Law firms commonly implement internal structures aimed at meeting their peculiar requirements. The structures may include rules for the admission of partners (directors in the case of incorporated firms) and the assignment of responsibilities for the various areas of practice and the financial functions. While firms develop such measures in accordance with their business needs, operating structures and the internal financial relationships, it must always be borne in mind the internal structures will not lead to immunity for the practitioners in the event that risks materialise. This is particularly the case with the regulatory requirements that law firms must meet.

The firm’s internal structures

In some firms the founding documents, the partnership agreement (in the case of a partnership) or the shareholders’ agreement (in the case of an incorporated practice) may refer to those who share in the profits as ‘equity partners/directors’ and those who are remunerated on a salary basis as ‘salaried partners/directors’. The Legal Practice Act 28 of 2014 (LPA), however, makes no distinction between profit sharing and salaried partners in firms. The responsibilities of all partners/directors in firms are identical no matter what the internal arrangements are regarding remuneration. Similarly, for incorporated practices, the Companies Act 71 of 2008 refers to ‘directors’ and there is no concept of a ‘salaried director’ in that legislation with different obligations to other directors (see Limpopo Provincial Council of the South African Legal Practice Council v Chueu Incorporated Attorneys and Others (SCA) (unreported case no 459/22, 26-7-2023) (Nicholls JA (Saldulker and Carelse JJA and Nhlangulela and Mali AJJA concurring)) at 28 quoted below). Section 34(7) of the LPA provides:

‘A commercial juristic entity may be established to conduct a legal practice provided that, in terms of its founding documents –

…

(c) all present and past shareholders, partners or members, as the case may be, are liable jointly and severally together with the commercial juristic entity for –

(i) the debts and liabilities of the commercial juristic entity as are or were contracted during their period of office; and

(ii) in respect of any theft committed during their period of office.’

Internal arrangements cannot trounce the provisions of legislation and legal practitioners cannot contract out of the liability imposed by the LPA.

For purposes of the Legal Practitioners Indemnity Insurance Fund NPC (LPIIF) policy, the annual amount of cover is afforded to the firm as a whole and not to individual partners/directors (see clauses II, XXIII, 5, 6 and 7 of the policy). That policy also does not distinguish between salaried and equity partners and those held out to the public as partners/directors as considered as such for purposes of that policy.

It will be noted from the cases discussed below that all the partners/directors in the firm are liable even where the financial functions are the responsibility of the one partner/director. A partner/director appointed simply to improve the firm’s Broad-Based Black Economic Empowerment score, for example, with no real involvement in the management and administration of the firm will have the same responsibilities and face the same consequences as one who is effectively controlling the firm. Such a person will also be considered a partner/director by the LPIIF.

Some decided cases

In Incorporated Law Society, Transvaal v K and Others 1959 (2) SA 386 (T), the three respondents had practiced in partnership as attorneys. The first respondent was primarily office based, responsible for the conveyancing and estate work and, since the inception of the partnership with the second respondent, had overseen the firm’s books of account (at 387E-F). It was contended by the second respondent that his areas of concern in the firm were court work and that he (the second respondent) was not involved in the financial aspects of the practice, or the trust accounting tasks (at 387C-D). The second respondent had not concerned himself with the management of the trust account and whether there were sufficient funds retained in that account to meet the trust account creditors (387H). The third respondent was the first respondent’s son, having served articles at the firm and admitted to the partnership after his admission. The third respondent’s primary areas of concern were magistrate’s court work, though he took it upon himself to supervise some of the trust account functions (at 387D-E). The first and third respondents admitted, inter alia, that they had contravened s 33 of the Attorneys, Notaries and Conveyancers Admission Act 23 of 1934, which prescribed the retention of money in the trust banking account until required to be paid to or on behalf of the trust creditors (at 387F-G). The first and third respondents oversaw the firm’s trust account (387G). The court explained that the second respondent’s ‘guilt extends not from the direct default in making the necessary provisions or in contravening [s 33 of the Attorneys, Notaries and Conveyancers Act] but in the fact that he failed to ensure, as an attorney of this court, that the partnership firm was complying with the requirements of the section, and as a partner he was admittedly guilty of that charge’ (387H-388A). The court stated the following in respect of the second respondent:

‘It frequently happens in partnership firms that one or more of the partners is concerned with court work and that either another partner or an individual person is entrusted with the books of account and with seeing that trust accounts are properly kept, and that sufficient trust money are properly held at all times. In the instant case the court is accepting the ignorance of the second respondent in the circumstances disclosed as a very strong mitigation feature, but in future no attorney should be heard to say that, because of the arrangement that he would be doing a particular type of work and therefore was not concerned with the manner in which the books of account had been kept, or the trust account, he should not be blamed. He will not be heard in that regard.

Every attorney must realise that it is a fundamental duty on his part, breach of which may easily lead to his being removed from the roll, to ensure that the books of the firm are properly kept, that there are sufficient funds at all times to meet the trust account claims, and that when he makes the declaration required for fidelity fund [certificate] purposes there is no doubt that that declaration is truly and honestly made’ (391C-F).

The third respondent, on the other hand, was aware for a period of six months that the books of account were not properly kept, and during that period, the trust account did not have sufficient funds to meet the claims of trust creditors (392A).

The first respondent was removed from the roll of attorneys, the second respondent severely reprimanded and the third respondent was suspended from practice for a period of six months.

In Hepple and Others v Law Society of The Northern Provinces [2014] 3 All SA 408 (SCA), the first and second appellant, Hepple and Earle, respectively, practiced as co-directors in an incorporated practice with two other directors. The two other directors were not involved in the appeal as they had not been subject to the application for removal from the roll of attorneys. The then Law Society of the Northern Provinces commissioned an expert in the field of auditing the accounting records of attorneys to investigate the conduct of the firm. The accounting expert had noted that ‘one would have expected that, given the size of the practice and, the nature of its activities, [directors] meetings would have been held and that the financial performance and the state of the trust account would have been placed on the agenda for discussion, more so if separate management functions had been allocated to each of the directors’ (at para 16). The two directors who were not involved in the appeal had told the accounting expert that they had not been informed of some of the activities in the firm (at para 17). The first appellant pleaded for a lessor sanction maintaining that he was not involved in the financial shenanigans of the second appellant as –

• a resolution was taken by the board of which allegedly relieved him of financial management of the firm; and
• he claimed that when he discovered that the second appellant was conducting an investment practice, he asked the latter to desist (at para 20).

The court found that:

‘As to the first point, there is the difficulty that he is unable to explain the trust deficits that occurred … whilst he was involved with the financial management of the firm. Moreover, that he was not involved with the financial management of the firm, is no defence at all. The duty to comply with the provisions of [the Attorneys Act 53 of 1979] and the Rules is imposed upon every practising attorney, whether practising in partnership or not, and no attorney can therefore be heard to say that under an arrangement between him and his partner, the latter was not responsible for the keeping of the books and control and administration of the trust account, and that he was therefore not negligent [in] his failure to ensure compliance with the provisions of the Act and the Rules. As to the second point – knowing that his co-director had engaged in serious misconduct, Hepple simply asked him to stop. One would have thought that such a discovery would have caused him to be more vigilant and not to simply continue with his unquestioning behaviour’ (para 21) (footnotes omitted).

More recently, in Limpopo Provincial Council of the South African Legal Practice Council v Chueu Incorporated Attorneys and Others the question before the Supreme Court of Appeal was the liability of all directors of a law firm when the financial misconduct was allegedly committed by only one director (at para 3). The directors had operated at different locations of the firm, with the second respondent serving as its managing director and in charge of the finances of the firm (at para 6). The third to eighth respondent contended that their shareholding, if any, was minor and that they had nothing to do with the firm’s finances, which fell within the exclusive domain of the second respondent, were not provided with financial statements, not consulted about major decisions, did not receive distributions of profit (at para 14), no shareholders agreement was entered into and they were treated as salaried employees (at para 15). The Supreme Court of Appeal found that:

‘Every director has a fiduciary duty towards the company of which it is a director. To plead ignorance of financial matters, when faced with allegations of misappropriation, does not absolve a director. It has been emphasised over the years that legal practitioners cannot escape liability by contending that they had no responsibility for the keeping of the books of account or the control of the administration of the trust account. As this court stated in Hepple v Law Society of the Northern Provinces, for an attorney to explain trust deficits on the grounds that he or she had no involvement in the financial affairs of the firm “is no defence at all”.

Abdication of responsibilities does not absolve legal practitioners of their duties. As far back as Incorporated Law Society, Transvaal v K and Others, the court cautioned attorneys who attempted to excuse their conduct on the basis that they were responsible for other work in the firm and did not concern themselves with the books of account. In that matter, as here, a particular individual in the firm was tasked with handling the books of account. …

In addition, the respondents were constrained to concede that the concept of “a salaried director” is not one found in the Companies Act of 2008 or the LPA. Once a legal practitioner is appointed as a director, whatever the factual terms of the arrangement may be, they bear full responsibility for the finances of the firm’ (paras 26 – 28) (footnotes omitted).

Some lessons from the cases

Having regard to the cases, some of the lessons to be learnt are that:

• It is paramount that all practitioners educate themselves on their responsibilities.
• All partners/directors must take an active role in the management of the law firm’s financial functions, especially the management of the trust account functions.
• The responsibility for compliance with the LPA and the Rules lies equally with all the partners/directors in the firm.
• Frank discussions must be held regularly regarding the firm’s operations and finances even in circumstances where such discussions lead to discomfort. The discussions must be held formally and properly documented.
• Beware of narratives provided by one party without providing verifiable documentary proof thereof. Though this may be difficult when dealing with the founder of the firm (as happened in the three cases referred to above), confronting that discomfort may mitigate the risk of a strike-off later if any unethical conduct emerges.
• Irregularities in the handling of trust money must be reported to the Legal Practice Council (LPC) when they are detected (see the Rules made under the authority of ss 95(1), 95(3) and 109(2) of the Legal Practice Act 28 of 2014, which stipulate that:
  • ‘Report of dishonest or irregular conduct
  • 36 Unless prevented by law from doing so every legal practitioner is required to report to the Council [the LPC] any dishonest or irregular conduct on the part of a trust account [legal] practitioner in relation to the handling of or accounting for trust money on the part of that trust account practitioner’.
  • Paragraph 5 of the Code of Conduct for all Legal Practitioners, Candidate Legal Practitioners and Juristic Entities provides that: ‘Legal practitioners, candidate legal practitioners … are encouraged to report unprofessional conduct by other legal practitioners, candidate legal practitioners or juristic entities to the Council in the manner prescribed in the rules prescribing the disciplinary procedure.’
• A rotation of the responsibility in the financial role is essential.
• Beware of the overconcentration of financial responsibilities with one person.
• Address the regulatory requirements, liability and indemnity in the partnership agreement or shareholders agreement (as the case may be).

Thomas Harban BA LLB (Wits) is the General Manager of the Legal Practitioners Indemnity Insurance Fund NPC in Centurion.

This article was first published in De Rebus in 2023 (Dec) DR 20.