This practice note concerns transactions where multiple client investors aggregate funds pre investment. It does not address the regulatory implications of a solicitor holding third party funds. These are addressed in a Practice Note dated 3 July 2020: Moneys received from third parties. Solicitors should have regard to all relevant Practice Notes from the Law Society dealing with client monies.[1] The illustrative scenario guidance set out in this Practice Note is subject always to S.I. No. 118/2023 - Solicitors Accounts Regulations 2023 (the Regulations)

Practitioners will need to comply with the Regulations when transferring or holding funds in the context of a transaction and must only hold clients’ moneys as defined in the Regulations in their client account. Practitioners should only accept or receive funds into the Client Account from investors who are clients of the practice in relation to the relevant transaction.

Practitioners may be familiar with the following scenario:

A company looking to raise up to €1 million to fund future development gets the agreement in principle of a lead investor, who indicates that he will invest €500,000 subjected to the company raising at least another €300,000 to be invested at the same time on the same terms. A similar scenario may arise in relation to the acquisition of a property or indeed any form of investment.

Typically, the lead investor will instruct a solicitor to advise the lead investor on the transaction. The company or buyer etc. will seek to secure commitments for the further €300,000 from one or more parties who will not necessarily be known to each other or to the lead investor.  Additional investments may be agreed to by a number of parties investing varying amounts.    

One or more of such other investors may not wish to instruct solicitors to act for them given that they might be a minority investor having regard for the total amount being invested.

The solicitor acting for the lead investor may, in such circumstances, be asked to hold the monies of the other investors, as well as its client the lead investor.  Practitioners should note that monies can only be held for these other investors where they are also clients of the solicitor[2].

The circumstances in which a solicitor holds pre-investment funds are generally varied which means that this guidance note is not definitive (an investment of funds by unsophisticated private individuals to purchase a property is different to commercial investment funds to invest in a company).  There are a number of factors which practitioners should consider before agreeing to any such proposal, including but not limited to:

1. Firms which hold the monies on the basis of an agreed solicitor-client relationship are better placed to avoid disputes outside their terms of engagement and at lesser risk of exposing a situation in which an investor later alleges that his money was released when it ought not to have been. Each practitioner must satisfy him/herself with respect to the existence of a substantive solicitor-client relationship when agreeing to hold or transmit funds.

2. Consideration should be given to a precise mechanism to trigger release of funds and the manner in which instructions and advice are taken and given.

   In the example above, the lead investor might be satisfied to complete and release to transfer its €500,000 when the company has raised a further €250,000.  Firms which have not precisely documented the manner of release (for example, when it is agreed that the firm will give advice to and take instructions only from a lead investor, without the necessity to obtain individual permissions) may have to deal in future years with an argument that the other investor was unaware of this instruction by the lead investor and would not have agreed to it. Such an argument may arise where the investments have been unsuccessful and may arise in any event, but the risk can be mitigated by careful drafting of engagement letters and confirmations given by investors, including for example, that the engagement letter is addressed to and sent to all clients.

3. Solicitors should be mindful of conflicts of interest.

   In the example above, a lead investor may have additional motivations for an investment to proceed and may have greater protection afforded to it in the investment documentation or a greater tolerance for risk based on advice received. Solicitors should consider whether the parties’ interests are aligned and whether it is appropriate in all the circumstances to act for multiple client investors in the matter, with appropriate waivers or disclosures are in place. Consideration should be given as to duties to clients if a conflict of interest becomes apparent during the engagement and the engagement letter should specify the firm’s rights in this event.

4. Although not a current risk, consideration should be given to ensuring that the firm is not liable for the application of negative interest rates, bank charges or for failure to seek favourable deposit rates.

5. While this is obvious, firms should ensure that their communications with their banks and administrative assistance are in line with the real issues involved in bank transfers and the expectations of clients and others, which should be managed appropriately.

6. In many jurisdictions, lawyers do not hold client or other funds and there appears to be a growing reluctance to do so among Irish firms on account of the significant regulatory and administrative burden and the inherent risks involved. Solicitors should consider if their fee arrangement considers the associated costs, expenses and risk of holding and transmitting client funds in these cases.

Queries and feedback

If you have any comments or queries in relation to this Practice Note, please contact the Business Law Committee Secretary.

[1] See also Law Society August 2024 Practice Note- Transferring completion funds in commercial transactions

[2] The July 2020 Practice Note is very clear on this issue: “…where moneys are received from third parties that are not moneys received for or on account of a client or clients, these moneys do not come within the definition of clients’ moneys. It is therefore a breach of the Regulations for a solicitor to pay such moneys or allow such moneys to be paid into the client account…..”A solicitor has an obligation to identify and verify the identity of clients and to make such enquires into the source of funds…”