Supreme Court New South Wales

• Medium Neutral Citation: Registrar-General of New South Wales v LawCover [2013] NSWSC 1471
• Hearing dates: 18 September 2013
• Decision date: 09 October 2013
• Before: Harrison J

Decision

Summons dismissed with costs

• Catchwords: INSURANCE - professional indemnity insurance - claim against a solicitor - whether LawCover policy in existence at time of event giving rise to the claim - where two separate events in contest - Law Reform (Miscellaneous Provisions) Act 1946 s 6 - whether the happening of the event giving rise to a claim against a solicitor is the result of a fraudulent, wilful or negligent act or omission by him - claim upon the Torrens Assurance Fund - where Registrar-General subrogated to the claimant in respect of the claimant's rights and remedies against the solicitor in relation to loss caused by solicitor's default - whether Registrar-General able to show existence of a charge upon a LawCover policy of insurance indemnifying defaulting solicitor - whether loss caused by solicitor "compensable loss" for purposes of Real Property Act - whether loss or damage suffered "compensable under an indemnity given by a professional indemnity insurer" - whether indemnity otherwise potentially excluded by dishonesty clause - whether question of dishonesty already determined in earlier proceedings
• Legislation Cited: Civil Liability Act 2002; Law Reform (Miscellaneous Provisions) Act 1946; Real Property Act 1900
• Cases Cited: Argyropoulos v Layton [2002] NSWCA 183; Chubb Insurance Company of Australia Limited v Moore [2013] NSWCA 212; Energize Fitness Pty Ltd v Vero Insurance Ltd [2012] NSWCA 213; Hawkins v Clayton [1988] HCA 15;(1988) 164 CLR 539; Owners - Strata Plan 50530 v Walter Construction & Ors [2006] NSWSC 552; Owners - Strata Plan 50530 v Walter Construction Group Limited (in liquidation) & Ors [2007] NSWCA 124; (2007) 14 ANZ Insurance Cases 61-734; Pedulla v Panetta [2011] NSWSC 1386; Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834; Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; (2001) 53 NSWLR 198; Tzaidas v Child [2004] NSWCA 252; (2004) 61 NSWLR 18; Vaccaro v Flammia [2008] NSWSC 1322; Wilson v Rigg [2002] NSWCA 246
• Category: Principal judgment
• Parties: Registrar-General of New South Wales (Plaintiff); LawCover (Defendant)
• Representation: Counsel: G A Sirtes SC & H Altan (Plaintiff); S R Donaldson SC & P A Horvath (Defendant); Solicitors: Gavin Bartier (Plaintiff); DLA Piper Australia (Defendant)
• File Number(s): 2012/384918
• Publication restriction: Nil

Judgment

1 HIS HONOUR: By a summons filed on 28 March 2013 the Registrar-General seeks leave pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 to commence proceedings against LawCover in the circumstances referred to below. The application is opposed.

Background

2 On 1 July 2011 Nadia Pedulla commenced proceedings in the Equity Division of this Court against her brother Fernando Panetta and his wife Anna Lam in which she alleged that they fraudulently dealt with a property of which she was the registered proprietor. She also joined the Registrar-General as a defendant in those proceedings, seeking compensation from the Assurance Fund. Mr Panetta and Ms Lam had by that time left Australia and took no part in the proceedings.

3 Ms Pedulla did not join Lewis Yee, the solicitor who was involved in assisting Mr Panetta and Ms Lam to become the owners of the property, when she filed the statement of claim on 1 July 2011. The Registrar-General joined him as a party to those proceedings by way of a cross-claim filed on 12 August 2011. Ms Pedulla subsequently amended her statement of claim on 2 September 2011 to join Mr Yee as the third defendant, alleging that he negligently caused her loss. LawCover was not a party to those proceedings.

4 The facts that gave rise to the claims that were brought against Mr Yee by Ms Pedulla and the Registrar-General were as follows. Mr Yee first met Ms Lam when he acted for her on her purchase of a property in Lindfield in 1995. They formed a friendship that later developed into a romantic relationship. By 1998 they were living and working together. Mr Yee became acquainted with Mr Panetta in 2000. By 2002 Mr Yee and Ms Lam were no longer romantically involved but continued to co-habit in a rental apartment in Pyrmont. Mr Panetta and Ms Lam developed a romantic relationship.

5 In about 2003, Mr Yee became aware that Ms Lam had moved into the property with Mr Panetta. He was aware that it belonged to Mr Panetta's sister. Mr Yee continued to see Ms Lam socially and undertook legal work for her. Mr Yee's evidence was that during his association with Ms Lam and Mr Panetta, he never had any reason to doubt their honesty or integrity, and considered them good friends who he trusted completely. Mr Yee's evidence was that in about July 2006, he had a discussion with Mr Panetta in his offices during which Mr Panetta said:

"My sister is in Italy in a convent and she is supposed to transfer all of her assets to the Church. Is there any way we can transfer the property to me rather than giving it to the Church."

6 Acting on that information, and on the understanding that both Mr Panetta and Ms Pedulla wished to engage him to facilitate a transfer of the property to Mr Panetta, Mr Yee advised Mr Panetta that the only way he could think for this to occur was for Ms Pedulla to provide Mr Panetta with a power of attorney. He subsequently made enquiries and discovered that Shreuder Partners, a firm of solicitors, held the certificate of title for the property. On 17 August 2006, in anticipation of receiving the signed power of attorney from Ms Pedulla, Mr Yee wrote to Shreuder Partners to enquire whether they still held the certificate of title. In that letter, he stated that he acted for Ms Pedulla. Mr Yee's evidence was that in making that statement, he believed he was carrying out Ms Pedulla's wishes and instructions, as conveyed to him by Mr Panetta.

7 Schreuder Partners responded in letters dated 21 August 2006 and 30 August 2006 in effect refusing to provide the certificate of title unless they received written authorisation to do so from Ms Pedulla. Mr Panetta subsequently provided Mr Yee with what appeared to be such a written authority. That document, which was dated 11 September 2006, and which also appeared to be from Ms Pedulla and signed by her, was addressed to Shreuder Partners and referred to Mr Yee as "my solicitor". At the time Mr Panetta handed the authority to Mr Yee, he told him that he obtained it from Ms Pedulla, and Mr Yee's evidence was that he had no reason to doubt its authenticity. He said that it confirmed his understanding that Ms Pedulla wished to engage him as her solicitor for the purpose of having the property transferred to Mr Panetta.

8 On 25 September 2006, Mr Yee wrote to Schreuder Partners enclosing the authority. Shreuder Partners subsequently released the certificate of title four days later.

9 In late January or early February 2007, Mr Panetta delivered a power of attorney to Mr Yee that appeared to have been signed by Ms Pedulla. Mr Yee's evidence was that he had no reason to doubt the authenticity of this document either. From that point, Mr Yee assisted in having the property transferred to Mr Panetta. It was subsequently encumbered by various mortgages for loans provided to Mr Panetta and Ms Lam, and on 2 May 2011 Mr Panetta and Ms Lam ultimately sold it to bona fide purchasers for $3.8M. As at that date, the property was encumbered by a mortgage securing a loan of $1.990M.

10 The proceeds of that sale were used to discharge that mortgage, and after payment of expenses consequent on the sale, Mr Panetta and Ms Lam each received $684,890.92 on 25 May 2011 before they left the jurisdiction.

11 As at 12 August 2011, when Mr Yee was served with the Registrar-General's cross-claim, he was a practising solicitor and held professional indemnity insurance with LawCover. That was a "claims made" policy that covered Mr Yee for claims that were made against him in the period from 1 July 2011 to 30 June 2012. On 15 August 2011, Mr Yee notified LawCover of the claim.

12 Pembroke J heard the proceedings. Mr Yee was represented by solicitors and both senior and junior counsel retained by LawCover. His defence was conducted on the basis that he was negligent, but not dishonest or fraudulent, and apportionment of his liability under the Civil Liability Act 2002 was sought on the basis that he was a negligent concurrent wrongdoer.

13 It emerged in the proceedings that what Mr Panetta had originally told Mr Yee was false and that Mr Panetta and Ms Lam had fraudulently created the authority and the power of attorney.

14 On 25 November 2011 Pembroke J published reasons for judgment: Pedulla v Panetta [2011] NSWSC 1386. He found in favour of Ms Pedulla against Ms Lam, Mr Panetta, the Registrar-General and Mr Yee, and in favour of the Registrar-General against Mr Yee on the Registrar-General's cross-claim. Mr Yee's liability as a concurrent wrongdoer was assessed at 30 percent. Ms Lam and Mr Panetta were ordered to account to Ms Pedulla for the net proceeds of the sale of the property. His Honour found that Mr Panetta and Ms Lam each received $684,890.92 from the proceeds of the sale. His Honour gave judgment for the Registrar-General against Mr Yee in the sum of $1,238,748.11, being 30 percent of the amount that the Registrar-General was ordered to pay Ms Pedulla from the Assurance Fund, plus costs.

15 On 30 November 2011, LawCover informed Mr Yee that it had declined indemnity under the policy based on the fraud and dishonesty exclusion.

Questions for determination

16 Following the exchange of written submissions between the parties, it became clear that three issues arise for consideration by me:

1. When did the event giving rise to the claim within the meaning of s 6 of the Law Reform (Miscellaneous Provisions) Act take place? For obvious reasons, that inquiry invites and requires an answer to the associated question of what was the event giving rise to the claim within the meaning of s 6 of the Act?

2. Are the proceedings that the Registrar-General wishes to commence at least arguable having regard to Pembroke J's conclusions concerning Mr Yee's dishonesty and its relationship to Ms Pedulla's loss?

3. In the events that have occurred, does the Registrar-General's proposed claim against LawCover constitute an abuse of process?

Legislation

17 Section 6 of the Act is notorious, but is for present purposes in the following relevant terms:

"6 Amount of liability to be charge on insurance moneys payable against that liability

(1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.

...

(4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured:

Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken."

18 As recently as July this year, the Court of Appeal was called upon to consider the section in Chubb Insurance Company of Australia Limited v Moore [2013] NSWCA 212. At [55], Emmett JA and Ball J said this:

"[55] The language of s 6 has been described as 'undoubtedly opaque and ambiguous' (New South Wales Medical Defence Union v Crawford (1993) 31 NSWLR 469 at 479D). It has also been said that its 'ambiguity may be its only clear feature' (McMillan v Mannix (1993) 31 NSWLR 538 at 542B). Section 6 should be repealed altogether or completely redrafted in an intelligible form, so as to achieve the objects for which it was enacted."

19 Ms Pedulla's claim for compensation out of the Assurance Fund administered by the Registrar-General was based upon a combination of provisions in the Real Property Act 1900. Those provisions are relevantly as follows:

"120 Proceedings for compensation

(1) Any person who suffers loss or damage as a result of the operation of this Act in respect of any land, where the loss or damage arises from:

(a) fraud...

may commence proceedings in the Supreme Court for the recovery of damages.

(2) Such proceedings may be taken only:

(a) against the person whose acts or omissions have given rise to the loss or damage referred to in subsection (1), or

(b) against the Registrar-General.

(3)...

128 Definitions

(1) In this Part:

...

'compensable loss' means loss or damage of the kind referred to in section 129 (1), other than loss or damage of the kind referred to in section 129 (2).

'compensation' means compensation from the Torrens Assurance Fund to which a person is entitled under section 129.

'court proceedings' means proceedings referred to in section 132.

'insurer' means a professional indemnity insurer and any other person who carries on an insurance business within the meaning of the Insurance Act 1973 of the Commonwealth.

...

'professional indemnity insurer' means an insurer, scheme or fund (whether or not established by or under any Act or law) by or from which claims are payable, being claims made by persons sustaining loss or damage owing to any fraudulent, wilful or negligent act or omission by a person carrying on business in a particular profession, trade or calling.

129 Circumstances in which compensation payable

(1) Any person who suffers loss or damage as a result of the operation of this Act in respect of any land, where the loss or damage arises from:

...

(e) the person having been deprived of the land, or of any estate or interest in the land, as a consequence of fraud...

is entitled to payment of compensation from the Torrens Assurance Fund.

(2) Compensation is not payable in relation to any loss or damage suffered by any person:

...

(b) to the extent to which the loss or damage:

(i) is a consequence of any fraudulent, wilful or negligent act or omission by any solicitor, licensed conveyancer, real estate agent or information broker, and

(ii) is compensable under an indemnity given by a professional indemnity insurer, or...

129A Limits on amount recoverable generally

The total compensation that is payable under this Part, in relation to loss or damage suffered by a person as a result of the person being deprived of land or any estate or interest in land, is limited to the market value of the land at the date on which compensation is awarded to that person plus any legal, valuation or other professional costs reasonably incurred by the person in making the claim.

132 Court proceedings for the recovery of compensation

(1) Proceedings before a court for the payment of compensation are to be taken against the Registrar-General as nominal defendant.

(2) Any such court proceedings may only be commenced:

(a) if administrative proceedings have been commenced and determined in relation to the compensable loss, or

(b) by leave of the court or with the consent of the Registrar-General...

133 Subrogation of rights to claim compensation

(1) ...

(2) If administrative proceedings or court proceedings are commenced in relation to a claimant's compensable loss, the Registrar-General is subrogated to the claimant in respect of the claimant's rights and remedies against any person in relation to that loss.

(3) ...

(4) The Registrar-General may join any person in any court proceedings if of the opinion that the claimant has a cause of action against that person in respect of the compensable loss to which the proceedings relate..."

The first issue

20 The Registrar-General contends that the event that gave rise to the claim for damages or compensation was the institution of the proceedings by Ms Pedulla against the Registrar-General on 1 July 2011 pursuant to s 120 of the Real Property Act. LawCover contends in contrast that the event that gave rise to the claim was Mr Yee's negligent conduct that caused her to lose her property. It is uncontroversial in these proceedings that that loss occurred either in 2007 or April/May 2011, but in any event before 1 July 2011 and accordingly not during the relevant period of insurance commencing on that date.

21 The Registrar-General's argument was as follows. Ms Pedulla's claim against Mr Yee was a claim in negligence. However, the event that founded her claim against Mr Yee did not also give rise to the claim brought against him by the Registrar-General. What is described as "the trigger point" is said to be the later event subsisting in Ms Pedulla's claim on 1 July 2011 against the Registrar-General based on the fraudulent acts of Mr Panetta and Ms Lam. The Registrar-General maintains that he is not bringing an action on behalf of Ms Pedulla founded on Mr Yee's negligence. The Registrar-General is said to be bringing his own statutory cause of action to recover the amount of "compensable loss" as defined in s 128 of the Real Property Act paid out of the Assurance Fund in response to Ms Pedulla's claim against the Registrar-General.

22 The Registrar-General urged upon me that the critical question was, would the Registrar-General have had a claim against Mr Yee in relation to Ms Pedulla's compensable loss if she had not instituted her claim against the Registrar-General on 1 July 2011? The suggested answer to that question was "no". The Registrar-General maintained that his claim relied upon the anterior claim made against the Registrar-General by Ms Pedulla. It was necessary for her to enliven her statutory cause of action before the Registrar-General's cause of action under s 133(2) of the Real Property Act arose. That event occurred on 1 July 2011 when she commenced her proceedings.

23 In the proceedings before Pembroke J, Ms Pedulla relevantly made two claims. First, a claim for $3.8M in compensation from the Assurance Fund pursuant to s129(1)(e) of the Real Property Act, having been deprived of her property as a consequence of fraud. Secondly, a claim against Mr Yee for $3.8M for the loss of her land, as well as approximately $400,000 in consequential losses. The Registrar-General defended the first claim on the basis that, pursuant to s 129(2)(b), compensation is not payable by the Assurance Fund to the extent to which the loss is a consequence of any fraudulent, wilful or negligent act or omission by any solicitor and "is compensable under an indemnity given by a professional indemnity insurer". Pembroke J described this defence as turning on "the likely application of the dishonesty exclusion in Mr Yee's professional indemnity policy".

24 The circumstances in which the issue fell to be determined caused a reversal of the usual onus, in that the party seeking to establish the availability of cover (the Registrar-General) bore the onus of proving on the balance of probabilities that the dishonesty exclusion did not operate to deprive Mr Yee of cover. Following a comprehensive review of the evidence, Pembroke J held that the Registrar-General had not demonstrated that it was more likely than not that the loss was compensable under a relevant indemnity.

25 As to Ms Pedulla's claim against Mr Yee for the $3.8M, his Honour held at [39] that:

"[39]...once the plaintiff has recovered her compensable loss from the Assurance Fund consisting of the current market value of the land and associated professional costs, she cannot obtain judgment against Mr Yee for the same amount. Her common law rights and remedies to recover that amount from Mr Yee cease to be exercisable by her and are only exercisable by the Registrar-General pursuant to Section 133(2)."

26 Accordingly, Ms Pedulla failed in her substantive claim against Mr Yee, although the Registrar-General succeeded in its subrogated action against him.

27 In the present proceedings the Registrar-General carries the onus of establishing that a charge under s 6(1) of the Act has come into existence. This is the first step. There is no occasion to consider a grant of leave in the absence of a charge under s 6(1): Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834 at [17] per McCallum J.

28 In Chubb at [56]-[57] Emmett JA and Ball J said this:

"[56] Section 6(1) provides that the amount of the liability to pay damages or compensation, of any person who has entered into a contract of insurance by which that person is indemnified against that liability, is to be a charge on all insurance moneys that may become payable in respect of that liability. The charge comes into existence on the happening of the event that gives rise to the claim for damages or compensation.

[57] The reference in s 6(1) to 'the happening of the event giving rise to the claim for damages or compensation' should be construed as a reference to the moment when the liability arises, rather than to a later time when the claim based on that liability is made. That is to say, it should be construed as referring to 'the happening of the event giving rise to the liability to pay damages or compensation'. The charge comes into existence on the happening of the event that gives rise to the liability to pay damages or compensation, not when the claim for damages or compensation that that liability may prompt is made. The claim for damages or compensation will ordinarily be made some time after the liability arises."

29 It is also clear that a charge under s 6(1) cannot fix on monies payable under a contract of insurance that was not in existence at the time of the event giving rise to the claim for compensation. In Owners - Strata Plan 50530 v Walter Construction Group Limited (in liquidation) & Ors [2007] NSWCA 124; (2007) 14 ANZ Insurance Cases 61-734, Hodgson JA considered these matters at [30]-[31] as follows:

"[30] It is common ground, as well as being asserted by the High Court in Bailey, that under s 6(1) the 'charge' must arise, if at all, on the happening of the 'event' giving rise to the claim against the insured, and not at some later time. That being so, if there is to be any charge in any cases where that event (whatever completes the cause of action against the insured) occurs before any contract of insurance is made, it would have to be a 'charge' arising where there is no property or even potential property to which it could apply, and not even any identifiable insurer with whom such property, if and when it came into existence, might be associated. It would thus be a 'charge' without having even as much substance as a contract to give a charge on after-acquired property, where there is at least a person against whom a contractual right exists pursuant to which (assuming the contract is specifically enforceable) an equitable charge can arise if and when the property is acquired.

[31] It is true that the charge under s 6(1) is something created by statute, which does not have to conform to pre-existing general law categories; but it is difficult in the extreme to read s 6(1) as disclosing a legislative intention that there be something called a charge in existence at a time when there is no property to which it could attach, and no person against whom any rights could be asserted to have a charge attached to property if and when the property comes into existence. (It would be otherwise if there were, at the time of the event, a contract between the insured and the insurer for claims-made insurance to be given for some future period: in those circumstances, I think a charge would arise.)"

30 The Registrar-General in the present case cannot establish an entitlement under s 6(1) unless the event to which the provision refers occurred in the twelve months commencing 1 July 2011.

31 In order to consider when the Registrar-General's claim that is said to attract indemnity under the LawCover policy arose, it is necessary to identify the precise nature of that claim. For the reasons analysed by Pembroke J at [35]-[44] and [54], the Registrar-General's claim is that of Ms Pedulla to which it is subrogated by operation of s 133 of the Real Property Act. Once Ms Pedulla commenced her claim pursuant to s 132, by virtue of s 133(2) the Registrar-General was subrogated to her in respect of her rights and remedies. Pembroke J noted at [38] that the underlying rationale of this statutory remedy was the same as subrogation under general law and in particular that:

"[38] ... it is implicit in any form of subrogation that there is only one claim which, upon subrogation, becomes a right or remedy available to be pursued by the surety (here the Registrar-General). Subrogate is a word of Latin derivation that means to substitute or put in another's place. It would be a contradiction in terms if subrogation were invoked to enable the simultaneous pursuit of a right or remedy against a third party by both the surety and the original party in whose favour it arose. Such an outcome would be oppressive. It would also be heterodox because, as I have said, there are not two claims but only one, and the one claim cannot be pursued by two different parties - at least without crossing metaphysical boundaries."

32 Section 133(2) does not create any independent entitlement on the part of the Registrar-General to recover losses from a wrongdoer that are sustained by the Registrar-General as a consequence of an order for compensation from the Assurance Fund. The Real Property Act does not alter the general law principles that the rights and remedies acquired by or granted to the Registrar-General pursuant to s 133 are Ms Pedulla's rights to which the Registrar-General is subrogated. They are not the Registrar-General's rights. It is accordingly inaccurate and misleading to refer to the Registrar-General's "right" to sue Mr Yee or the Registrar-General's "cause of action" against him accruing at any particular time.

33 The "event giving rise to the claim for damages or compensation" that might have served to give rise to a charge under s 6(1) of the Act was the event giving rise to Ms Pedulla's claim against Mr Yee. When did that "event" occur?

34 Mr Yee's liability established in the earlier proceedings before Pembroke J, and to which the Registrar-General is subrogated, is a liability in negligence: at [54]. A cause of action in negligence is complete once measurable loss has been suffered, even if further damage continues to accrue: Argyropoulos v Layton [2002] NSWCA 183 at [5]. Equally in Wilson v Rigg [2002] NSWCA 246 at [21] and [23], Santow J said:

"[21] So far as the duty was tortious, the appellant's cause of action against the respondent accrued when he first suffered damage in consequence of the breach of duty. Damage is an element of a cause of action in tort for negligence, and the cause of action is not complete until damage is sustained but is then complete even though further damage is later sustained...

...

[23] There must be actual damage, as distinct from the risk or prospect of damage or contingent damage...and the damage must be measurable or beyond what can be regarded as negligible..."

35 Determining precisely when it is that a party has suffered actual damage, as distinct from the risk or prospect of damage, requires a consideration of "the precise interest infringed by the negligent act or omission" as Gaudron J noted in Hawkins v Clayton [1988] HCA 15;(1988) 164 CLR 539 at 600 to 601. Mr Yee's negligent acts were essentially assisting to transfer Ms Pedulla's property to Mr Panetta between mid-2006 and February 2007 and assisting him and Ms Lam between March and June 2007 to become its joint registered proprietors.

36 The loss or damage caused by a breach of a duty owed to a registered proprietor of Real Property Act land that leads or contributes to the fraudulent transfer of the property to a fraudster or a bona fide purchaser is suffered when the transfer takes place. The original fraudulent transfer of Ms Pedulla's property occurred in March 2007. It was later transferred to a third party for value in April 2011. Her loss of the property is the damage occasioned by the breach.

37 The Registrar-General argued that there were two separate events calling for consideration, one in respect of Ms Pedulla's claim for damages against Mr Yee and one in respect of the Registrar-General's claim against him. The relevant event, according to this analysis, is the commencement of proceedings by Ms Pedulla against the Registrar-General on 1 July 2011. The Registrar-General contends that it was at that point that the Registrar-General "gained rights under s 133(2) of the Real Property Act" to sue Mr Yee. The Registrar-General's submission, based upon this analysis, was therefore formulated as "whether [or not] the event is viewed from the perspective of Ms Pedulla's claim for damages, or from the perspective of the Registrar-General's claim for indemnity, the 'event giving rise to the claim for damages or compensation' occurred during the policy period".

38 It will immediately be apparent that at the heart of this argument is the need for the Registrar-General to establish that the right of subrogation for which s 133(2) of the Act provides is somehow different to a right of subrogation arising under the general law. To this end the Registrar-General described his claim as "not a subrogated claim simpliciter". The submission suggested that the claim was "a hybrid claim involving a statutory right of action entitling a statutory officer to pursue a party for negligence so as to recover the 'compensable loss' paid to a claimant from the Torrens Assurance Fund."

39 The burden of this argument is that it is not until the Registrar-General is joined by a person such as Ms Pedulla, claiming compensation from the fund, that the statutory charge descends upon the relevant policy of insurance for the purposes of s 6(1). The argument proceeds upon the basis that the Registrar-General's statutory right to pursue Mr Yee under s 133(2) "does not arise directly because of any act of negligence by [him]". The associated and necessarily underpinning proposition of this argument is that "the happening of the event giving rise to the claim for damages or compensation" is the commencement of proceedings against the Registrar-General by Ms Pedulla on 1 July 2011.

40 As intriguing and possibly even beguiling as this argument might at first sight appear, I think it is wrong. Howsoever one may characterise the right to recover Ms Pedulla's losses from Mr Yee to which the Registrar-General became subrogated upon payment of compensation from the Assurance Fund to her, the loss in question was caused by Mr Yee's negligence. Ms Pedulla's cause of action against Mr Yee was consummated at the first point that she suffered loss as a result. That was the happening of the event giving rise to her claim for damages to which the Registrar-General has become subrogated. The fact that the Registrar-General may not, as in this case, have been called upon to pay compensation until a later time does not alter the fact that the relevant event for the purposes of s 6(1) was the point when Mr Yee's acts or omissions caused loss. That point was no later than April or May 2011. It follows that no charge was created upon any insurance moneys "that are or may become payable" pursuant to the LawCover policy indemnifying Mr Yee for the policy year commencing 1 July 2011. That fact is not altered by any characterisation of the Registrar-General's right of subrogation as a statutory right or a hybrid claim involving a statutory right of action.

41 It follows in my view that there could be no charge on any insurance monies that became payable under the LawCover policy as the policy was not in existence at the time of the "happening of the event giving rise to the claim for damages or compensation" as contemplated by s 6(1) of the Act.

The second issue

42 The LawCover policy contains the following, usual, exclusion:

"We will not indemnify an insured under this policy when the claim arises, whether directly or indirectly, from any dishonest or fraudulent act or omission of that insured."

43 The meaning and effect of that exclusion were considered by Pembroke J in the instant case at [28] and [29] as follows:

"[28] The meaning and effect of an earlier version of that exclusion was considered in McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579. More recent illustrations of the scope and application of other variations of this well-known exclusion can be found in Yaktine v Perpetual Trustees Victoria Ltd [2004] NSWSC 1078, Ginelle Finance Pty Limited v Diakakis [2007] NSWSC 60 and Vaccaro v Flammia [2008] NSWSC 1322. The version of the exclusion in issue in this case is more favourable to an insurer than earlier versions but whatever version is in issue they all depend on the existence of some causally relevant dishonest act or omission by the insured. The words 'or fraudulent' add nothing. Fraudulent conduct is necessarily dishonest. And of course, the expression 'arises from' is an expression of wide import, to which the qualification 'whether directly or indirectly' adds an even broader causal dimension.

[29] Dishonest conduct by solicitors usually involves conscious impropriety in the sense of an act, omission or statement that the solicitor knows is false or misleading. It is not necessary that there be an intention to profit personally from the dishonest act. Nor is it necessary that the dishonest act or omission deprive another of money or valuable property. It is difficult to go past Lord Nicholls' masterful description of dishonesty in Royal Brunei Airlines SDN. BHD. v Philip Tan Kok Ming [1995] 2 AC 378 at 389:

...acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour..."

44 His Honour's discussion of the exclusion clause arose in the context of that part of the proceedings before him, outlined by his Honour at [26] of his judgment as follows:

"[26] The third issue is the Registrar-General's defence under Section 129(2)(b). It turns, in substance, on the likely application of the dishonesty exclusion in Mr Yee's professional indemnity policy. In considering this question, I should have regard to the facts proved at the hearing before me and the inferences against Mr Yee that are available to be drawn from those facts. The burden, of course, is with the Registrar-General. And it is not a light task, for 'it involves proving facts which show the absence of any ground upon which the insurer could effectively deny liability under the policy': Chandra v Perpetual Trustees Victoria Ltd [2007] (supra) at [64] per Bryson J."

45 His Honour analysed and considered Mr Yee's conduct in some detail with a view to determining whether it met the description of dishonesty within the meaning of the exclusion in the LawCover policy. His Honour's conclusions on the "dishonesty" issue before him were set forth at [34] as follows:

"[34] For those reasons, I am quite satisfied that the Registrar-General has not established that it is more probable than not that the loss is compensable under Mr Yee's professional indemnity policy. The findings of fact that I have made suggest that the opposite conclusion is more probable."

46 After the commencement of these proceedings LawCover notified the Registrar-General that it had made a decision to decline indemnity under the policy upon the basis that Mr Yee "knowingly made false statements and thereby acted dishonestly in [his] dealings with Mr Panetta and [Ms Lam] in respect of [Ms Pedulla's] land, and that the claim made against [him] arises from those dishonest and/or fraudulent acts or omissions within the meaning of [the exclusion clause]." Notwithstanding that notification, and the Registrar-General's earlier (unsuccessful) attempts in the proceedings before Pembroke J to establish that Mr Yee was not dishonest and that the exclusion did not therefore apply, so that the LawCover policy of insurance potentially responded to meet the claim and defeat Ms Pedulla's proceedings against the Registrar-General, the Registrar-General continued in these proceedings to maintain that it was at least arguable that Mr Yee was not relevantly dishonest for the different purpose of establishing that a charge attached to the LawCover policy to the extent of the subrogated right.

47 LawCover argued before me on the contrary that leave should be refused upon the basis that there is no arguable case for relief. The findings in the earlier proceedings, which are relied upon to establish the liability said to attract indemnity under the LawCover policy, plainly establish that indemnity is excluded on the basis that the liability arose from Mr Yee's dishonest acts. His liability cannot now be reagitated in these proceedings.

48 LawCover submitted that the issue of Mr Yee's dishonesty had been determined once and for all in the proceedings before Pembroke J. The only issue raised for determination in these proceedings is said to be whether, on the basis of the Registrar-General's liability established in the earlier proceedings, Mr Yee is entitled to indemnity under the LawCover policy. Because the basis of the Registrar-General's liability was the establishment of Mr Yee's dishonesty, he remains correspondingly disentitled to indemnity under the LawCover policy.

49 The Registrar-General's submissions in response to this argument were detailed. It is unnecessary for present purposes to repeat those submissions here. They distil essentially to the proposition that Pembroke J's decision concerning Mr Yee's dishonesty does not foreclose the Registrar-General's right to litigate the issue afresh in these proceedings. Prominent among the reasons for that contention is the argument that the question determined by Pembroke J, dealing with the availability of the Registrar-General's defence based upon s 129(2)(b) of the Real Property Act, is different to the question of whether or not Mr Yee's conduct qualifies as dishonesty so as to trigger the operation of the exclusion clause in the LawCover policy. That is said in any event to be a question that cannot, or should not, be resolved at an interlocutory stage, as per Owners - Strata Plan 50530 v Walter Construction & Ors [2006] NSWSC 552 at [29] as follows:

"[29] I am conscious of the limitations on the extent of decision making in the course of an interlocutory hearing. However, I take the relevant principle to be as expressed by McClelland J in Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 at 535. Although his Honour was speaking in the context of an application for an interlocutory injunction, I think that the principles are at least equally, if not more, applicable to a case such as this. His Honour said, among other things, that where the fate of the entitlement to ultimate relief is uncertain, the Court is required to consider the cause of the uncertainty. Where that uncertainty depends on contested questions of fact, it cannot be resolved at an interlocutory hearing. Where it depends on a contested question of law, it may or may not be appropriate for the Court to decide that question notwithstanding that the hearing is interlocutory. Whether the Court should do so will depend on a number of circumstances including the novelty or difficulty of the question, its susceptibility to resolution on the limited evidence available and the availability of time to give proper consideration to the question."

50 The Registrar-General also referred me to decisions in the Court of Appeal dealing with this issue. In Tzaidas v Child [2004] NSWCA 252; (2004) 61 NSWLR 18 at [140], Santow JA said, "all that was required was an arguable case". His Honour described that as "a relatively modest hurdle".

51 In Energize Fitness Pty Ltd v Vero Insurance Ltd [2012] NSWCA 213, Campbell JA said this at [51]-[56]:

"[51]... Mr Weinberger contends that the primary judge made an error of principle in not applying the test for summary dismissal of an action contained in General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125.

[52] The judge made no such error of principle. The questions involved in an application for summary dismissal, and an application for leave under s 6 Law Reform (Miscellaneous Provisions) Act are different. In a summary judgment application, the question is whether an action that a litigant has been able to commence without any need for leave of the court should be brought to an end. In an application for leave under s 6 Law Reform (Miscellaneous Provisions) Act the question is whether the court should permit a litigant to commence an action against a party who, in the absence of such leave, the litigant has no right to sue. In a general sense, considerations about when the court should permit the curial system to be deployed against a person enter into both summary judgment applications and applications for leave under s 6, but the questions are still different.

[53] As well, the onus operates differently in the two types of application. In a summary judgment application, the evidentiary and persuasive onus of establishing that the action is doomed to fail is on the defendant who seeks the summary dismissal. By contrast, when an application for leave is made pursuant to s 6(4) the evidentiary and persuasive onus of establishing that there is an arguable case that the insured is liable, and an arguable case that the policy responds, is on the applicant for leave. Whether the court finds that there is an 'arguable case' will be very dependent on the facts and circumstances of the individual case, including any grounds on which the insurer opposes leave.

[54] Mr Weinberger supported the applicability of the General Steel test by reference to the decision of Grove J in Bede Polding College v Limit (No 3) Limited [2008] NSWSC 887. At [6], Grove J accepted that in an application for leave under s 6:

'... the plaintiff must show three things. First, that there is an arguable case against [the insured]; second, that there is an arguable case that the policy responds and, third, that there is a real possibility that, if judgment is obtained, [the insured] would not be able to meet it: Oswald v Bailey (1987) 11 NSWLR 715; Zhang v Minox Securities [2008] NSWSC 689.'

[55] At [9], Grove J said that in determination of whether there is an arguable case:

'...I would ... follow the guidance of General Steel Industries v Commissioner for Railways (1962) 112 CLR 125. That case and Dey v Victorian Railway Commissioners (1949) 78 CLR 62 were focussed on summary dismissal but as Dixon J observed in the latter "once it appears that there is a real question whether of fact or law and that the rights of the parties depend on it, then it is not competent for the Court to dismiss the action". That test is applicable.'

[56] For the reasons given above, the litigious frame in which the General Steel test comes to operate is not the same as that in which the court considers a s 6(4) application. In considering an application under s 6(4) a judge should consider directly whether the applicant has shown that there is an arguable case on the relevant matters, without being distracted by the General Steel test. To that extent, Bede Polding should not be followed."

52 Remarks to the same effect are to be found in the judgment of Johnson J in Vaccaro v Flammia [2008] NSWSC 1322 at [105]-[108].

53 Limiting myself to the single identified issue of whether or not Mr Yee might be found to be dishonest for the purposes of the exclusion in the LawCover policy, it is at least arguable that the acts and omissions identified by Pembroke J, and the conclusions at which his Honour arrived, may not automatically dispose of the question. It is in my opinion at least arguable that Mr Yee's conduct does not attract the operation of the dishonesty exclusion in the LawCover policy.

54 However, upon the question of whether or not to grant leave, the Registrar-General was necessarily required to confront a considerably more difficult and fundamental problem. That difficulty arises from the fact that there is an inescapable inconsistency between the proposition that the Registrar-General has a right under s 133(2) of the Real Property Act to recover from Mr Yee the "compensable loss" sustained by Ms Pedulla on the one hand, and the fact that Mr Yee's corresponding liability to the Registrar-General is the subject of indemnity under his professional indemnity policy on the other hand. That inconsistency arises in the following way.

55 The expression "compensable loss" is defined, for the purposes of s 133, in s 128(1). The definition excludes from the scope of such losses loss or damage of a kind referred to in s 129(2), being loss for which indemnity is available under a solicitor's professional indemnity insurance policy. As already discussed, the Registrar-General originally sought to resist Ms Pedulla's claim upon the basis that the loss consisting of the market value of her property was loss caused by Mr Yee's negligence and was the subject of an indemnity under his professional indemnity policy. The Registrar-General failed in that defence upon the basis that, on the balance of probabilities, indemnity was not available.

56 The Registrar-General wishes now to re-litigate the question of the availability of cover with a view to enforcing a charge pursuant to s 6(1). If the Registrar-General succeeds in establishing that such cover is available it will simultaneously establish that Ms Pedulla's loss was not a loss in relation to which compensation was payable: s 129(2). The original court proceedings were not therefore commenced in relation to Ms Pedulla's compensable loss, with the result that there can be no subrogation in accordance with s 133(2) and no charge capable of enforcement at the suit of the Registrar-General. In short, if the policy responds, the loss is not a compensable loss.

57 In my opinion, as a result of that fundamental problem, the present application is not fairly arguable. The Registrar-General is only subrogated to Ms Pedulla's rights in respect of the recovery of the uninsured and hence "compensable loss". The Registrar-General cannot ever be, and is not now, subrogated in respect of any loss to which the LawCover policy might hypothetically or potentially respond. The Registrar-General's argument is self-defeating. Leave to commence proceedings against LawCover should be refused on this basis as well.

The third issue

58 LawCover contended that it is an abuse of process for the Registrar-General to bring proceedings for the purpose of establishing that Mr Yee's liability is the subject of an indemnity under the LawCover policy in circumstances where the Registrar-General sought to resist the claim on precisely that basis, and where Pembroke J found that insurance cover was not available.

59 The Registrar-General argues that there is a fundamental flaw with that submission inasmuch as Pembroke J expressly made clear that he would make no finding about LawCover's entitlement to decline indemnity under the policy as it was unnecessary to do so: at [30]-[31]. His Honour only determined that the Registrar-General did not meet the high burden of establishing its defence under s 129(2)(b) of the Real Property Act that there was an "absence of any ground upon which the insurer could effectively deny liability under the policy": at [26].

60 The question raised in these proceedings is whether LawCover is entitled to deny liability under the policy, not whether the Registrar-General had proved the absence of any ground upon which LawCover could effectively deny liability under the policy for the purposes of establishing a defence to Ms Pedulla's claim under s 129(2)(b) of the Real Property Act.

61 The proposition simply stated is whether the presently contemplated proceedings are an attempt to litigate or re-litigate issues that were either decided in or are barred by the earlier proceedings. See, for example, what was said by Handley JA in Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; (2001) 53 NSWLR 198 at [32]. Having regard to my earlier conclusions, it is sufficient simply to observe that in the context of the present application, I do not consider that the proposed proceedings amount to an abuse of process.

Conclusions and orders

62 For the reasons given, the Registrar-General's application fails. In the circumstances the appropriate order is that the summons is dismissed with costs.

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Decision last updated: 10 October 2013