PUBLIC TRUSTEE v A-G FOR SA & LAW SOCIETY OF SA No. SCGRG-99-76 [2000] SASC 184

Supreme Court of SA|2000-06-30|Before: Gray JJ, Olsson J, Wicks J

Judgment No. [2000] SASC 184

On Appeal from JUDGE BURLEY (MASTER OF THE SUPREME COURT)

I agree with his conclusions and the answers which he proposes.

I particularly desire to associate myself with the concept which he has expressed concerning the interest bearing accounts. The actual pecuniary loss in relation to them was, inter alia, the loss of an income stream - not the mere loss of the relevant capital sum. Viewed in that light, the second answer proposed is inevitable.

WICKS J I have read in draft the reasons published by Gray J. I agree with the answers he gives to the questions asked. I also agree with his reasons for the conclusions reached.

GRAY J. Kemp, a solicitor, acted for the administrator of the estate of Vincent Stanley Bates ("the Estate"). He received and managed money the property of the Estate. Between May 1988 and October 1993 Kemp fraudulently converted to his own use amounts totalling $372,059.01.

Kemp's conduct came under scrutiny and he was charged with fraudulent conversion. He pleaded guilty and was sentenced to imprisonment. He has been struck off the roll as a practitioner.

Public Trustee took over the administration of the Estate and made claim against the Legal Practitioners' Guarantee Fund ("Guarantee Fund") for the capital sum of $372,059.01 and interest of $95,380.18. The Law Society admitted and made payment of the claim for the capital sum. It disputed the claim for interest. Public Trustee issued a summons pursuant to Supreme Court Rule 63.02, seeking, inter alia, a determination of the following question:

Is the interest claimed a valid claim, having regard to the provisions of

The matter came before Master Burley who answered the question "No". An appeal has been lodged by Public Trustee.

"2. Between February 1987 and October 1993, Kemp, in the course of his practice as a Legal Practitioner, acted for Rachel Cecilia Thomas, administrator pendente lite of the estate of Vincent Stanley Bates (deceased). In that period and in that capacity Kemp received and managed money which was the property of the estate of the deceased person. In the course of practice acting for the said Rachel Cecilia Thomas, Kemp received money and:- (a) paid some of it directly into his solicitors trust account for and on behalf of her as administrator of the said estate of the deceased; (b) paid some of it directly into a National Australia Bank account no. 785 03833 972 5967 in the name of 'Estate of Vincent Stanley Bates (deceased)'; (c) paid some of it directly into National Australia Bank fixed deposit accounts in the name 'Estate of Vincent Stanley Bates Deceased'; (d) transferred money from the said solicitors trust account into the said bank account (2(b) above) and fixed deposit accounts (2(c) above); (e) transferred money from account (b) above to account (c) above; (f) transferred money from account (c) above to account (b) above. 3. The said bank accounts identified in paragraphs 2(b) and (c) were interest bearing accounts. Kemp had no instructions permitting him to withdraw the said deposits or not to rollover the capital and interest on the said interest bearing deposits. 4. Between May 1988 and October 1993 Kemp wrongfully and without lawful authority withdrew sums totalling $372,059.01 from the said accounts identified in paragraphs 2(a), (b) and (c) and converted it to his own use. 5. On or about the 5th day of July 1995, Letters of Administration of the estate pendente lite of the said Vincent Stanley Bates deceased were granted by this Honourable Court to Public Trustee. 6. On 4th June 1996 Public Trustee made a claim against the Legal Practitioners' Guarantee Fund claiming both the said capital sum of $372,059.01 and interest which would have accrued thereon calculated at $95,380.18. 7. The second Defendant (the Law Society) has admitted the claim and paid the same so far as it concerns the capital sum of $372,059.01 with the authorisation of the Attorney-General but has made no determination with respect to the validity of the claim for the sum of $95,380.18 or any sum in respect of interest which would have accrued to the estate by reason of the said withdrawals of the said capital sum from the accounts identified in paragraphs 2(a), (b) and (c) above."

Solicitors' dealings with trust money are regulated by the Legal Practitioners Act 1981 ("the Act"). The Law Society of South Australia ("the Society") has responsibilities and duties with regard to trust accounts, as prescribed by the Act. The Society is required to maintain a Legal Practitioners Combined Trust Account ("combined trust account"). Section 53 requires legal practitioners to deposit "the appropriate amount" in the combined trust account twice a year. The appropriate amount is determined by formulae within subsections of section 53.

Pursuant to section 56, the Society is required to continue and maintain a statutory interest account and to pay to that account all interest earned by the combined trust account. The Society is authorised to use the statutory interest account to defray management fees and expenditure relating to the management or administration of the combined trust account and the statutory interest account. A portion of the interest earned is to be paid to the Guarantee Fund.

The Society has the further responsibility of continuing and maintaining the Guarantee Fund. As has been mentioned, money from the statutory interest account is paid to the Guarantee Fund and is then invested within that fund. Other money is payable to the Guarantee Fund. The Society is authorised to apply the Guarantee Fund for a number of purposes. Section 57(4)(g) authorises the application of the Guarantee Fund to meet the "costs of processing claims under Part 5 of the Act and of paying out those claims to the extent authorised by that Part."

Part 5 deals with claims against the Guarantee Fund. Section 60 provides as follows:-

"(1) Subject to this Part, where - (a) a person suffers loss as a result of a fiduciary or professional default; and (b) there is no reasonable prospect of recovering the full amount ´of that loss (otherwise than under this Part), the person may, by instrument in writing served on the Society, claim compensation under this Part. (2) The amount of a claim cannot exceed - (a) the actual pecuniary loss suffered by the claimant in consequence of the fiduciary or professional default (including the reasonable costs of making the claim); less (b) any amount that the claimant has received, or may reasonably be expected to recover (otherwise than under this Part) in reduction of that loss. (3) If a valid claim has not been satisfied as provided by this Part at the expiration of 12 months from the day on which it was lodged with the Society it is then, to the extent to which it has not been satisfied, increased by interest at a prescribed rate calculated from the expiration of that period. (4) No claim can be made under this Part - ... (b) in respect of a liability for which indemnity is provided under a scheme of professional indemnity insurance under Division 13 of Part 3.

"(1) The Society must satisfy any valid claim under this Part, to the extent determined by the Society or the Supreme Court, out of the guarantee fund. ... (6) The Society may, with the approval of the Attorney-General, make further payments to any person- (a) whose claim has not been satisfied in full by reason of the operation of subsection (2), or for any other reason; or (b) whose claim is barred, but any payment so made does not revive or reinstate a claim."

Section 5(1) defines fiduciary or professional default in relation to a legal practitioner as follows:-

"(a) any defalcation, misappropriation or misapplication of trust money received in the course of legal practice by the legal practitioner or a firm of which the legal practitioner is a member; or (b) any wrongful or negligent act or omission occurring in the course of the practice of the legal practitioner, or a firm of which the legal practitioner is a member, whether committed by the legal practitioner, an employee of the legal practitioner or any other person;"

"money includes any instrument for the payment of money that may be negotiated by an ADI;"[1]

"trust money means money received by a legal practitioner to which the practitioner is not wholly entitled both at law and in equity, but does not include money received by a practitioner in the course of mortgage financing;"

Kemp deliberately took money, the property of his client, and applied that money to his own personal benefit. This constituted fiduciary and professional default.

The money converted by Kemp falls into two categories, money deposited in Kemp's trust account, and money placed with a banker, in the name of the administrator of the Estate, in interest bearing bank accounts ("the investment accounts"). The Estate had no entitlement to interest on the trust money but was entitled to interest earned on the capital sum in the investment accounts.

It was submitted by counsel for Public Trustee that when Kemp misappropriated money from his trust account he was obliged to re-invest the money elsewhere for the benefit of the Estate and that his failure to re-invest was an omission within subparagraph (b) of the definition of "fiduciary or professional default." It was submitted that when the investment accounts were terminated and the money misappropriated, the loss to the Estate was of the existing investment, including the ongoing entitlement to interest.

The withdrawals from trust and the omission to re-invest were all part of the one course of fraudulent conduct. There is no evidence that Kemp had any instruction to withdraw money from trust and to invest in interest bearing accounts. Had the misconduct not occurred, the money would have remained in trust and the Estate would not have had the benefit of interest. At some point, the money would have been withdrawn from trust and paid to or on an account of the Estate. The agreed facts do not permit any finding as to when this may have occurred.

Different considerations apply to the investment accounts. This money was not held in trust. The legal title was in the administrator and the beneficial interest was in the Estate.[2]

Although Kemp apparently had some ability to deal with the investment accounts he had no instructions permitting the withdrawal of the deposits and had no instructions to do other than rollover the capital and interest. The withdrawals were wrongful and fraudulent. On withdrawal, the monies were impressed with a constructive trust. At that point, they became trust money as defined by the Act. The loss to the estate was the loss in the investment account, including interest that would have been earned according to the terms on which the money was invested.

20 The general purpose of the legislative scheme is to use interest from the combined trust accounts of legal practitioners to establish and maintain a fund to guarantee a measure of recovery to persons who suffer loss as a result of the fiduciary or professional default of a legal practitioner. The loss must be suffered as a result of a fiduciary or professional default. It is not envisaged that compensation will include all loss.

(a) the actual pecuniary loss suffered by the claimant in consequence of the fiduciary or professional default (including the reasonable costs of making the claim); less

(b) any amount that the claimant has received, or may reasonably be expected to recover (otherwise than under this Part) in reduction of the loss."

The Estate suffered loss in consequence of the fiduciary or professional default by Kemp. Section 60(4) precludes any claim in respect of a fiduciary or professional default when indemnity in respect of the liability is provided under a scheme of professional indemnity insurance. It was common ground before this Court that there is no entitlement to indemnity and that there is no reasonable prospect of recovering the full amount of the loss other than under Part 5. The issue to be decided is whether the interest claimed by Public Trustee is actual pecuniary loss.

The word pecuniary has a wide meaning and is to be contrasted with non pecuniary. The Oxford English Dictionary (2nd edition) defines pecuniary to include, "of, belonging to, or having relation to money; having regard to money; of which money is the object; resources in money; money matters." Interest is money paid for the use of money lent or money paid for forbearance of a debt. There can be no doubt that pecuniary loss includes a loss of interest.[3]

24 Counsel for the Attorney General emphasised the word actual and the phrase actual pecuniary loss and submitted that the use of the word actual operated to circumscribe pecuniary loss so as to exclude ongoing interest.

25 The word actual is defined by the Macquarie Dictionary, 3rd edition, as "existing in act or fact; real; now existing; present".

26 The Oxford English Dictionary contains the following definition - "Existing in act or fact; really acted or acting; carried out; real; - opposed to potential, possible, virtual, theoretical, ideal."

27 A loss of an entitlement to interest is no more than a loss of an income stream. Losses of an income stream have been treated as compensable and are pecuniary losses. If they are actual in the sense of existing, present and real, then they are actual pecuniary loss.

28 As observed earlier, there is a distinction between the trust money and the investment account money. There was no present or existing entitlement to interest on the trust money. The entitlement of the Estate was to the money in trust and that was what was lost. The investment accounts carried an entitlement to the capital sum and interest. The investment accounts were wrongfully terminated, the money misappropriated, and as a result the entitlement to capital and interest was lost. The entitlement to ongoing interest was existing in fact, present, and in every sense real.

29 Counsel for the Attorney-General suggested that there was a line of authority supporting his contention that the phrase actual pecuniary loss excluded any entitlement to ongoing interest. He relied on Schofield v Consolidated Interest Fund[4]. That case concerned the Land and Business Agents Act 1973-1975. The provisions then under consideration bear similarity to but upon close analysis are materially different from the provisions of the Legal Practitioners Act.

30 In Schofield, a land agent promised to invest monies on interest bearing investments. He failed to do so and applied the monies for his own purposes. This is a different circumstance to the agreed facts in this matter. Interest on the trust money was not to the benefit of the Estate and the investment accounts carried a contractual entitlement to interest.

31 The Land & Business Agents Act provided by section 68(1):-

"(1) In this Part 'fiduciary default' means any defalcation, misappropriation or misapplication of trust moneys in the charge of an agent or firm of agents, whether committed by the agent or firm of agents, his or their employee, or any other person."

"(1) The amount of a claim made pursuant to this Part shall not exceed the actual pecuniary loss suffered by the claimant in consequence of the fiduciary default less any amount that the claimant has received, or may reasonably been expected to receive, otherwise than from the consolidated interest fund, in reduction of that loss."

As has been observed, fiduciary or professional default are given a much wider meaning by the Legal Practitioners Act 1981. Fiduciary or professional default has the following extended meaning:-

"any wrongful or negligent act or omission occurring in the course of the practice of the legal practitioner, or a firm of which the legal practitioner is a member."

In Schofield, (in the absence of the extended definition of default) Olsson J adopted the reasoning of the Court in Dobcol Pty Ltd v Law Institute of Victoria[5]

. Anderson J there considered legislation comparable to the Land & Business Agents Act and expressed the view that actual pecuniary loss was limited to the subject matter of the defalcation. This reasoning loses its force when the extended definition of fiduciary or professional default is considered. The actual pecuniary loss can be in consequence of a wrongful or negligent act or omission. The actual pecuniary loss is not limited to money, the subject of defalcation.

34 As I have already observed, the investment account money was not trust money. Kemp proceeded in breach of his fiduciary and professional obligations to bring the investment accounts to an end. A direct consequence of his fiduciary and professional default was the termination of the Estate's then existing entitlement to interest. But for Kemp's conduct the Estate would have continued to earn interest on the investment accounts.

35 I reject the submission of counsel for the Attorney-General that Schofield is directly applicable to this legislation and that it provides direct authority supporting the rejection of all claims to interest.

36 In any event to use the language of Olsson J in Schofield, the compensation had to be, "... in the reimbursement of the actual subject matter of the fiduciary default."[6] With the investment accounts, the loss of the entitlement to interest was part of the very subject matter of the fiduciary or professional default. The reasoning in Schofield does not negate the conclusion that interest is recoverable in respect of the investment accounts.

37 Other authorities were referred to and as the following analysis demonstrates, each turns on the construction of the particular legislative scheme under consideration.

38 In Re Queensland Law Society Incorporated[7], Ryan J considered the provisions of the Queensland Law Society Act 1952, including the following:-

"Section 24 ... (1) Subject to the provisions of this Act, the [Legal Practitioners' Fidelity Guarantee] Fund shall be held and applied for the purpose of reimbursing persons who may suffer pecuniary loss through stealing or fraudulent misappropriation committed by a practising practitioner ... of any money or other property entrusted to him ... Section 25 ... (2) no person shall be entitled to recover from the [Queensland Law] Society out of the Fund by action or other proceeding as aforesaid an amount greater than the amount of the actual pecuniary loss suffered by him less the amount or value of all moneys or other benefits received or receivable by him from any source other than the Fund in reduction of such loss. ..."

Ryan J held that the right to indemnity extended to pecuniary loss having a real causal connection with a fraudulent misappropriation committed by a practising solicitor. He applied the decision of Dobcol and limited the recovery to the value of money or property, the subject of defalcation. The legislation under consideration is distinguishable from the present case as the extended definition referred to above had no counterpart in the Queensland legislation. Further, the Queensland Act included an express entitlement to award interest on such part of the claim for such period and at such rate as the Council of the Law Society may determine. The word actual did not appear in the Queensland legislation.

40 In Re Real Estate and Business Agents Supervisory Board; Ex parte Cohen [8] the Western Australian Full Court considered the interpretation of the Real Estate and Business Agents Act 1978 (WA) and the issue of recovery under the Real Estate and Business Agents Fidelity and Guarantee Fund. The relevant legislation provided:-

"... Section 116: '(1) ... the Fidelity Fund shall be applied for the purpose of reimbursing persons who may suffer pecuniary loss or loss of property by reason of any defalcation by a current licensee, ... but reimbursing only to the extent of the defalcation of the licensee. Section 117: '... (2) A person is not entitled to recover from the Fidelity Fund an amount greater than the balance of the loss suffered by him after deducting from the total amount of his loss, the amount or value of all money or other benefits received or receivable by him from any source other than the Fidelity Fund in reduction of his loss, including any benefits received by reason of services rendered or payments made by the defaulting licensee. ..."

"In my opinion, however, where the claim is in respect of an amount of money misappropriated, s 117 when read with s 116(1) have the effect that the claim is limited to that amount and does not extend to any loss of interest on the amount by reason of the misappropriation. ..."

These provisions are distinguishable from the Act here under consideration. There was no counterpart in the Western Australian legislation to the extended definition of default referred to above.

43 The New Zealand Court of Criminal Appeal in Florence v New Zealand Law Society [9] considered the proper interpretation of s 169 of the Law Practitioners Act 1982 which provided:-

"(1) ... the fund shall be held and applied for the purpose of reimbursing persons who may suffer pecuniary loss by reason of the theft by a solicitor to whom this Part applies, or by his employee or agent, of any money or other valuable property entrusted to him, or to his employee or agent, in the course of his practice as a solicitor, including any money or other valuable property entrusted to him as a solicitor-trustee. (2) No person may bring a claim against the fund unless notice of claim is given in writing to the Council or the Management Committee within 12 months after the claimant has become aware of the theft, or within such further time as the Council or Committee may in its discretion allow."

The Court distinguished the decision of Dobcol on the basis of the differently worded legislation and in particular, the absence of the word actual in the New Zealand legislation. It was noted that the Victorian Statute provided for interest at a prescribed rate calculated from the date on which the defalcation was committed and continuing until the day upon which the claim is satisfied. The Court took the view that apart from such interest the defalcation date was intended to be the cut-off date. Cooke P, at page 135 said:-

" In the end one has to come back to the words of the New Zealand section, considered in their context in the light of the purpose of the Part of the Act. The crucial words are 'for the purpose of reimbursing persons who may suffer pecuniary loss by reason of the theft by a solicitor ... of any money ... entrusted to him ... in the course of his practice as a solicitor'. The provision is not limited to reimbursement of the money entrusted. That is consistent with the clear intention not to confine the rights to the persons, such as clients, entrusting the money to the solicitor. Conceivably that may have been the only reason for the choice of wording and there may have been no intention to extend liability beyond the money actually entrusted to the solicitor by someone. But that is no more than speculation. In itself it is not enough to justify reading down the words of s 169. In the natural and ordinary meaning of the words the right of reimbursement extends to anything which may fairly be described as pecuniary loss suffered by reason of theft of money entrusted to a solicitor in the course of his practice. Claims for mental distress and the like are clearly excluded, but once a pecuniary loss is established and a real or substantial causal connection with the theft, there is nothing in the language of the section or the public safeguard aim of the statute which seems to me adequate to cut down what is in effect a statutory indemnity."

This decision supports the view that the issue before this Court should be resolved by ascertaining the nature of the actual pecuniary loss suffered by the claimant.

46 Reference was made during submissions to James v Rentz[10]. There the Canadian statute allowed recovery in regard to damages resulting in actual financial loss. The issue related to the meaning of actual and the Court took the view that actual was used in the Oxford English Dictionary sense as I have referred to above.

47 Each of these authorities addressed a materially different legislative scheme to that being considered in this case. As a result they are of limited assistance. No other scheme has the extended definition of fiduciary or professional default which definition as I have observed, substantially broadens the scope of recovery. As has also been noted other material differences exist.

48 I summarise my views as follows. The legislative scheme permits payments from the Guarantee Fund in respect of some but not all losses sustained by a claimant. Loss is a very broad term. It includes more than pecuniary loss and more than actual pecuniary loss. The words pecuniary and actual qualify or cut down the broad meaning of loss. The Estate had no entitlement to interest on the trust money. The actual pecuniary loss was the loss of the capital sum in trust. The Estate did have an entitlement to interest on the investment accounts. Those accounts were existing choses in action giving rise to then existing present and real entitlements to interest. The actual pecuniary loss was the loss of the entitlement to capital and interest.

49 I would allow the appeal and answer the question as follows:-

(1) the claim for interest on the monies held in the trust account of Kemp is not a valid claim.

(2) the claim for interest on the monies held in investment accounts is a valid claim.

1 ADI is a reference to an authorised deposit-taking institution.

2 (or more correctly in the beneficiaries of the Estate)

3 Hungerford v Walker [1989] HCA 8; (1990-1991) 171 CLR 125 at 143, 144

6 Schofield v Consolidated Interest Fund supra at 555

10 (1986) 27 DLR (4th) 724, a decision of the Alberta Court of Appeal

ADI is a reference to an authorised deposit-taking institution

[2] (or more correctly in the beneficiaries of the Estate)

[3] Hungerford v Walker [1989] HCA 8; (1990-1991) 171 CLR 125 at 143, 144

[6] Schofield v Consolidated Interest Fund supra at 555

[10] (1986) 27 DLR (4th) 724, a decision of the Alberta Court of Appeal

Legal Practitioners Act 1981(SA)

Queensland Law Society Act 1952(Qld)

Real Estate and Business Agents Act 1978(WA)

Land and Business Agents Act 1973

Law Practitioners Act 1982

Legal Practitioners Act 1981(SA)

Queensland Law Society Act 1952(Qld)

Real Estate and Business Agents Act 1978(WA)

Land and Business Agents Act 1973

Law Practitioners Act 1982

At a glance

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Judgment (90 paragraphs)

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Legislation Cited (10)

Cases Cited (3)