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

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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 los ses to their clie nts and other cred itors by bankru ptcy or theft – or b oth –

and the slow deve lopments of ru les designed to li mit that loss-ca using behavi our. It is

argued that the le gal profession wa s remarkably slow to t ake any eective ac tion, with

the vital step of req uiring solic itors to operate tr ust accounts b eing forced upon the m

by Parliament i n 1892. As the ar ticle demons trates, the tr ust account regi me was not

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

defalcations an d bankruptci es of solicitors . e article co ncludes with di scussion of th e

suspect Law So ciety claims t hat inexperien ce was the key elem ent in lawyers fail ing to

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

a “three years’ expe rience” restr iction on the ri ght to commence p ractice 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 i n legal employ ment prior to pract ice on the law yer’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 anot her, took or dissipat ed the fund s entrust ed to them by t heir

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 Pr actitioners 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 1 913 change to ok time to bed i n. The f‌ina l 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 t radition t hat the lega l profession in New Zea land ha s

had only the o ccasiona l “bad apple” crim inal sol icitor. This may s tem from the

“establi shment” nat ure of most book s about the profession , books that gener ally

emphasise t he careers of s uccessful l awyers and l argely ignor e the unsucc essful

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

the years 18 69–1968, men tions any ca ses of lawyers’ cl ients suer ing sign if‌icant

losses. ES Bow ie, writi ng on Canter bury, mentions t wo lawyers found t o have

died insolvent a nd gives a subs tanti al account of t he Harper & C o scandal of t he

1890s.1 Ban kruptcies of l awyers hardly get a menti on. There is a cur ious 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 th is art icle that loss-c ausing sol icitors were qu ite common –

certa inly fa r more common tha n previously believed – espe cially i n the 1880s a nd

the 15 years or so a fter World War 1, a nd that the lo sses suered by t heir clients

were much more subst antia l than ha s previously b een suspect ed. By sear ching

the newspaper s ources avai lable thr ough the Paper s Past colle ction provided b y

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.