GUIDELINES FOR EXERCISE OF DISCRETION PURSUANT TO SUBSECTION 396(4) OF THE LEGAL PROFESSION ACT 2007

Transcription

1 GUIDELINES FOR EXERCISE OF DISCRETION PURSUANT TO SUBSECTION 396(4) OF THE LEGAL PROFESSION ACT 2007 Introduction The Society administers the Legal Practitioners Fidelity Guarantee Fund ( the Fidelity Fund ) pursuant to the provisions of Part 3.6 of the Legal Profession Act 2007 ( the Act ). Section 355 of the Act provides that the main purpose of Part 3.6 is to establish and keep a fund to provide a source of compensation for defaults by law practices arising from, or constituted by, acts or omissions of associates. No legislative requirement to fully compensate losses There is nothing in the Act, or the Legal Profession Regulation 2007 ( the Regulation ), that requires the Fidelity Fund to fully recompense losses occasioned by defaults. Subsection 396(1) of the Act provides that a regulation may: 1. fix the maximum amount, or the method of calculating maximum amounts, that may be paid from the Fidelity Fund for individual claims, or classes of claims; and 2. fix the maximum aggregate amount, or the method of calculating the maximum aggregate amount, that may be paid from the Fidelity Fund for all claims made in relation to individual law practices or classes of law practices. Section 84 of the Regulation provides that the maximum amount that may be paid from the Fidelity Fund for a single claim is $200, and the maximum aggregate amount that may be paid from the Fidelity Fund for all claims made in relation to a single law practice is $2 million. These amounts will be referred to in these Guidelines as the statutory caps. Insufficiency of Fidelity Fund Section 397 of the Act provides that if the Society believes that the Fidelity Fund is likely to be insufficient to meet the Fidelity Fund s ascertained and contingent liabilities, it may do any or all of the following and a decision made under section 397 is final and not subject to appeal or review: 1. postpone all payments relating to all or any class of claims; 2. impose a levy under section 369 of the Act; 3. make partial payments of the amounts of 1 or more allowed claims out of the Fidelity Fund with payment of the balance being a charge against the Fidelity Fund; 4. make partial payments of the amounts of 2 or more allowed claims out of the Fidelity Fund on a pro rata basis, with payment of the balance ceasing to be a liability of the Fidelity Fund. The last option is the most extreme of the options available to the Society. It wipes the slate clean by discharging the Fidelity Fund from all remaining liabilities and enables the Society to grow the balance of the Fidelity Fund to meet future claims and there is no right of appeal or review of the decision to adopt that option. The existence of this option can be viewed as justification for the Society adopting X:\ContactDocs\CEO\Corporate Docs\Publication Scheme\Statutory Caps Discretion approved by Council 3 Dec 2009.doc Page 1 of 7

2 the position that it will pay all admitted claims in full whilst there are sufficient funds to do so and, when there are no longer sufficient funds, make partial payments of the remaining allowed claims in full and final settlement of those claims. Subsection 397(2) provides that in deciding whether to do any of the things mentioned in 1-4 above, the Society: must have regard to cases of hardship if it knows relevant information; and must endeavour to treat outstanding claims equally and equitably, but may make special adjustments in cases of hardship. As a matter of general policy, the Council of the Society considers that the Society should adopt a strategy that limits the possibility of running the Fidelity Fund down to a level where there are insufficient funds. Discretion available to pay more than the statutory caps Subsection 396(2) prohibits the payment, from the Fidelity Fund, of amounts in excess of the statutory caps. Subsection 396(3) provides that a payment that is limited in amount by the application of a statutory cap is made in full and final settlement of the claim concerned. Subsection 396(5) provides that no proceeding can be brought, by way of appeal or otherwise, to require the payment of a larger amount or to require the Society to consider payment of a larger amount. It is subsection 396(4) that gives the Society a discretion to pay more. It provides that, despite subsection (2), the Society may authorise payment of a larger amount if satisfied that it would be reasonable to do so after taking into account the position of the Fidelity Fund and the circumstances of the particular case. The Society can exercise a discretion to pay more than the relevant statutory cap but pay less than the full admitted amount. Subsection 396(5) prevents proceedings being brought by way of appeal or otherwise to require the payment of a larger amount. There are two (2) scenarios where the Society may be required to consider exercising a discretion to pay more than a cap amount. The first is when a single claim is admitted for more than the single claim cap of $200,000. If the total amount of the admitted claims in respect of that law practice is less than $2 million, the Society s decision as to whether to pay more than the $200,000 cap only affects that claimant. On the other hand, if the total amount is more than $2 million, the Society s decision as to whether to pay more than $200,000 in respect of a single claim can affect all of the claimants in respect of that law practice. For example: 20 claims totalling $3 million have been admitted in respect of a law practice comprising: 1 claim admitted in the sum of $720,000; and X:\ContactDocs\CEO\Corporate Docs\Publication Scheme\Statutory Caps Discretion approved by Council 3 Dec 2009.doc Page 2 of 7

3 19 claims, each for less than $200,000, admitted for a total amount of $2, If both statutory caps are applied, the claim for $720,000 will only be paid to the extent of $200,000 with the result that there will be $1.8 million available to be distributed to the other 19 claimants at the rate of cents in the dollar ($1.8 million divided by $2.28 million). If the Society decides to pay the $720,000 claim in full, the other 19 claimants will only be paid at the rate of cents in the dollar [$1.28 million (the $2 million statutory cap less the $720,000) divided by $2.28 million (the total amount of the remaining claims)] unless the Society also exercises a discretion to pay more than the law practice cap of $2 million. As a matter of general policy, the Council of the Society considers that in the event a discretion is exercised to pay more than the statutory cap of $200,000 in respect of a single claim, the amount paid in respect of all other claims in respect of that law practice should be at least the same as the amount that would be payable in respect of those claims if the Society did not exercise the discretion. In the above example, the total amount payable in respect of the claims would be at least $2,520,000 comprised of: $720,000 payable in respect of the single claim of $720,000; and at least $1,800,000 (the amount that would be available if the $200,000 single claim statutory cap were applied to the claim for $720,000) payable in respect of the 19 claims totalling $2,280,000 - i.e cents in the dollar. The second scenario where the Society may be required to consider exercising a discretion to pay more than a cap amount is when the claims admitted in respect of a particular law practice exceed the law practice cap amount of $2 million. First, the Society must decide whether it will exercise a discretion to pay more than the law practice cap amount of $2 million to increase the rateable distribution to all claimants. For example, if claims totalling $4 million are admitted, the Society could exercise a discretion to pay a total of $3 million on a pro rata basis in respect of all claims such that all admitted claims are paid at the rate of 75 cents in the dollar ($3 million divided by $4 million). Secondly, the Society could, in the first instance, decide that it will not exercise a discretion to pay more than the law practice cap of $2 million but then, when considering individual claims, decide to exercise a discretion to pay one, or more, of those claims in full. For example, if claims totalling $2.5 million are admitted, the general rate payable, if no discretions are exercised, would be 80 cents in the dollar ($2 million divided by $2.5 million). If the Society decided to pay one of those claims in the sum of $180,000 in full, the Society could decide to reduce, proportionately, the amount payable to the other claimants in respect of that law practice (so that the total amount paid in respect of the law practice is $2 million), or could decide that the other claimants should not be penalised by the exercise of that discretion and should be paid at the rate they would have been paid if that discretion had not been exercised. If this second option were adopted the total amount payable in respect of the claims would be $2,036,000, comprised as follows: X:\ContactDocs\CEO\Corporate Docs\Publication Scheme\Statutory Caps Discretion approved by Council 3 Dec 2009.doc Page 3 of 7

4 $180,000 payable in respect of the claim paid in full $1,856,000 (payable at the rate of 80 cents in the dollar) in respect of the other claims totalling $2,320,000. First consideration position of the Fidelity Fund Subsection 396(4) of the Act provides that, despite subsection (2), the Society may authorise payment of a larger amount if satisfied that it would be reasonable to do so after taking into account the position of the Fidelity Fund. The Fidelity Fund is administered by the Society for the benefit of all Queensland solicitors and clients of Queensland law practices that entrust trust money to a law practice. The Fidelity Fund is funded entirely by Queensland solicitors. Each year, Queensland solicitors pay a contribution to the Fidelity Fund. In addition, pursuant to section 369 of the Act, if the Society believes that the balance of the Fidelity Fund is not sufficient to satisfy the liabilities of the Fidelity Fund at or about that time, the Society can impose on each solicitor a levy that each solicitor must pay to the Fidelity Fund. In the event of a default resulting in a claim, or claims, exceeding one of the statutory caps, the Society needs to consider exercising its discretion pursuant to subsection 396(4), which involves, amongst other things, striking a balance between the competing aspirations of: 1. paying all claims in full to compensate the claimants and preserving the confidence of the public in the legal profession; and 2. prudentially managing the Fidelity Fund such that it does not become necessary to significantly increase the contribution payable by solicitors to the Fidelity Fund, or impose a levy that solicitors must pay. Without limiting the generality of the issues that will be taken into consideration when determining whether to exercise a discretion to pay more than a statutory cap, subsection 396(4) requires the Society to take into account the financial position of the Fidelity Fund. As a general principle, it is considered prudent to apply no more than 33.33% of the balance (net assets after providing for all known and anticipated claim payments) (rounded down to the nearest $1,000) of the Fidelity Fund in respect of an individual law practice when exercising a discretion to pay more than the statutory caps. It is suggested that the balance at the end of the month preceding the date of receipt of the first claim against the relevant law practice is the balance that should apply for the relevant law practice. Second consideration circumstances of the particular case Subsection 396(4) of the Act provides that, despite subsection (2), the Society may authorise payment of a larger amount if satisfied that it would be reasonable to do so after taking into account the circumstances of the particular case. Without limiting the generality of the matters that are to be taken into account in the circumstances of any particular case, Council may wish to consider the following factors, where relevant: ensuring the equitable treatment of claims; X:\ContactDocs\CEO\Corporate Docs\Publication Scheme\Statutory Caps Discretion approved by Council 3 Dec 2009.doc Page 4 of 7

5 whether any hardship will be caused to a party entitled to the claim payment if the discretion is not exercised; the conduct of the party making the claim; and the purpose for which the trust funds were held by the law practice. Equitable Treatment of Claims As a matter of transparency, objectiveness and impartiality, if claims against the Fidelity Fund in respect of a law practice are admitted for more than the law practice cap amount and a discretion is exercised to pay more than that amount but less than the amount required to pay all such claims in full, all claims in respect of that practice should, unless a discretion is exercised to do otherwise, be paid at the same rate. Hardship Whilst section 396 does not use the term hardship, Council may consider it a relevant factor that may be taken into consideration when considering whether one claimant, or a class of claimants, is to be treated preferentially to other claimants (i.e. the circumstances of the particular case). The term hardship is not defined in the Act or the Regulation. It is defined in the The Australian Pocket Oxford Dictionary as: severe suffering or privation. The term privation is defined by The Australian Pocket Oxford Dictionary as: lack of the comforts or necessities of life. The Conduct of the Party Where relevant, other factors that may be taken into account when considering whether to exercise the discretion to pay more than a statutory cap amount could include: 1. the extent to which the claimant knowingly assisted in or contributed towards, or was a party or accessory to, the act or omission that gave rise to the claim; and 2. the extent to which the negligence of the claimant contributed to the loss. The Purpose for which the trust funds were held Another factor that might be considered when deciding whether to treat a claimant, or a class of claimants, preferentially to other claimants, is the purpose for which the trust funds were held by the law practice. Application of the Policy In an appropriate case, in order to assess the relative merits of claimants seeking to be treated preferentially to other claimants, Council may consider it prudent to invite the claimant to provide the Society with a Statutory Declaration: X:\ContactDocs\CEO\Corporate Docs\Publication Scheme\Statutory Caps Discretion approved by Council 3 Dec 2009.doc Page 5 of 7

6 1. setting out details of the assets and liabilities of the person, or entity, that will receive the benefit of the claim payment (the person receiving the benefit of the claim payment will not always be one and the same person as the claimant e.g. the executor of a deceased estate may make a claim on behalf of all of the beneficiaries of the estate); 2. the hardship that will be suffered by that person, or entity, if a discretion is not exercised to pay more than the relevant capped amount; 3. whether the claimant s conduct contributed, in any way, to the loss and 4. the purpose for which the trust funds were held by the law practice. An example of a situation where a discretion might be exercised to treat a claimant preferentially to other claimants is set out hereunder: there are 51 claims for amounts totalling $4,350,000 in respect of the relevant law practice; a claim for $350,000 is for the proceeds from the sale of an elderly lady s home the money was to be used to purchase a unit in a retirement village she has no other assets apart from the sum of $100,000 in a bank account the purchase price of the unit is $350,000; there are no known special circumstances pertaining to the other claimants; the balance of the Fidelity Fund at the end of the month preceding the receipt of the first claim for the law practice was $9 million The Society determines that it will exercise a discretion to pay more than the law practice cap amount of $2,000,000 by making $3,000,000 (33.33% of the balance of the Fidelity Fund) available to reimburse the claimants losses. As a result of deciding to make $3,000,000 available to reimburse the claimants, each claimant would receive cents in the dollar ($3,000,000 divided by $4,350,000) if no discretion is exercised to treat any claimant, or class of claimants, preferentially to others. If a discretion is exercised to treat the elderly lady preferentially by paying her claim in full, the options available in relation to the reimbursement of the other claimants losses are as follows: pay them at the same rate they would have been paid if the elderly lady s claim was paid at the same rate as their claims this would result in the elderly lady being paid $350,000 and them being paid a total amount of $2,758,621 ($4,000,000 paid at the rate of cents in the dollar), meaning that the total amount paid from the Fidelity Fund would be $3,108,621; or limit the total payments to $3,000,000 with the result that the elderly lady s claim would be paid in full ($350,000) and the other claimants would be paid a total amount of $2,650,000, representing reimbursement at the rate of cents in the dollar ($2,650,000 divided by $4,000,000) Summary 1. Without limiting the generality of the issues that will be taken into consideration when determining whether to exercise a discretion to pay more than a statutory cap, one X:\ContactDocs\CEO\Corporate Docs\Publication Scheme\Statutory Caps Discretion approved by Council 3 Dec 2009.doc Page 6 of 7

7 consideration is the financial position of the Fidelity Fund s.396(4). As a general principle, it is considered prudent to apply no more than 33.33% of the balance (net assets after providing for all known and anticipated claim payments) (rounded down to the nearest $1,000) of the Fidelity Fund in respect of an individual law practice when exercising a discretion to pay more than the statutory caps. 2. If claims against the Fidelity Fund in respect of a law practice are admitted for more than the law practice cap amount of $2 million and a discretion is exercised to pay more than that amount but less than the amount required to pay all such claims in full, all claims in respect of that practice should, unless a discretion is exercised to do otherwise, be paid at the same rate. 3. In the event that an admitted claim will not be paid in full, the claimant may be invited to lodge a statutory declaration to provide relevant information, including, but not limited to, those issues identified above, to enable the Society to determine whether to exercise a discretion to treat one or more of the claims more favourably than the other claims in respect of that law practice. 4. In the event that a discretion is exercised to pay more than the single claim cap amount of $200,000, the other claims in respect of the relevant law practice should normally be compensated at the same rate that they would have been compensated if the discretion had not been exercised. 5. In the event that a discretion is exercised to treat one, or more claimants, preferentially to other claimants in respect of the relevant law practice, the other claimants should normally be compensated at the same rate that they would have been compensated if that discretion had not been exercised. X:\ContactDocs\CEO\Corporate Docs\Publication Scheme\Statutory Caps Discretion approved by Council 3 Dec 2009.doc Page 7 of 7