If Greece goes bust, what will happen to client money?
As the spectacle of potential Greek bankruptcy unrolls before our eyes, we should put ourselves in the shoes of our Greek lawyer colleagues.
The main impact of the crisis so far has been on younger lawyers, and those with small firms. Clients have no money to pay. If there are court cases, then the lawyer has to find the court fee and the VAT out of his or her own pocket, with little chance of recovery from the client. Overall, business is bad.
The big firms may not be affected to the same extent by client poverty, but if there is a Grexit they need to be worried now about what happens to the client money they hold. If you are a Greek lawyer with the possibility of a meltdown within a few days, what do you do? You might try hurrying the transaction, so that the client’s money is used for the intended purpose before possible national bankruptcy. If and when national bankruptcy occurs, two further events might follow.
First, as happened with Cyprus, all bank accounts might be frozen. Your client’s money is inaccessible, with obvious consequences for the transaction to which it is tied. Second, all deposits might be subject to a haircut once accounts are re-opened.
Haircuts raise interesting questions for clients’ money. The money is not the lawyer’s, but the client’s. Is the lawyer liable to the client for the loss incurred while it was in the lawyer’s safekeeping? That would mean that the client would suffer no loss, but the lawyer would suffer the client’s loss instead. Does it make a difference if national bankruptcy was obviously on the horizon – in other words, is there a duty of care on the lawyer to take steps to protect the money (or to advise the client of the risk) if there are clear warning signals, as there have been here?
I don’t know what advice, if any, is being given on this by the various Greek bars, which are the relevant competent authorities. I am told that when Cyprus faced similar events, the local bar managed to obtain a release from the haircut for lawyers’ client funds.
Interestingly, the Solicitors Regulation Authority issued a warning notice a few days ago about missing client money. It does not deal specifically with haircuts, but among its warnings are: ‘You have a duty to ensure that client money is safe’. The notice also refers to other principles such as ‘protecting client money and assets’ and making sure that ‘clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them’.
The Greek legal profession is not the only group of lawyers worrying about Grexit, though. The EU is itself beginning to confront the possibility. But there is an interesting legal conundrum. It is possible to leave the EU after a two-year negotiation period, but it is not possible to leave the eurozone without leaving the EU first.
So if Greece drops out of the euro, it has to leave the EU – but that can only be done after two years. In any case, while some member states would apparently face a Greek departure from the eurozone with equanimity, no one believes that Greek departure from the EU would be a good idea. We might all be saved, though, since Article 352 of the Treaty (the flexibility clause) allows the council, on a proposal from the European Commission and with the consent of the European Parliament, to adopt whatever measures it deems appropriate, even if there is no legal basis.
I imagine that there will be the usual euro-fudge. That may be for the best. It is in no one’s interest, in my view, for Greece to leave the EU. And fudge would save the difficult questions about clients’ funds.
But would euro-fudge be sufficient for the Greek economy to recover so as to bring paying clients back to young lawyers and small firms?