Ahmed & Co, Biebuyck Solicitors, Dixon & Co & Ors, Re Solicitors Act 1974

The Law Society is a corporate body which represents the solicitors of England and Wales. The Law Society’s regulatory functions under the Solicitors Act 1974 (“the 1974 Act”) are exercisable against solicitors regardless of whether or not those solicitors are members of the Law Society, and are exercised by the Law Society as a public body and in the public interest.

Under section 35 of the 1974 Act, the Law Society has power to intervene into solicitors’ practices. Every year, there are between 50 and 100 such interventions. The grounds for an intervention are set out in Part I of Schedule 1 to the 1974 Act. Typically, interventions will occur when the Council of the Law Society has reason to suspect dishonesty on the part of the solicitor concerned (or his employees) or where there has been failure by the solicitor to comply with the Solicitors’ Accounts Rules 1998. Interventions are also necessary in other circumstances, such as when a solicitor is incapacitated by age or illness, is made bankrupt, is imprisoned, has been struck off or suspended from practice, abandons his practice, is practising uncertificated, has previously been the subject of an intervention on grounds of suspected dishonesty and within 18 months is found practising as a sole solicitor, or when the personal representative of a deceased solicitor practising alone prior to death is guilty of undue delay in connection with the solicitor’s practice.

The powers exercisable on intervention are set out in Part II of Schedule 1 to the 1974 Act. By paragraph 5(1) the court may, on the application of the Law Society, order that no payment shall be made without the leave of the court by any person of any money held on behalf of the solicitor or his firm. By paragraph 6:

“(1)

… if the Council pass a resolution to the effect that any sums of money to which this paragraph applies, and the right to recover or receive them, shall vest in the Society, all such sums shall vest accordingly (whether they were received by the person holding them before or after the Council’s resolution) and shall be held by the Society on trust to exercise in relation to them the powers conferred by this Part of this Schedule and subject thereto upon trust for the persons beneficially entitled to them.

(2)

This paragraph applies

(a)

where the powers conferred by this paragraph are exercisable by virtue of paragraph 1, to all sums of money held by or on behalf of the solicitor or his firm in connection with his practice or with any trust of which he is or formerly was a trustee;

(b)

where they are exercisable by virtue of paragraph 2, to all sums of money in any client account; and

(c)

where they are exercisable by virtue of paragraph 3, to all sums of money held by or on behalf of the solicitor or his firm in connection with the trust or other matter to which the complaint relates.”

By paragraph 9, the Law Society may require production of the solicitor’s practice documents. The powers to vest monies in the Law Society and to obtain possession of practice documents can be exercised in combination: Sritharan v Law Society [2005] EWCA Civ 476, [2005] 1 WLR 2708, at [46].

If the Law Society takes possession of any sum of money to which paragraph 6 applies, it must pay it into a special account in the name of the Law Society or in the name of a person it has nominated on its behalf or in a client account of a solicitor nominated on its behalf. The monies in the hands of the nominated person or solicitor are held on trust on the same terms as the Law Society holds it on trust, that is (paragraph 7(1))

“on trust to exercise in relation to them the powers conferred by [Part II of Schedule 1] and subject thereto on trust for the persons beneficially entitled to them”.

These powers are exercisable notwithstanding any lien on the money or documents concerned or any right to their possession: paragraph 12.

Under paragraph 13, the costs incurred by the Law Society for the purposes of Schedule 1, including the costs of any person exercising the powers in Part II of Schedule 1 on behalf of the Law Society, are to be paid by the solicitor (or his personal representatives, if appropriate) and are recoverable as a debt owing to the Law Society.

By paragraph 16 of Schedule 1: “The Society may do all things which are reasonably necessary for the purpose of facilitating the exercise of its powers under this Schedule.” This is an ancillary power which is confined to facilitating the exercise of the express powers conferred by the Schedule: Rose v Dodd [2005] EWCA Civ 957, at [29]; see also Dooley v Law Society, November 27, 2001, unreptd, at [13].

Intervention does not give the Law Society the power to take over the practice and to carry it on or to close it down. The Law Society does not become the administrator of the practice, nor a receiver or manager. The focus of the legislation is on precautionary and preventive powers. The ownership of the assets (apart from practice monies) and the goodwill of the practice remain with the solicitor and can be disposed of notwithstanding the intervention; but the solicitor’s practising certificate is automatically suspended under section 15(1A) of the Act where the intervention is on grounds of suspected dishonesty or breach of the Solicitors’ Accounts Rules or the solicitor has been committed to prison: Rose v Dodd [2005] EWCA Civ 957 at [24], [27].

The right to recover sums due from former clients to the solicitor remains vested in the solicitor. The solicitor alone can commence and pursue recovery proceedings, and the Law Society has no duty to pursue such proceedings. But any recovery effected by the solicitor would vest automatically in the Law Society subject to the statutory trust: Dooley v. Law Society, supra, at [9], [10].

The Law Society is required to serve on the solicitor or his firm, and on any other person having possession of sums of money to which paragraph 6 applies, a certified copy of the Council’s resolution and a notice prohibiting payment out of any such sums of money: paragraph 6(3). A payment out at a time when such payment is prohibited by a notice by a person on whom the notice has been served constitutes an offence: paragraph 6(6).

The intervention process is compliant with Article 1 of the First Protocol to the European Convention on Human Rights, in that, although it does constitute an interference with a solicitor’s peaceful enjoyment of his property, the interference is necessary in proper cases in the public interest: Holder v The Law Society [2003] EWCA Civ 39, [2003] 1 WLR 1059.

The Compensation Fund is established under section 36 of the 1974 Act, funded by annual contributions paid by practising solicitors (Schedule 2, paragraphs 2 and 6(a)), out of which grants may be made by the Law Society for the purpose of relieving loss or hardship caused by dishonesty or failure to account. The Compensation Fund is not a legal entity, and the fund is held and administered by the Law Society.

Such a fund was first established under the Solicitors Act 1941, the purpose being then to relieve or mitigate losses sustained by any person in consequence of dishonesty on the part of a solicitor.

The Council of the Law Society may make a grant out of the Compensation Fund where it is satisfied that:

The purpose of the grant must be to relieve the loss or hardship of which the Council was satisfied in order to consider making the grant. It is possible for the Compensation Fund to make a grant under (c) above in the form of a loan: section 36(3). The Council has to give reasons for a refusal of a grant: section 36(7).

The Compensation Fund Rules 1995, together with the guidelines published by the Law Society, give an indication of how the Law Society is likely to exercise its discretion when faced with an application for a grant. In particular:

Paragraph 1 of Schedule 2 provides that the Compensation Fund is held on trust by the Law Society, “for the purposes” set out in section 36 of the Act and in Schedule 2.

In R v Law Society, ex p Mortgage Express [1997] 2 All ER 348 Lord Bingham CJ said (at 359) that the Law Society would be in breach of trust were it to make a grant out of the Compensation Fund when the statutory criteria set out in section 36(2) were not satisfied. But it is clear from that decision that the trust is not an ordinary private law trust, but is a fund in relation to which (once the applicant qualifies for a grant) the Law Society has to exercise discretion or judgment in accordance with public law principles. Lord Bingham CJ said (at 360):

“Any discretion … must be exercised reasonably, fairly, in good faith, so far as possible consistently and with regard to the objects of the legislation. But there is nothing to prevent the Law Society formulating and following policies which satisfy these criteria, provided they do not fetter their discretion by applying such policies inflexibly and without recognising that exceptional cases may call for exceptional exercises of discretion.”

Applicants do not have a right to compensation which they are entitled to enforce; all they have is a right to seek a favourable exercise of discretion: ibid. See also R v Law Society, ex p Reigate Projects Ltd [1993] 1 WLR 1531, at 1543-1544; R v Law Society, ex p Ingman Foods Oy Ab [1997] 2 All ER 666; R v The Law Society, ex. p. Nielsen, December 3, 1998, unreptd.; The Mortgage Corporation v Law Society, December 15, 2000, unreptd. at [13], [14].

The powers of intervention on grounds of “reason to suspect dishonesty” enable the Law Society to exercise control over those solicitors whose conduct might give rise to claims against the Compensation Fund, claims which ultimately have to be met by the profession as a whole: Sritharan v Law Society [2005] EWCA Civ 476, [2005] 1 WLR 2708 at [18]; Pine v Law Society [2002] EWCA Civ 175, [2002] 1 WLR 2189 at [12].

The Compensation Fund pays the cost of interventions where the ground for intervention is reason to suspect dishonesty: Schedule 2, paragraph 7(e). This is because interventions on grounds of dishonesty are in the interests of the profession as a whole, in that they may prevent further dishonesty on the part of the intervened in solicitor, which would, otherwise, result in further claims on the Compensation Fund from the victims of that dishonesty: Law Society v KPMG Peat Marwick [2000] 1 All ER 515, affd [2000] 1 WLR 1921. A consequence of the Law Society’s exercise of its two basic powers of intervention (document possession and money vesting), in suspected dishonesty cases, is protection of the Compensation Fund.

To the extent that the Compensation Fund has made a grant to a person entitled to client account monies, it will be subrogated under section 36(4) to the right to receive any money that person would have received from the Law Society. Such recoveries will then be carried back to the credit of the Compensation Fund pursuant to Schedule 2, paragraph 6(f).

In practice, the Compensation Fund is subrogated to a significant number (in some cases, the overwhelming majority) of such persons’ rights to such money in any given intervention. This is because, following an intervention, a significant number of persons usually make claims upon, and receive grants from, the Compensation Fund.

The same factors that prompt the Law Society to intervene into a practice frequently make the Law Society’s task following intervention extremely difficult. In particular, it is often the case upon intervention that the solicitor’s records (such as accounting records, client files and client ledgers) are in disarray, incomplete, or sometimes partially or completely non-existent, whether through dishonesty, incompetence, incapacity, abandonment or otherwise. Such problems may be long standing.

Moreover, there are often significant discrepancies between the sums of money recovered following an intervention and the money that should have been present in the solicitor’s client accounts. In cases where there are such shortfalls, the Law Society must then determine how best to deal with the shortfall, in terms of distributions to be made of the funds recovered on intervention.

A solicitor stands in a fiduciary relationship to his clients: Nocton v Lord Ashburton [1914] AC 932; Moody v Cox & Hatt [1917] 2 Ch 71; Brown v IRC [1965] AC 244; Boardman v Phipps [1967] 2 AC 46; Clark Boyce v Mouat [1994] 1 AC 428; Bristol & West Building Society v Mothew [1998] Ch 1; Hilton v Barker Booth & Eastwood [2005] UKHL 8, [2005] 1 WLR 567. Money on client account has often been said to be held on trust for the client: In re a Solicitor [1952] Ch 328; Target Holdings Ltd v Redfern [1996] 1 AC 421, 436; Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, at [12] where Lord Hoffmann said: “Money on a solicitor’s account is held on trust. The only question is the terms of that trust.”

The solicitor’s duties are underpinned by a regulatory regime whereby (a) the Solicitors’ Accounts Rules require client money to be held in separate client bank accounts, prescribe the records which must be kept and the circumstances in which the solicitor is permitted to draw on client money and guard against the mixing of client money and office money; (b) clients have the right to apply to court (inter alia) for delivery of a cash account, a list of money held for the client and payment over of that money: CPR, r 67.2.

In intervention cases, the Law Society frequently inherits a disordered and chaotic situation, and must seek to understand, as best it can, such records as there are with the available resources it has, in order to distribute the monies it has removed from a solicitor’s control to the clients or other persons who appear to the Law Society in all of these circumstances to be entitled to it.

It emerged, in the course of proceedings by Mr Halley against the Law Society (Halley v Law Society [2003] EWCA Civ 97, [2003] WTLR 845), that there might have been inadvertent breaches of trust by the Law Society in its dealing with money vested in it upon intervention. In particular, the Law Society became concerned that insufficient efforts had been made pro-actively to identify, contact and account to clients (and others) for whom money was held. On intervention, current clients were generally told that there had been an intervention and who the intervening agent was, and told to apply to the Compensation Fund if they considered that they were owed monies (i.e. rather than being repaid money held for them in trust). The concentration upon current clients and the reactive nature of the process of expecting clients to apply to the Compensation Fund meant that there had been apparent failures to contact or account to clients for whom the solicitor had been holding money. There was also concern about the transfers being made into the Compensation Fund from money which was held on statutory trust in purported exercise of the Compensation Fund’s rights of subrogation. As a result a continuing review was instigated.

It was found that in some dishonesty intervention cases (usually where there was a shortfall on client account) the money received from the intervention agents was paid direct into the Compensation Fund without waiting for aggregate grants from the Compensation Fund to exceed the amount received, probably because it was assumed that grants would in due course exceed that amount. In addition, funds in long-standing statutory trust accounts had been transferred into the Compensation Fund as part of a concern to clear old balances held.

As a result of detailed investigations a total of £2.7 million was in June 2004 repaid by the Compensation Fund to be held on statutory trust. The money represented repayment of erroneous transfers into the Compensation Fund since February 1999.

Subsequently the intervention processes have been reviewed and improved, and there has been a detailed analysis of all the trust accounts which the Law Society holds in order to ensure that so far as possible beneficiaries were accounted to where they could be identified and traced, and there has been put in place a system of evidence gathering to enable to Law Society to discharge its duties as statutory trustee.

Detailed instructions to intervention agents were issued and revised from time to time.

As a result of the new processes, instead of beneficiaries being required unnecessarily to apply to the Compensation Fund, intervention agents and/or the Law Society have been able to distribute funds to beneficiaries where the client account has been reconciled and verified as intact, and almost £15.8 million was distributed in this way in relation to interventions effected between April 2002 and April 2004.

But there are significant problems relating to client accounts which impact on the ability of the Law Society to identify and trace beneficiaries and distribute funds. For example (i) there may be a shortfall of funds on client account; (ii) there may be no proper records detailing amounts held or on whose behalf they are held (since dishonest solicitors sometimes deliberately destroy all records); (iii) documents, files or other records may be missing; (iv) there may be a lack of accounting material to enable the Law Society to reconcile the accounts at the date of intervention or subsequently; (v) there may be false accounting entries concealing misappropriation, and, consequently, the beneficiaries; (vi) books may purport to balance but the solicitor’s “clients” who have been providing funds to the solicitor may themselves be involved in fraud, money laundering, theft or false accounting and may not be the true beneficial owners of the funds; (vii) the intervened solicitor may not cooperate; (viii) the firm’s staff may not cooperate because they have not been paid; and (ix) there may be a generally chaotic situation, involving angry and upset clients, utilities being cut off and equipment being repossessed.

These problems make it difficult, and sometimes impossible, for the Law Society as statutory trustee to establish who is beneficially entitled to the funds on client account.

Where there are problems, some clients will receive in effect their full beneficial entitlement by way of payments from the Compensation Fund, and in those cases the Compensation Fund has rights of subrogation under section 36(4) of the 1974 Act, and as a consequence distribution may be possible to the Compensation Fund (like any other beneficiary) from money held on statutory trust. But before any money can be paid to the Compensation Fund it is necessary to determine how much of that money belonged to the recipient of the grant.

The consequence is that there are the following problems. In the past when clients came forward to claim funds, unless the accounts were clearly intact, they were generally told to apply to the Compensation Fund, whereas in fact they were entitled to their share of the money held on statutory trust and should not have had to apply to the discretionary Compensation Fund. As a result it is possible that clients who were entitled to money but were refused a discretionary grant would have been left uncompensated (e.g. as a result of the expiry of the time limit for applications to the Compensation Fund).

As a consequence of what is described as the aggregated basis, excessive sums were transferred from the statutory trust to the Compensation Fund. For example a client may have been paid 100% by the Compensation Fund, in a case where the client account was deficient by 50%, and yet the whole amount was transferred to the Compensation Fund from the statutory trust where the amount payable from the money held on statutory trust to the client would only have been 50%. The problem would be compounded if only some of the clients had been paid by the Compensation Fund. In addition the Compensation Fund was wrongly treated as having a subrogated claim in respect of interest and costs paid to the client.

It is accepted that the approach was mistaken. Section 36 of the 1974 Act does give the Compensation Fund a right of subrogation, in respect of the full amount of the grants made, but in exercising that right the Compensation Fund can have no greater claim against the client account than the client would have had. The client would only be entitled to recover from the client account his or her remaining share of the monies in that account and such interest as has accrued on that share (not any shortfall, nor interest on the shortfall). Further, the client could not claim against the client account for the costs of making a claim on the Compensation Fund (which the Compensation Fund reimburses in exercise of its discretion).

Where the statutory trust account is incomplete, the Law Society now recognises that, before making any distribution (including pursuant to a right of subrogation) the Law Society as trustee needs to have, so far as possible, identified precisely whose money has been lost or, where this has not been possible, to have arrived at a proper scheme of distribution for the remaining trust funds.

As a result of these problems, the Law Society has reviewed and rewritten intervention agent’s instructions. It has established a new unit, the Post Intervention Unit (“PIU”), to ensure that clients are properly accounted to for their funds, and to correct past errors. The Law Society has separated decision making in relation to Compensation Fund grants and decisions about payments from monies held on statutory trust to the Compensation Fund. It has investigated possible overpayments to the Compensation Fund from statutory trusts, resulting in repayments of almost £3 million. The PIU has created a template to record all relevant information in respect of each statutory trust to enable an informed decision to be made by the Law Society as statutory trustee about distribution. The template acts as a guide to Law Society officers to enable them methodically to acquire all relevant evidence in relation to each statutory trust.

Very few people appear to have complained that they have not received what they would have been entitled to, and only two cases have been brought before the High Court of which the Society is aware, in respect of the Law Society’s conduct under paragraph 6, post intervention. The first involved an unsuccessful claim by a broker involved in dishonesty: Halley v Law Society [2003] EWCA Civ 97, [2003] WTLR 845. The second involved proceedings brought by the Law Society for directions, and again the court was not critical of the Law Society: Law Society v Soulimov, May 27, 2002, unreported. Two cases were also pursued by claimants arising from an intervention into a firm called J.R. Sierzant & Co, but the amounts involved totalled less than £10,000 and the matters were dealt with in the County Court.

Because of the difficulties inherent in identifying persons entitled to any given amount of money, no payments have been made to the Compensation Fund by way of subrogation since 2001, except in cases where the client account was intact (or what is known as a top up grant was made) and therefore full distribution was possible. As at November 30, 2004, the total sums amounted to some £44 million. There were over 950 statutory trust accounts, although some of them were very small, and 85% of the funds were held in 161 of the accounts. By October 31, 2005 the amount locked up in the statutory trusts had increased to £52.55 million (of which 35% represent funds to which the Compensation Fund might be entitled by way of subrogation). It is undesirable for the Compensation Fund and the profession to have uncertainty, not least because this may affect the size of the Compensation Fund and the level of contributions which may be required from the profession in each year to maintain it.

The Law Society has applied to the court for directions relating to the exercise of its powers as statutory trustee, and in particular as to whether its duties are the same as those of a trustee under a private trust, or are affected by the statutory nature of the trust and its status in public law. The court plainly has jurisdiction. If the trust is to be treated as a private law trust the court obviously has jurisdiction to lend assistance in the form of guidance concerning specific questions that arise in the execution of the trust, and in particular whether some proposed action is within the trustees’ powers, or is a proper exercise of the trustees’ powers.

Should the Law Society be exercising public statutory functions under statutory trusts and not private law trusts, then the Law Society brings these matters before the court in order to demonstrate how it has been reaching decisions to date and resolving difficulties to date and how it would propose to do so going forward. If statutory power to seek directions were required (which I do not think it is) paragraph 16 of Schedule 1 would provide it.

Four test cases

In order to check how the newly designed processes were operating and to identify any issues arising, the template system was tested by reference to a sample group of 60 statutory trusts, arising from 60 different interventions. From this sample of 60, four specific cases were identified to bring before the court because they raise particular problematic issues.

Ahmed & Co

Mr Sheikh Rahim Ahmed practised in Wembley. His practice involved a large amount of immigration work. An inspection of Mr Ahmed’s books of accounts and documents began in October 2000. Mr Ahmed told the Forensic Investigation Unit that he was practising alone, not in partnership, with eleven members of staff.

The Law Society’s Compliance Board Adjudication Panel (‘the Panel’) resolved to intervene into Ahmed & Co on December 20, 2001 and intervention notices were served on January 3, 2002. The intervention was on grounds of (a) suspected dishonesty on the part of Mr Ahmed and (b) failure to comply with the Solicitors’ Accounts Rules and/or the Solicitors’ Practice Rules.

The Panel’s resolution included a resolution under paragraph 6. The sum of £75,662.03 was frozen in the general client account and designated deposit accounts held by Ahmed & Co.

When compared with other interventions, the accounting records of Ahmed & Co were, in fact, very good. The amounts shown as due in the solicitor’s accounting records tallied with the amounts recovered from the Ahmed & Co bank accounts. The accounts were up to date to the end of December 2001, a few days before the intervention, and when updated they reconciled. On the basis of all the available information, there did not appear to be any deficit.

The Compensation Fund paid out grants to a substantial number of Ahmed & Co former clients and/or others beneficially entitled to money in the client accounts. Its subrogated claims amounted to about £38,000 (inclusive of interest), which was paid to it on December 22, 2004.

As a result of such good records and, most importantly, the fact that there was not a shortfall in funds as at the date of intervention, the Law Society decided that it was possible, in this case, to distribute to those entitled whom it was possible to locate and contact. Just over £10,000 of the trust fund remains undistributed.

The Part 8 Claim in respect of this intervention was issued on January 17, 2005 with the Court’s permission without any defendants.

Mr Ahmed was served several times at different addresses with the claim form and evidence in support of the claim. The papers first served on Mr Ahmed at 54 High Road, Willesden Green, under cover of a letter dated January 19, 2005, were returned. Service was effected at a different address found in Law Society records, 48 Hazel Road, London, by letter dated July 1, 2005. Nothing was heard from Mr Ahmed. However, Mr Ahmed and others involved in the firm have been struck off the Roll of Solicitors.

Biebuyck Solicitors

Anthony Biebuyck had been a sole practitioner since 1993, practising in Chelmsford. He had a general practice, for the purposes of which he employed 14 staff, including an assistant solicitor.

There was an inspection of Mr Biebuyck’s books of account and other documents carried out in August 2002. Following this, the Law Society intervened into Biebuyck Solicitors on grounds of (a) suspected dishonesty and (b) failure to comply with the Solicitors’ Accounts Rules. The Professional Regulation Adjudication Panel’s resolution included a resolution under paragraph 6. Intervention notices dated 14th October 2002 were served on Barclays Bank Plc and the Royal Bank of Scotland.

£180,267.54 was frozen in the practice’s general client accounts on October 15, 2002. A further £32,547.71 was recovered after the intervention.

Mr Biebuyck was struck off the Roll of Solicitors on October 30, 2003.

The records were up to date to 2 months before the intervention, but the client accounts were not intact at the time of the intervention. Not all of the money that should have been in the accounts was present, and many of the client files were missing, hampering attempts to understand and reconcile, if at all possible, the discrepancies. The shortfall identified is the sum of £130,311.83. There are some examples of ledger debit entries for some clients, which if netted off would lessen the shortfall.

The Compensation Fund has submitted subrogated claims to £364,100.13 principal. This sum is clearly well above the amount of money (just over £200,000) currently held by the Law Society, highlighting the deficit existing in this case. It is also an indicator that the majority of persons potentially entitled to funds have probably made a claim on and received a grant from the Compensation Fund (which is now subrogated to their entitlements).

The possibility was contemplated of an interim distribution of the sum of £166,050.56 to the Compensation Fund from the funds, which sum must on any view (that is, on the basis that the existing uncertainties are resolved unfavourably as far as its potential entitlement is concerned) be due to the Compensation Fund. In this case, it has not yet, in fact, been made.

The Part 8 Claim in respect of this intervention was issued on January 17, 2005 with the Court’s permission without any defendants.

Mr Biebuyck was served, under cover of a letter dated January 19, 2005, with the claim form and evidence in support, and replied by e-mail on January 20, 2005 confirming that, whilst he was willing to help if he could, he did not want to be represented in the proceedings.

Dixon & Co

Anne Christine Dixon had a general practice as a sole practitioner in Oxford Street, London. She also practised in partnership under the name of Dixon Emberton. However, this partnership was not the subject of an intervention.

An inspection of Ms Dixon’s books of accounts and other documents was commenced in November 2001. Ms Dixon told the Forensic Investigation Unit that she had been practising alone since 1987 and that she had been severely affected by the death of her partner and office colleague and, as a result, had allowed matters relating to the proper running of her practice to drift.

The sole ground for intervention into Dixon & Co was failure to comply with the Solicitors’ Accounts Rules. The Professional Regulation Adjudication Panel also resolved that all monies within paragraph 6(2)(a) would be vested in the Law Society. Intervention notices were served dated March 5, 2002, and sums totalling £31,120.75 were recovered from the Dixon & Co general client accounts.

The records were written up to six days before the intervention, and the practice bookkeeper then wrote them up to the intervention date. The client accounts were not intact at the time of the intervention. In fact, a considerable shortfall in funds has been identified, in the order of £251,000. Corresponding with this shortfall is a very large debit balance in the name of one client, a Mr H, who was sued to judgment by the Law Society for the money he was overpaid from the Dixon & Co client accounts. However, whilst a judgment has been obtained, Mr H has declared himself bankrupt and there do not currently appear to be any assets against which the judgment can effectively be enforced.

After the intervention, Ms Dixon remitted to the Law Society sums totalling £14,563 to seek to reduce the shortfall in funds somewhat. The shortfall identified takes into account these additional sums.

The Compensation Fund has submitted subrogated claims amounting to £288,275.74 principal. A sum that is clearly substantially more than the funds (£45,683.75) available for distribution. This does indicate that many persons have made claims against the Compensation Fund and that the Compensation Fund grants have, in many cases, alleviated the problems of the deficient client accounts for the client/person entitled to the funds in the account, leaving the Compensation Fund to bear the loss (in that it is unable, through its subrogated claims, to recover all of the money it has paid out by way of grants).

However, some discrepancies appeared, in the course of investigation, between the Compensation Fund’s subrogated claims as calculated by the Compensation Fund itself and as calculated by the Law Society in its capacity under paragraph 6. These discrepancies have been the subject of ongoing investigation and resolution.

The Part 8 claim form for this claim was issued, without defendants with the permission of the court, on July 4, 2005.

Ms Dixon was served with a copy of the claim form and accompanying evidence in support under cover of letter dated July 5, 2005. Ms Dixon responded with some comments on the evidence on July 14, 2005. She indicated that she did not wish to be joined to these proceedings, but indicated that she may write again with further comments.

Zoi & Co/Lancaster Bailey

Farooq Zoi practised under the name of Zoi & Co and under the name of Lancaster Bailey in Plaistow and Edgware Road. He had previously operated in partnership, but at the time of the intervention was a sole practitioner. His was a general practice employing 20 un-admitted staff.

The Law Society carried out an inspection into Mr Zoi’s books of accounts and other documents between October 2000 and June 2001. The Professional Regulation Adjudication Panel resolved to intervene into any practices or the remainder of any practices, which Mr Zoi conducted as a principal, on the grounds of (a) suspected dishonesty and (b) failure to comply with the Solicitors’ Accounts Rules. The resolution included a resolution under paragraph 6.

An intervention notice dated June 14, 2002 was served on Barclays Bank and a total sum of £37,002.47 was frozen in the client accounts of Lancaster Bailey and Zoi & Co.

The accounting records recovered at the time of the intervention were (compared with the other three cases) very unreliable. They were significantly out-of-date and much of the underlying material, such as client files, was missing. The accounts had only been written up to 18 months before the intervention, and it was not possible to reconcile the accounts from the client ledger list.

However, once served with these proceedings, Mr Zoi produced a client ledger list for May 2002, the month before the intervention, which appeared to reconcile to the bank statements for that month. The additional material has been the subject of analysis by the accounting department working for Russell-Cooke, the solicitors for the Law Society, albeit with an element of caution given the manner in which the additional material was produced.

The Compensation Fund has thus far made subrogated claims amounting to £21,669.40, and there are some applications made for grants to be paid out of the Fund still pending.

The new information produced by Mr Zoi does not alter the approach in his case. It may result, subject to further verification if possible, in additional sums being distributed to other clients, if they can be located, shown in the client ledger list for May 2002 produced by Mr Zoi. The amount remaining undistributed, even if the information can be verified and relied upon, will be £6,075.11.

The claim form for this case was issued, again without defendants but with the permission of the Court, on July 4, 2005.

Mr Zoi was served by way of letter dated July 5, 2005 with the claim form and supporting evidence. He has been involved in proceedings with the Law Society, appearing at the Solicitors Disciplinary Tribunal in August 2005. He confirmed by way of e-mail dated July 26, 2005 that he does not wish to be joined to the proceedings.

The issues

The Law Society has identified the following issues:

Accordingly, the Law Society seeks a number of orders and declarations in relation to these interventions, which include (depending on the problems encountered in relation to each of the practices):

The Law Society accepts that, if the court holds that the Law Society, whilst bound by statutory duties, is not a private law trustee, there may be no need to continue to determine the majority of the other matters. But the Law Society submits that it would still be necessary or desirable to consider the specific issues arising in these test cases for the following reasons: (a) given the complexity of the points in issue, the Law Society needs to be confident that the court has considered its approach; (b) consideration of these matters should serve to demonstrate to the court some of the very considerable difficulties encountered by the Law Society in administering these funds, even where, as in the test cases, very considerable resources have been devoted to them and reinforce the points made in support of the Law Society’s primary submission that there are difficulties inherent in construing paragraph 6 as creating private law trusts; (c) consideration of these matters enables the court to have a factual matrix against which to make the decision as to how best to construe paragraph 6.

In summary the Law Society in its capacity as statutory trustee argues that the trust is subject to public law for these reasons. First, monies held on trust under paragraph 6 are expressly subject to the powers conferred by Part II of Schedule 1, and the fact that the trust may be subject to such powers is inconsistent with a private trust. Second, the Law Society’s position as statutory trustee is analogous to that of a trustee in bankruptcy in that a trust is created in circumstances where there is often financial chaos and the trustee has no idea who all the beneficiaries are or how the trust will be divided. Third, the expression "trust" is not a term of art and its meaning depends on the context. Fourth, it would be highly inconvenient if the trust were a private law trust: it might fail for uncertainty of beneficiaries; it might fail for evidential uncertainty owing to the often uncertain or incomplete nature of the solicitors' records in these cases. Consequently, paragraph 6 creates two stages. Stage one creates a statutory purpose trust whereby monies are held to exercise in relation to them the powers conferred by Schedule 1, including determining entitlement to the funds. Stage two creates a secondary statutory trust for those who have been determined to be entitled in stage one.

In its capacity as trustee of the Compensation Fund, the Law Society puts forward for the assistance of the court the contrary arguments. They are in summary these: the fact that a trust does not fulfil all the traditional criteria does not mean that it is not a private law trust. The relevant feature of a trust is that there is a separation of legal title and beneficial interest. The fact that the interest cannot be ascertained until claims are established and verified does not prevent the court from recognising the trust. Parliament would not have intended that private law trust duties over client account monies should be converted to public law duties on intervention. This is further confirmed by the absence of any express obligation to distribute or power to recover costs. If it had been intended to remove the pre-existing private trust there would be clear wording to that effect. The legislative history provides no evidence that Parliament intended to impose a public law trust. A private trust analysis is not unworkable. Proportionality is relevant in private law. Conceptual and evidential uncertainty relate solely to express trusts. There is no absolute need to inform beneficiaries of claims. It would be sufficient for the statutory trustee to take out insurance in respect of any liability from late-emerging beneficiaries or alternatively to provide undertakings to replace any overpayment. The statutory trustee’s duty to act reasonably and proportionately would be fulfilled in these circumstances by the compilation of a Best List.

The Solicitors Act 1974 was a consolidating Act. The wording now contained in Section 35 and Schedule 1 was first introduced in the Solicitors (Amendment) Act 1974, section 8 and Schedule 1.

The origins of the intervention jurisdiction were in the Solicitors Act 1941, by which the Compensation Fund was established. The Compensation Fund was established to make discretionary grants in dishonesty cases, and by section 2(2) it was to be “held by the Society in trust for the purposes” provided in section 2 and the First Schedule, and any rules made under section 2. The power to intervene was confined to dishonesty cases, and to a power to require production of documents and a power to ask the court to prohibit payments by the solicitor’s bank without the court’s permission: Schedule 1, paragraphs 4 and 5.

The power to intervene was subsequently extended to cases where a solicitor had been struck off or suspended: Solicitors (Amendment) Act 1956, section 9. No provision was made by that Act for the funding of interventions on this ground.

Those provisions were consolidated in the Solicitors Act 1957, which by sections 31 and 32 introduced separate Schedules for intervention (Schedule 1) and the Compensation Fund (Schedule 2). Schedule 1, paragraph 7, provided for the Law Society to apply to the court for an order prohibiting payments from bank accounts of the solicitor or his firm. By Schedule 2, paragraph 1, the Compensation Fund was to be held on trust by the Law Society, and by paragraph 7(e), it was provided that the costs of interventions on the grounds of dishonesty should (as before) be borne by the Compensation Fund.

The Solicitors Act 1965 extended the circumstances in which the intervention powers could be exercised (to encompass also undue delay, bankruptcy etc, and deceased solicitors’ practices in certain circumstances). It also extended the nature of the powers, giving the Law Society for the first time a power to resolve to take control of monies: all the powers were set out in Schedule 1 which was substituted for Schedule 1 to the 1957 Act.

Schedule 1 to the 1965 Act enabled the Law Society to require production of documents and (for the first time) to take control of monies:

The Solicitors (Amendment) Act 1974 replaced the existing powers, by repealing section 31 of the 1957 Act, the substituted Schedule 1 thereto and the relevant provisions of the 1965 Act. In Schedule 1 the 1974 Act set out both the circumstances in which the powers could be exercised (which were extended to include failure to comply with accounts rules or indemnity rules) and also the powers themselves. There was no change to the position whereby the Compensation Fund continued to fund dishonesty interventions. The Solicitors (Amendment) Act 1974, Schedule 1, paragraph 6(1) (which is reproduced in the 1974 Act, Schedule 1, paragraph 6(1)) introduced the trust concept for the first time in the context of interventions.

A review of the potentially admissible materials from 1973-4 (including minutes of the relevant Standing Committee) has revealed nothing that sheds light on the meaning of the word “trust” in paragraph 6 of Schedule 1 to the 1974 Act (or on that word in the Solicitors (Amendment) Act 1974)).

There are a number of differences between the trust created by the Act under Section 36 and Schedule 2 and that created under Section 35 and Schedule 1.

First, paragraph 3 of Schedule 2 contains a specific power to invest the Compensation Fund. There is no such specific power in relation to the trusts created under paragraph 6. I accept the Law Society’s point that this is consistent with the view that the Compensation Fund is a trust fund which it is expected that the Law Society will hold onto, maintain and administer, as paragraph 1 of Schedule 2 states, and from which grants will be made from time to time in the exercise of the Law Society’s discretion: but the trusts created by paragraph 6 are expected to be transient, short term trusts, in respect of which it is envisaged that the Law Society will distribute the funds to those entitled to it as soon as it is in a position to do so following the intervention.

Second, there is provision made for the Law Society to protect itself against too many claimants against the Compensation Fund. Paragraph 5 of Schedule 2 permits the Compensation Fund to insure the Fund for such purposes and on such terms as the Council may deem expedient. In fact, this has not been done since it would prove to be too expensive. There is no such provision made in respect of the funds vested in the Law Society under paragraph 6. There is no explicit guidance in the Act as to how the Law Society should handle a situation, following intervention, when the client accounts prove to be deficient and there are insufficient funds to meet all of the claims made (notwithstanding the fact that this is, unfortunately, a very common situation).

Third, grants are made out of the Compensation Fund according to the exercise of its discretion, which it exercises specifically and explicitly to compensate the most deserving of applicants: cf R v Law Society, ex p Mortgage Express [1997] 2 All ER 348, 360. By contrast, on an intervention, the Law Society holds the money on trust for the purpose of the exercise of its powers, and according to the beneficial interests in it. “It has no general discretion to pay it to the most deserving of beneficiaries”: Halley v Law Society [2003] EWCA Civ. 97, [2003] WTLR 845, at [41].

The wording of the trust created by Schedule 2 is more obviously in line with the creation of a statutory purpose trust than that of the wording of the trust created by paragraph 6. Paragraph 1 of Schedule 2 states “the fund … shall be held by the Society on trust for the purposes provided for in Section 36 and this Schedule”, whereas paragraph 6 states “all such sums…shall be held … on trust to exercise in relation to them the powers conferred by this Part of this Schedule and subject thereto upon trust for the persons beneficially entitled to them.”

If the paragraph 6 trust were a private law trust, then it would import the duties of a private law trustee. Those duties would include the following: first, a trustee has to ascertain the identity of the beneficiaries, and to ascertain their beneficial entitlement. Second, a trustee is obliged to inform a beneficiary of full age and capacity of his interest in and rights under the trust: Lewin on Trusts (17th ed. 2000, Mowbray et al), para 23-03. Third, a trustee is obliged to give beneficiaries a full and accurate record of the stewardship and management of the trust, and is required to keep and render proper, clear and accurate financial accounts: Lewin on Trusts, para 23-05. Fourth, a trustee has to distribute to the correct beneficiaries of a trust fund, and that obligation is a strict obligation: Lewin on Trusts, para 26-03. This principle is onerous and places a trustee in a demanding position, in terms of correctly distributing to the right beneficiaries of the trust.

The Law Society argues that in practice the imposition of private law trust principles on the Law Society might render the scheme created by Schedule 1 unworkable. The reality is that the Law Society is in a fundamentally different position from that of a private law trustee. When (unlike a private law trustee) the Law Society is required to try to reconstruct from (often extremely poor or possibly fraudulent) records who might be entitled to the client account monies, and how much of the monies those persons might be entitled to receive in any distribution, it is unworkable to impose upon the Law Society a strict obligation to distribute to the “right” beneficiaries only. Such a conclusion overlooks the reality that seeking to ascertain who are the “right” beneficiaries involves numerous decisions and the exercise of discretion on the part of the Law Society. Normally a trustee would be under a duty to look to trust records which would ordinarily exist in a private law trust to inform the trustee about the state of the trust, the identity of the trust property and trust beneficiaries etc. The Law Society is in a very different position. It must look to the solicitors’ accounting records, but it must do so in a situation where the very reason why it has become a trustee of the client account monies, in the first place, is usually linked to some deficiency in those accounting records. If the Law Society is not able to take those decisions, and exercise its discretion, in a manner which will only be overturned if it has acted in an irrational and unreasonable manner etc, it becomes almost impossible to administer the funds vested in it upon each intervention. To obtain any kind of certainty, the Law Society may well have to burden the court with frequent applications for directions and approval of the decisions it had taken or was proposing to take.

I am satisfied that the Law Society’s position, that its duties in relation to the paragraph 6 trust are grounded in public law, is correct. This is so for the following reasons.

There is no doubt that the duties of the Law Society in relation to the Compensation Fund are duties grounded in public law. Grants are made out of the Compensation Fund according to the exercise of its discretion, which it exercises specifically and explicitly to compensate the most deserving of applicants: cf R v Law Society, ex p Mortgage Express [1997] 2 All ER 348, 360. The wording of the trust created by Schedule 2 is more obviously in line with the creation of a statutory purpose trust than that of the wording of the trust created by paragraph 6. Paragraph 1 of Schedule 2 states “the fund … shall be held by the Society on trust for the purposes provided for in Section 36 and this Schedule.”

In Law Society v Soulimov, May 27, 2002, unreported, it was assumed that paragraph 6 involved a private law trust. Mr Soulimov demanded payment of money (which he alleged was his) from the client account vested in the Law Society following intervention into Mr Simms’ practice. The Law Society was concerned as to the propriety of paying the money out, because of the quality of the evidence it had, and commenced an application for directions from the court, as a private law trustee would. In the application, the Law Society took a neutral role and surrendered its discretion to the court. In that case the primary question now before the court was not the subject of argument.

In regulating the profession, the Law Society performs a public duty: Law Society v KPMG Peat Marwick [2000] 1 All ER 515, [33], affd [2000] 1 WLR 1921 at [16], [19] and [23]. In Swain v Law Society [1983] 1 AC 598, at 607-608, Lord Diplock said that the Law Society has both a private capacity and a public capacity. When acting in its private capacity it was subject to private law, but

“It is quite otherwise when the Society is acting in its public capacity .. The Council in exercising its powers under the Act to make rules and regulations and the Society in discharging functions vested in it by the Act … are acting in a public capacity and what they do in that capacity is governed by public law; and although the legal consequences of doing it may result in creating rights enforceable in private law, those rights are not necessarily the same as those that would flow in private law from doing a similar act otherwise than in the exercise of statutory powers” (at 608)

Similarly Lightman J said in Law Society v Dooley, supra,at [12] that the approach of the Law Society – namely, to allow the solicitor supervised access to these documents for the purposes of the solicitor recovering unpaid costs due to him at the time of the intervention (notwithstanding the fact that the costs of such supervision might make costs recovery economically unattractive or unviable) - reflected a fair and reasonable balance in accord with the Law Society’s public law duties as a public body to protect the interests of the solicitor’s former clients.

The starting point is the construction of paragraph 6 in Schedule 1. The wording does not give an answer, and, as has been seen there is no relevant legislative history. But Parliament must be taken to have known that the Law Society might well be acquiring depleted funds, that it might not know where the beneficial interest lay, and might not know who the potential beneficiaries might be. The Law Society had to look to the solicitor’s accounting records, in a situation where the very reason why it has become a trustee of the client account monies, in the first place, would often be linked to some deficiency in those accounting records.

The use of the word “trust” does not conclude the matter. The word “trust” is defined in the Act as follows (at section 87(1)): “ ‘trust’ includes an implied or constructive trust and a trust where the trustee has a beneficial interest in the trust property, and also includes the duties incident to the office of a personal representative, and ‘trustee’ shall be construed accordingly.” This definition is not exhaustive and is of no assistance in relation to the present question. The same word “trust” is used in both Schedule 2 and Schedule 1 to impose different obligations on the Law Society and “trusts” of differing natures, which indicates that the word is not a term of art, but means different things even within the same Act.

There is no doubt that when the word “trust” is used in a statute it does not necessarily mean a classic private trust. Thus in Tito v Waddell (No. 2) [1977] 1 Ch 106 the relevant Ordinance described the resident commissioner as being paid compensation to hold on trust on behalf of the former owner or owners of a native or natives of the colony subject to such directions as the Secretary of State may from time to time give. Sir Robert Megarry V-C said (at 211) that, when the word “trust” was used one has to look to see whether in the circumstances of the case, a sufficient intention to create a true trust is manifested: “One cannot seize upon the word ‘trust’ and say that this shows that there must therefore be a true trust” (at 227).

In Ayerst v C& K (Construction) Ltd [1976] AC 167 it was held that an order winding up a company divested the company of the beneficial ownership of its assets for the purposes of its unrelieved losses and capital allowances being used by a successor company. In the context of the question whether the company still retained legal ownership of its assets, Lord Diplock discussed the analogous position of the assets of a bankrupt, the legal title to which vests in the trustee in bankruptcy. Lord Diplock referred (at 178) to the example of a trustee in bankruptcy as a “trust” imposed by statute which clearly did not have all the indicia of a private law trust. One of the reasons for this was that, in the course of administration of the bankrupt’s estate, prior to the submission of all the proofs from the creditors of the bankrupt, the trustee had no way of knowing all of the beneficiaries for whom he was administering the estate, and the shares in which he would distribute the estate. Lord Diplock went on to say that the label “statutory trust” can be understood as characterising a trust that does not bear all the indicia of a trust as would be recognised by a Court of Chancery apart from the statute. He said (at 180) that all that may be meant by the use of the word “trust” was giving property the essential characteristic which distinguishes trust property from other property; namely, it cannot be used or disposed of by the legal owner for his own benefit but must be used or disposed of for the benefit of others.

Accordingly, it does not follow that, when the word “trust” is used, that brings with it the full range of trust obligations attendant upon a traditional private law trust, particularly so when the trust is imposed by statute and is in the context of the exercise of a public function. The meaning of a word depends on its context. Thus in Brooks v Brooks [1996] AC 375, where the question was the meaning of the word “settlement” in the Matrimonial Causes Act 1973. Lord Nicholls said (at 391): “In English law ‘settlement’ is not a term of art, with one specific and precise meaning. Its meaning depends on the context in which it is being used.”

In my judgment the background to the need for the powers and the structure of Part II of Schedule 1 make it clear that the paragraph 6 trust was not intended to be, and could not have been intended to be, an ordinary private law trust. The Law Society inherits, like a trustee in bankruptcy, a situation not of its own making including records which are often in a chaotic state, in which it does not know initially where all the funds lie, and then, having recovered the funds, does not know who the claimants to the funds are. It has, nonetheless, to determine entitlement to the funds and distribute to those identified as claimants to the funds. It would be difficult if the Law Society were, in that context, to be burdened with overly excessive or onerous duties as a private law trustee under paragraph 6. I accept the Law Society’s submission that the trust created under paragraph 6 can be labelled a statutory trust. Similarly, the term “beneficiaries” can be used, in the sense of statutory beneficiaries entitled under paragraph 6 to a share of the funds vested in the Law Society (as opposed to beneficiaries of a private law trust).

This approach is also supported by the consideration that the Law Society needs to be able to act efficiently in circumstances where there may be many clients involved (cf.R v Takeover Panel, ex p Datafin plc [1987] 1 QB 815, 840), and it is not likely that it could have been envisaged that the Law Society would constantly be applying to the court for directions of the kind sought in this case.

Such an interpretation would also avoid the danger that the trust might be void. Were the trust under paragraph 6 a private law trust it would be a fixed trust, and not a discretionary one. A fixed trust with conceptual and/or evidential uncertainty is a void trust, and a fixed trust is only valid if it is possible to draw up a complete list of the beneficiaries at the time of distribution: Lewin on Trusts, para 4-30. I accept that it is by no means certain that failure to identify the clients would make such a private law trust invalid, and certainly a court would do everything it could to find it valid, but it would be an odd interpretation of paragraph 6 to allow it to result in a situation where it is possible that some trusts were valid, because of the good level of accounting records maintained by the solicitor prior to intervention, and others (those, often in fact, where intervention was required the most) were void for evidential uncertainty. The only way in which to ensure that all of the trusts created under paragraph 6 are valid, no matter how bad is the level of evidence as to beneficiaries, is to recognise that the trust created under paragraph 6 is not a trust subject to the usual rules, such as evidential certainty, imposed upon such fixed private trusts.

I consider that the analogy of liquidators and trustees in bankruptcy is an apt one. They inherit the company’s or individual’s affairs when they are financially in a mess and, very often, there is a deficit between the available assets and the total potential claims for a share in the assets. The purpose of their appointment is to wind up the company’s or individual’s affairs and distribute such assets, as are recovered and available, to the creditors. Similarly, the Law Society intervenes and, in some, limited, senses, winds up the practice that is the subject of the intervention. It is not an administrator, but it is terminating the practice of the individual solicitor, at least so far as it relates to historic client matters. It inherits a situation, often, financially in a mess where there is a deficit between the funds in the client accounts and the potential claims to those funds and it, too, has to distribute the monies it recovers to identified claimants.

Consequently, I do not consider that in exercising the power under paragraph 6 the Council of the Law Society is effecting an assignment of the trusts constituted by the client accounts, such as it was in the hands of the solicitor. It is legally divesting the solicitor of legal ownership of the funds and vesting the same in the Law Society, and also creating a new trust upon which the funds are to be held. The solicitor did not hold the funds on trust to exercise in relation to them the powers conferred by Part II of Schedule 1. On the other hand, paragraph 6 specifically provides that the funds are to be held on trust to exercise in relation to them the powers conferred by Part II of Schedule 1, and only subject thereto on trust for the persons beneficially entitled to them.

This solution effectively involves two forms of statutory trust. A statutory purpose trust first arises whereby the monies are held to exercise in relation to them the powers conferred by Schedule 1, which includes the ancillary power in paragraph 16. The statutory purpose trust must include the purpose of determining who are beneficially entitled to the funds in order that the funds can be held for those who are entitled to them. A second statutory trust arises under paragraph 6, namely, for the persons beneficially entitled to the funds.

The Law Society therefore has a statutory power to determine who is entitled to the funds under paragraph 6. That does not mean that it has a discretion as to who is beneficially entitled: cfRoy v Kensington and Chelsea and Westminster Family Practitioner Committee [1992] 1 AC 624; Trustees of the Dennis Rye Pension Fund v Sheffield City Council [1998] 1 WLR 840; Steed v Secretary of State for the Home Department [2000] 1 WLR 1169. In taking steps to determine who is beneficially entitled, it must exercise the power in a way that is bona fide, rational, reasonable, takes into account relevant considerations and does not take into account irrelevant considerations. The exercise of the power would be subject to review on public law grounds. So also the statutory power to distribute must be exercised in accordance with public law principles.

The Law Society accepts that private law trust principles and the claims of the clients to the monies prior to the intervention would be relevant: cf R v Tower Hamlets LBC, ex p Chetnik Developments Ltd [1988] AC 858, 882, per Lord Goff of Chieveley. The Law Society, in exercising its power rationally and reasonably, would need to take into account and give due weight to principles of trust law in, for example, arriving at a Best List of whom it reasonably considers to be, on the available information, the most probable persons entitled to the fund vested in itself.

Accordingly most of the other questions which the Law Society has brought before the court do not, strictly, arise for determination. I have set out the relevant material on these questions in an appendix to this judgment, together with my views on the approach which the Law Society has taken. But there are three matters with which I should deal at this point.

The first relates to the position of unbilled costs. I am satisfied that the Law Society is right to proceed on the basis that where there is no evidence of a bill, or other written notification of the costs incurred, having been sent to the client or paying party, sums of money on a client ledger, which might represent payments made on account of costs or be equivalent to the costs incurred on behalf of that client, are to be held for the client and not for the solicitor. In determining whether the sums of money should be held for the client or the solicitor, the Law Society need only conduct reasonable and proportionate enquiries.

It is common for clients to pay solicitors money on account of the solicitors’ costs or on account of unpaid professional disbursements. This money is client money and, as such, has to be held in a client account: Solicitors’ Accounts Rules (“SAR 98”), r.13 and the notes thereto, and r.19(4). One of the fundamental principles of the SAR 98 is that client money is kept separate from office money, which belongs to the solicitor; see SAR 98, r.1(b), r.13(c), r.19(1)(a)(i).

In order for money to be transferred properly from a solicitor’s client account to office account, certain procedures have to be followed, as laid down in the SAR 98. Under rule 19(2), the solicitor must first give or send a bill of costs or other written notification of the costs incurred to the client or to the paying in party, whenever he properly requires payment of his fees. Once that has been done, the money then becomes office money and must be transferred out of the client account within 14 days: see r. 19(3). Consequently it has been held that a solicitor cannot transfer small, old balances existing on client ledgers to his office account without raising a proper bill prior to the transfer: Doggett v Law Society, February 21, 2000, unreported.

These are provisions of the SAR 98 that are often breached by solicitors who are then subject to intervention. It is not uncommon for solicitors who are the subject of inspections and/or interventions to have made round sum withdrawals on account of costs generally without reference to precise figures as should be contained in a proper bill of costs. Such round sum withdrawals are prohibited: note (x) to r. 19.

The Compensation Fund operates a policy whereby it may deduct, from any grant it makes to an applicant, the costs that would have been due to the solicitor provided that the work had been properly completed, so that the applicant is not in a better position by reason of a grant than he would otherwise have been. This is so, even if the intervened in solicitor did not hold a practising certificate at all material times: Guideline 11(a). It can mean there are situations in which the Compensation Fund makes a grant to an individual of less than the balance shown under the name of the individual on the Best List, having calculated itself what the likely costs of the work done by the intervened in solicitor on behalf of the applicant would have been. This leaves a small residual balance on the client’s ledger, the beneficial entitlement to which the Law Society, in its capacity as statutory trustee, must determine.

While it is justifiable for the Compensation Fund, in the exercise of its discretion, to choose not to award a grant which includes sums of money, which it considers equivalent to the amount of work the solicitor concerned had carried out on behalf of the applicant, the Law Society is determining existing entitlement to the funds at the date of intervention.

I accept the Law Society’s submission that the Law Society should treat money on a client ledger as held for the client and not for the solicitor. To do so would not undermine the solicitor’s entitlement to be paid for work he has done and for fees properly incurred, should there be any. This is a personal remedy as between the solicitor and the client. It (and the lien which it triggers) is a separate question to that of entitlement to the money physically sitting in the client account at the date of intervention, subsequently vested in the Law Society.

The Law Society is mindful of the fact that the solicitor who has been the subject of an intervention may well have a considerable interest in being able to recover costs properly due to him, but in respect of which he has not been able, prior to the intervention, to bill his respective clients. To ensure that the interference with the solicitor’s property is as little as is reasonably possible, the Law Society usually agrees to allow the solicitor supervised access to the files in order that he may take steps to recover costs due to him. The Law Society is entitled to do so, even though the costs of providing supervision of the solicitor (recoverable from the solicitor himself under paragraph 13 of Schedule 1) may render costs recovery by the solicitor economically unviable: Dooley v Law Society, supra, at [11]-[12].

The second question to which I shall refer is the application of the Rule in Clayton’s Case where there is a deficiency. I accept that the Law Society may determine entitlement to the funds vested in it, having regard to any shortfall in client account at the date of intervention, and the most reasonable and proportionate manner of allocating the shortfall as between all of the clients who had money deposited in client account prior to the intervention, taking note of principles of private trust law governing allocation of deficiencies in trust funds.

It is very common for there to be a deficit between the amount of money recorded as supposedly in client account at the time of the intervention and the amount of money that is, in fact, there and becomes vested in the Law Society. This may arise as a result of debit balances, representing the fact that sums of money have been spent on behalf of other clients who did not have money in the client account at the time the money was withdrawn on their behalf. Alternatively, the solicitor may have been dishonest and withdrawn money, to which he was not entitled, for himself or others and either posted such withdrawals dishonestly to named clients, or not bothered posting the withdrawals to any ledger. Alternatively, the solicitor may have failed properly or accurately to record withdrawals made from the client accounts for some time prior to the intervention.

The rule in Clayton’s Case is still treated as the starting point: Lewin on Trusts, para 41-52. Under that rule, those funds which are deposited with the solicitor first are the funds which are presumed to have been the first to leave the client account. However, it takes only a very small counterweight to displace the rule in Clayton’sCase: Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 Ch, [2003] 2 All ER 478 at [55]. It is commonly recognised that a pari passu solution, in which all of the beneficiaries share the loss pro rata in accordance with the proportion of their beneficial entitlement to the fund as a whole, is the usual solution: Commerzbank Aktiengesellschaft v IMB Morgan Plc [2004] EWHC 2771 (Ch), [2005] 1 Lloyd’s Rep. 298 at [47] and [48]. This solution was adopted in Barlow Clowes International Ltd (in Liquidation) v Vaughan [1992] 4 All ER 22.

In most intervention cases, there will be a counterweight. Payments into solicitors’ general client accounts do not generally get paid out in the same sequence. Nor would any of the clients of the solicitor expect them to. Some clients’ money sits in solicitors’ accounts for some time, for example, if paid in as a payment on account of costs in ongoing litigation. Other money comes in and goes out again in a short space of time, for example, the purchase money remitted by a mortgage company to complete a conveyancing transaction. In Russell-Cooke Trust Co v Prentis Lindsay J said (at [58]) that he considered the pari passu approach to be the system least unfairly distributing loss on an account that should have been dealt with in accordance with SAR 98.

Accordingly, the pro rata approach is, in most cases, likely to be the most appropriate approach, simply because of the very nature of a solicitor’s general client account. In addition, attempting to allocate a deficit on the basis of the “first in first out” rule would also be extremely impracticable. The evidence is that it is difficult enough, given the commonly found levels of available evidence, to reconstruct the accounts as at the date of the intervention with sufficient accuracy. The following problems arise in the application of the “first in first out” rule:

It would require the identification of all of the misappropriations from the client account. This would, itself, not necessarily be straightforward. Ledger balances which are in debit at the time of the intervention are an obvious place to start, but they are not the only possible source of misappropriations. There may have been unauthorised or improper withdrawals from the client account which were posted to a ledger sufficiently in credit, so that the net effect was that the credit on that ledger was reduced as opposed to creating a negative debit balance. The only way in which those misappropriations could possibly be identified is if the Law Society went behind all the ledgers in credit, checking every transaction that had been posted to that ledger.

Even if all of the misappropriations from the client account could be successfully identified, then, in order to allocate them on a “first in first out” rule, a reconciliation of the account would be necessary as at the date of each misappropriation, together with a list of dates on which all of the funds present in the reconciled account had been deposited. The difficulties in achieving reconciliation at the time of the intervention demonstrate how difficult, time-consuming and expensive such a process would be. Equally, the further back in time the reconciliations go, the less evidence there may well be from which a reconciled account could be drawn up, and the greater chance that attempting to chase down evidence from missing files etc. would produce inconclusive or no results.

Assuming misappropriations could be successfully identified and reconciliations effected at each of the relevant dates, it may well be that the client’s money presumed to have been used under the “first in first out” rule would have subsequently been used in a legitimate transaction. The rule in Clayton’sCase is only an evidential presumption, rebuttable by contrary evidence. It would be incredibly onerous, and most likely not possible, to attempt to undo all of the legitimate withdrawals that took place after a misappropriation on the basis of an evidential presumption that money legitimately withdrawn for a client had earlier been presumed withdrawn under the rule.

The third issue is whether, as it proposes, the Law Society may reimburse itself for costs out of undistributable sums. The relevant sums arise because there may be historic balances, which have remained on ledgers for long periods of time without any further movement on the ledger. There may be clients for whom up-to-date contact details are not available and who do not come forward in response to advertisement. There may be small sums for which any further work would be completely disproportionate to the amounts of money involved. These small sums, when added together over numerous interventions, amount to significant amounts of money.

The Law Society is proposing to retain the undistributable sums as reimbursement of the Law Society’s properly incurred costs in determining entitlement to the funds and taking steps to distribute the funds to those it has determined to be entitled thereto. Costs would only be reimbursed from property that would not otherwise be distributed to clients, those clients not being reasonably and proportionately identifiable or contactable.

In addition, the Law Society has offered an undertaking to repay money retained as reimbursement to late-emerging beneficiaries. The undertaking would be limited to the total sum of money it had received as reimbursement for its costs. It would also be limited to a period of one year. The limitation of one year has been chosen in order that the Law Society may have some certainty after a reasonable period of time, in order to be able to know what financial liabilities it has going forwards, and rule out contingent liabilities going forward after a period of time has elapsed.

This would present no problem if the Law Society were a private law trustee, since it would be entitled to be indemnified out of the trust property for all expenses and costs incurred in connection with the performance of its duties: Lewin on Trusts, paras 21-03–21-03E; Trustee Act 2000, section 31(1).

But if a public body is to levy a charge, there must be clear statutory authority to that effect: Attorney-General v Wiltshire Dairies Limited (1921) 37 TLR 884, affd (1922) 38 TLR 781, HL. Consequently, a public body charged with a public duty may not charge for carrying out the duty without specific statutory authority: Goff and Jones, Law of Restitution, 6th ed. 2002, paras 10-019 – 10-024; Woolwich Building Society v IRC [1993] A.C. 70 at 155 per Lord Keith (dissenting), and 164-165 per Lord Goff of Chieveley. The authority must be express or arise by necessary implication: R v Richmond upon Thames London Borough Council, ex p McCarthy & Stone (Developments) Ltd [1992] 2 AC 48, at 74, per Lord Lowry. See also R v Greater Manchester Police Authority, ex p Century Motors (Farnworth) Ltd, March 24, 1998, unreported.; R v Liverpool City Council, ex parte Barry [2001] EWCA Civ 384.

With some hesitation I have come to the conclusion that the Law Society is entitled to make the deduction from the undistributable funds. The fact that the relevant funds are undistributable is not relevant to the existence of the power, although it does mean that it is unlikely that there will be any prejudice to anyone if it should turn out that, contrary to my view, the Law Society has no power to deduct its costs. My reasons are these.

The essential question is whether, in the absence of an express power, there is any necessary implication that there is such a power. Against such an implication are the express provisions for costs. First, paragraph 13 of Schedule 1 provides that the solicitor is responsible for the costs, but the solicitor may have disappeared, and/or be bankrupt, and/or simply be unable to raise sufficient money to pay the costs. Second, the effect of paragraph 7(e) of Schedule 2 is that the Law Society’s costs in dishonesty interventions are payable out of the Compensation Fund (about one-third of interventions). Nevertheless I consider that there is the necessary implication because although, in fact, the Law Society has sufficient funds to carry out the intervention exercise, it is not publicly funded and it might be possible to envisage cases in which it could not carry out the intervention exercise unless it could be satisfied that the costs would be met. The potential sources of recovery from the intervened in solicitor and the Compensation Fund should not preclude the Law Society being reimbursed out of money that will not otherwise be distributed, particularly if it may be that, in a given intervention, recovery under paragraph 13 is theoretical only and will not result, in reality, in recovery of all or part of the costs incurred. I do not consider that the ancillary power in paragraph 16 is a safe basis for reimbursement, but I do accept the alternative submission that the power to reimburse can derived from the general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred in connection with the administration of the property: cfRe Berkeley Applegate [1989] Ch 32.

I should record my gratitude to counsel and solicitors for the excellent and extremely thorough presentation of this interesting matter.

I will hear submissions of the form of the order.

Verification of accounting records from a sample of client files

B Compiling a “Best List” of entitlement to the funds

A23. Generally, a trustee does not have to look into all of the historic trust records to see if there might have been some misfeasance by a previous trustee: Lewin on Trusts, para 12-58. Whilst the Law Society does not have to suspect dishonesty in relation to every ledger automatically, the difficulty it faces is that it is intervening in situations where the very reason why it is intervening might be sufficient to give a normal private law trustee grounds for investigating historic transactions concerning the trust. Often, the Law Society is on notice that the ledgers cannot necessarily be trusted or taken at face value and that there may well be errors in the trust accounts, such as they are, either through incompetence or dishonesty: Law Society v Soulimov, May 27, 2002, unreported, at [71].

C Ability to net off debit and credit ledgers

D Re-allocating postings from a suspense ledger to named ledgers

E Reliance on posting of debits to a specific ledger by a defaulting solicitor

F Reliance on Compensation Fund verification exercise

H Allocation of a deficit in trust funds

I Advertisement

J Contacting persons entitled to funds: £75 limit

K Disputes between beneficiaries

L Distribution

M Retention of the undistributed sums as reimbursement of the Law Society’s properly incurred costs in determining entitlement to the funds and effecting distribution of the funds

A129. The Law Society has recovered its costs of intervention from solicitors in approximately 6 to 10 cases each year; for example, in 2004, having incurred the sum of £5,086,591 in intervention costs, the Law Society recovered £960,681.