When winners are not grinners – who gets paid first when the winning litigant goes bust?

Commercial litigation is often ultimately uncommercial. And when things turn really sour solicitors will often have a personal stake in the question of who is to miss out financially.

This issue arose in an insolvency context last week in a Supreme Court tussle between mega firm DLA Piper and the liquidators of their former client Windemac Pte Ltd.

Back in 2013 Windemac won a Supreme Court judgment for $312,000 plus interest and costs. It was perhaps a Pyrrhic victory as DLA’s bills to Windemac totalled almost $360,000. Windemac went bust two years later still owing DLA Piper more than $100,000.

After Windemac went into liquidation there still remained a costs order for almost $98,000 in Windemac’s favour to be enforced against the defendants. Was that money to go to Windemac’s liquidators or to the short-paid solicitors?

Associate Justice Derham held that the solicitors were entitled to an equitable lien over the proceeds of the costs order on established ‘fruits of the action’ principles and that the solicitors’ rights had priority over the claims of Windemac’s other creditors in the insolvency.

The decision contains a useful extract on solicitor’s liens for costs extracted from Elliot J’s decision in Oakley Thompson & Co v Maisano (No 2) [2015] VSC 210 at 77. Here (with citations omitted) is Elliot J’s summary:

(1)     At common law, a solicitor has a general possessory lien for all professional costs due by her or his client.  This entitles the solicitor to keep in her or his possession all property of the client which comes into the solicitor’s possession during the course of her or his professional employment until the solicitor’s costs have been paid.

(2)     A solicitor has no lien for costs over any property which has not come into her or his possession.

(3)    If a client obtains a judgment for the payment of money (including a judgment for costs),  the solicitor acquires a right to have her or his costs paid out of the money payable, such right being an equitable right to be paid.  This right is not dependent upon an order having been made to recognise the right, or upon a taxation having occurred.

(4)    If the solicitor gives notice of the right to the person who is liable to pay the money, only the solicitor, and not the client, can give a good discharge to that person for an amount of the money equivalent to the solicitor’s costs.

(5)    If the person liable to pay has notice of the solicitor’s right, but refuses to pay the solicitor, the solicitor may obtain a “rule of court” directing that the costs be paid to the solicitor and not to the client.  (In this context, a rule of court is a reference to an order or a direction of the court.)

(6)    If the client and a judgment debtor make a collusive arrangement in order to defeat the solicitor’s right, the court will enforce that right against the judgment debtor notwithstanding the arrangement and notwithstanding that no notice of the solicitor’s claim has been given to the judgment debtor prior to the arrangement.

Associate Justice Derham’s decision is DLA Piper Australia v Official Receiver of Singapore (as liquidators of Windemac Pte Ltd) [2017] VSC 216.

The lesson from this? Solicitors’ liens are good and can trump a liquidator. But solicitors getting their money into trust up-front on account of fees is even better. After all, the solicitors here might have chalked up a win but they still took a haircut on the fees which had been outstanding to them for over four years.

WA court bins stat demands, orders indemnity costs and calls the cops

Some obscure judgments deserve a wider audience.

Master Sanderson of the Western Australia Supreme Court delivered one such gem in April in Rohanna Pty Ltd v Nu-Steel Homes Adelaide Pty Ltd [2013] WASC 109.

Some scene-setting first.

In Christmas week 2012 the plaintiff received two statutory demands from the defendant. The parties had never had any prior contact with each other and yet the demands totalled almost $220,000. Both stat demands were ultimately set aside by Master Sanderson. In the interim the defendant was represented in correspondence by a South Australian solicitor who did not file a formal appearance (Mr Nicholls) and in Court by a non-lawyer (Mr Pearse). Mr Nicholls had offered to settle the matter on the basis that the plaintiff pay the defendant’s costs of $25,000. He also remarked upon the need to advertise any winding up application which might follow if the plaintiff didn’t stump up that loot.

Master Sanderson was scathing. Here are some highlights from a stinging judgment.

11.   In further support of its application the plaintiff filed a second affidavit …. The purpose of this affidavit was to demonstrate the solvency of the plaintiff. A mere glance at this affidavit would be enough to convince even the economically illiterate the plaintiff was solvent. Indeed it shows the plaintiff as a massively successful commercial enterprise. But that was not enough for Mr McNamara.

 

       ….

 

17.   All of these matters can then be aggregated. First, the defendant served the statutory demands without any prior consultation with the plaintiff. If it had a genuine belief there was a debt owed it would have been reasonable to write to the plaintiff, make a claim and explain the basis of that claim. That was not done. Instead the demands were sent by post and arrived on the Thursday before Christmas. If ever there was a time when it was difficult to deal expeditiously with a demand which required action within 21 days, that was it.

 

 ….

 

20.   Fourthly, faced with clear evidence of the solvency of the plaintiff the defendant determined to press on. No reasonable party properly advised would have done so.

 

21.   Fifthly, the correspondence suggests an attempt to embarrass the plaintiff by advertising the fact of a winding up application. There was no need to refer to the advertising of a winding up application in the way Mr McNamara did. The letter strongly suggests the defendant was looking to force the plaintiff into a compromise to serve its own purposes.

 

22.  Sixthly, the defendant actually issued a winding up application. This was done prior to the application to set aside the demands being heard. It must have been clear there was a live issue as to whether the application to restrain the defendant would succeed. … Once again it looks as though the defendant was attempting to pressure the plaintiff.

 

23.   Seventhly, no appearance to the application to set aside the demands was ever lodged. Mr McNamara in his correspondence said he had been retained by the defendant. As late as 28 February 2013 he wrote to the plaintiff’s solicitors on behalf of the defendant. At no time did Mr McNamara indicate his instructions had been terminated and at no time did he give any indication he would not appear at the hearing of the matter on 7 March 2013. Perhaps the defendant was concerned if it did enter an appearance a costs order might be made against it. Or perhaps there was some other reason no appearance was entered. But it does suggest the defendant never took seriously the prospect it could successfully resist the plaintiff’s application.

 

24.   Finally, there is the offer to settle on payment of $25,000 for costs. It may be that Mr McNamara is one of South Australia’s leading corporate lawyers. If that is so, this case does not represent his finest hour. But even assuming high competence on the part of Mr McNamara there is no possible way the defendant’s costs could have amounted to $25,000. No appearance was filed, no affidavits in opposition to the application were lodged, it would appear submissions to be made on behalf of the defendant were drawn by Mr Pearse and the totality of Mr McNamara’s involvement was three or four letters. Really this demand for ‘costs’ is no such thing. It was tantamount to extortion.

 

25.   … This is a case where indemnity costs should be awarded and the only question is who should pay those costs. Mr Pearse will have 14 days from the publication of these reasons to make submissions as to why he should not pay the costs personally.

 

26.   I intend to refer these reasons to the Western Australian Police Service for such action as they deem necessary in relation to Mr Pearse. I will also refer a copy of these reasons to the authorities in South Australia who regulate the legal profession to take such action as they deem appropriate in relation to Mr McNamara.

 

Lessons from this case? Many.

But the very first that occurs to me is that the Wild West’s legal system might have been unfairly maligned by the late Robert Hughes (as recorded in my post here on his passing).

Charge and countercharge of overcharging in Sydney

Is the expression “excessive legal costs” tautological?

Cynics might say so but not our regulators.

Section 4.4.4(b) of the Legal Profession Act (Vic) makes the “charging of excessive legal costs in connection with the practice of law” (surely a further tautology) conduct capable of constituting either ‘unsatisfactory professional conduct’ or ‘professional misconduct’.

New South Wales’ equivalent legislation saw former high-flying personal injuries soli Russell Keddie struck off last month for just such professional misconduct.

According to the Sydney Morning Herald account here Keddie’s bill of $819,000 to his paraplegic client was $215,00 too high.

Keddie is unlikely to miss his ticket – he retired before he was rubbed out.

Perhaps with a view to the many similar claims against him and his former firm, he also declared himself bankrupt last month.

Keddie’s sagging public reputation is unlikely to be assisted by reports (like further SMH yarns here and here) that before his bankruptcy he transferred his half share in two properties worth a combined $6 million to his wife for – you guessed it – a single dollar each.

The SMH has given the Keddies story a lot of air since 2008 but in Victoria only readers of the Oz are likely to have heard of it.

Keddie’s eponymous firm was once NSW’s leading personal injury plaintiffs’firm. Slater & Gordon took it over for a reported $32 million in 2010. By then Keddies had been been already in strife with NSW’s Legal Services Commissioner for at least 4 years.

Radio National revisited the Keddies saga in Background Briefing last Sunday, 22 July 2012 – audio here and transcript here.

Some highlights from the ABC’s retelling:

  • Aggrieved Keddies clients have already racked up approximately $4 million in judgments against the firm’s three former partners;
  • The ABC speculates that the total overcharging judgments might eventually top $11 million;
  • Enforcement of those judgments is likely to be problematic. Of the three ex-Keddies partners sued, one is already bankrupt and the other two have reportedly had their assets frozen;
  • The overcharging claims against Keddies have been spear-headed by solicitor Stephen Firth with the apparent assistance of some ex-Keddies Deep Throat(s);
  • Coincidentally, Stephen Firth is himself defending several overcharging claims. The plaintiffs’ solicitor in those cases? None other than ex-Keddies partner (and defendant to many Firth-issued overcharging writs) Tony Barakat.

Firth has been forthright in his pursuit of Keddies – see his website here where he boasts of 11 wins totalling $1.5 million in Keddies cases for the month of April alone.

And Barakat is not bashful either. See his comments to The Australian here about the claims against Firth.

Only in Sin City?

 

 

Safeguard your Mareva injunction with a PPSA registration

I have just put the finishing touches to a seminar paper I am delivering this week on the Personal Property Securities Act 2009.

My paper is not as unwieldy and dry as the PPS Act itself (is anything?) but I wouldn’t call it sexy either. I will post it on its own discrete (ie separately tabbed) page in this blog after the seminar.

For an extremely short synopsis of the PPS Act generally see my post of 10 February 2012 (which you can access by simply following the date prompts below the mugshot in the right-hand margin of this page.)

But let me take you straight to what might be the highlight for general commercial litigators with Mareva-type injunctions in their armoury (and they should be in every armoury).

Once Mareva orders (aka ‘asset preservation orders’ and ‘freezing orders’) and some analogous orders are obtained from any Australian court or tribunal it seems they can be ‘perfected’ by registration on the PPS Register.

Such registration will effectively advertise the existence of your client’s Mareva injunction to the world at large. That ‘perfection’, among other things, should constructively warn off third parties who might otherwise purchase or lend against the property in breach of a court order restraining the use and/or disposal of that property.

This new tool lies buried in reg 5.3(c) of the PPS Regulations. I am not aware of it having been used since the PPSA regime started on 30 January 2012.

Is this history waiting to be made or has it been made already?

Anyone?

PPSA in 500 words

The Commonwealth Personal Property Securities Act 2009 came into operation on 30 January 2012. It comprises 300 + pages (never mind the regulations) and is not light reading.

Can it be summarized in just two A4 pages? Let’s try.

The PPSR Act establishes something that might be crudely likened to a Torrens title registration scheme for tangible and intangible personal property. It is modeled on existing legislation in New Zealand and Saskatchewan.

“Personal property” does not mean domestic or consumer property (although that is within its scope too). “Personal” means personal as opposed to real property.  Most businesses will be affected (For example who has title to the hire-purchased photocopier in a solicitor’s office if the soli goes broke? What if the soli stays solvent and the photocopier supplier goes bust?)

The registration system is national, internet-based, administered by the Insolvency & Trustee Service of Australia (ITSA) and accessible 24/7.

In insolvency situations the register will generally determine the title of the liquidator / trustee in bankruptcy to personal property in the possession of the insolvent company / individual that might otherwise be claimed by a financier, unpaid supplier etc.

Example:

Say ABC Company goes into liquidation while in possession of:

  • vehicles it has leased from X bank;
  • widgets from Y supplier which have not yet been paid for and are subject to retention of title clauses; and
  • an entire business ABC purchased from Z on vendor terms and on which there are still instalments outstanding.

In this example X, Y and Z would formerly probably have had good title as against the liquidator to their particular property in ABC Company’s possession. But no longer. Under the new regime the liquidator will likely be entitled to seize and sell each of these assets as part of ABC Company’s insolvent estate unless the rival claimants have registered a security interest in them.

Registration of a given security interest will cost $5 a time.

Failure to make that $5 investment might cost unlucky punters literally millions – see Waller v New Zealand Bloodstock Limited [2005] NZCA 254; [2006] 3 NZLR 629. In that case the owners of a $2 million racehorse leased it to a stud. The stud’s financier repossessed the stud (and with it, the horse). The horse’s owners had not registered their security interest in their  horse under New Zealand’s equivalent of the Australian legislation. They lost their $2 million chaff-burner to the liquidator as a result.

Now consider the lawyers –

  • Clients’ standard terms of trade agreements might require revision. Previously effective retention of title clauses in supply agreements might fail under the new regime unless supported by registration of the resulting security interest;
  • Clients who are not advised of the new regime by their lawyers are likely to be gravely miffed if they lose their assets to their customer’s liquidators as a consequence;
  • Professional negligence claims against lawyers will inevitably result – see for example K-Auto Trading NZ v McGurie [2008] NZHC 94

After a remarkably long gestation the Personal Property Security Act 2009 is now operational law. The new regime includes a two year introductory transition period (but why defer getting things right until 2014?)

Paul Duggan

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Paul Duggan is a commercial litigation barrister based in Melbourne, Australia.

Since 1996 he has advised and appeared in most types of business-to-business and business-to-customer disputes – commercial and domestic building matters, commercial and retail leasing disputes, insolvencies, franchises, partnerships, insurance, professional negligence, sales of land, Corporation Act matters and trade practices disputes to name a few. Although Paul has represented governments, major public companies, insurers, Lloyds syndicates and private individuals his clients are predominantly small and medium enterprises contemplating or engaged in litigation in the Victorian Supreme Court, County Court or VCAT.

Paul also practises in the federal jurisdictions and interstate.

Paul’s clerk is Gordon & Jackson.

Liability limited by a scheme approved under the Professional Standards Act 2003.