New Zealand Law Society - Censure and fine for conflict of interest

Censure and fine for conflict of interest

Published on 12 May 2020

[All names used are fictitious]

A lawyer who acted for the vendor and purchaser of a company, and for the company, has been censured and fined $3,000 for acting where there was a conflict of interest.

Mr Q agreed to sell Mr R his 42% shareholding and to exit the company they were both directors of.

The purchase price for the shares was to be repaid by monthly instalments over three years.

Mr Q was also to receive repayment for his current account advances to the company by monthly instalments over three years, and be released from a personal guarantee to the bank and supporting mortgage security he had given for company borrowings, within one year of the sale of his shares.

Six months after the agreements were signed, Mr R and the company stopped making the monthly payments. Mr Q was still owed a substantial amount of money and also remained liable for a bank guarantee.

Mr Q complained to the Law Society that the lawyer, Wrexham, who acted for both him and Mr R on the Agreement for Sale and Purchase of Shares and the Exit Agreement failed to adequately advise him or protect his interests.

However, Wrexham asserted that he had only acted for the company, and not for Mr Q or Mr R in a personal capacity.

Upon review of the material before it, a lawyers standards committee noted that Wrexham had met with both Mr Q and Mr R, copied Mr Q into a number of emails sent to Mr R, and provided advice directly to Mr Q in relation to a query about tax.

Breached rules 6.1 and 7

The committee found that by acting for Mr Q, Mr R and the company, Wrexham had contravened rule 6.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008.

Rule 6.1 prohibits a lawyer from acting for more than one client in circumstances “where there is more than negligible risk that the lawyer may be unable to discharge the obligations owed to one or more of the clients”.

The committee said that as “primary parties” to the agreements, Mr Q’s and Mr R’s “respective interests were different and created a conflict”. The interests were also “competing” and “needed to be protected”.

Mr Q was “incapable of giving informed consent” for [Wrexham] to act for more than one party because Mr Q had no “proper appreciation” of the conflicts or their implications.

The committee also found that Wrexham breached rule 7 by not disclosing to Mr Q all the information in his possession that was relevant to the matter.

The share sale agreement provided for a three-year repayment term and the exit agreement required Mr Q’s personal guarantee and mortgage to the bank to support the company borrowings for a year beyond Mr Q’s departure from the company.

Those factors ought to have raised doubts for Wrexham about the financial positions of the company and Mr R, and the prospect of default by Mr R.

Wrexham did not advise Mr Q about these issues “or the need to include provisions in the agreement that might provide [Mr Q] with some protection,” the committee said.

Contravened rule 8.7

The committee also decided that by using the company’s confidential information for Mr R’s benefit, Wrexham had contravened rule 8.7.

Information important for Mr Q to have received at that time was that if he transferred his shares to Mr R before Mr R paid for them, Mr Q would be an unsecured creditor of Mr R and of the company in the event of a default by Mr R.

That information, confidential to the company, was ultimately used “for the benefit of [Mr R] and to [Mr Q’s] disadvantage.”

As well as the censure and fine, the committee ordered Wrexham to pay $2,000 costs and ordered a summary of the decision to be published without any details that might lead to the identification of any parties.

On review, the Legal Complaints Review Officer (LCRO) – in LCRO 74/2017 – confirmed the committee’s determination that Wrexham had breached rules 6.1, 7 and 8.7, which constituted unsatisfactory conduct.

The LCRO also confirmed the censure, the $3,000 fine, the $2,000 costs order and the committee’s publication decision. However, the LCRO reversed the committee’s determination that Wrexham had also breached rule 8.7.1.