Borrowing, Lending and Guarantees

There are special considerations where a lawyer does business with a client because the lawyer is inherently in a conflict of interest in these transactions.

Any discussion of these issues must start with section 3.4-28 of the Code of Professional Conduct: “A lawyer must not enter into a transaction with a client unless the transaction with the client is fair and reasonable to the client.” A lawyer should be able to prove that the transaction is fair and has been entered into in good faith.

Rule 5.12(1) states that a lawyer shall not borrow money from a client during the existence of a solicitor and client relationship unless the client falls into one of the categories set out in the rule or the Benchers authorize the transaction. With respect to lending, providing guarantees and co-signing loans for clients, there is no blanket prohibition but a lawyer in these situations is required under rule 5.12(3) to

• disclose and explain the conflict of interest,
• require that the client receive independent legal representation,
• obtain the client’s consent, and
• obtain the authorization of the Benchers.

The process for seeking the authorization of the Benchers is set out in rule 5.12(3). In addition to those requirements, the lawyer must also report the transaction to the Law Society – see rule 5.12(7) for guidance.

Keep in mind that lots of transactions constitute lending and will therefore attract the application of these requirements (section 3.4-29). For example,

• buying or selling property or services having other than nominal value,
• giving or acquiring ownership, security or other pecuniary interest in a company or other entity, and
• recommending an investment or entering into a common business venture.

Further considerations are necessary where a lawyer is asked to act for a client in a transaction in which the lawyer is also personally participating – see section 3.4-30 commentary [2].

For further information, see also sections 3.4-31 to 3.4-34 of the Code of Professional Conduct.

Links:

Borrowing and Lending: rule 5.12 (Law Society Rules)

Transactions with Clients: sections 3.4-28 to 3.4-30 (Code of Professional Conduct)

Borrowing from Clients: sections 3.4-31 to 3.4-32 (Code of Professional Conduct)

Lending to Clients: section 3.4-33 (Code of Professional Conduct)

Guarantees by a Lawyer: section 3.4-34 (Code of Professional Conduct)

Related Topics:

Maintenance of Records: rule 5.02 (Law Society Rules)

Conflicts of Interest: section 3.4 (Code of Professional Conduct)

Conflicts of Interest

Managing Money

Clients

(Posted: June 12, 2020)