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[2015] ZASCA 168
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Law Society of the Northern Province v Le Roux (185/2015) [2015] ZASCA 168 (26 November 2015)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case
No.: 185/2015
DATE:
26 NOVEMBER 2015
Reportable
In
the matter between:
LAW
SOCIETY OF THE NORTHERN
PROVINCES
.....................................
FIRST
APPELLANT
M
J S
GROBLER
.............................................................................................
SECOND
APPELLANT
And
LOUW
DE WITT LE
ROUX
............................................................................
FIRST
RESPONDENT
GIDEON
FRANCOIS DU
PLESSIS
...........................................................
SECOND
RESPONDENT
DE
LOUW LE ROUX & DEOFRANN
DU
PLESSIS INCORPORATED t/a LE ROUX
DU
PLESSIS
ATTORNEYS
............................................................................
THIRD
RESPONDENT
Neutral
citation:
Law Society of the Northern
Provinces v Le Roux
(185/2015)
[2015]
ZASCA 168
(26 November 2015)
Coram:
Maya DP, Shongwe, Majiedt, Petse and Mathopo JJA
Heard:
6 November 2015
Delivered:
26 November 2015
Summary:
Attorneys Act 53 of 1979 – Law
Society’s resolution introducing a requirement to its rules for
the submission of an
acceptable, unqualified audit certificate for
the issue of fidelity fund certificates under s 42(3)(
a
)
of the Act constituted administrative action within the meaning of
the
Promotion of Administrative Justice Act 3 of 2000
and is binding
until set aside on review – wrong relief sought by insolvent
attorneys from whom the Law Society’s secretary
withheld the
certificates because their firm’s trust account was in deficit
and its audit certificate accordingly qualified
as a result of
fraudulent misappropriation of funds from the account by their
associate – should have taken the resolution
on review instead
of merely challenging the secretary’s refusal to issue the
certificates – appeal thus upheld.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (Tuchten J sitting as court of
first instance):
1
The appeal is upheld with costs, including the costs of two counsel,
on the scale as between attorney and client.
2
The order of the Gauteng Division of the High Court, Pretoria, is set
aside and replaced with the following order:
‘
The
application is dismissed with costs on the scale as between attorney
and client.’
JUDGMENT
MAYA
DP
(SHONGWE, MAJIEDT, PETSE and
MATHOPO JJA
concurring
):
[1]
This is an appeal against the judgment of the Gauteng Division of the
High Court, Pretoria (Tuchten J) which compelled the secretary
of the
first appellant (the Law Society) to issue fidelity fund certificates
to the first and second respondents. The matter serves
before us with
the leave of the court a quo.
[2]
The first and second respondents practise as attorneys in the third
respondent, an incorporated firm (the firm). In October
2014, they
unsuccessfully applied to the secretary of the Law Society (the
secretary) for the renewal of their fidelity fund certificates.
The
reason given for the refusal, which sparked these proceedings, was
that they had ‘not complied with the lawful requirements
of the
Law Society in terms of Section 42(3)(a) of the Attorneys Act, 1979
having regard to the problems … identified relating
to [their]
firm’s trust account and the allegations of a trust shortage’.
[3]
This decision was made against the backdrop of the stringent
regulatory framework provided by law for the regulation and control
of attorneys’ trust accounts. An important cog in that
framework is the Attorneys’ Fidelity Fund,
[1]
which
is meant to protect the public against the misappropriation of their
money entrusted to attorneys. It is chiefly financed
by means of
contributions made by practising attorneys in terms of s 43 of the
Attorneys Act 53 of 1979 (the Act) and the interest
the attorneys
earn on their trust bank accounts in terms of s 78(3) of the Act. Its
purpose is set out in s 26(
a
)
of the Act which provides that ‘the fund shall be applied for
the purpose of reimbursing persons who may suffer pecuniary
loss as a
result of … theft committed by a practising practitioner, his
or her candidate attorney or his or her employee,
of any money or
other property entrusted by or on behalf of such persons to him or
her or to his or her candidate attorney or employee
in the course of
his or her practice or while acting as executor or administrator in
the estate of a deceased person or as a trustee
in an insolvent
estate or in any similar capacity’.
[4]
The attorneys’ trust accounts are regulated by ss 78 and 79 of
the Act which, inter alia, require attorneys to hold all
money
entrusted to them in separate trust banking accounts
[2]
which
do not form part of the attorney’s assets;
[3]
and
to keep proper accounting records containing particulars and
information of the money held in trust
[4]
which
shall be inspected by the council of the society of the province in
which the attorney practises to satisfy itself that they
are kept
properly.
[5]
These
provisions are supported by rules 68 to 70 of the Rules of the Law
Society
[6]
which
impose similar requirements and enjoin attorneys, inter alia, to
ensure prompt deposit of trust money received;
[7]
that
the money in a trust account is not less than the total amount of the
credit balances of its trust creditors;
[8]
that
no account of any trust creditor is in debit;
[9]
and
that withdrawals from the trust account are only in respect of
payments to or for or on behalf of a trust creditor.
[10]
Rule
70(1) obliges a firm,
[11]
at
its expense once in each calendar year, or at such time as the
council may require, to appoint an accountant approved by the
council
to act on behalf of and as the representative of the fund to
discharge the duties assigned to him or her in terms of rule
70.4.
[12]
These
duties are essentially the preparation of an audit report in the form
prescribed by the Third Schedule to the rules, once
a year, and to
report to the council on the firm’s compliance with the
requirements of the Act and the rules regarding its
accounting.
[5]
Section 41 of the Act bars an attorney from practising for his or her
own account without a fidelity fund certificate.
[13]
Section
83(10) of the Act criminalises breach of these provisions by
providing that ‘[a]ny person who directly or indirectly
purports to act as a practitioner or to practise on his or her own
account or in partnership without being in possession of a fidelity
fund certificate, shall be guilty of an offence and on conviction
liable to a fine not exceeding R2 000 or to imprisonment for
a period
not exceeding six months or to both such fine and such imprisonment’.
Section 42(1) of the Act obliges the attorney
to apply in the
prescribed form to the secretary of the society concerned for the
certificate. Subsection (2) requires such application
to be
accompanied by the contribution (if any) payable in terms of s
43.
[14]
[6]
In addition to rule 70, the Law Society resolved, on 30 September
2013, to amend the
‘
lawful
requirements’ for the issue of a fidelity fund certificate, in
terms of s 42(3)(
a
)
of the Act. The resolution required timeous submission of the
original completed and signed application form for the certificate
and the lodgement with the Law Society of an acceptable, unqualified
audit certificate for the relevant period. The Law Society
duly
notified
its members (which included the respondents) of the resolution.
[15]
Failure
to comply would also deprive the members of the Attorneys Indemnity
Insurance cover.
[7]
It is the respondents’ failure to comply with the requirements
for an unqualified audit requirement which led to the secretary’s
refusal of their applications for renewal of their fidelity fund
certificates. The respondents’ audit certificate was heavily
qualified because their trust account had been plundered and was
accordingly in disarray. Three of the firm’s trust creditors
had debit balances amounting to R545 758 and a sum of R5 024 041
appeared to have been misappropriated from the
firm’s trust
account, in breach of rules 68.1, 69.3 and 69.5.
[8]
The culprit was the second respondent’s brother, Mr Andries
Christiaan Dormehl du Plessis (Du Plessis), who worked at
the firm
until his expulsion for his misdeeds on 16 July 2014. From 2007 until
his admission as an attorney on 24 March 2014 he
was a candidate
attorney at the firm. Thereafter, he practised as a sole proprietor
under the name of Dormehl Du Plessis Incorporated
but ran his
practice in association with the firm from its premises under a
lease. He also used its personnel, office facilities
and trust
account for all deposits in respect of his matters. He referred all
his conveyancing work to the firm as he was not a
qualified
conveyancer.
[9]
The association ended abruptly when Du Plessis confessed to the
second respondent that he had misappropriated several millions
of
rands from the firm’s trust account over several months.
Pursuant to this disclosure he was immediately removed from the
premises. The respondents took various steps to rectify the
situation, including reporting him to the Law Society, laying fraud
charges against him, launching sequestration proceedings against his
estate, mandating a forensic audit and placing their own immovable
property on the open market for sale to raise funds to rectify the
trust deficit.
[10]
In August 2014, the Law Society appointed an independent auditor, Mr
Ashwin Reddy, to conduct a forensic audit on the firm.
He made the
following findings:
‘
[Du
Plessis] was able to defraud the firm’s trust bank account by
taking advantage of certain weaknesses in the firm’s
system of
internal controls. In particular, the firm did not obtain suitable
confirmation of the client’s bank account details
as well as
confirming the client’s bank accounts details prior to payment.
[Du Plessis] recognised the weakness and took
advantage of the
weakness by falsifying correspondence from clients wherein they
confirm their bank account details. Suitable proof
of banking details
would be a cancelled cheque, a letter from the bank or a bank stamped
bank statement.
Due to the
significant trust shortage … as well as the claims lodged with
the Attorney’s Fidelity Fund, I am of the
opinion that the firm
poses a high risk to the Attorney’s Fidelity Fund and trust
creditors.
In my opinion [the
first and second respondents] were not party to the fraudulent
activities of [Du Plessis] however as the directors
of the firm they
are ultimately reliable for establishing, maintaining and monitoring
the firm’s system of internal controls
with the objective of
preventing and detecting fraud as well as safe-guarding trust assets.
Furthermore the Directors of the firm
are responsible for the
supervision and oversight of all staff members. I thus recommend that
my report be referred to the Disciplinary
Department to consider
further appropriate steps against [the first and second respondents].
In
light of [Du Plessis’s] fraudulent and dishonest actions which
has resulted in financial loss to the firm, trust creditors
and
ultimately the Attorney’s Fidelity Fund, I recommend my report
be referred to the Council to consider further appropriate
steps.’
[11]
Mr Reddy described the disorder he found in the firm’s trust
account as follows:
‘
During
my inspections of the accounting records I quantified the trust
shortage to be an amount of R4,690,070, based solely on the
information I was provided. The directors of the firm are not in the
financial position to reimburse the trust creditors, the funds
which
have been misappropriated. Furthermore the accounting records are not
accurate in that the fraudulent payments to Mr Du Plessis
have been
accounted for as legitimate payments towards trust creditors. This
places the firm in a predicament as they are unable
to properly
account to the trust creditors, nor are they able to identify the
actual liability towards each trust creditor. The
effect of this is
that the directors are unable to provide satisfactory responses to
the queries of the affected trust creditors.’
In
essence, the gravamen of the report was that the respondents are
factually and commercially insolvent.
[12]
Pursuant to Mr Reddy’s report, the Law Society launched an
application, which was subsequently struck off the roll for
lack of
urgency, for the suspension of the first and second respondents from
practice pending the finalisation of an application
for the removal
of their names from the roll of Attorneys.
[16]
In
the meantime, the respondents had lodged their applications for
fidelity fund certificates for 2015. When the applications were
refused, they
successfully
brought an urgent application in the Gauteng Division, Pretoria
(Tuchten J), to compel the secretary to issue the certificates.
[13]
The court a quo found that the first and second respondents had
‘shown themselves to be fit and proper people to practise
…
caught up in a situation which was not of their own making’. In
the court’s view, s 42(3)(
a
)
of the Act enjoined the secretary to assess the risk attendant on the
issue of the certificate which it believed was ‘very
low’
in this case. The court then found the requirement of an unqualified
audit certificate unlawful because it did not ‘address
the
situation of an entirely unblameworthy applicant who is unable
through circumstances beyond his control to comply with it’
and
required the respondents to do what they were objectively incapable
of in circumstances where they were blameless and the risk
to the Law
Society and the Fidelity Fund, if the certificates were issued, were
negligible. Interestingly, the court recognised
that deposits into
the firm’s trust account in deficit by the respondents’
future trust creditors would likely be exposed
to risk. But it held
that such risk could be ‘mitigated to some extent by a
direction that the [respondents] open a fresh
banking account into
which trust deposits must be deposited and … that such
deposits will not carry the risk that the depositors
in relation to
amounts previously deposited will suffer as a result of the
misbehaviour of [Du Plessis]’.
[14]
On appeal before us, it was argued for the respondents that the
requirement of an acceptable, unqualified audit certificate
is
invalid because it ‘is overbroad, vague and leaves no room for
discretion’ as it does not cater for exceptions or
instances
such as where the qualification may be trivial, or the applicant
practitioners are not blameworthy and cannot comply
with the
requirement through circumstances beyond their control. It was
further argued that the respondents were entitled to mount
a
collateral challenge against the validity of the Law Society’s
resolution and that the court a quo was correct to set aside
the
secretary’s decision and substitute its own decision.
[15]
I agree with the Law Society’s contention that the chief hurdle
for the respondents is that their application targeted
the wrong
party. The respondents’ main complaint in their papers and in
argument before us, as set out above, concerned the
scope and
validity of the resolution. But the only relief sought in their
notice of motion was an order compelling the secretary
to renew their
fidelity fund certificates. The difficulty with this approach is that
it neither reckons with the statutory provisions
in terms of which
the secretary acts when considering applications for fidelity fund
certificates nor the nature of the resolution
and the effect thereof.
[16]
The empowering provisions are couched in s 42(3)(
a
)
of the Act which provides that ‘[u]pon receipt of the
application [for a fidelity fund certificate], the secretary of the
society concerned
shall, if he or she is
satisfied that the applicant has discharged all his or her
liabilities to the society in respect of his or
her contribution and
that he or she has complied with any other lawful requirement of the
society, forthwith issue to the applicant
a fidelity fund certificate
in the prescribed form’. These provisions clearly circumscribe
the secretary’s role to
merely satisfying herself that the
application complies with the relevant, lawful requirements. Whilst
that exercise involves some
judgment on her part, she nevertheless
enjoys no discretion to go beyond simply granting the application if
it meets the requirements
or declining it if it does not. As the
respondents’ applications did not meet the requirement of an
unqualified audit certificate
the secretary had no option but to
decline them.
[17]
But the more fundamental problem arises from the fact that the
resolution, which remains extant, was a decision of an administrative
nature made by an organ of state or a juristic person exercising a
public power and performing a public function under an empowering
statutory provision, which had a direct external legal effect on
practitioners and adversely affected their rights. Thus, it
constituted
administrative action within the meaning of s 1(
a
)
and (
b
)
of the
Promotion of Administrative Justice Act 3 of 2000
. It is trite
in our law that invalid administrative action may not simply be
ignored, but may be valid and effectual, and may continue
to have
legal consequences until set aside on judicial review.
[17]
The
resolution was therefore binding on the secretary and the
respondents. Furthermore, the principles of fairness embedded in our
law militate against invalidating the requirement without affording
the Law Society an opportunity to explain the requirement.
And this
could be done only in review proceedings. The respondents should,
therefore, have challenged the resolution in such proceedings
and
followed a wrong procedure.
[18]
Having thus found, it is not necessary or even prudent to determine
the validity of the resolution and the appeal should succeed
on that
basis alone. But a few material misdirections committed by the court
a quo bear mention. For its finding that the requirement
was unlawful
the court relied on this court’s statement in
Law
Society of the Northern Provinces & another v Viljoen; Law
Society of the Northern Provinces and another v Dykes &
others
.
[18]
There,
the court determined that a lawful requirement under
s 42(3)(
a
)
of the Act ‘means one that: (i) relates to the purpose served
by the issue of a fidelity fund certificate; (ii) unequivocally
informs the practitioner what it is that the society requires of him
or her; (iii) the practitioner is capable of complying with,
since
the section is designed to enable the practitioner to carry on
practice subject to satisfying the requirement’.
[19]
In
the court a quo’s view, (iii) invalidated the requirement
because it required practitioners ‘to do things which they
are
objectively not capable of doing in situations where they are not
blameworthy and where the risk to the law society and to
the fund is
as small as it is in the present case’.
[19]
The first problem with this finding, ie that any risk that might
arise from the issue of the certificates was ‘very low’
or ‘small’, is belied by Mr Reddy’s undisputed
findings to the contrary. The second problem is that the court
a
quo’s interpretation of (iii)
above
overlooks the context in which the statement was made and accordingly
misconceives its meaning. The court in
Viljoen
also remarked that the enquiry conducted by a secretary dealing with
an application for a fidelity fund certificate is ‘intended
solely to assess any risk attendant on the secretary … so as
to ensure that the Fidelity Fund is not overexposed’.
In the
circumstances, the court’s statement in (iii) could only have
meant that the requirement must be capable of objective
fulfilment.
The court simply could not have meant that the secretary was obliged
to issue a fidelity fund certificate to an insolvent
practitioner
with a trust account in deficit, such as the respondents, which would
patently place the Fidelity Fund at risk.
[20]
[20]
This finding finds support in the court a quo’s own order for
the opening of a new trust account and the attempt to immunise
deposits of new trust creditors’ funds made into that account,
which was a key condition to the issue of the certificates.
This
unprecedented order clearly attests to the court a quo’s
recognition of the real risk that any fresh trust funds would
be
swallowed up by the trust account in deficit to the prejudice of the
new trust creditors. Needless to say, neither the Law Society
nor the
secretary could grant such a remedy. And it remains highly doubtful
that the court a quo itself could, as the order impermissibly
sought
to alter the ranking of claims in insolvency in the absence of the
relevant creditors.
[21]
The following order is accordingly made.
1
The appeal is upheld with costs, including the costs of two counsel,
on the scale as between attorney and client.
2
The order of the Gauteng Division of the High Court, Pretoria, is set
aside and replaced with the following order:
‘
The
application is dismissed with costs on the scale as between attorney
and client.’
M
M L MAYA
Deputy
President of the Supreme Court of Appeal
APPEARANCES
For
the Appellants: W Trengrove SC (with H Vorster)
Instructed
by: Rooth & Wessels Attorneys, Pretoria
Phatshoane
Henney, Bloemfontein
For
the Respondents: JGW Basson
Instructed
by: Clarke & Van Eck Attorneys, Pretoria
Martins
Attorneys, Bloemfontein
[1]
Established
by s 8 of the Attorneys’ Admission Amendment and Legal
Practitioners’ Fidelity Fund Act 19 of 1941.
[2]
Section
78(1).
[3]
Section
78(7) and s 79.
[4]
Section
78(4).
[5]
Section
78(5).
[6]
In this instance the rules of the Law Society of the Northern
Provisions (Incorporated as the Law Society of the Transvaal) made
under the authority of s 74 of the Act and promulgated in
GG
7164 of 1August 1980, as amended.
[7]
Rule
69.1.
[8]
Rule
69.3.1.
[9]
Rule
69.3.2.
[10]
Rule
69.5.
[11]
Defined
in Rule 1.9 as a partnership of practitioners, a sole practitioner
for his own account, a professional company who or
which in each
case conducts the practice of a practitioner.
[12]
Section
70.4 provides:
‘
Duties
of accountant
Every
accountant who has accepted an appointment in terms of rule 70.1
shall –
70.4.1
within six months of the annual closing of the accounting records of
the firm concerned, or at such other times as the
Council may
require, furnish the council with a report which shall be in the
form of the Third Schedule to these rules;
70.4.2
without delay report in writing directly to the council if, at any
time during the discharge of his function and duties
under this
rule–
70.4.2.1
it comes to his/her notice that at any date the total of the
balances shown on trust accounts in the accounting records
of the
firm exceeded the total amount of the funds in its trust banking
account, its trust investment account and its trust cash;
70.4.2.2
any material queries regarding its accounting records which he/she
has raised with the firm have not been dealt with
to his/her
satisfaction;
70.4.2.3
any reasonable request made by him/her for access to its accounting
records and supporting documents or for any authority
referred to in
rule 70.2 has not been met to his/her satisfaction.’
13
Section 1 of the Act makes reference
to ‘a practitioner’ which is defined as an ‘attorney,
notary or conveyancer’.
A fidelity fund certificate is defined
as ‘a certificate issued in terms of section 42’.
Section 41 provides that:
‘
(1)
a practitioner shall not practise or act as a practitioner on his or
her own account or in
partnership unless he or she is in
possession of a fidelity fund certificate.
(2)
Any practitioner who practises or acts in contravention of
subsection (1) shall not be entitled to any fee, reward or
disbursement
in respect of anything done by him or her while so
practising or acting’.
14
Section 43 determines the contributions which
practitioners practising for their own account are required to make
to the Attorneys
Fidelity Fund annually. In terms of s 42(3)(
b
)
the certificate shall be valid until 31 December of the year in
respect of which it was issued
[15]
Law Society Notice 4 September 2013.
[16]
The
application was subsequently struck off the roll for lack of urgency
and it does not appear that it was pursued thereafter.
[17]
Oudekraal
Estates (Pty) Ltd v City of Cape Town & others
2004
(6) SA 222
(SCA) paras 26 and 40 (41/2003)
[2004] ZASCA 48
(28 May
2004);
MEC
for Health, Eastern Cape & another v Kirland Investments (Pty)
Ltd t/a Eye and Lazer Institute
2014
(3) SA 481
(CC) paras 87-106;
Incorporated
Law Society, Transvaal v Visse & others
(1);
Incorporated
Law Society, Transvaal v Viljoen
(2)
[18]
Law
Society of the Northern Provinces & another v Viljoen; Law
Society of the Northern Provinces & another v Dykes &
others
2011
(2) SA 327
(SCA);
[2010] ZASCA 176
(2 December 2010).
[19]
Ibid,
para 15.
[20]
According
to the first and second respondents, the trust deficit amounts were
initially in the region of R7 million which they
reduced by a sum of
R1,5 million which was all they were able to raise to rectify the
situation. The respondents are therefore
actually and commercially
insolvent.