Administrative Decisions Tribunal New South Wales

• Medium Neutral Citation: Law Society of New South Wales v Aouad [2012] NSWADT 267
• Hearing dates: 23 November 2012
• Decision date: 14 December 2012
• Jurisdiction: Legal Services Division
• Before: Judge K P O'Connor, President; J Pheils, Judicial Member; J Butlin, Non-judicial Member

Decision

1. The Tribunal finds that the respondent engaged in professional misconduct.

2. The Tribunal orders that the respondent be reprimanded.

3. The Tribunal orders that the respondent pay the applicant's costs of and incidental to the proceedings, and, if not agreed, as assessed by a costs assessor under Part 3.2 of the Legal Profession Act 2004.

• Catchwords: LEGAL PRACTITIONERS - Discipline - Negotiation by solicitor of regulated mortgages - Contravention - Unethical conduct - Reprimand - Legal Profession Act 1987, s 117
• Legislation Cited: Legal Profession Act 1987; Legal Profession Act 2004
• Category: Principal judgment
• Parties: Law Society of New South Wales (Applicant); Nasser Aouad (Respondent)
• Representation: Counsel; C Webster (Applicant); A Cheshire (Respondent); L Pierotti (Applicant)
• File Number(s): 112034

REASONS FOR DECISION

1 On 5 December 2011 the Council of the Law Society lodged an application with the Tribunal under s 551 of the Legal Profession Act 2004. The Council applied for disciplinary orders to be made against a legal practitioner, Mr Nasser Aouad, on the ground of professional misconduct. The Council alleged that he had contravened s 117 of the Legal Profession Act 1987 on two occasions, in November 2004 and in January 2005. Section 117 regulated the conduct of solicitors in relation to the obtaining of mortgages for their clients; and provided that a contravention constituted professional misconduct. The conduct came to notice as a result of a trust account inspection.

2 The material before the Tribunal comprises: the application, setting out the particulars of the grounds of complaint; the solicitor's reply, admitting many of the particulars, and denying or qualifying some; the affidavit of Anne-Marie Foord, of the Law Society, setting out the resolutions of the Society in relation to the matter; the affidavit of Charles Quagliata, Law Society trust account investigator, outlining his investigation of the matter; an affidavit of the solicitor, in elaboration of those points of reply where he disagrees with the particulars.

3 At hearing on 23 November 2012, the parties handed up an agreed statement of facts (see Attachment to these reasons), and indicated their consent to an order, in the terms sought in the application, i.e. that the respondent be publicly reprimanded and that the respondent pay the applicant's costs of and incidental to the proceedings.

4 The events of concern took place between November 2004 and January 2005. A finance broker introduced a Mr Charmand to the solicitor, with a view to the solicitor introducing Mr Charmand to persons to whom he might be able to on-lend money which he had borrowed on the security of a mortgage of his home from Perpetual Trustee Australia Pty Ltd. The total amount borrowed under the primary loan was $520,000. The amounts on-lent were $250,000 and $95,000. The first amount was the subject of a loan described in the agreed statement of facts as the 'First loan', and the second was the subject of a loan described in the statement as the 'Naamat loan'. They were secured by second mortgages. The agreed statement of facts is attached.

5 These loans were regulated mortgages within the meaning of s 115 of the Act, which provided relevantly to this case:

regulated mortgage means a mortgage (including a contributory mortgage) other than: ...

(b) a mortgage under which the lender or contributors nominate the borrower, but only if the borrower is not a person introduced to the lender or contributors by the solicitor who acts for the lender or contributors or by:

(i) an associate of the solicitor, or

(ii) an agent of the solicitor, or

(iii) a person engaged by the solicitor for the purpose of introducing the borrower to the lender or contributors, ...

6 Mr Charmand was a 'client' within the meaning of s 115:

client of a solicitor means a person who:

(a) receives the solicitor's advice about investment in a regulated mortgage or managed investment scheme, or

(b) gives the solicitor instructions to use money for a regulated mortgage or managed investment scheme.

7 Section 117 provided:

117 Conduct of mortgage practices

(1) A solicitor must not, in the solicitor's capacity as solicitor for a lender or contributor, negotiate the making of or act in respect of a regulated mortgage unless:

(a) the mortgage is a State regulated mortgage, or

(b) the mortgage is a run-out mortgage, or

(c) the mortgage forms part of a managed investment scheme that is operated by a responsible entity.

(2) A solicitor must not, in the solicitor's capacity as solicitor for a lender or contributor, negotiate the making of or act in respect of a regulated mortgage except in accordance with:

(a) the Corporations Act 2001 of the Commonwealth, or that Act as modified by any ASIC exemption or the regulations under that Act, and

(b) this Act, the regulations and solicitors rules.

(3) A solicitor must not, in the solicitor's capacity as solicitor for a lender or contributor, negotiate the making of or act in respect of a regulated mortgage that forms part of a managed investment scheme unless the solicitor complies with any ASIC exemption that applies to managed investment schemes that:

(a) have more than 20 members, and

(b) are operated under the supervision of the Law Society in accordance with that exemption.

This subsection applies even if the regulated mortgage forms part of a managed investment scheme that has no more than 20 members.

(4) Subsection (3) does not apply if the managed investment scheme is operated by a responsible entity.

(5) A solicitor who knows that an associate has contravened a requirement referred to in subsection (1), (2) or (3) must notify the Law Society Council of that fact in writing within 21 days after becoming aware of the contravention.

(6) A solicitor who contravenes this section commits professional misconduct.

8 This case did not fall within any of the exceptions listed in s 117(1), nor were these State regulated mortgages as defined. Section 118 required solicitors who are involved in negotiating regulated mortgages to notify the Law Society, and nominate their practice as a State regulated mortgage practice. The solicitor did not make a notification.

9 It is not disputed that the solicitor acted in contravention of these provisions.

10 The application is brought under the current Act, the Legal Profession Act 2004, but relates to conduct that contravened the former Act. Conduct of the kind identified by the application remains regulated by the current Act, see generally ss 477 ff. The difference of immediate relevance between the old and new provisions is that a contravention of s 117 must be treated as professional misconduct (see s 117(6)), whereas a contravention of the current provision (s 479(6)) is less definitively categorised, and it provides that a contravention is 'capable of being professional misconduct'.

11 We are satisfied, as outlined in the disciplinary application, that each loan into which the solicitor's client entered as lender, following the solicitor's introductions, constituted a regulated mortgage as defined in s 115, and they were not State regulated mortgages as defined in s 116. The solicitor had not furnished a notice as required by s 118. Nor were they run-out mortgages as defined in s 115, having been entered into after 7 September 2001, and they did not form part of a managed investment scheme operated by a responsible entity as defined in s 115.

12 The respondent was admitted to practice in June 1999 at the age of 30. He had just commenced practice as a principal in a small suburban practice in Lakemba when the events the subject of these proceedings occurred. He has now been in practice for 13 years.

13 At hearing his counsel referred to the toll these events had taken on his client. He said that these were the only occasions when his client had engaged in conduct of the kind charged. He noted that the events had occurred several years ago, and that his client had not come to disciplinary attention since then. He said that though his client acknowledges that he should have been aware of ss 115-118 and their implications for the course of conduct on which he embarked, he was not aware of them. Counsel also noted that a finding of professional misconduct was a grave one, and that this was an instance of a case where, once contravention was admitted, the finding followed by virtue of the statute, there being no possibility of it being dealt with by, say, a finding of unsatisfactory professional conduct.

14 While ss 115-118 possess a degree of complexity in the way they draw distinctions between permissible activity and impermissible activity by solicitors in relation to arranging mortgages, it should have been readily apparent to any solicitor by 2004 that the giving of assistance to clients to find borrowers drawn from his circle of associates or clients was, at the very least, problematic.

15 During the 1990s, there had been a spate of major collapses involving solicitors' mortgage practices, leading to the significant depletion of the Fidelity Fund. At the time the respondent was entering practice this was a major area of concern. Sections 115-118 replaced earlier provisions going to this subject, and involved a significant tightening of the rules. See further, Legal Profession Amendment (Mortgage Practices) Bill, Second Reading Speech: New South Wales, Parliamentary Debates Legislative Council 3 May 2000, p 5020 (The Hon. Jeff Shaw, Attorney General). The Law Society's material included the bulletins issued to practitioners notifying them of these amendments when they came into effect and their significance: see 'Caveat 220 - 07 June 01' and 'Caveat 224 - 31 August 2001'.

16 Further, the facts as agreed show that the solicitor had a plain conflict of interest in respect of both loans. The solicitor not only had Mr Charmand as a client but also the co-borrower in respect of the first loan, NGK Enterprises Pty Ltd. The same situation applied in relation to the Naamat loan. This conflict should have been obvious to the solicitor, and led him not to be involved in this kind of activity regardless of whether he had a specific awareness of s 117 and the related provisions.

17 As the orders to which the respondent is prepared to submit are in line with those sought by the Law Society, we are not inclined to intervene and exercise our discretion to impose a different, and possibly more serious, order.

18 We accept that the finding of professional misconduct is itself a form of punishment. We also acknowledge that it is now six years since the respondent was first notified of the Law Society's concerns. This case was delayed until civil proceedings for professional negligence brought by Mr Charmand against the respondent were resolved. That occurred in December 2010.

19 The applicant was not able to inform us how the orders proposed compared with previous orders in similar cases, advising that this was a unique case.

20 The case is one of unethical conduct involving an admitted contravention of provisions designed to protect clients. In that sense it is not, regrettably, unique. We have reviewed recent Tribunal decisions involving unethical conduct where orders of reprimand have resulted. We consider this case comparable, and that the additional orders seen in some of those cases such as a fine, or a condition that the respondent undertake a course of instruction need not be considered on this occasion.

21 The orders are to be made under the present Act. As the Law Society acknowledged at hearing, there is no need to use the adjective 'public' to describe the reprimand, as all reprimand orders are now public ones in contrast to the earlier system. In that regard, the Act provides (s 562(8)) that: 'If the Tribunal makes an order reprimanding the practitioner, the Tribunal is to publish the order and a statement of its reasons for making the order'.

Orders

1. The Tribunal finds that the respondent engaged in professional misconduct.

2. The Tribunal orders that the respondent be reprimanded.

3. The Tribunal orders that the respondent pay the applicant's costs of and incidental to the proceedings, and, if not agreed, as assessed by a costs assessor under Part 3.2 of the Legal Profession Act 2004.

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ATTACHMENT

THE COUNCIL OF THE LAW SOCIETY OF NEW SOUTH WALES

v

NASSER AOUAD

NO: 112034

ORDERS AGREED

1. NASSER AOUAD ["the Solicitor"] is guilty of professional misconduct as follows:

Unethical conduct - contravention of Section 117 of the Legal Profession Act 1987 (repealed 1.10.05).

2. That the legal practitioner be publicly reprimanded.

3. That the legal practitioner pays the costs of and incidental to the proceedings.

AGREED STATEMENT OF FACTS

Background

1. In November 2004 Abdul Karim Charmand ["Mr Charmand"] consulted the Solicitor seeking advice in respect of an investment of funds available to Mr Charmand. Mr Charmand was introduced to the Solicitor by Mr Richard Kabbara ["Mr Kabbara"], a finance broker.

2. Mr Charmand was, as at November 2004, the sole proprietor of premises known as 11A Jellicoe Street, Condell Park ["the property"]. There was then a mortgage to the Commonwealth Bank with a balance of $37,554.69 outstanding.

3. Mr Charmand had then separated from his wife and there were attempts being made to settle his family law obligations with her. The Solicitor acted for Mr Charmand and those matters were ultimately settled. Mr Charmand was required to pay the sum of $105,000 to his former wife.

4. The Solicitor was instructed by Mr Charmand and informed by Mr Kabbara that Mr Kabbara had been retained to obtain a loan of $520,000, part of which was required for personal commitments of Mr Charmand (including in relation for settlement between Mr Charmand and his wife), and that on the recommendation of Mr Kabbara, the surplus was being borrowed to enable Mr Charmand to make loans at a higher rate of interest than he would have to pay on the loan to be arranged by Mr Kabbara. The Solicitor agreed to act for Mr Charmand in relation to a mortgage of the property by Mr Charmand.

5. The Solicitor advised Mr Charmand that he was able to recommend borrowers who might wish to borrow part of the funds available to Mr Charmand for a return in excess of Mr Charmand's monthly repayments The Solicitor informed Mr Charmand that he (the Solicitor) could recommend certain loans by way of further investments of such monies as were available to Mr Charmand forming part of the principal under the loan obtained by Mr Charmand, and to act for Mr Charmand in relation to the taking of security for such further investments. Mr Charmand instructed the solicitor to find appropriate borrowers and negotiate terms on his behalf, and act for Mr Charmand on the documentation of the loans.

6. Mr Charmand instructed Mr Kabbara to make the necessary application for finance and, in due course, that application was made with Perpetual Trustee Australia Limited ["Perpetual"]. The Solicitor accepts that either or both the application for the loan or notification of approval of the loan may have occurred after he received preliminary instructions from Mr Charmand.

7. On or about 14 November 2004 the Solicitor presented to Mr Charmand various documents for execution and which documents Mr Charmand executed. Those documents included a Loan Contract and a Mortgage of the property ["the documents"].

8. The documents provided for an advance to Mr Charmand by Perpetual of $520,000 repayable over a period of thirty (30) years and at an interest rate of 6.89% variable.

9. On 21 December 2004 the sum of $520,000 was advanced to Mr Charmand ["the advance"]. The Solicitor attended to all requirements concerning the advance.

10. At the date of settlement of the advance, a sum of $516,737.00 was made available by Perpetual. This sum was provided in the form of nine (9) cheques:

a. $37,554.69 - payable to the Commonwealth Bank of Australia to discharge the mortgage on the property.

b. $11,000 - payable to Instyle Rugs Pty Ltd - a company owned by Mr Charmand's son.

c. $5,000 - payable to Mr Charmand's daughter [R Charmand].

d. $89,000 - payable to Mr Charmand's former wife [M Charmand] - cheques (b),(c) and (d) represented the $105,000 payable to Mr Charmand's former wife pursuant to the Marital Deed of Agreement entered into by Mr Charmand.

e. $2,200 - payable to the Solicitor.

f. $250,000 - payable to Ruxan Pty Ltd ["Ruxan"].

g. $110,414.81 - payable to Mr Charmand. This cheque was banked by Mr Charmand.

h. $1,500 - payable to Mr Geard.

i. $10,000 - payable to St George Bank.

The First loan

11. In about January 2005 the Solicitor informed Mr Charmand that clients of his who were well known to him were prepared to borrow funds from him ["the First loan"] and that the First loan would be secured.

12. On or about 20 January 2005 the Solicitor, on behalf of Mr Charmand, executed a Deed of loan in respect of an advance of $260,000 [repayable by 20 April 2005 with a variable interest rate of 24% per annum] to Monir Taha, Abomahamed Benhikmat, Madge Hamze and NGK Enterprises Pty Limited ["the first borrowers"].

13. A cheque for $250,000 (see 10(f) above) was drawn in favour of Ruxan at the direction of the first borrowers, the Solicitor says because the funds were applied to the purchase of a property completed simultaneously with settlement of the First loan, which transaction required payment of $250,000 to the vendor, Ruxan, on settlement.

14. Ruxan was the vendor under contract of sale between it and NGK Enterprises of certain property in Bankstown and in which the Solicitor acted for NGK Enterprises.

15. The Solicitor introduced the First loan, did some title searches, obtained copies of the first borrowers' then current bank loans and prepared the relevant documentation. He was satisfied that the equity in the properties was sufficient to secure the First loan.

16. The First loan was secured by way of second mortgages, themselves secured by caveats, on a number of properties and provided for an establishment fee of $10,000.

17. The First loan was subsequently in default. The Solicitor says that contrary to his advice, Mr Charmand made new arrangements with the first borrowers involving relinquishing caveats securing the loan and assigning the loan.

The Naamat Loan

18. In or about January 2005 the Solicitor informed Mr Charmand that one of his clients wished to borrow a sum of money.

19. The Solicitor subsequently negotiated a second loan advance from Mr Charmand to Adnam Naamat. The loan advance was for a sum of $95,000 ["the Naamat loan"].

20. The Naamat loan was repayable by 15 January 2006 with variable interest initially at the rate of 21% per annum.

21. Of the Naamat loan monies, on request by the Solicitor, Mr Charmand obtained a bank cheque in the sum of $83,846.50 and cash in the sum of $6,158.50, by withdrawal of the sum of $90,012.50 on 14 January 2005 [with the sum of $7.50 being the bank cheque fee] from his account into which the funds representing cheque at 10(g) had been banked . An establishment fee of $4,700 was payable to Mr Charmand in respect of the Naamat loan. The Solicitor says $83,846.56 was the net amount advanced on settlement, and that other money forming part of the principal was retained by Mr Charmand as prepayment of interest and / or an establishment fee.

22. The Naamat loan settled on 19 January 2005.

23. Mr Naamat was unrepresented and the Solicitor, on behalf of Mr Charmand, dealt directly with Mr Naamat.

24. Mr Naamat, formerly a finance broker, was known to the Solicitor but not to Mr Charmand.

25. At settlement of the Naamat loan, Mr Charmand provided to the Solicitor the bank cheque in the sum of $83,846.50 in favour of Mr Naamat. The difference between the loan advance of $95,000 and this sum (i.e. $11,153.50) comprised interest payments in advance and some legal fees as well as the establishment fee.

26. The loan documentation was signed by the Solicitor on behalf of Mr Charmand.

27. Mr Charmand only received interest payments for four (4) months.

28. The Naamat loan was subsequently in default.

Legal Profession Act 1987

29. At all relevant times the provisions of Section 117 of the Legal Profession Act 1987 [the Act] were in force, relevantly as follows:

117 Conduct of mortgage practices

(1) A solicitor must not, in the solicitor's capacity as solicitor for a lender or contributor, negotiate the making of or act in respect of a regulated mortgage unless:

(a) the mortgage is a State regulated mortgage, or

(b) the mortgage is a run-out mortgage, or

(c) the mortgage forms part of a managed investment scheme that is operated by a responsible entity.

(2) A solicitor must not, in the solicitor's capacity as solicitor for a lender or contributor, negotiate the making of or act in respect of a regulated mortgage except in accordance with:

(a) the Corporations Act 2001 of the Commonwealth, or that Act as modified by any ASIC exemption or the regulations under that Act, and

(b) this Act, the regulations and solicitors rules.

(3) A solicitor must not, in the solicitor's capacity as solicitor for a lender or contributor, negotiate the making of or act in respect of a regulated mortgage that forms part of a managed investment scheme unless the solicitor complies with any ASIC exemption that applies to managed investment schemes that:

(a) have more than 20 members, and

(b) are operated under the supervision of the Law Society in accordance with that exemption.

This subsection applies even if the regulated mortgage forms part of a managed investment scheme that has no more than 20 members.

(4) Subsection (3) does not apply if the managed investment scheme is operated by a responsible entity.

(5) A solicitor who knows that an associate has contravened a requirement referred to in subsection (1), (2) or (3) must notify the Law Society Council of that fact in writing within 21 days after becoming aware of the contravention.

(6) A solicitor who contravenes this section commits professional misconduct.

30. Section 115 of the Act defined regulated mortgage as follows:

regulated mortgage means a mortgage (including a contributory mortgage) other than:

(a) a mortgage under which the lender is a financial institution, or

(b) a mortgage under which the lender or contributors nominate the borrower, but only if the borrower is not a person introduced to the lender or contributors by the solicitor who acts for the lender or contributors or by:

(i) an associate of the solicitor, or

(ii) an agent of the solicitor, or

(iii) a person engaged by the solicitor for the purpose of introducing the borrower to the lender or contributors, or

(c) a mortgage, or a mortgage of a class, that the regulations prescribe as exempt from this definition.

31. Mr Charmand was a lender and client as defined in section 115 of the Act.

32. The First loan and the Naamat loan:

a. were regulated mortgages as defined in section 115 of the Act;

b. were not State regulated mortgages as defined in sections 115 and 116 of the Act (the Solicitor had not at the relevant times given notice to the Council nominating his practice as a State regulated mortgage practice in accordance with section 118 of the Act); and

c. were not run-out mortgages as defined in section 115 of the Act (having been entered into after 7 September 2001); and

d. did not form part of a managed investment scheme operated by a responsible entity as defined in section 115 of the Act.

Decision last updated: 14 December 2012