Ms Vx and Vxz v [North Island] Standards Committee
 NZLCRO 24
Concerning an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
Concerning a determination of [North Island] Standards Committee
Application for review of Standards Committee determination that the practitioner's incorporated law firm breached the provisions of s110(2) Lawyers and Conveyancers Act 2006 (incorporated firm that received money for, or on behalf of, any person to ensure that the money paid into a bank to a general or separate trust account of the firm; and hold the money exclusively for that person, to be paid to that person or as that person directed) — law firm specialised in employment claims — payments for claims under the Employment Relations Act 2000 required to be made either to the claimant directly or into a solicitor's trust account — practitioner made arrangement with another law firm to use that firm's trust account — client was recorded as practitioner law firm — whether practitioner or her firm was in receipt of client funds by being “in control” of the funds — whether imposition of fine, costs and censure was appropriate.
The names and identifying details of the parties in this decision have been changed.
The issues were: whether VX was in receipt of client funds; and, whether or not the imposition of fine and costs and censure was appropriate.
Held: The LCA and the Client Care and Conduct Regulations were designed to ensure protection of client funds. If a lawyer was able to avoid the application of the various provisions by an arrangement such as this, that objective would not be met. A lawyer receiving the money had to be the same lawyer who held the money.
By virtue of the direction given by the firm's clients (that any payments made were to be directed to WAA's trust account) VXZ did not actually at any time “receive” funds from its clients. They were diverted to WAA. The question was whether or not VXZ took control of those funds.
The client recorded in WAA's trust account was VXZ. No payment out of the account could be made without the authority of VXZ. Although separate ledger accounts were created for each person within that client account, that did not alter the fact that the client was recorded as VXZ. The client was not recorded as the individual for whom VXZ was acting. If they were, they would have been recorded in the same way as WAA's own clients who were referred to VXZ. WAA had made clear statements that the funds were received on behalf of VXZ and were to be paid as VXZ directed.
This was later qualified by stating that there was a “sub-trust” for the clients. The implication appeared to be that WAA was assuming the obligations of VXZ to its clients in respect of the funds. That was a concept which did not sit comfortably with a lawyer's direct obligations to his or her clients.
The reality that the funds were under the control of VXZ regardless of actions taken by the principals of WAA. They acted on instructions from VX. VX would have wanted to make sure that payment of her fees was secure. If the funds were to be held to the order of her clients then this could not have been guaranteed. If WAA were to operate on her instructions, then payment was secure.
It was imperative that any dealings with client funds were straight forward and clear. The client had to know without doubt that his or her funds were at all times held strictly to his or her order. Conversely, the lawyer had to acknowledge without question, the right of the client whose funds they were holding to direct how those funds were to be applied. There was no room for imprecise terminology or misunderstandings in the matter of client funds. These requirements were not met by the arrangement between VXZ and WAA.
The funds were in reality under the control of VXZ. VXZ was in breach of s110(2) LCA as the funds were not paid into a trust account operated by that firm. As a result of this finding, it followed that VX gave a false certificate in terms of s112(2) LCA. Section 17(2) LCA provided that a lawyer who was a director or shareholder of an incorporated firm was subject to all the professional obligations applicable to a lawyer practicing on his or her own account and therefore the findings against VXZ were also findings against VX.
The function of a penalty in a professional context was to punish the practitioner, to act as a deterrent to other practitioners, and to reflect the public's and the profession's condemnation of the practitioner. Weighed against these criteria, there was therefore no reason to interfere with the Standards Committee's orders.
The correspondence between VX and the Lawyers Complaints Service revealed that VX did not accept criticism of the arrangement and that her responses to it were less than cooperative. In addition, the arrangement was clearly designed to allow VXZ to operate without a trust account but at the same time the firm was required by ERA to have any funds awarded to clients paid into a solicitors' trust account. Instead of establishing its own trust account, the firm chose to establish an arrangement with WAA to avoid the obligations that were imposed on law firms which operated a trust account. This indicated an unwillingness to meet the obligations imposed on a lawyer who wished to receive client funds. The censure was warranted.
Determination of the Standards Committee confirmed.
This is an application for review of a determination by the Standards Committee in which it found that VXZ, the law firm operated by Ms VX, had breached the provisions of s 110(2) of the Lawyers and Conveyancers Act 2006 (the Act) and issued a wrongful certificate under's 112(2) of the Act.
This decision is of some importance in that it concerns an arrangement between VXZ and the law firm WAA whereby VXZ operated without a trust account (and certified accordingly to the New Zealand Law Society) and directed funds paid to VXZ clients pursuant to Employment Relations Act proceedings into WAA's trust account.
Following an inspection by the New Zealand Law Society Inspectorate of WAA's trust account, the Standards Committee commenced an own motion investigation pursuant to s 130(c) of the Act.
Mrs AT, an NZLS audit inspector, was appointed pursuant to s 144 of the Act to conduct an investigation and reported to the Committee on 15 February 2011. In her report, Mrs AT advised:
two hundred and fifty three sub ledgers have been opened in the name of [VXZ] within the trust account maintained by [WAA].
I have spoken with Ms [VX] who explained that she would not be able to state “hand on heart” that she had obtained a letter of engagement from each and every client although it was her normal policy to do so.
VXZ standard terms of engagement included the following paragraph:
[VXZ] does not operate a Solicitor's Trust Account but has an arrangement with [WAA] Barristers & Solicitors to use their Trust Account. By authorising [Ms VX] and/or [VXZ] to act on your behalf, you are also authorising any monies to be collected or held on your behalf, to be depotised into the [WAA] Barristers & Solicitors Trust Account to be dealt with in accordance with your instructions, and the rules and legislation that govern Solicitor's Trust Accounts.
Mrs AT's report continued: 1
I understand that Ms [VX] deals only with employment relationship matters and she stated that authorities to lodge the monies within the [WAA] trust account were contained in her clients' settlement statements. However I have found that other monies had been transferred from a bank account in the name of [VXZ] to cover disbursements and fees payable to [WAA].
[Mr WB] of [WAA] explained that the bank account in the name of [VXZ] was operated jointly by Ms [VX] and the partners of [WAA] and if fees were not to be taken from settlement funds clients were requested to pay monies to cover their legal costs into this account.
From my enquiry into the administration of the account by [WAA], I found that Ms [VX] rendered each client an individual bill of costs and these were handed to the trust account administrator at [WAA] to enable disbursements to be debited to the ledger together with 50% of the costs payable to [WAA].
If compensation monies had been received on behalf of the clients, it was the normal practice to debit disbursements and 50% of the fees to the [WAA] float account and to pay the remaining share of the fees to the [VXZ] business account by direct credit.
However, if the fees were to be paid from monies received into the joint business account a pro-forma bill to cover the [WAA] costs was posted to the trust ledger and Ms [VX] was responsible for drawing her share of the fees from that account.
It was not [WAA] policy to render a bill of costs to [VXZ].
By way of further explanation it is helpful to refer to the following extracts from a letter dated 28 October 2010 sent by Mr VZ, counsel engaged by Ms VX, to the Standards Committee:
1. [VXZ] is a company of which [Ms VX] is the Director.
2. The company occupies office space in the premises of the law firm [WAA]. It also has use of the firm's reception, accounting, power and telephone facilities.
3. Instead of paying rent as a sub-tenant, the company pays for its use of...
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