Whyte v LM Investment Management Limited

PROFESSIONS AND TRADES - LAWYERS - REMUNERATION - TAXATION AND ASSESSMENT OF COSTS - APPLICATIONS AND REFERENCES - where the applicant was appointed as a receiver by the court - where the respondent is the responsible entity for a managed investment scheme - where an order for assessment of costs was made of legal costs payable by the respondent to a law practice under the Legal Profession Act 2007 (Qld) - where the applicant receiver was not given notice or served with the application for the costs assessment - whether the applicant is a "non-associated third party payer" under the Legal Profession Act 2007 (Qld) - whether the costs are "payable out of a fund"

Civil Proceedings Act 2011 (Qld), s 15

Legal Profession Act 2007 (Qld), ss 300, 301, 329, 330, 332, 335, 336, 339, 341

Uniform Civil Procedure Rules 1999 (Qld), rr 678, 680, 681, 700, 703, 705, 720, 743A, 743C, 743D, 743I

Boyce v Macintyre (2009) NSWLR 152; [2009] NSWCA 185, referred to

Equuscorp Pty Ltd v Short Punch & Greatorix [2001] 2 Qd R 580; [2000] QCA 407, referred to

Huntingdale Village Pty Ltd & Ors v Mallesons Stephen Jaques [2013] WASC 48, referred to

Legal Services Commissioner v Wright [2012] 2 Qd R 360; [2010] QCA 321, followed

Shillington v Harries [2013] NSWSC 1202, considered

[1] JACKSON J: The respondent company to the present application, LM Investment Management Limited (in liquidation)(receivers and managers appointed) ("the respondent") is the responsible entity and trustee of a managed investment scheme that is a registered scheme known as "the LM First Mortgage Income Fund" ("FMIF").

[2] On 21 August 2013, the Court made an order under s 601ND(1) of the Corporations Act 2001 (Cth) ("CA"), directing the respondent to wind up the FMIF. Shortly afterwards the respondent was ordered to be wound up in insolvency.

[3] By another provision of the orders made on 21 August 2013, the applicant, Mr Whyte, was appointed under s 601NF(1) as a person to take responsibility for ensuring that the FMIF is wound up in accordance with its constitution and any orders made under s 601NF(2) of the CA. He was also appointed receiver of the property of the FMIF under s 601NF(2).

[4] This application is yet another dispute between these parties in the context of the winding up of the FMIF. The applicant applies for directions as a court appointed receiver.

[5] On 29 July 2015, pursuant to r 743E of the Uniform Civil Procedure Rules 1999 (Qld) ("UCPR"), the Court ordered that 38 invoices for legal costs ("the bills") be assessed. The invoices are for legal costs alleged to be payable under the Legal Profession Act 2007 (Qld) as between a client and law practice. The client is the respondent or the liquidators of the respondent. The law practice is the firm of Russells ("the law practice"). The law practice applied for the order for the costs assessment.

[6] The applicant was neither given notice of the application for the costs assessment nor was he served with that application. By the present application he applies for directions as to whether he was entitled to notice of the application, to be served with a copy of the application for the costs assessment and is entitled to notice of the costs assessment. If he is, he will have consequential rights to participate in or make submissions in the costs assessment.

[7] The application turns on the operation of two statutory provisions. First, Mr Whyte submits that he is a "non-associated third party payer" within the meaning of s 301(3) of the Legal Profession Act 2007 (Qld) ("LPA"). If he is, it does not appear to be in dispute that he was a person entitled to be served with the application for the costs assessment and to participate in the costs assessment.

[8] Second, he submits that the costs assessment is subject to r 720 of the UCPR. Accordingly, he contends that within the meaning of r 720(3) "the costs are payable out of a fund", being the FMIF and he is "the person having charge of the fund" who must be served with notice of the costs assessment. Again, it does not seem to be disputed that if the rule applies in that way he would be entitled to make submissions to the costs assessor in relation to the assessment.

[9] For the reasons that follow, in my view, Mr White as a person appointed to ensure that the FMIF is wound up in accordance with its constitution and as receiver of the property of the FMIF is neither a "non-associated third party payer" in respect of the legal costs payable by the respondent to the law practice, nor does r 720 of the UCPR entitle him to notice of the costs assessment or to make submissions in relation to the same.

[10] Some of the bills are or will be said by the respondent to have been payable or to be payable in whole or in part from the property of the FMIF. For example, 14 of them have already been paid in whole or in part from that property.

[11] However, it is also not in dispute that some of the bills or some parts of them are not said to be payable from the property of the FMIF. For the purposes of this application it is unnecessary to attempt to isolate or categorise individual bills further. It is convenient simply to proceed on the assumption that there is a class of bills which after assessment the respondent will say are payable wholly or in part from the property of the FMIF.

[12] To the extent that such an indemnity is claimed, the source of the right to an indemnity may be found in the constitution of the FMIF or the equitable right of a trustee to indemnity for expenses incurred properly or the statutory right of a trustee to an indemnity for expenses reasonably incurred in or about the execution of the trusts or powers.

[13] The scheme of the relevant provisions in ch 3 of the LPA is that a "third party payer" is a person other than the client who is to be given notice of a costs assessment as between a law practice and the client and is entitled to participate as a party in the costs assessment process. The class of third party payers is broken into two sub-classes. One of them is a "non-associated third party payer". The relevant terms are defined in s 301 of the LPA as follows:

"(1) A person is a third party payer, in relation to a client of a law practice, if the person is not the client and -

(a) is under a legal obligation to pay all or any part of the legal costs for legal services provided to the client; or

(b) being under that obligation, has already paid all or a part of those legal costs.

(2) A third party payer is an associated third party payer if the legal obligation mentioned in subsection (1)(a) is owed to the law practice, whether or not it is also owed to the client or another person.

(3) A third party payer is a non-associated third party payer if the legal obligation mentioned in subsection (1)(a) is owed to the client or another person but not the law practice.

(4) A legal obligation mentioned in subsection (1) can arise by or under contract or legislation or otherwise.

(5) A law practice that retains another law practice on behalf of a client is not on that account a third party payer in relation to that client."

[14] Accordingly, the applicant's right or entitlement to notice of the costs application and to participate in the costs assessment process as a party[1] depends on whether or not he is a third party payer as a "non-associated third party payer" in relation to the legal costs for legal services under the relevant bills.

[15] To be a "third party payer" under s 301(1)(a), the applicant must be "under a legal obligation to pay all or any part of [those] legal costs".[2] It is enough if the legal obligation is owed to the respondent as the client of the law practice.[3] That would make the applicant a non-associated third party payer. As well, the legal obligation "can arise by or under contract or legislation or otherwise."[4]

[16] The applicant's position is unusual. He is the receiver of the property of the FMIF. The FMIF is constituted in law as a trust. The respondent as responsible entity is the trustee and the members of the FMIF are the beneficiaries. In a general sense, it is the respondent's role as responsible entity and trustee exercising its powers in the administration of the registered scheme and trust that engages any right to an indemnity as previously mentioned.

[17] Both under the present LPA, which has equivalent counterparts in other States, and under prior legislation, questions have arisen about the entitlement of a beneficiary of a trust to be involved in the taxation or assessment of costs as between a law practice and the trustee. The parties made their submissions as though the applicant is in a position analogous to a beneficiary of a trust as someone appointed as receiver to take possession of the property of the trust fund.

[18] In Equuscorp Pty Ltd v Short Punch & Greatorix,[5] it was held that the holder of units in a unit trust was not entitled to apply to the court to decide the reasonableness of the fees and costs charged in a solicitor's account to the trustee, because the unit holder as beneficiary was not "liable to pay" the account within the meaning of s 6ZF(1) of the Queensland Law Society Act 1952 (Qld). An important point was that, under an earlier statutory provision, the meaning of "liable to pay" had been expressly extended to a party interested in property out of which a trustee had paid or was entitled to pay the bill. That extending provision had been repealed. In that context, the Court of Appeal held that the unit holder's liability to contribute to a fund from which the costs might be paid was not enough to make the unit holder "liable to pay" within the meaning of s 6ZF(1).

[19] In Boyce v Macintyre[6] the Court of Appeal of New South Wales considered the meaning of s 302A of the Legal Profession Act 2004 (NSW), which corresponds to s 301 of the LPA. It said:

"... the introduction in 2006 of the non-associated third party payer provisions in the Legal Profession Act... can be seen as being for the purpose of consumer protection. In particular, the introduced provisions afford protection to persons who agree, in effect, to indemnify other parties (such as lessors and mortgagees) in respect of legal costs for services rendered to those parties."

[20] The context in that case was the contractual liability of a sub-lessee to pay the sub-lessor's lawyers costs of the transaction.

[21] In Legal Services Commissioner v Wright[7] the Court of Appeal considered the position of a person who was a party to a consent order providing that the proceeds of sale of property to be sold on a statutory trust for sale were to be applied to the costs of a solicitor (who was another party's solicitor). The question was whether the person was a third party payer. It was held that by the direct operation of the court order, the person was under a legal obligation to pay all or any part of the legal costs within the meaning of s 301(1). However, McMurdo J analysed the operation of the definition of "non-associated third party payer" under s 301(3) as well, as follows:

"As Equuscorp illustrated, there are likely to be many cases where the burden of a lawyer's bill will fall to a substantial extent upon someone other than the client and who therefore has more than an academic interest in having the costs assessed. But where the line is to be drawn, in defining who apart from the client should be entitled to an assessment, has been decided by the Parliament in unambiguous terms: it is according to the existence or otherwise of a legal obligation to pay the costs.

A case such as Equuscorp would not entitle the unit holder to an assessment of the trustee's legal costs under s 335, because the unit holder's obligations would not include an obligation to pay the costs, as distinct from having to pay to a fund from which those costs and other expenses might be paid."[8]

[23] In Huntingdale Village Pty Ltd & Ors v Mallesons Stephen Jaques[9] Le Miere J considered whether a company (at the suit of its directors) was a non-associated third party payer in respect of the legal costs for legal services provided by a law practice to a receiver of the company appointed by a secured creditor. His Honour considered a number of cases, including Legal Services Commissioner v Wright. The company contended that because it had promised the secured creditor that it would indemnify a receiver against any liability, loss, cost or expenses, it was a non-associated third party payer. Le Miere J held that the question was a real question to be tried.

[24] In Shillington v Harries,[10] Latham J considered whether beneficiaries of a trust for sale were non-associated third party payers under s 302A of the New South Wales Act. The beneficiaries submitted that because beneficiaries effectively indemnify a trustee against the expenditure of costs legitimately incurred in the administration of the trust there was a legal obligation to pay those costs. In particular, they submitted that the obligation came within the words in the equivalent of s 301(4) set out above that a legal obligation "can arise by or under contract or legislation or otherwise", because the equitable right to an indemnity was a liability in the beneficiaries "otherwise".

"I am not persuaded by the defendant's submission that 'otherwise' is capable of comprehending other than a legal obligations. To adopt such a construction would seem to me to ignore the context within which the term appears, in particular the deliberate omission from the Act in 2006 of an express provision recognising the right of a beneficiary to apply for an assessment of legal costs paid out of the assets of a trust."[11]

[26] Again, having regard to the similar statutory history in Queensland to the provisions referred to by Latham J in New South Wales, I agree.

[27] It follows, in my view, that a member of the FMIF is not a non-associated third party payer in relation to the legal costs for legal services provided to the respondent by the law practice as responsible entitle and trustee of the FMIF. Because a member is not a third party payer the members are not entitled to notice of the costs application under s 339(1) of the LPA and are not entitled to participate in the costs assessment process under that section.

[28] To the extent that the applicant made his submissions by analogy with the position of the members of the FMIF as beneficiaries, in my view, the applicant is not a "non-associated third party payer". The applicant did not submit that he was personally liable to pay any of the bills.

[30] Part 3 of ch 17A is headed "Assessment of costs other than under the Legal Profession Act 2007".

[31] An assessment of costs under pt 3 of ch 17A (being costs other than under the LPA) begins, under r 705(1) with a party entitled to be paid costs serving "a costs statement in the approved form on the party liable to pay the cost" and follows steps that may end with a costs assessment carried out under r 720.

[32] Rule 720 of the UCPR provides:

(1) A costs assessor appointed to carry out a costs assessment is to decide the procedure to be followed on the assessment.

(a) appropriate to the scope and nature of the dispute and the amount in dispute; and

(b) consistent with the rules of natural justice; and

(3) Also, if the costs are payable out of a fund -

(a) the applicant must serve on the person having charge of the fund a notice -

(ii) stating that the costs in the costs statement to be assessed are payable out of the fund; and

(iii) stating when the costs are to be assessed; and

(iv) containing or attaching any other information the costs assessor requires to be included in or with the notice; and

(b) the person having charge of the fund may make submissions to the costs assessor in relation to the assessment.

(4) Without limiting subrule (1) or (2), the costs assessor may decide to do all or any of the following -

(b) carry out the costs assessment on the papers without an oral hearing;

(c) not be bound by laws of evidence or procedure applying to a proceeding in the court;

(d) be informed of the facts in any way the costs assessor considers appropriate;

(e) not make a record of the evidence given." (emphasis added)

[33] Accordingly, if the costs are payable out of a fund the applicant for a costs assessment under pt 3 is required to serve on the person having charge of the fund a notice identifying the fund and "stating that the costs in the costs statement to be assessed are payable out of the fund".

[34] The reason for my conclusion that the applicant is not entitled to notice of the costs assessment or to make submissions to the costs assessor is that, in my view, the costs the subject of the bills are not "payable out of [the] fund" within the meaning of r 720. It is necessary to explain the operation of r 720 in a costs assessment to which it applies in more detail.

[35] Chapter 17A was introduced to the UCPR after the LPA came into force in 2007. The rules as to costs that had previously appeared in Part 2 of Ch 17 of the UCPR were repealed and replaced in ch 17A.

[36] Chapter 17A is divided into four parts. Part 1 contains definitions and provides as to the application of the different parts. Rule 678(2) provides that pt 3 does not apply to costs to be assessed under the LPA.

[37] Part 2 of ch 17A deals with the costs of a proceeding, meaning a proceeding in the court, beginning with r 680 that provides a party to a proceeding cannot recover any costs of the proceeding from another party other than under the rules or an order of the court. The court's power to order costs is now conferred by s 15 of the Civil Proceedings Act 2011 (Qld) and the rules in pt 2 of ch 17A, in particular r 681(1).

[38] Part 3 of ch 17A provides for the assessment of costs other than under the LPA. Generally speaking, that is the assessment of the costs payable under an order for costs.

[39] Thus, a costs assessment under an order for cost begins, as appears above, with a costs statement under r 705, in the approved form. The other requirements for a costs statement are set out in r 705(2). It must "contain sufficient details to enable the party liable to pay the costs to understand the basis for the costs, prepare an objection to the costs statement and obtain advice about an offer to settle the costs." Part 3 then provides for the processes of notice of objection to the costs statement, default assessment, application for a costs assessment and appointment of a costs assessor. It also provides for the powers of a costs assessor and the procedure to be followed on the assessment, culminating with r 720.

[40] In contrast, pt 4 of ch 17A provides for assessment of costs under the LPA. Generally speaking, they are the costs as between a law practice and a client when a client instructs a law practice, as opposed to costs payable under an order of the court. Part 3.4 of the LPA makes provision for the regulation of those costs.

[41] Thus, s 329(1) of the LPA prohibits a law practice from starting legal proceedings to recover legal costs until 30 days after the law practice has given "a bill" to the relevant person. Section 330(1) provides that a bill may be in the form of a "lump sum bill" or "an itemised bill". Under s 332(1) if the bill is in the form of a lump sum bill any person who is entitled to apply for an assessment may request an itemised bill.

[42] As defined in s 300 of the LPA, a "lump sum bill" is a bill that describes the legal services to which it relates and specifies the total amount of the legal costs and an "itemised bill" is a bill stating, in detail, how the legal costs are made up in a way that would allow the legal costs to be assessed under div 7 of pt 3.4 of the LPA.

[43] Division 7 of pt 3.4 of the LPA provides for the assessment of costs under the LPA. It contains processes for an application for a costs assessment by a client, a third party payer or law practice. Sections 335 and 336 provide that a client, third party payer or law practice may apply for a costs assessment. Section 339(1) refers to the applicant for assessment giving notice of the costs application under the UCPR.

[44] The criteria for the costs assessment are set out in s 341 of the LPA. The costs assessor must consider, inter alia:

"(a) whether or not it was reasonable to carry out the work to which the legal costs relate; and

(b) whether or not the work was carried out in a reasonable way; and

(c) the fairness and reasonableness of the amount of legal costs in relation to the work, except to the extent that section 340 applies to any disputed costs."

[45] All of this proceeds by reference to a relevant lump sum bill or itemised bill under the LPA, not to a costs statement under r 705 of the UCPR. That point is reinforced by r 743C of the UCPR. It provides that if there is no itemised bill the relevant court may give a direction for one to be prepared.

[46] By r 743A of the UCPR a person applying for a costs assessment under the LPA must apply to the relevant court.

[47] By r 743D(1) of the UCPR the applicant for a costs assessment under the LPA must serve a copy of the application on any person to whom notice must be given under

s 339(1) of the LPA. By r 743D(2), if the person served under sub-rule (1) knows a third party payer should have been but was not served, the person must, within 14 days after being served, give the applicant written notice of that fact and the name and contact details for the third party payer. By r 743D(3), as soon as practicable, but no more than 14 days after receiving a notice under sub-rule (2) the applicant must serve a copy of the application on the third party payer.

[48] Rule 743I of the UCPR is in pt 4 of ch 17A. It provides, in part, as follows:

"(1) The following rules also apply to costs assessed under the Legal Profession Act 2007-

• ...
• Rule 720
• ..."

[49] In this context, it can be seen that although r 743I expressly applies r 720 to costs assessed under the LPA, there are some inconsistencies of language and process in seeking to do so. First, there is no costs statement required on a costs assessment under the LPA, and r 720 does not require one in lieu of a bill or itemised bill. References in r 720 to a "costs statement", when applied to a costs assessment under pt 4 of ch 17A must be treated as references to any relevant bill or itemised bill, mutatis mutandis.

[50] Second, in construing the expression "costs are payable out of a fund", the context is that r 720 in its primary operation is intended to apply to situations where costs are payable out of a fund under pt 2 of ch 17A, In that context, it encompasses costs payable out of a fund because of an order. See, for example, rr 700(2) and 703(2)(a) of the UCPR.

[51] In cases where a trustee is either the party ordered to pay costs or has the benefit of an order for costs, it will be a party to any costs assessment under pt 3 of ch 17A upon the order. The trustee in those cases does not require notice under s 720(3) to become involved in the assessment. It is already a party.

[52] The requirement of notice to a "person having charge of the fund" under r 720(3) is intended to operate where that person is not already a party to the costs assessment. That will occur, for example, in trust or estate proceedings where the court orders that the costs of a party or parties be paid out of the trust property or the estate, including cases where the trustee or executor is not an active party.

[53] In any event, under r 720(3), the trigger for the rights of a person having charge of the fund is that the "costs are payable out of a fund". In my view, costs are so payable when they are payable under an order of the court, not otherwise.

[54] Of course, the application of r 720 to a costs assessment under the pt 3.4 of the LPA is necessarily to the assessment of costs that are not payable under an order of the court. Accordingly, as construed above, r 720(3) would not apply to the costs to be assessed.

[55] In my view, the application of r 720 to a costs assessment under the LPA does not alter the meaning of when "costs are payable out of a fund" within the meaning of r 720(3).

[56] It follows, in my view, that the costs payable by the respondent as client to the law practice are not costs "payable out of a fund" within the meaning of r 720(3) of the UCPR in its ordinary operation.

[57] It also follows that the law practice (as applicant for the costs assessment) was not obliged to give notice to the applicant under r 720(3) of the UCPR as a person having charge of the FMIF as a fund.

[59] I will hear the parties on the question of costs.

[1] Legal Profession Act 2007 (Qld), s 339.

[2] Alternatively, the applicant must have been under that obligation when a relevant tax invoice was paid.

[3] Legal Profession Act 2007 (Qld), s 301(3).

[4] Legal Profession Act 2007 (Qld), s 301(4).

[5] [2000] QCA 407; [2001] 2 Qd R 580.

[6] (2009) 78 NSWLR 152.

[7] [2012] 2 Qd R 360.

[8] [2012] 2 Qd R 360, 371 [28]-[29].

[9] [2013] WASC 48.

[10] [2013] NSWSC 1202.

[11] Shillington v Harries [2013] NSWSC 1202, [36].