TITLE OF COURT: SUPREME COURT OF TASMANIA (FULL COURT)

Professions and Trades - Lawyers - Legal practitioners' guarantee funds - Other States or Territories - Tasmania - Who may claim - Assignee of investor clients' rights.

English Scottish and Australian Bank Ltd v Phillips [1937] HCA 6; (1937) 57 CLR 302, applied.

Costa & Duppe Properties Pty Ltd v Duppe [1986] VicRp 9; [1986] VR 90, followed.

Judgment Number: [2004] TASSC 139

GARRISONS PTY LTD [ACN 009 556 370] v THE SOLICITORS' TRUST

2 That the decision ("first Decision") made by the respondent on or about 8 October 2003 to reject the claim made by the applicant on 29 January 2003 ("first Claim") for compensation from the Court fund ("first Court fund") established in Supreme Court Matter No M230 of 2001 in respect of Lewis Driscoll & Bull loans numbered 960394 and 960179, be quashed.

3 That the decision ("second Decision") made by the respondent on or about 8 October 2003 to reject the claim made by the applicant on 29 January 2003 ("second Claim") for compensation from the Court fund ("second Court fund") established in Supreme Court Matter No M115 of 2001 in respect of Lewis Driscoll & Bull loans numbered 960349 and 970219, be quashed.

4 That the decision ("third Decision") made by the respondent on or about 8 October 2003 to reject the two claims made by the applicant on 14 August 2003 ("third Claim") for compensation from the Court fund ("third Court fund") established in Supreme Court Matter No M337 of 2001 in respect of Piggott Wood & Baker loans numbered 942289 and 952709, be quashed.

5 That the first Claim, second Claim and third Claim be accepted.

GARRISONS PTY LTD [ACN 009 556 370] v THE SOLICITORS' TRUST

1 The question for determination is whether the learned primary judge was in error when he held that the appellant was not "a client" who has lost money as a result of a fiduciary default or defaults by a firm of legal practitioners as provided by the Legal Profession Act 1993 ("the Act"), s112(1), which relevantly provides:

"112 - (1) A Court fund in respect of a firm or legal practitioner corporation is to be applied by the Supreme Court in -

(a) the compensation to a client for the loss of trust money or other property as a result of a fiduciary default if -

(i) the loss occurred wholly in this State whether in the course of legal practice in this State or in a participating State by a legal practitioner; or

2 The appellant was and is a licensed dealer in securities. In the course of its business, it gave financial advice to clients. It advised a number of clients to invest in solicitors' contributory mortgage schemes conducted by two legal firms, Piggott Wood & Baker and Lewis Driscoll & Bull. The clients acted on that advice but subsequently found that the interest was not being paid and they could not recover the capital sums lent. Consequently, these mortgage schemes attracted the attention of regulatory bodies and others.

3 As it gave the advice, the appellant decided it should offer to refund to its clients the capital sums lent to the two schemes, plus interest. Eighty-eight such offers were accepted. In return, the appellant obtained from each of those clients a deed of assignment. Each deed transferred to the appellant the clients' "Investor's Rights". These rights are defined by the deed to mean:

"(a) the Investor's right, title and interest in or to the Mortgage and the Loan; and

(b) any and all rights and entitlements whatsoever, whether legal or equitable, which are now or at any time in the future held by the Investor, or to which the Investor is or becomes otherwise in any way entitled, in connection with the Loan or the Mortgage, and includes, without limitation, any such rights, actions or entitlements:

(iv) to recover compensation under the provisions of the Legal Profession Act 1993 (Tasmania) and any other statute;

(v) to recover compensation under any government sponsored scheme;

(vi) to recover compensation from the Law Society of Tasmania, or under any compensation fund or scheme sponsored by that Society; and

(vii) to recover compensation under any insurance policy."

4 Notices of the execution of the deeds of assignment were given to the two firms of legal practitioners or their managers appointed under the Act. At that time, none of the securities that the firms held to secure the loans to which the appellant's 88 clients had contributed had been realised.

5 Subsequently, an order was made pursuant to the Act, s111(1) and (2), establishing a court fund with respect to the loans to which some of the appellant's clients had contributed. There was no evidence before the learned primary judge as to the nature of the fiduciary default or defaults that resulted in the establishment of these court funds, nor the date of any such default or defaults.

6 In accordance with the Act, s114(2), the appellant claimed compensation with respect to four of the 88 losses from three court funds. The respondent rejected all the claims upon the basis that the appellant was not a client who had lost trust money as a result of a fiduciary default of a firm of legal practitioners. The respondent's contention was that the "clients" were the investors who had lent money to the solicitors.

7 Pursuant to the Act, s115, the appellant appealed to a judge for a review of that decision. The review was refused and the appellant has now appealed to this Court.

8 The grounds upon which the respondent rejected the claims are set out in a document filed in the appeal book. These were the issues for determination by the learned primary judge. In addition to the contention that the appellant was not a client of the firm within the meaning of the Act, s112(1)(a), the respondent contended that the rights that the appellant's clients had against the firm were to sue for damages for equitable compensation and the right to claim from the fund was analogous to such rights. Accordingly, it was contended that such rights were not assignable, for if they were, the agreements were void as constituting maintenance.

9 I infer from the reasons for judgment that the learned primary judge was pressed with submissions with respect to the assignability of a chose or choses in action. The arguments appear to have been that the assignments were assignments of the right of the appellant's clients to sue the firms of solicitors and that a claim against the court fund was an analogous right. Thus, it was contended that at common law the assignment of the bare right to litigate was void as constituting maintenance. See Clegg v Bromley [1912] 3 KB 474. The competing argument was that if an assignor has a genuine interest in taking the assignment, there is no maintenance and the deeds were not void. See Trendex Trading Corporation v Credit Suisse [1982] AC 679; Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499.

10 The learned primary judge did not reach any final view with respect to these arguments. He referred to them and then said that it was unnecessary to consider them if the terms of the Act, s112(1)(a), were such that even if the assignments were not void, the appellant had no right to claim against a court fund. He said, at par7:

"In this case it is necessary to consider whether the Act permits the payment of compensation out of a court fund to an assignee in the position of the applicant. If that is not permitted, it makes no difference whether the rights of the assignors were of such a nature as not to be inherently incapable of assignment."

11 The learned primary judge referred, at par13, to the Acts Interpretation Act 1931, s8A, which requires that preference be given to an interpretation that promotes the object of the Act, and said that in this case the object of the legislation is "to provide compensation to innocent persons (including solicitors' investor clients) who have suffered losses as a result of improprieties on the part of legal practitioners: Dobson v The Solicitors' Trust [2001] TASSC 99 at pars14, 46." There follows this passage in the judgment:

"I think it would be inconsistent with the purposes or objectives of the relevant statutory provisions for them to be interpreted in such a way that compensation would be available to an assignee whose only loss has resulted from the payment of a consideration pursuant to a contract. When Parliament enacted the original s112(1)(a), it surely did not intend compensation for a "loss ... suffered by a client" to be available to (a) an assignee who purchased a client's rights for a small fraction of the amount claimable from a court fund; or (b) an assignee that had contributed to causing the client's loss by giving bad investment advice; or (c) an assignee alleged to have done that. Such an intention would be inconsistent with the maintenance and replenishment of the Solicitors' Guarantee Fund, and would benefit persons whom it was not the Act's purpose to benefit. If s112(1)(a) was still in its original form, I would hold that the applicant has never been a client of the relevant legal firms; that only the assignors were clients for the purpose of that provision; and that none of those clients had any compensable loss because the applicant has made good all their losses."

12 In my respectful opinion, the learned primary judge was in error when he concluded that the appellant's "only loss has resulted from the payment of a consideration pursuant to a contract". The fiduciary relationship between the appellant's clients and the firms of solicitors to whom they gave their money was that of a trustee and a cestui que trust. The trust property comprised money in the first instance and, after the solicitor had lent it to a borrower, an interest in land. This interest arose out of the security taken to secure the repayment of the money. It was either in the legal title to the land which was the subject of the mortgage, if the mortgage was not over land under the Land Titles Act 1980, or an interest in the mortgage if it was over a Torrens title. In English Scottish and Australian Bank Ltd v Phillips [1937] HCA 6; (1937) 57 CLR 302, Dixon J (as he then was), Evatt and McTiernan JJ said with respect to a Torrens system mortgage, at 321:

"Under the system of registration governing the present case, the statutory charge described as a mortgage is a distinct interest. It involves no ownership of the land the subject of the security. Like a lease, it is a separate interest in land which may be dealt with apart altogether from the fee simple or other estate or interest mortgaged."

13 Accordingly, the appellant's clients had equitable interests in land to the extent of their contributions to the loans in respect of which the mortgages were executed. In Costa & Duppe Properties Pty Ltd v Duppe [1986] VicRp 9; [1986] VR 90, Brooking J held that a unit holder had a proprietary interest in all the assets of a unit trust, even though no unit holder could claim an interest in any particular asset. This decision was followed in Connell v Bond Corporation Pty Ltd (1992) 8 WAR 352. In that case, it was held with respect to real estate being trust property held by a trustee for members of a partnership, that each of the partners had an equitable interest in the trust property to the extent of their share in the partnership.

14 Thus, it seems that immediately prior to the execution of the deeds of assignment and the giving of notice of such execution, each of the appellant's clients had an interest in land. By virtue of the deed of assignment, which provided (inter alia) that "the Investor hereby transfers the Investor's Rights to Garrisons absolutely", that interest in land was transferred to the appellant. Upon the giving of notice of the execution of the deed of assignment, the appellant became the beneficiary of the trust.

15 At that stage, the trust property had not been realised, nor the personal remedies against the defaulting mortgagee been exhausted, so it cannot be said that at that stage there had been any "loss of trust money or other property" within the meaning of the Act, s112(1)(a). That loss only occurred after the exercise of the power of sale and the consequential loss of capital. In these circumstances, it could not be said that such loss resulted from payment of a consideration pursuant to a contract.

16 In my view, in the circumstances of this case, upon the occurrence of such a loss, the appellant became a client of the firm within the meaning of the Act, s112(1)(a). At that time any accounting of trust funds by the firms to the appellant's clients would not have discharged the liability owed by the firm to the appellant by virtue of the deed of assignment and notice of the deed of assignment. The original investors had ceased to be clients of the firms and the appellant became a client in their place. Analogous situations were urged upon the learned primary judge. It was submitted that the following persons would be clients within the meaning of the Act, s112(1)(a):

* a new trustee of a superannuation fund, appointed to replace the trustee who had invested money with the firm;

* a trustee in bankruptcy of the estate of a bankrupt who had invested money with the firm;

* an executor of the estate of a deceased person who had invested money with the firm;

* the beneficiary of an order made in the Family Court vesting in him or her a share of the money that had been invested with the firm.

17 With respect to these submissions, the learned primary judge said, at par16:

"It may be that all of those situations are distinguishable. It may be that some or all of them are not. ... I do not think I need consider those situations. I think it is at least arguable that the sorts of claimants I have referred to might constitute clients for the purposes of s112(1)(a), given the evident purpose or object of the relevant provisions. However it is my firm view that an assignee in the position of the present applicant does not constitute a client for the purpose of that provision and that no loss within the scope of that provision exists in relation to any of the assignors."

18 With respect, I differ from the learned primary judge, for it seems to me that such persons would clearly be clients of the firm within the meaning of the Act, s112(1). Like the appellant, each would have taken the interest that the investor had in the money or the security, and when fiduciary default caused a loss of trust money, viz, upon realisation of the security, like the appellant, such persons were clients of the firm who had lost trust money. Indeed, Mr O'Farrell, who appeared as counsel for the respondent conceded that "client" should not be given a narrow meaning. He submitted that whoever suffered the loss of trust money or property became a client within the meaning of the section, but contended that the loss was suffered as a result of payment of consideration pursuant to the contract as found by the learned primary judge. Alternatively, he contended that the loss occurred at the time of the fiduciary default. This submission cannot be accepted for fiduciary default may not necessarily be productive of any loss.

GARRISONS PTY LTD [ACN 009 556 370] v THE SOLICITORS' TRUST

20 I have read the reasons for judgment of Underwood CJ and agree with them.

21 The requirement in the Legal Profession Act 1993, s112(1), that the Court fund in respect of the firms be applied by the Court in "the compensation to a client for the loss of trust money or other property as a result of a fiduciary default" was clearly intended to extend to circumstances where people or institutions entrusted the firms with money for investment in mortgages, as occurred here. In my opinion, upon a change in the ownership of funds so invested, the new owner became the client for the purposes of the provision, whether the change in ownership arose because the original client became bankrupt and the interest devolved on a trustee in bankruptcy, or the original client died and the interest devolved on the personal representatives, or the original client held the interest as trustee and there was a change in the identity of the trustee, or the original client assigned the interest to another, as occurred here. There is no justification for confining the meaning of the word "client", in the circumstances of this case, to the person who originally invested the funds with the firm and not extend it to another person who became the owner of the interest in the funds and to whom, in place of the original client, the firms accordingly became responsible and owed a fiduciary duty.

GARRISONS PTY LTD [ACN 009 556 370] v THE SOLICITORS' TRUST

22 I agree with the reasons for judgment prepared by Underwood J and the course that he proposes.