Fuglers LLP & Ors v Solicitors Regulatory Authority

This is an appeal under Section 49 of the Solicitors Act 1974 against a decision dated 7 January 2013 (“The Decision”) of the Solicitors Disciplinary Tribunal (“the Tribunal”). The First Appellant (“the Firm”) is a West End firm of solicitors. The Second and Third Appellants are its two equity partners, Mr Fugler and Mr Berens.

The Tribunal found charges of misconduct proved against the Appellants and imposed fines in the following amounts:

The Appellants no longer contest the Tribunal’s finding of misconduct, but appeal against the fines imposed by way of sanction, which are said to be in error in three ways:

The Appellants also challenge the Tribunal’s award of costs. The Tribunal ordered the Appellants to bear a proportion of the costs of the Solicitors Regulation Authority (“SRA”) in the total sum of £56,250, split between the Firm, Mr Berens and Mr Fugler in the same proportions as the fines.

The Tribunal also found charges of misconduct proved against Mr Jacob, who was at the time a salaried partner of the Firm, but has since left. Mr Jacob has not appealed the Decision.

At the material time the Firm comprised five partners, a consultant solicitor, and five assistant solicitors. It handled a significant amount of commercial work and commercial property work, as well as acting on the panel of a professional indemnity insurer and various banks. Its turnover in the past four years was approximately £1 million per year. Mr Fugler and Mr Berens managed the Firm, and were (and remain) the only two equity partners, the other partners being salaried. Both are experienced solicitors. Mr Fugler is 66 and has been a solicitor for 43 years. Mr Berens is 51 and has been a solicitor for 25 years. The Firm, including in particular Mr Berens, had previous experience in acting for footballers and football clubs. This included dealing with insolvency matters for football clubs.

The Appellants faced five charges. The first four, which were found proved, were made against each of them in the following terms:

The fifth allegation was made against the two partners and was that they acted recklessly. The Tribunal acquitted the partners on this charge.

The relevant part of Rule 15 referred to in the second charge was Rule 15 note (ix) of the Solicitors’ Accounts Rules 1998 which was in the following terms:

“(ix)

In the case of Wood and Burdett (case number 8669/2002 filed on 13 January 2004), the Solicitors Disciplinary Tribunal said that it is not a proper part of a solicitor’s everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not. Solicitors should not, therefore, provide banking facilities through a client account. Further, solicitors are likely to lose the exemption under the Financial Services and Markets Act 2000 if a deposit is taken in circumstances which do not form part of a solicitor’s practice. It should also be borne in mind that there are criminal sanctions against assisting money launderers.”

The relevant part of Rule 14 of the Solicitors’ Code of Conduct 2007 referred to in the third charge was in the following terms:

“(1)

The business of a recognised body may consist only of the provision of:

(a)

professional services of the sort provided by individuals practising as solicitors and/or lawyers of other jurisdictions;…….”

All the charges arose in relation to the same conduct. The gravamen of the charges was that the Appellants had allowed the Firm’s client account to be used by a client of the Firm, Portsmouth City Football Club Limited (“the Club”), as a banking facility over a period between 5 October 2009 and 8 February 2010. During this period the account had been used to receive payments in from the Club and others, and to transfer out many payments to service the Club’s day to day trading activities. A total of about £10 million passed through the account in this way over the four month period. The transactions took place via two client ledger accounts which were set up for that purpose. Throughout that period, the Club’s banking facilities had been withdrawn by its bank because HMRC had presented a winding up petition on 1 October 2009. Mr Berens was aware of the petition shortly after 5 October 2009. The winding up petition was subsequently withdrawn on 12 November 2009, but a second petition was presented by HMRC on 22 December 2009.

Throughout the period the Club was in a perilous financial state and subject to negotiations for its purchase by a consortium of potential buyers, for whom the Firm was also acting. In February 2010 the Firm ceased to act for the Club and the Club entered a Company Voluntary Arrangement which was formally approved in June 2010. The company, Portsmouth City Football Club Limited, went into liquidation later that year, and the football club continued its activities through another corporate structure.

The approach to appeals against sanction imposed by a Solicitors Disciplinary Tribunal has been considered in a number of cases including in particular Bolton v The Law Society[1994] 1WLR 512, Salsbury v The Law Society [2009] 1 WLR 1286, and Solicitors Regulation Authority v Anderson [2013] EWHC 4021 (Admin), from which the following principles may be derived:

There are two aspects of insolvency law which are relevant to the conduct under consideration in the present case. The first is section 127(1) of the Insolvency Act 1986 which provides:

“In a winding up by the court, any disposition of the company’s property… made after the commencement of the winding up is, unless the court otherwise orders, void.”

The commencement of winding up, which triggers the potential operation of the provision, occurs when a winding up petition is presented, although the invalidity of the disposition which the section provides for only takes effect if a subsequent winding up order is made. The invalidity is subject to the court ordering otherwise, and the court may make such a validation order either retrospectively, or in advance before a disposition is made upon an application by an interested party. It is not uncommon in insolvencies for interested parties to make prospective applications for such validation orders prior to a disposition being made.

The other insolvency aspect of relevance is peculiar to football clubs who are members of the Football League. The Football League itself, and its member clubs, enter into a series of agreements whose effect is what is colloquially known as “the Football Creditor Rule”. In briefest summary, the effect is that the revenues of a football club from certain sources, for example from television or the sale of players, is all held by the Football League; the Football League will not release the money to the club except on certain terms which require the club to use such monies for certain designated purposes or to face penalties including expulsion from the Football League; one of those purposes is to pay off first, and if possible in full, a category of creditors of the club who are designated as “football creditors” in the event of insolvency, in preference to debts to others.

Subsequent to the conduct of the Appellants which is in issue in this appeal, the Football Creditor Rule was considered in a judgment of David Richards J in HMRC v The Football League and Others[2012] EWHC 1372 (Ch), in which a challenge was brought by HMRC. In rejecting such challenge, David Richards J described the rule in the following terms:

“1.

These proceedings concern the so called “football creditor rule” operated by The Football League Limited (the FL). Its purpose and effect is to ensure that in the event of a member club becoming insolvent particular classes of creditors, such as other clubs in the FL, the club’s players, managers and other employees and the FL itself, are paid in full in priority to any other creditors. These preferred creditors are called “football creditors” by the FL. It means, the FL acknowledges in its evidence, that football creditors will be paid in full before, for example, the St John Ambulance which provides first aid at many clubs’ grounds during matches.

2.

The football creditor rule has been subject to a good deal of criticism, in Parliament and in the courts as well as from commentators. It was heavily criticised in a report of the Culture, Media and Sport Committee of the House of Commons dated 29 July 2011 which recommended that it should be abolished, by legislation if necessary. In his recent judgment on an application for an administration order in relation to Portsmouth Football Club (2010) Ltd (17 February 2012), Norris J said:

“I understand the disquiet from the creditors. The general body of taxpayers, and the ordinary consumers who do pay their energy bills, and the ordinary traders and professionals who provide services such as, from the creditor list, coach hire, catering, medical services, ground care and maintenance, must wonder why they should subsidise the club’s wage bill, why it is that they are involuntarily lenders to the club of their outstanding bills and why they will only get back pence in the pound for the services they have provided.”

3.

These proceedings are not concerned with whether giving priority to football creditors is socially or morally justified. The issue is one purely of law, whether the provisions which together accord this priority are void and of no effect on the grounds that they are contrary to insolvency law. The challenge is brought by The Commissioners for Her Majesty’s Revenue and Customs (HMRC) who submit that the relevant provisions conflict with two fundamental principles of insolvency law.”

The two principles engaged were the pari passu principle, which requires the assets of an insolvent person to be distributed amongst the creditors on a pari passu basis, subject only to such exceptions as the general law may permit. Parties are not free to contract out of the operation of the principle except by the creation of security over a debtor’s assets. The pari passu basis of distribution is intended to ensure that all unsecured creditors will receive the same percentage of their debts out of the available assets. The second principle is what is commonly called the anti deprivation rule, which renders void any provision by which a debtor is deprived of assets by reason of insolvency with effect that they are not available in the insolvency proceedings. Section 127 of the Insolvency Act 1986 is one of the provisions which gives effect to both these principles.

The effect of the Football Creditor Rule is to distort these principles so as to grant more favourable treatment to football creditors. In the context of actual or potential insolvency, football creditors can be paid out in full to the disadvantage of unsecured creditors notwithstanding that such football creditors do not have secured debts which would otherwise attract preferential treatment under the general law.

Before the Tribunal, the Appellants argued that they were not in breach of the Rules as charged, and had not committed any misconduct. The argument of Miss Foster QC on their behalf was summarised in paragraph 21.12 of the Decision in the following terms:

“21.12.

Ms Foster QC submitted the exemption [section 327(2) & (4) of the Financial Services and Markets Act 2000] allowed solicitors to do some acts if they were incidental to the work carried out. In this case the First, Second and Third Respondents had been engaged in order to effect the successful transfer of PCFC, assist it to survive if possible and discharge its debts. She submitted Rule 15 note (ix) did not define a banking facility and that in this case the transactions carried out by Fuglers were ancillary work. There was a distinction between acting as a mere bank and acting where knowledge and expertise was required. Mr Berens had given advice on who should be paid and when, and Fuglers’ client account had not been used for a nefarious purpose.”

The Tribunal addressed the issue and made its relevant findings of fact in the following paragraphs:

“21.17.

The Tribunal did not accept that the Football Creditors Rules were in the minds of the Respondents at the time these transactions had taken place, and rejected the assertion that allowing Fuglers’ client account to be used in this way was ancillary to the work being carried out. It was particularly pertinent that throughout the SRA’s interviews, there was no reference at all to the Football Creditors Rules. It was also relevant that, although submissions had been made that this work was ancillary to the firm’s retainer, no evidence of the actual terms of that retainer had been produced. It appeared from the evidence that Fugler’s work was to ensure the salvation and survival of PCFC; however, the Tribunal had been provided with no documents to confirm or to demonstrate the nature and extent of the legal transaction that Fuglers had been instructed to deal with. It was clear to the Tribunal that the Respondents’ main concern, in allowing their client account to be operated as they did, was to try and keep PCFC afloat.

21.18.

The Tribunal then considered the nature of the payments that had passed through Fuglers’ client account. Mr Berens on cross examination had accepted that not every financial movement was in relation to an underlying legal transaction. During his interview with Mr Grehan, Mr Berens had stated in response to a question asking “…did the firm operate a banking facility for [PCFC]?”:

“The answer to that question is regrettably the firm did operate a bank facility for the club and with the benefit of hindsight that was a breach of Rule 15. Unfortunately the firm did not appreciate at the time that it was in breach of Rule 15.”

Mr Berens also stated:

“…In relation to the specifics it is accepted that in respect of some of those payments there was no underlying legal transaction as regards which the firm had been engaged to act on behalf of the club.”

The Tribunal noted Mr Berens had subsequently resiled from these admissions...

……….

21.25.

It was evident from the schedules of payments provided that a mixture of creditors had been paid. Some of those were football creditors and others were not. The non-football creditors included payments to coffee suppliers, laundry services and maintenance/repair fees among other things. Even if the Tribunal were to accept that the Football Creditors Rules were in the minds of the Respondents at the material time, these payments were outside the debts payable under the rules and therefore could not possibly have been made in accordance with those rules. Furthermore, while some payments were made where there may have been underlying legal transactions, there were also a number of payments made from those accounts where it was blatantly obvious that there could have been no underlying legal transaction. It was hard to see how payments to coffee suppliers and for laundry services could be connected to any legal transaction. The nexus of such payments was too remote from the core purpose of any legal work.

21.26.

The broader mischief of Rule 15 note (ix), and Wood and Burdett, was not only to protect client funds, but also to protect a solicitor in that a solicitor should not allow funds to be placed in his client account which required the solicitor to make judgments (without particular reference to any transaction) on where the money should be paid, or how it should be utilised, and then subsequently make those payments from his client account, particularly in circumstances where control of that money was still with the client. The Tribunal did not accept that the app1ication of the Football Creditors Rules allowed a solicitor to make decisions about which creditors should be paid in preference to others and having made such decisions, then to make those payments from funds being held in the solicitor’s client account. The facts of this particular case demonstrated some of the mischief that a proper application of the rule seeks to avoid. The Second Respondent had taken responsibility to make judgments about which creditors should be paid and had actually made those payments from Fuglers’ client account. This had clearly led to a number of difficulties where there were competing claims on the funds from HMRC, investors and various other creditors. In addition to these difficulties there were also the attendant risks associated with the complications of two winding up petitions, the potential engagement of Section 127 of the Insolvency Act 1986, and an undertaking given during the currency of the arrangements which caused practical difficulties between the Respondents themselves requiring them to notify a potential claim to their insurers.

21.27.

The Respondents had no meaningful oversight of the creditors paid because, as demonstrated by the documents provided, Mr Jacob, as a director of PCFC, provided Fuglers with schedules containing details of creditors to be paid, and these creditors were then paid from the client account regardless of who they were, be itcreditors under the Football Creditors Rules or otherwise.

21.28.

The Tribunal had not seen evidence of the retainer between PCFC and Fuglers so it was not at all clear exactly what the nature of the legal work that Fuglers had been instructed to carry out actually was. The Tribunal had already rejected the submission that making payments to various creditors, particularly those who were non-football creditors, was ancillary to any legal work being carried out. The Tribunal was therefore not satisfied that these payments from Fuglers’ client account were incidental to the provision of professional services and that the Respondents could rely on any such exemption under the Financial Services and Markets Act 2000. The Tribunal found that the Respondents could not rely on a blanket protection based on a retainer being in place which enabled these payments to be made as ancillary to that work. There had to be a reasonable nexus between the nature and scope of activity and the original retainer, and in this case the Tribunal found that was not the position. Payments in the ordinary course of the business of creditors, whether football creditors or not, could not be said to be linked to insolvency advice on the facts of this case.

21.29.

It was clear that the Respondents, when making these payments from their client account, had done so with the intention of ensuring the survival of PCFC against the backdrop of PCFC’s bank account being frozen. The Tribunal was satisfied that the comments made by Mr Berens and Mr Jacob during their interviews with Mr Grehan in April 2011, and the content of Mr Berens’ letter to his insurers dated 2 November 2010, were all an accurate reflection of the true position. The Tribunal was satisfied that the Respondents, by allowing their client account to have been used in this way, had indeed provided a banking facility to PCFC. This had been an improper use of Fuglers’ client account which was contrary to Rule 15 note (ix) of the Solicitors’ Accounts Rules 1998 and contrary to Rule 14 of the Solicitors’ Code of Conduct 2007. The Tribunal found allegations 1.1, 1.2 and 1.3 all proved against all the Respondents.”

In relation to the fourth charge of acting in a way which was likely to diminish the trust the public placed in the Appellants and the profession contrary to Rule 1.06 of the Solicitors’ Code of Conduct 2007, the Tribunal’s findings against the Appellants were recorded in paragraph 22.1 of the decision in the following terms:

“22.1.

In this case, HMRC had started proceedings in the High Court of Justice and were clearly aggrieved by the manner in which PCFC’s company voluntary arrangement had been dealt with in contravention of the insolvency principles as they saw them. The Tribunal had already found the Respondents had allowed their client account to be improperly used as a banking facility and that there had been competing demands on the money in that account. The Tribunal was satisfied that members of the public, who were aware that a solicitor’s account had been used as a technical device to deprive creditors of their funds, and to favour certain creditors over other creditors in particular circumstances, would take a dim view of such conduct and that this behaviour did, or was likely to diminish the trust and confidence placed in the profession. Accordingly, the Tribunal was satisfied that allegation 1.4 was proved against the First, Second and Third Respondents, Fuglers, Mr Berens and Mr Fugler.”

In relation to the fifth charge alleging recklessness against Mr Fugler and Mr Berens, the Tribunal rejected the allegation of recklessness in the following paragraphs:

“23.1.

The parties had all agreed on the correct definition of “recklessness” which was contained in the case of R v G and another [2004] 1 AC where it had been held:

“…it had to be shown that the defendant’s state of mind was culpable in that he acted recklessly in respect of a circumstance if he was aware of a risk which did or would exist, or in respect of a result if he was aware of a risk that it would occur, and it was, in the circumstances known to him, unreasonable to take the risk…”

…………..

23.3.

The Tribunal heard evidence from Mr Berens in which he confirmed that he had telephoned the SRA on 7 January 2010 as he had been concerned about the position. He had outlined the work that Fuglers were doing including receiving monies on behalf of a client and dispersing payments and he confirmed that at no time did the SRA raise Rule 15 with him. He had considered the relevant rules, case law and had discussed the matter with Mr Fugler when he made his decision.

……………

23.6.

The Tribunal was not satisfied that these Respondents had acted recklessly. It was clear to the Tribunal that the Second and Third Respondents, Mr Berens and Mr Fugler, had given the matter some considerable thought. The Tribunal accepted Mr Berens had considered the relevant cases, read the appropriate rules, discussed the issue with Mr Fugler and had gone so far as to telephone the SRA for guidance. Whilst Mr Berens, Mr Fugler and Mr Jacob may have under estimated the risks attached to their course of conduct this fell short of acting recklessly. The Tribunal found allegation 1.5 not proved.”

In dealing with the sanction to be imposed, the Tribunal noted at paragraph 26 that there had been no previous disciplinary matters against any of the Appellants and continued:

“27.

Ms Foster QC referred to the Tribunal’s Guidance Note on Sanctions and submitted that the public had not been harmed, public confidence in the profession had been maintained and that proportionality must be considered. It was accepted Mr Berens had got it wrong but there were no aggravating features. The motivation behind the conduct had been entirely proper and the mitigating factors set out in the Guidance Note did not appear to be directed to a case of this sort. Mr Berens and Mr Fugler had an unblemished career that they were proud of and, at the hint of criticism from their regulator, they had accepted that there had been a rule breach if that was what they were told. They had co-operated with the regulator throughout and their appearance before the Tribunal was a matter of extreme discomfort, regret and sorrow. There was no risk of such conduct occurring again and the Tribunal was reminded that the case involved a particularly difficult rule where the exact obligation was not set out clearly in the correct context. The Tribunal was referred to a number of character references in relation to Mr Berens and invited to make no order in this case.

……..

31.

The Tribunal had considered carefully the submissions made on behalf of all the Respondents, the documents it had been referred to, the character references provided and evidence given. The Tribunal referred to its Guidance Note on Sanctions when considering sanction. The Tribunal also had due regard to the Respondents’ rights to a fair trial and to respect for their private and family life under Articles 6 and 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms.

32.

Although the Respondents appeared to have underestimated the significance and adverse consequences of using their solicitors’ client account as a banking facility, the Tribunal took the view that this was a very serious case. Solicitors’ client accounts were the bedrock of the profession. These Respondents, and particularly the First and Second Respondents, Fuglers LLP and Mr Berens, the latter of which had made the decision to allow the use of the client account in this manner, had exposed the Respondents to a number of potential dangers that solicitors should avoid. Sums in excess of £10 million had passed through their client account and payments had been made to third parties, which had ultimately led to Mr Berens writing to Fuglers’ insurers on 2 November 2010 and notifying them of a potential claim.

33.

Mr Berens had accepted that he had taken the decision to allow PCFC to utilise Fuglers’ client account. This placed him in a different position from both Mr Fugler and Mr Jacob. Mr Berens had allowed the client account to be used knowing full well that PCFC’s own bank had frozen PCFC’s account. In freezing the account the bank was fully aware of the consequences of a winding up petition and the risks the bank could be exposed to if transactions were allowed to take place through that account in the event that insolvency proceedings ensued. As events developed there were indeed competing claims on the funds held in Fuglers’ client account from HMRC, other investors and various other creditors. In addition to these issues, there were the additional risks associated with the complications of two winding up petitions, section 127 of the Insolvency Act 1986 and disputes between investors of PCFC which eventually led to the matter being transferred to another firm of solicitors. Although Mr Berens had taken the view that any dispositions would subsequently be validated by the court should any application be made under the Insolvency Act 1986, he had still exposed Fuglers and their insurers to the risk that they may not be validated. Huge sums of money had been involved and there was a potential that a large number of claims could have been made as a result.

34.

In the case of HMRC v Portsmouth City Football Club Ltd (in administration), Andronikou, Kubik and Keily, Mr Justice Mann had stated:

“16…. It is alleged that this device was adopted to avoid the inconvenience of the club’s bank account being frozen on the presentation of the petition (because of the operation of section 127 of the 1986 Act); and it is said that Fuglers did not feel themselves to be under the same constraints as banks….”

Fuglers’ client had been used as a banking facility from 5 October 2009 until 8 February 2010, a period of over four months, during which huge amounts of money had passed through it. The Tribunal took the view that in light of all the circumstances of this case, the breaches were not trivial or technical but were very serious indeed. Mr Berens had allowed PCFC to avoid the consequences it faced when presented with the winding up petitions, in that PCFC was able to continue trading and making payments through the use of Fuglers’ client account in substitution for the use of PCFC’s own bank account which had been frozen, when PCFC would not otherwise have been able to do so. This was in effect a device which was not a proper use of a solicitors’ client account and it had exposed the Respondents to a serious risk in relation to the use of that account, such that creditors could claim that they had been deprived of receiving funds which they might otherwise have received. A solicitor’s client account should only be used for the receipt of money which was directly connected to the legal work the solicitor was carrying out on behalf of the client. The Tribunal had found that such a connection did not exist here to any sufficient extent. The Respondents had grossly underestimated by their actions the risk and damage that could have been caused. This was accordingly not a case where no order or reprimand were appropriate or proportionate.

35…. The Tribunal had found allegations 1.1, 1.2, 1.3 and 1.4 proved against Mr Fugler. However, it had been conceded by Mr Berens that, although he had consulted Mr Fugler about the use of the client account, Mr Berens had made the actual decision to allow the account to be used in the way it had. The Tribunal decided that the appropriate sanction in this case was to fine each of the Respondents, including the First Respondent, Fuglers LLP, which was an individual recognised body entity, in whose name the client account had operated. The Tribunal Ordered the First Respondent, Fuglers LLP be fined £50,000 and the Second Respondent, Mr Berens, be fined £20,000, such amounts reflecting the seriousness of their misconduct. The Tribunal took into account the Third and Fourth Respondents, Mr Fugler and Mr Jacob, had been less culpable in that they had not made the actual payments respectively, and accordingly Ordered they both be fined £5,000 each. ”

On behalf of the Appellants, Miss Foster QC submitted that the Tribunal had made a finding of fact which constituted an error of law because it was not supported by its reasoning and was so contrary to the evidence as to be perverse. This was the finding at the beginning of paragraph 21.17 that the Tribunal did not accept that the Football Creditor Rule was in the minds of the Appellants at the time that the transactions had taken place. It is clear from the terms of this paragraph that the finding was based to a significant extent on the Tribunal’s view that throughout the SRA interviews there had been no reference at all to the Football Creditors Rule. This was an error. Mr Berens had referred to it in one answer, as was accepted on behalf of the SRA before me. The error is more readily understandable because the transcript of the relevant hearing has the initials of the speaker transposed so as not to make clear that it was, as is now accepted, Mr Berens.

Mr Cunningham QC on behalf of SRA submitted that the finding was nevertheless one which was open to the Tribunal, having heard Mr Berens give evidence and being in the best position to assess his credibility, such that it could not be said that there was an error of law or that this court should interfere. Miss Foster QC submitted that it was inherently improbable that a solicitor of Mr Berens’ experience could have failed to have in mind the effect of the Football Creditor Rule. In my view it does not inexorably follow from Mr Berens’ previous experience in football work that he had the Rule specifically in mind when deciding to allow the client account to be used as a banking facility. Whether or not he did was a matter for the Tribunal to judge with the advantage of seeing him give evidence and be challenged on the point in cross examination. Having considered the evidence, and the transcript of the cross examination (which is an inadequate substitute for observing it taking place), I have concluded that the Tribunal’s finding was open to it on the evidence. It cannot be said that the evidence was incapable of supporting the finding or that the finding was perverse.

My conclusion on this point is not critical to the outcome of the appeal. The Tribunal addressed the position on the alternative hypothesis of accepting that the Football Creditor Rule was in the minds of the Appellants at the material time (see paragraph 21.25 and, for example 21.26), and as appears below, my conclusions do not depend to any significant extent on the effect of the Football Creditor Rule.

There are three stages to the approach which should be adopted by a Solicitors Disciplinary Tribunal in determining sanction. The first stage is to assess the seriousness of the misconduct. The second stage is to keep in mind the purpose for which sanctions are imposed by such a tribunal. The third stage is to choose the sanction which most appropriately fulfils that purpose for the seriousness of the conduct in question.

In assessing seriousness the most important factors will be (1) the culpability for the misconduct in question and (2) the harm caused by the misconduct. Such harm is not measured wholly, or even primarily, by financial loss caused to any individual or entity. A factor of the greatest importance is the impact of the misconduct upon the standing and reputation of the profession as a whole. Moreover the seriousness of the misconduct may lie in the risk of harm to which the misconduct gives rise, whether or not as things turn out the risk eventuates. The assessment of seriousness will also be informed by (3) aggravating factors (eg previous disciplinary matters) and (4) mitigating factors (eg admissions at an early stage or making good any loss). These considerations are reflected in The Solicitors Disciplinary Tribunal Guidance Note on Sanctions issued in August 2012 at paragraphs 13 to 17.

At the second stage, the tribunal must have in mind that by far the most important purpose of imposing disciplinary sanctions is addressed to other members of the profession, the reputation of the profession as a whole, and the general public who use the services of the profession, rather than the particular solicitors whose misconduct is being sanctioned. In Bolton v The Law Society[1994] 1WLR 512 Sir Thomas Bingham MR stated the guiding principles as follows, at pp 518-519:

“it is required of lawyers practising in this country that they should discharge their professional duties with integrity, probity and complete trustworthiness…. Any solicitor who is shown to have discharged his professional duties with anything less than complete integrity, probity and trustworthiness must expect severe sanctions to be imposed upon him by the Solicitors Disciplinary Tribunal. Lapses from the required high standard may, of course, take different forms and be of varying degrees. The most serious involves proven dishonesty, whether or not leading to criminal proceedings and criminal penalties. In such cases the tribunal has almost invariably, no matter how strong the mitigation advanced for the solicitor, ordered that he be struck off the Roll of Solicitors. Only infrequently, particularly in recent years, has it been willing to order the restoration to the Roll of a solicitor against whom serious dishonesty had been established, even after a passage of years, and even where the solicitor had made every effort to re-establish himself and redeem his reputation. If a solicitor is not shown to have acted dishonestly, but is shown to have fallen below the required standards of integrity, probity and trustworthiness, his lapse is less serious but it remains very serious indeed in a member of a profession whose reputation depends upon trust. A striking-off order will not necessarily follow in such a case, but it may well. The decision whether to strike off or to suspend will often involve a fine and difficult exercise of judgment, to be made by the tribunal as an informed and expert body on all the facts of the case. Only in a very unusual and venial case of this kind would the tribunal be likely to regard as appropriate any order less severe than one of suspension.

It is important that there should be 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 tempted to behave in the same way. Those are traditional objects of punishment. But often the order is not punitive in intention. Particularly is this so where a criminal penalty has been imposed and satisfied. The solicitor has paid his debt to society. There is no need, and it would be unjust, to punish him again. In most 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. This purpose is achieved for a limited period by an order of suspension; plainly it is hoped that experience of suspension will make the offender meticulous in his future compliance with the required standards. The purpose is achieved for a longer period, and quite possibly indefinitely, by an order of striking off. 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. To maintain this reputation and sustain public confidence in the integrity of the profession it is often necessary that those guilty of serious lapses are not only expelled but denied readmission. If a member of the public sells his house, very often his largest asset, and entrusts the proceeds to his solicitor, pending reinvestment in another house, he is ordinarily entitled to expect that the solicitor will be a person whose trustworthiness is not, and never has been, seriously in question. Otherwise, the whole profession, and the public as a whole, is injured. A profession’s most valuable asset is its collective reputation and the confidence which that inspires.

Because orders made by the tribunal are not primarily punitive, it follows that considerations which would ordinarily weigh in mitigation of punishment have less effect on the exercise of this jurisdiction than on the ordinary run of sentences imposed in criminal cases. It often happens that a solicitor appearing before the tribunal can adduce a wealth of glowing tributes from his professional brethren. He can often show that for him and his family the consequences of striking off or suspension would be little short of tragic. Often he will say, convincingly, that he has learned his lesson and will not offend again. On applying for restoration after striking off, all these points may be made, and the former solicitor may also be able to point to real efforts made to re-establish himself and redeem his reputation. All these matters are relevant and should be considered. But none of them touches the essential issue, which is the need to maintain among members of the public a well founded confidence that any solicitor whom they instruct will be a person of unquestionable integrity, probity and trustworthiness. Thus it can never be an objection to an order of suspension in an appropriate case that the solicitor may be unable to re-establish his practice when the period of suspension is past. If that proves, or appears likely, to be so the consequence for the individual and his family may be deeply unfortunate and unintended. But it does not make suspension the wrong order if it is otherwise right. The reputation of the profession is more important than the fortunes of any individual member. Membership of a profession brings many benefits, but that is part of the price.”

Those statements were made in a case in which the solicitor had not been guilty of deliberate dishonesty or conscious impropriety, but had acted in a way which the tribunal characterised as naïve and foolish in disbursing the sums received on behalf of his client, as prospective purchaser of a property, to the vendor, in anticipation of completion which did not then take place. Once the shortage on the client account was discovered it was promptly made good by the solicitor. It was this conduct which Sir Thomas Bingham had in mind in characterising it as falling below the required standards of integrity probity and trustworthiness and remaining very serious indeed in a member of a profession which depends upon trust. The Court of Appeal held that his conduct merited the penalty imposed by the tribunal of suspension from practice for two years.

As this and other authorities make clear, although two elements of the sanction’s purpose may be to punish the solicitor in question and to deter repetition of similar or other misconduct by him, these are not the main purposes. The primary purpose of the sanction is to deter others and uphold the reputation of the profession (see e.g. Andersonper Treacy LJ at [72]). In determining sanction the tribunal will properly have in mind the message which the sanction will send to other solicitors for the purposes of promoting and maintaining the highest standards by members of the profession, and the high standing of the profession itself in its reputation with the public at large. This latter aspect engages not only the public’s confidence in the standards maintained by practising solicitors, but also its confidence in the organs of a self regulating body to conduct effective and fair disciplinary regulation.

At the third stage, the tribunal will first consider which category of sanction is appropriate from the range which is available to it. Under Section 47 (2) of The Solicitors Act 1974, these include the following, in ascending order of severity:

Another category of penalty available to the tribunal is to attach conditions to the firm’s or solicitor’s continued practice. Depending on the particular circumstances and the conditions being considered, this may fall, in terms of the hierarchy of severity, above, below or between a fine and suspension from practice.

Where a fine is the appropriate category, factors which will influence the appropriate level of fine will include the following:

Submissions

On behalf of the SRA, Mr Cunningham QC supported the Tribunal’s characterisation of the breaches as very serious indeed (para 34) by reference to five aspects of the relevant conduct.

On behalf of the Appellants, Miss Foster QC advanced the following points as diminishing the seriousness of the misconduct:

Mischief

In determining seriousness, it is convenient to start by considering the mischief at which the prohibition in note (ix) to Rule 15 is aimed. There appear to me to be at least three strands.

The first strand is that it is objectionable in itself for a solicitor to be carrying out or facilitating banking activities because he is to that extent not acting as a solicitor. If a solicitor is providing banking activities which are not linked to an underlying transaction, he is engaged in carrying out or facilitating day to day commercial trading in the same way as a banker. This is objectionable because solicitors are qualified and regulated in relation to their activities as solicitors, and are held out by the profession as being regulated in relation to such activities. They are not qualified to act as bankers and are not regulated as bankers. If a solicitor could operate a banking facility for clients which was divorced from any legal work being undertaken for them, he would in effect be trading on the trust and reputation which he acquired through his status as a solicitor in circumstances where such trust would not be justified by the regulatory regimen: see Patel v SRA per Cranston J at [34]. Such behaviour has the potential to cause significant damage to the standing of the profession. This is all the more so if the solicitor is not merely allowing the client to use the client account to pay trade debts, but is himself involved in directing the payment of creditors and making the decisions as to who should be paid, as Mr Berens was in this case. Moreover such conduct involves determining or implementing commercial decisions as to which creditors should be paid when, and whether some creditors should be paid in priority to each other, as a matter of timing or at all. Even in the absence of any risk of insolvency, that is not an activity for which a solicitor is qualified or regulated, and the more favourable treatment of one creditor ahead of another may attract criticism and opprobrium which is capable of damaging the solicitor’s standing and that of the profession.

In my view it is for these reasons that irrespective of a risk of the abuse of the account for money laundering, providing banking facilities through a client account is objectionable per se. Rule 15 note (ix) has subsequently been changed so that the relevant prohibition is now contained in Rule 14.5 of the SRA Accounts Rules 2011 which provides:

“You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”

Although the rule was not in force in that form at the time of the events with which this appeal is concerned, the rule in its current form fairly encapsulates the principles which were enumerated in Wood and Burdett and Rule 15 note (ix), as is made clear in the judgment of the Divisional Court in Patel v SRA: see paragraphs [34], [35], [40], [42], [43] and [45].

The second strand is that allowing a client account to be used as a banking facility, unrelated to any underlying transaction which the solicitor is carrying out, carries with it the obvious risk that the account may be used unscrupulously by the client for money laundering. This was the danger referred to in paragraph 58 of the Tribunal decision in Wood and Burdett (8699/2002) which is referred to in note (ix) itself. That this was one of the dangers at which the rule was aimed is reinforced by the express mention in note (ix) of the criminal sanctions attaching to money laundering. See also Patel v SRA[2012] EWHC 3373 (Admin) per Cranston J at [34] and Moore-Bick LJ at [40].

The third strand arises in the particular context of insolvency or risk of insolvency. In such context, to allow a client account to be used as a banking facility is objectionable for several reasons. In the first place, it allows the client to achieve that which the client will normally be unable to achieve from any bank. It is the common practice of banks, as happened with the Club’s bank in this case, to withdraw facilities upon notification that there has been a winding up petition. The solicitor is therefore giving the client a commercial service which would otherwise be unavailable to it through the device of using a solicitor as if he were a bank. Secondly there is the risk of disaffection and opprobrium which is involved in favouring one creditor over another. This exists in the absence of any risk of insolvency, but becomes more acute in the event of insolvency or potential insolvency. This arises irrespective of whether dispositions would or would not be subject to invalidity by the operation of section 127. A third reason is the risk of section 127 applying so as to require creditors to reimburse payments from the client account in a subsequent liquidation. A solicitor who knowingly makes or facilitates such payments may be subject to a personal liability, quite apart from the liability of the payee to reimburse the amount transferred. That is why banks usually withdraw banking facilities when they are notified of a winding up petition. A solicitor can eliminate the section 127 risk by seeking prospective validation under section 127 for all payments through the account, but that is not what Mr Berens did in this case.

Conclusions on the seriousness of the misconduct in this case

The important factors which increase the seriousness of the misconduct in this case are the following:

Against these considerations must be set the mitigating features relied upon by Miss Foster QC which I have summarised above, which go some way to diminishing the seriousness of the misconduct.

Miss Foster QC submitted that the Tribunal did not adequately set out its reasoning for reaching its conclusions on sanction, in that it failed to take account of the mitigating factors and failed to identify the dangers and risks which it regarded as contributing to the seriousness of the offence. In my view, this is not a fair criticism. The mitigating features were properly summarised in paragraph 27 of the Decision. The Decision as a whole, including in particular paragraphs 22.1 and 34, contained the matters which the Tribunal regarded as rendering the misconduct very serious and requiring the imposition of substantial fines. In substance those reasons largely coincide with the matters I have set out above.

In my judgment the misconduct is properly to be characterised as serious. It was sufficiently serious to justify a sanction which sends a clear message, so as to deter similar conduct by anyone in the future, that permitting a client account to be used as a banking facility in this way and on this scale is not misconduct of a technical kind, but misconduct which has the potential to cause real and substantial damage to the profession and its members. It was sufficiently serious that the Tribunal might reasonably have considered imposing a suspension.

It follows that if there was to be no suspension, it was appropriate for the Tribunal to impose the highest level of fine consistent with taking into account the Appellants’ financial circumstances and the overall financial consequences of the Decision.

Since 2009 there has been no statutory limit on the amount of a fine which may be imposed by a Solicitors Disciplinary Tribunal. On behalf of the Appellants, Miss Foster QC drew attention to the fact that the total fines in this case of £75,000 were the largest ever imposed by such a tribunal, and by some margin. The material before me suggested that the previous highest fines had been one of £40,000 in 2013 and two of £25,000 each in 2012. That does not of itself assist the Appellants because in other cases, different financial circumstances might have precluded a fine at a higher level, or it may have been thought necessary to impose a suspension. What matters is whether the amount of the fines can properly be regarded as clearly inappropriate in the circumstances pertaining to these particular Appellants and the seriousness of their misconduct.

Miss Foster QC relied on the level of fines imposed in the Patel and Anderson cases. In Patelthe tribunal’s fine of £7,500 was not interfered with on appeal. In Anderson the court increased the fines imposed by the tribunal to £15,000 for one individual and £5000 each for four other respondents, those being headline figures which were to be subject to potential adjustment by the tribunal on a remission to take account of evidence of the means of the respondents. The circumstances of each of those cases was somewhat different, and in my view less serious than the misconduct of the Appellants in this case. Moreover Andersonwas an appeal by the SRA, in which the fines were increased, with the result that the fines imposed do not necessarily represent the upper limit of an appropriate range. No doubt the court had in mind the considerations which cause the Court of Appeal Criminal Division, when increasing sentences on an Attorney-General’s Reference, to impose sentences which are lower than those which might reasonably have been imposed by the sentencing judge originally.

In a witness statement put before the court on the appeal (without objection), Mr Berens explained the adverse effect which the finding of misconduct had had on the Firm’s business. In financial terms such loss, although difficult to quantify with any precision, can properly be characterised as significant rather than substantial. Account must also be taken of the burden of costs falling on the Appellants in addition to the fines imposed.

The Tribunal did not have figures as to the personal finances of Mr Fugler or Mr Berens, nor as to the Firm’s turnover or profits, although it may have been in a position to make an educated guess as to the latter. Mr Berens’ statement before the court said that the Firm’s turnover for each of the last four years was £1 million and that firms of solicitors typically make a 15% profit, although he did not divulge the Firm’s actual profits. I was not made aware of the size of the fees received by the Firm from the Club and the consortium. In those circumstances, a total fine of £75,000, being six months profits for a notional firm making a 15% profit on an annual turnover of £1 million, is not a disproportionately large sum.

If there was to be no suspension, a very substantial fine was called for to mark the seriousness of the misconduct and in order to send a message to the profession in relation to the use of client accounts, which is a matter of central importance in the regulation of solicitors’ conduct. I do not consider that a total fine of £75,000 for the misconduct in question was disproportionate or excessive, let alone clearly so.

Miss Foster QC submitted that the extent of Mr Fugler’s involvement was such that he ought not to have been subject to any personal sanction. Mr Berens’ evidence had been that he had had a conversation with Mr Fugler when he learnt that the Club’s bank account had been frozen, during which they discussed the position and Mr Berens’ opinion that the Firm could act in the way in which it subsequently acted. Mr Fugler obviously sanctioned that course. The Tribunal was entitled to conclude, as it did in paragraph 23.6, that Mr Fugler as well as Mr Berens had given the matter some considerable thought. He was the most experienced of the two, although the matter was being handled by Mr Berens, and was personally involved in sanctioning the course of conduct in this way although he had no dealings in what happened on a day to day basis over the subsequent four months. In those circumstances it could not be said to be clearly inappropriate that he should be subjected to a personal fine, or that the sum of £5,000 was disproportionate or excessive.

Miss Foster QC submitted that by imposing a sanction on the two equity partners individually, as well as upon the Firm, the individuals were in effect subjected to double jeopardy since they would personally bear both elements, and that this was unfair. It was submitted that there was no justification for imposing a fine on the Firm itself, which had merely acted through its relevant partners who were themselves fined for their misconduct. Any force this submission might have had falls away with my finding that a total fine of £75,000 was not clearly inappropriate or excessive. However I should emphasise that there was no error in the Tribunal imposing a penalty on the Firm, as distinct from its partners. The Firm is the regulated entity. Imposing a sanction on a firm, rather than the individuals, may result in the sanction becoming more readily known and appreciated by other members of the profession. There was no error in the Tribunal apportioning the overall fine of £75,000 in the way it did so as to fine the Firm as the regulated entity, and the individuals by reference to their personal degree of involvement in, and responsibility for, the misconduct in question.

Under the Solicitors (Disciplinary Proceedings) Rules 2007 the Tribunal is given a wide discretion in relation to costs, as rule 18(1) demonstrates:

“The Tribunal may make such order as to costs as the Tribunal shall think fit…”

Rule 18(3) allows the costs to be quantified either by the Tribunal or by a detailed assessment by a costs judge.

Before the Tribunal, the SRA sought all its costs in the total sum of £78,906.39, supported by a schedule of costs containing a breakdown. The Tribunal considered that although the Appellants had succeeded in relation to the allegation of recklessness, it was not unreasonable for the SRA to have pursued that allegation on the documents and the admissions made during interview. It recognised that the test of recklessness advanced by the SRA had been incorrect, and that some time had been occupied in relation to an issue in relation to Mr Jacob which had not been properly pleaded. The Tribunal concluded that the total costs awarded should therefore be reduced to £60,000. These were apportioned between these appellants as follows:

Miss Foster QC submitted that a greater reduction should have been made, in an amount of at least one third, as opposed to the reduction made which amounts to just under a quarter. She did not identify any error of principle in the exercise of the discretion, or any factors which the Tribunal erroneously took into account or failed to take into account. There are therefore none of the circumstances in which this court can interfere with the exercise of a discretion by a tribunal which was well placed to make the relevant assessment after conducting a four day hearing. This is especially so since the adjustment which the court is asked to make is in an amount of less than 10% of the costs.

For these reasons the appeal is dismissed.