Protecting Clients' Money - the Road to the Solvency and Experience Requirements of the Law Practitioners Act 1955

• Author: Jeremy Finn
• Position: Professor Emeritus, University of Canterbury
• Pages: 27-49

27

PROTECTING CLIENTS’ MONEY –

THE ROAD TO THE SOLVENCY AND

EXPERIENCE REQUIREMENTS OF THE

LAW PRACTITIONERS ACT 1955

Jeremy Finn*

Abstract

is article e xplores two largely unexplored a spects of the history of the New Zea land

legal profession: t he generally ignored but ver y substantial cohort of law yers who caused

f‌inancial losses to their clients and other creditors by bankruptcy or theft – or both –

and the slow developments of rules designed to limit that loss-causing behaviour. It is

argued that the legal profession was remarkably slow to take any eective action, with

the vital step of requiring solicitors to operate trust accounts being forced upon them

by Parliament in 1892. As the article demonstrates, the trust account regime was not

adequately enforc ed for several decades, with th e public continuing to s uer loss through

defalcations and bankruptcies of solicitors. e article concludes with discussion of the

suspect Law Society claims that inexperience was the key element in lawyers failing to

protect their cl ients and creditors, a cl aim which was apparently us ed to justify imposing

a “three years’ experience” restriction on the right to commence practice on one’s own

account, as w ell as a long-overdue bar on b ankrupt solicitors rem aining in practice.

I. Introduction

The Law Pract itioners Act 1955 contai ned two novel provisions – a requ irement

that a pract itioner not be a bankr upt or insolvent and a requ irement of three year s’

experience in legal employment prior to practice on the lawyer’s own account.

Neither of these i nnovations ha ve been the subject of a ny signi f‌icant discu ssion in the

literat ure about the New Zea land lega l profession. Althou gh apparently u nrelated, it

appears t hat the changes were bot h aimed at a single problem – t hat some lawyers,

in one way or another, took or dissipated the funds entrusted to them by their

clients. Ot her means of deal ing with th e problem, with incr easing degre es of rigour,

* Professor Em eritus, Uni versity of Cant erbury.

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had been tri ed, but none had proved entirel y successful. The h istory of loss-ca using

behaviour a nd of attempts t o limit or prevent it ca n be divided int o three sta ges. The

f‌irst, f rom 1840–1892, saw no s ignif‌icant res trictions on law yers' conduct except the

basic provis ions of the various Law Practitioners Ac ts and minima l supervision by

the Supreme Cour t. The second, which beg ins with the requ irement that solicitors

operate tr ust accounts impose d in 1892, runs t o the initiation i n 1913 of compulsory

audits of solic itors’ account s, althoug h arguably t he termi nal date shou ld be adjuste d

because the 1913 change took time to bed in. The f‌inal period involves t he attempt

to tight en those existing a pproaches until major cha nges in 1943 and 1955 opted for

a dierent and m ore exclusionary t reatment of bankr upts and the less ex perienced.

These change s are discussed i n more detail in sec tion IX below.

II. The Scale of the Problem

There is a received tradition that the legal profession in New Zealand has

had only the occasional “bad apple” criminal solicitor. This may stem from the

“establishment” nature of most books about the profession, books that generally

emphasise the careers of successful lawyers and largely ignore the unsuccessful

or disreputable. Only one cha pter in the Law Society’s cent enary histor y, covering

the years 1869–1968, mentions any cases of lawyers’ clients suering signif‌icant

losses. ES Bowie, writing on Canterbury, mentions two lawyers found to have

died insolvent and gives a substantial account of the Harper & Co scandal of the

1890s.1 Bankruptcies of l awyers hardly get a mention. There is a curious ref‌lection

of this in c ontemporary newsp apers. Throughout t he period covered in thi s article,

newspapers f requently repor ted comments by publ ic f‌igures – polit icians a nd others

– about lawyer s, and published many le tters to the edit or critical of the profes sion,

often descr ibing lawyers a s “sharks” who were prep ared to abandon a ll rules of go od

conduct – and inde ed obedience to the law – in t he interests of mak ing money. Yet

there was li ttle or no comment abou t loss-causing law yers betrayi ng their clients or

those from whom t hey obtained cred it.

I contend in this article that loss-causing solicitors were quite common –

certainly far more common tha n previously believed – especially in the 1880s and

the 15 years or so after World War 1, and that the losses suered by their clients

were much more substantial than has previously been suspected. By searching

the newspaper sources available through the Papers Past collection provided by

1 See ES Bowie Q C “Canterbury ” in R B Cooke (ed) Portrait of a Pr ofession (AH and AW Reed for

NZLS, Well ington, 19 69) at 249 and 25 9–261, respec tively.