viewed as an isolated episode nor was there any evidence before us upon which we could determine that it was atypical or uncharacteristic of Mr Wehbe's normal qualities of character. The non-payment of statutory liabilities arose in the circumstances of the Company having exhausted other avenues of capital or debt funding for the purposes of maintaining the business activities of the law practice. This had the benefits to Mr Wehbe which we have identified. There is no evidence before us as to underlying qualities of character shown by previous or other misconduct or whether Mr Wehbe's conduct after the liquidation of the Company demonstrates that public and professional confidence might be reposed in him to uphold and observe the high standards of moral rectitude required of a legal practitioner.
The solicitor's conduct in respect of a failure to pay superannuation was held not to be professional misconduct in Koffel. In the circumstances of that case the solicitor had informed the staff of financial difficulties which the practice was experiencing and that they might not be paid superannuation contributions. Mr Koffel made meaningful changes to the law practice to mitigate its financial difficulties. He voluntarily acknowledged the responsibility to pay and guaranteed to pay outstanding superannuation entitlements and by the time of the hearing in 2010 had largely done so. The Tribunal was satisfied in all the circumstances that Mr Koffel recognised his professional, corporate and moral obligations and met those obligations; at [48].
In Adams at [81] the Tribunal noted that in Koffel there had not been a systematic course of conduct which extended over "a long period of time". It was not of "such gravity as to constitute professional misconduct".
In the circumstances of this case the non-payment of superannuation and other statutory liabilities occurred from November 2009 until April 2012. The failure to ensure payment of the statutory fiscal obligations was not inadvertent; see Council of the Law Society of NSW v Healey [2013] NSWADT 173 at [22]. It was systematic. Mr Wehbe did not acknowledge responsibility to ensure that payment was made or otherwise effect payment. The representations made to staff on the Company's behalf by Mr Dona were unsatisfied. As was the case in Kingston at [33] it cannot be said that Mr Wehbe upon becoming aware of default in payment of superannuation contributions and PAYG tax and GST "did what he believed he could reasonably do in all the financial circumstances to meet his revenue responsibilities, thus demonstrating conduct in a professional (and personal) sense a commitment to pay these debts".
Unlike the position in Koffel there was no evidence of any reasonable or other steps taken by Mr Wehbe to ensure that the Company met its revenue responsibilities apart from seeking to refinance and make instalments arrangements with the ATO. There is no evidence that Mr Wehbe took steps to reduce his expenses. The continuing operation of the practice was funded at least in part by non-payment of statutory creditors.
In written submissions it was said that Mr Wehbe "deeply regrets that all creditors went unsatisfied". In his letter to the Law Society dated 20 February 2013 Mr Wehbe's solicitor stated:
"Mr Wehbe confirms that RWP (the Company) was primarily responsible for all superannuation entitlements. Although Mr Wehbe is not personally responsible for those entitlements he hopes to personally attempt to contribute to entitlements sometime in the future."
There is no evidence that he took any steps to do so. There is no evidence that Mr Wehbe recognised his professional, corporate and moral obligations with respect to the payment of superannuation entitlements or statutory creditors. We find that the circumstances referred to in Koffel are not applicable to Mr Wehbe.
Additionally, the Tribunal in Kingston concluded at [119] that an employer is under an obligation to notify his or her employees who defaults in payment of superannuation contributions have occurred or are likely to occur. This is so employees have an opportunity of deciding whether to continue in the same employment. We have found that Mr Assi was not informed that his superannuation entitlements were not being paid and discovered the fact only after the Company had gone into liquidation. It also follows in our view that if an employer makes a representation that any cash flow difficulties are temporary or that the employer would attend to superannuation payments as soon as they could a similar obligation arises requiring employees to be notified if the cash flow difficulties continue or contributions are not being repaid. We have found that the other employees were not fully informed as to the Company's financial position and the continuing non-payment of their superannuation entitlements.
Reference was made in Mr Wehbe's case to the company's financial position arising from the global financial crisis. We infer this to suggest that it was outside Mr Wehbe's control. This ignores the more endemic problems in the nature and management of the practice identified in the Summit Report which were within Mr Wehbe's control. The Company's failure to remit GST and PAYG and pay superannuation was not caused by the global financial crisis. Nor was Mr Wehbe's failure to ensure that statutory creditors were paid. The systematic decisions to continue to trade and not to pay statutory creditors were those of Mr Wehbe.
Mr Gray asked the Tribunal to infer that Mr Wehbe's bankruptcy arose from the failure of the incorporated legal practice and that he had committed all he had to the practice and there was nothing more that he could do. He said in written submissions that Mr Wehbe had also suffered substantial losses as a result of the failure of the Company. There was no evidence upon which we could conclude that any assets in which Mr Wehbe had an interest went to satisfy the obligations of the Company. Nor is any ultimate loss which he suffered an answer to his failure to meet the professional obligation from November 2009 to ensure payment of statutory liabilities.
In written submissions on Mr Wehbe's behalf it was suggested that in view of the cash flow difficulties the Company either had to cease trading completely with the consequences for employees and creditors which would follow or apply its funds discriminately differentiating between creditors preferring some creditors to others. It was submitted that the Company under Mr Wehbe's direction adopted the latter course and that this was done in light of the independent expert advice. We do not accept this submission. There was no reference to evidence establishing that Mr Wehbe was advised that the Company should not meet its statutory obligations to pay PAYG, GST and staff superannuation entitlements. Importantly at least until 2010, by the allocation of expenses paid on his behalf to reduction of his loan account one creditor being preferred to other statutory creditors was Mr Wehbe himself.
It was also submitted on behalf of Mr Wehbe that a distinction is to be drawn between temporary illiquidity and insolvency. It was submitted that if there was an honest and reasonable belief that the trading entity is experiencing temporary illiquidity which would be overcome by the receipt of funds in the future, that is, within a reasonable time then it is neither unlawful nor contrary to commercial morality to continue to trade that entity pending receipt of those funds. It was submitted that there was no basis for a contention that a legal practitioner who honestly and reasonably trades during a period of illiquidity does so at the risk of having his name removed from the Roll of lawyers if the practice becomes insolvent.
The evidence does not establish that the Company's illiquidity was temporary. The accounts reflect that the Company's losses and indebtedness to the ATO increased year by year from November 2009. Superannuation was not paid from February 2010. The independent advice obtained in July 2011 confirmed that the basis upon which the Company had been operating was unsustainable. The cash flow projection for 2011/12 in respect of receipts necessary to maintain its activities even without paying existing debt was not being met. Mr Wehbe and Mr Dona were not meeting their revenue budgets. There is no basis for us to conclude that Mr Wehbe had an honest and reasonable belief that the Company's illiquidity which in fact had been longstanding would be resolved by receipt of funds in the future within a reasonable timeframe. The conduct issue arises not as a result of any illiquidity of the Company but for Mr Wehbe's failure to meet his professional obligation identified in the authorities to ensure that the statutory financial obligations of the practice were being met.
In McHugh regard was had at [41] - [42] to the determination of the New South Wales Court of Appeal in Murphy which concerned the cancellation of the respondent's practising certificate after he had gone bankrupt for failure to pay tax for which he was liable in circumstances in which the New South Wales Bar Association believed that he had chosen to spend his money on expenditure of a private nature. The Tribunal below had found that Mr Murphy was not a fit and proper person.
Giles JA said at [162] - [163], [170] - [172]
"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 (for example the debt to the bank).
171 The determination is of fitness to hold a practising certificate at the time of the determination - s 38FC(1)(b) refers to circumstances that show that the applicant or holder is not a fit and proper person to hold a practising certificate. 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. On the facts of this case, plainly very different from those of cases such as New South Wales Bar Association v Cummins and New South Wales Bar Association v Somosi, the statutory test has not been fulfilled."
The Tribunal in McHugh concluded that the orders sought in the instrument of consent were appropriate, namely a reprimand and fine. The Tribunal was satisfied however in doing so that the solicitor did not participate in or have direct knowledge of the breaches; that when he did he took steps to rectify the matter; that his decision to trade out of financial difficulties whilst misguided was not made with a view to evading obligations with regard to tax and superannuation; that he sold a number of properties owned by him to assist the practice to meet its obligations and that he had demonstrated that he was able to manage and supervise the management of trust accounts in an incorporated legal practice to an acceptable standard and to ensure that its tax and superannuation obligations have been discharged.
As we have said, there is no evidence that Mr Wehbe intended that the Company evade its obligations with regard to tax and superannuation. However, unlike the position in McHugh, Mr Wehbe had knowledge of and caused the non-payment of its statutory financial obligations by the ILP. He did not take effective steps to remedy the situation. He did not liquidate any properties to assist the ILP to meet its obligations. As was the case in Kingston, Mr Wehbe's response to the Company's financial crisis was, on the evidence to which we have been referred, undoubtedly inadequate. There was no evidence from Mr Wehbe that he had demonstrated that he was able to manage an incorporated legal practice to ensure that its tax and superannuation obligations were discharged.
Mr Wehbe was the sole legal practitioner director of the ILP. We have found that the Company experienced significant cash flow difficulties arising out of its inability to generate billings and recover fees rendered. Mr Wehbe does not dispute this. The Company had exhausted capital and debt funding. Mr Wehbe's conduct in not ensuring the payment of statutory creditors and staff superannuation in breach of his professional obligation for nearly two and a half years in an amount exceeding $300,000 during which time as we have found his interests in continuing the business and receiving payment of superannuation and reduction of his loan account from time to time were knowingly being preferred to the interests of statutory creditors and staff even in the absence of dishonesty reflects a failure to accept high standards of conduct and acting in accordance with them. In our view, the conduct falls outside the generally accepted standards of common decency and common fairness. We find that Mr Wehbe was not of good fame and character and that the conduct would justify a finding that he is not a fit and proper person to engage in legal practice within the meaning of s 497(1)(b) and that he is guilty of professional misconduct.
Even without a finding that Mr Wehbe had knowingly preferred his interests in continuing the conduct of the business over the interests of staff and creditors the remaining circumstances including Mr Wehbe's knowing, intentional and systematic failure to ensure payment by the Company of its statutory financial obligations in breach of his professional obligation would in our view justify a finding that he is not a fit and proper person to engage in legal practice within s 497(1)(b) LPA.
In Vosnakis at [33] the Tribunal found that the practitioner's failures to pay moneys due for employee superannuation contributions for period of up to nine years, PAYG tax and GST constituted professional misconduct. Vosnakis concerned delay in paying of employees' superannuation guarantee levies, failure to pay GST over a four year period and failure to pay PAYG tax in respect of employees of the practice. The allegations relating to non-payment were admitted. Ultimately all moneys due to the Australian Taxation Office or payable in respect of the employees' superannuation levies were paid by the solicitor. The Tribunal nevertheless found in the circumstances in line with Cummins at [286] that the failure was "an inexcusable pattern of illegal conduct in complete defiance of his civic responsibilities" constituting professional misconduct.
In Somerfield the Tribunal gave consideration to an instrument of consent pursuant to s 564 of the LPA concerning an omitted failure by the practitioner to pay employees' superannuation entitlements for 25 employees for four and a half years. The Tribunal noted in the material and agreed facts that there was no dishonesty involved in the several incidents which occurred and that the failure to pay contributions arose from the practitioner's lack of financial resources flowing from the poor financial performance of his practice. It was noted that the practitioner had undertaken to pay the superannuation contributions and intended to do so but ultimately did not have the financial resources to meet his undertaking. The conduct and other matters were accepted by the practitioner as constituting professional misconduct and the Tribunal was satisfied that they were.
The Tribunal in Delpopolo was concerned with non-payment of superannuation entitlements totalling $125,000. It determined at [56] that the failure to cause the ILP to make superannuation payments was in the circumstances a sufficiently serious abrogation of financial responsibilities in the practice of law to warrant a finding that the practitioner was guilty of professional misconduct. The Tribunal found at [47] that there was no evidence of dishonesty and that failure to make the payments by the ILP arose from a lack of resources flowing from poor financial performance of the legal practice. The practitioner did seek to satisfy her obligations. The Tribunal was not satisfied that she had done all that she could reasonably do to meet the statutory obligations of the employer to pay superannuation guarantee levies in respect of an employee.
Gillroy concerned the legal practitioner director's failure to pay superannuation entitlements for a period of around 2 years. They also failed to pay PAYG and group tax. The total amount unpaid or unremitted was in the sum of $213,852.81. The Tribunal referred at [21] to the allegation in the solicitors' case that they were forced by:
"… the substantial deterioration of the financial performance of the firm, and its loss of clients and work to undertake remedial steps. Significantly the two solicitors say they made a decision to postpone the relevant statutory payments …"
The Tribunal noted at [31] - [32]
"31 It is conceded by both solicitors however that they failed to take the fundamental necessary management and financial actions necessary to redress the reduced financial success of the practice. In particular, they concede now that perhaps they should have taken the morally difficult step of considering and implementing a reduction in staff numbers.
32 It is conceded by both solicitors that their actions in deferring the statutory payments, well-intentioned as they might have been, resulted in a serious breach not only of their statutory obligations to the Commonwealth, but also a serious breach of their professional obligations, and that these failures amounted to professional misconduct."
These authorities establish that a breach of the professional obligation to ensure payment of statutory creditors is capable of giving rise to a finding of professional misconduct notwithstanding there being no dishonesty, the underlying circumstances including the poor financial position of the incorporated legal practice or any steps taken to remedy it including payment of the debts.
For nearly two and a half years Mr Wehbe failed to ensure that the Company met its statutory financial obligations. This involved numerous and continuing decisions not to remit the funds outstanding to the ATO in respect of GST which had been collected on its behalf by the Company and the balance of wages comprised in PAYG tax payable in respect of employees' salaries. The failure to make superannuation payments in the same period is also to the extent unrecoverable liable to be paid out of consolidated revenue. The amount involved in the order of $300,000 exceeds the amounts the subject of consideration in Delpopolo and Gillroy which were the subject of findings of professional misconduct. We have found that the decisions made by Mr Wehbe by which the Company's statutory financial obligations were not met as they fell due and his failure to ensure payment were knowing, intentional and systematic.
Even without taking into account the respects in which we have found that Mr Wehbe knowingly preferred his interests in continuing the operations of the Company over the interests of staff and statutory creditors the serious breach of his professional obligation in the remaining circumstances reflects a failure to accept high standards of conduct and acting in accordance with them and falls short of generally accepted standards of common decency and common fairness. We find that he was not of good fame and character and that his conduct would justify a finding that he is not a fit and proper person to engage in legal practice within the meaning of s 497(1)(b) and that he is guilty of professional misconduct in respect of the breach in those circumstances alone.
As to the common law position we have referred to the finding by the Tribunal in McHugh at [32] - [33] that a failure by a solicitor as a principal and solicitor-director of an ILP to ensure that the ILP discharges its obligations to pay GST and PAYG and superannuation contributions occurring over a substantial period of time and involving substantial amounts of money warranted a finding of professional misconduct at common law; see also Andreone at [110] - [113]. We are satisfied and find that the failure to comply with his professional obligations in the circumstances identified would be regarded by the profession as disgraceful and dishonourable and that Mr Wehbe is also guilty of professional misconduct at common law.
[29]
Appropriate consequential orders
Mr Wehbe has been on notice since the service of the amended application of the nature of the orders sought by the Council. Our concern that Mr Wehbe put on evidence in his case if he wished to in light of the decision in NSW Bar Association v Meakes [2006] NSWCA 340 to which we shall refer was raised with Mr Gray during the hearing. He has been given the opportunity to do so. The Council made submissions as to appropriate orders to which Mr Wehbe responded. The matter did not proceed on the basis that upon a finding of misconduct there would be a second hearing as to appropriate orders nor did Mr Wehbe seek one.
We have determined that Mr Wehbe is guilty of professional misconduct. In the initial application the Council sought a reprimand. The order seeking that Mr Wehbe's name be removed from the Roll of local lawyers was added in the amended application upon the incorporation of amended grounds 6 to 9 to which reference has been made. We have found that the ground in respect of failure to maintain appropriate management systems was not made out. We have found that the additional ground at clause 6 that Mr Wehbe breached his fiduciary duty to avoid a conflict of interest as particularised by the Council was not made out. Grounds 7 to 9 were not pressed.
Notwithstanding that it did not proceed with grounds 7 to 9 in the amended application Council did press for an order removing Mr Wehbe's name from the local roll. In particular, Council submitted that the position advanced in submissions on Mr Wehbe's behalf, namely that he was under no professional obligation to ensure the Company met its statutory obligations indicated that Mr Wehbe had no appreciation of his professional obligations.
Council said that were Mr Wehbe to return to practice the Tribunal could have no comfort that he would not act in precisely the same way again. It said that the protection of the public generally and the protection of future employees in particular required that Mr Wehbe not be allowed to repeat that conduct. Council submitted that in all the circumstances including that the solicitor had preferred his own interests, the appropriate order would be that his name be removed from the local Roll.
The Council also said that by changing the Company name to Samky Holdings and resigning his directorship Mr Wehbe escaped the consequences of being a director of a company which proceeded into liquidation. There was no detailed evidence or submissions concerning the circumstances surrounding Mr Wehbe's resignation nor was it a ground of the application. Nor was a finding as to the circumstances sought. We have made no finding on that issue.
Mr Gray said that if the submissions which he had made were accepted the solicitor was not in breach of s 143(2) of the LPA and not in breach of any relevant fiduciary duty. He further submitted that s 562(6) of the LPA empowers the Tribunal to find that a solicitor engaged in unsatisfactory professional conduct even though the claim had been made that the solicitor was guilty of professional misconduct. He referred to the non-exhaustive definition of "unsatisfactory professional conduct" in s 496. As we have indicated Mr Gray conceded that Mr Wehbe would not oppose the Tribunal finding that by failing to inform the employees that their superannuation guarantee payments were not being made and thereby enabling them to make an informed decision as to whether or not to continue their employment by the Company, the solicitor was guilty of unsatisfactory professional conduct. He said that if the Tribunal were to adopt this course, Mr Wehbe would not oppose the making of an order under s 562(2)(e) of the LPA being a reprimand.
Mr Gray also submitted that by reason that Mr Wehbe was acting on the basis of independent professional advice as to the measures required to restore the ILP to profitability an order that his name be removed from the Roll should not be made even if the Tribunal did not accept his submissions as to the true construction of ss 143 and 140(3) and that no breach of fiduciary duty has been established. We do not accept this submission. Except for attempts to refinance, there was no detailed evidence that Mr Wehbe had taken any real or effective steps to implement the advice. The misconduct which we have found arises from failure to ensure the payment of statutory obligations well before or otherwise notwithstanding the obtaining quite late in the day of independent professional advice.
Mr Gray's submissions did not address the issue of Mr Wehbe's fitness to practice at the date of hearing about which there was no evidence but which is a principal consideration when assessing appropriate dispositive orders.
Evidence as to factual matters was given in the solicitor's case by Mr Maksoudian and Mr Dona. Mr Wehbe did not give evidence himself. In Meakes, Tobias JA said at [70]:
"70 In my opinion, the Tribunal also erred in declining to criticise the respondent's decision not to give sworn evidence at the hearing. It is true that in professional disciplinary proceedings the onus of proving misconduct lies with the party bringing the charges and, it should be noted, a practitioner is not required to give evidence. However, as this Court observed in Coe v NSW Bar Association [2000] NSWCA 13, there is an expectation that legal practitioners will mount the witness box to provide some explanation as to their conduct, rather than simply relying upon evidence from the Bar table. In Coe, Meagher JA (at [21]), with the agreement of Priestley JA, repeated with approval the following observations made by the Tribunal in that case and which are apposite to the present case:
"In the circumstances where a prima facie [case] against a legal practitioner has been presented and where the practitioner wishes the Tribunal to accept an explanation as to how the conduct came about it is inappropriate and irregular for the legal practitioner to attempt to do so through submission from the Bar table. If he wishes the Tribunal to accept some explanation as to how the conduct came to take place then in our view he has an obligation to meet the situation by explanation on oath."
In Council of the New South Wales Bar Association v Miller (No 2) [2012] NSWADT 129 the Tribunal considered an application for a finding that a practitioner was not a fit and proper person to engage in legal practice. The application was made in the course of a second hearing to determine consequential orders after a finding of professional misconduct had been made. The practitioner had not tendered evidence or made submissions. The Tribunal said at [34] - [37]:
"34 [Miss Williams] then quoted the whole of paragraph [106] of our first decision, in which we found that at the time of the Respondent's behaviour in relation to the Loan he was not a 'fit and proper person to engage in legal practice'. Her ensuing submission was that we should now make the further finding that he was 'permanently unfit to practise and should not remain a member of the legal profession'. In this context, she relied on the fact that in two decisions on which we placed emphasis in concluding that this behaviour was professional misconduct - Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 and Law Society of New South Wales v Moulton [1981] 2 NSWLR 736 - the respondent solicitor was struck off.
35 Ms Williams submitted finally with regard to Ground 1 of the First Application that because the Respondent had not tendered evidence or made submissions with a view to showing that he was now a fit and proper person to engage in legal practice despite his earlier conduct, 'the Tribunal could not be satisfied that "his past proved unfitness has changed to fitness"'. The quoted phrase appears in the judgment of Moffitt P in Johns v Law Society of New South Wales [1982] 2 NSWLR 1 at 9-10 and, as Ms Williams pointed out, was repeated by the Tribunal in Council of the Law Society of New South Wales v Rook [2011] NSWADT 191 at [24].
36 In our opinion, these contentions by Ms Williams are well founded, subject to one observation. Her formulation of the test to be applied - whether the Tribunal could be 'satisfied that the Respondent's "past proved unfitness has changed to fitness"' - may suggest that the Respondent bore the onus of establishing this. But at most, he was subject to an evidentiary onus, which he failed to discharge because he did not tender any evidence at all on the issue. If we are to order removal of his name from the Roll, the finding that we must make is that on the balance of probabilities his 'past proved unfitness' has not 'changed to fitness'. In reaching our conclusion on this question, we must have due regard to his decision not to tender evidence, to the evidence adduced by the Bar Association and to the principles stemming from Briginshaw v Briginshaw (1938) 60 CLR 336.
37 We are satisfied on these matters. The Respondent's conduct in relation to the Loan, embracing specific acts over a period of more than two years, was 'disgraceful' and 'dishonourable' to a degree that left us in no doubt that it amounted to professional misconduct, both at common law and under a statutory criterion raising the question whether he was 'fit and proper' to engage in legal practice. Because he tendered no evidence and made no submissions that might show him no longer to be unfit for practice, we find now that, by virtue only of the matters stated in Ground 1 of the First Application, the 'probability' now (to quote from the judgment of Young CJ in Eq in Prothonotary of the Supreme Court of New South Wales v P [2003] NSWCA 320 at [17(2)]) is that he is 'permanently unfit to practise'. It follows that his name must be removed from the Roll."
Mr Wehbe made appropriate admissions as to factual matters in his defence. However, as the Council has submitted Mr Wehbe gave no evidence of financial matters within his knowledge which might explain particularly in the period after June 2010 the application of the Company funds to his own uses in preference to the discharge of statutory taxation and superannuation obligations leaving the Tribunal with an incomplete understanding of what transpired. That is not to Mr Wehbe's credit.
Similarly, there was no evidence from Mr Wehbe or on his behalf as to the reason for his failure to ensure that the Company met its liability to statutory revenue authorities. The position he took in the proceedings was that he had no professional obligation to do so. As the Council submitted, there has been no expression of remorse or contrition or regret or sympathy for those that had suffered loss as a result of his actions; see Gillroy at [34] and Bouzanis at [22] referred to in Dalla at [31], [33] and Gillroy at [54] and [60]. Mr Wehbe has taken no personal responsibility.
Relevant considerations for determination of whether a practitioner is fit and proper to remain on the Roll upon a finding of professional misconduct include the protection of the public against similar conduct, the solicitor's character, the effect which an order will have on the understanding in the profession and amongst the public of the standard of behaviour required of solicitors, the effect upon relationships which must exist between solicitors and the circumstances surrounding the impugned conduct; see Da Rocha at [29] referring to Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 and McHugh at [48].
In Kingston at [128] the Tribunal said:
"128 In reaching this conclusion, we have taken account of two important considerations. One is that the basic test for determining whether a legal practitioner should be struck off is that he or she must be found, on the balance of probabilities, to be permanently unfit for practice. The other is that the purpose of orders made against a practitioner by way of penalty should be protection of the public, not punishment of the practitioner. This is the case even though, as was stated in Law Society of NSW v Bannister (1993) 4 LPDR 24 at 28, the maintenance of professional standards will require that offenders be deterred from re-offending and other practitioners be deterred from offending."
The High Court of Australia in New South Wales Bar Association v Evatt (1968) 117 CLR 177 at 184, considered that a failure to accept responsibility for wrongdoing has implications in relation to personal insight or character or both. It stated at [12]:
"The respondent's failure to understand the error of his ways of itself demonstrates an unfitness to belong to professional where, in practice, the client must depend on the standards as well as the skill of his professional advisor."
The Council also referred us to the Law Society NSW v Moulton [1981] 2 NSWLR 736 in which it was held that a failure to appreciate the wrongfulness of behaviour when allied with a lack of awareness, understanding or care of elementary aspects of professional responsibility raises doubts as to a solicitor's fitness to practise; see Moulton at 740.
The Tribunal has given close consideration to the nature of the orders which should be made in all the circumstances. Many of the authorities have determined that a finding of professional misconduct arising from the failure (either as a solicitor-director of an ILP or a sole practitioner or partner in an unincorporated legal practice) to ensure that statutory revenue obligations are met is, without more, not usually the subject of an order for removal from the Roll. Generally such an order has not been made unless the practitioner also failed to file tax returns (thereby committing an offence under tax law) and/or engaged in another deliberate strategy including going bankrupt in order to prevent the ATO from recovering tax due to it; Kingston at [130].
However, the decisions in the authorities turn on their facts. Usually, there is evidence from the practitioner as to the circumstances giving rise to the impugned conduct and as to an understanding of the nature of the conduct, contrition, steps taken to redress the conduct and fitness to practise; see for example Somerfield, Delpopolo and Gillroy. There is no such evidence in this case.
There is no material before us upon which we might be satisfied that Mr Wehbe is at the date of hearing a fit and proper person to remain on the Roll. Importantly, there is no evidence of an understanding on the part of Mr Wehbe as to his wrongdoing. Through his Counsel Mr Wehbe strenuously maintained the position that he had no professional obligation to ensuring the payment of statutory creditors. This is notwithstanding the authorities which identify the obligation in respect of sole practitioners, partners in unincorporated practices and legal practitioner directors of incorporated legal practices. Direct reference is made in Andreone to the operation of s 143 LPA.
Unlike the situation in Kingston, Somerfield at [6] and the other authorities to which we have referred, Mr Wehbe did not concede the serious breach of his professional obligations. Nor was there evidence of contrition or remorse which are matters relevant to the nature of appropriate orders. There is no material upon which we could be satisfied that if he remained in practice Mr Wehbe would not offend in the future.
In Da Rocha the New South Wales Court of Appeal considered whether it was necessary to make an additional declaration as to present absence of good fame and character where there was no contemporary evidence. The Court at [25] referring to the decision of the Court of Appeal in Prothonotary of The Supreme Court of New South Wales v Nikolaidis said:
"25 … The Court there considered it unnecessary to discuss whether declaratory relief as to fame and character would require more recent evidence. The Court did, however, note that cases such as Ex parte Tziniolis and Health Care Complaints Commission v Litchfield (1997) 41 NSWLR 448 made it appropriate to act on the basis of the absence of reformation of character in assessing current fitness to remain on the Roll. The Court had earlier observed (at [25]) that, in the context of assessing whether reformation may or may not have occurred, in circumstances where the respondent did not give evidence it was difficult to see how it could be concluded that the reflection upon the underlying character of the respondent by the commission of a planned offence of dishonesty did not reflect on him over ten years later."
In Adams [at 151], the Tribunal concluded that the established conduct was inconsistent with the respondent being of good fame and character. It concluded that he was not a fit and proper person to engage in legal practice and that for the protection of the public and the reputation of the profession there should be an order that he be removed from the Roll. The Tribunal considered that a reprimand and a costs order would be an inadequate response to such serious professional misconduct. It said that such orders would not have provided protection to the public and would not have addressed the need to protect the reputation of the profession. Nor it considered would an order to restrict the respondent's practising certificate to that of an employed solicitor be an adequate response.
The finding of professional misconduct in the circumstances to which we have referred even without the finding that Mr Wehbe preferred his interests in continuing the operations of the business over those of staff and statutory creditors and the absence of any evidence or submissions that might show him no longer to be unfit for practice justify a finding in the nature of that made in Miller at [37], namely that the probability now is that Mr Wehbe is permanently unfit for practice. We make that finding. In our view orders in the nature of a reprimand or fine or restriction on Mr Wehbe's practising certificate would not ensure the protection of the public or future employed staff or the maintenance of professional standards. The only appropriate order is that Mr Wehbe's name be removed from the Roll.
[30]
Costs
The Council seeks an order for costs. As Mr Barnes submitted where a finding has been made that a solicitor engaged in professional misconduct in the absence of exceptional circumstances the Tribunal is bound by Schedule 5, Clause 23 of the CAT Act to order costs in favour of the Council.
Clauses 23(1), (6) and (7) of Schedule 5 of the CAT Act provide:
"23 COSTS CONSEQUENT OF ADVERSE CONDUCT FINDINGS
(1) Despite section 60 of this Act, the Tribunal must make orders requiring a respondent lawyer whom it has found to have engaged in unsatisfactory professional conduct or professional misconduct to pay costs (including costs of the Commissioner, a Council and the complainant), unless the Tribunal is satisfied that exceptional circumstances exist.
…
(6) The Tribunal may fix the amount of costs itself or order that the amount of costs be assessed by a costs assessor under the legal costs legislation (as defined in section 3A of the Legal Profession Uniform Law Application Act 2014 ).
(7) An order for costs may specify the terms on which costs must be paid."
The operation of the s 60 of the CAT Act was considered by the Tribunal in Council of the Law Society of New South Wales v Truong (No 2) [2015] NSWCATOD 79. Section 60 of the CAT Act is a general empowering provision enabling the Tribunal to award costs "only if it is satisfied that there are exceptional circumstances warranting an award of costs". The Tribunal may determine "by whom and to what extent costs are to be paid"; s 60(4)(a). Unless such "exceptional conditions" exist, s 60(1) provides that each party to the Tribunal proceedings must pay the parties' costs; Truong at [45]. Clause 23 operates despite s 60.
When considering the meaning of "exceptional circumstances" in the context of s 566 of the LPA, now repealed but in relevantly similar terms to clause 23 the Tribunal in Council of the New South Wales Bar Association v BRJ (No. 2) [2015] NSWCATOD 140 said:
"22 Without attempting to provide a meaning of "exceptional circumstances" in s 566 of the Act, which is all encompassing, we are of the view that for the purposes of this application, a circumstance is exceptional where it is one which is such as to form an exception, which is out of the ordinary course, or unusual, or special or uncommon. It need not be unique or unprecedented or very rare, but it cannot be one that is regularly, or routinely, or normally encountered in cases heard in the Tribunal in which findings of unsatisfactory professional conduct or professional misconduct are made. A circumstance will not be exceptional if it is only relevant to penalty or mitigation of penalty. It is implicit in s 566 (1) that an order exempting a respondent practitioner found guilty of unsatisfactory professional conduct or professional misconduct from paying costs incurred by the applicant, is not warranted simply because exceptional circumstances of some kind or other are present. The nature of the exceptional circumstances must be such as to justify displacement of the normal rule that a costs order should be made. If the Tribunal is satisfied that exceptional circumstances in this sense exist, it has a discretion under s 556 (1) not to order a respondent legal practitioner to pay the applicant's costs or the whole of the applicant's costs [relevant authorities cited]."
The Council submitted that straightened financial circumstances including bankruptcy will not sound as an exceptional circumstance for the purposes of clause 23(1); Miller at [44]. Mr Gray did not submit to the contrary. The Council said there is no evidence of exceptional circumstances in the present case and that the Tribunal should make an order for Mr Wehbe to pay the Council's costs as agreed or assessed.
Mr Gray submitted that if the Tribunal did not accept the solicitor's submissions as to the true construction of LPA ss 140 and 143 and that no breach of fiduciary duty had been established there should be no order as to costs. The basis for this submission Mr Gray said was that up until the conclusion of the evidence, the Law Society had alleged and maintained that the solicitor was guilty of lodging false tax returns being the grounds alleged at paras 7-9 of the amended application. Mr Gray said that grounds 7, 8 and 9 were particularly significant to his client and were the reason why his client was taking the position he did in the proceedings. He noted that the evidence of Mr Maksoudian had been served on the Council since December 2015.
Mr Gray then submitted that where an allegation of fraud is made and not proved, the normal "rule" is that the party making the allegation, even if otherwise successful, is not awarded costs on that issue and as with any contested issue on which an otherwise unsuccessful party failed the Court or Tribunal may order the party who made the unsuccessful allegation to pay the costs of the party against whom the allegation was made and who successfully resisted it. He submitted that to make and pursue an allegation of fraud and abandon it at the conclusion of the evidence is an "exceptional circumstance" for the purposes of CAT Act Schedule 5, Clause 23.
The Council said that grounds 7 to 9 were only added in the application following receipt of a letter from Mr Maksoudian dated 2 September 2014 which attached over 400 documents. It said that these documents raised concern about the deductibility of expenses by both the solicitor and the Company and about the way in which the Company was paying personal expenses of the solicitor. It said that further information was sought from both Mr Maksoudian and the solicitor's legal representatives neither of whom responded. It said that in the face of the documents provided and the lack of response it was not unreasonable for it to add grounds 7, 8 and 9 to the application and that it was made clear at the commencement of the hearing that those grounds would turn on the evidence given by Mr Maksoudian. The Council said that it has acted reasonably and in the public interest and that it should not suffer any adverse costs order in relation to the withdrawn grounds.
Grounds 7, 8 and 9 which were not pressed were particularised in paragraph 61 of the amended application in the following terms:
"61 The Solicitor
a. as a director of the Company, allowed the Company to claim as a tax deduction his personal expenses as described in paragraph 44 above
b. in the tax years ending 30 June 2008 to 30 June 2012 inclusive, claimed the costs of his investment properties as a personal tax deduction in a negative gearing exercise, in circumstances where in at least the tax years ending 30 June 2010 to 30 June 2012 inclusive, he had not incurred those costs. The amount of interest represented as being paid and entitled to be claimed by the Solicitor as a rental expense in his 1 July 2010 to 30 June 2011 Tax Return for his share of the three investment properties was $81,766
c. claimed the costs of his investment properties as a personal tax deduction in circumstances where the Company claimed the same item as an expense and a tax deduction, allowing him to live tax free
…"
In his provisional defence Mr Wehbe denied paragraph 61(1)(a), (b) and (c). The evidence of the Council was contained in Exhibit A being the material which Mr Maksoudian had produced. Mr Wehbe's evidence given by Mr Maksoudian in respect of the three grounds which were not pressed was limited to paragraph 20 of his affidavit sworn 24 October 2015 in the following terms:
"20 I refer to paragraph 61(a), (b) and (c) of the amended application filed herein. Those paragraphs are false. I refer to all of the paragraphs above."
The preceding paragraphs in his affidavit dealt generally with Mr Maksoudian's evidence in respect of the way in which the ILP conducted its business, the accounting exercise undertaken as between Mr Wehbe personally and the Company in respect of moneys paid by the Company for Mr Wehbe's personal expenses and steps taken by Mr Wehbe to address the financial circumstances of the Company. The evidence chiefly answered other grounds contained in the amended application.
Mr Wehbe's written submissions in respect of the alleged dishonest conduct concerning his taxation affairs comprised two paragraphs to the effect that Mr Wehbe's taxation affairs were dealt with by Mr Maksoudian who was fully conversant with his and the Company's financial and taxation affairs, that the accusations must be proved convincingly and that in light of Mr Maksoudian's evidence (and the denial) the accusations were not made out.
This is not a case as was considered by the New South Wales Court of Appeal in the context of the operation of s 566 LPA in Xu v Council of the Law Society of NSW [2009] NSWCA 430 at [62] where the Society had failed to establish one of three charges the hearing of which had occupied about the same length of time as the other charges. Nor is it a case such as was considered by the Tribunal in Council of the Law Society of New South Wales v Webb (No 2) [2012] NSWADT 233 at [52] also in the context of s 566 LPA, in which a finding of exceptional circumstances was made, where the Council withdrew two of seven grounds on commencement of the hearing and the Tribunal dismissed four further grounds making a conduct finding on the single remaining ground.
Whilst grounds 7-9 were appropriately of significant concern to Mr Wehbe the bulk of the hearing was ultimately taken up with the cross-examination of Mr Maksoudian and Mr Dona concerning their evidence regarding other grounds and the lengthy submissions of the parties in respect of the proper construction of s 143 and other matters which remained in issue in the proceedings and have been the subject of findings.
It is not uncommon for the Council to fail to establish one or more elements of an application while succeeding on others. We are not satisfied that the inclusion of grounds 7 to 9 significantly lengthened the proceedings or added to Mr Wehbe's costs. The pleading in respect of the grounds 7 - 9, the evidence of Mr Maksoudian and submissions directed to the issues raised were in very short compass. The hearing was ultimately reduced in length as a result of the grounds not being pressed.
We are not satisfied that the matters raised by Mr Gray are an "exceptional circumstance" within the meaning of the CAT Act Schedule 5, Clause 23 sufficient to justify displacement of the normal rule.
We are bound by Schedule 5 clause 23 of the CAT Act to order costs in favour of the Council.
[31]
Orders
1. The name of Robert Joseph Wehbe be removed from the Roll of local Lawyers.
2. Robert Joseph Wehbe pay the costs of the Applicant as agreed or accessed.
[32]
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: 14 February 2018
The recommendations expressed to be to the "owners", Mr Wehbe and Mr Dona, were that they personally:
"3. Generate billings yourselves of above 3 partner hours per day combined aggregate to yield approx. $300,000 p.a. in cash revenues."
The report concluded:
"● The business is too heavily weighted with what we call non-paying clients. Therefore you must change to only taking matters where you receive significant deposits, until this turns around.
● You will need to engage in event billing to give a framework to the payment arrangements.
● We recommend you pursue work which is consistent with this cash-driven strategy. Thus we would propose strengthening of your criminal and commercial offerings, and more targeting of business clients.
● Each department must be monitored and measured and be independently cash positive.
● Target $2 m cash fees for 2011-12 with individual department targets as we have suggested.
● Take immediate and firm action with aged WIP and debtors to convert into cash asap."
The Summit Report identified that the ILP required cash receipts of $100,000 per month to meet its expenses. It concluded that the business model adopted by the ILP, namely acting for clients who did not pay for services until work was completed or not at all was not a sustainable model unless the business was "well capitalised and/or heavily subsidised". It confirmed that the ILP did not have the capital.
Mr Maksoudian agreed that Mr Perivolaris' assessment and conclusion identified a legal practice that was not very well managed, or at least in his words, "to a point".
Also in evidence were the minutes of a meeting of Robert Wehbe Partners on 21 July 2011. Mr Maksoudian was present with Mr Wehbe, Mr Dona, the three employed solicitors and Mr Perivolaris. The minutes noted a recommendation that fee/cash targets for each department and lawyer responsible should be $700,000 for the Litigation and Commercial Group undertaken by two employed solicitors, $1 million for the Property Group by Wisam Assi and $300,000 for Mr Wehbe and Mr Dona.
The minutes noted that in the 2010 to 2011 financial year billings were $1.48 million. Cash collections were $1.1 million leaving a shortfall of $370,000. The minutes stated:
"this and previous shortfalls had been funded from the capital reserves of RW and ND. PP put it to the meeting that it was not sustainable for RWP to continue to operate on cash deficits and rely on the capital of RW and ND to fund the business".
There was also in evidence a cash flow projection for the period 2011/2012. In order to fund a projected surplus in the order of $266,883 in the period it was necessary to generate cash receipts of $2,047,000 comprising monthly receipts of between $150,000 to $205,000. Upon meeting the cash flow projections, taking into account estimated tax liabilities the opening bank balance of $15,000 was projected to reduce to $6,527 at the end of the period.
After the review Summit Business Consultants held work in progress review meetings with several employees. They stated in a letter to Mr Wehbe and Mr Dona dated 11 August 2011:
"We found an unusually high percentage matters of a speculative nature or delayed payment plan; often with no money having been received from the client."
Summit Business Consultants also noted an unusually high percentage of pro-bono work and recommended minimisation of this. The letter noted that the billing procedure would need to be addressed to ensure that work in progress, time and costs and disbursements were not constantly being funded by the practice. The letter noted that there was a "good percentage" of fees/WIP which could be billed out of costs immediately.
There was also in evidence a fee report for the period 1 July 2011 to 16 February 2012 indicating billable fees entered. Mr Maksoudian agreed that Mr Assi entered work in progress equivalent to 48.96% of a total entered by all fee earners in the firm. The fees billed by Mr Assi were 57.29% of the total billings of the firm. The fees received for work done by him was equivalent to 57.63% of the fees received by all fee earners. He also noted that Mr Wehbe had work in progress amounting to 2.75% of the total entered in the eight month period, that his fees were 3.01% of the firm total and that his fees received were $20,786.
Mr Maksoudian gave evidence that between 2008 and 2012 he had many meetings with Mr Wehbe to discuss the financial position of the Company and whether there were realistic prospects of the Company trading out of its illiquid state and reverting to profitable trading. He had communications with the ATO on behalf of the Company. He engaged Rhodes Consulting to provide a report. He said as far as he could see Mr Wehbe did everything reasonably practicable to adopt and then act on the recommendations made to him by Rhodes Consulting to restore the Company to profitability. He said that Mr Wehbe did everything in his power with the resources that he had to improve profitability and cash liquidity of the practice. He queried the accuracy of the fee report.
Mr Maksoudian said that he was present at the meeting on 21 July 2011 and that the matters including the implementation of the changes which had been recommended in the nature of volume of work, type of work, disclosure and costs agreements, billing practices, debtor management, departmental budgets and making the employed solicitors responsible for departmental budgets were discussed in depth. He observed Mr Wehbe to participate "fully and intelligently" in the discussion. He said that because of his continuing advisory role he was concerned to be satisfied that Mr Wehbe appreciated the nature and magnitude of the difficulties the Company faced. He was satisfied as to that matter. He considered that Mr Wehbe's attendance at and participation in that meeting evidenced a responsible approach by Mr Wehbe to the problems the Company confronted.
Mr Maksoudian was asked by the Tribunal whether all that was needed to turn the business around was to engage consultants to re-engineer the practice Mr Maksoudian said:
"Mr Wehbe from my recollection did adopt many strategies policy refining, refinancing applications, attempts. From memory merger acquisition attempts, discussions, equity, partnership introductions to the business in connection with engaging a third party consultant Rhodes Consultants. It wasn't just one factor, it was many factors over a period of time in an attempt to restore the liquidity in the profitability of the business."
There was in evidence a letter from Summit Consulting to the Law Society of New South Wales dated 8 October 2012 which set out the alternative funding arrangements that Mr Wehbe had attempted to put in place. These comprised:
1. The initial NAB commercial market rate facility in ANZ Business Overdraft Facilities.
2. Personal investment properties used as security.
3. Unsuccessful funding applications with NAB, St George and Yellow Brick Road.
4. Personal finance obtained on credit card facilities in an amount exceeding $150,000 to fund ongoing monthly overdraft commitments.
5. Personal loans from friends and family accumulated to an amount of $200,000.
6. Unsuccessful restructuring options.
The documentary evidence and the evidence of Mr Maksoudian establish and we find that the continuing non-payment of PAYG and GST from November 2009 and employee's superannuation entitlements from February 2010 occurred in circumstances in which the Company had been trading at a loss since 2008 and Mr Maksoudian had been having discussions with Mr Wehbe about illiquidity since that time. Mr Maksoudian was in continuing discussions with the ATO concerning payment arrangements in arrears. In June 2011 Mr Wehbe took professional advice about turning the business around. The advice received and detailed in the Summit Report concluded that the business model which had been adopted by the Company since incorporation to the date of the report was unsustainable and that there was insufficient capital to maintain it. As at March 2012 the yearly budget set for the fee earners was not being met in particular by Mr Wehbe and Mr Dona. The cash flow projections were not being met. External financing initiatives were unsuccessful if not exhausted.
We accept Mr Maksoudian's evidence that Mr Wehbe expressed concern about the Company's financial position and that in Mr Maksoudian's observation sought to engage in the process of review and turning the business around. However, apart from the unsuccessful loan applications referred to there was no evidence of the implementation by Mr Wehbe of any of the recommendations from Mr Perivolaris' review or other steps taken in respect of refinancing, merger, partnership introduction, reduction of expenses or any other initiative to restore the liquidity and profitability of the business. There was no evidence of any reduction of staff numbers to a level commensurate with the realistic revenues likely to be achieved.
Mr Maksoudian, more by way of submission, asserted that a temporary lack of liquidity did not necessarily mean that a company or business was doomed and that it was the immediate duty of directors to close down the business. He said it was a matter for business judgment by the director. He said in the case of the Company there were substantial assets in the form of outstanding debtors and unbilled work in progress much of which was regarded as recoverable. There was no evidence as to the basis upon which this assessment was made. In our view a lack of liquidity evidenced by an inability to pay statutory creditors in increasing amounts from November 2009 to April 2012 could not be described as temporary.
The evidence establishes and we also find that the Company's failure to make payments to statutory creditors and of superannuation entitlements and Mr Wehbe's failure to ensure that such payments were made was knowing and intentional. As sole legal practitioner director of the ILP Mr Wehbe had ultimate control over the allocation of payments to creditors and staff superannuation entitlements. It was Mr Wehbe's decision not to cause the Company to make or otherwise ensure that it made payments to statutory creditors and in respect of superannuation entitlements as they fell due for payment. He was aware that staff superannuation payments were not being met. Mr Dona's evidence confirms this. Nor could he have been unaware of the escalating debt to the ATO by reason at least of the contents of the Company's accounts which were in evidence and the numerous and continuing negotiations and arrangements being undertaken with the ATO on the ILP's behalf by Mr Maksoudian. We find that the failure was systematic. The non-payment continued from November 2009 in respect of GST and PAYG and February 2010 in respect of superannuation entitlements until liquidation of the Company in April 2012.