derived from the LSBs power to conduct an

audit of the compliance of an ILP with the LPA

(s2.7.22).
While there is no stated LSB time limit
for submission of the self-assessment, three
months would be appropriate. Submission
within three months is the requirement of
the Ofce of the Legal Services Commissioner
(NSW) (OLSC) and the Legal Services
Commission (Queensland) (LSC).
6
REQUIREMENT TO HAVE A LEGAL
PRACTITIONER DIRECTOR
An ILP must have at least one legal practi-
tioner director in addition to any directors
who are not legal practitioners (s2.7.10 LPA).
A legal practitioner director is an Australian
legal practitioner who holds a practising cer-
ticate as a principal of a law practice and is
appointed to the position of a director (s2.7.2).
The CA denes director as a person who is
appointed to the position of a director, or is
appointed to the position of alternate direc-
tor and is acting in that capacity, regardless
of the name that is given to their position.
Also, unless the contrary intention appears
a person who is not validly appointed as a
director is also regarded as a director if they
act in the position of a director or the direc-
tors of the company are accustomed to act in
accordance with the persons instructions or
is the fundamental obligation placed on an
ILP before it can engage in legal practice.
An ILP wishing to engage in legal practice
in another state must comply with the noti-
cation requirements under each states Legal
Profession Act. Of note, aside from the statu-
tory implications of breaching s2.7.7(1), the
LPA is silent on the recovery of costs during
the period of breach. The equivalent Legal
Profession Acts in NSW, Queensland and WA
explicitly disallow recovery of any amount
for anything the corporation did in contra-
vention of the notication section and allow
the ILPs client to recover as a debt due any
costs paid during the period of breach.
2
There
is no prohibition on a corporation providing
non-legal services before notication, but it
must not represent itself as engaging in legal
practice (s2.7.8).
After notication, the LSB requires com-
pletion and submission of the self-assessment
audit (self-assessment).
3
The LSB requires
every corporation that engages in legal prac-
tice in Victoria to undertake an internal (or
self-assessment) audit of its compliance with
its obligations under Part 2.7 of the Act.
4

Part A elicits information regarding the ILP
and details of all legal practitioner directors,
and all other directors and shareholders. Part
B is an internal self-assessed management
systems audit relating to the implementation
and maintenance of appropriate management
systems (s2.7.10(3)).
5
The self-assessment is
T
he incorporation of a sole practitioner
or a law rm into an incorporated legal
practice (ILP) is becoming more preva-
lent in Victoria.
1
While there is much to
be considered in the decision to incorporate,
the statutory and regulatory obligations are
sometimes not given prominence.
This article outlines the major statutory
and regulatory obligations placed on ILPs
and legal practitioner directors by the Legal
Profession Act 2004 (LPA), the Legal Profession
Regulations 2005 (LPR), the Legal Services
Board (LSB), and the Corporations Act 2001
(Cth) (CA).
WHAT IS AN ILP?
An ILP is a corporation (s57A CA) that
engages in legal practice in the jurisdiction
of Victoria, whether or not it also provides
non-legal services to clients (s2.7.4(1) LPA).
Legal services are dened as work done, or
business transacted, in the ordinary course
of legal practice (s1.2.1 LPA).
ILP NOTIFICATION OBLIGATIONS
After meeting the CA and ASIC obliga-
tions regarding incorporation, the ILP must
notify the LSB in writing on the approved
form before it starts to engage in legal prac-
tice in Victoria (s2.7.7(1) LPA). Notication
The legal and professional obligations of law firms that incorporate can be complex and
potential conflicts between them and directors duties need to be watched. By Patrick Oliver
INCORPORATION
PROCEED WITH CAUTION
42 L I J A U G U S T 2 0 1 1
LEGAL PRACTI CE
ILLUSTRATION SHANE McGOWAN
43 L I J A U G U S T 2 0 1 1
Duty to act in good faith in the best
interests of the company and to
exercise powers for a proper purpose
Directors are under duciary duties to act in
good faith and in the best interests of the cor-
poration and to exercise their powers for a
proper purpose, not for the purpose of gain-
ing an personal advantage (s181(1) and (2) CA).
These duties are of importance to an ILP. For
instance, if a legal practitioner director was
considering leaving the ILP to set up a rival
rm and was taking clients, would that direc-
tor breach the duties to act in good faith and
in the best interests of the ILP?
Duty to avoid undisclosed
conflicts of interest
Directors are under duciary duties not to
make undisclosed personal prot from their
position as a director (ss182 and 183 CA). The
statutory duties extend to employees as well
as directors and ofcers.
CONFLICT BETWEEN LEGAL
PROFESSIONAL OBLIGATIONS AND
DIRECTORS FIDUCIARY DUTIES
There is an inherent conflict between cer-
tain directors duciary duties and those of
a legal practitioner under their professional
obligations. Tension arises between a legal
practitioners professional duty to act in the
best interest of their client coupled with their
overarching duty to the court on one hand
and their duty as a director to act in the best
interest of the company (i.e. the shareholders)
on the other. Common examples include:
t Settling litigation pre-trial may be in the
best interests of the client and the admin-
istration of justice, but not in the best
interests of an ILP, as a corporation, which
may stand to generate more fees if the liti-
gation process is prolonged.
t Pro bono legal services are certainly in
the best interests of the community and
the administration of justice, but as they
do not generate revenue may not be in the
best interests of the ILP as a corporation.
The legal practitioners duties to the court,
the administration of justice and their clients
take precedence over a directors general du-
ciary duties. Safeguards have been placed in
the LPA to ensure that this hierarchy of obli-
gations is maintained. In respect of conicts
of interest in general the LPA states that for
the purpose of any law (including the com-
mon law) or legal professional rules relating
to conflicts of interest to the conduct of a
legal practitioner who is a legal practitioner
director or an ofcer or employee then the
interests of the ILP are also taken to be those
t taking all reasonable action available to
deal with any unsatisfactory professional
conduct or professional misconduct of an
employed legal practitioner (s2.7.11(2));
t ensuring that the ILP complies with its dis-
closure obligations (s2.7.15);
t ensuring that a disqualified person (s1.2.1)
is not a director, officer or employee or
shares receipts from the provision legal
services (s2.7.21); and
t not exerting undue influence or causing
or inducing a legal practitioner director or
another legal practitioner who provides
legal services on behalf of the ILP to contra-
vene the LPA, the LPR, the legal profession
rules, or the professional obligations of a
legal practitioner (s2.7.35).
LEGAL PRACTITIONER
DIRECTORS DUTIES AT COMMON
LAW AND UNDER THE CA
The common law and the CA impose fidu-
ciary duties on the directors and ofcers of
a corporation. These duciary duties apply
to all directors of an ILP, so are in addition
to legal practitioner directors LPA obliga-
tions. The CA fiduciary duties (ss180-183
CA) do not replace the common law duciary
duties; rather they replicate, and in some cir-
cumstances extend, those duties.
Duty to exercise reasonable
care, skill and diligence
Directors are under duciary duties to exer-
cise their powers and undertake their duties
with a reasonable degree of care and diligence
(s180 CA). Under the tort of negligence, and
the equitable duty of care, directors must
exercise a reasonable degree of care and
diligence in exercising their powers and dis-
charging their duties. The statutory duty
of care and diligence imposes an objective
standard of reasonableness on directors
(s180(1) CA). Section 180(1) is subject to the
business judgment rule defence (s180(2) CA).
wishes [shadow director] (s9 CA). Under the
LPA denition of a legal practitioner director
it would appear that a legal practitioner who
does not hold a principal practising certi-
cate may be appointed a director of the ILP
but will not be a legal practitioner director.
OBLIGATIONS OF A LEGAL
PRACTITIONER DIRECTOR
UNDER THE LPA
In addition to directors duties in general and
the professional obligations of a legal practi-
tioner,
7
every legal practitioner director has
specic obligations under the LPA, namely:
t responsibility for management of the legal
services provided by the ILP (s2.7.10(2));
t ensuring that appropriate management
systems are implemented and maintained
to enable the provision of legal services in
accordance with professional obligations
(s2.7.10(3)(a));
t ensuring that the conduct of non-legal
practitioner directors and other officers
or employees does not affect the conduct
of those who are legal practitioners
(s2.7.10(3)(b));
t if it is reasonably apparent that the provi-
sion of legal services by the ILP will result
in breaches of the professional obligations
by officers and employees who are legal
practitioners, taking all reasonable action
available to ensure that the breaches do not
occur (s2.7.10(4)(a));
t taking appropriate remedial action in
respect of breaches of professional obliga-
tions that do occur (s2.7.10(4)(b));
t taking reasonable steps to ensure that the
conduct of employed legal practitioners
does not constitute unsatisfactory profes-
sional conduct or professional misconduct
(ss2.7.11(1)(a) & 2.7.11(1A)(a));
t taking reasonable steps to ensure that the
conduct of non-legal practitioner directors
does not adversely affect the provision of
legal services by the ILP (ss2.7.11(1)(b) and
2.7.11(1A)(b));
t taking reasonable steps to ensure that
non-legal practitioner directors are not
unsuitable to be a directors of the ILP
(ss2.7.11(1)(c) and 2.7.11(1A)(c));
44 L I J A U G U S T 2 0 1 1
LEGAL PRACTI CE
There is an inherent conflict between certain
directors fiduciary duties and those of a legal
practitioner under their professional obligations.
of courts and regulatory authorities such
as the Legal Services Board etc.;
t Supervision of practice and staff: providing
for compliance with statutory obligations
covering licence and practising certifi-
cate conditions, employment of persons
and ensuring proper quality assurance
of work outputs and performance of legal,
paralegal and non-legal staff involved in
the delivery of legal services; and
t Trust money and trust accounts: avoiding
failure to account and breaches of Chapter
3, Part 3.3 of the LPA.
The self-assessment helps by outlining
key concepts to consider when address-
ing [the relevant] Objective and provides
examples of possible evidence or systems
most likely to lead to compliance.
10
The Ten
Objectives are principle-based and exible,
not prescriptive. As each ILP is unique it is
for the legal practitioner director(s) to design,
implement and maintain management
systems appropriate to that ILP. The self-
assessment states that all examples provided
. . . are suggestions only because ILPs vary
in terms of size, work practices and nature
of operations and thus no one size ts all.
11

Failure by the legal practitioner director(s)
to implement and maintain appropriate
of the practitioner (s2.7.14). Furthermore, the
provision of pro bono legal services is
expressly allowed (s2.7.13(4)).
Legal practitioner directors should have an
awareness of their general directors duciary
duties, their obligations as legal practitioner
directors under the LPA and professional obli-
gations, and how those duties interact.
8

APPROPRIATE MANAGEMENT SYSTEMS
Each legal practitioner director has an
obligation to ensure that appropriate man-
agement systems are implemented and
maintained to enable the ILP to provide
legal services in accordance with over-
all professional obligations (s2.7.10(3)(a)).
Appropriate management systems are
not defined in the LPA but manifest them-
selves as the Ten Objectives of Appropriate
Management Systems (Ten Objectives).
9

The Ten Objectives are based on profes-
sional conduct rules and were drawn up by
the OLSC in conjunction with the College of
Law and LawCover (NSW PI insurer). The
Ten Objectives, which have been adopted by
the LSB with minor amendments to reect
the LPA and the Victorian Professional Conduct
and Practice Rules 2005, are:
t Negligence: competent work practices to
avoid negligence;
t Communication: effective, timely and
courteous communication;
t Delay: timely delivery, review and follow-
up of legal services to avoid delay;
t Liens and file transfers: acceptable pro-
cesses for liens and file transfers;
t Costs disclosure, billing practices and ter-
mination of engagement: providing for
a shared understanding and appropri-
ate documentation from commencement
through to termination of the engagement
covering cost disclosure, billing practices
and termination of retainer;
t Conflicts of interest: timely identification
and resolution of the many different incar-
nations of conflict of interest;
t Records management: minimising the
likelihood of loss or destruction of cor-
respondence and documents through
appropriate document retention, filing,
archiving etc and providing for compliance
with requirements as regards registers of
files, safe custody, financial interests;
t Undertakings: providing for undertakings
to be given, monitoring of compliance and
timely compliance with notices, orders,
rulings, directions or other requirements
45 L I J A U G U S T 2 0 1 1
LEGAL PRACTI CE
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LEGAL SERVICES BOARDS
POWER TO AUDIT ILPS
The LSB may conduct an audit of an ILPs:
t compliance with the obligations contained
in Part 2.7 of the LPA, the LPR and the Legal
Profession Rules as they relate to ILPs
(s2.7.22(1)(a)); and
t management of the provision of legal ser-
vices (including the supervision of officers
and employees providing the services)
(s2.7.22(1)(b)).
An audit may be carried out whether or not
a complaint has been made (s2.7.22(2).
The rationale behind the compliance audit
is to ensure that an ILP has systematically
identied its statutory and regulatory obli-
gations, complies with them, and monitors
its compliance. To show compliance with
s2.7.22(1)(a) it might be prudent for an ILP to
have an obligations register outlining all the
obligations under Part 2.7 etc.
In relation to s2.7.22(1)(b), as the imple-
mentation and maintenance of appropriate
management systems is mentioned in the
note to s2.7.22(1), an assumption can be made
this will be within the audit scope, as will the
management systems may amount to unsat-
isfactory professional conduct or professional
misconduct (s4.4.4(a)).
The Queensland Legal Services Commis-
sioner believes management systems . . .
count as appropriate only if they support
and encourage and guide the rms employ-
ees to do the right thing and discourage and
deter them from doing the wrong thing.
12

The NSW Legal Services Commissioner
agrees, stating that . . . by requiring incorpo-
rated legal practices to implement an ethical
infrastructure: that is, formal and informal
management policies, procedures controls,
work team cultures and habits of interac-
tion and practice that support, encourages
ethical behaviour through ethical infrastruc-
tures. [This] provides better protection for
consumers of legal services. This is because
the management systems we require ILPs
to maintain act as a quasi-educative mech-
anism teaching practitioners best practice
to achieve compliance with the require-
ments of the legislation and promote cultural
change.
13
Parker et al suggest the legisla-
tive provisions that require incorporated
legal practices to have appropriate manage-
ment systems [are] in effect a requirement
that incorporated legal practices consciously
implement an ethical infrastructure as a
part of their new business structure.
14
The
self-assessment itself touches on ethical
infrastructure, stating the intent of these
provisions is to encourage ethical practice
within ILPs and to promote professional
standards, competence and honesty.
15

46 L I J A U G U S T 2 0 1 1
LEGAL PRACTI CE
Meeting the statutory and regulatory obligations
on the ILP and the legal practitioner directors is
another, albeit important, consideration in the
decision whether to incorporate.
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7. Professional obligations of an Australian legal prac-
ti tioner include: duties to the Supreme Cour t;
obligations in connection with conflicts of interest;
duties to clients, including disclosure; and ethical rules
required to be observed by the practitioner (s2.7.2).
8. Other Corporations Act obligations include: report-
ing; record keeping; and accounting.
9. Note 3 above, p6.
10. Note 3 above, pp8-38.
11. Note 3 above, p7.
12. J Briton, Rethinking the regulation of lawyer con-
duct: the centrality of law firm management and
ethical infrastructure, speech to Australian Legal
Pr ac t i ce Management Associ at i on Nat i onal
Conference, 15 August 2009, p10: www.lsc.qld.gov.au/
speeches/ALPMA_National_Conference_Aug_09.pdf.
(accessed 17 June 2011).
13. S Mark, The future is here, Journal of the
Professional Lawyer, American Bar Association, Centre for
Professional Responsibility, May 2009, pp45-63 at p46.
14. C Parker et al, The Ethical Infrastructure of Legal
Practice in Larger Law Firms: Values, policy and behav-
iour, (2008) 31(1) University of New South Wales Law
Journal 158-188, p174.
15. Note 3 above, p2.
16. Supervision in this context means the supervision
of the overall ILP (governance) and/or the supervision
of matter files (professional supervision).
17. Note 13 above, p15.
18. An LSB representative in a conversation with the
author on 1 September 2010.
19. Legal Services Board, Annual Report 2009, p17 and
the Australian Financial Review, 2 July 2010, p58.
supervision of ofcers and employees who
provide legal services (s2.7.22(1)(b)).
16

Most audits are internal (self-assessment);
in fact every ILP should have completed the
self-assessment. Records should be kept of
all self-assessments, any gap analysis under-
taken (internal or external), and the results
of any audits. With regard to external audits,
there is no public information on the LSBs
thinking as to their scope or frequency. It
is instructive to note that the LSC conducts
two types of external audit: web-based sur-
veys to test discrete aspects of an ILPs ethical
infrastructure; and comprehensive on-site
reviews.
17
It is understood that the LSB is
likely to carry out audits in 2011-12.
18

CONCLUSION
Statistics from the LSB suggest that most new
law practice registrations in Victoria (aside
from sole practitioners) are ILPs, as in New
South Wales and Queensland.
19
The number
of law practices incorporating may increase
if agreement is reached between the repre-
sentative bodies (the LIV etc.) and the ATO
on certain taxation issues. The incentives to
incorporate may include: limited liability;
asset protection; share ownership; capital
raising; tax structuring; entry and exit of
directors; succession planning; and overall
management. The disincentives may include:
taxation; disclosing nancial information;
and potential payroll tax liabilities. Meeting
the statutory and regulatory obligations on
the ILP and the legal practitioner directors
is another, albeit important, consideration in
the decision whether to incorporate.
PATRICK (PADDY) OLIVER is a lawyer, management con-
sultant and managing director of Lexcel Law Practice
Consultants. He has worked extensively with law rm
clients in practice management, management systems
and risk management.
1. 761 ILPs are registered in Victoria: www.lsb.vic.gov.
au/PractitionerStatistics.htm (accessed 22 June 2011).
2. See Legal Profession Act 2008 (WA), ss102(5) and (6).
Sections material in the WA matter of Hammond Legal
in which an ILP in breach of s102(1) (failure to notify)
was disallowed from recovering costs during the period
of breach: www.perthnow.com.au/business/news/
hi gh- pr of i l e- l awyer- j ohn- hammond/s t or y-
e6frg2qu-1225796121613 (accessed 17 June 2011).
3. Legal Services Board, Incorporated Legal Practices: Self-
Assessment Audit: www.lsb.vic.gov.au/documents/
LSB_ILPSelfAssessmentAudit.pdf (accessed 17 June 2011).
4. Note 3 above, p2.
5. Note 3 above, p6.
6. OLSC and LSC perform regulatory duties with regard
to ILPs. LSC allows online self-assessment submission.
47 L I J A U G U S T 2 0 1 1
LEGAL PRACTI CE
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