Victorian Civil and Administrative Tribunal|2011-07-11|Before: Mr P

Legal Services Commissioner v Johnston (Legal Practice) [2011] VCAT 1366 (11 July 2011)

Legal Practice List; Charges of professional misconduct and unsatisfactory professional conduct; Failure to obtain acknowledgement from client in accordance with the Rules where client lent money by a company related to the solicitor; Party with funds to new solicitor despite undertaking to third party claimant; Guilty plea; Penalties by consent; Legal Profession Act 2004 Sections 4.4.3 and 4.4.4; Professional Conduct and Practice Rules 22.1 and 22.2

In respect of the findings of professional misconduct and unsatisfactory professional conduct, the respondent is:
- (a) reprimanded; and
- (b) to pay a fine of $2,000 to the Legal Services Board within 30 days of the date of the making of this order by the Tribunal.
The respondent is to pay the applicant's costs of these proceedings in the amount of $2,000 to the applicant within 30 days of the date of the making of this order by the Tribunal.

In this proceeding brought before me under the Legal Profession Act 2004 the Legal Services Commissioner seeks certain relief against Mr Neil Johnston, a legal practitioner. Mr Johnston has been a legal practitioner in Victoria since as long ago as 1964. He was born in 1941. The matters which have brought Mr Johnston before the Tribunal today occurred in 2009 when a testatrix died in the middle of a renovation of her home. She had obtained funds from the Commonwealth Bank of Australia on a first mortgage loan and part of the loan had been advanced. When the deceased died the renovation was incomplete. The bank in accordance with standard practice froze the account and declined to make any further advances to the executor. The executor who had asked Mr Johnston to act for him in proving the will being unable to obtain further funds sought assistance from the practitioner. The practitioner owned a company known as East Bentleigh Furnishing Company Pty Ltd which he had acquired as a dormant shelf company. That company had acted as a custodian for the practitioner but according to an affidavit which he has sworn, had not carried on business. It did not for instance have an Australian Business Number for the purposes of paying Goods and Services Tax. The company made two loans to the executor which were secured by a second mortgage over the subject property.
The Professional Conduct and Practice Rules 2005 which bound the practitioner in the conduct of his practice, required by Rule 32.1A as follows:

A practitioner, before referring a client of the practitioner or the practitioner's firm, to another business conducted by the practitioner concurrently must first obtain from the client an acknowledgment in the form of Form 2 in the Schedule to these rules.

The Form 2 in effect discloses the connexion between the practitioner and the undertaking to which the client has been referred and obtains an acknowledgement from the client inter alia that he understands that the other undertaking is separate from the practitioner's legal practice and that the client is not a client of the law practice for the purposes of its dealings with the other undertaking.
Later in the administration of the estate, a claim was made as to certain real estate that was the legal property of the estate and apparently the beneficial property of the estate too. It was asserted by the claimant that this property was beneficially the claimant's pursuant to a constructive trust. There were threats of caveats and the dispute was resolved on an interim basis on the footing that the practitioner undertook to the claimant not to part with the proceeds of sale of the real estate other than for the purpose of paying out registered mortgages. In fact when the executor withdrew the practitioner's instructions, at the request of the executor the net proceeds of sale after paying out the mortgages were remitted to another law firm which was not bound by the undertaking. The undertaking was effectively therefore nullified and this led to a complaint being made to the Legal Services Commission.
Arising out of the matters which I have narrated the Commissioner has brought two charges. The first is a charge of:

Professional misconduct within the meaning of section 4.4.3(1) and/or section 4.4.4(a) of the Act in that contrary to rule 22.1 of the Rules, on or about 21 October 2009 you released monies to Remington Wright & Co in breach of an undertaking given to Soccio & Associates on or about 7 October 2009.

Unsatisfactory professional conduct within the meaning of section 4.4.2 and/or section 4.4.4(a) of the Act in that contrary to rule 32.1A of the Rules, on or about 18 May 2009 the executor of the estate of the late Veronica Brick was referred to the EBFC for the obtaining of a loan without an acknowledgement being obtained from the Executor in the form of From 2 in the Schedule to the Rules.

At this stage I should refer to the Professional Conduct and Practice Rules 2005 at Rule 22 relative to undertaking. Rule 22.1 provides:

A practitioner who, in the course of the practitioner's practice, communicates with another practitioner orally, or in writing, in terms which expressly, or by necessary implication, constitute an undertaking on the part of the practitioner personally to ensure the performance of some action or obligation, must honour the undertaking so given strictly in accordance with its terms, and within the time promised, or, if no precise time limit is specified, within a reasonable time.

A practitioner must not give to another practitioner an undertaking, compliance with which requires the co-operation of a third party who is not a party to the undertaking, and whose co-operation cannot be guaranteed by the practitioner.

I now turn to the two charges. I note that the practitioner has accepted liability under both charges on the basis of a proposed consent order agreed upon between him and the practitioner. The effect of the consent order is that the practitioner accepts liability for the two charges, is reprimanded and is fined $2,000 for both matters.
I now turn to a consideration why in the circumstances I regard this as an appropriate disposition of the matters before me. I turn first to the issues relative to Rule 32 and the failure to obtain signature of the required acknowledgement.
Mr Mackinnon who appears on behalf of the practitioner has referred me to an affidavit by the practitioner in which he sets out the history of East Bentleigh Furnishing Company Pty Ltd or EBFC as it has been described. Mr Mackinnon submits it is substantially arguable that in the circumstances described EBFC is not a business for the purposes of Rule 32; nevertheless he says his client has in the interests of obtaining a global disposition of these matters, elected to plead guilty to the charge of unsatisfactory professional conduct with respect to the failure to obtain Form 2.
Mr Matthews who appears for the Commissioner concedes that failure to obtain a signature of the Form 2 apart the transaction is not otherwise open to any sanction. Certainly the executor found himself in a difficult situation. He did not, to use popular language have what one might describe as a bankable transaction which could obtain finance. Indeed, he came to the practitioner for assistance because the bank declined to assist. In broad terms therefore there is nothing improper in the transaction. The unsatisfactory professional conduct here resides solely in the failure to obtain the written acknowledgement which the Rules require. In making that observation I am not to be taking as in any way trivialising the importance of compliance by practitioners with the mandatory requirements of the Rules. I agree that there may be grounds for argument as to whether EBFC in the circumstances was a business. I have however a guilty plea with respect to this charge and I believe I should accept it.
Whilst if you like a natural person can have a private and non-business capacity, a company incorporated under the Corporations Act or any of its predecessors is almost by its nature a trading and business entity. So whilst there is an argument that EBFC was not a business, the argument is not an unanswerable one. In my view in all the circumstances which I have described and the manner in which the Commissioner seeks to deal with Charge 1 is appropriate.
This brings me next to the second and far more serious matter. The practitioner here it would seem found himself in a difficult situation, that is, he had given an undertaking and was confronted with a demand by the client that the moneys, the subject of the undertaking, be remitted to a different law practice. As between solicitor and client the moneys were the moneys of the client and not the solicitor. I was not referred to any authorities that dealt with the difficult conceptual issues which arise here. Does the giving of the practitioner's undertaking in the circumstances described create some sort of paramount lien, mortgage or a charge in favour of the holder of the undertaking? My inclination is to think that the answer is 'no'. Perhaps therefore, the vice here was not so much what the practitioner did when confronted with the demand to part with the money but rather the circumstances in which he gave the undertaking. Rule 22.2 of the Professional Conduct and Practice Rules 2005 says:

The client was it would seem the third party here who on the face of it was not party to the undertaking and his co-operation could not be guaranteed by the practitioner. On the other hand I have to say that undertakings of the sort that seem to have been given here are relatively common and are not immediately thought to fall foul of principles such as Rule 22.2.
Mr Matthews on behalf of the Commissioner said the appropriate course to have followed was that a practitioner first should seek to be released from the undertaking by the person to whom the undertaking was given and if this were not done, to approach the Supreme Court for an order of the Court releasing him. He referred me to the well known book on Lawyers Professional Responsibilities by Dal Pont, Third Edition 2006 at paragraph 22.25. Referring to the Supreme Court's jurisdiction to enforce undertakings and its basis being the Court's:

Inherent right to insist and require that its officers observe a high standard of conduct.

He referred me to authorities at footnote 32 on page 503 appended to paragraph 22.30 of the work:

Esso Australia Resources Ltd v Plowman (1995) 183 CLR 10 at 37 per Brennan J (as he then was). See for example Re Kelly and Department of Treasury and Finance [No. 2] [2002] VCAT 1019; (2002) 19 VAR 330 at paragraphs [54] - [63]; Blanch v Deputy Commissioner of Taxation [2004] NSWCA 461.

As examples of the Court dealing with the situation of practitioners seeking to be released from undertakings. The text of those decisions is not available to me in the hearing room and Mr Matthews did not suggest that any of those cases dealt with the matter precisely before me.

As I sit here now it is not abundantly plain to me what the correct conceptual approach for a practitioner in Mr Johnston's situation should be. Should he regard the undertaking as having created some sort of paramount lien enforceable against the client with respect to the relevant funds? If that were not the correct view, what he could have done was informed the solicitors who held the undertaking of the imminence of his release of the funds to enable that firm's client to seek urgent injunctive relief preventing the release of the funds. This he did not do. He might also have sought counsel from somebody such as the Law Institute of Victoria. In fact he did none of those things. This rendered the undertaking effectively worthless. This is a matter of the greatest concern because undertakings are an important part of the legal system. Not just as a matter of comity between practitioners but also because his undertakings in many respects underpin the operation of the legal system. When a Court or Tribunal is pressed to grant an injunction to prevent the dissipation of a fund of money the Court or Tribunal is guided by the maxim that equity does nothing in vain. A decision of the Full Court of the Supreme Court in Grasso v Love [1980] VicRp 20; [1980] VR 163 tells us that it is not appropriate for a Court or Tribunal to intervene with an interlocutory injunction unless some action is imminent which will inflict potentially irreparable damage on the person seeking the injunction. Generally the existence of an undertaking such as the one that is given here would be seen as a reason why either no injunction was required and the person asserting a right would not even seek one, which is what happened here, or if the Court or a Tribunal were pressed to grant an injunction would decline to do so on the basis that the Grasso v Love test had not been met and with the maxim that equity does nothing in vain pointing away from interlocutory injunctive intervention. If undertakings on this type can be set at nought without even the opportunity of an injunction being sought in lieu of the undertaking when the undertaking in effect ceases to bind the fund, the entire basis of the legal system is undermined. That being the case there is I think every reason to regard what happened here as a matter of the gravest concern and to regard the Commissioner as being well justified in the very serious charge that he brought as Charge 2. The guilty plea is also quite appropriate in the circumstances, nevertheless what I have said already indicates that the practitioner was put in a very difficult situation. In a situation where whilst there might be an ultimately clear and analytically satisfying answer, that answer does not immediately come to the minds of the people in the course of the hearing before me today.
This practitioner has come before me bringing a spotless record and therefore despite the seriousness of Charge 2 I believe the disposition which the parties have agreed to here is an appropriate one so I make orders in terms of the disposition that the parties have consented to.

Legal Services Commissioner v Johnston

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Judgment (20 paragraphs)

Legal Services Commissioner v Johnston (Legal Practice) [2011] VCAT 1366 (11 July 2011)

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