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Lawyers Complaints Service: Fined for using trust account of another firm

22 November 2013

A law firm, F Ltd, has been fined $1,500 by a lawyers standards committee for using the trust account of another practice for transactional work where F Ltd had control of client funds.

The committee ordered F Ltd to immediately cease using the trust account of the other practice, or any other firm, for transactional work.

During an inspection of a law firm, the Law Society inspector picked up that F Ltd had been conducting property transactions but did not operate a trust account.

A number of undertakings F Ltd provided appeared to indicate that F Ltd was in control of settlement funds. The inspectorate considered that F Ltd may be in breach of the Trust Account Regulations by operating in that way.

F Ltd was invited to respond to the following issues of concern:

  • that it may have breached s110(2) of the Lawyers and Conveyancers Act 2006 (LCA) by receiving trust account money and failing to pay it into a general or separate trust account of the firm;
  • that it may have breached s112(1) of the LCA by failing to keep trust account records as required under that section; and that it may have breached regulation 4 of the Trust Account Regulations 2008 by failing to notify the New Zealand Law Society that it was no longer entitled to rely on s112(2) of the LCA.

F Ltd’s sole director, F, responded to the committee saying, in essence, that the firm did not operate a trust account, nor did it receive or control any client’s money. F stated that all clients, including lenders, were notified that monies were held in the trust account of another firm and controlled by that firm.

F stated that the situation was no different to that which is required from the professional conveyancer.

The committee said that in its view F Ltd had breached s110(2) of the LCA in that it did have control over the money belonging to the client and had failed to ensure that the money was paid into a separate or general trust account of F Ltd, in accordance with the LCA. Control over the money was shown by the undertakings given by F Ltd, and “control” by F Ltd was part of the arrangement with the other law firm.

Because F Ltd had not kept trust account records, it was also in breach of s112(1) of the LCA, which imposes an obligation on non-exempt lawyers to keep trust account records.

The committee also found that F Ltd had breached regulation 4 of the Trust Account Regulations 2008 by not notifying the Law Society that it was no longer entitled to rely on s112(2) of the LCA.

Accordingly, the committee found there had been unsatisfactory conduct on F Ltd’s part.

The committee noted that although the breaches were serious, they were technical in nature and could have arisen because F did not fully understand or appreciate the implications of s110(3) of the LCA and the limited circumstances under which a lawyer could operate without a trust account.

The committee ordered that F should take advice from a senior lawyer to be nominated by the Law Society as to the manner in which his practice should be conducted.

As well as this order and the $1,500 fine, the committee ordered that F Ltd immediately cease to use the trust account of any other firm for the purpose of transactional work. F Ltd was also ordered to pay the Law Society $1,000 costs.

Last updated on the 17th March 2016