BF v ZL [2019] NZLCRO 13 (21 February 2019)

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	LCRO 140/2016 LCRO 153/2016
CONCERNING	applications for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
AND
CONCERNING	a determination of [Area] Standards Committee [X]
BETWEEN	BF
	Applicant / Respondent
AND	ZL _{Respondent / Applicant}

The names and identifying details of the parties in this decision have been changed.

[1] Mr ZL acted for Mr QR. Mr QR was the ultimate sole shareholder, and sole director, of a number of companies, one of which was called CAB Limited (CAB).

[2] Mr QR’s business interests and those of the companies were interrelated in a number of ways.

[3] Mr BF was appointed liquidator of CAB in November 2012. In the course of the liquidation, Mr BF became aware of transactions involving CAB and a number of other of Mr QR’s companies and interests.

[5] The sole shareholder of CAB was MET Limited (MET). Mr QR was the sole shareholder of MET. Mr BF was the liquidator of that company also.

[6] MET was the sole shareholder of a number of companies. Mr QR was the sole director of each company.

... Mr [ZL] is in breach of s 6 of the Lawyers and Conveyancers Act 2006 (the Act) in that his conduct over a number of years could not be held to be other than disgraceful and dishonourable by lawyers of good standing.

[9] Mr BF continues by referring to what he considers to be breaches by Mr ZL of rr 2, 2.4, 6 and 6.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (CCCR).

[10] Mr BF considers Mr ZL has breached rr 2 and 2.4 by “configur[ing] the affairs of

Mr [ZL] had habitually acted for [MET Limited] the holding company of [CAB] and a substantial creditor of that company, and for [CAB] itself. He then acted for [CAB] and for [FAR Limited] without ensuring that [CAB] took independent advice.

2 A lawyer is obliged to uphold the rule of law and to facilitate the administration of justice.

2.2 A lawyer must not attempt to obstruct, prevent, pervert, or defeat the course of justice.

2.4 A lawyer must not advise a client to engage in conduct that the lawyer knows to be fraudulent or criminal, nor assist any person in an activity that the lawyer knows is fraudulent or criminal. A lawyer must not knowingly assist in the concealment of fraud or crime.

2.4.1 A lawyer may assist a client in seeking to avoid or minimise any penalty or adverse effects that flow from fraud or crime.

[12] Mr BF alleged that Mr ZL “configured the affairs of [CAB] such that [it] has been dispossessed of $960,000”. The manner in which this was “engineered” would seem to be summarised in the last bullet point of the “conclusion” to Mr BF’s letter. He says:

• On the basis of the “loan” and the GSA, [FAR] misappropriated $961,000 belonging to [CAB].

[13] The “loan” that Mr BF refers to is a loan of $300,000 by FAR Ltd (FAR) to CAB. FAR had a single director (Ms WR) and was ultimately owned by a company of which Mr QR was the sole shareholder.

[14] CAB had granted General and Specific Security Agreements to SOX Limited (SOX). Mr BF notes that Mr QR had signed certificates annexed to these securities which included a certificate that CAB was solvent. Mr BF disagrees.

[15] These Security Agreements were subsequently assigned by SOX to FAR. The Deed of Assignment records that the assignment was at the request of CAB. The purchase price for the assignment was $300,000. The documentation was prepared by another law firm and provided that the purchase price would be paid by CAB (the debtor). In his letter of complaint Mr BF advises that he is unclear as to the reason why the purchase price was payable by CAB.

[16] It seems that the funds for the purchase were derived from the advance by FAR to CAB and paid into the trust account of Mr ZL’s firm (Law firm XY). The payment to SOX was effected by way of journal transfer within the trust account.

[17] Subsequently FAR exercised its rights under the Security Agreements and took

[18] By virtue of the combinations of the various transactions, Mr BF submits that

6 A lawyer must not act for more than 1 client on a matter in any circumstances where there is a more than a 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.

[19] Mr BF’s complaints with regard to rr 6 and 6.1 are set out above in paragraph

[20] On 20 October 2009, CAB and nine other MET subsidiaries entered into a guarantee of an advance by SOX Limited and RIG Limited to HUY Limited (HUY). HUY was a company directed by ST and owned by YUM Limited. The purpose of the borrowing was to purchase the assets of another company in the QR group.

[21] The loan agreement was prepared by another law firm. Mr ST’s signature as sole director of the company is witnessed by a lay person, whilst Mr QR’s signature, as sole director of all guarantor companies, is witnessed by a legal executive in Mr ZL’s firm.2

[22] The [Area] Standards Committee [X] (the Committee) formulated the following issues from Mr BF’s complaints:

(a) Has a fraud been committed? If so, was Mr ZL a party to the fraud, or did he assist with its concealment?

[23] The Committee noted that it “require[d] a high standard of detail to uphold an

[24] The Committee did not consider that Mr BF had provided sufficient evidence to establish any breach of rr 2 or 2.4.

2 At [14] of its determination the Committee has noted that “it is apparent that Mr ZL advised [HUY]”. The basis for this comment is not clear. However, there is no conflict between the borrower and the guarantors, so this comment is not significant.

[27] The Committee observed that Mr BF had not been “able to state specifically

Mr ZL’s role in each of the above listed transactions” but Mr BF asserted that “Mr ZL was

[28] Mr ZL submitted that his retainer on behalf of the various companies was limited by Mr QR in his capacity as director of CAB. However, the Committee commented that Mr ZL could not “point to any written record of that limitation, either a communication from Mr QR or a record of verbal instructions confirmed in writing”.7

[29] However, during the course of the investigation by the Committee Mr ZL did provide a document signed by Mr QR which included the following statements:

1. I was at all relevant times the sole director of both [FAR Limited] ...and [MET Ltd]. ... Therefore, in relation to those transactions, I was the only person Mr [ZL] was entitled or obliged to take instructions from. ...

3. ... As implementation of the deed would substantially reduce the total debt of [CAB] I considered that it was clearly in [CAB]’s interests to enter into the term loan agreement. I did not seek Mr [ZL]’s advice on that point. ...

5. I at all times considered that it was in the interests of both [FAR] and [CAB] to proceed with the implementation of the deed of assignment which included the entry into the loan agreement. I did not, whether on behalf of [CAB] or otherwise, seek Mr [ZL]’s advice on that. ...

7. I note there is reference to the concept of obtaining “informed consent.” I instructed Mr [ZL] to act in relation to the preparation of the loan agreement in the form that it is in as part of the implementation of the deed. I have entered into dozens, probably hundreds, of similar such loan agreements and security documents, many times on behalf of multiple parties. I am very familiar with their terms. I have never considered it necessary to take legal advice from different

solicitors for different companies that I represent in such circumstances. I consider this would be a significant cost burden and waste of time for no benefit. Mr [ZL] is well aware of my views on this matter. In light of my comments above I do not know what further information I was required to be “informed of.”

If a lawyer proposes to accept instructions from two or more clients in relation to a transaction, then a special onus applies to that lawyer over disclosure and obtaining, in advance or as soon as practicable, mutual consent.

[31] It took the view that “obtaining consent is not merely a procedural formality” and that “consent must be in written form, ideally signed by the clients involved, or alternatively a written communication from each client confirming its informed decision”.9

Strict fiduciary obligations apply before the lawyer can act or continue acting. There must be full disclosure of the prospective existing conflict issues, and each client must have a full understanding of the existence and potential ramifications of the lawyer holding composite obligations. The clients involved must be made to understand that their respective interests may not be able to be fully met and that the assistance the lawyer might be able to give could be diluted or qualified.

[33] It also noted that r 6.1 meant that if there was “more than a negligible risk the lawyer may not be able to perform his or her professional and fiduciary obligations to one or other of the clients” then a lawyer must decline to act.11 The clients must be required to take independent advice.

The fact that Mr [QR] was a director of both companies does not remove the need for impartiality and care on the part of Mr [ZL] as the lawyer acting to objectively consider whether or not it was in [CAB]’s interests to enter into the transaction and make the loan advance for the ultimate benefit of [FAR], or its shareholders. Mr [ZL] seemingly did not recognise that requirement.

As a first step, he should have sought the written consent of both [FAR] and [CAB] before proceeding to act, in accordance with rule 6.1.1. The suggestion that Mr [QR] gave implicit consent, by virtue of the fact he was director of both companies, is insufficient. That Mr [QR] would have given that consent without difficulty, if he had been asked, doesn’t obviate the requirements. The process contemplated by rule 6.1.1 is more than procedural; it requires the lawyer to discuss the full implications with both parties to the transaction, so that their consent to the same lawyer acting concurrently is informed and in writing. Even

...failed to comply with his professional obligations under rule 6.1 by failing to obtain the informed consent of both [CAB] and [FAR] before undertaking the work to prepare the loan agreement and to attend on Mr [QR] to sign that agreement in his respective capacities as director of [FAR] and [CAB].

[36] With regard to the penalties to be imposed the Committee took note of the following factors:

[37] Following the finding of unsatisfactory conduct against Mr ZL, the Committee imposed the following penalties:14

c. Under s 156(1)(n) that Mr [ZL] and [Law firm XY] pay the sum of $1000 in respect of the costs and expenses of the enquiry and the hearing conducted by the Standards Committee.

[40] Mr ZL asks this Office to reverse the finding of unsatisfactory conduct and consequent penalties on review. Mr OP QC made the following submissions in support of the application:

• SC erred in not accepting the common evidence of both Mr [ZL] and Mr [QR] that the scope of Mr [ZL]’s retainer was limited and did not extend to advising on the merits of the transaction.

• In substance SC finding was one of credibility. An adverse finding of credibility is unsupportable given the absence of contrary evidence and the inadequacy of the reasons given by SC for such finding.

• The absence of any written record of the instruction ... is not, of itself, reason to reject the common account of the only two people involved in the instruction ie Messrs [ZL] and [QR], of the instruction given.

• The basis for, and absence of written record of, the decision by Mr [QR] as director to enter into the transaction does not have any relevance to the extent of the instruction given to Mr [ZL]. ... Further it was not sought by SC. Had it been, Mr [ZL] understands it would have been available.

• The SC accordingly erred in finding that Mr [ZL] had a duty to protect [CAB]

• ... there was a concurrence, not conflict, of interest in his giving effect to what the parties had agreed.

• No sensible articulation of what was required by way of informed consent is possible in these circumstances.

[41] Mr BF is unsure that the Committee understood the accounting data presented by him. He restates his conclusions that FAR had extracted the sum of $960,000 from CAB. He submits that the Committee conclusion that the accounting analysis was insufficient was simply false.

[42] He considers the Committee has concluded “that Mr ZL’s failure to advise CAB

[43] He makes it clear that he could not provide any further documentation to support his complaints because of failure by others to comply with obligations to provide documents when requested by him.

[44] Mr BF seeks an increase in the penalties imposed on Mr ZL and publication of the determination.

[45] In his letter of complaint Mr BF acknowledged on a number of occasions that he did not have a clear understanding of the transactions referred to. However, he has formed the view that Mr ZL had facilitated the transactions, resulting in his complaints to the Lawyers Complaints Service. He has accused Mr ZL of “fraudulent or criminal behaviour”.

[46] As noted by the Committee, Mr BF’s allegations are serious.15 They are allegations that are properly made to the Police and examined in court, consequently attracting a standard of proof beyond reasonable doubt. They are not matters to be investigated and determined by the Lawyers’ Disciplinary Process.

[47] If charges against a lawyer are proven in Court, then a complaint alleging breach of r 2 would be considered to be appropriate.

[48] Rule 2.4 requires proof that the lawyer “has knowledge” that his or her client’s conduct is fraudulent or criminal or conceals fraudulent or criminal conduct. There has been no proven evidence provided that Mr ZL’s client has engaged in fraudulent or criminal behaviour. Without this, r 2.4 cannot apply.

[49] In the first bullet point of the “conclusion” in his letter of complaint Mr BF says:

[50] In an Acknowledgement attached to the guarantee each guarantor (through Mr QR as sole director) states that it was advised by its lawyer to obtain independent advice but elected not to do so. Each company further confirms that

the nature and effect of the documents and this acknowledgement has been explained to the directors of the guarantor by it solicitor and they understand the terms and provisions of the document.

[51] It is clear that Mr BF has not noted this Acknowledgement. It would seem that the Committee has not noted it either.

[52] Each guarantor has acknowledged that it was advised (but declined) to take independent advice. Each guarantor also acknowledges that “the nature and effect of the document” had been explained to them by its solicitor.

[53] These acknowledgements clearly constitute “informed consent” as required by

[54] Prior to this complaint, Mr BF had made another complaint about Mr ZL, in which he also alleged Mr ZL has breached rr 6 and 6.1 in similar circumstances to those involved in this complaint.16 The same principles relating to conflicts of interest are involved in that complaint and, rather than repeat the comments made in that Review they are specifically imported into this decision.17

[55] In addition, it is pertinent to note, that if Mr ZL had required the companies to take independent advice, the practicality of this was that Mr QR would have been required to consult separate solicitors for each company and would have instructed them to proceed as he had instructed Mr ZL to proceed.

[57] As noted in the earlier decision it is neither necessary or appropriate to make adverse findings against Mr ZL. None of the purposes of the Lawyers and Conveyancers Act would be promoted by making an adverse finding.

[58] Accordingly, pursuant to s 211(1)(a) of the Lawyer and Conveyancers Act 2006 the finding of unsatisfactory conduct by the Committee is reversed. The penalties imposed by the Committee consequently fall away.

In accordance with s 213 of the Lawyers and Conveyancers Act 2006 copies of this decision are to be provided to:

New Zealand Legal Complaints Review Officer

BF v ZL [2019] NZLCRO 13 (21 February 2019)