Further Important Judgment on Intervention in the Practice of a Law Firm

UPDATE

As readers may remember, all was not so quiet on “Christmas Eve” last year in some parts of Hong Kong. The Council of the Law Society of Hong Kong moved quickly to intervene in the practice of a law firm after resolving to do so on 23 December 2020. That set off a sequence of events that has (to date) culminated in three High Court written decisions/judgments – the most recent of which was handed down on 7 July 2021 and approves an initial distribution with respect to claims made by former clients which have been accepted by the intervention agent. Together the three decisions/judgments summarise the events leading up to and during the intervention (to date) and give some interesting insight into (among other things) a regulator’s modus operandi.

BACKGROUND

The background to the intervention is summarised in an “Industry Insights” in January 2021 (“Schedule 2 of LPO – A Complete Statutory Scheme for Intervention of Law Firms”). In short, some odd things appear to have gone on in the intervened firm’s conveyancing practice, which was thought (at the time) to be one of the largest conveyancing practices in Hong Kong. These matters are referred to in the High Court’s previous two decisions/judgments, dated 27 January and 19 February 2021, refusing one of the intervened firm’s former partner’s applications for “interim-interim” relief and permission to apply for judicial review (in effect, attempts to stop the intervention).

7 JULY 2021 JUDGMENT—THE COUNCIL OF THE LAW SOCIETY OF HONG KONG V NG & YUEN

The most recent judgment makes for some interesting reading, besides being an exemplar of judicial case management – given the importance of the matters raised, the court appears to have managed to hand down a comprehensive judgment on the same day as hearing the Council’s application as trustee to distribute client monies to those persons beneficially entitled to them. Several points in the judgment are worth noting.

  • Following on from remarks in the previous decisions/judgments about the practice of the intervened firm, in paragraph 13 the court notes:
  • “I accept that the process on this Intervention was daunting, because of the sheer volume of transactions in process by the Firm, exacerbated by the fact that the Firm did not have a systematic method for keeping files and documents”.
  • Given the speed with which the Council’s decision to intervene was executed (on the next working day), it appears that client monies of approximately HK$379 million became vested in the Council as trustee. Only time will tell whether this is enough to pay former clients’ legitimate claims in full. It appears that the first tranche of payments will be distributed on or before 4 August 2021 – which is quick relative to some previous interventions.
  • The court has allowed a further period of twelve months for claimants to make “late claims”.
  • There appear to be rival claims to some of the monies held by the Council and these are subject to other litigation.
  • The court has ordered that the two former partners of the intervened firm are jointly and severally liable for the costs of and occasioned by the intervention. One would imagine that these costs are very substantial (given, for example, the intervened firm’s multiple offices and the number of assisting firms working with the intervention agent). The intervention also appears to be far from over. Presumably, every dollar of costs in the intervention not recovered from the former partners will ultimately have to be paid by the Society’s members.

TAKEAWAY POINTS

The Law Society gave another detailed press briefing on 20 July 2021 – a summary of which is publicly available on its new and impressive looking website. Based on the three High Court decisions/judgments and the Law Society’s press briefings to date, the decision to intervene was rightly made in order to protect the public interest and the interests of the intervened firm’s former clients.

Managing partners of law firms and sole proprietors would do well to read the three decisions/judgments and review their office practices, especially as regards the supervision of unqualified staff – for example, legal clerks. Partners should also ensure that they properly supervise their registered foreign lawyers. These regulatory concerns are only heightened in a COVID-19 environment with some staff working from home or overseas. The consequences and cost of not properly supervising staff are serious.

Finally, the final paragraph of the Law Society’s press briefing (20 July 2021) suggests that the Law Society is working with the Hong Kong Monetary Authority and the Hong Kong Association of Banks “to facilitate improvements to the current procedures in conveyancing transactions”.

Jurisdictions

Partner, RPC