The allegations relating to trust account misappropriation concerned 13 clients who either in part or full retained his practice Kernaghan & Associates Pty Ltd (KAPL). A liquidator was appointed to this practice on 10 March 2016 and Mr Kernaghan then started operating a sole practice six days later. While the firm held a trust account, Mr Kernaghan’s sole practice operated two accounts but no trust account. 

The first client, Ms Watson, entered a costs agreement with Mr Kernaghan for an estimated amount of $4,400. However, the matter resolved without a hearing and the two agreed over the phone that the total would be reduced to $900. After speaking with the Office of the Legal Services Commission (OLSC) when she did not receive the remaining $3,500, Mr Kernaghan was ordered to transfer to her within 14 days. 

In his affidavit, Mr Kernaghan said Ms Watson had transferred the $4,400 into the trust account but investigations revealed it was transferred into the office account without her authority or direction and in circumstances where no invoice had been issued. The $3,500 repayment is still outstanding and may come under orders. 

For the second client, $660 was paid into the KAPL office account and no tax invoice was issued. Similarly, there is no record of the third client’s $1,650 being transferred into a trust account and no record of a tax invoice on file. This is much the same for the fourth and fifth client who also did not receive tax invoices, and the sixth client who retained the sole practice and did not have a trust account to transfer into. 

The seventh and eighth client transferred their amounts into KAPL’s trust account, but in both cases this was transferred into the office account a few days later and recorded as either the “wrong account” or “incorrect deposit”. For both clients, part of the work agreed to be carried out under the amount transferred had not been completed and the tribunal found no evidence that either received a tax invoice. 

A costs disclosure was not found in respect of the ninth client. An invoice for $1,650 was provided to the 10th client in August 2015 but no costs disclosure agreement. The solicitor submitted it was because he was “legally aided” and would not require a costs disclosure but no evidence in support of this position was produced. 

During the period in which the firm was being wound up and the sole practice took over, some clients were represented by both. In the 11th client, Mr Douglas’, case, a costs agreement was issued for when he was represented by KAPL – under a Legal Aid grant – but no costs agreement was issued by the sole practice. 

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In respect of the 12th and 13th clients, Mr Kernaghan claims that he drafted a letter regarding the winding up of KAPL and was informed by his clerk that “this step was taken”. However, in both cases, the letter has not been produced and neither client received a costs agreement for the time they were represented by the sole practice. The tribunal understands the 13th client was represented on a pro bono basis. 

Failure to comply with fiscal obligations, expert fees

Amid the trust account breaches, an employee of KAPL – known to the court as only Mr Howell – claimed that while $2,305 was deposited into his superannuation account during the course of his employment, an ATO summary document indicated that he was owed an outstanding contribution in the amount of $26,782.75. 

KAPL was indebted to the Deputy Commissioner of Taxation for $80,640.97 for unpaid superannuation guarantee charges. Mr Kernaghan said he had attempted to resolve the compulsory superannuation charges “by way of negotiations with the ATO” over the course of several months and an agreement was reached that he would pay instalments until the law practice was finally wound up. 

Further, he said he believed the liquidator “sought to get back all of the monies paid to the ATO”, including payments in respect of compulsory superannuation charges. He submitted that he “does not know, nor had any control over, what happened to the [compulsory charges] component of the funds paid to the ATO thereafter”.

In a report to creditors, the liquidator stated: “I am of the opinion that due care and diligence was not exercised in ensuring financial records were adequately maintained and that KAPL was in a position to repay its creditors. It appears that expenses such as employee superannuation were left unpaid for [a] significant amount of time while the solicitor attempted to negotiate with the ATO.” 

KAPL was also penalised for failing to lodge activity statements on time on six occasions and failing to lodge tax returns on five occasions. The ATO also wrote off $218,921 that was found to be outstanding on the running balance account.

In March 2016, Mr Kernaghan wrote to the Law Society to inform it that KAPL had been defaulted on the payment plan with the ATO “by one day only” and this default had led the ATO to apply for the firm’s winding up. He said the consolidated debt was the result of a bookkeeper “who ran out on me and left me to discover that while BAS was being prepared by me, it wasn’t being filed”. 

In March 2017, Mr Kernaghan engaged a forensic psychologist to carry out work, including provision of an expert report. In total, the expert sent an invoice in the amount of $2,000 with a request for payment within 28 days. The expert followed Mr Kernaghan up about the unpaid amount in May and again in July 2017.

In July 2017, an employee of Legal Aid confirmed to the expert that Mr Kernaghan had “claimed the fee to pay your invoice” five days after the May follow-up. When the expert still hadn’t received it by August 2017, he made a complaint to the OLSC. In response, Mr Kernaghan said he had produced an invoice and repayment. 

However, the payment receipt shown to the Law Society indicates that the $2,000 was made from the sole practice office account and into a personal savings account in the solicitor’s name. As of October 2018, the expert had still not been paid. 

“In our view, the considerations in respect of the failure to pay the invoice of the expert indicate that the relevant breaches fall short of conduct which would reasonably be regarded as disgraceful or dishonourable by professional colleagues of good report and competency and are therefore, adequately and appropriately sanctioned by a finding of unsatisfactory professional conduct, rather than one of professional misconduct,” NCAT found in its judgement. 

Disciplinary orders will be made at a later date. 

The entire judgement can be found on AustLII: The Council of the Law Society of New South Wales v Kernaghan [2021] NSWCATOD 111 (6 August 2021).