QUESTIONS HAVE been raised by solicitors who are being asked by the Law Society to pay an annual levy over 10 years to bail out the Solicitors Mutual Defence Fund Ltd (SMDF) to the tune of €16 million.QUESTIONS HAVE been raised by solicitors who are being asked by the Law Society to pay an annual levy over 10 years to bail out the Solicitors Mutual Defence Fund Ltd (SMDF) to the tune of €16 million.
The SMDF notified the Law Society in March that it did not have sufficient reserves to meet claims, that it would not take new business this year, and that it was seeking financial support for an orderly wind-down.
According to the Law Society, the as yet unpublished SMDF accounts for the indemnity period 2008/2009 reveal claims experience was “far worse than previously estimated”, resulting in a net additional exposure of about €5 million.
It estimates gross ultimate claims of €202 million up to last November. Some 90 per cent of that exposure is reinsured.
Currently, the SMDF insures 22 per cent of firms (482 firms with 1,479 solicitors).
Until about two years ago, it insured more than half of firms, but the cost of cover increased and some firms are now covered by other private insurers.
Once the fund notified the society of its position, its taskforce on professional indemnity immediately produced a report that has been sent as a briefing document to members, with the recommendation they support the bailout via a €200 levy on each solicitor’s practising cert each year.
It states this is the best option to avoid a “worst-case” scenario of solicitors with claims against them being exposed to up to €300 million should the SMDF’s reinsurers disclaim responsibility for claims made against them.
But some solicitors have questioned the basis on which any such levy might be imposed and whether the society should play any role at all in bailing out the private company.
The SMDF is, they point out – and according to the Law Society’s own task force report – an “unregulated mutual fund with a discretionary power as to whether to indemnify its members”.
With minimum notice, the society called a special general meeting for May 4th to seek the approval of members to impose the annual levy to fund the bailout plan. But a petition gathered by one solicitor forced the issue to a postal ballot.
Vincent Crowley, who collected about 300 signatures for that petition, said he took that step in order to allow all members of the society make a “democratic” decision on whether they should bail out the SMDF.
He did not, he said, want a repeat of a situation in 2009 whereby the council of the Law Society took an executive decision to give a loan guarantee of €8.4 million to the SMDF following the near total collapse of its investment in the Bloxham Saturn bond.
The society provided such a guarantee making it conditional upon the recovery of funds by the SMDF in litigation against Bloxhams.
This was subsequently settled on confidential terms. A loan guarantee – ultimately for €5 million – wasn’t drawn down, the society has said.
Mr Crowley has been tasked by the society with producing a 500-word argument on the “against” side of the bailout.
Stuart Gilhooly, president of the Dublin Solicitors Bar Association, has been tasked with producing the “for” argument. Both papers will be sent to members with their ballot papers.
Mr Crowley says while he commends the society for its work to address the crisis in the legal profession, he has reservations at the speed at which it has moved in this matter.
He says those opposing the bailout believed it “could be the equivalent of the Anglo Irish [Bank] scenario”, with €16 million soaring to many millions more.
“If the reinsurers [of SMDF] disclaim, if they default, then SMDF are liable, and they don’t have money. So €16 million would only be a drop in the ocean.”
He questions why a meeting of the SMDF’s own members hasn’t been convened. “It seems to be a unilateral decision of the board of the SMDF to seek funding. Even at that, we have not seen the minutes of the executive meeting of the board.”
He says a levy only on SMDF members would ensure the society did not have to become involved.
But the current plan meant “involving the Law Society in the debts of a private company” and thereby saddling members with those debts.
Mr Gilhooly, a member of the SMDF without any claims against him, says such a meeting of members has not been called because the fund has “no power” to force its members to pay any money.
The chances of SMDF members voluntarily contributing to a bailout are “very slim”, he said.
“Most SMDF members don’t have claims outstanding, so they have nothing to lose. They’re in no worse a position than a non-SMDF member.”
Mr Gilhooly states the collapse of the €8.4 million bond is “not pivotal” to the SMDF’s need for a bailout, which is instead due to “adverse claims experience” since 2006.
Mr Crowley says, however, it was “quite apparent” to him back in 2009 that, based on the history of investment losses, the body “would not be in business in two years”.
The task force report says “on the basis of reasonable assumptions, €16 million is likely to be sufficient”.
It says its own liability will be capped at that amount. But the report continues: “It is not likely to be known for a number of years into the future whether or not €16 million will be sufficient. If it proves that €16 million is insufficient, the society will have to assess the position which prevails at the relevant time.”
While the report says “every aspect of the course of action being recommended by the society is based on the advice of independent experts”, this advice has not been published.
Law Society director general Ken Murphy said the profession should agree to the bailout for “reasons of collegiality and of common sense”. The potential result of failing to support it could be “disastrous”, where the cost of supporting colleagues was reasonably affordable. He insists it is also in the public interest that the bailout take place.
Asked whether the fact that some members of the society’s own council are insured with SMDF posed a conflict of interest, Mr Murphy said the special meeting had been told, on the basis of the advice of senior counsel, that the fact that a decision on whether to provide the financial support will be made by the membership as a whole, and not by the Law Society council, “removes any difficulty whatsoever in that regard”.
The briefing document distributed to members notes the society “has obtained legal advice that it should be able to successfully resist any claim that it has a liability for the SMDF”.
Yet, as one solicitor points out, this statement is contained in a document that urges the assumption of responsibility for that very liability.
Laurence Shields of LK Shields Solicitors, who is chair of the SMDF, did not respond when asked for comment.
Ballot papers will be sent out on June 1st and a result is expected to be known by June 14th.
