Background

The lawyer in question (Mr L) was a sole practitioner and trust account supervisor who sold his practice to another firm on retirement. The Inspectorate of the New Zealand Law Society | Te Kāhui Ture o Aotearoa carried out a review of the new firm and identified a “proliferation” of aged and inactive balances which had been transferred from Mr L’s trust account. The total sum involved was close to $3 million, relating to more than 150 matters.

The matter was then referred to the Standards Committee, which opened an inquiry into Mr L’s conduct. Mr L did not engage with the Committee in its inquiry.

No annual reporting

Regulation 12(7) of the Trust Account Regulations (Regulations) requires a practice to provide to each client for whom trust money is held a complete and understandable statement of all trust money handled for the client, all transactions in the client’s account and the balance of the client’s account. Generally, such reporting is to be done at least every 12 months.

The Committee noted that the money transferred by Mr L to the new firm mostly came from IBD and many of those IBD balances had been held by Mr L for a “very long time”. It said that Mr L had “not provided any evidence to the Committee of having reported annually to clients with funds in his trust account”. It noted that the Inspectorate had previously brought the matter of dormant balances to Mr L’s attention four years earlier. At that time, the dormant balances dated from up to 15 years earlier and the Inspectorate cautioned Mr L that he needed to review such balances.

In the absence of evidence to the contrary, the Committee concluded that there had been “little or no annual reporting” by Mr L to his clients with dormant balances in his firm's trust account. The Committee was satisfied that Mr L had therefore breached reg 12(7) of the Regulations.

Dealing with client monies without authority

The Committee also considered whether Mr L dealt with client monies without client authority. It said, “[i]t is both axiomatic and well established that no lawyer can make payment of client monies without client authority”. Section 110(1)(b) of the Lawyers and Conveyancers Act 2006 (Act) requires a lawyer holding money on behalf of a person to hold that money exclusively for that person and to pay it only “to that person or as that person directs”. Further, reg 12(6) of the Regulations provides that one of the requirements for a practice making transfers or payments from a client’s trust money is that it “obtains the client’s instruction or authority for the transfer or payment, and retains that instruction or authority (if in writing) or a written record of it…”

The Committee acknowledged that it had seen no evidence that Mr L had misappropriated any funds. 

However, there was also a complete absence of evidence that the lawyer had obtained the authority of any client or that the clients were even aware of the transfer. The Committee found this to be a breach of both s 110 of the Act and 12(6) of the Regulations.

Determination

The Committee noted that handling client funds involves fundamental obligations for lawyers and that there is “limited room to exercise a discretion where breaches occur”. It noted that this matter involved a “large amount of money” and the breaches occurred over a “lengthy period”. It considered that the breaches were not “merely technical”. However, as Mr L had retired from legal practice and there was no evidence of misappropriation, the Committee decided, “by a narrow margin”, that the matter did not warrant referral to the Disciplinary Tribunal.

The Committee made a determination of unsatisfactory conduct and censured Mr L. It also fined him $5,000 and ordered him to pay $1,000 in costs.

Closure of practice

In its decision, the Committee referred to the duties on lawyers when closing their practice and that the Law Society has a practice briefing outlining those duties. It directed publication of an anonymised summary of its determination specifically to remind lawyers:

“…that it is not appropriate for a retiring lawyer to essentially wash their hands of an accumulation of client monies by transferring funds to another firm without complying with all their duties and obligations under the Act and Trust Account [Regulations].”

Law Society note:

Read the practice briefing relating to closing down or selling a law firm

Read a practice briefing on changes to the Unclaimed Money Act 1971