New Zealand Law Society - Directorship in professional trustee company created a conflict of interest
A Standards Committee (Committee) has found that a lawyer, Mr A, engaged in unsatisfactory conduct by acting for a company while being indirectly involved with a shareholder. Mr A was a director of a professional trustee company that was a trustee of a trust that held shares in a company that he acted for. The Committee determined that Mr A breached rules 5 and 5.4 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (RCCC). The Committee ordered Mr A to pay $1,000 towards costs. It also encouraged lawyers to revisit their professional obligations and review how their professional trustee arrangements are structured to avoid similar conflicts.
Mr A was a partner at a law firm that acted for Mr C and Mr C’s trust (the Trust). Mr A acted for a company (the Company) that employed Mr C. The Trust held shares in the Company. In addition, Mr A was one of the directors of a professional trustee company that was a trustee of the Trust. Other partners of the law firm, including Mr G, were also directors of the professional trustee company, but Mr G was the only director actively involved in the Trust’s affairs.
Mr C resigned from the Company. Several disputes arose including a shareholder dispute involving Mr C, the Trust and the majority shareholder in the Company. Mr A acted for the Company. Mr C was concerned that Mr A was advising the Company while also being indirectly involved with the Trust as a shareholder in the Company. Mr C shared his concerns with Mr A, who confirmed that he was acting for the Company. Mr G also discussed the situation with Mr C and said that the firm had not received any instructions from the Trust on any of the matters with the Company. Over the next five weeks, Mr G acted for Mr C and the Trust to reach a settlement with the Company, while Mr A acted for the Company in that matter with Mr C’s knowledge. But Mr C believed that Mr A was conflicted, so he lodged a complaint with the New Zealand Law Society Te Kāhui Ture o Aotearoa.
The Committee considered that the key issues included whether Mr A breached his obligations under rules 5 and 5.4 of the RCCC by failing to appreciate the potential conflict between his role as a director of the professional trustee company for the Trust and acting for the Company of which the Trust was a shareholder.
Rules 5 and 5.4 of the RCCC are mandatory obligations that require lawyers to be independent and free from compromising influences. A lawyer must not act or continue to act if there is a conflict or a risk of a conflict between the interests of the lawyer and the interests of the client for whom the lawyer is acting for.
The Committee acknowledged that Mr A was not a trustee in his personal capacity, so he did not owe fiduciary duties to its beneficiaries directly. Those duties were owed by the professional trustee company of which he was a director. Consequently, he owed directors’ and fiduciary duties to the professional trustee company. Given the professional trustee company was the Trust’s corporate trustee, its purpose included independently managing and safeguarding trust assets in the best interest of the beneficiaries according to the terms of the Trust. As a director, Mr A was required to act in the best interests of the professional trustee company in fulfilling that position. In that capacity, he had a role in safeguarding the interests of the beneficiaries. Mr A relied on Mr G playing a more active role in respect of the professional trustee company and that together they tried to facilitate a settlement between the Trust and the Company. The effect was that Mr A was negotiating with the professional trustee company while he himself was a director of that professional trustee company.
On reflection, Mr A submitted that a better course would have been not to act for the Company and/or obtain informed client consent from all parties.
The Committee determined that Mr A lacked sufficient independence to act for the Company as his loyalties to the Company as a client conflicted with his loyalties to the professional trustee company given the fiduciary and directors’ duties it owed to the Trust. Mr A should not have acted for the Company. The Committee found that rules 5 and 5.4 of the RCCC had been breached and amounted to unsatisfactory conduct.
The Committee ordered Mr A to pay $1,000 towards the costs relating to the inquiry and hearing. In determining the penalty, the Committee considered several factors including that Mr A did not provide legal services to Mr C and/or the Trust and that there was no evidence of loss or harm. The Committee said that conflicts of duty are treated seriously as they undermine public confidence in the profession.
The Committee directed that an anonymous summary be published as it could have an “educative value” for the wider profession. It is not uncommon of lawyers to find themselves in the position of acting for an entity while being indirectly involved with a shareholder or partner of the same entity. The Committee suggested that the profession take the opportunity to remind themselves of their obligations and to consider how professional trustee arrangements (including directorships) are structured.