This article will outline the major statutory and regulatory obligations placed upon Incorporated Legal Practices (ILP) and Authorised Principals of ILPs (validly appointed directors, previously known as Legal Practitioner Directors).
The Uniform Law is applicable in New South Wales and Victoria. The Corporations Act, 2001 (Cth) (CA) is applicable across all jurisdictions.
What is an Incorporated Legal Practice?
An ILP is a corporation (s.57A, CA) that engages in legal practice in the jurisdiction, whether or not it also provides non legal services to clients: Uniform Law. Legal services are defined as work done, or business transacted, in the ordinary course of legal practice: Uniform Law.
ILP Notification Obligations
After meeting the CA and ASIC obligations around incorporation, the ILP must notify either its law society or legal regular in writing on the approved form before it starts to engage in legal practice, Uniform Law. Notification is the fundamental obligation placed upon an ILP before it can engage in legal practice. There is no prohibition on a corporation providing non legal services prior to notification, however, it must not represent itself as engaging in legal practice, Uniform Law.
Requirement to have an Authorised Principal who is a validly appointed director.
An ILP must have at least one Authorised Principal in addition to any directors who are not legal practitioners, Uniform Law. An ILP must not go without an Authorised Principal for more than seven days, Uniform Law.
An Authorised Principal is an Australian legal practitioner who holds a practising certificate as a principal of a law practice and is validly appointed to the position of a director, Uniform Law. The CA defines director as “a person who is appointed to the position of a director, or is appointed to the position of alternate director and is acting in that capacity, regardless of the name that is given to their position. Also, unless the contrary intention appears a person who is not validly appointed as a director is also regarded as a director if they act in the position of a director or the directors of the company are accustomed to act in accordance with the person’s instructions or wishes” [shadow director]: s.9, CA. Under the Uniform Law definition of Authorised Principal it would appear that a legal practitioner who does not hold a principal practising certificate may be appointed a director of the ILP but will not be an Authorised Principal.
The Obligations of as Authorised Principle of an ILP under the Uniform Law
In addition to director’s duties in general, discussed below, and the professional obligations of a legal practitioner (duty to the Court; duty to clients; observance of ethical rules etc.) each and every LPD has specific obligations under the Uniform Law, namely:
- Responsibility for management of the legal services provided by the ILP;
- Ensuring that appropriate management systems are implemented and maintained to enable the provision of legal services in accordance with professional obligations;
- Ensuring that the conduct of non LPDs and other officers or employees does not affect the conduct of those who are legal practitioners;
- If it is reasonably apparent that the provision of legal services by the ILP will result in breaches of the professional obligations by officers and employees who are legal practitioners to take all reasonable action available to ensure that the breaches do not occur;
- Taking appropriate remedial action in respect of breaches of professional obligations that do occur;
- Taking reasonable steps to ensure that the conduct of employed legal practitioners does not constitute unsatisfactory professional conduct or professional misconduct;
- Taking reasonable steps ensure that the conduct of non LPDs does not adversely affect the provision of legal services by the ILP;
- Taking reasonable steps to ensure that non LPDs are not unsuitable to be a director of the ILP;
- Taking all reasonable action available to deal with any unsatisfactory professional conduct or professional misconduct of an employed legal practitioner;
- Ensuring that the ILP complies with its disclosure obligations;
- Ensuring that a disqualified person (Sch 2, Uniform Law) is not a director, officer, employee or shares receipts from the provision legal services; and
- Not exerting undue influence or causing or inducing a LPD or another legal practitioner who provides legal services on behalf of the ILP to contravene the Uniform Law, the Legal Profession Regulators, the legal profession rules, or the professional obligations of a legal practitioner.
Key Obligations of a Director of an ILP at Common Law and under the Corporations Act, 2001.
The common law and the CA impose statutory and fiduciary duties upon the directors and officers of a corporation. These directors’ duties apply to all directors of an ILP. Therefore are in addition to a LPD’s specific Uniform Law obligations. The CA statutory duties (s.180-183, CA) do not replace the common law fiduciary duties; rather they replicate, and in some circumstances extend, those duties.
Duty of Loyalty and Good Faith
Directors of an ILP must:
- Act in good faith in the best interests of the ILP and exercise their powers for a proper purpose: CA, s. 181.
- Not improperly use their position to gain an advantage for themselves or someone else or cause detriment to the ILP: CA, s. 182(1).
- Not improperly use information obtained because they are, or have been, a director to gain an advantage for themselves or someone else or cause detriment to the ILP: CA, s. 183(1).
- Avoid conflicts of interest between the personal interest of the director, or a duty owed elsewhere, and the duty to act in the best interests of the company: fiduciary duty. Unless fully informed consent it obtained.
These duties are of importance to an ILP. For instance, if a LPD was considering leaving the ILP to set up a rival firm and was taking clients, would that director breach the duties to act in good faith and in the best interests of the ILP? Is it in the best interests of the ILP to continue to bill clients on an time basis when an alternative method is more attractive to clients and potentially more profitable for the ILP?
Duty of Care & Diligence
Directors of an ILP must:
- Act with the degree of care and diligence that a reasonable person would exercise: CA, s. 180 (1). Subject to the business judgment rule defence: CA, 180(2).
- Act with care, skill, and diligence: fiduciary duty.
- Act with care: tort of negligence.
Duty to Prevent Insolvent Trading
Directors of an ILP must have a duty to prevent insolvent trading where:
- He or she is a director of the ILP at the time the ILP incurs a debt:
- The ILP is insolvent at that time (or becomes insolvent by incurring that debt; and
- At that time there are reasonable grounds for suspecting that the ILP is insolvent or would become insolvent. CA, s. 588G.
Conflict Between Legal Professional Obligations and Director’s Fiduciary Duties
There is an inherent conflict between certain director’s fiduciary duties and those of a LPD under their professional obligations. Tension arises between a legal practitioner’s professional duty to act in the best interest of their client coupled with their overarching duty to the court on one hand and their duty as a director to act in the best interest of the company (i.e. the shareholders) on the other. Common examples include:
- Settling litigation pre-trial – this may be in the best interests of the client and the administration of justice but not in the best interests of an ILP, as a corporation, which may stand to generate more fees if the litigation process is prolonged.
- Pro bono legal services – are certainly in the best interests of the community and the administration of justice but as they do not generate revenue may not be in the best interests of the ILP as a corporation.
The LPD’s duties to the court, the administration of justice and their client take precedence over a director’s general fiduciary duties. Safeguards have been placed in the Uniform Law to ensure that this hierarchy of obligations is maintained. In respect to conflicts of interest in general the Uniform Law states “that for the purpose of any law (including the common law) or legal professional rules relating to conflicts of interest to the conduct of a legal practitioner who is a LPD or an officer or employee then the interests of the ILP are also taken to be those of the practitioner”: Uniform Law. Furthermore, the provision of pro bono legal services are expressly allowed, Uniform Law.
LPDs should have a good working knowledge of their general director’s fiduciary duties, their specific obligations as a LPD under the Uniform Law and professional obligations, and how those duties interact. General directors (non legal practitioner directors), in addition to having a good working knowledge of their directors’ duties, should have a good understanding of those duties which are specific to the LPDs. It is incumbent on all types of directors in an ILP to identify, understand, and comply with their respective directors’ duties.
After notification the legal regulator requires completion and submission of the ILP Self Assessment Audit by the LPD. Part A of the Self Assessment Audit requests information regarding the ILP itself, together with details of all LPDs, all other directors (non LPDs), office holders, and shareholders. Part B is an “internal self assessed management systems audit” relating to the implementation and maintenance of appropriate management systems.