In a recent judgment by the Supreme Court of Appeal (SCA), the Court considered the liability of all directors of a law firm when financial misconduct was committed by only one director.

Limpopo Provincial Council v Chueu Incorporated

In the matter of Limpopo Provincial Council of the South African Legal Practice Council v Chueu Incorporated Attorneys and Others (459/22) (2023) ZASCA 112 (26 July 2023) the court reaffirmed the legal position that all the directors of a law firm are liable and responsible for the financial management of the firm. The SCA held that every director has a fiduciary duty towards the company of which it is a director, and that ignorance of financial matters when faced with allegations of misappropriation of trust funds by one of the directors, does not absolve other directors of liability.

Personal and professional liability of directors

Unlike private companies, directors in a law firm are personally liable, jointly and severally, for the firm's debts. Another important aspect to consider is that the directors in a law firm do not only face financial liability, but are also professionally accountable for misconduct, which can lead to suspension or being struck off the roll of legal practitioners.

The facts in this matter concerned the managing director of a law firm, being Chueu Incorporated Attorneys, that misappropriated trust funds. An investigation was launched once it became known to the Legal Practice Council (LPC) that the Road Accident Fund had caused to make a duplicate payment to the firm to the value of about R 29 million. During the investigation it became apparent that there was misappropriation of trust funds and was further established that there was a trust deficit, which could not be explained.

The LPC proceeded to launch an urgent application in the High Court for the suspension of all the directors of Chueu Incorporated, pending the finalisation of a disciplinary enquiry into the alleged misconduct of the respondents. The High Court ordered that the managing director be suspended for a period of 12 months, pending the finalisation of an investigations into his conduct and disciplinary proceedings to be instituted against him. The Court however dismissed the application for the suspension of the other directors, which led to the appeal proceedings in the SCA.

The LPC lodged an appeal against the judgment and the matter was heard in the SCA. The SCA highlighted in its judgment the legal principles, that has long been part of our law and is trite, when dealing with the aspect liability and responsibility of a director in a law firm. 

In a unanimous judgment the SCA confirmed that legal practitioners are obliged to conduct themselves with the utmost integrity and scrupulous honesty. The court confirmed that public confidence is enhanced by maintaining the highest ethical standards, and that the lack of trust in the profession goes hand in hand with the erosion of the rule of law.

The other directors, apart from Mr Chueu, raised the defence that they were not involved in the finances of the firm, they were only salaried directors and that the management of the firm finances were not their responsibility and was entirely within the knowledge of Mr Chueu. They went further to state that they were not provided with financial statements, were not consulted in respect of major decisions and did not receive any distribution of profit.

These defences were raised from the perspective that whilst the directors accept that they remain financially liable for the debts of the firm, they are not guilty of professional misconduct because they, according to them, bore no responsibility and had no knowledge of the finances of the firm and were not involved in the same.

Application of the Legal Practice Act

In addressing this aspect, the SCA commenced with reference to the provisions of the Legal Practice Act 28 of 2014 (LPA) and trite legal principles as found in case law. In terms of the LPA, practitioners are allowed to establish private companies to conduct their legal practice, subject to certain conditions that include that all present and past shareholders, partners or members are jointly and severally liable for the debts of the company.

The LPA’s code of conduct, have specific provisions dealing with legal practitioner’s failure to account accurately and timeously to clients; failure to exercise proper control and supervision over staff; failure to report irregular conduct to the LPC; and dishonest and irregular conduct on the part of a trust practitioner in relation to the handling of trust monies.

Implications for directors

In analysing the versions and defences raised of the other directors, being that they had nothing to do with the firm’s finances, the Court dealt with this aspect in deciding whether they should be suspended from practice pending an investigation and disciplinary proceedings against them by the LPC. 

The Court found that every director has a fiduciary duty towards the company of which it is a director. Directors may not and is not allowed to plead ignorance of financial matters, especially when faced with allegations of misappropriation, and 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 to the keeping of the books of account or control and administration of the trust account.

The SCA dealt with this aspect in the matter of Hepple v Law Society of the Northern Provinces (2014) ZASCA 75; (2014) 3 All SA 408 (SCA) wherein it stated that for an attorney to explain trust deficits on the grounds that he or she had no involvement in the financial matters of the firm is ‘no defence at all’. Our courts’ view this as an abdication of responsibilities that does not absolve a legal practitioner of their duties. 

The Court further referred to the matter of Incorporated Law Society, Transvaal v K and Others (1959) 2 All SA 24 (T); 1959 (2) SA 386 (T), where an attorney 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. The court made the following remarks: ‘Every attorney must realise that it is a fundamental duty on his part, breach of which may easily lead to him being removed from the roll, to ensure that the books of the firm are properly kept……

The SCA further emphasised that the concept of ‘salaried directors’ is not a concept that is found in either the Companies Act 71 of 2008 or the LPA. This means that 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 and have the same duties and are regarded to be fully appraised of the finances of the firm.

Although the court was not required to make a finding whether the explanation proffered by the other directors’ qualifies as to whether they are regarded as fit and proper to practice as legal practitioners, the Court’s finding does confirm that the facts placed before the court were sufficient to impose a sanction of an interim suspension from practice, pending the outcome of disciplinary action to be initiated. The Court found that the facts established that there can be no doubt as to the offending conduct of the directors in respect of the financial affairs of the firm, and that this has been established. The directors accordingly admitted to playing no role and were in fact found to be in dereliction of their duties as directors of the firm.

Key takeaways for practitioners

The judgment reaffirms the responsibilities of directors in a law firm, and that practitioners, especially young practitioners, be aware of his or her duties and responsibilities pertaining to the financial aspects and responsibilities of a law firm. This is not only limited to the financial obligations of the firm, which requires insight and knowledge as to the status of the trust account, but that ignorance of the financial matters when there is misappropriation of funds can lead to professional misconduct that may lead to being struck off the roll. The court confirmed that practitioners are not allowed to claim ignorance and or that they had no knowledge as to the finances of the firm. 

The SCA confirmed the legal position that the defence raised by a director in the case of misappropriation that the director had no knowledge of the finances of the firm, is considered to be “no excuse at all” and  legal practitioners that raise such defence(s) before court in respect of liability of debts or when faced with an enquiry into being regarded as fit and proper to practice, will constitute to be no defence at all.

A warning to directors

This judgment serves as a reminder to all directors in law firms: do not abdicate responsibilities regarding financial management. Ignorance to do so, is an abdication and a breach of one’s fiduciary duty as a director and in the event of misappropriation of trust funds the non-guilty practitioners equally face sanction, which is not one limited to financial responsibility but professional liability as well. What this professional liability will be, will be dependent on the facts of each case.  

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