Scott v Solicitors Regulation Authority

This is an appeal against the determination of the Solicitors’ Disciplinary Tribunal (the SDT), brought pursuant to section 49 (1) (b) of the Solicitors Act 1974.

It centres on the finding by the SDT that the appellant acted without integrity. On behalf of the appellant, Mr Timothy Kendal submits the SDT applied the wrong test in determining that issue, focusing purely on objective considerations rather than subjective ones, and that this error vitiates the SDT’s determination. Other grounds of appeal have now been abandoned and I need say nothing more about them. In relation to sanction, again there is one point only, which is that the sanction that was applied, of striking off, was excessively harsh and clearly inappropriate.

For the reasons that follow I would dismiss the appeal both on the merits and as to sanction.

The appellant was born on 9 March 1968. He was admitted a Solicitor on 2November 1992. At all material times he practised as a Member of Key 2 Law LLP (the firm). On 15 August 2012, Mr Gary Page, an investigation officer with the Solicitors Regulation Authority (the SRA), the respondent to this appeal, began an inspection of the firm’s accounts. He produced a Forensic Investigation Report on 5 October 2012. On 23 November 2012, the SRA resolved to intervene into the firm and to close it down. The appellant has not practised since that date. On 29 October 2013 these proceedings were issued against the appellant. On 1 April 2014 he was declared bankrupt. The hearing at the SDT took place between 2 and 5 June 2014. The appellant was represented and gave evidence. The SDT ordered that he be struck off the Roll of Solicitors and pay costs fixed in the sum of £42,500.00 The SDT issued its written judgment on 23 July 2014 filed with The Law Society on 24 July 2014; and the appellant issued this appeal on 14 August 2014.

This appeal was originally listed to be heard in March 2015; it has been adjourned twice since then: once because the appellant wanted to obtain more transcripts of the hearing before the SDT, and then, to await the outcome of the decision in Solicitors Regulation Authority v Chan[2015] EWHC 2659 (Admin), which it was thought might have some bearing on the issues raised in this case. No stay of any part of the Order was made however pending the determination of this appeal.

The appellant faced five allegations or charges centring on three issues: his failure to co-operate with the SRA, his breaches of Solicitors Accounts Rules and conduct obligations; and his failure properly to manage the affairs of the firm. The relevant rules and principles are set out as an Appendix to this judgment.

The charges were as follows.

Charges 3 and 4 (which essentially covered the same allegations) were formulated in that way because some of the relevant transactions spanned a period covered by the Solicitors Code of Conduct 2007 and then by the SRA Principles 2011 and the SRA Accounts Rules 2011 which came into force on 6 October 2011.

The first four charges were put as ones of dishonesty, though it was the SRA’s case that it was not necessary to establish dishonesty to substantiate them.

Shortly before the hearing, the appellant admitted some, but not all of the matters alleged against him. In respects it is not necessary to detail, his admissions were limited to only some of the underlying facts against him. He denied however that he had acted dishonestly as alleged or at all or that he had acted without integrity. Specifically, in relation to each charge, his response was as follows:

Charge 1: He admitted that he had failed to respond substantively to the SRA to certain requests for information which the SRA was entitled to (and which were needed for its investigation), and thus that he had failed to deal with the SRA in an open and timely and cooperative manner albeit various explanations and excuses were proffered for his failure to do so, and that he had thereby acted in breach of Principle 7.

Charge 2: He denied being in breach of Rule 22 of the SAR 1998 and/or Rule 20 of the SRA Accounts Rules 2011. His case was that every transfer was properly authorised.

Charge 3: He admitted he had permitted money to pass into and out of client account when not accompanied by the conduct of a legitimate underlying legal transaction in breach of Rules 1.03 (Footnote: ¹) and 1.06 (Footnote: ²) of the Solicitors Code of Conduct 2007 and note (ix) to Rule 15 of the SAR 1998. (Footnote: ³) He denied however that he had acted in breach of Rule 1.02 of the Solicitors Code of Conduct 2007.

Charge 4: He admitted being in breach of Rule 14.5 of the SRA Accounts Rules 2011 (Footnote: ⁴); and that in so doing, he acted in breach of Principles 3 (Footnote: ⁵) and 6 (Footnote: ⁶) of the SRA Principles 2011, but denied that he acted in breach of Principles 2 (Footnote: ⁷) and 10 (Footnote: ⁸) of the SRA Principles 2011.

Charge 5: He admitted that there had been financial mismanagement of his firm in breach of Principle 8 of the SRA Principles 2011, as evidenced by the firm’s debt to HMRC of £232,317, which had led to the failure of the firm.

The appellant’s overriding explanation (or excuse) for his conduct was that he believed in the honesty of a man called Mr Bartholomew White (BW); and in the legitimacy of BW’s use of the various client accounts (and monies in them) with which the charges were concerned. He also relied on particular personal and family problems he was facing at the material time.

In the event however, the charges as formulated, were found to be substantiated. In relation to the issue of honesty, the SDT found that the appellant’s conduct was objectively dishonest, but that the subjective requirement for dishonesty was not met. In this connection, the SDT referred to the test for dishonesty in Twinsectra v Yardley[2002] UKHL 12, where it was said that “before there can be a finding of dishonesty, it must be established that the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest.” However, the SDT concluded that his conduct lacked integrity because, in summary, he showed no regard at all for his obligation to protect client money and assets.

The facts which gave rise to the proceedings are set out at great length in the judgment of the SDT, which runs to more than 50 pages; but I need only set them out in outline, focusing in particular on the matters which led to charges 1.2, 1.3 and 1.4 since it was these issues that led to the SDT’s conclusions on the appellant’s integrity, or lack of it.

The charges related to two matters, which were connected. The first concerned a company called Key 2 Claims (London) Ltd (“K2C”) and in particular the use of the client account ledger, K75/3; the second concerned a company called Applied 3 D Technologies Ltd (“A3DT”) and the dissipation of monies paid into the client account.

K2C was one of a number of companies using the “Key 2” name, set up and run by the appellant and his wife. K2C’s registered office was at the firm. One of the directors was “Key 2 Directors Ltd” the Directors of which were the appellant and his wife. K2C attracted potential claimants who were aggrieved at their treatment by credit card companies. The person engaged to generate this work was BW. BW was not a lawyer but was described as a consultant. He was not however employed by the firm, nor was he its agent, but he was involved, amongst other things, in the marketing exercise which gave rise to the work. According to the appellant, he had been introduced to BW by a client in 2010, and there developed a “mutual interest” in undertaking Consumer Credit Act (CCA) claims. The plan was that if K2C could not resolve the claims then the firm would act in the necessary litigation. Potential claimants made payments to the firm by credit card using the firm’s terminal. These payments were paid into client account. According to the appellant however, he regarded these payments (of £300) as “file opening fees” rather than payments on account, but this was something that was inconsistent with the payments being held in client account.

Between 16 March 2010 and 14 August 2011, the firm received £566,952.44 into the relevant client account. The ledger for this account (the K75/3 ledger) was 75 pages long. However the appellant failed (or was unable) to provide Mr Page with any underlying file in relation to the payments in and out as recorded in the K75/3 ledger (the fact he had failed to provide this information formed part of the case against him in relation to charge 1).

What the K75/3 ledger did show however raised two matters of particular concern: first that payments had been made out of the client account which appeared to be improper, and where there was no underlying legal transaction for them; and secondly, that the payments made from the account were not properly authorised. Thus, payments were made out of the funds received from potential claimants and held in client account (amongst others) to two schools, M and L as school fees (£6,150); to BW (£108,574.81); to the appellant (£23,640); to Harcourt (Nominees) Ltd, a company of which the appellant and his wife were directors (£25,695); to the firm’s office account (£43,375.39) where, notably, there was no evidence that any bill had ever been sent to the client(s) and to a coffee bar business (CB) owned by the appellant’s wife. These improper payments totalled £227,635.20.

On 30 April 2012 a complaint was made to the SRA by a Mr Simon Helliwell whose company had introduced the CCA business to the firm via BW. Over 500 cases had been referred. The thrust of the complaint was this: despite the payments that had been made, the clients had received no service from the firm, or update or information about the progress of their claims whatever, nor had they (or Mr Helliwell) been told what had been done with those client fees. Numerous requests from Mr Helliwell and from the clients for such information had received no substantive response.

The SDT madethe following findings in relation to the ledger. The credit card holders were clients of the firm who had paid money to the firm for services they expected to receive. The appellant should have opened individual client accounts for them, but he had not done so. K2C was also the firm’s client. BW was not. BW had no legal standing to give instructions on behalf of K2C.

The appellant had given evidence to the effect that all of the payments out had been authorised by BW. However K2C had not resolved that BW could give instructions on its behalf. Accordingly, payments out could only properly be made to K2C. The payments to the appellant and his firm were improper as no bills had ever been raised; and in any event, the payments in question were all improper as K2C had not given instructions for them to be made.

The SDT said the appellant had made the K2C ledger available to BW via his cashiers; and BW had authorised the distribution of significant amounts of money to numerous other people. Anyone looking at the ledger would recognise that it was being used as a banking facility without any underlying legal transactions. The appellant had effectively handed over control of receipts and payments to BW; he had accepted instructions “willy-nilly” from BW and had never queried his actions. The appellant had failed to protect clients’ funds; and had shown a lack of integrity. He had not cared at all about what he was instructed to authorise.

As for A3DT, the appellant and his wife were directors of this company, via Key 2 Directors Ltd. The appellant was the shareholder. BW was never a director or shareholder of any of these companies.

Mr Ivor Lanzman (“IL”) had invented a 3D projector. BW advised Mr Lanzman to seek capital investment for his project. In pursuance of this enterprise BW sent a letter dated 8 March 2011 to a Mr M Kisberg (“MK”) soliciting an investment. It was sent on the firm’s notepaper, albeit it gave a false address in Perivale (the address of K2C) and set out the terms on which MK’s money was to be paid to the firm. The appellant accepted he had seen the contents of this letter before it was sent, and that he had approved its contents. The appellant claimed he did not approve it being sent on headed notepaper. However it was obvious from its terms, and it would have been obvious to the appellant that the letter purported to be sent by the firm. The opening words of the letter said: “We act for the above-named company [A3DT] as corporate solicitors and can confirm the following details for your information.”; further, the letter concluded by saying that in the event MK decided to proceed with the investment, any cheques should be made payable to the firm, and marked on the back Re A3DT.

On 15 March 2011 the firm duly received the solicited £20,000 from MK for the purchase of shares in A3DT. Within 3 days of the receipt of those funds, the funds began to be paid away to third parties on the instructions of BW (as could be seen from the client ledger). Beneficiaries of theses improper payments included Harcourt Nominees, a School, BW, IL and the firm itself (as to costs).

By 20 April 2011 the entire sum of £20,000 had been dissipated. On 27 April 2011, solicitors acting for MK wrote to the firm seeking the return of his funds. However, nothing was ever paid. (Footnote: ⁹)

The SDT found that A3DT (not MK) was the client. However the appellant had not exercised any proper stewardship regarding the monies held in client account. MK had been expressly asked to pay money to the firm’s client account and no protection was afforded to him. The appellant had a duty towards MK because it was effectively holding the £20,000 to his order. The payments out were improper because instructions did not come from the client (A3DT) but from BW, and the payments were made in breach of the duty the firm owed to MK.

Further, there had been two improper inter ledger transfers between K75/3 and A3DT ledger. First, an inter ledger transfer of about £13,000 from K75/3 into the A3DT ledger, after the dissipation of the £20,000. This sum of £13,000 was then paid to someone who the appellant believed was BW’s girlfriend at the time. There was also an inter ledger transfer between K75/3 and A3DT, which resulted in a payment to IL. This inter ledger transfer was also improper: since neither payment had been authorised by K2C or A3DT at the material time.

In the light of these facts, the SDT found that charges 2, 3 and 4 were substantiated (charges 1 and 5 were, save in respects not material to this appeal, not contested), and it then went on to consider, separately for each charge, and in detail, the issue of dishonesty. As is obvious from its judgment, when it considered this question, the SDT had full regard to the appellant’s various explanations for his conduct. The SDT found that a reasonable and honest person would consider what the appellant had done to be dishonest. Objectively therefore it concluded his conduct was dishonest.

In respect of the first matter (the K2C client account) the SDT concluded the appellant had allowed money paid by numerous members of the public who believed they were paying money to solicitors for work to be done on their claims, to be paid away, without question, at the direction of someone (BW) who was not even a director of K2C and who had no authority from that company. In respect of the second matter (A3DT) the £20,000 had been dissipated within a month, without any steps being taken to list that company in accordance with the terms under which MK had paid money into the firm’s client account. The manipulation of the two ledgers, by the inter ledger transactions resulting in unauthorised payments was also, objectively dishonest.

£566,952.44 had been received into the K2C client account between 16 March 2010 and 14 August 2011. It was not disputed that the most significant payments which appeared to have no underlying legal transaction took place between 14 April 2010 and 14 November 2011 and totalled £227,635.20 or that K2C had been set up using marketing directed at members of the public which resulted in money going into the firm’s client account. The appellant did not make any checks, but permitted the ledger to be available (through cashiers) to BW and permitted money to pass into and out of a client account when not accompanied by the conduct of a legitimate underlying legal transaction. Anyone looking at the ledger would recognise it was being used as a banking facility and providing banking facilities through client account.

The appellant had effectively handed over control of receipts and payments to BW, who was not a member of the firm, where there was no underlying legal transaction, and allowed the ledger to be used as a banking facility. As I have already said, the SDT concluded that the appellant accepted instructions “willy nilly” from BW. The evidence from the firm’s cashier was that whenever she asked the appellant for authority to accede to BW’s “requests” for payments to be made, he always acceded to them, and there was no evidence he had ever queried them. The SDT found his unquestioning acceptance of BW’s instructions in respect of monies paid by numerous members of the public, to be conclusive evidence that he had failed to protect client assets and funds, in breach of Principle 10 of the Code.

The respondent asked the SDT to accept that that the known facts were consistent only with systemic dishonesty on the part of the appellant. The SDT concluded that the subjective test for dishonesty was not made out. In other words, it said that the appellant did not realise that by the standards of reasonable and honest people, his conduct was dishonest.

The SDT reached this conclusion on the basis that the appellant was “in thrall” or “in awe” of BW; he believed that BW was [the controlling mind of] both K2C and A3DT and accepted instructions from him on that basis. He was also distracted by personal issues, including a significant problem with alcohol, problems in his personal life and substantial litigation in which he was personally concerned.

The SDT found that the appellant did not care what happened to the money in the client account because he considered it was BW’s money; and he was “acting on BW’s instructions”. Though the SDT said, this “mind-set” gave it “great cause for concern” this did not mean the appellant “knew he was dishonest”.

However it decided that by his conduct, the appellant had failed to act with integrity because he showed no regard at all for his obligation to protect client money and assets. The transactions involving the inter ledger transfers involved a lack of integrity on the admitted facts. There was no evidence that the appellant had enquired into the reasons for the transfers or payments out or that he cared at all about what he was instructed to authorise. There was no steady adherence to any kind of ethical code in the operation of the ledgers or the inter ledger transfers. The test for acting with a lack of integrity was an objective one, and the test was satisfied to the required standard.

The SDT’s factual findings are not challenged; and it is now accepted that looked at objectively, the appellant’s conduct was both dishonest and lacked integrity. In essence however, it is submitted that the appellant believed he was entitled to do what he did because of his mistaken belief that BW was the beneficial owner of K2C and A3DT; and that he was complying with the relevant professional rules (which continued until he took independent legal advice in relation to these proceedings). At best therefore he was guilty of misjudgement; and the fact that he was found not to have acted dishonestly, should have led to his “acquittal” of a lack of integrity. The SDT went wrong and its findings on the issue of integrity were flawed, because it failed to approach this issue on that basis.

Some reliance in this context is placed on the fact that when directing itself on the meaning of “integrity” the SDT did so by reference to an inaccurate quotation from Hoodless and Blackwell v. FSA [2003] UKFTT FSM007 (3 October 2003).

Hoodless was a case which involved the application of the regulatory regime provided for by the Financial Services and Markets Act 2000; and para 19 of its judgment, the Financial Services and Markets Tribunal, said as follows:

At paragraph 65.15 of its judgment the SDT however said this:

One explanation for the difference might be that the SDT was quoting from a summary or digest of the effect of Hoodless rather than from the decision itself. But I do not think the difference is material, or that the appellant would have been better off if the SDT had quoted Hoodless accurately, or indeed (presciently) had taken the approach subsequently adopted in SRA v Chan and ors, whereDavis LJ, with whom Ousely J agreed, said this at para 48:

I would respectfully agree with that approach.

Turning to the facts here, the respondent argued and the SDT accepted, that the appellant’s defence (that he followed BW’s instructions) was inconsistent with his professional duties and showed a lack of integrity. There was not one iota of evidence that he had stood back and asked himself if it was right to make payments, sometimes to organisations he did not know. It was telling there was no evidence to support the legitimacy of the transactions. These were serious allegations that went directly to fitness to practice. The extent of the facility afforded to BW was remarkable and even if the appellant’s conduct was not dishonest, this put the allegations at a very high level of seriousness.

There were a number of features of what happened which should be emphasised. The failure to co-operate with the respondent was itself very serious. The appellant was sent a number of emails asking him for information, which was vital to enable his professional regulator to get to the bottom of what had happened, and he ignored them. One result of this lack of co-operation was that the investigator’s interim report, had to stand for a final report at the hearing. Against that background, the appellant’s various complaints, at the hearing, though not before us, that he had been deprived of relevant documentation were particularly hollow ones.

In relation to A3DT, the facts were stark, and on their own, justified the finding of a lack of integrity. The starting point was the appellant’s admission that he had failed to act with independence, his admission that his conduct served to diminish public trust and his admission that he had breached the Solicitors’ Accounts Rules.

The appellant was both A3DT’s shareholder and its director (with his wife) through two of his K2 companies. He knew from the letter to MK from his firm, that MK’s money had gone into the client account for the purchase of shares. He knew that BW was not a director or shareholder of A3DT; indeed he knew that he had no locus at all in respect of this company. He nevertheless took “instructions” from BW as to the operation of the client account, and the monies within it, approving the dissipation of the funds in the client account by payments (amongst others) to a company in which he (the appellant) was involved. It is difficult in those circumstances to comprehend his defence to the charge that he failed to protect client money, a charge he denied “to the last”.

The position was even starker, in relation to the two inter ledger transfers where money paid by members of the public for the purpose of pursuing legal claims, ended up in the A3DT account where it was transferred in one instance into the hands of IL and in another (£13,000 on 20 April), to someone the appellant believed to be BW’s girlfriend after the A3DT account had been depleted. Mr Geoffrey Williams QC described this as disgraceful misconduct, and I agree.

The position was little better in relation to K2C, and the operation of the K75/3 ledger. The appellant apparently regarded the members of the public who paid money to his firm in this connection as his clients, and claimed the sums paid by them were for opening a client file. Mr Williams says, rightly in my view, this was an incredible charge for opening a file, not least because there was no evidence that any file was ever opened. Members of the public were entitled to expect to receive legal services for the monies they had paid, but none did so. And in the event, more than £227,000 of their money was improperly paid out with the appellant’s sanction: see para 17 above. Of that sum, over £43,000 went to the firm’s account, without any bill being raised, or sent to the client(s).

The fact that the appellant was, in the event, found not to have been dishonest, plainly did not mean that it was not open to the SDT to conclude that he lacked integrity. There is an obvious distinction between the two concepts, as Mr Williams QC submits, and Mr Kendal did not argue to the contrary. A person can lack integrity without being dishonest. One example which applied here, was by being reckless as to the use of various client accounts. As the SDT found, the appellant had not enquired as to the reasons for the improper payments and transfers out of client account; he had not cared at all about what he was instructed to authorise, and he had not shown any steady adherence to any kind of ethical code. Accordingly it was not so much a case of what the appellant thought, but that he neither thought nor cared about what was required by the rules governing his profession, of which he was aware.

The SDT clearly considered the matter “in the round” as they were entitled to in my judgment. On the facts, including the admitted or proven breaches which involved culpability and a consideration of what was in the appellant’s mind at the time, it seems to me that the SDT’s findings of recklessness and lack of integrity were not only justified but inevitable.

The core argument for the appellant is that some sanction short of striking off should have been imposed in this case because such a sanction did not reasonably reflect the appellant’s culpability and was excessively severe. It is said that the SDT gave insufficient weight to matters raised in mitigation and that the sanction was “at odds” with sanctions handed down in similar cases: see Fuglers LLP, Berens and Fugler v. SRA[2014] EWHC 179 (Admin) for example. I do not agree.

It is well-established that absent any error of law, the High Court should pay considerable respect to the sentencing decision of the SDT, which is an expert informed tribunal, particularly well-placed to assess what measures are required to deal with defaulting solicitors and to protect the public interest: see Salsbury v Law Society[2009] 2 All ER 487 at para 30.

In this case, the SDT adopted a careful and thorough approach to the issue of sanction by reference to its own Guidance, the correct principles of law, and the relevant facts, and I am not satisfied there are any grounds for interfering with the SDT’s decision or for concluding its decision was one that was clearly inappropriate.

The SDT here considered at some length the matters put forward in mitigation on the appellant’s behalf: for example the fact that there were no previous appearances before the SDT, the supportive testimonials, the absence of dishonesty and the partial admissions that had been made. The SDT also had the medical report about a family member, and considered matters relating to the appellant’s health.

These matters were carefully evaluated. However, this was a serious case of its kind for the reasons identified by the SDT. I should add that decisions in this jurisdiction are of course fact sensitive, and I have not found the reference to the facts of other cases where lesser or different penalties were imposed to be of any assistance. As was observed in Law Society (SRA) v Emeana and ors,[2013] EWHC 2130 (Admin) sentences imposed in this jurisdiction are not designed as precedents: see paras 24 to 25.

Here the misconduct was found to be “very serious”. The appellant had shown a lack of integrity with respect to the management of his client account. The conduct in question had taken place over 19 months. Substantial sums were involved. The appellant had lost control over his client account to BW to do with it as he wished. There was serious reputational harm. He had taken no real responsibility for what had occurred. The appellant had been “in thrall” to BW but it was his duty to stand up to him. There had been misuse of clients’ money on a considerable scale. These findings were justified on the facts.

In the light of its factual findings, the SDT rightly attached considerable significance to two fundamental points. First, to the essential principles identified in Bolton v The Law Society[1994] 1 WLR 512, at 518-9, by Sir Thomas Bingham MR (with whom Rose LJ and Waite LJ agreed) where it was said amongst other things that “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 on him by the [SDT]”. See further Emeana and ors where it was said at para 26, that in cases where there has been a lapse of standards of integrity, probity and trustworthiness, a solicitor should expect to be struck off, and that striking off is the most serious sanction, but it is not reserved for offences of dishonesty. And secondly, to the onerous obligation on solicitors to ensure that the solicitors accounts rules are observed because of the importance attached to affording the public maximum protection against the improper and unauthorised use of their money: see Weston v Law Society, The Times Law Reports, July 15 1998.

In all the circumstances, I do not consider the SDT’s conclusion on sanction can be faulted. I would not interfere with its decision, and I would dismiss the appeal.

I respectfully agree with all that my Lady, Sharp LJ, has said both about the merits and about the sanction. I add only the following.

It was submitted on behalf of the appellant that, in the circumstances of this case, the basis on which the SDT found that the appellant was not subjectively dishonest should inevitably have led them also to conclude that he did not fail to act with integrity. I am unable to accept that submission. It is worth emphasising the general point to which Sharp LJ has referred, that dishonesty, and a lack of integrity, are not synonymous terms. As was said in Hoodless and Blackwell v FSA, where ordinary standards are clear -

That hypothetical example also serves as an illustration of the point made by Davis LJ at paragraph 48 of his judgment in SRA v Chan, to which Sharp LJ has referred in paragraph 40 of her judgment and with which I respectfully agree.

In the circumstances of this case, the SDT were plainly entitled to find that the appellant had shown a lack of integrity. Like Sharp LJ, I regard such a finding as not only justified but indeed inevitable. Equally plainly, the SDT were also entitled to conclude that nothing less than striking off would be an appropriate sanction.

I therefore agree that this appeal must be dismissed.

act with integrity;

not allow your independence to be compromised;