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SMDF: Madness

The Law Society of Ireland is a significant but Janus-like body. It is the representative body for solicitors in Ireland and is also the regulator of those solicitors.

The Law Society is Janus-like in other ways. It is a private corporation, nominally answerable solely to its own members. It has a public aspect arising from its representative role (no representative body can claim to be wholly private) but also arising from the fact that it has been assigned executive functions under statute to administer important aspects of the profession.

It is currently promoting a scheme to rescue a private company called the Solicitors Mutual Defence Fund Ltd. (SMDF ) from declared and anticipated insolvency. Currently, it is the Council of the Law Society that is doing the promoting and the promotion is directed towards the members of the Law Society (all being solicitors).

The Council convened an Extraordinary General Meeting of the members of the Law Society to get authorisation for the scheme to benefit SMDF. The Council failed in this effort; the matter had to be referred to the decision of members in a postal poll. The poll is due shortly.

The Council has told the profession that the bailout will cost €16 million. The Council proposes that payment of the bailout levy on solicitors will be compulsory and will be a condition of delivery of the annual practising certificate to each solicitor.

Currently, what the members have received from the Law Society, to assist in making the decision, is a “briefing note”.

Missing from that briefing note is any evidence that the Law Society has the statutory authority to do what the Council proposes. It is not even alluded to; it is assumed.

That is ineptitude.

Implicit in the convening of the EGM, and, now, the postal vote process, is evidence that the Council of the Law Society do not know the difference between a decision and an endorsement. (A decision is made on facts; an endorsement refers to a previous decision made by somebody else). The Council members are seeking an endorsement, while professing to seek a decision.

That is ineptitude.

The briefing note is not signed. It is in fact an extensive expression of an opinion (with many qualifiers).

Its subject is the advices and opinions commissioned by the Council of the Law Society on the issue. The briefing note is itself an endorsement of the opinion of some other person or persons.

That opinion or opinions have been withheld from the Law Society members.

That is ineptitude.

The Council of the Law Society, through its spokesman, claims that that opinion or opinions are confidential. In whom are they confidential? They cannot be confidential in their author, or the Council members.

That is ineptitude.

The Council of the Law Society has denied that the author of the supportive opinion on the Council’s bailout plan is Dermot Gleeson SC, former Chairman of Aillied Irish Banks. The denial came weeks after a journalist cited him as the author of a critical opinion commissioned by the Council.

That was ineptitude.

If the journalist is correct and Dermot Gleeson is the author of the opinion advocating the bailout of SMDF, that is ineptitude of a high order by the Council.

Falstaff’s judgment on Prince Hal springs to mind;

“Thou art mad, tho’ not seeming so”

SMDF: A pointed question

Should the Law Society not ask SMDF for some help in understanding the extent of the problem?

Here is a suggestion.

Ask SMDF what number of claims outstanding might fall under the following category:

“…any dishonest, fraudulent, criminal or malicious act or omission by the insured, or any acts or omissions which were done by the insured knowing them to be wrongful, or any of the foregoing in which the insured has acquiesced after obtaining personal knowledge thereof;”

This quote is from the Schedule of Statutory Instrument 312 of 1995,
with which the Society is very familiar. It wrote it.

If the answer is a number in excess of zero, perhaps the Law Society would then ask SMDF;

“What is the estimated value of those claims?”

Then perhaps the Law Society would treat its members with respect and convey those answers (or rebuff!) to the members before they come to vote on the SMDF bailout.

SMDF: Good Advice!

The Law Society briefing note to the members of the solicitors’ profession has this statement:

“The Society has not relied in any way on advisors of the SMDF.”

Why not? Is one expert (particularly “legal experts”) not as good as another?

The answer is, no they are not. It is very easy to get the advice you want by choosing a person who either thinks as you do, or fashions an opinion to suit the client.

That is why the Council of the Law Society has not relied on the SMDF advisors (or its directors, presumably).

There are big problems for the Council in adopting this course of action: either their own legal advisor will appear to have been chosen for underhand reasons of chicanery or/and the Council will be deprived of the very best advice on the issues most affecting the SMDF and its members. Surely the SMDF and its advisors are the experts in that area?

After all, the Council’s briefing note to the profession claims;

“…the SMDF is a separate entity from the Society and is not, and never has been owned, controlled, directed or regulated by the Society”.

Currently, there appears to be a difference of opinion between the Council of The Law Society and the SMDF as to the “benefits” of liquidation of SMDF.

SMDF does not, it seems, see liquidation as a disaster for the solicitors relying on it for indemnity, whereas the Law Society is adamant in its assertions that the sky will fall on every solicitor in the event of liquidation of SMDF.

Where is the source of this darkness and who, exactly, is the Cassandra being listened to by the Council?

Why is that opinion, if it exists, not published to the profession?

SMDF; A signed Opinion?

This blog has argued that the failure of the Law Society to furnish its members with the opinions and advices, upon which the Council of the Law Society say they are relying, is not acceptable.

The Council members have made their decisions, on the SMDF debacle, on foot of those opinions. If they do not give the members the opportunity to read the same material, they are not in fact submitting the problem to the members for decision.

Instead, they are submitting themselves to the members as the issue.

“Trust us!”

they are saying.

Remarkably, as they do this, they fall below a standard that even the SMDF has managed to achieve; not one Council member, not the Director General, has personally subscribed to the information and views in the “briefing note” the Law Society distributed to its members on the SMDF crisis. If there is error or falsehood in that paper, the members have no identifiable individual person whom they can later make accountable.

Connected with that point, but a separate issue of great importance is this; who, among the Council members, is relying on the SMDF for insurance? And which of them has lodged a claim with SMDF?

Are they urging the SMDF bailout to the members? Do they not see that they are conflicted? Do they not subscribe to a personal moral standard that would oblige them to reveal this to the general membership?

In the same vein, is it not obvious that no solicitor induced to take “insurance” cover with SMDF can be said to be acting in the interests of the Law Society when he or she votes in the postal poll?

The SMDF letter

We received a letter from the SMDF about its financial affairs.

According to the letter, everything appeared hunky dory in the garden until receipt by the SMDF of an actuary’s report on 23rd March 2011. The report seems to have been received by the directors of SMDF with mixed emotions. It showed that SMDF was “not under immediate stress” but it “might not have sufficient reserves to pay claims into the long term future”.

This benign prospect was offset by advice in the report that SMDF should seek appointment of a liquidator. This course could only be avoided by closing down promptly AND getting new capital of €14 to €16 million to carry on for 15 years [still closed down].

Well, hats off to SMDF, not to feel immediate stress from this prospect.

Interestingly, SMDF, unlike the Law Society, sees no threat to its reinsurance contracts. This makes sense; liquidators may sometimes repudiate onerous contracts but they are not known to repudiate beneficial contracts very often.

Again, interestingly, SMDF reinsured 100% of its business for the “current period”, meaning January 2011 to December 2011. That can only mean that the SMDF members finally got something like real insurance cover against claims of negligence. It also means that any claim arising in 2011 will cost SMDF nothing; the risk is laid off elsewhere.

So where have the claims come from, that the SMDF needs “re-capitalisation”? From previous years it seems. Where else?

Bear in mind that SMDF operated on a “claims made” basis. That meant that it “accepted” a claim made now, even though the negligence long predated the claim, possibly occurring in some previous year, when the solicitor was insured in the normal way with an insurance company. As a consequence of this, SMDF has known of the financial problems the relevant claims represent since dates long preceding March 2011.

In fact we knew that; SMDF had asked for and got a loan facility of €8.4 million from the Law Society in 2009. [Here, for “Law Society” read “the Council of the Law Society”].

All of this should be taken with a grain of salt. It is very possible to mismanage an insurance claim after it has been lodged. It is necessary to estimate the extent of the claim in money terms and set aside sufficient reserves of that amount. If SMDF failed to make the necessary estimate accurately, the maturing claims might prove unmanageable.

Possibly, that is what happened. But did it happen twice, firstly in 2008-2009, and again in 2010? No wonder the Law Society is talking about the insolvency of the SMDF, even though SMDF is prohibited from making payments, the effect of which would be to make it insolvent.

While the Law Society characterisation of the SMDF position may be understandable, it is misleading to speak of insolvency when there is not and cannot be an insolvency. This is all the more so given that the Council of the Law Society, in establishing SMDF, ensured that SMDF COULD NOT make a payment leading to its insolvency.

As for the directors of SMDF, there are two questions.

A) Do you accept responsibility for the mis-management of SMDF, resulting in its insolvency?
B) If you deny SMDF is (or will be) insolvent how do you think you can persuade a court to appoint a liquidator to a solvent company, as your letter seems to suggest?

SMDF: Plausible?

There is a well known radio entertainment format in which contestants are presented with three accounts or narrative explanations of a “fact”. In the convention the “fact” will be true, but only one explanation is true. The contestants must choose the true explanation. Typically, even the “fact” will be outside their usual personal experience.

The explanations, presented by actors, are each “plausible”.

The state of mind implied by this illustrates that we often act on less than full knowledge in making judgments.

To some degree the members of the Law Society are now confronted with this experience, but without the entertainment.

The Law Society has consciously and admittedly withheld available information from the members as it asks them to make the decision to bailout the SMDF.

Outside radio entertainment it is a perilous strategy of persuasion. If you concede to requests for more information you will be shown to have been, at the very least, condescending in not giving it in the first place. Condescension is not a recognized method of persuasion.

Then there is the problem, in real life, of breaking the convention of “plausibility”. If an element in the narrative does not seem to fit, the listener will be lost.

In the case of the SMDF there is something of that kind. According to the Law Society, the SMDF has been insolvent for some time. No evidence of admissions by the directors of SMDF to this effect is available.

Even in current circumstances, if it is true that SMDF traded while in that condition, it is a disgrace. The Law Society seems to take the view that this was forgivable and understandable; that they were trying to “trade out” of losses. (This is what the Law Society spokesman has said).

Because it is a disgraceful admission it is easy to miss the fact that it is inconsistent with something else in the Law Society narrative; the SMDF is an unregulated discretionary mutual fund.

That means that, in the absence of drink, drugs or a death wish, a fund like that cannot be insolvent. To escape the disgrace of insolvency, with possible legal sanctions personally suffered by the directors, the directors can avail of the discretion to deny indemnity to one or more (or all) SMDF members.

So, the evidence of implausibility in the Law Society narrative is this; there is no evidence of admission by the directors of SMDF of their presumed disgrace.

SMDF: Confidential?

The Sunday Business Post has accessed a confidential Law Society report on the SMDF.

How do journalists manage such things? The members of the Law Society have not had access to that report despite the fact that they are going to be polled on the Law Society proposal to bailout the Solicitors Mutual Defence Fund Ltd., one of the sources of professional indemnity insurance for solicitors.

The following is, presumably, extracted from the secret report:

“Failure to provide financial support to the fund could be considered contrary to the public interest, and might lead to intervention by the Minister for Justice.”

“Could” and “might” are powerful qualifiers here.

How could it be considered contrary to the public interest to require negligent solicitors to pay recompense to their victims?

How could it be conceivable that the Minister for Justice might make up the SMDF shortfall, if that is what is meant?

Of course, it might be that the suggestion is that the Government would force blameless solicitors to pay for the wrongful actions of blameworthy solicitors.

How could that be lawful, not to say unlikely?

The members of the Law Society of Ireland, and, a fortiori, non-member solicitors, had no role in the regulation, management or general supervision of the SMDF.

How could any Minister for Justice think that legislation (because nothing less would suffice), intended to selectively assign general social losses on innocent solicitors, would survive a court challenge?

Surely the Law Society ought to be taking the lead in challenging the very notion that a Minister could lawfully seek to do such a thing?

Surely the Law Society should immediately place the “confidential report” on its website so that its members might feel more like professional people rather than mushrooms in a cloche.

SMDF: Questions for the Law Society

1. Has the Law Society received legal advice that it may lawfully bailout the SMDF?

2. Has the Law Society received legal advice that it may lawfully levy the cost of the bailout of the SMDF on solicitors?

3. Has the Law Society received legal advice that it may lawfully make that levy without any statutory power additional to its current powers?

4. Is any such legal advice based on cited legal authority?

5. What, if any, are the cited authorities?

6. From which branch of the profession does the advice come?

7. Will the Society release to the public the legal advice it has received relating to its proposal to bail out the SMDF?

8. Has the Law Society accessed the financial records of the SMDF?

9. Does the Law Society think that a liquidator should be appointed to SMDF?

10. If not, how does the Law Society think it should be managed and wound up?

11. Is it satisfied that the directors of SMDF are without fault in the collapse of SMDF?

12. Does the law Society think that the current directors should continue to manage SMDF?

13. Does the Law Society think that the Central Bank should be asked to make an independent report on the management of SMDF?

14. Does the Law Society accept that the Insurance Compensation Fund is not accessible by the SMDF?

15. Does the Law Society think that all SMDF reinsurance contracts will fall if SMDF goes into liquidation? If so, why?

16. Does the Law Society share the opinions of its appointed representative, Mr. Stuart Gilhooly, as expressed on twitter, on the subject of the SMDF:

a. that there could be an independent investigation of the SMDF?
b. that payment of individual “excess” money to an SMDF liquidator can be ring fenced and allocated only to secure the benefit of the SMDF reinsurance contracts? In other words, that SMDF can continue in business even in liquidation?
c. That the Law Society has the power to levy its members to bailout the SMDF?
d. By implication, that that power does not extend to non-members?

Can’t pay; won’t pay

The current moment presented by the SMDF/Law Society debacle brings to mind the day Charles J. Haughey addressed the Dail. He quoted a fictional character, Othello;

“I have done the State some service and they know it.”

This was feasible only when addressed to an ignorant audience. Othello was a murderer. He was deceived by Iago, but culpably so. He accepted everything Iago told him and took no opportunity to seek evidence of Iago’s assertions. Othello is in fact the minor character in his eponymous play. Not an exemplar for anyone and not to be quoted by way of self justification, particularly when the dominant note of the quote is self pity.

Currently, the Law Society aspires to be Othello, wronged but seeking vindication vainly. Who has been its Iago?

Should it not look to the available evidence. Is it available?

It is worthwhile examining the legislation empowering (and directing) the Law Society of Ireland to set conditions on the issue of a practising certificate to a solicitor.

HERE is the Statutory Instrument relating to 1998. [SOLICITORS (PRACTISING CERTIFICATE 1998 FEES) REGULATIONS 1997]

For example, the obligation to contribute to the Compensation Fund (designed to compensate victims of fraudulent solicitors) is derived from Section 30 of the Solicitors (Amendment) Act 1994. Without that statutory power the Law Society’s regulation could not be effective to compel the payment of the contribution of that year to the Fund.

The Solicitors Acts do not empower the Law Society to levy charges at the discretion of the Society, on solicitors. The charges levied are stipulated in the statutes.

In short, to repeat, currently the Law Society of Ireland has no power to lawfully compel the payment of the levy to make up the SMDF insolvency shortfall. The payment is not provided for in statute, or even contemplated.

The SMDF debacle

1. The solicitors of Ireland are going to decide an issue (on a postal poll).

2. The issue is whether they should assume responsibility to indemnify some negligent solicitors against claims made, or to be made, against those solicitors. The solicitors are (or were) solicitors “insured” by the Solicitors Mutual Defence Fund Ltd. (SMDF) and against whom successful claims for professional negligence have or will be made.

3. The Council of the Law Society of Ireland is in favour of this idea and sought to get authority to impose the responsibility on the profession by convening a meeting of Law Society members in the City West conference centre in Dublin.

4. There were sufficient members of the Society opposed to the Council’s idea to stymie its plan. The opposition, invoking the Society’s rules, undermined the Council’s meeting and forced remittance of the matter to a decision by postal poll. (Contrary to press report, the “meeting”[which convened anyway] in City West did not remit the matter to the poll).

5. Every practicing solicitor in Ireland is, nowadays, obliged to have insurance cover (PI insurance) for claims arising from the professional negligence of the solicitor.

6. There are a number of entities offering cover of this kind, the SMDF having been one.

7. “Entities” is used here to distinguish SMDF from its rivals, or competitors; they, unlike it, are all authorised insurers, regulated, nominally at least, by the Central Bank of Ireland. The SMDF was not like that. It appears to have been modeled on the structure of UK medical professional defence bodies current at its formation. Those bodies, at that time, denied that they “insured” member doctors, in the contractual sense; they indemnified them in practice, but denied an obligation to do so.

8. It is an astonishing fact that solicitors in Ireland accepted “cover” of such a weak kind, (from SMDF) to protect them when they most need help, but they did.

9. The cover was weak for two reasons; it was discretionary and it was, it seems, unregulated. (Being unlike its rivals/competitors, SMDF liquidators [if appointed] will be unable to access the Insurance Compensation Fund to make up shortfalls).

10. In principle the Law Society’s proposal is very odd. It overlooks the fact that every individual solicitor has paid for professional indemnity insurance. It seems to take for granted that solicitors should be collectively responsible for the negligence of any individual solicitor. This is a new principle; before PI insurance became compulsory, the only person answerable for a solicitor’s negligence was the solicitor at fault (and his/her partners, if any).

11. That SMDF has failed is, of course, of great concern. It was promoted by the Law Society of Ireland. Its directors were, invariably, past Presidents of the Law Society. Arguably, the failure of the SMDF is a failure of the Law Society. But that is not to say that the Law Society’s members are responsible for that failure. The members had no method of seeking accountability for the activities of the SMDF or the Law Society’s failures relating to it. (Even the High Court is constrained here; the Law Society of Ireland is a corporate body, but a very unusual one; it is not subject to the provisions of the Companies Acts. Most of the jurisdiction of the High Court over corporate bodies is derived from those Acts).

12. The Law Society’s proposal is not just odd in principle; it is unsustainable even on a cursory examination of its terms. It assumes that the Law Society or its members has the legal authority to impose a charge on solicitors.

13. The Law Society, in its proposal, intends to make the charge on solicitors a condition of furnishing the annual practicing certificate. In short, it will withhold the certificate if the charge is not paid.

14. The power of granting the certificate is one conferred on the Law Society by statute (the Solicitors Acts 1954-2002).

15. That such a refusal would be unlawful is immediately obvious, for this reason; solicitors do not have to be members of the Law Society.

16. To be a solicitor and to be a member of the Law Society is not one and the same thing. Consequently, what the members of the Law Society decide is irrelevant to the solicitors’ profession.

17. Consequently, it would be unlawful of the Law Society to deny a solicitor a practicing certificate unless he/she paid for the SMDF shortfall.

18. There are other good reasons to question the Law Society’s idea. The profession has no information as to why SMDF is insolvent. It has no information on any investigation, proposed or actual, into the management of SMDF. Without information like that, it is not possible to know exactly who is going to benefit from the Law Society’s proposal. By definition, only solicitors who have been negligent will benefit. Furthermore, given that SMDF asserts that it operates on a “claims made” basis for indemnity and that cover is yearly only and the only possible uncertainty lies with respect to claims which may be made before the end of 2011, the identities of the negligent solicitors in question are known to every practicable degree.

19. Who are they, that the Law Society is anxious to protect them?

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