Solicitors:
Law Society of New South Wales (Respondent/Plaintiff)
Boyd House and Partners (Applicant/Defendant)
File Number(s): 2019/104595
[2]
Ex teMpore Judgment (Revised)
At the suit of the plaintiff, the Council of the Law Society of New South Wales ("the Law Society"), I made a restraining order in respect of the assets of the first and second defendant on 4 April 2019. The reasons I gave that day are published as [2019] NSWSC 383. I directed the parties to bring in short minutes of order giving effect to my decision, which was done on the same day. A further dispute has arisen between them effectively about the meaning and operation of the freezing or restraining order I made.
The first defendant is a solicitor whose practising certificate has been suspended as a result of a Law Society investigation in which he has cooperated and made significant admissions. It appeared he had defrauded beneficiaries under the will of each of two clients of bequests or legacies in a total amount approaching $6 million. The second defendant is the solicitor's wife, who may have been aware of some of his misconduct and who may have benefited from his use of the proceeds of his apparent fraud.
The order I made was limited. It was limited because through his solicitor, Mr Kevin Emanuel, as I dealt with in my earlier judgment, the solicitor facilitated the payment to the Law Society of very substantial sums of money, saving the Law Society the difficulty of seeking recovery by proceedings brought under s 246 of the Legal Profession Uniform Law (NSW) ("Uniform Law") in respect of those particular assets. When I say "in respect of those particular assets" I really mean in respect of the anticipated payouts to the apparently defrauded beneficiaries. "Assets" is defined by order 2 quite comprehensively but the specific identifiable assets at that time the subject of the freezing order were the chose in action of each of the first and second defendants respectively in three bank accounts identified in the orders. Without setting it out in full for present purposes, the form of the freezing order I was asked to make, and did make, can be summarised as follows:
Until further order the defendants, their servants or agents be restrained from
...
(d) diminish[ing] the value of,
any of their assets within Australia without first obtaining the written agreement of the plaintiff (including as to legal expenses) or the leave of the court to do so..."
In the course of the working out of the operation of that order, a particular dispute has arisen between the parties as to the meaning of the expression "legal expenses" as used in that order. In particular, although the Law Society has facilitated payment of certain legal expenses incurred by the first and second defendants - they are separately represented - from the amounts standing in the bank accounts, it has disputed that the expression "legal expenses" in the order extends to the costs of the criminal defence of each of the defendants.
Each has now been charged with very serious criminal offences in relation to the apparent fraud, and it is anticipated those matters will proceed on indictment and in due course the defendants will be committed to the District Court for either trial or sentence. The criminal proceedings have only recently commenced. The first defendant was arrested and brought before the court on 22 November 2019. I interpolate he cooperated with the police in bringing about that situation. And the second defendant has now been served with a court attendance notice returnable at Waverley Local Court on 22 January 2020. That document was created only on 10 December 2019.
The criminal proceedings are clearly in their infancy. Because of the ongoing dispute the first defendant filed a notice of motion pursuant to liberty reserved on 4 April 2019. The motion was filed on 13 December 2019 and seeks what Mr Stitt, of Her Majesty's Counsel, describes as an ancillary order as contemplated by the provisions of Rule 25.12 of the Uniform Civil Procedure Rules 2005 (NSW). The form of the order sought is as follows:
that the defendants have leave to pay, out of the funds frozen by the order of this Court on 4 April 2019, the reasonable legal costs incurred by them in criminal proceedings and ancillary matters arising from and relating to the misconduct proceedings up to the sum of $119,000 (inclusive of GST).
A number of affidavits were read in support of the relief sought. Mr Herring, solicitor, appeared for the second defendant and his affidavit of 19 December 2019 was also read. Mr El-Hage of counsel appeared for the Law Society and read two affidavits and tendered portions of the affidavit of assets and liabilities provided to the Law Society by each of the defendants pursuant to the orders I made on 4 April 2019.
During the course of his oral addresses Mr Stitt identified two potential issues. The first was that issue in relation to the meaning of legal expenses that I have referred to. The second issue relates to the nature of the claim that the Law Society has foreshadowed and, indeed, made demands in respect of, under s 246 of the Uniform Law. That issue related to the entitlement of the Law Society by way of subrogation to claim interest under s 100 of the Civil Procedure Act 2005 ("NSW") given that s 243 of the Uniform Law creates a separate provision for the payment of interest to claimants against the fidelity fund as occurred here.
By reference to the affidavits of Mr Lean and Ms Siddons, Mr El-Hage pointed out that notwithstanding the high degree of cooperation of the first defendant in facilitating the recoupment of the fruits of the apparent fraud by the Law Society in its statutory capacity, as things presently stand, and allowing for a claim for pre-judgment interest in any recovery proceedings, there is a shortfall in likely recovery of between $350,000 and $450,000. Moreover, the evidence indicates that currently the combined amount standing to the credit of the first and second defendants in the bank accounts that I have referred to is something in the order of $120,000. I should point out that also the recovery of assets from the defendants by the Law Society has been in the just short of $5.9 million and total payments out are just short of $6.2 million.
As Mr Stitt has submitted, and Mr El-Hage acknowledges, this is a most unusual case. I have not done the arithmetic but that degree of recovery is something like 95% of the total amounts paid out. There is an outstanding claim, likely to be paid, of $100,000. This is a very unusually high degree of recovery for a case like this, which it must be said in fairness, through its counsel, the Law Society acknowledges. Even so Mr El-Hage submits, correctly, that there will still be a significant shortfall. There is a question about whether it can be made up from the defendants' assets and if not then the burden will fall upon the solicitors of New South Wales generally, through the contributions they are required to make to the fidelity fund, to make good the apparent fraud of the first defendant.
That is the factual background for the present dispute. As Mr Stitt points out Rule 25.12 gives the Court a wide discretion to make such ancillary order ancillary to a freezing order as the Court considers appropriate.
It is important to bear in mind as a matter of general principle that a freezing order is made for the purpose not of restraining the defendant from use of what are after all legally his own assets at all, but to ensure that any expenditure from those assets is legitimate and that there is no conduct engaged in for the purpose of making the defendant judgment-proof, as it is often put, to the detriment of the plaintiff who is seen to have a legitimate claim against the defendants.
Mr El-Hage has referred me to the judgment of Derham AsJ of the Supreme Court of Victoria in Vasilaris v Laprese [2019] VSC 56 where his Honour, with respect, sets out admirably the principles giving the granting of relief sought in these proceedings in the following way:
69 It is undoubted that a freezing order (or a 'Mareva' Order as it used to be called) does not exist to create additional rights. Rather it exists to enable a Court to protect its process from abuse in relation to the enforcement of its orders, it being neither a species of anticipatory execution, nor a form of security for any judgment which may ultimately be awarded.
70 To the extent, therefore, that the plaintiffs rely upon tracing what amount to stolen funds into the One Call Legal NAB bank account, and in that way purporting to establish a propriety interest in the funds in that account, that is not the purpose of the freezing order. The function of the order is to minimise the possibility of an unscrupulous defendant rendering itself judgment proof by taking steps which are liable to produce the result that no assets are within the jurisdiction on the day of judgment.
71 The exception that is always made in a freezing order for living expenses and legal costs reflects a recognition of the nature of the order. Because it is not security, and because the object is to prevent an abuse of the process of the Court by the defendant disposing of his assets to defeat any judgment, the freezing order cannot extend to prevent a respondent from having access to its own assets to the extent necessary to meet legitimate expenses such as ordinary living and business and legal expenses.
72 The aim is not to stop people spending their money. It is to stop them spending it in ways which are not legitimate having regard to the interests of the claimants in ensuring that there is no untoward removal of assets from the ownership of the person against whom a judgment may in due course be entered. The denial of access to funds needed to fund the conduct of the very litigation the integrity of which the order is designed to protect goes beyond the proper protective province of the jurisdiction.
73 Where there is an application for a variation of the terms of the freezing order, the variation is dictated by what justice demands in the particular circumstances of the case. The following matters are established by the authorities:
(a) the Court may vary the terms of the order to give the defendant access to assets in order to meet, amongst other things, legal expenses of defending proceedings providing the purpose does not conflict with the purpose for which the order was made;
(b) having made a freezing order, a Court should not be quick to reverse it save for good reason and the dictates of justice;
(c) the defendant carries the burden of establishing the lack of assets, other than those bound by the injunction, out of which the expenses might be paid;
(d) a general assertion about inability to pay expenses is insufficient;
(e) when a defendant seeks variation of a freezing order allowing a specific dealing, even for intended permitted purposes, it is relevant to take into account whether the defendant has access to other sources of funds for those purposes;
(f) where the plaintiff seeks the recovery of money allegedly held by the defendant on trust, an order allowing the defendant to use part of the money to pay legal expenses does no more than permit to be done what otherwise would constitute a contempt of court. If the plaintiff succeeded at trial, the order would not necessarily bar the plaintiff from recovering the money from the solicitors to whom the payment for the expenses was made;
(g) it may be appropriate in the interests of justice to refuse a variation where the variation requested, if granted, would give rise to a substantial risk that any judgment obtained by the plaintiffs would be rendered nugatory due to the limited remaining assets held by the defendants, so that the effect of the variation, if ordered, would more than likely frustrate the plaintiffs in their attempt to seek a remedy at law.
(My emphasis.)
As I will explain, Mr El-Hage placed emphasis upon the type of considerations set out in the sub-paragraphs of [73] and in particular 73. I will return to that passage later.
As I have said, the genesis of this present dispute relates to the meaning of the expression "legal expenses" in Order 1. I was reminded that in my judgment of 4 April I said the following (at [15]):
"Naturally the defendants will need to have access to the amounts for the purpose of their living expenses and, doubtless, legal expenses...the question of legal expenses, of course, is somewhat at large. However, a sensible arrangement, as mentioned by Mr Emanuel, is that the proposed costs be submitted to the Law Society for approval so that arrangements can be made for payment to the legal representatives direct and that should be incorporated in the order I will make."
Focussing on the question of whether legal expenses in the order extends to the costs of the defence of criminal charges I have been assisted by Mr Stitt's reference to the decision of the Court of Appeal in the New South Wales Crime Commission v Fleming; New South Wales Crime Commission v Hill (1991) 24 NSWLR 116. That case concerned a precursor to the criminal assets recovery legislation, being the Drug trafficking (Civil Proceedings) Act 1990 (NSW). That legislation provided for restraining orders much like freezing orders made under the Rules in respect of the assets of persons when certain statutory conditions as to their criminal conduct were satisfied. The legislation expressly provided that the restraining order may make provision for meeting the reasonable legal expenses of any persons. The decision of the Court of Appeal makes clear that the expression legal expenses did not simply mean the cost of defending proceedings brought under the legislation. Gleeson CJ (at p 124) said:
"A primary factor affecting the reasonableness of the legal expenses for which provision is sought will be the market for legal services in which the client, as the consumer, is obliged to seek such services. Underlying the policy of [the relevant sections] is a recognition that justice requires that persons accused of criminal offences, or confronted with a threat of forfeiture of their property, should not be unfairly deprived of a means of defending themselves, and it would be inconsistent with that recognition to adopt an approach to the question of reasonableness of legal expenses which had the practical consequences of depriving persons of the opportunity of obtaining proper legal representation."
His Honour went on to make clear that making provision for persons to fund their defence of serious criminal charges from restrained property was not only in the interests of justice but was also in the interests of the administration of justice.
Kirby P set out the principles governing the operation of that Act. Of particular relevance for my purposes is what his Honour said at numbered pars 3 and 4 on p 136:
3. Given the objects of the Act, the establishment of the Confiscated Drug Proceeds Account within the Treasury and the purposes for which payments from that account may be made (s 32(3)) it is scarcely likely that Parliament would have intended that a person, securing provision for reasonable legal expenses, should have a complete free hand in that regard to the extent that the person expends funds upon legal expenses, the property of that person is diminished. In that property the Crown, in the form of the Confiscated Drug Proceeds Account, has a contingent interest. It would be especially surprising, given the objects of the Act, to adopt a construction of its provision which would permit an accused person unrestricted use of property which is clearly the proceeds of drug-related activity to engage a team of expensive private lawyers paid at the full market rates of the private Bar: see Badgery-Parker J in State Drug Crime Commission of New South Wales v Ukja ; cf Commonwealth of Australia v Jansenberger (Southwell J, Supreme Court of Victoria, 3 October 1985, unreported);
4. On the other hand, the Act is not written on a blank page. It was enacted against a background of settled civil rights. These include the presumption of innocence in criminal proceedings; the presumption that a person may use his or her property as that person decides, and specifically may use that property to defend serious legal proceedings. It is not only in the interests of the individual that such property should be used for the last- mentioned purpose. It is also in the interests of society in at least three respects. It helps to ensure both the reality and appearance of a fair trial of issues seriously in contest (as cases involving drugs often are). It may assist in the provision of considered legal advice which may result, in proper cases, in a plea of guilty to serious criminal charges which may save significant court time and public cost. And it may ensure that a person is not thrown upon public legal assistance in resisting serious actions of the State which threaten that person's property, livelihood, reputation and even liberty. It is clearly undesirable, in at least most cases, that people without knowledge of legal procedure should be forced to defend their interests without legal assistance. This is why it is repeatedly stressed that there is a public as well as an individual interest in the competent legal representation of such persons before the courts: see, eg, State Drug Crime Commission of New South Wales v Ukja ; Studdert J in Director of Public Prosecutions (Cth) v Saxon (3 August 1990, unreported) and cf Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276 at 293, 299, 304; and
I emphasise that Kirby P, like the Chief Justice, emphasised that there is a public interest in allowing people to defend themselves against serious criminal charges.
Mr El-Hage, by reference to the principles discussed by Derham AsJ, made the following, with respect, salient points. First, there was likely to be a shortfall even if the whole of the balances in the restrained bank accounts were immediately surrendered to the Law Society. Secondly, it is in the public interest that that shortfall should be reduced so that the solicitors of New South Wales, as I have said, do not bear the burden of the apparent fraud. Thirdly, he pointed out that although the Law Society does not yet have a judgment the case is a very strong one indeed, and supported by the frank admissions that the first defendant has made at various times. Thirdly, from the Law Society's point of view, assessing the prospect of recovery proceedings, there is no evidence of any other assets of a substantial type which would satisfy the shortfall if the order sought was made.
Fourthly, by reference to exhibits 1 and 2 which are the portions of the affidavits of the defendants I have referred to already, the defendants, as late as November 2018, have made substantial loans to their three children totalling about $1.2 million. Some repayments have been made, but the upshot is that the outstanding balance of those loans is a little under $1.1 million. The terms in which the moneys were advanced and is to be repaid, more importantly, are not before me and I note from the affidavit of the portion I have attended that the first defendant said that the written loan agreements effectively have been misplaced or lost during the sale of the former matrimonial home pursuant to his undertaking given to the Court in April.
The point is that Mr El-Hage submits that given those substantial loans there may be other avenues that the defendants could look to for money to pay legal expenses. From this I should infer that a refusal of the relief sought will not stultify the criminal defence. I interpolate these loans are probably assets within the meaning of Order 2.
Finally, he submitted that there is no evidence that either of the defendants have applied for Legal Aid and, apart from the evidence of Mr Mitchell, a solicitor, whose affidavit was read by the plaintiff, no evidence that they are not eligible for Legal Aid.
I think it is important to point out that when the orders were made in April it was obviously on the cards that criminal proceedings of a serious kind would be taken against at least the first defendant if not both defendants. If I may be permitted to say so it was for this reason that I said legal expenses are obviously at large and that by that I meant they were then an unknown quantity given the nature of the apparent offending of the first defendant.
Returning to sub-par (g) of [73] in Vasilaris v Laprese, this is not a case where it could be said that the order sought from me would give rise to a substantial risk that any judgment obtained by the Law Society would be rendered nugatory. It needs to be borne in mind, as I have said, that in advance of the commencement of any recovery proceedings under s 246 of Uniform Law the first defendant, and to the extent necessary the second defendant, have facilitated the voluntary handing over of nearly $6 million to the Law Society from which the Law Society has substantially been able to meet the just claims of the beneficiaries deprived of their entitlements by the apparent fraud of the first defendant.
In that context, although there may be a shortfall, it is not obvious that it is of a very high proportion. Indeed, the proportion of the shortfall, if it materialises, is likely to be small. I accept that the burden of any shortfall will fall upon the rest of the profession, the overwhelming majority of whom are honest and diligent practitioners. At the same time, the fidelity fund exists to protect the public and part of the cost of engaging in the honourable profession of the law for those who practice as solicitors includes making contributions to the fidelity fund.
Although the New South Crime Commission v Fleming concerns a specific statutory scheme it is obvious from the cases referring to orders under Rule 25.11 that similar concepts inform the making of orders under the rules and variations of those orders. I bear in mind what Gleeson CJ and Kirby P - both among the most eminent of jurists who have served the people of New South Wales and of Australia in the last generation - have said about allowing provision for legal expenses to defend serious criminal charges being not only in the interests of justice so far as the parties to the litigation are concerned, but also in the public interest. In my judgment the expression I have used in the orders drafted by the parties, "legal expenses", extends to embrace the cost of defending the criminal proceedings. After all this litigation, the proposed recovery litigation, inevitable conduct litigation and the criminal proceedings all arise out of the same factual matrix. That factual matrix, as I have said too many times, is the apparent fraud of the first defendant. In the circumstances, I think I should make clear by way of a declaration at least that the expression "legal expenses" in Order 1 extends to costs referable to these proceedings, the proposed recovery proceedings, the inevitable conduct proceedings and the criminal proceedings that have now been instituted by the New South Wales Police.
I should say that in making the decision I have made I have not lost sight of the loans to the children subject to the terms on which those moneys were advanced. They are likely to be an asset that the Law Society may have recourse to in the event of any successful recovery proceedings and reduce the risk that there will be a shortfall.
There are two matters remaining. The first relates to the issue about interest. I accept the force of Mr Stitt's submission about interest on interest not being available under s 100. Although the main purpose of that provision is to avoid compound interest it also extend,s as a decision he referred me to on cognate legislation in the United Kingdom of the Medina Princess [1962] 2 Ll LLR 17, it extends to denying a claimant interest where there is an independent right interest otherwise. In this case the right to interest of the claimants under s 243 of the Uniform Law is limited. However, Mr El-Hage has argued that s 246 makes it clear that the Law Society, or rather the Fidelity Authority, is subrogated to the rights of the claimants as against the first defendant, which ordinarily would include the right to interest under s 100 should proceedings be commenced. I note that in the event that the Law Society recovers by that means a the greater amount than it has paid out it is, under the section, required to account for the claimants for the surplus net of the costs of recovery.
Given the subtlety of the various arguments that may be put in that regard, I think it inappropriate for me to resolve that question in the context of this case, which is concerned only with the freezing order. The question should be decided, if necessary, in the context of any recovery proceedings which are ultimately commenced.
I have received evidence of the likely costs of defending the criminal proceedings. Mr Herring who appears for the second defendant today and who has assisted with oral submissions, largely adopting those of Mr Stitt, reminds me that the position of his client is very different from that of the first defendant. It is appropriate that there be separate representation of each of them. However, the costs of her defence are highly unlikely to be less than the costs of the first defendant's defence even if in the end there is committal for sentence rather than trial.
The affidavit of Mr Mitchell, an experienced criminal lawyer, indicates that the total cost of the first defendant's defence of the criminal proceedings could be as large as $45,000. He provides a detailed breakdown of the work that will be required to arrive at that figure. Mr Herring has provided a very similar figure and a similar approach to the matter in his affidavit. Mr Emanuel has provided an estimate in his affidavit that the cost of his involvement in the recovery proceedings and conduct proceedings in the future. This is likely to be an additional $30,000. All of this, of course, totals $119,000; $45,000 on Mr Mitchell's estimate; $44,000 on Mr Herring's estimate; and $30,000 on Mr Emanuel's estimate. As I have said already the total amount in the bank accounts is currently $120,000 and they are the source of the funds which have been permitted for the living expenses of the defendants
It should follow from what I have said that I do not regard the estimates of the solicitors to be in any way unreasonable. Indeed, bearing in mind what Gleeson CJ said in Fleming (at 125C) the Court should be slow to go behind honest estimates of experienced practitioners in the field in matters of this type.
However, it seems to me that the regime provided for in the short minutes of order has been working generally satisfactorily except for the dispute about whether the cost of defending criminal proceedings was covered. I say that conscious of the fact that perhaps Mr Emanuel and Mr Herring might think that payment could be made with a little more celerity at times. But leaving that issue to one side, I think the arrangement has been working well on the evidence I have read and I do not propose to impose a cap on the amount of legal expenses as I am asked to do. It seems to me that that would be of limited practical effect given that the funds in the bank accounts are going to be eroded one way or another anyway with the passage of time and the withdrawal of living expenses. However, I will make the declaration that I have indicated.
My order is:
Declare that the expression "legal expenses" where it appears in order 1, pronounced on 4 April 2019, extends to the reasonable legal costs of these proceedings, the proposed recovery proceeding under s 246 of Uniform Law, conduct proceedings brought against the first defendant by the plaintiff and the legal costs of the defence of the criminal proceedings now instituted against each of the first and second defendants.
Given that I have not made an order in the form sought by the defendants, Mr El-Hage submits that each side has enjoyed some success and that the appropriate orders of each party bear its, his or her own costs.
It seems to me that the order I have made settles what was the substantial controversy between the parties and as it has been resolved by a decision that substantially favours the applicants, the defendants in the case.
There is no real difference in substance between what was sought and what I have allowed and I have given my reasons for departing from what was sought already. It seems to me that, with respect, no good reason has been demonstrated for departing from the usual rule that costs follow the event. It was a substantial issue. It had to be resolved and legal costs have been properly incurred.
I order the plaintiff to pay the defendants' costs of the motion.
[3]
Amendments
07 January 2020 - Representation: Solicitors for the First Defendant/Applicant amended.
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Decision last updated: 07 January 2020