Directors of law firms are still liable for financial misconduct even if they have left and even if the misconduct was committed by only one of them, the Supreme Court of Appeal (SCA) said this week.
Ignorance cannot protect attorneys from facing disciplinary action when it concerns clients’ money, the court said in a ruling in which a Limpopo law firm, Chueu Incorporated Attorneys, misappropriated more than R25m in RAF claims owed to clients.
Established in 2014, the firm, which specialised in personal injury matters, had offices in three provinces and handled cases that were valued at more than R6bn.
In 2020, a number of complainants told the Legal Practice Council (LPC), the national watchdog of the legal profession, that after the firm represented them in road accident matters and collected payouts from the RAF, it never paid them.
For example, one complainant said the RAF awarded her R1.2m after the firm handled her matter, but she didn’t receive a cent. The RAF also told the LPC it had accidentally made a duplicate payment to the firm of almost R30m, which had not been repaid.
After investigating the complaints, the LPC concluded there was evidence of various breaches of the lawyers’ code of conduct. The council also concluded the firm owed about R25m to clients. It charged all eight directors of the firm and they were instructed to attend a disciplinary hearing. None attended.
To plead ignorance of financial matters when faced with allegations of misappropriation does not absolve a director. Every director has a fiduciary duty towards the company.
— Judge Caroline Nicholls
As a result, the LPC urgently went to the Limpopo high court to suspend all the directors from practice.
Seven of the eight directors argued they did not deal with the firm’s finances. They all said one director, Chupjana Chueu, was in charge of such matters. The other directors all indicated they had varying relationships to the firm, such as holding minor shares. Three of the directors resigned from the firm, founding new firms. About this time, the firm was named by Fikile Mbalula, then-minister of transport, as one of 102 law firms that were reported to the LPC for mismanagement of RAF matters.
In 2021, the Limpopo high court agreed the complaints related only to Chueu, and not the other directors. By agreement, the high court granted the order to suspend Chueu for 12 months. Nevertheless, the LPC appealed to the SCA to argue for the suspension of the other directors.
Fiduciary duty
Writing for a unanimous court on Wednesday, appeal judge Caroline Nicholls disagreed with the high court, finding that the other directors were in fact also liable and should be suspended.
“To plead ignorance of financial matters when faced with allegations of misappropriation does not absolve a director,” she said of the other directors. “Every director has a fiduciary duty towards the company”.
Speaking of attorneys specifically, she noted numerous judgments that confirmed attorneys “cannot escape liability” by saying they had no responsibility for keeping the books of account or by abdicating responsibilities. It is “no defence at all”, when faced with a firm’s trust deficits, for an attorney to claim no involvement.
She also spelt out the implication for all directors of law firms.
“Once a legal practitioner is appointed as a director,” she warned, “whatever the factual terms of the arrangement may be, they bear full responsibility for the finances of the firm.”
None of the directors denied there had been “misdeeds”, they only denied their responsibility. But directors cannot do this because of their duties as directors, she said.
Though Nicholls noted suspension from practice has a “grave impact” on a lawyer’s professional life, the suspension of the other directors would only be for six months pending the LPC’s final findings.
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