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Uniform law: Principal matters

Uniform law: Principal matters

By Carol Barton and Rosemary Teele Langford

Uniform Laws 

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There are particularly pertinent requirements and obligations of legal principals arising under the Uniform Law and the Corporations Act.

Snapshot
  • ILPs are a popular practice structure and the legal practitioner director and principal must meet the compliance requirements. 
  • Such directors must conform to the Uniform Law requirements, corporations legislation and general law duties.
  • This article discusses compliance requirements which, if not met, can have serious consequences.

Incorporating a legal practice has become increasingly popular – of 9580 registered entities in Victoria as at July 2018, 1769 are incorporated legal practices (ILPs).1 The advantages of incorporation have enhanced the attractiveness of this form of practice. ILPs are a unique form of business in that they involve dual and possibly conflicting obligations of the legal practitioner director (or directors) and principal. ILPs are both corporations under the Corporations Act 2001 (Cth) with listing on the Australian Securities and Investments Commission website and registered entities under the Legal Profession Uniform Law (Vic) (Uniform Law). Balancing client and internal business demands with the obligations on a legal practitioner, such as the duty to the court and the administration of justice, is not unique to ILPs. The principal can encounter added difficulties where directors or shareholders are non-lawyers. Principals also need to be mindful of their obligations under the Uniform Law and corporations legislation, as well as their general law duties. The purpose of this article is to highlight particularly pertinent requirements and obligations arising under each of these regimes in order to provide clarity.

Incorporated legal practices

The provisions relevant to ILPs are Parts 1.2, 3.2, 3.7 and 4.4 of the Uniform Law and Part 3.7 of the Legal Profession Uniform General Rules 2015 (General Rules). The LIV’s Legal Profession Uniform Law Guide is also a useful reference.

 The Uniform Law permits an ILP to provide both legal and non-legal services (s103 Uniform Law). An ILP must provide notice to the regulatory authority – in this case the Victorian Legal Services Board and Commissioner (VLSB+C) at least 14 days before commencing practice (s104(1) and General Rules r28). It is illegal for the ILP to engage in legal practice in Victoria unless it holds an approved insurance policy for Victoria which covers the legal practice in which it is engaged (s212).

An ILP must have at least one authorised principal (s105). If an ILP ceases to have an authorised principal for longer than seven days it is no longer compliant, it must notify the VLSB+C and not provide legal services while non-compliant (s106). When ceasing to engage in legal practice the ILP must give notice to the VLSB+C at least 14 days before ceasing legal practice (s104 and r29). In addition, there are ASIC notification requirements if the authorised principals cease to be directors.

Legal practitioner directors and other directors

The Uniform Law makes the distinction between “authorised principals” and “principals”. Section 6 defines “authorised principal” as a principal authorised by their Australian practising certificate to supervise others. Section 47(6) provides that an Australian practising certificate authorises the holder to supervise others, unless it is subject to a condition providing that the holder engage in supervised legal practice or a condition providing that the holder may not supervise practice by others. In contrast, a principal of an ILP is an Australian legal practitioner who both holds an Australian practising certificate authorising them to engage in legal practice as a principal of a law practice and is a validly appointed director of the company that is a corporation under the Corporations Act (s6(d)(ii)). However, non-legal practitioner directors can also be appointed. Like the principal, they must be validly appointed by the company, the ILP. They, like the principal, may own shares in the company. However, it is the principal (by their practising certificate) who has the responsibility of supervision under ss34 and 35 of the Uniform Law.

A law practice (including an ILP – s6(d)) has disclosure obligations under the Uniform Law concerning the provision of legal and non-legal services – s107 and r31 require disclosure regarding legal services to be in writing outlining the legal services to be provided and whether the services are to be provided by an Australian legal practitioner. If a non-practitioner is to provide the services, this must be indicated and their qualifications outlined. The notice must also indicate that the Uniform Law and the General Rules only apply to the ILP’s provision of legal services. If the required disclosure regarding non-legal services is not made, the standard of care applicable is that to which an Australian legal practitioner would be held (s107(3)).

As noted above, s6 defines “a principal” of an ILP as someone who both holds an Australian practising certificate authorising the holder to engage in legal practice as a principal and who is a validly appointed director of the company. This person has supervision requirements under ss34 and 35; the principal must take reasonable steps to see that employee solicitors and the legal services themselves are conducted in accordance with the requirements of the Uniform Law. Failure to meet this requirement can result in disciplinary action against the principal for unsatisfactory professional conduct or professional misconduct. In Victorian Legal Services Commissioner v Chelper (Chelper)2 Senior Member Wentworth examined the “reasonable steps” requirement in determining whether insufficient supervision amounted to unsatisfactory professional conduct of a principal. Mr Chelper was found liable for unsatisfactory professional conduct for not adequately supervising a clerk who did not seek instructions from the client regarding settlement negotiations to recover hire costs.3

The client, who was involved in a vehicle accident where she was not the “at fault” driver, received a replacement vehicle and had signed an authority for the hire company and the legal practice to recover these costs. Though not having exercised adequate control in such supervision, Mr Chelper was otherwise found to have taken “reasonable steps”.4 What constituted reasonable steps was in part determined by the particular circumstances; he was an inexperienced and relatively junior practitioner5 who had only been the principal for two months and had sought to institute proper procedures.6 In addition, the client had not been exposed to financial risk and “legal proceedings had not been instituted in her name”.7 VCAT highlighted “the hazards of legal practitioners who agree to become the principal of an incorporated legal practice owned by non-lawyers who see it as their practice and exercise control behind the back of the legal practitioner director”.8 Seemingly attractive offers may tempt young practitioners “to become the legal practitioner director of an incorporated legal practice, only to find that they are in fact treated as a token or tame practitioner without any real control”.9

It is also vital that legal practitioner directors and principals be cognisant of their responsibilities in their capacity as company directors, both under the general law and the Corporations Act. Such directors must balance these company law obligations with the duties imposed by the Uniform Law and the common law ethical demands imposed on lawyers. The oversight requirements imposed on directors, including the avoidance of conflicts, are common but not co-extensive. The legal practitioner director’s responsibilities under the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules and the civil procedure legislation may require resolution of a client’s matter in a timely manner, including settling at mediation rather than proceeding to a court hearing; whereas the financial interest of the company may be best served by continuance of the litigation.10

Directors’ duties at general law and under the Corporations Act

As stated above, principals and other directors are subject to duties at general law and under the Corporations Act. The general law duties imposed on directors include duties to avoid unauthorised conflicts and profits from position, duties to act in good faith in the interests of the company and for proper purposes, a duty of care skill and diligence and duties to disclose and to retain discretions. The duty to avoid conflicts includes a prohibition on unauthorised conflicting duties. 

The statutory duties in the Corporations Act operate alongside the general law duties. The central duties are the duty of care and diligence (s180), the duties to act in good faith in the interests of the company and for proper purposes (s181), the duties to avoid improper use of position or information from position (ss182 and 183), duties to disclose material personal interests and, in the case of public companies, to abstain from participation (ss191 and 195). More specific duties pertain to insolvent trading (s588G) and financial benefits to related parties of public companies (chapter 2E). A key point to note is that, unlike the general law duties, breach of the statutory duties cannot be authorised by shareholders. Other directors may be liable for involvement in a contravention under ss181(2), 182(2) or 183(2).

The statutory duties that correspond to the fiduciary duties to avoid conflicts and profits are more specific than the fiduciary duties. Sections 191 and 195 require disclosure (and abstention in the case of public company directors). The duties in ss182 and 183 require proof of purpose and improper use of position or information. 

One duty to which authorised principals should be particularly attentive is the duty of care skill and diligence both at general law and under s180 of the Corporations Act. The duties are alike in content. Section 180(1) of the Corporations Act provides:

“A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer”.

The duty is primarily objective, but incorporates subjective elements in that regard is had to the company’s circumstances and to the director or officer’s position and responsibilities within the company in assessing whether the director or officer has exercised reasonable care and diligence.11 The following factors have been found to be relevant:

  • the type of company
  • the provisions of its constitution
  • the size and nature of the company’s business
  • the composition of the board
  • the director’s position and responsibilities within the company
  • the particular function the director is performing
  • the experience or skills of the particular director
  • the terms on which he or she has undertaken to act as a director
  • the manner in which responsibility for the business of the company is distributed between its directors and its employees
  • the circumstances of the specified case.12

Section 180(2) provides a business judgment rule.

Courts often assess compliance with the duty of care by balancing the foreseeable risk of harm to the company flowing from the contravention with the potential benefits that could reasonably be expected to have accrued to the company from the conduct.13 This is done through the lens of the company’s circumstances and the director’s position and responsibilities. Directors may also breach s180 in circumstances where the company breaches the law. This is sometimes referred to as “stepping stones” liability.14

As mentioned, a key emphasis of more recent cases is the exact duties and responsibilities of the relevant director. The duty of care affixes to these duties and responsibilities – directors who have more extensive duties and responsibilities are subject to increased liability. This is of particular note for principals given their extensive responsibilities in relation to ILPs.

Conclusion

The popularity of ILPs will continue. However, the note of caution sounded in Chelper and the necessity of balancing legal requirements imposed on directors and the supreme duties under the Uniform Law (s112) mean that those operating in the role of a principal must exercise their authority effectively. They must be mindful that if owners and non-legal directors do not accept their leadership it is they, and not the other directors, who bear the responsibility in any disciplinary proceedings that result from non-compliance. They should also be attentive to the duty of care (and to all their directors’ duties) in such circumstances. 


Carol Barton is a solicitor working in the LIV Ethics, Professional Practice and Wellbeing department.

Rosemary Teele Langford is an associate professor with the Melbourne Law School, University of Melbourne, and author of Company Directors’ Duties and Conflicts of Interest (Oxford University Press, 2019).

1. Victorian Legal Services Board + Commissioner, Lawyer Statistics, Registered Entities, 31 July 2018.
2. [2018] VCAT 2041.
3. Note 2 above, 2.
4. Note 2 above, 5.
5. Note 2 above, 20.
6. Note 2 above, 9, 89, 106 and 113.
7. Note 2 above, 113.
8. Note 2 above, 19.
9. Note 2 above, 20.
10. See Patrick Oliver “Incorporation – proceed with caution” August 2011 LIJ 85(8), p42 which concerns requirements under the Legal Profession Act 2014 (Vic) but is still of relevance under the Uniform Law. 
11. See, eg, Trilogy Funds Management Ltd v Sullivan (No 2) (2015) 331 ALR 185, 229 [201]; Australian Securities and Investments Commission v Adler (2002) 168 FLR 253 [372]; Australian Securities and Investments Commission v Maxwell (2009) 59 ACSR 400 [100]; Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FLR 430 [165].
12. Eg, Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373.
13. Eg, Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 241 FCR 502, 584 [450]-[451]; Australian Securities and Investments Commission v Cassimatis (No8) (2016) 336 ALR 209, 301-3 [479]-[487]. Note that ASIC v Cassimatis (No8) has been appealed.
14. For cases see notes 12 and 13 above.

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