Plaintiff v Defendant

Supreme Court of Victoria|2010-03-31|Before: EMERTON J

LEGAL PRACTITIONERS - External intervention - Application to appoint a receiver to a law practice - Legal Profession Act 2004 (Vic) s 5.5.1

1 By amended originating motion filed 16 October 2009, the plaintiff ("the Board") has applied for the appointment of a receiver to the practice of the defendant for breaches of the trust accounting requirements of the ("the Act") and the ("the Regulations").

2 The Board regulates legal practice in Victoria pursuant to the Act. It has a number of powers to intervene or to cause external intervention to take place in a law practice. These powers may be exercised when the Board forms a belief on reasonable grounds that the practice or an associate of the practice is in breach of the trust accounting requirements of the Act or the Regulations.

3 The defendant is a legal practitioner in sole practice who practices under the name 'Hollows Lawyers' ("the law practice"). At the time the breaches are said to have occurred, the defendant's practice consisted almost exclusively of personal injury claims brought by former navy personnel against the Commonwealth for injury arising from the collision in 1964 between HMAS Voyager and the aircraft-carrier, HMAS Melbourne. The law practice handled more than 82 of these claims. By any measure, the proceedings arising from the claims were difficult and protracted. The files to which the Court was referred and which formed the basis for this application were opened in 2000 and many were not concluded before 2008, when the Commonwealth appointed Mr Gormly QC to settle the claims. There was a flurry of settlements in early to mid-2008, according to the evidence of the defendant. Understandably, the defendant and his staff at the law practice were placed under considerable pressure during this period.

4 In late 2008, trust account inspectors were appointed pursuant to the Act to carry out an inspection of the law practice. As a result of that inspection, the Board now makes this application to have a receiver appointed to the law practice.

5 The application is strongly resisted. The defendant argues that the preconditions for the exercise of the Court's jurisdiction to appoint a receiver do not exist, in that the Board's determination to apply for a receiver under s 5.2.2(c) of the Act was not based on reasonable grounds. In the alternative, it is the defendant's case that the requirements of the Act for the appointment of a receiver are not satisfied because:

(a) the errors identified by the trust account inspectors on which the application is based were inadvertent accounting errors which were not deliberate or dishonest;

(b) the errors were promptly restored and adequately rectified;

(c) revised management systems were promptly introduced;

(d) a design flaw in the software system used by the practice that caused the inadvertent accounting errors has been rectified;

(e) the practice does not intend to continue with no win/no fee litigation in any event; and

(f) the law practice provided valuable support for the litigants in the Melbourne-Voyager cases ("a David v Goliath battle").

6 For the reasons that follow, I have decided that a receiver should be appointed to the law practice for a limited purpose. Having considered evidence from the Board and the defendant about the accounting practices of the law practice and the rectification of the errors that were identified, I have concluded that while the errors identified by the trust account inspectors were for the most part inadvertent accounting errors that were not deliberate or dishonest, their existence has exposed a lack of understanding of the trust accounting requirements of the Act and the Regulations, and a somewhat cavalier attitude towards the management of trust funds. The defendant ought not to have allowed the errors to occur. In particular, I have found that:

(a) Although the defendant blamed the errors on the accounting software used by the law practice, the errors were not principally attributable to a design flaw in the software system;

(b) Rather, the accounting errors were caused by a lack of understanding of how the accounting software worked and a lack of attention to the requirements of Part 3.3 of the Act and Part 3.3 of the Regulations;

(c) The accounting errors should have been readily apparent and might have been avoided had the law practice prepared final trust account statements as required by the Regulations;

(d) Further, the manner in which the trust account irregularities were remedied by the law practice gives rise to concern because -

(i) trust moneys that were appropriated in breach of the Act and Regulations were actually restored to the trust account in only a very small number of cases;

(ii) in the majority of cases, to deal with the deficiencies identified, amounts 'written off' were 'written back in' or new invoices were raised, even though many of the matters had been finalised some time earlier;

(iii) in the matter of Rann, the new invoice that was raised to partially offset the deficiencies identified included fees for professional services that the defendant was not able to properly explain;

(iv) the review conducted by the law practice to identify deficiencies in its Melbourne Voyager files looked only for deficiencies created by one means (the double payment of disbursements) and did not look for errors of other kinds, such as those identified by the inspectors in the files that were reviewed by them.

7 Accordingly, I cannot be confident that trust account deficiencies have been properly identified and restored or that the errors that gave rise to them have been rectified. It is necessary for the protection of clients and former clients of the law practice that a suitably qualified person to be appointed to examine the Melbourne Voyager files held by the law practice to ensure that all irregularities in relation to trust money, trust property or the affairs of the practice have been fully identified and rectified and, in particular, that all trust deficiencies have been properly restored.

8 The Act contains a chapter (Chapter 5) providing for 'external intervention' in the affairs of a law practice. Section 5.1.1 sets out the purposes of Chapter 5 and provides:

(a) to ensure that an appropriate range of options is available for intervention in the business and professional affairs of law practices and Australian- registered foreign lawyers for the purpose of protecting -

(ii) the interests and the trust money and property of clients; and

(iii) the interests of lawyers, including the owners and employees of law practices, so far as their interests are not inconsistent with those of the general public and clients; and

(b) to ensure that there is an accountable and transparent process for the appointment of interveners and for the conduct of interventions.

9 It will be observed that the interests of the general public and clients are paramount. The interests of lawyers are protected only "so far as their interests are not inconsistent with those of the general public and clients".

10 Section 5.2.1 sets out the circumstances in which external intervention may take place. Relevantly, subsections (d) and (e) provide:

(d) in any case - where the Board forms a belief on reasonable grounds that the practice or an associate of the practice -

(i) is not dealing adequately with trust money or trust property or is not properly attending to the affairs of the practice; or

(ii) has committed a serious irregularity, or a serious irregularity has occurred, in relation to trust money or trust property or the affairs of the practice; or

(iii) has failed properly to account in a timely manner to any person for trust money or trust property received by the practice for or on behalf of that person; or

(iv) has failed properly to make a payment of trust money or a transfer of trust property when required to do so by a person entitled to that money or property or entitled to give a direction for payment or transfer; or

(v) is in contravention of the regulations or legal profession rules with the result that the record-keeping for the practice's trust account is inadequate; or

(vi) has been or is likely to be found guilty of an offence relating to trust money or trust property; or

(vii) is the subject of a complaint relating to trust money or trust property received by the practice; or

(viii) has failed to comply with any requirement of an inspector or external examiner appointed under this Act; or

(ix) has ceased to engage in legal practice without making provision for properly dealing with trust money or trust property received by the practice or for properly winding up the practice; or

(e) where any other proper cause exists in relation to the practice.

11 The present application for the appointment of a receiver is made by the Board on the grounds in s 5.2.1(d) (i) - (vii) and (e).

12 Under s 5.2.2(2)(c) of the Act, the Legal Services Board may apply to the Court for the appointment of a receiver if it is of the opinion -

(i) that the appointment is necessary to protect the interests of clients in relation to trust money or trust property; or

(ii) that it may be appropriate that the provision of legal services by the practice be wound up and terminated.

13 The statutory requirements for dealing correctly with trust money are contained in Part 3.3 of the Act and Part 3.3 of the Regulations. The present application is founded in part on potential breaches of the requirements in ss 3.3.13(1), 3.3.14(1)(b), 3.3.14(3), 3.3.21 and 3.3.22 of the Act and reg 3.3.28 of the Regulations. For convenience, those provisions are set out below:

s 3.3.13 Certain trust money to be deposited in general trust account

(1) Subject to section 3.3.17A, as soon as practicable after receiving trust money, a law practice or an approved clerk must deposit the money in a general trust account of the practice or clerk unless-

(a) the practice or clerk has a written direction by an appropriate person to deal with it otherwise than by depositing it in the account; or

(b) the money is controlled money; or

(c) the money is transit money; or

(d) the money is the subject of a power given to the practice or an associate of the practice to deal with the money for or on behalf of another person.

Penalty: 120 penalty units.

s 3.3.14 Holding, disbursing and accounting for trust money

(1) A law practice or an approved clerk must-

...

(b) disburse the trust money only in accordance with a direction given by the person.

Penalty: 120 penalty units.

...

(3) A law practice or an approved clerk must account for the trust money as required by the regulations.

Penalty: 60 penalty units.

s 3.3.21 Deficiency in trust account

(1) An Australian legal practitioner or an approved clerk is guilty of an offence if he or she, without reasonable excuse, causes-

(a) a deficiency in any trust account or trust ledger account; or

(b) a failure to pay or deliver any trust money.

Penalty: Level 4 imprisonment (15 years maximum).

...

(3) In this section-

cause includes be responsible for;

deficiency in a trust account or trust ledger account includes the non-inclusion or exclusion of the whole or any part of an amount that is required to be included in the account.

s 3.3.22 Reporting certain irregularities and suspected irregularities - legal practitioners

(1) As soon as practicable after a legal practitioner associate of a law practice becomes aware that there is an irregularity in any of the practice's trust accounts or trust ledger accounts, the associate must give written notice of the irregularity to-

(a) the Board; and

(b) if a corresponding authority is responsible for the regulation of the accounts concerned - the corresponding authority.

Penalty: 60 penalty units.

reg 3.3.28 Trust account statements - law practices

...

(6) A trust account statement is to be furnished-

(a) as soon as practicable after completion of the matter to which the ledger account or record relates;

...

First preliminary issue: Does the Court have jurisdiction to appoint a receiver?

14 The defendant submitted that under the Act, there are a number of preconditions for the exercise of the special jurisdiction to appoint a receiver to a law practice. Given the drastic consequences of an order appointing a receiver, the necessary preconditions to the jurisdiction must be strictly complied with. It was submitted that the necessary preconditions did not exist, and could not be established, in the present case.

15 The preconditions for the appointment of a receiver identified by the defendant were as follows:

(a) First, either:

(i) the Board must form the belief based on reasonable grounds that the practice or an associate of the practice is, or is not acting, or has acted in the manner set out in paragraphs (i) - (ix) of s 5.2.1(d) of the Act; or

(ii) any other proper cause must exist in relation to the practice;

(b) when the Board becomes aware of one or more of the circumstances referred to in s 5.2.1 existing in relation to the law practice, it must decide that, having regard to the interests of the clients of the practice and to other matters that it considers appropriate, external intervention is warranted;

(c) the Board must determine to apply to the Supreme Court for the appointment of a receiver premised on the requisite opinion (s 5.2.2(2)(c));

(d) if the Board determines to apply to the Supreme Court for the appointment of a receiver, the Supreme Court may, on the application of the Board, appoint a person as a receiver for the law practice (s 5.5.1(2)).

16 It was the defendant's submission that the exercise of the Court's special jurisdiction to appoint a receiver to a law practice is predicated on the Board forming the requisite opinions referred to in ss 5.2.1 and 5.2.2 of the Act. These opinions must be opinions that can be formed by a reasonable man who correctly understands the meaning of the law under which he acts.[1] The jurisdiction of the Court is therefore dependent on the Board having formed the opinions referred to in ss 5.2.1(d) and 5.2.2(c) reasonably or on reasonable grounds. It was submitted the Court had to be satisfied that there was material before the Board on the basis of which the Board could form a belief based on reasonable grounds that the matters the subject of the opinion existed.

17 The defendant submitted that the Court could not be satisfied that the preconditions to the exercise of its jurisdiction were satisfied. He gave a number of reasons why this was the case:

(a) First, at the time of issuing the application for the appointment of a receiver on 2 June 2009, the defendant had already restored the errors that had been identified on a 'self-help', but co-operative and informative basis.[2]

(b) Secondly, the present application has not been characterised by any urgency, the inspection having taken place in late 2008 and the inspector's report having issued on 28 April 2009. The Board's application to the Court to appoint a receiver was not made until 2 June 2009 and the hearing of the application did not commence until 9 November 2009.

(c) Thirdly, the fact that the Board also determined to appoint a supervisor of trust money to the law practice shows that the Board did not hold a reasonable belief that a receiver should be appointed because of issues relating to the practice's trust accounts or because it is appropriate that the practice be wound up and terminated.

18 Approaching these grounds in reverse order, the basis for the third ground is that on 23 June 2009 the Board made a determination to appoint a supervisor of trust money to the law practice under s 5.5.2(a), having already made the determination to apply for the appointment of a receiver under s 5.2.2(c). The Board has not revoked either the determination to apply for the appointment of a receiver or the appointment of the supervisor of trust money. Both the application for the appointment of a receiver and the appointment of the supervisor remain on foot. The defendant submits that the determination to apply for the appointment of a receiver and the determination to appoint a supervisor cannot sit together and that the determination to appoint a supervisor undermines the legitimacy of the determination to apply for the appointment of a receiver.

19 Section 5.2.2(2) relevantly provides that the Board may determine:

(a) to appoint a supervisor of trust money of the law practice, if the Board is of the opinion-

(i) that external intervention is required because of issues relating to the practice's trust accounts; and

(ii) that it is not appropriate that the provision of legal services by the practice be wound up and terminated because of those issues; or

(b) to appoint a manager for the law practice, if the Board is of the opinion-

(i) that external intervention is required because of issues relating to the practice's trust records; or

(ii) that the appointment is necessary to protect the interests of clients in relation to trust money or trust property; or

(iii) that there is a need for an independent person to be appointed to take over professional and operational responsibility for the practice; or

(c) to apply to the Supreme Court for the appointment of a receiver for the law practice, if the Board is of the opinion-

(i) that the appointment is necessary to protect the interests of clients in relation to trust money or trust property; or

(ii) that it may be appropriate that the provision of legal services by the practice be wound up and terminated.

20 The defendant submits that the Court cannot on any basis be satisfied that the Board has formed the opinion referred to in s 5.2.2(2)(c), as it has subsequently determined to appoint a supervisor, which required it to form the opinion that it was not appropriate that the provision of legal services by the law practice be wound up and terminated because of issues relating to the practice's trust accounts: s 5.2.2(2)(a)(ii). As a result, the Court cannot now be satisfied that the Board reasonably formed the opinions required by s 5.2.2(2)(c) for its application for the appointment of a receiver.

21 The Court's power to appoint a receiver to a law practice is contained in s 5.5.1 of the Act. Section 5.5.1(1) of the Act provides that s 5.5.1 applies if the Board determines to apply to the Supreme Court for the appointment of a receiver to the law practice. Thereupon, the Supreme Court may, pursuant to s 5.5.1(2), appoint a person as a receiver for the law practice. Section 5.5.1 contains no express criteria for the exercise of the power to appoint a receiver.

22 However, by reason of s 5.5.1(1) of the Act, the Board must satisfy the Court that it has made the relevant determination. Ms Amalia Castos, who is a Litigation Officer for the Board, gave evidence of the determination having been made by resolution of the Board. The determination was made on the basis that the Board was of the opinion that the appointment was necessary to protect the interest of clients in relation to trust money or trust property, that is, under s 5.2.2(2)(c)(i) of the Act.

23 The jurisdiction to appoint a receiver to a law practice is invoked once an application has been made to the Court based on a determination of the Board made in accordance with s 5.2.2(2)(c). Accordingly, the Court has become validly seized of the Board's application to appoint a receiver to the defendant's law practice.

24 In deciding whether or not to appoint a receiver upon an application by the Board, the Court is not concerned to judicially review the Board's determination to apply to the Court. Under the precursor legislation to the Act, the Court was required to consider the reasonableness of the determination made by the relevant body to apply for the appointment of a receiver. Under s 250 of the Legal Practice Act 1996 (Vic), the Court had to be satisfied that the statutory regulator had reasonable grounds for making an application to appoint a receiver. Likewise, under s 104B(2) of the Legal Profession Practice Act 1958 (Vic), the Court had to be satisfied that the regulator had reasonable grounds for the opinion that it formed regarding the necessity to appoint a receiver.

25 By contrast, the Act contains no requirement for the Court to be satisfied that the Board's determination to apply for the appointment of a receiver was made on reasonable grounds. Section 5.2.1 of the Act provides generally that "[e]xternal intervention may take place in relation to a law practice in any of the following circumstances - ", including where the Board forms "a belief on reasonable grounds" that the practice is not dealing adequately with trust money. That belief may then form the basis for the determination to apply to this Court for the appointment of a receiver. However, the power of the Court to appoint the receiver is not conditioned on the Court being satisfied that the Board formed the requisite belief on reasonable grounds. It is for the Court to decide on the evidence before it whether the law practice has conducted itself so as to require the appointment of a receiver. Accordingly, it is not relevant that the Board was not provided with certain evidence that the defendant now relies on to resist the application to appoint a receiver.[3]

26 In Law Society of NSW v Clapin,[4] Harrison J considered an application to have a receiver appointed to a law practice under the New South Wales uniform legislation, on the basis that the Court had to be satisfied that the determination to apply for the appointment of a receiver had been made on reasonable grounds. Both the plaintiff and the defendant argued their case on that basis and by reference to the principles developed in cases under the precursor legislation. It appears not to have been submitted to Harrison J by either party that the uniform legislation does not refer to the opinion of the regulator as the basis for the exercise of the Court's power to appoint a receiver and his Honour proceeded on the basis that the opinion of the regulator conditioned the appointment.

27 In my view, it is not a condition for the exercise of the power to appoint a receiver that the Court satisfy itself that the Board's determination to apply for the appointment of a receiver was based on an opinion reasonably formed. However, if that were a condition for the exercise of the Court's power to appoint a receiver, I would be satisfied on the basis of the material in the inspectors' report that founded the application[5] that the Board's opinion that the appointment of a receiver was necessary to protect the interests of clients in relation to trust money or trust property was an opinion that was reasonably formed and that its belief in the matters described in s 5.2.1(d)(i) - (vii) of the Act was formed on reasonable grounds.

28 In any event, in the present case there is no requirement for the Court to satisfy itself that the Board's determination to apply for the appointment of a receiver was based on an opinion reasonably formed that it was appropriate that the provision of legal services by the practice be wound up and terminated, for that is not the basis upon which the Board made its determination to apply for the appointment of a receiver. The current application was made on the basis that the Board had formed the view that it was necessary to apply to the Court for the appointment of a receiver to protect the interests of clients in relation to trust money or trust property. Accordingly, the determination made by the Board to apply for the appointment of a receiver was not inconsistent with the determination that it made to appoint a supervisor of trust money.

29 Although it is the role of the receiver to be the receiver of regulated property and to wind up and terminate the affairs of the practice, a receiver is not required to wind up the practice. Sections 5.6.1 and 5.6.5 permit the Court to impose conditions on the appointment of an intervener and to give directions in relation to any matter affecting the intervention or the intervener's powers, duties or functions under the Act. The receiver is at all times subject to the control of the Court, and in appropriate cases, the Court can direct him or her not to wind up the law practice.

30 Finally, the use in s 5.5.2(2) of the disjunctive "or" between the paragraphs providing separately for the appointment of a supervisor, a manager and a receiver is not determinative. The Act expressly provides that more than one determination may be made under s 5.2.2 of the Act in relation to external intervention. Section 5.2.2(3) provides that further determinations may be made "from time to time". Moreover, ss 5.5.4 and 5.6.5A contemplate the coexistence of a manager and a receiver.

31 The third and most substantial ground for submitting that the preconditions for the exercise of the Court's jurisdiction do not exist therefore fails.

32 As to the absence of urgency in pursuing the application, the time that it has taken to bring the Board's application to a conclusion has been in part due to the defendant's vigorous opposition to the application. A supervisor of trust money was appointed to the law practice when it became evident that the application to appoint a receiver would not be heard and determined for some time. The effluxion of time is not fatal to the application. The files in question are for the most part closed, funds have been appropriated to pay legal costs and disbursements and the balance of settlement moneys has been paid to clients. What is said to be required is a thorough review of those actions. There is no exceptional urgency to that task. It is not suggested that the funds will be dissipated if a receiver is not appointed straight away.

33 As to the first ground raised by the defendant, that the law practice has fixed the problem and there is no need for the appointment of a receiver, that is a matter for determination by the Court.

Further preliminary issue: The validity of the Board's resolution

34 In closing submissions, the defendant submitted that the Court lacked jurisdiction to appoint a receiver on the basis that s 6.2.16 of the Act had not been satisfied. Section 6.2.16 concerns the procedures of the Board and provides for resolutions to be passed by the Board without meetings. Section 6.2.16(1) provides:

If -

(a) the Board has taken reasonable steps to give notice to each member setting out the terms of a proposed resolution; and

(b) a majority of the members, including at least one appointed member and one elected member, sign a document containing a statement that they are in favour of the resolution in the terms set out in the document -

a resolution in those terms is deemed to have been passed at a meeting of the Board held on the day on which the document is signed or, if the members referred to in paragraph (b) do not sign it on the same day, on the day on which the last of those members signs the document.

35 In her affidavit sworn on 14 October 2009, Amalia Castos deposed that on 21 May 2009, she caused an email to be sent to members of the Board attaching a facsimile response sheet for a vote pursuant to s 6.2.16 of the Act in respect of a resolution to be made by the Board without a meeting. The resolution was, in summary, that the Board apply to the Court for the appointment of a receiver to the law practice on the grounds set out in s 5.2.1(d)(i)-(vii) of the Act.

36 On that same day and on 22 May and 25 May 2009, she received signed copies of the circular resolution from four Board members. Two of these were sent by facsimile, one was delivered by hand and one was forwarded by email. The resolution received via email was signed electronically. The covering email stated:

Dear Debbie, Please find attached my response re Hollows. The signature is typed in as I am away at the moment and don't have access to a printer.

37 It is clear from this email that the signatory, Ms Bennett, intended the electronic signature to stand as her signature.

If, by or under a law of this jurisdiction, the signature of a person is required, that requirement is taken to have been met in relation to an electronic communication if -

(a) a method is used to identify the person and to indicate the person's approval of the information communicated; and

(b) having regard to all the relevant circumstances at the time the method was used, the method was as reliable as was appropriate for the purpose for which the information was communicated; and

(c) the person to whom the signature is required to be given consents to that requirement being met by way of the use of the method mentioned in paragraph (a).

39 It was the defendant's submission that compliance with s 9(1)(c) had not been established: there was no evidence before the Court that the person to whom the electronic signature was required to be given had consented to the requirement being met in this way. In order for the Board to avail itself of s 9 and rely on the resolution signed by Ms Bennett, the Board had to formally consent to Ms Bennett using a typed signature. Consent would have to have been given at the time of the resolution, and not subsequently. It would have to have been exhibited to Ms Castos' affidavit.

40 In response to this, the Board submitted that there was no requirement in the Act for the consent of the person to whom the signature is supplied to be in writing or otherwise formalised. It is plain that the Board did consent to the receipt of Ms Bennett's electronic signature, because it instituted the proceedings on the basis that the resolution had been agreed to by the four members required. The determination to apply to appoint a receiver had properly been made.

41 The Board also submitted that the common law has long held that a signature is not necessarily the writing in of a name, but may be any mark which identifies it as the act of the party.[6]

42 In my view, it is clear that the Board consented to Ms Bennett providing her signature in the form that she did. As appears in the covering email, Ms Bennett intended her typed signature to stand as her signature. The Board instituted these proceedings on the basis that she had voted to adopt the resolution.

43 Accordingly, based on the determination made by the Board to apply to this Court to appoint a receiver, I propose to consider whether a receiver should be appointed to the law practice on the basis of the extensive evidence that was led by the parties in this proceeding.

Yet another preliminary issue: The exclusion of persons from the court

44 On 9 November 2009, prior to the commencement of the hearing of the receivership application and upon an application by the defendant, an order was made under s 5.5.1(4) of the Act ordering from the precincts of the Court any person who is not -

(b) a party or any of the persons associated with the party referred to in s 5.1.1(4)(b);

(d) a person who is about to or who is in the course of giving evidence.

45 On 12 November 2009, on the fourth day of the hearing, two persons entered the courtroom and sat down in the public area, apparently for the purposes of listening to the application. I was informed by counsel for the defendant that the persons in question were well known to the defendant as lawyers employed by the Australian Government Solicitor who had been charged with the conduct of the Melbourne Voyager litigation on behalf of the Commonwealth. I was informed that the defendant had a very strained relationship with them because of the manner in which that litigation had been conducted and that he was 'embarrassed' by their presence in the courtroom. Counsel for the defendant asked that I direct them to leave the Court in compliance with the order that had been made under s 5.5.1(4) of the Act.

46 Pursuant to s 2.3.9 of the Act, a person admitted to the legal profession under that Act becomes an officer of the Supreme Court of Victoria. Section 5.5.1(4)(a) exempts from the order to leave the precincts of the Court, "an officer of the Court". The Court had the benefit of detailed and helpful submissions from counsel for the defendant on whether the persons in question, who were admitted to practice in Victoria, were 'officers of the Court' for the purposes of s 5.5.1(4)(a). In essence, counsel for the defendant submitted that an officer of the Court for the purposes of s 5.5.1(4)(a) of the Act did not include a person who was an officer of the Court merely because he or she had been admitted to the legal profession under the Act.

47 The question is not an easy one. However, I decided that persons admitted to the legal profession under the Act were not excluded from the precincts of the Court by reason of the order that had been made on 9 November under s 5.5.1(4)(a) of the Act. My ruling on that question has been published separately.

48 Throughout the hearing of the Board's application, the defendant made repeated applications pursuant to ss 18 and 19 of the Supreme Court Act to have those persons and two former employee solicitors of the law practice who also attended from time to time excluded from the Court on the grounds that their presence prejudiced the administration of justice. I was informed that one of the former employee solicitors had made a complaint to the Legal Services Commissioner about the defendant and that the defendant viewed him as the reason for his difficulties with the LIV inspectors. It was submitted that the defendant felt intimidated by the presence of these people and would be impeded in the presentation of his case and in giving his evidence if they were allowed to remain in the court. I was told that one of the persons was making eye contact with the defendant and would "look daggers" at him. However, I declined to order the people in question to leave the Court, as I could not be satisfied on the material before the Court that their presence in the courtroom prejudiced the administration of justice.

49 I observed the defendant's demeanour in the witness box and at the bar table. He gave evidence in a manner that was confident and emphatic. He showed no sign of being intimidated by the presence of the persons to whom he objected. Likewise, I saw no sign that his ability to instruct his counsel was in any way affected by the presence of the relevant persons in the courtroom. He energetically and effectively instructed his counsel throughout the hearing. In this context, I should say that the four persons were rarely in the courtroom at the same time. I saw no evidence of aggressive staring or anything of that kind from any of them. To assist the Court, they agreed to sit where the defendant could not see them during the defendant's evidence. I am satisfied on the basis of my observations of the defendant's demeanour and the way that he gave his evidence that he was not intimidated by the persons in question.

50 In resolving to bring the application to appoint a receiver to the law practice, the Board relied on a report of an inspection of the law practice carried out by trust account inspectors employed by the Law Institute of Victoria Ltd ("the LIV") in November and December 2008. The report, dated 28 April 2009 ("the Chun Report"), was prepared by LIV inspector, Mr Colin Chun on the basis of the inspection carried out by Mr Chun and a former LIV inspector, Ms Val Kozovska, (who left the employ of the LIV on 24 February 2009).

51 Mr Chun and Ms Kozovska were appointed on 28 October 2008 by the chief executive officer of the LIV, Michael Brett Young, as inspectors pursuant to s 3.3.29 of the Act to conduct an investigation of the trust accounts of, and records relating to trust money received by, the law practice.[7]

52 Mr Chun and Ms Kozovska examined a sample of 12 of the approximately 82 Melbourne Voyager files handled by the law practice.

53 Pursuant to s 3.3.47 of the Act, an inspector must give a written report on the investigation to the Board as soon as practicable after completing an investigation. Prior to the preparation of the Chun Report, Mr Chun and Ms Kozovska wrote to the defendant setting out in detail the matters that had been identified giving rise to potential breaches of the Act and the Regulations and requesting written explanations and information from the law practice. The defendant responded in two letters dated 5 March 2009, which included a large number of attachments. The Chun Report was prepared after receipt and consideration of the defendant's responses.

54 The Chun Report identified irregularities in the law practice's trust account and records, which constituted breaches of the Act and Regulations by the law practice. These included failure to deposit trust money into the general trust account kept by the law practice (s 3.3.13 of the Act), failure to disburse trust money in accordance with the directions given by the client (s 3.3.14(1)(1b)), failure to account for trust money as required by the Regulations (s 3.3.14(3)), deficiencies in the law practice's trust account, principally arising from the law practice appropriating trust moneys for the payment for invoices that included disbursements that had already been paid from the trust account (s 3.3.21) and failure to notify irregularities in trust accounts (s 3.3.22).

55 The Chun Report identified two main types of breaches of the trust account provisions:

(a) In three files, the same item of disbursement had been billed twice to the client and paid twice ("the double billing of disbursements");

(b) In nine of the files examined, there had been a double payment of disbursements by the client on a slightly different, but more troubling basis. Disbursements were billed once, and paid once from funds held in trust for the client, but then subsequently appropriated or deducted from settlement moneys received on behalf of the client ("the double payment of disbursements").

56 The double payment of disbursements was the issue that occupied most of the Court's time. The sums of money involved were significant and the law practice benefited financially from the errors. In each case, the double payment of disbursements gave rise to a trust account deficiency, and a breach of the Act and the Regulations.

57 The Chun Report also found that GST had been charged on amounts that already included a GST component, and had thus been charged twice. This also gave rise to trust account irregularities, and breaches of the Act and the Regulations.

58 In addition, the Chun Report identified a number of other areas of non-compliance with the Act or the Regulations:

(a) failure to provide trust account statements upon completion of the file;

(b) failure to disburse trust moneys as directed;

(c) failure to pass on to the client discounts given by barristers;

(d) withdrawal of funds notwithstanding that costs were disputed;

(e) costing in a manner inconsistent with fees agreements;

(f) discrepancies between bills and work in progress reported.

59 In addition to these matters, the Board relies on further matters, in particular the manner in which the defendant proceeded to rectify the irregularities that had been found. The Board also points to the fact that the defendant has been unable to give a cogent account of how the double payment of disbursements actually occurred.

60 The double payment of disbursements in nine of the 12 files examined by the inspectors resulted in the law practice paying itself from trust funds approximately $370,000 to which it was not entitled. The Chun Report sets out the amount of third party disbursements paid from trust and billed again in invoices sent to the relevant clients:

61 In his affidavit sworn on 2 June 2009 in support of the Board's application, Mr Chun explained how he believed the double payment of disbursements had occurred:

The circumstances in which this (possible) offence occurred was that in many, if not most matters that I reviewed during the course of my investigation, the law practice renders a Bill of Costs before any settlement moneys are received. The correspondence sent to clients includes a statement of account. As a general practice, once the settlement moneys are received by the law practice its costs are paid to the general office account. However, no adequate accounting is provided to the client. Accordingly, the client does not know all the necessary details of the trust moneys received by way of settlement moneys by the law practice and how those moneys have been disbursed by the law practice.

62 To similar effect, in its opening statement the Board explained the double payment of disbursements by reference to the sequence of events in each file examined by the inspectors as follows:

(a) settlement agreement is reached with the Commonwealth;

(b) the defendant's practice sends the client a bill for professional costs and disbursements (raised from the client debtor account) together with a trust account statement to the date of the bill, as required by Regulation 3.3.34(4);

(c) settlement funds are received from the Commonwealth by the law practice on behalf of the client;

(d) disbursements are paid from funds in trust (i.e. settlement funds) to third party creditors; and

(e) the defendant's practice appropriates/deducts from the remaining settlement funds the full amount of the bill rendered to the client (as in (b) above), including all disbursements.

63 The Board says that for each client file examined by the inspectors, in all but the final series of transactions, some step was taken by the law practice to credit a paid disbursement in the client debtor account. As a result, disbursements paid before settlement moneys came in do not appear to have been billed twice to the client, and the debtors ledger does not show the third party debit (disbursement) amount as outstanding. This is as it should be. However, in the files examined, the final series of transactions following receipt of settlement moneys resulted in amounts for disbursements being taken by the defendant on account of professional costs. This resulted in the double payment of disbursements and, correspondingly, in the creation of deficiencies in the law practice's trust account. Clients could not have become aware that they had paid twice for disbursements because, contrary to s 3.3.28(6)(a) of the Regulations, no final trust account statements were sent to them. The Board submits that the double payment of disbursements would have been apparent if final trust account statements had been prepared and sent to clients, as required, and would have been avoided if invoices had been checked against trust account statements before funds were taken by the law practice on account of costs

64 It is therefore the Board's contention that the trust account deficiencies arising from the double payment of disbursements occurred as a result of the manner in which the post-settlement transactions (involving the payment of large invoices by appropriation from the trust account) were carried out by the law practice and the fact that final trust account statements were not prepared when they should have been.

65 From the outset, the defendant freely admitted that accounting errors were made resulting in the double payment of disbursements. He said that the double payments were made in error, and I accept this. Both he and members of the staff of the law practice gave evidence that they were extremely shocked when they learned from the inspectors about the double payment of disbursements. I also accept this evidence. I find that the trust account deficiencies resulting from the double payment of disbursements were created inadvertently.

66 That, however, is not the end of the matter. The question remains whether the double payment of disbursements could and should have been avoided by more careful management of trust funds and trust account records by the defendant. In particular, the preparation of final trust account statements - as required by the Regulations - would have exposed the problem. That basic requirement was not met by the law practice.

67 The defendant gave an explanation for the double payment of disbursements that was based on defects in the accounting software used by the law practice. From 2005 onwards, the law practice used accounting software known as "Infinity Law". When advised orally of trust account irregularities identified by the inspectors in late November 2008, the defendant was concerned to identify the cause of the problem and to remedy it without delay. However, the defendant decided very quickly that the errors were not his or those of his staff, but were instead attributable to the Infinity Law accounting package.

68 On 27 November 2008, the law practice wrote to the inspectors confirming that it had requested comments from Mr Chun and Ms Kozovska on the appropriate way to rectify the trust account irregularities identified by them. The law practice stated that the problem needed to be attended to urgently and that consultations had already taken place with its trust account auditor to ensure that it was complying with its statutory obligations. The letter states:

It is now apparent to us the infinity computer package seems to be the problem.

69 On 28 November 2008, the defendant sent an email to the inspectors asking for details of alleged irregularities in order to enable deficiencies in the trust account to be rectified immediately. The email states:

I met with you today and indicated I was seeking an urgent meeting with infinity law for the purposes of rectifying the situation. It appears to us that the package is flawed in allowing the alleged deficiencies to occur in the first place. I advise that Kate Hay who was previously employed by infinity law was employed by us from 6 February '08 to 24 September '08, was responsible for our accounts and she did not pick up any of these alleged deficiencies. She was engaged in training staff to use the infinity package generally.

70 On that same day, the defendant wrote to Mr Male, the firm's trust account auditor, seeking help in reconciling the existing accounts "and advising me as to what changes you recommend should take place in the software package."

71 On 1 December 2008, the defendant wrote to the Board referring to a "form 5" that had apparently previously been submitted and making the following qualification to the form:

Due to an [sic] accounting errors caused by the accounting package, I am taking urgent measures to rectify the problem.

72 On 3 December 2008, the law practice wrote to the then LIV president, Anthony Burke, regarding the Infinity Law software. The letter describes the law practice contacting the LIV in late 2004 to seek its views on software packages and refers to the fact that it was advised that the Infinity Law software had no problems as far as the LIV was concerned. The letter continued:

It has subsequently transpired that the package has an inherent defect which has caused us to unwittingly provide accounts which are in error. Lindy Thewlis who is the Australian representative for Infinity Law advised our Mr Forster that she could have made exactly the same mistake as was made by our accounting staff. Given the ramifications of the errors and our Mr Forster's responsibilities we have taken a number of steps to rectify the problems. Infinity Law has now installed a new package to rectify the problem.

73 From that point onwards, the defendant vigorously pursued the LIV in relation to its knowledge of problems with the Infinity Law software package. It was the defendant's contention that he had been unfairly targeted by the LIV, which knew about the propensity of the Infinity Law software to cause the errors that were made by the law practice and failed to alert it to the danger. I deal with the allegations made against the LIV below, so far as those allegations are relevant to the measure of fault that can be attributed to the defendant and his staff for the trust account irregularities that were identified.[8]

74 On 10 December 2008, the law practice wrote to the manager of Legal Services at Fujitsu in New Zealand, which owned and developed the Infinity Law software. The letter stated that the law practice had previously advised Fujitsu of serious accounting problems caused by the Infinity Law software: "As explained, the package has resulted in double-dipping of clients' accounts and very substantial disruption to our business." The law practice sought to obtain from Fujitsu agreement that Fujitsu provide training courses to its accounts staff, suspend licence fees and make a representative available to assist in addressing the problem at the law practice.

75 As it transpired, Ms Lindy Thewlis, a representative of Infinity Law, did attend at the law practice on an ongoing basis throughout January and February 2009 to assist with redressing the accounting errors that gave rise to the double payment of disbursements. I deal with the manner in which the law practice remedied the double disbursement and other trust account irregularities in detail below.[9]

76 On 3 February 2009, the inspectors wrote to the defendant setting out in detail the problems that they had identified as giving rise to possible breaches of the Act and Regulations, including, but not limited to, the double payment of disbursements. In its letter of response dated 5 March 2009, the law practice explained the double payment of disbursements as follows:

At this time the software did not offset creditor trust payments against creditors recorded invoices. The software has since been rectified and it notes now if paid from trust it offsets to the creditors invoice. If the creditors invoice is unbilled it reduces the amount owed to the creditor and if it has been billed it returns the outstanding debt to Hollows Lawyers and the creditor's invoice. The Infinity Law system was originally designed for New Zealand audit rules where they have no separate trust account. This is no longer an issue.

77 The 5 March response to the inspectors also said:

We believed at the time that the disbursements previously billed were written off when the credit note was done. As explained the Infinity Law package did not write off the value of its disbursement from the bill. The new updated Infinity Law release has since resolved the problem.

78 In his affidavit sworn on 18 August 2009, the defendant explained the accounting errors as being due to a combination of factors including -

Infinity Law software problems including design failures and data conversion limitations;
Infinity Law software designed for New Zealand jurisdiction where practitioners maintain only a trust account;
poor training and resources provided by Infinity Law and its Victorian agent;
the fact that the Law Institute of Victoria approved an accounting package which did not comply with all Acts and Regulations and failure to provide assistance to practitioners using the package it knew was flawed;
the failure of the Law Institute of Victoria to advise solicitors of problems that it knew existed with Infinity Law package; and
the difficulties experienced by the firm's external accountant and external auditors in detecting complex accounting errors.

79 The defendant also deposed to the fact that, after inspecting documents subpoenaed from the LIV, he believed that the Infinity Law software package did not comply with Victorian trust accounting requirements, including the Act and the Regulations.

80 In cross-examination, the defendant singled out the double payment of disbursements as the substantial problem identified by the inspectors in terms of the number of files and the quantum. He was asked whether he attributed that problem to the flaws in the Infinity Law software. He said that he did. He then said:

Well in terms of the situation the flaws - the flaws are caused firstly by the fact that with the Infinity Law system we - our operators did our credit note and as a result of doing a credit note they put in the statement 'moneys paid from trust'. Now in terms of that particular problem that problem is caused by a badly designed system, a system that's been badly explained to the operators ... .

81 In essence, it was the defendant's case that the Infinity Law software required a three stage process to be followed by the law practice to avoid the double payment of disbursements. The law practice had known about and carried out the first two stages, including the entry of credit notes in the office accounts to reflect payments made from the trust account for disbursements. The third stage, involving the creation of a hitherto unknown document called an 'adjustment note', had not been carried out by the law practice because it was not aware of the need to do so.

82 The double payment of disbursements occurred when the law practice appropriated settlement moneys from trust to pay third party disbursements and then appropriated further moneys from trust to pay its own invoices. The defendant was repeatedly asked in cross-examination to describe the steps he took to appropriate money from trust to pay third party disbursements. His attempts to answer to this question resulted in a number of lengthy diversions which are not relevant for present purposes. He said that where there was money in trust, disbursements would be paid from the trust account. If the invoice for the disbursement had already been entered into the debtors ledger, the balance of the office account had to be reduced. He then said:

And that step - and that step of reducing off and taking it down is not done by a credit note, it has to have - it's a three - it's an extra step in the process and you have to do the adjustment note. I think I can't really explain myself any more clearly than that.

83 The defendant was also asked what he checked an invoice against before making an appropriation from trust to pay it. The defendant answered that he could not be specific. When pressed for an answer, he said "Well, you - you check against the invoices." He then said that there would be a whole range of factors, including whether the bill was due and payable, whether the bill was for the right amount, what the instructions were from the client, what the position was as to what the client knew, what had been agreed, what the oral and written agreement was. He said:

Solicitors' office and trust accounts are fairly complex creatures. You've got all these sorts of things and they're not just something where you flick a switch and then you say bang bang bang. So you just have to be prudent and careful, and when you consider what you do is that you have to - you obviously - you cross-reference people with - cross-reference your decision against the accuracy of the invoice. And these cases were frankly a nightmare. They were a nightmare because of the fact that all the invoices, no win, no fee, changing invoices, double invoices, they were very difficult cases ... All I can say to this court is I believe I was prudent and careful. Obviously we've made mistakes. We didn't pick up on the double - double accounting and I rue the day that I didn't pick up on it, but at the end of the day I'm not Superman and I try to be prudent and I try to be careful.

84 In my view, the defendant did not provide an adequate explanation of how the double payment of disbursements occurred and why the payment of disbursements from trust was not identified by the law practice before further appropriations were made from trust to pay the firm's invoices. It is not correct to say that the step of entering a credit note did not reduce the office account and that something more was required. In fact, the entry of a credit note was effective to ensure that a payment from trust was reflected in the office accounts.

85 The practice manager for the law practice, Mr Andrew Scott, had a better understanding of how the problem occurred, which he described in his affidavit sworn on 17 August 2009 in the following terms:

I was [sic] believed that Infinity Law would not allow moneys to be taken for our fees before the disbursements were paid. I was also aware that these disbursements were usually paid from trust once settlement moneys came in and later removed from the client's invoices using credit notes prior to the firm taking its due fees. I believed that this was correctly done.

The credit note entry included words like "paid by Trust" as this was the reason for removing them from the client accounts. I believe the accounting system was reducing the clients account at the same time as marking the disbursements as paid. Infinity Law's built-in warning regarding unpaid disbursements stopped after completing the credit notes. I was not aware that a further step of doing an adjustment note, for the same items and the same values as the credit note, was also required to actually reduce the client's account value. In fact I was not aware of the existence of adjustment notes at all, I did not know what they did or how to use them.

From a management point of view the procedure for paying disbursements from trust, writing them out of the client accounts and then taking our fees seemed to be correct and in accordance with trust procedures. With the benefit of hindsight I now know that when the Infinity Law accounting package was introduced the training was completely inadequate.

86 Mr Scott was asked in examination-in-chief to describe the manner in which the double payment of disbursements error arose. He said as follows:

Alright. The clients go through their case. Now over the years the clients cases instead of taking a few years ended up taking eight to ten years, a long long time. There was a number of legal delays involved. There were things that had to go to the High Court, and other matters, but it took a lot longer than the clients or we expected. But during those years we would bill them for disbursements, but not for barrister bills and the like, because barristers bills and the like were like us, no win/no fee - they got paid at the end. But other disbursements that came along we would bill the clients for during those years, so they would get some bills. However, when it came up to the finalisation of the matter, whether it was in court or through a mediation, for the client to make a proper assessment of what his position is, and what debt he is in, at the time of the mediation we gave him a cost estimate which listed all the costs of all the barristers, all the court's costs, all the travel, all the doctors, all the psychologists, all the costs involved in the case, we made a very comprehensive document called a cost estimate, we gave them that. We gave them copies of potential bills, a draft bill - the draft bill would be a listing of all of the disbursements he had not yet been charged, plus all of our bills, which up until that time he wouldn't have seen our fees. So he suddenly gets this bill for hundreds of thousands worth of fees, and sometimes hundreds of thousands of disbursements ... It must have been very hard for them to take it in, but he would get this draft bill and he would be told "This is the amount that is outstanding on your account. It's not the final bill, because we can't bill until it's actually settled." Then the settlement would take place, and assuming he did settle it in mediation that draft bill within a few weeks would become the final bill, and he would be given a copy of this final bill. It did have a trust statement, all our bills have trust statements attached. Now, at that stage all the disbursements as far as barristers go would be listed in that bill, but they would be listed as accounts owed by the client, because they - at that stage they're accounts owed by the client. It takes 28 days for the cheque to clear from the time they finish their legal paperwork, sometimes it's a couple of months before the money came in, but when the money came in it would be put into the Hollows trust account. From the trust account we then send off a cheque to the client. At the time of the settlement we had instructions to settle document which listed the amount he was basically going to receive, this is the time that they knew they were going to settle, and the amount he would be paid out of that settlement. So we would know exactly how much the client was getting out of it and he would be sent off his cheque. We would then go through the barristers and other disbursements that hadn't yet been paid and pay them. If we tried to take money at that point in time, or Hollows money, the computer system would not allow us, it would pop up "warning" would appear in the middle of the thing saying there is still disbursements outstanding on this, you can't take your professional fees. We would then have to do a credit note to remove the professional fees, so each one of the professional fees we had to do a credit note for, so we'd have a bill there for Mr [Barrister X] for $2,200, we'd have to go and do a credit note on that. Then we'd have another bill for Mr [Barrister Y] for $3,200, we'd do - and there was sometimes listed 20 or 30 credit notes, we had to do individual credit notes for each of these. At the time we did those credit notes - I've always liked computers, I always thought computers worked for you and not against you - I thought that was automatically taking them off the bill as well. I thought when we did the credit note it was credit noting the original account and taking it out of our account. It didn't. All it did was take it out of our accounts payable and left it on our account. Now if you do it now since they've done their computer upgrade when you write a trust cheque - I'll just step back one - Australian Software Programs, if Mr [Barrister X] is owed $2,200 you can write the trust cheque for Mr [Barrister X]'s bill, it will pay the bill and reduce the client's account automatically. With the new software upgrade they put in in mid 2008, which we put in in the end of 2008, it now does that, it automatically does credit note and adjustment note, adjust the bill. It automatically does the two steps automatically and that's what I thought credit notes were doing, and they weren't.

87 Mr Scott was also asked what steps he followed when he wrote a trust cheque. He answered:

Well the trust cheque just paid the account. It didn't link in any way to all the - when we got say Mr [Barrister Y]'s bill in 2002 and put it in our system it would go into the accounts payable and it would still be sitting in accounts payable, it wasn't linked by the trust cheque to the accounts payable. So we would do the trust cheque to Mr [Barrister Y], pay his account. We'd then go to the accounts payable and do a credit note and take it out. So that was the step we did do. What we should have done as I now know is do an accounts - go into accounts payable, do a credit note and take it out and then do virtually the same thing again using an adjustment note to take it out of the bill. That part I wasn't aware that we had to do and wasn't aware that we had to do it until the inspectors arrived, and until they pointed out that it's a problem, and even then we didn't know it was called an adjustment note, it wasn't until Lindy told us later and they said what you have got to do is the adjustment note.

88 Mr Scott gave evidence that the first time he learned of the process that would enable payments of disbursements from trust to be taken over to client bills was when he met with Lindy Thewlis on 1 December 2008. "Myself, Mr Forster and Lindy sat down and said, okay we've got these problems, how do we fix them, and Lindy said, well you can do it by adjustment note. I said, 'Well, what's an adjustment note?', and she showed me and it was very, very complicated and it took me a while before I picked it up. But that was the first I heard of an adjustment note to reduce the bill".

89 Mr Scott, when taken to a debtor's ledger exhibited to the affidavit of the firm's bookkeeper, Ms Mulyadi, agreed that credit notes reduced the client's balance in the debtors ledger. However, he said that it did not reduce the bill. In order to reduce the bill another step had to be taken. He agreed that the information in a bill about disbursements was taken from the debtors ledger. He said: "If a bill had not been done, and it was done it would take information from the debtor's ledger, but if you reduced the debtor's ledger at some later stage it doesn't affect the bill. It doesn't affect that bill that's already been done. ... And that's what we had not done, this is what we hadn't done, the adjustment notes. They were needed to reduce the original bill."

90 This picture is obscured by the evidence of Sherly Mulyadi, the law practice's part-time bookkeeper. Ms Mulyadi commenced working at the law practice on 24 April 2008. In her affidavit sworn 12 August 2009, she explained that she was trained to produce credit notes. Her training notes were exhibited to her affidavit. The process involved prefixing the invoice with the notation "CN", describing the entry as "paid by trust - reversed on [client name]" and entering an amount "in the negative".

91 Ms Mulyadi deposed to first learning about adjustment notes in December 2008 from Lindy Thewlis. These were to be used, "when you pay a Barrister from Trust or another disbursement from Trust and it is already billed to the client." She said that she did not previously understand that the office account had not been reduced by doing credit notes. "In the description column, I would type in 'paid by Trust - Reversal and the name of the account.' I believed incorrectly that this meant that the office account would be reduced." She gave as an example an item in the debtors' ledger of the client Ramsay which reads:

Barristers Fees SHARPE

J.L. Sharpe Inv

CN120905 (Paid) Paid by

trust-reverse from

Ramsay's Account

92 The example is not a good one, because it is evident from the debtors ledger that the reversal has reduced the balance in the debtors ledger by the correct amount. Indeed, in a suite of similar entries following the entry in question, each of which is annotated "paid by trust" and "reverse from", the balance on the ledger is duly reduced by the relevant amount.

93 Ms Mulyadi was asked in examination-in-chief whether she was aware that when a cheque was paid from trust, the payment was not automatically recorded in the client's bill. She answered in the negative. She said that she thought that by doing a credit note it would reduce the client's bill automatically, but somehow it still allowed the law practice to take the money without giving any warning that the amount had already been paid by trust.

94 In cross-examination, Ms Mulyadi was taken to the example in her affidavit of an entry in the debtors ledger described as having been "paid by trust". This was the entry for payment to Mr Sharpe of $3,431.82. She was also taken to an earlier entry in relation to the same invoice from Mr Sharpe for $8,800.

95 Ms Mulyadi seemed confused by these two entries as she could not immediately reconcile them. The invoice from the barrister was for $8,800, but the reversal was only for $3,431. When asked to put the difference aside and concentrate on the entry for $3,431 as being an example of a reversal of a payment that had been made from trust, Ms Mulyadi suddenly decided that the payment might not have come from trust after all. Ms Mulyadi said she was pretty sure that the amount of $3,431.82 had not been paid by trust. Had it been paid by trust, the whole amount would have been reversed. She said it was not always the case that an amount had been paid from trust when a credit note was done: every time you reverse you do a credit note and write in "reversal - paid from trust". But that does not mean the payment has necessarily been made from trust.

96 Ms Mulyadi agreed that the reversal of the amount of $3,431 had two effects: first, it meant that the law practice did not send a second payment to the barrister for that amount; secondly, it meant that the client would not be billed for that amount. She qualified this last answer by saying:

It depends though, if the bill's already been - the bill already being created it won't come up.

97 Ms Mulyadi agreed that the amount owing by the client was reduced by the amount of the reversal.

98 The position is further confused by the affidavit of Kirsty Eccles sworn on 18 August 2009. Ms Eccles was employed by the law practice from 8 May 2006 to 24 December 2008. Her role was to manage its Sydney office in conjunction with the practice manager, Mr Scott, who was based in Melbourne. Ms Eccles deposed that she had worked in accounts in solicitors' offices for a number of years before joining the law practice and that she regarded her accounting skills as good. However, she found the Infinity Law accounting package complex. The packages she was familiar with had separate office and trust receipts and payment systems. She said:

Mr Forster requested me to reverse the office entries on most of the New South Wales files where write-offs were necessary prior to closing files. I now know that the process used to do this involved missing a step which I was not previously instructed to do.

99 Ms Eccles did credit notes to make write-offs, but was not requested to do a separate adjustment note.

100 The relevance of the write-offs in Ms Eccles' evidence is unclear. According to the evidence given by Mr Scott, 'write-offs' occurred only at the time of the closure of files. By contrast, credit notes were used on an ongoing basis to reduce the balance in debtors' ledgers in respect of disbursements that had been paid from trust.

101 The defendant also relied on an affidavit of Keith Anthony Fox sworn on 20 August 2009. Mr Fox had nothing to do with the law practice, but was the bookkeeper for another law practice in Castlemaine. That law practice also used the Infinity Law software in 2007 and 2008. Mr Fox described the difficulties experienced with Infinity Law as follows:

Initially Infinity would not allow payments from trust of disbursements recorded in the system. This would mean either a lengthy process of paying the disbursement from office and then reimbursing from trust or paying from trust and then reversing the original disbursement entry. Infinity Law provided an upgrade to allow paying disbursements from trust, after which we had errors with trust cheques appearing on our office reconciliations.

In August 2008 after an update the Infinity system allowed me to apply trust moneys to an invoice when there was no trust moneys being held for the client. The system had a feature allowing an invoice to apply any money held in trust towards the invoice. As a result it was causing a negative trust balance. The system often required you to resolve a problem manually when a good system would do it automatically. This meant you would have to do two or three entries and the extra entering often created more errors.

103 Again, this does not seem to me to explain the problem experienced by the law practice. Mr Fox plainly understood that the Infinity Law package required disbursements paid from trust to be manually reversed in the office account.

104 Finally, in relation to the double disbursement issue, the defendant relied on two affidavits of Lindy Thewlis, who worked in Infinity Law software support, sworn 6 August 2009 and 30 September 2009. Ms Thewlis' second affidavit repeats most of the matters in her first affidavit.

105 Ms Thewlis' first affidavit provides a cursory explanation of how the double payment of disbursements arose. According to Ms Thewlis, the double payments occurred as a consequence of the law practice missing one of the three stages required. These stages consisted of drawing the trust cheque, doing a credit note against the creditor and finally doing an adjustment note against the bill. The law practice had missed the final stage. As the law practice had "credit noted" the creditor's invoice, the system in effect considered that this invoice had been paid and therefore did not trigger any alarms at the time of receipting funds to the bill. The following explanation appears in the affidavit:

They however were making note on the credit note for the creditor that the entry had been paid from trust. This notation indicates that the person doing the account entry was under the mistaken belief that this was the correct way to ensure that the outstanding bill was reduced.

106 In her second affidavit, this statement was slightly modified to read:

Hollows were effectively making a note on the credit note for the creditor that the entry had been paid from trust. This notation indicated to me that the person doing the account entry was under the mistaken belief that this was the correct way to ensure that the outstanding bill was reduced.

107 No more detailed explanation of how the double payments of disbursements occurred was given in the affidavits of Ms Thewlis. However, in examination-in-chief Ms Thewlis was asked to describe to the Court the error that was occurring. She said:

The firm had paid the creditor from the trust account, but they had already sent a bill, raised a bill to the client. When - at the time this happened when you paid a creditor from trust you had to reverse the creditor's invoice and you also have to - reduce the debtor's bill so it was a three stage step. What Hollows had not done was reduce the bill, and I think this was - I think they were under the impression that when they did the creditor's invoice reduction that it automatically reduced the bill, and that wasn't the case.

108 Ms Thewlis explained what an adjustment note was. Examples of adjustment notes that were sent to clients were put in evidence. The examples in evidence were simply statements crediting a particular amount to a particular invoice. They were produced to rectify discrepancies arising from the inclusion in the invoice of disbursements that had already been paid by the client. However, because both the disbursement and the invoice had been paid on behalf of the client by means of an appropriation from trust, the adjustment notes in question did not prevent the trust account deficiencies arising in the first place. Moreover, the adjustment notes did not restore moneys representing the amount of overpayment to the client's trust account. They were simply a mechanism to enable the law practice to 'net off' the overpayments to itself against other moneys owing or that would come to be owing to the law practice.

109 The defendant provided written final submissions which attempted to explain how the problem arose. In these submissions, the defendant said:

The failure to link trust cheques to accounts was a major software fault. The fact that Infinity Law created a patch to fix this fault is recognition of the reality of the problem.

The defendant and his staff understood that the preparation of a credit note was the appropriate way to complete the reduction in the office account to the payment made from trust for disbursements.

110 Plainly, this is not a satisfactory explanation. The evidence was that a credit note did reduce the balance in the office account in respect of a payment made from trust for disbursements.

111 Written reply submissions were also prepared in which the defendant submitted that:

The computer system was designed to prevent payments being made from trust to office when there were outstanding disbursements. When looking at the screen and seeking to transfer moneys from trust to office, warnings would appear and the system would refuse to allow the transfer unless all outstanding disbursements were accounted for. If a credit note was done when a payment was made from trust, there would be no warning and the system would incorrectly allow the transfer. The large bills usually with partial write-offs and partial payments of accounts over a number of years made the errors more difficult to detect. The firm had regular checks to ensure all disbursements were paid but depended on the system and its warnings for trust to office transfers.

112 Not surprisingly, the defendant was requested to explain more clearly how the double payment of disbursements occurred. During final submissions, the defendant handed up a further outline providing the following explanation:

The office account is all the firm's accounts other than the trust accounts. These are kept in a ledger called the debtors ledger which is linked to other ledgers including the creditors' ledger.
At the time the client's bill is made or created, it draws items from the debtor's ledger (such as office payments for disbursements, disbursement expenses), from the WIP, and from trust.
When a trust cheque is drawn to pay creditors that were previously billed to the client, there was no link to the other accounts.
Hollows created a credit note in order to reduce the amount paid by that trust cheque. The credit note was produced in the accounts payable and we believed it was reducing the creditor's invoices and the linked debtor's ledger to the linked client's bill. In fact it only reduced the creditor's and debtor's ledgers and failed to reduce the client bills.
Later the firm ascertained that not only did it have to do a credit note but that it should also do an adjustment note containing the same information. [Court Book reference is provided.]
The new software package correctly links the trust cheque with the creditor's ledger reducing it and then reducing the debtor's ledger and reducing the client's bills at the same time. What it does now is what the Practice thought it always did.

113 The explanation that was given by the defendant in final submissions by counsel seemed to attribute the double payment of disbursements to the fact that the drawing of trust cheques to pay creditors would not be reflected in a bill that had already been prepared. Counsel for the defendant, when again pressed to explain what had gone awry, said:

The specific situation that we have got here arises when in fact the client's bill has already been prepared, and the credit note reduces - the credit note which was produced at the time the trust cheque was drawn would have the effect of automatically - would have the effect of reducing the debtors' ledger but not the client's bill. ... The problem, as I understand it, arises when the client was - the bill was prepared previously, for example for the mediation, and a cheque was paid from trust, the credit note was created, that reduced the debtors' ledger but it didn't reduce the client's bill which was sitting there.

114 In effect, it appears that the double payment of disbursements occurred because the client invoice was prepared before settlement funds were received and third party disbursements were paid. The invoice included amounts for disbursements. It was a static document. Settlement moneys were then received, paid into the trust account and third party disbursements were paid from those trust moneys. There was then a further appropriation from the trust account to pay the invoice as a whole (including the disbursements that had since been paid). This resulted in trust account deficiencies, because moneys were appropriated from trust for the same purpose twice. The law practice had the benefit of the second payment.

115 In these circumstances, it seems to me to miss the point to attribute the trust account deficiencies that were created by the duplicated appropriations from trust to defects in the Infinity Law accounting package and the failure to produce adjustment notes. If funds are appropriated from trust to pay costs and disbursements on the strength of an invoice that has already been prepared (and given to the client), but disbursements are also separately paid from trust without reference to the invoice, then surely that is a problem with the way that the accounting system is being used rather than a problem with the accounting system per se. Invoices were prepared before disbursements were paid and a credit note entered in the debtors ledger to reduce the balance owing by the client. This is a process issue, not a problem with the software. The manual entry of a credit note would have ensured that the running balance of the debtors ledger reflected payment of disbursements.

116 I find the suggestion that the problem arose from a failure to create adjustment notes very odd in circumstances where the invoice that the adjustment note 'adjusts' was sent to the client before the payments to which the adjustment note refers were made.

117 The law practice could have avoided the double payment of disbursements if, as the LIV compliance manager Mr Dunn suggested, it had produced and checked a final trust statement before appropriating money from trust to pay itself. The trust statement would have disclosed that the disbursements had already been paid from trust. A number of invoices and trust statements were put in evidence. Although the invoices were often very large (that is, they described a very large amount of work on the file over a number of years and ran over several pages), disbursements were separately itemised and were not nearly as large in number as the itemised services. Trust account statements were generally quite short. It would have been a simple matter to check the disbursements in the invoice against disbursements in the trust account ledger before appropriating moneys from trust for the payment of invoices.

118 On the evidence before me, therefore, I am not satisfied that the double payment of disbursements was due to a fault in the Infinity Law software. I accept that payments made from trust were not automatically recorded in the office account ledgers (that is, the debtors or creditors ledgers). Infinity Law was designed to and did quarantine the trust account from the office account - transactions recorded in the trust account would not be automatically recorded in the office accounts. This was well known to the law practice, which made manual entries in the form of a credit note each time a payment was made from trust.

119 It is uncontroversial that credit notes entered in the office account ledgers served to reduce the relevant balances. An invoice prepared using those ledgers would properly reflect the payment of disbursements from trust, and the client would not be billed again for those disbursements. However, the credit note did not, as Ms Thewlis observed, automatically reduce an invoice that had already been prepared. A further step was required to remove the paid disbursements from any invoice that had already been prepared. I find this unsurprising. I find that the defendant has not given a satisfactory explanation for the double payment of disbursements.

The defendant's knowledge of the double payment of disbursements

120 The Board contends that there is evidence from which the Court should conclude that the defendant became aware of the potential for the double payment of disbursements in 2007, well before the inspectors carried out the inspection. The Board points to four 'events' that it says demonstrate that the law practice was aware, or ought to have been aware, of the potential for the double payment of disbursements.

121 It is sufficient to consider the first 'event', which is an inter-office memorandum dated 16 May 2007 drafted by a solicitor in the practice's Sydney office, Susan Johnson, in the matter of Ramsay. The memorandum is addressed to Diane Dawson, Peter Scott and the defendant. It records that the defendant asked Ms Johnson to review a cost estimate that had been prepared for Mr Ramsay, compare it with the accounts folder and check all the correspondence folders for invoices. Ms Johnson went through all the correspondence folders, the accounts folder, and the trust and debtors ledgers in an attempt to work out what had been done over the past five years. She identified 21 issues requiring attention. Six of those issues involved the identification of a potential double payment of disbursements. For example, in relation to a disbursement for a transcript fee, Ms Johnson said: "$1,462 has been paid from trust. I am not sure why we are billing Mr Ramsay again for this item."

122 Five other disbursements were queried in the same terms: " ... has been paid from trust. I am not sure why we are billing Mr Ramsay again for this item."

123 Neither the defendant nor Mr Scott would accept that the memorandum drew attention to a problem with the law practice's accounting that could have led to the double payment of disbursements. They said that the purpose of the memorandum was to identify all disbursements in the matter, irrespective of whether they had been paid. As the Board pointed out, this does not meet the relevant point. The importance of the memorandum is the fact that Ms Johnson had identified that the practice's records were showing disbursements as unpaid, when in fact they had already been paid from trust.

124 In my view, the defendant, as principal of the law practice, and Mr Scott as its manager, should have followed up on the problem identified by Ms Johnson. It is plain that that follow-up did not occur and the manner in which both the defendant and Mr Scott sought to minimise the impact of the 16 May memorandum is worrying. The defendant ought to have been alerted by the 16 May memorandum to a potential problem with the recording of payments made for disbursements across its accounting system. However, I do not consider that the existence of the memorandum shows knowledge of the double payment of disbursements so that it could be said that the double appropriation of trust funds for disbursements was deliberate.

125 It is worth briefly mentioning the second 'event' identified by the Board, which are transactions which took place on 18 June 2007 in the matter of Rann. Mr Rann's debtors ledger records that on 18 June 2007, two disbursements which were the subject of an invoice rendered by the law practice were written off in the debtors ledger with the accompanying narration, "Disbs paid from trust". Mr Rann's trust account statement shows that the two disbursements had been directly paid from trust on 25 May 2007. Invoice No. 3919, which contained the two disbursements, was entered on Mr Rann's debtors ledger on 19 April 2007. Consequently, the two disbursements would have been available to be paid twice had they not been removed from the debtors ledger. The Board contends that the write-offs which occurred on 18 June 2007 were correct and necessary. However, Mr Scott gave emphatic evidence that they were not.

126 The write-offs in question, and a further entry which 'wrote up' an amount that was the sum of the two write-offs, generated a great deal of confusion in the evidence of the defendant, Mr Scott and Mr Lombardo, the accountant to the law practice. Mr Scott insisted that the entries writing off the two disbursements were incorrect. That is why an equivalent amount was 'written back in' on the same day. He could only imagine that the write-offs were a mistake, because the law practice would not write things off in the middle of a case.[10]

127 I do not accept this explanation, if it can be described as such. The more likely explanation is that the writing off of "disbs paid from trust" recognised that the disbursements had already been paid from trust and that these payments had to be recorded in the client's debtors ledger as credits. The law practice knew that a credit note, or something like a credit note, had to be entered in the office accounts if a disbursement was paid from trust. Why the reversal was described as a write-off in this instance, but as a credit note in other instances, is not explained. Why the write-offs were reversed by a 'write-up' is a mystery.

128 I have concluded that the double payment of disbursements was inadvertent. However, there were clear signs that should have alerted the defendant and his staff to a problem with the firm's accounting processes and which highlighted the need to make inquiries to ensure that trust moneys were dealt with in accordance with the Act and Regulations and the client was not left out of pocket by an accounting error.

129 Insofar as the 'events' referred to formed the basis for the Board's contention that the defendant failed to report trust account irregularities as required by s 3.3.22 of the Act, that failure is not made out in my view. The defendant was not aware of the double payment of disbursements until he was alerted to the problem by the inspectors.

Failure to provide final trust account statements

130 Regulation 3.3.28(6)(a) requires a trust account statement to be furnished as soon a practicable after the completion of the matter to which the ledger account or record relates.

131 At the conclusion of the inspection carried out by Mr Chun and Ms Kozovska, no final trust account statements had been sent out for any of the completed files examined by them. All but one of these files had been completed. Some of the files - for example, the matter of Rann - had been completed almost two years previously.

132 The defendant's explanation for the failure to send out trust account statements was inconsistent. On the one hand, he said that he did not realise there was a requirement to send out final trust account statements; on the other, he asserted that final trust account statements had been sent out in about two thirds of the files.

At a glance

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Judgment (468 paragraphs)

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Legislation Cited (7)

Cases Cited (2)