New Zealand Law Society - Conflict of interest for practitioner acting for two companies without proper authority

Conflict of interest for practitioner acting for two companies without proper authority

A practitioner who acted for two companies in a sale agreement and submitted the e-dealing for that transaction after one of the companies went into liquidation, has been found to have breached several Conduct and Client Care Rules amounting to unsatisfactory conduct. The Committee ordered that the practitioner be censured, pay a fine of $7,500 and pay the costs of $1,500.

Company A had a sole director, Mr D who was also one of two directors of Company B. Half of the shares in Company B were held by Company A and Mr D. The other half of the shares were held by an entity controlled by the other director. The practitioner was instructed to act for both companies on the sale of a property from Company B to Company A, on the instructions of Mr D without the authority of the other director. Furthermore, his instructions when acting for Company B furthered the personal interests of Mr D, potentially to the detriment of the other director and/or shareholder of Company B. The practitioner therefore had conflicting duties (Rule 6.1). Even if Rule 6.1 was not breached, Mr D, as only one director of Company B, could not give consent for the practitioner to act for both parties (Rule 6.1.1).

The Committee questioned whether the practitioner ever had a valid retainer with Company B, given he did not have the authority of both members of the Board.

The Committee further considered that, even if had been permissible for the practitioner to act for both parties at the outset, he should have terminated his retainer with both companies as soon as it became apparent that the practitioner was unable to discharge the obligations owed to each client (Rule 6.1.2). The Committee’s view was that that point was when Company B was subject to liquidation proceedings and was unable to avoid being placed into liquidation.

After Company B was put into liquidation, the practitioner continued to act for Company A.  He relied on a Client Authority and Instruction (Client A&I) he had earlier obtained from Company B on the sole authority of Mr D in order to register the transfer of the property from Company B to Company A.

The Committee held that by doing so the practitioner had undermined the fiduciary obligations he owed to Company B. The Committee noted that “the fiduciary obligations a lawyer owes to a client do not cease when the lawyer ceases to act for the client.”

It considered that the practitioner should not have certified and signed the Transfer Instrument for and on behalf of Company B. Had the situation been different and the companies had had separate lawyers acting for them, the lawyer acting for Company A would not have been in possession of the Client A & I form from Company B. It was only because the practitioner had acted for both parties that he was able to make use of this form for the benefit of Company A after he ceased acting for Company B.

At the time the practitioner certified and signed the Transfer Instrument, Company B was in liquidation and he was no longer acting for it. The practitioner had sought the consent of the liquidators to the transfer of the property, but they refused consent. The Committee was of the view that the practitioner’s actions in proceeding to transfer the property from Company B, without the consent of the liquidators, was solely in furtherance of the interests of Company A and to the detriment of Company B.

The Committee was not satisfied that the certificates signed by the practitioner, stating that he had authority to act for the Transferor (Company B) and that that party had the legal capacity to lodge the instrument, was correct.  Its view was that the certificates did not meet the requirements of Rule 2.5.  

The liquidators had refused consent to the transfer on the basis that sale agreement had been entered into three days before Company B went into liquidation, the agreement was not signed by the requisite majority of shareholders, it was a related party transaction, and the transaction was supported by a valuation that was two and half years old.

Nonetheless, the practitioner went ahead in registering the transfer, taking the position that the liquidators’ consent was not required because Company B had approved it prior to liquidation. The Committee held that this was conduct which fell short of the standard of competence and diligence expected of a reasonably competent lawyer.

By breaching the rules regarding conflicting duties and Rule 2.5, and in failing to meet the required standards of competence and diligence, the practitioner’s actions were found to have been unsatisfactory conduct (sub-sections 12(a) and (c)). In addition, the Committee concluded that the practitioner’s conduct in certifying and signing the transfer where the liquidators had expressly refused consent had “a deliberate quality setting it apart from an innocent breach of the Rules or a failure to meet the standard of competence and diligence…”. The Committee determined that the practitioner’s conduct would be regarded by lawyers of good standing as being unacceptable and therefore unsatisfactory conduct under sub-section 12(b) also.

The Committee ordered that the practitioner be censured, pay a fine of $7,500 and pay the costs of $1,500.

Lawyer Listing for Bots