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New Zealand Legal Complaints Review Officer |
Last Updated: 5 March 2019
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LCRO 052/2016
LCRO 057/2016
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CONCERNING
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an application for review pursuant to section 193 of the Lawyers and
Conveyancers Act 2006
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AND
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CONCERNING
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a determination by [Area] Standards Committee [X]
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BETWEEN
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BF
Applicant / Respondent
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AND
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ZL
Respondent / Applicant
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DECISION
The names and identifying details of the parties in this decision have been changed.
Introduction
[1] Mr BF was appointed liquidator of ABC Limited (ABC) in 2011. Mr ZL had acted for the company. In a judgment by Associate Judge QR, His Honour referred to potential conflicts of interest on the part of Mr ZL.1
[2] Mr BF provided a copy of His Honour’s judgment to the Lawyers Complaints
Service and requested it to investigate the potential conflicts.
[3] Having completed its investigation [Area] Standards Committee [X] (the Committee) determined that Mr ZL’s conduct constituted unsatisfactory conduct and made the following orders pursuant to s 156 of the Lawyers and Conveyancers Act
2006:
(a) Mr ZL was reprimanded.
1 BFv ABC Ltd [2XXX] NZHC XXXX.
(b) Mr ZL and/or his firm (Law firm XY) was ordered to cancel the fee rendered to ABC.
(c) Mr ZL was ordered to pay the sum of $1,000 to NZLS by way of costs.
[4] The Committee determined not to publish its determination as publication would identify the parties to readers which, the Committee considered, “would be unnecessarily punitive and inappropriate”.2
[5] Both Mr BF and Mr ZL have applied for a review of the determination.
Background
[6] The facts giving rise to Mr BF’s complaints are somewhat complex and involve the interrelationship between a number of companies with common shareholding and directors. There is no need to traverse much of the detail in this decision as it is adequately recorded in the Standards Committee determination.
[7] The salient facts are that Mr ZL acted for ABC. That company held all the shares in DEF Limited (DEF).
[8] The assets of DEF included water rights issued by [Regional Council]. [9] All of the shares in ABC were, at the time, held by GHI Ltd (GHI).3
[10] Mr ZL (a director of [Law firm XY] (XY)) was instructed by Ms WR to effect a transfer of the shares held by ABC in DEF to LMN Ltd (LMN) for the sum of $1. This involved the preparation of an Agreement evidencing the sale and completion of the share transfer.
[11] Ms WR was the sole director of ABC, and the sole director of GHI, itself being the sole shareholder at the time in LMN as well as ABC. The named director of LMN at that time was an undischarged bankrupt.
[12] Mr ZL (and an employee) acted for both companies and rendered an account for $969.45 to ABC for this work.
[13] In the meantime, Mr BF had been appointed liquidator of ABC and gave notice to the directors of ABC (Ms WR) and LMN (by then, Mr ST) that he was avoiding the Agreement.
2 Standards Committee determination 16 February 2016 at [54].
3 [GHI Ltd] is referred to in the Committee’s determination as [GHL].
[14] Mr ZL gave notice of the outstanding debt due to his firm by ABC to Mr BF. He also received instructions from Ms WR and Mr ST to advise Mr BF that the two companies did not accept the avoidance of the Agreement to transfer the shares.
[15] Litigation in the High Court ensued in which Mr BF sought a number of orders and directions, which included confirmation of his decision to cancel the share sale and purchase Agreement and rejection of the proof of debt by XY.
[16] On 7 November 2013, Associate Judge QR issued his judgment in which he was critical of Mr ZL’s involvement on behalf of both parties.
[17] Mr BF’s complaint followed.
The judgment of Associate Judge QR
[18] The Associate Judge was quite specific in his finding that “on the balance of probabilities XY did not obtain the prior informed consent of both parties before acting on the proposed sale of the [DEF] shares”.4
[19] The Associate Judge also ventured an opinion as to the potential decision of a Standards Committee in the “almost inevitable consequence that [ABC would] file a complaint as to the bill of costs under s 132(2) of the Act”.5
[20] He said:6
... Having regard to the failure of [XY] to obtain the prior informed consent of both parties to act, there is a distinct prospect that a Standards Committee would find in favour of [ABC] on such a complaint.
[21] Mr BF’s complaint did not focus on the invoice. His complaint concerned the alleged conflict of interests and the failure by Mr ZL to obtain informed consent from both parties as required by r 6.1.1. of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Rules).7
The appeal
[22] XY appealed the High Court judgment and progress of the investigation was delayed pending issue of the Court of Appeal judgment. The appeal did not seek to have the High Court judgment, upholding Mr BF’s decision to reject XY’s proof of debt for its account, set aside. The Court described the appeal as “seek[ing] orders
4 BF v ABC Ltd, above n 1, at [94].
5 At [96].
6 At [96].
7 See [51] below.
quashing the reasons given by Associate Judge QR in reaching that decision”.8 Those
“findings” related to the comments made by Associate Judge QR as to:9
... whether or not there was a conflict between the interests of [ABC] and [LMN], whether [XY] failed to obtain prior informed consent of both parties to act, and the comments about the prospect of success of a complaint made to the Standards Committee.
[23] The Court continued:10
The reason for pursuing the appeal is that a complaint has since been made to the Standards Committee. The complaint is that [XY] acted for parties where there was a conflict of interest. [XY] is concerned that, in determining the complaint, the Standards Committee inevitably will be influenced by the views expressed by the Associate Judge. [XY] considers that the Associate Judge’s comments were tantamount to a finding that [XY] breached the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008. [XY] says that the Associate Judge’s views were both unnecessary to what he had to decide and wrong.
[24] The Court dismissed the appeal for want of jurisdiction. There is no need to record here the reasons provided by the Court of Appeal, but the Court did make the following comment with regard to this complaint:11
... The Standards Committee must consider the issue before it afresh, on the material before it. In doing so it should not take into account the views expressed by the Associate Judge, which are not accepted by [XY] as correct.
[25] The same principle has been adhered to in this review.
Mr BF’s complaint
[26] Mr BF’s complaint was reasonably straightforward. The following paragraphs from his letter of complaint, dated 13 November 2013, comprise the essence of his complaint:
To summarise, I was appointed liquidator of [ABC Limited (ABC)] in 2011. I sought records from Mr ZL as the solicitor purportedly acting for [ABC]. I received very little information other than an invoice from Mr ZL’s firm. The basis of the charge was that the apparently sole asset of the company, shares in another company, had been transferred for the derisory sum of $1. Mr ZL seemed to think that he could charge in excess of $900 for this ‘service’.
The matter of the charge and Mr ZL’s conduct is considered in detail in the judgment from about paragraph 66 onwards. In essence the Associate Judge has commented adversely on Mr ZL’s propensity to engage in serious conflict of interest. And it is that matter I wish to have investigated.
8 XY v BF [20XX] NZCA XXX at [1].
9 At [8].
10 At [9].
11 At [12].
[27] In a subsequent letter dated 30 January 2014, Mr BF refers to another judgment of the High Court by JK which he had included with his letter of complaint by way of “another example” of Mr ZL’s conduct.12 He referred to this comment by JK: “It appears the document was prepared by Messrs AH and ZL and that OPQ Ltd was not independently advised”.13
[28] Mr BF then gave details of what he considered to be two further examples of Mr ZL acting for both parties in transactions that Mr BF was also involved in as liquidator.
The Standards Committee determination
[29] The Committee confined its inquiry to the transfer of the DEF shares by ABC
to LMN. It declined to include the additional matters referred to by Mr BF in his letter of
30 January 2014 for the reason that he had not provided evidence in support of these additional matters.
[30] The Committee identified the following “primary” issues to be addressed:14
a. Whether Mr ZL acted under conflicting duties when performing legal services for [ABC] and/or [LML], on the instructions of Ms WR, in relation to the sale and transfer of [DEF] shares to [LML].
b. The first stated primary issue, raises a number of sub issues, mostly factual:
• Did XY act for [LML] at the same time Mr ZL was retained by [ABC]
to act on the transfer of [DEF] shares?
• Did Mr ZL advise or represent [LML] in relation to the share transfer and/or related matters?
• If [ABC] and [LML] were concurrent clients of XY, did Mr ZL obtain the prior informed consent of both [ABC] and [LML] in accordance with rule 6.1.1 of the Conduct and Client Care Rules?
c. If the Committee finds that Mr ZL in fact acted under conflicting duties at the material time or times, did Mr ZL breach rules 6 and 6.1 Conduct and Client Care Rules?
d. If a breach is made out, does that conduct constitute unsatisfactory conduct or misconduct, as defined in sections 7 and 12 respectively of the Lawyers and Conveyancers Act?
e. If so, what orders should the Committee make under sections 156 and
157 of the Act?
12 XY v JK Ltd (in rec) HC Christchurch CIV-2XXX-XXX-XXXX (Date).
13 At [13].
14 Standards Committee determination, above n 2, at [17]. The Committee refers to LMN Ltd as
LML.
[31] The evidence provided by Mr BF was the two judgments referred to in this decision together with the various affidavits that were before the High Court and the Court of Appeal.
[32] Mr ZL’s instructions to transfer the shares were provided by Ms WR as director of ABC. The Agreement and share transfer form were signed by Ms WR for ABC.
[33] The documents were signed for LMN by Mr ST who was appointed sole director of that company on the same day as the documents were signed (24 August
2011).
[34] The Committee noted that:15
XY, and specifically Mr ZL, provided legal services in respect of the transfer of shares in [DEF]. It is apparent that XY had as clients a number of the companies in the [UVW] Group and the [GHI] Group, and had held a long standing association with Mr RV.
[35] Mr ZL acknowledged that “he was the lawyer instructed and that he had decision-making control on the file, in the sense that he dealt with Ms WR and supervised an employee, Mr MD”.16
[36] The Committee noted that Mr ZL acknowledged that he was asked by Ms WR to nominate the purchaser of the shares, with the only requirement being that the purchasing company should be a wholly owned subsidiary of GHI.
[37] Mr ZL nominated LMN to purchase the shares and this was confirmed by
Ms WR.
[38] The Committee did not accept Mr ZL’s advice that he had not previously acted for LMN as the Companies Office records show the address for service of that company as being the predecessor firm of XY. Mr ZL had been a partner of the predecessor firm. The Committee further noted that there was no separate file for LMN and the fee rendered to ABC incorporated all costs incurred when acting for both parties.
[39] After considering the various submissions for each party the Committee recorded that it did not “accept Mr OP’s submission that the role of XY was limited to transactional steps giving effect to the transfer”.17
15 At [22] footnote omitted.
16 At [23].
17 At [38] — Mr OP QC acted for Mr ZL.
[40] The Committee took note of the fact that XY had acted to effect the appointment of Mr ST as director of LMN and there were no separate discussions with him as to the wisdom of accepting the transfer of the shares.
[41] It determined that XY assumed a “professional obligation to protect [LMN’s]
interests”.18
[42] Whilst the Committee “recognis[ed] that concurrent instructions are common place in New Zealand” there was a:19
special onus [that] applies to that lawyer over disclosure and the obtaining of mutual consent, and a requirement of alertness to the possibility of a potential or actual conflict arising, which dictates that the lawyer must step aside from acting from either client
[43] The Committee determined that Mr ZL was obliged by virtue of r 6.1 of the Rules to obtain the informed consent of both parties to the transaction but had not done so. In reaching this view, the Committee rejected the submission by Mr OP that:20
... A lawyer is not obliged to obtain informed consent to having concurrent clients. Rather, in the interests of protecting or promoting the interests of the client to the exclusion of the interests of third parties, the lawyer must not act for more than one client in a matter in any circumstances where there is ‘a more than negligible risk’ that the lawyer may be unable to discharge the obligations owed to both clients. As an exception to that, where there such a risk, a lawyer may act for more than one party in respect of the same transaction provided informed consent to all is obtained.
[44] The substance of the Committee’s determination is contained in paragraphs
[44] and [45]:
[44] The Committee is satisfied that given his role in preparing documents for both parties to the transaction incorporating the nominal price, there was risk that Mr ZL would be unable to discharge his obligations to one or both of the contracting parties and that he was therefore not able to protect and promote the interests of one to the exclusion of the interests of the other, as envisaged by rule 6. It is not an answer to say that both parties were directed by the same principal or that they had common shareholders. They were separate corporate entities on different sides of a sale and purchase agreement and given the developing circumstances with the appointment of a new director for [LML], which [LML] has an integral role in, it is arguable that a more than negligible risk existed that Mr ZL would not be able to perform his professional obligations to both parties. It was at least incumbent on Mr ZL, before proceeding to act, to obtain the informed consent of both [ABC] and [LML] in accordance with rule
6.1.1, certainly before Mr ST was appointed director, and attended upon to sign the transfer agreement and share transfer form.
[45] Before the High Court, Mr ZL suggested that both [GHL] and Mr ST
‘consented to the transfer and knew that we were acting’. He must be referring to an implicit consent here, as there is no evidence of any express consent form
18 At [38].
19 At [39].
20 At [40].
either. The first point is that Mr ST was appointed as director close to the date the share agreement and transfer were signed. Also the context in which Mr ZL describes ‘consent’ relates to the share transfer and not to ‘informed consent’ under rule 6.1.1, being the procedural step recording acceptance that an identified lawyer may act for both parties to the transaction. That consent should be in writing in any case.
Mr ZL’s application for review
[45] Mr OP (for Mr ZL) submits:
• Mr ZL did not act for LMN but in any event there was no more than a negligible risk of his being able to discharge his obligations to the company.
• Mr ZL was instructed by GHI, the sole shareholder of LMN. Mr ZL was acting for GHI.
• Mr ZL’s instructions were limited to effecting the appointment of Mr ST as a director and to completing the technical matters required to transfer the shares.
Mr BF’s application
[46] Mr BF is unhappy with the determination of the Committee not to publish the determination. Because of the outcome of this review the issue of publication does not arise.
Review
[47] Before embarking on this review it is necessary to record some important facts relevant to the issues to be addressed:
• Both ABC and LMN were wholly owned subsidiaries of GHI.
• Ms WR was the sole director of ABC.
• Ms WR was the sole director of GHI.
• The current director of LMN was an undischarged bankrupt who, by reason of the provisions of the Insolvency Act, was not able to fulfil that role.
• Ms WR, as the sole director of GHI which was the sole shareholder of
LMN, appointed Mr ST to be the director of LMN.
• The documentation appointing Mr ST was executed at the same time as the share transfer took place. Mr ST signed both the Agreement and the share transfer form on behalf of LMN.
[48] Consequently, by the time it came to execute the documents effecting the share transfer LMN had a different director from ABC. However, the shareholder of both companies remained the same.
[49] A director of a company is answerable to the company’s shareholders. In this instance, it was the director of the shareholding company in LMN who had instructed Mr ZL to effect the share transfer. Mr OP argues that for this reason Mr ZL was not acting for LMN.
[50] This is a difficult proposition to accept. The shares were not to be transferred to GHI, the company giving the instructions. The shares were to be transferred to LMN which thereby became a party to the transaction.
[51] Mr ZL was acting for LMN. He was also acting for Mr ST but there has been no complaint from Mr ST. In the circumstances, it is sufficient that Mr ZL is made aware that he has breached the Rules and will need to be alert to similar situations arising in future.
[52] There is some disagreement between Mr OP and the Committee over the interpretation of rr 6.1 and 6.1.1 of the Rules. The respective rules are set out here:
6.1 A lawyer must not act for more than 1 party in respect of the same transaction or matter where there is a more than negligible risk that the lawyer may be unable to discharge the obligations owed to 1 or more of the clients.
6.1.1 Subject to the above, a lawyer may act for more than 1 party in respect of the same transaction or matter where the prior informed consent of all parties concerned is obtained.
[53] In this regard, the parties are referred to the commentary by the authors of the text Ethics, Professional Responsibility and the Lawyer:21
21 Duncan Webb, Kathryn Dalziel and Kerry Cook Ethics, Professional Responsibility and the
Lawyer (3rd ed, LexisNexis, Wellington, 2016) at 212, footnotes omitted.
However, under the rules, the position is that there is a prohibition on a lawyer acting wherever there is a “more than negligible risk” that the lawyer may be unable to discharge his or her obligations to one or more of the clients. While r 6.1.1 provides that in some cases a client’s consent is required, this is subject to the overriding rule in r 6.1 that a lawyer may act (with consent) for multiple clients on the same transaction or matter only where the risk of a conflict is negligible.
[footnotes omitted]
[54] The authors of the text referred to subsequently discuss what constitutes
“informed consent”:22
... every effort must be made by the solicitor to ensure the consent is genuine and informed. It bears emphasising that a formulaic consent procedure will not suffice to show that the client understood the existence, nature, and possible consequence of the conflict of duties the lawyer faced.
[55] The term “informed consent” is also defined in r 1.2 of the Rules:
informed consent means consent given by the client after the matter in respect of which the consent is sought and the material risks of and alternatives to the proposed course of action have been explained to the client and the lawyer believes, on reasonable grounds, that the client understands the issues involved
[56] Clearly the most decisive manner in which informed consent could be evidenced would be by obtaining written acknowledgement from each party of the advice provided with an instruction to proceed nevertheless. Mr ZL did not do this.
[57] Whether or not there was a “more than negligible risk” that he could not protect the interest of both parties to the transaction determines whether or not Mr ZL was obliged to obtain informed consent from each party.
[58] The exposure of LMN, and Mr ST, to objection from the company’s shareholder (GHI) was non-existent. It is inconceivable that GHI could object to the transfer of shares given that it had issued the instructions to do so. There was not a
‘more than negligible risk’ that Mr ZL could fulfil his obligations to both companies.
[59] Provided, therefore, that Mr ZL obtained ‘informed consent’ from both parties, he was able to act. In the case of LMN this would have meant having the informed consent signed by Mr ST.
[60] Mr ZL did not obtain informed consent from either party.
22 At 214–215, footnotes omitted.
[61] Mr ZL has offended against the requirements of rr 6.1 and 6.1.1. The Committee noted that “it is not an answer to say that both parties were directed by the same principal or that they had common shareholders”.23 In taking this approach, the Committee has imbued the corporate entities with personalities separate from the individual who controlled them both. It could be said, with some certainty, that Ms WR would readily have provided her consent to the transaction, regardless of any advice proffered to her.
[62] The Committee has also noted that “obtaining consent is not a mere procedural formality, and strict professional and fiduciary obligations apply before the lawyer can continue to act”.24
[63] That is correct, but the reality of the situation in this instance cannot be ignored. To do so reduces the relevance of the Rule and the importance of complying with it in circumstances where the purpose of the Rule is clearly engaged.
[64] The breach of the requirements has had no detrimental effect. Section 138(2) of the Act gives a Standards Committee (and this Office) a discretion to take no further action on a complaint if further action is unnecessary or inappropriate.
[65] The purposes of the Act are:25
(a) to maintain public confidence in the provision of legal services and conveyancing services:
(b) to protect the consumers of legal services and conveyancing services:
(c) to recognise the status of the legal profession and to establish the new profession of conveyancing practitioner.
[66] Neither corporate consumer of Mr ZL’s legal services in this matter is concerned about Mr ZL’s breach of the Rules. Both companies (and parties to the transaction) were represented by the same person — as director of ABC and as director of the 100% shareholder of LMN.
[67] In the circumstances, none of the purposes of the Act are promoted by making an adverse finding against Mr ZL. To some extent, a finding against Mr ZL will reduce his respect for the processes of the Complaints Service and that must be maintained to
23 Standards Committee determination, above n 2 at [44].
24 At [41].
25 Lawyers and Conveyancers Act 2006, s 3.
ensure lawyers accept the relevance of Standards Committee findings, which in turn will maintain public confidence in the legal profession.
Conclusion / Summary
[68] The overriding fact which leads to this decision on review is that Mr ZL received instructions from a common shareholder of the two companies before the appointment of Mr ST as a replacement director. Mr ST was not at risk of being accused by the shareholders of LMN that he had failed in his duty to the company. The company was receiving an apparently valuable asset for a nominal sum.
[69] Mr ST was an associate of Ms WR and the shareholder so it was reasonable for Mr ZL to assume Mr ST was well acquainted with events and the proposals. Mr ST would have been able to assess for himself any apparent downside that presented.
[70] In all the circumstances, it seems that the Committee has seized on the fact that there has been a breach of the Rules without considering whether or not it should exercise its discretion to take no further action.
[71] I have come to the view that it is appropriate to exercise that discretion as the purposes of the Act are not being fulfilled by a finding against Mr ZL.
[72] An adverse finding against Mr ZL is both unnecessary and inappropriate.
Decision
Pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006 the decision of the Standards Committee is reversed and replaced with a determination pursuant to s138(2) of the Act to take no further action in respect of Mr BF’s complaints. The orders made by the Committee consequently fall away.
DATED this 18TH day of February 2019
D Thresher
Legal Complaints Review Officer
In accordance with s 213 of the Lawyers and Conveyancers Act 2006 copies of this decision are to be provided to:
Mr BF as the Applicant / Respondent
Mr ZL as the Respondent / Applicant
Mr OP QC as the Representative for Mr ZL Mr AH as a Related Person
[Area] Standards Committee [X]
New Zealand Law Society
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