Hazelhurst & Ors v Solicitors Regulation Authority

This is an appeal against orders made by the Solicitors Disciplinary Tribunal (“the SDT”) in respect of four appellants, Brian Hazelhurst, Christopher Murphy, Stephen David Garrett, Martyn Robert Brown. At the material time they practised together with other partners at Fanshaw, Porter & Hazelhurst Solicitors (“the Firm”). The appeal is brought as of right pursuant to s.49(1)(b) of the Solicitors Act 1974, as amended (“the Act”).

Between 3 February 2003 to 4 May 2006, an employee of the Firm, Ms Morley, stole £102,826.99 from the Firm’s client account and a further £1,331.00 from the office account. The thefts were discovered by chance, the matter was investigated by the Firm who self-reported to the Solicitors Regulation Authority (“the SRA”). The SRA investigated the matter as a result of which the four appellants were charged with two breaches of the Solicitors Accounts Rules 1998 (“SAR 1998”) and one breach of the Solicitors Practice Rules 1990 (“SPR 1990”). The appellants pleaded guilty to all charges.

The charges against the appellants were that they had:

At the original hearing in June 2009 the SDT announced its decision and in January 2010 produced a written determination. The sanction imposed was that each appellant was to pay a penalty of £4,000.00, a costs order of £13,000.00 was made, it being joint and several. No appeal is raised as to the costs order.

The appellants rely upon six grounds of appeal:

In essence, the case on behalf of the appellants is that the SDT failed to give reasons for such findings as it made and for the sanction it imposed. It is contended that what should have been contained within the judgment was:

In support of the submissions reliance was placed upon the authority of English v Emery Reinbold & Strick Ltd and others [2002] 1 WLR 2409. Lord Phillips of Worth Matravers MR, as he then was, gave the judgment of the court. At paragraph 16 onward he stated:

“16.

We would put the matter at its simplest by saying that justice will not be done if it is not apparent to the parties why one has won and the other has lost.

17.

As to the adequacy of reasons, as has been said many times, this depends on the nature of the case…

18.

…if the judgment does not make it clear why the judge has reached his decision, it may well be impossible within the summary procedure of an application for permission to appeal to form any view as to whether the judge was right or wrong…

19.

It follows that if the appellate process is to work satisfactorily the judgment must enable the appellate court to understand why the judge reached his decision. This does not mean that every factor which weighed with the judge and his appraisal of the evidence has to be identified and explained. That the issues of the resolution of which were vital to the judge’s conclusion should beidentified and the manner in which he resolved them explained…”

As to the sanction itself, reference was made to the authority of Bolton v The Law Society [1994] 1 WLR 514, in particular the passage from the judgment of Sir Thomas Bingham MR, as he then was, at page 518:

“It is important that there should be a full understanding of the reasons why the Tribunal makes orders which might otherwise seem harsh. There is, in some of these orders, a punitive element: a penalty may be visited on a solicitor who has fallen below the standards required of his profession in order to punish him for what he has done and to deter any other solicitor to behave in the same way. Those are the traditional objects of punishment. But often the order is not punitive in intention…in those cases the order of the Tribunal will be primarily directed to one or other or both of two other purposes. One is to be sure that the offender does not have the opportunity to repeat the offence…the second purpose is the most fundamental of all: to maintain the reputation of the solicitors’ profession as one in which every member, of whatever standing, may be trusted to the ends of the earth.”

The respondent relied upon the authority of The Law Society v Salsbury [2008] EWCA Civ 1285, in particular, paragraph 30 of the judgment of Jackson LJ:

“From this review of authority I conclude that the statements of principle set out by the Master of Rolls in Bolton remain good law, subject to this qualification. In applying the Bolton principles the Solicitors Disciplinary Tribunal must also take into account the rights of the solicitor under article 6 and 8 of the Convention. It is now an overstatement to say that “a very strong case” is required before the Court will interfere with the sentence imposed by the Solicitors Disciplinary Tribunal. The correct analysis is that the Solicitors Disciplinary Tribunal comprises an expert and informed Tribunal, which is particularly well placed in any case to assess what measures are required to deal with defaulting solicitors and to protect the public interest. Absent any error of law, the High Court must pay considerable respect to the sentencing decisions of the Tribunal. Nevertheless if the High Court, despite paying such respect is satisfied that the sentencing decision was clearly inappropriate then the Court will interfere. It should also be noted that an appeal from the Solicitors Disciplinary Tribunal to the High Court normally proceeds by way of review; CPR Rule 52.11 (1)”.

The respondent submits:

Further, it was submitted that a financial penalty of £4,000.00 in relation to each of the appellants was appropriate and within the sentencing discretion of the SDT. It cannot be said that the penalty imposed by the SDT was “clearly inappropriate”. Indeed, the penalty imposed by the SDT could fairly be described as lenient and the appellants should consider themselves fortunate that a more severe penalty was not imposed. This is a clear case in which the court should not interfere in sentence and should uphold the orders of the SDT.

The Firm employed Sarah Morley between May 1998 and May 2006. She was initially employed as a secretary but rose within the Firm to the position of fee-earner, she was a member of the Institute of Legal Executives. On 22 May 2006 it was discovered, by chance, that Ms Morley had been stealing monies from client funds. Subsequent inquiries by the Firm revealed widespread misuse of private funds. The Firm immediately self-reported the matter to the SRA. The Firm appointed a locum to examine its files in order to identify the full nature and extent of the misuse of funds by Ms Morley. The SRA also instituted its own investigation. The result of the SRA investigation revealed a minimum cash shortage on the client bank account of £102, 826.99. This occurred as a consequence of:

All monies have been repaid to the accounts by partners within the Firm. The SDT and this court were informed that indemnity insurance was insufficient for this purpose, as a consequence the partners of the Firm paid between £80-90,000.00 in order to meet the liabilities. No client of the Firm suffered any loss. There is no suggestion that any appellant was involved in dishonest practice.

Ms Morley was dismissed from employment by the Firm in May 2006. In the proceedings before the SDT she was the fifth respondent. She did not appear and had failed to respond to the communications from the SDT or the SRA.

The case against the appellants was founded upon the breaches of the Solicitors Accounting Rules and a breach of the Solicitors Practice Rules, namely a failure to supervise an employee who was discovered to be dishonest.

At the original hearing in June 2009 the SDT provided brief reasons for the sanction which they imposed as follows:

“So far as Mr Hazelhurst, Mr Murphy, Mr Garrett and Mr Brown are concerned, we were very concerned that there was a complete breakdown of supervision here. We have all had good employees, or what we thought were good employees, but we have all dealt with clients’ money and, although it has been repaid, you have to be particularly careful and on the lookout all the time to see that everything is done properly. We have, therefore, imposed a monetary penalty, and I will read the order against Mr Hazelhurst. The orders against Mr Murphy, Mr Garrett and Mr Brown are in exactly the same terms.”

The written findings which are dated January 2010 comprise a 45 paragraph Determination. Paragraphs 1-42 contain a recital of the facts and a summary of the submissions of the applicant and the respondents. Paragraphs 43-45 are as follows:

“The decision of the Tribunal

43.

Having considered all the evidence and the submissions of the Applicant and on behalf of the Respondents, the Tribunal found three allegations against the First, Second, Third and Fourth Respondents both admitted and proved and the allegation against Ms Morley proved. The Tribunal was satisfied that Ms Morley’s conduct had been dishonest by the standards of reasonable and honest people and that she herself had realised that by those standards her conduct had been dishonest.

44.

The Tribunal was extremely concerned both by the breaches of the Accounts Rules and by the lack of adequate supervision of an un-admitted member of staff. In the Tribunal’s view the lack of a tight and rigorous control of cheque requisitions and a system of file review contributed to the insufficient supervision of Ms Morley. It was vital for the reputation of and trust in the profession that client monies were held strictly in accordance with the Solicitors’ Accounts Rules.”

Paragraph 45 recites the penalty.

The forensic investigation unit of the SRA carried out an inspection of the appellants’ books of accounts, it produced a report dated 31 July 2007. It was found that the books of account were not in compliance with the SAR 1998. The respondent accepts that the evidence of non-compliance were the thefts perpetrated by Ms Morley.

By a letter dated 19 September 2007 Mr Brown, on behalf of all appellants, wrote to the SRA and stated:

“As a Firm we have to accept that, with the benefit of hindsight, the supervisory arrangements in place at the time that Ms Morley was employed were not sufficiently robust.”

One of the appellants was the nominal head of the non-contentious partners and as such, supervised the work of Ms Morley. Within the forensic investigation report it was noted that the partner conceded that whilst Ms Morley brought to him work with which she had difficulty, he did not supervise her work on a day to day basis. He carried out random reviews of the files on a monthly basis but not all of those files he selected were available for review. It was submitted on behalf of the respondent, that alone should have been a matter of some concern. It was the basis of the admission, on behalf of the partner, that his reviews had not identified any problems but he now appreciated that he had reviewed files from an incomplete set. During the relevant period, the partner in question was suffering from health problems and was not always in the office, in his absence another partner dealt with Ms Morley’s queries.

During the course of the hearing, one of the members of the SDT stated that the procedures which were allowed to exist at the time, namely permitting cheques to be drawn to a clearing bank, contributed to the money being removed. The point being made by the SDT member was that the supervising partner should have looked at the cheque and considered whether it was appropriate to sign it.

The transcript of the original hearing does not identify other references to specific breaches of supervision found by the investigation or raised by members of the SDT. It was clear from the submissions made by Mr Goodwin, on behalf of the respondent, that considerable reliance was placed upon the fact that the appellants had admitted a failure to supervise and the fact of thefts over a lengthy period of time, of itself, raised an inference of inadequate supervision.

The appellants relied upon two matters:

In short, the acceptance of a failure to supervise, which was made primarily on the basis of a fraud carried out over a period of three years, had to be balanced against the fact that others had failed to identify any wrong-doing and that such wrong-doing was perpetrated by a member of staff whose conduct had given no cause to question her honesty.

The original oral finding of the SDT, that there was a complete breakdown of supervision, does not begin to address the points made on behalf of the appellants. The written findings which made reference to “the lack of a tight and rigorous control of cheque requisitions” and “a system of file review” which contributed to the insufficient supervision of Ms Morley, would appear to be based upon the interventions of the SDT member as to the drawing of cheques on a clearing bank and the appellants’ admission of the limited nature of the file review.

I am satisfied that there was evidence upon which the SDT could find that there was “a lack of tight and rigorous control of cheque requisitions” which contributed to the lack of supervision of Ms Morley. I find that there was evidence of inadequacies in the system of file review, whether those inadequacies were sufficient to lead to a finding of a lack of a system of file review is, in my view, open to doubt. Such a finding was not consistent with the report of the forensic investigation. In my view, such a general finding does not fairly represent the limited evidence before the SDT.

In its written Determination, the SDT did not specifically address the appellants’ submissions:

The breaches of the Accounts Rules are breaches of strict liability offences. The fact that these offences were allowed to take place raises a strong inference of lack of supervision. It was precisely to deal with that inference that the appellants raised the specific points which went to the core of their case on breaches, particularly, the failure to supervise.

In my view, the SDT failed in their written reasons to adequately address the submissions of the appellants as to why it was the thefts went undiscovered for a period of three years. A statement that all the evidence and submissions have been considered is plainly inadequate to deal with specific submissions properly made and based upon unchallenged evidence. In failing to address the appellants’ submissions, the SDT did not provide adequate reasons for their findings as to breaches of the Rules and specifically the lack of supervision.

By reason of the matters set out in paragraphs 28 to 30 above, I am satisfied that the SDT failed to give any reasons for its apparent refusal to take into account any of the mitigating factors it referred to in its judgment and accordingly allow the first ground of appeal. As the matters relied upon by the appellants in this ground of appeal go to the core of their case, of itself, it provides a sufficient reason for this court to revisit the decision of the SDT. As to the second and third grounds of appeal, for the reasons given in paragraph 27 above, I do not allow the second ground of appeal but I do allow the third ground of appeal.

The powers of the SDT as to sanction are contained in s.47 of the Solicitors Act 1974, as amended. S.47 (2) provides that:

“The Tribunal shall have power to make such order as it may think fit, and any such order may in particular include provision for any of the following matters

(a)

the striking off the roll of the name of the solicitor to whom the application or complaint relates;

(b)

the suspension of that solicitor from practising indefinitely or for a specified period;

(c)

the payment by that solicitor or former solicitor of a penalty….which shall be forfeit to Her Majesty;”

It was accepted by both parties that the SDT had power to issue a reprimand and that was the order which it was contended on behalf of the appellants, was appropriate in all the circumstances.

Mr Mitchell, on behalf of the appellants, accepted that the court would not easily interfere with the sentence of a professional disciplinary body but relied upon the authority of Macleod v The Royal College of Veterinary Surgeons [2006] UKPC 39. In that case, the brevity of the committee’s consideration of the issues relating to sanction, as contained in its Determination, permitted the court to examine afresh the appropriateness of the penalty imposed.

The only reasoning as to why a financial penalty was appropriate is contained in the transcript of the original hearing when the SDT observed:

“So far as Mr Hazelhurst, Mr Murphy, Mr Garrett and Mr Brown are concerned, we were very concerned that there was a complete breakdown of supervision here. We have all had good employees or what we thought were good employees, but we have all dealt with clients’ money and although it has been repaid, you have to be particularly careful and on the look out all the time to see that everything is done properly. We have, therefore, imposed a monetary penalty.”

The reference to a “complete breakdown of supervision” is dealt with at paragraph 26 above. Thereafter, it is difficult to understand how the SDT decided that a monetary penalty was appropriate. No mention of other sanctions is made, no reason is given for the sum imposed nor how such sum is apportioned as between the three breaches so as to permit the respondents or indeed members of the public to understand what degree of seriousness should be attached to any given breach of the professional rules.

The absence of any or any adequate reasoning by the SDT as to why the sanction of the financial penalty was appropriate, the amount of that penalty and specifically in respect of any breach, how much of that penalty applied, renders it impossible for this court to determine whether the considerations of the SDT which led to the financial penalty were fair and/or reasonable. It follows that the fourth, fifth and sixth grounds of appeal are allowed.

It is of note that the SDT has not published Indicative Sanctions Guidance. Such guidance identifies the purpose, parameters and range of sanctions. It permits those who appear before it to better understand the proceedings and the thinking of the SDT. It assists the transparency of the proceedings. Such guidance has been used by other regulatory bodies for some years and is a valuable reference point both for the tribunal and for those who appear in front of it, as practitioners or advocates.

It is agreed between the parties that if the court is minded to allow the appeal, the proportionate course is for this court to decide the matter of sanction. Neither party sought to argue that this case should be remitted to the SDT for further consideration.

It was contended on behalf of the appellants that in the circumstances the issues for the SDT and the court in considering sanction were (1) had the appellants put in place a mechanism which would ensure that there was no chance of a repetition of Ms Morley’s conduct; and (2) had the appellants behaved in such a way that the SDT could be satisfied that the public would continue to trust these members of the profession.

Specifically, it is submitted that account should be taken of the following factors when determining sanction:

On behalf of the respondent, it is said that the purpose of regulation is to afford safeguards and exercise control. Solicitors have the privilege and responsibility of holding sometimes very large sums of clients’ money in client account. It is in the public interest and for the benefit of those solicitors and the clients that solicitors should be subject to very strict rules governing the handling of that money. Client account is sacrosanct, there should never be a shortage. When shortages arise, the funds of all clients are at risk. Solicitors must at all times comply with the Rules. It is vital for the reputation of, and trust in, the profession that clients’ monies are held strictly in accordance with the Rules. It cannot be said that the sanction of £4,000.00 was clearly inappropriate, indeed objectively it could be said that the penalty was lenient.

There is no issue between the parties as to the principles applicable to the imposition of sanction in this case. It is imperative for the good standing and confidence in the profession that solicitors who have the responsibility of handling clients’ monies in client accounts should be held responsible for any breaches. Within that principle has to be an assessment based upon the facts of each case. Fundamental to that assessment in this case is the fact that no appellant has behaved dishonestly. When evidence of dishonesty became apparent, the Firm collectively and individually took steps to ensure that a detailed investigation was carried out and full reparation was made. The Firm and its solicitors behaved properly in self-referring the matter to the SRA, it has taken steps to ensure these events are not repeated. The admitted breaches are to be balanced against the fact that in scrutinising books of account and/or files, independent auditors and a representative of the Law Society failed to detect the dishonesty perpetrated by Ms Morley.

The responsibility of the appellants for the breach and the need to maintain public confidence in the profession require the imposition of a sanction. Determination of the appropriate sanction requires account to be taken of the appellants’ conduct. Conduct which positively reflects upon the appellants’ character can be viewed by the public as evidence of their own trustworthiness. I regard their conduct as identified in paragraph 43 above as such evidence. Each appellant has made his own financial reparation; as a result no client has suffered. This latter fact is relevant to the question of whether a financial penalty is appropriate.

I am satisfied that the sanction of a reprimand is appropriate to reflect the nature and circumstances of the breaches and the conduct of the appellants. The maintenance of public confidence in the profession does not require a greater penalty. Further, as each appellant has personally contributed monies to ensure that no client of the Firm has suffered loss, in the particular circumstances of this case the imposition of a financial penalty is not appropriate.

Accordingly, I quash the orders of the financial penalties made by the SDT. For each breach the sanction I impose is a reprimand. To that extent, this appeal is allowed.