Questions to be answered on legal entities provided for in Bill

The Legal Services Regulation Bill, which provides for multidisciplinary practices (MDPs) and legal partnerships (LPs), is due to go to report stage in the Oireachtas this month. Minister for Justice Frances Fitzgerald has said the Legal Services Regulatory Authority will conduct a study of MDPs within six months which will then be followed by a consultation process.

It seems to me that the most important issue for the authority to consider will be independence in the provision of legal services. At present the Bar provides independent legal advice to and independent legal representation for solicitors and their clients. Both LPs and MDPs will raise serious questions about this independence. Why? Because a client or clients of an MDP or LP may be so critical to the commercial wellbeing of the firm that it will be very difficult for a counsel to detach himself or herself from that reality.

At present legal services are provided by individuals (solicitors and barristers) who own and fund the practice and are responsible for the debts of the practice.

The Bill provides that companies, venture funds and other entities may be partners in MDPs. This could lead to unsatisfactory situations and will, I believe, be changed by the Minister.

MDPs, if formed, will provide legal and other services such as auditing, accounting, actuarial and engineering. Such firms will raise a wide number of questions, which are outlined below.

There are requirements on auditors under company law and tax law to report certain matters to the authorities. How will this be reconciled with the obligations of a solicitor or a barrister, a partner of the auditor, to represent the client?

Regulation

How will the remit of the proposed authority interact with non-legal partners in an MDP? Equally, how will the regulation exercised by say accountancy bodies or the Irish Auditing & Accounting Supervisory Authority (IAASA) apply to non-audit partners in an MDP? In an MDP comprising accounting and legal and/or other services, will legal partners who are directors of client companies be obliged to resign those directorships if the client becomes a client of the audit practice?

Auditors operate under professional ethical restrictions as to the percentage of fee income that may be derived from any one client. If an audit firm and legal practitioners (solicitors and barristers) form an MDP and the legal practice derives very large fee income from one client, will this be a breach of the obligations of the auditor and thus the MDP?

May a client of the MDP become a partner in the MDP? Clients of an audit practice cannot be partners in that practice. Can a client of a legal practice become a partner of an MDP? If so, what effect will this have on the other practice areas and most especially on the independence of the MDP?

The Bill provides for a managing legal practitioner to manage the legal services of an MDP and to ensure compliance with the Bill. However, the managing legal practitioner need not be a partner. This will surely create difficulties for the person filling that role and I would expect that the role will be confined to a partner.

Several issues need to be considered from these changes. Will a company or other corporate become a partner in an MDP purely for a return on investment? If the corporate is the principal financier and becomes insolvent from activities unconnected with the MDP, what happens to the business of the MDP? If the corporate investor is a company with limited liability (and almost certainly will be), will the partners be left to discharge the debts of the MDP? The same considerations will apply to liability arising from a professional negligence claim.

The only prohibitions in the Bill on persons who may become partners in an MDP are individuals against whom the High Court has made certain orders. If a partner or proposed partner in an MDP has been found guilty of offences under tax, company or criminal law or has been in breach of the financial services regime, there does not appear to be any prohibition on such a person becoming a partner.

Written agreements

Both LPs and MDPs will operate under written agreements. Before entering into such agreements, the parties will need to consider a range of questions. Who will be the senior/managing partner? What due diligence will be appropriate for proposed partners? Will assets and liabilities of the existing practices be absorbed into the LP or MDP or retained? What will be the rules regarding profit-sharing and will “goodwill” be valued? What will be the financing structure of the firm? How will the partners contribute to the financing?

Finally, parties will need to consider tax issues such as cessation and commencement rules and for barristers the change from cash basis to accruals basis.

Denis Cremins is a barrister specialising in tax and probate. These views are personal