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Lawyer’s conflict of interest

01 December 2017

[Names used in this article are fictitious]

A lawyer has been censured for advising clients at the same time as lending them funds.

The lawyer’s conduct relating to the lending “constitutes unsatisfactory conduct,” the Legal Complaints Review Officer (LCRO) said.

The lawyer, Tressell, was a trustee of the H Family Trust. Mr and Mrs H were the other two trustees.

The H Family Trust was a shareholder of a building company and Mrs H was its sole director. The company was incorporated to operate as a building business.

The company bought a section on which it proposed to build a “spec house”, and Tressell arranged a series of advances through his firm’s nominee company, and two by Tressell’s own family trust. The advances related to both the section purchase and to carry out building work.

Mrs H complained about a number of aspects of Tressell’s conduct. She said that he had a “conflict of interest” by lending his personal funds to the H Family Trust.

A lawyers standards committee expressed concerns about Tressell’s failure to ensure that Mr and Mrs H received independent advice and took note of the personal guarantees that they were required to provide.

The committee made a finding of unsatisfactory conduct, ordered Tressell to repay Mr and Mrs H $2,626 and pay $605 costs. Tressell then sought a review of the standards committee decision.

The LCRO said that the standards committee decision did not directly address the question of whether Tressell had a conflict of interest by lending personal funds to the H Family Trust. In doing so, the LCRO said that Tressell had become a lender to himself as a trustee of the H Family Trust.

“Whilst in New Zealand it is accepted that a lawyer may act for a lender and a borrower in the same transaction, that acceptance cannot have any application where the lawyer is the lender of the money to the client,” the LCRO said.

Rule 5.4.3 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 is expressed as an “absolute prohibition” against continuing to act for a client in these circumstances, the LCRO said. “That prohibition extends to any transaction in which the lawyer has an interest. That would include acting in respect of any transaction which would have resulted in repayment of any advances made by Tressell or his trust and advising the company in respect of any matter which would have affected the company’s financial position.”

Tressell’s role as an independent adviser “became compromised” when he advanced funds through his firm’s nominee company to the building company, and obtained guarantees from Mr and Mrs H and the H Family Trust, secured over trust assets. Mrs H was entitled to expect and receive objective advice from Tressell. That was impossible when he became a lender to the company, the LCRO said.

As well as confirming the committee’s determination, the LCRO also modified it by making an additional finding of unsatisfactory conduct in respect of conduct which occurred prior to the Lawyers and Conveyancers Act 2006 and imposed a censure on Tressell.

“The Court of Appeal has described a censure of lawyers as a ‘rebuke’ to be taken seriously. That is what is called for in this situation,” the LCRO said.

“It is a censure on behalf of the legal profession that [Tressell], as a senior member of the profession, has failed to recognise he was compromising his fiduciary obligations to his clients, jointly and severally, by not remaining a disinterested and objective advisor.”

The LCRO also ordered Tressell to pay $1,200 costs.

Last updated on the 1st December 2017