Incorporated law firms
Directors | Shareholding | Liability of lawyers | Personal liability | Misconduct | Barristers | Miscellaneous
The concept of law firm incorporation was introduced with the Lawyers and Conveyancers Act 2006 (LCA). This was not permitted under the previous (Law Practitioners Act 1982) regulatory regime.
As soon as an incorporated law firm is formed, Regulation 16 of the LCA (Lawyers: Practice Rules) Regulations 2008 requires that the Law Society is advised of:
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its name
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name of its directors and shareholders.
Every subsequent change of name, directors or shareholders must also be notified as soon as practicable. If the NZLS wants further information about the firm’s structure, directors or shareholders, this must be provided promptly.
Directors
Only lawyers actively involved in providing the incorporated law firm’s regulated services may be directors. For medium to large firms, particularly, the issue may arise as to which lawyers are to be directors. This could range from the members of the firm’s management board to all those who hold voting shares. Under the LCA, the deemed director provisions in the Companies Act 1993 will not prevent a company from being an incorporated law firm (s15(2)).
Shareholding
Two categories of shares are allowed – voting and non-voting.
Only actively involved lawyers can hold voting shares. Most incorporated firms will probably be structured so that the holders of voting shares are like the partners in an unincorporated firm.
Non-voting shares may be held by actively involved lawyers or their relatives. Relatives are defined in s6 of the LCA and include a spouse, civil union partner, de facto partner, parent, grandparent, child, brother or sister of an actively involved lawyer.
The definition of ‘incorporated law firm’ (s6) allows an administrator of a shareholder’s estate to hold the deceased’s shares.
It is clear that the intention of the act is to ensure that:
- control of an incorporated law firm rests in the hands of actively involved lawyers; and
- ownership resides with actively involved lawyers and their relatives.
In this area, caution is recommended as the effect of taking a firm outside the definition would result in serious breaches of various provisions in the LCA.
Staff lawyers are legally entitled to hold voting or non-voting shares. In most cases, a staff member would hold non-voting shares.
Liability of lawyer principals for loss by theft
All actively involved lawyers holding voting shares become personally liable for any pecuniary loss by a client resulting from theft by anyone in the law firm (s18).
It is likely that, by taking shares (whether voting or non-voting), a staff lawyer will be exposed to personal liability for negligence that would not otherwise be the case. Under s17(2), a lawyer who is a director or shareholder of an incorporated law firm is subject to all the professional obligations to which he or she would be subject if he or she were in practice on his or her own account.
Before a lawyer can hold shares (whether voting or non-voting) in an incorporated law firm, he or she must be entitled to practise on his or her own account (s30(2)).
Personal liability
Incorporating a law firm protects the directors and shareholders from personal liability for debts of the incorporated law firm. Section 17(1) makes it clear that just being a director or a shareholder does not make someone liable for:
- any act or omission of any other director or shareholder; or
- the debts or liabilities of the firm.
However, lawyer directors and shareholders will be liable for any theft that may occur (s18).
It will not be possible to negate tortious liability of a lawyer who is a director or shareholder, as this would be inconsistent with the provisions of s17(2). A lawyer who is a director or shareholder of an incorporated law firm is subject to all the professional obligations to which he or she would be subject if he or she were in practice on his or her own account.
However, other lawyers in an incorporated law firm would not share in the tortious liability of the negligent lawyer. Lawyers in an incorporated law firm will need to decide to what extent, if at all, they will indemnify a lawyer who becomes personally liable in negligence. Of course, the incorporated law firm will be liable in any event. Adequate insurance cover will still be needed under incorporation.
Misconduct and unsatisfactory conduct
The LCA defines ‘misconduct’ and ‘unsatisfactory conduct’. These provisions apply to incorporated law firms (or former incorporated law firms) in the same way as to other lawyers. Any orders a standards committee can make against an individual lawyer may also be made against an incorporated law firm.
(This contrasts with the Law Practitioners Act, where complaints and disciplinary measures were directed against individual lawyers rather than a law firm generally.)
Barristers
The incorporated law firm structure is also available to barristers.
Miscellaneous provisions
Incorporated law firms are referenced throughout the LCA and associated regulations. The more important of these are:
- An incorporated law firm must advise the NZLS of its name, the names of its directors and shareholders and any changes to these. It must also supply other information upon request (Lawyers and Conveyancers Act (Lawyers: Practice Rules) Regulations 2008).
- Section 30(2) provides that a lawyer who is a director or shareholder of an incorporated law firm is deemed to be practising on his or her own account. So before a lawyer can be a director or shareholder (voting or non-voting) in an incorporated law firm, the lawyer must have become entitled to practise on his or her own account.
- A person may complain to the NZLS Complaints Service about incorporated law firms as well as individual lawyers (s132(1)(ii)).
- Section 340, which permits lawyers to undertake the work of a real estate agent, is expressed as extending to an incorporated law firm. However, the definition of ‘regulated services’ in s6 applies to both lawyers and incorporated law firms, and regulated services include those provided by undertaking the work of a real estate agent. So it is considered that an incorporated law firm can provide real estate agency services through its lawyer members and their supervised employees.
- A lawyer who is the only director of an incorporated law firm must give a power of attorney to another lawyer authorising him or her to act as the board of the incorporated law firm (s44(1)(b) and cl 4 of Schedule 1).
- If an incorporated law firm goes into receivership or liquidation (other than for amalgamation under Part XIII of the Companies Act 1993), this constitutes grounds for a standards committee exercising its intervention powers under Part 7 of the act (s163(g)).
Further information
More information on incorporating your law firm is available in the NZLS Continuing Legal Education books Incorporating Your Law Firm – What you need to know (Grice, Haynes and Thompson), June 2007; and Incorporating Your Law Firm – Working Through the Process (Grice, Haynes and Thompson), October 2008.
To order these:
- see www.lawyerseducation.co.nz
- call 0800 333 111
- fax 04 463 2986; or
- email cle@lawyerseducation.co.nz