The Law Society v Pathania

Schedule 1 to the 1974 Act and the right to recover or receive them should vest in the Society.

Page 3

"(1) . . . if the Society passes a resolution to the effect that any sums of money to which this paragaph 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 Society'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 and to rules under paragraph 6B upon frust for the persons beneficially entitled to them.

This paragraph applies

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 former practice . . . . "

"Upon the passing by the Society of a resolution to that effect, all sums of money held by or on behalf of the solicitor or his firm in connection with his practice or former practice, and the right to recover or receive them, shall vest in the Society (whether they were received by the person holding them before or after the Society's resolution) and shall be held on the statutory frust".

"In my judgment the relevant time is the date of the resolution and the full period thereafter whilst the resolution remains in force. This is so for two reasons. The first is the words in paragraph 6 (l) requiring vesting in the Society of sums: "whether they were received by the person holding them before or after the Council's resolution". This is plainly the intent behind the use of these words and [counsel for the solicitor's] constuction deprives them of any meaning or effect. The second is that to limit the vesting to sums already held and to exclude sums to be received after the date of the resolution would for no conceivable reason emasculate the statutory protection provided"

I agree with this conclusion and with the reasoning that supports it. The consequence in the present case is that, whether or not the benefit of the loans vested in the Society on intervention, any sums repaid in respect of those loans will vest in the Society on repayment if they are to be regarded as held in connection with Mr Pathania's former practice. This is so notwithstanding that the intervention occurred over eight years ago, since there is no provision in the 1974 Act for bringing an intervention to an end (except to a limited extent under paragraphs 6 (4) and (5) of Schedule 1, which allow a person on whom a notice has been served prohibiting payment out of any sums of money to which the paragraph relates to apply to the High Court for, and for the Court to make, an order directing the Society to withdraw the notice). This latter conclusion was also reached in Dooley at [14]. Accordingly, the intervention will remain in force indefinitely; although its practical effect will be self-limiting, since there will inevitably come a time when there are no outstanding sums which can be said to be subject to the intervention.

"In my view the statutory provisions make clear beyond question that there vest in the Society only sums held by the solicitor (e.g.in bank accounts) or on behalf of the solicitor (e.g. by agents for him or to his account); the right to recover sums due from former clients to the solicitor remains vested in the solicitor and the solicitor can alone commence and pursue proceedings for recovery of the debt. The entitlement of the solicitor is however fettered in two regards. First any recovery automatically vests in the Society. Second implicit in the statutory scheme the solicitor is precluded from any dealing with the debts before payment which operates to evade or undermine the scheme and the protection intended to be afforded to clients and the Society.

This conclusion was accepted as correct by Lawrence Collins J in Re Ahmed & Co [2006] EWHC 480 (Ch) at [10], and I too agree with it. I was also referred to the decision of Mann J in The Law Society v Austin [2013] EWHC 3002 (Ch), in which he regarded the expression "sums of money" in paragraph 6 as being capable of applying to "any sums of money which were formally held on frust and which are either sums of money or, in my view, some other fraceable form which can still be seen to be held by the solicitor, or conceivably by others who have obtained it from the solicitor". But Mann J was not there dealing with debts, and what he said is of limited assistance in the present context.

but the matter is in any event put beyond doubt by the express reference in paragaph 6 (2) (b) — which applies where the intervention is on the death of a sole practitioner — to all sums of money in any client account. However, money in a bank account is not, strictly speaking, held by the customer or held by the bank on behalf of the customer.

It has been established at least since Foley v Hill (1848) 11 HLC (Clark's) 28; 9 E.R.

1002 that the relationship between banker and customer is that of debtor and creditor.

In that case, Cottenham LC said this (at pp 36-7):

The incidents of the relationship of debtor and creditor described in that passage are, of course, not confined to the relationship of banker and customer. They apply to any loan relationship, and in particular apply to the loans made in the present case. The chose in action which is the solicitor's right to repayment of the debt due from his banker represented by the sums on client and office accounts is clearly comprehended within the expression "sums of money held by or on behalf of the solicitor or his firm"; and in my judgnent the same applies to any other loan made by the solicitor or the firm from monies connected with the practice.

Society has never passed such a resolution, since in a typical intervention the adminisfrative effort involved in identiÜing and pursuing book debts will be too great. However, the existence ofthe paragraph might be taken to suggest that the passing of a resolution under paragraph 6 did not have the effect of vesting in the Society the right to recover a debt of any nature. As I have already pointed out, however, to consfiue paragraphs 6 and 6A in that way would mean that the Society would have no

payment. The decision whether or not to pursue such proceedings lies with the

Society, moderated only by the duties it has as a public body.

"the activities of the solicitor or authorised body so far as carried out in that capacity'. From this, Mr Hill-Smith argued that the activity of money-lending was not an activity done by a solicitor in his capacity as such, so that nothing resulting from moneylending could be said to be connected with the solicitor's practice. He did, however, concede that if a loan was ftmded entirely from client account it would have been made in connection with the practice; but he said that the position would be otherwise if the money taken from client account was reimbursed by the solicitor, since then the solicitor would ultimately have used his own money to make a loan that was not itself connected with his practice. Mr Hill-Smith's concession is in my view obviously correct: since the solicitor holds the client account in his capacity as such any misapplication of it is connected with that practice. It appears to me, however, that the position is the same where the loan has initially been funded by a misapplication of monies from client account, even if those monies have subsequently been reimbursed

by Norris J recording undertakings by Mr Pathania to preserve and identifr assets held by him or under his control. Mr Pathania provided some information in response to that order by two affidavits, the first undated and the second dated 6 November 2014. Neither of those affidavits stated the source of the monies used to make loans; and on 5 December 2014 an order was made by Mr Stuart Isaacs QC, sitting as a deputy judge of this division, requiring among other things that Mr Pathania make an affidavit answering a number of questions, of which one was: "5. In each of the 37 advances disclosed by [Mr Pathanial what is the origin of the money advanced or claimed by him". Mr Pathania made an affidavit in compliance with that order on 10

April 2015, but his answer to that question was that he claimed privilege as any answer might be self-incriminating. He ultimately changed his mind about that, making a witness statement on 10 December 2015 in which he abandoned his claim to the privilege against self-incrimination and for the first time offered affirmative factual explanations for the origin of the monies advanced by him as loans to clients and third parties. In considering those explanations, and in considering his evidence generally, I take the view that I am entitled to take into account that his initial sworn evidence, given in response to a court order requiring disclosure, was to decline to offer any explanation since to do so might incriminate him.

them under supervision once the proceedings had started. He contended that he was merely given access to a limited number of boxed documents, and that the materials relating to many of the fransactions were missing. Although he claims to have asked those supervising his visit where the other files were, he made no complaint or request in writing following the visit. Moreover, in the course of his evidence he showed considerable familiarity with the documents in the case, often referring to documents other than those to which his attention was being directed and making an informed point on them. My overall assessment of Mr Pathania was that, where he had an explanation to give, he was able to give it and to refer to relevant documentation; but that where he gave no explanation, it was because there was no explanation properly to be given. I do not consider that I can rely on his explanations unless they are supported by contemporaneous documentation.

Accounts Rules for each of the periods I May 2006 to 30 April 2007, 1 May 2007 to 30 April 2008, and I May 2008 to 31 October 2008. Each of these reports contains a statement by Reddy Siddiqui, a firm approved by the Society, that "the differences are as a result of debit balances in a number of client ledgers- The debit balances were rectified upon discovery the following month. No loss has occurred to clients". It was said to follow that any deficiency in client account was small and of a temporary nature, and that accordingly the client account could not be regarded as the source of the monies for the loans. Even at the date of intervention, the deficiency of E46,606.01 asserted by the Society was far less than the aggregate amount of the loans. I have already dealt with and rejected the contention that reimbursement of client account monies had the consequence that the loans, even if initially made with monies derived from client account, could not be regarded as connected with Mr Pathania's practice. However, it also seems to me that the fact that the client account was regularly brought into balance does not mean that it could not have been the ultimate source of the loans. That is for the following reason. A reconciliation of the client account involves a comparison between the total of the liabilities to clients shown by the client ledger accounts on the one hand and the balance on the client account on the other. It does not establish that the ledger entries accurately show the amount due to each client. Monies debited without authority to a particular client ledger would have the effect of reducing the amount apparently due to the client but would not, unless the effect was to produce a debit balance on that ledger, result in a discrepancy between the total of the client ledgers and the total in the client account. The only way for an auditor to check that the ledger balances are accurate would ordinarily be to ask the client. It is observable that, in the majority of cases where Mr Pathania used client monies to find loans, he debited the amounts against client ledgers that were in credit. That would not give rise to a deficiency in the periodic reconciliations. Accordingly, these reconciliations do not demonstrate either that monies were not obtained from client account or that, ifobtained, they were replaced. The second point, related to the first, is this. In his evidence, Mr Pathania stated that some twenty of his clients were connected to each other and they all knew about the lending. They would get between El 000 and E2000 in return for the use of their money, although their cut did not go through the client account. Mr Pathania paid them by cheque or by bank transfer. I

have no hesitation in rejecting this evidence: as Mr Pathania accepted, he had no record of any such transaction and had not mentioned these supposed arrangements until his cross-examination. None of the clients was called to give evidence to support his version. I find that any payments out of client account to fund loans were made without the knowledge or consent of the client or clients for whom the money was properly held. Thirdly, although I accept that Mr Pathania had available to him a number of sources of credit, particularly on a large number of credit cards, I am satisfied that the way in which he operated was to make use of monies on client account where possible, since to do so would not cost anything, and only borrow money on commercial terns where he had no alternative. The availability of these alternative sources of credit does not, therefore, lead me to conclude that Mr

Pathania's recourse to monies from client account was a matter of last resort; rather, he regarded it as a primary source ofthe available money. I observe, however, that this does not absolve the Society ofthe need to prove that client money was used to fund each of the loans: it is not open to the Society in effect to reverse the burden of proof and rely upon the absence ofproper records as establishing that all payments must have come from client account.

an issue as to whether these two names are aliases of the same client. They are treated as being the same person by Mr Pathania in parayaph 8 of his third witness statement, and paragraph 65 of the same wimess statement is explicit that they are the same person. In his seventh witness statement, however, Mr Pathania said in terms in paragraph 42 that they are not the same person; and in his cross examination and re-examination Mr Pathania maintained that they were not the same person. This is critical, since the only evidence relied on by the Society is a cheque dated 13 May 2008 drawn on the Newlands client account for El 0,425 in favour of Koyes Miah. They appear to have different client reference numbers, Mohammed Koyes having reference number 5288 and Koyes Miah having reference number 5574. Mr Pathania's case in his third witness statement was that he made a loan to Mohammed Koyes of E34,000 on 17 October 2006 from his personal account in respect of the acquisition of Flat 7, 50 Britannia Street,

London WC 1. In his seventh witness statement, he said that he had made an initial loan to Mohammed Koyes in 2007, and had obtained a promissory note dated 12 February 2007 for €53,000. He has never been able to produce the promissory note, and in his oral evidence said that he might in fact have obtained an equitable charge instead; and in fact that seems to have been the case. On 30 July 2010 Mr Pathania obtained judgnent against Mohammed Koyes in the Luton County Court for €65,585. He said that he subsequently invested about a further E48,000 or E49,000 for refurbishment work on the flat in 2012 or 2013, resulting in a total indebtedness (after crediting rent) of {105,000. He was cross-examined about this sum without the Society being able to establish that the amount was wrong. He said that he was supposed to be repaid from the proceeds of sale of the flat, but the solicitors acting in the transaction wrongly took the money for themselves. He has a claim against the SRA Compensation Fund in respect of the El 05,000. The existence of the Luton County Courtjudynent establishes that a loan was in fact made; but if Mohammed Koyes and Koyes Miah are not the same person, there is no evidence that the initial loan to Mohammed Koyes was funded from client account. The Society established in cross examination that there had been a payment from Mr Pathania's personal account ofE34,000 on 13 October 2006, which was four days before Mr Pathania claimed in his third witness statement to have lent the equivalent amount to Mohammed Koyes, and demonstrated that that payment had in fact been made into client account rather than to Mohammed Koyes. The Society was also able to demonstrate that there was no subsequent payment out of the client account to Mohammed Koyes. However, this does not in my judgment establish even that the initial payment was made out of client account; in fact, it seems to me to establish the exact opposite. If Koyes Miah and Mohammed Koyes are the same person, however, then the cheque relied on by the Society, which is dated 13 May 2008, does not fit with the date of completion of the purchase of the flat or with the date of the promissory note. Nor does it fit with the payment towards renovations, which (since it was made in 2012 or 2013) cannot have been made out of the client account, to which Mr Pathania had no access after June 2009. Despite my general scepticism about a good deal of Mr Pathania's evidence, I consider that the different client account numbers indicates that Mohammed Koyes and Koyes Miah are not in fact the same person; and in any event I conclude that the Society has failed to establish that any part of the monies lent towards the purchase and refurbishment of the flat came from client account. In my judgment, therefore, the entitlement to this loan did not vest in the Society on intervention. This conclusion has the consequence that Mr Pathania remains entitled to pursue his claim against the SRA Compensation Fund; but, since that fund is administered by the Society, the amount of the claim is to be set off against the value of those loans that did vest in the Society on intervention.

were drawn on the Newlands client account in favour of C T Johnson on 18 December 2007, although one of them seems not to have been presented for payment. Mr Pathania's seventh witness statement stated, at paragraph 26, that Ms Johnson "was not treated as a client for these purposes so is not listed on the monthly reconciliation statements", and that he replaced the money "as the February 2008 reconciliation statement shows only a small deficit". In crossexamination, he was unable to recall how he had made repayrnent to the client account. I have already held that repayment is immaterial as a matter of principle; but as a matter of fact in this instance I accept the Society's case that the deficit shown on the February 2008 reconciliation related to 7 identified client matters, none of which was anything to do with Ms Johnson, and that reconciliation is accordingly irrelevant to the question whether or not repayrnent was made. I find as a fact that it was not. It follows that this debt vested in the Society on intervention. However, Mr Pathania's evidence, which to this extent I accept, was that Mr Pathania's proceedings in relation to this loan have been struck out.

cheques, one for El 1 ,000 and the other for E9,000, were drawn on the Newlands client account on 9 February 2007, and a promissory note obtained for E20,OOO on the same date. Mr Pathania^ls case was that this amount was replaced by a transfer of E45,000 from office account to client account on 7 June 2007. In crossexamination, he accepted that he could not say that that transfer from office account was to replace the withdrawal from client account, but he was clear that he had repaid the money. It was in this connection that he claimed that he had twenty clients who were connected with each other and they all knew and

consented to what was going on, receiving a sum between El 000 and E2000 in return. He was unable to say why he had not mentioned this previously, and was unable to identify any of the cheques or bank transfers by which he paid them. As I have said, I reject this part of his evidence. I find that this loan was made out of client account monies, and was not reimbursed by Mr Pathania. It vested in the Society on intervention. It appears that proceedings in relation to the loan are now statue-barred.

in relation to the purchase of a property in Ilford. Mr Pathania claims to have lent a proportion of the purchase monies, amounting to E42,450, and contends that that sum was included in the amount of E237,500 paid on completion out of office account. He relied on the entries to that effect. However, three days before the completion monies were paid, transfers totalling E248,000 were made from client account to office account. When asked about this, Mr Pathania said that he was not in the office at the time (being in India) and was not involved in the transaction. Matters should have been properly recorded, and he was not responsible for the fiasco. This evidence is to be confrasted with the case he presented to the Central London County Court when attempting to obtain judgment for the loan, which ultimately came down to an assertion that he had expressly agreed the loan with Ms Das before he went to India. In dismissing the claim, HH Judge Timothy Lamb QC said, among other things, this: "Mr

[Pathania] was evasive in answering questions and he was inconsistent; not least in his recall and explanation of detail. He went back into the witness box in order to prove some bank statements which had recently come to light. Mr [Pathania] had an explanation for enfries on the statements which suited his case but was remarkably vague about other financial transactions appearing thereon". This mirrors very closely my own experience of Mr Pathania in the witness box. I am satisfied that Mr Pathania did make a loan to Ms Das in the sum he asserted, and that the source of the money was the client account. I am also satisfied that it was not repaid by Mr Pathania. It vested in the Society on intervention.

which Mr Pathania asserts was from his own money. The Society was unable to point to any payment from client account, but relied upon an admitted wrongful — and much larger — payment by Mr Pathania from client account to a Dr Adedeji, who had agreed to sell a property to Ms Ajai as part of a complex arrangement for repayment of a separate loan due to Mr Pathania from Dr Adedeji. I am unable to see anything in the arrangements with Dr Adedeji that supports the proposition that the loan to Ms Ajai was funded from client account, and I hold that this loan did not vest in the Society on intervention.

April 2008 for E30,000 was drawn on client account in favour of Ms Choudhury. In his third witness statement Mr Pathania said that the sum was replaced "in a short time thereafter" by a cheque for E34,000 drawn on his personal account; and in his eighth witness statement he said that "the money was replaced by me into client's account in subsequent months". He relied also on the May 2008 reconciliation statement, which showed a deficiency of only E6,923. In cross examination he himselfpointed out that the cheque he relied on as being the repayment was dated 3 May 2007, almost a year before the loan was made.

Although the manuscript date has been crossed out on the cheque, the cheque was cleared on the same date. This cannot sensibly be regarded as repayment of a loan to be made almost a year in the future, and in any event Mr Pathania's evidence was consistently that he made repayment afterwards. Also in cross examination, he claimed to have a "foggy memory" that the repayment had been made from a loan of E40,000 or €50,000 obtained from Tax Assist. Even allowing for the passage of time, this evidence was wholly unsatisfactory. I reject the suggestion

is that he lent Mr Haque El 6,000 from his personal account on 19 February 2007 in connection with the purchase of a property in London E3. He obtained a promissory note on the same date for El 6,000 at an interest rate of 29.9% if paid within 90 days or 39% ifpaid after 90 days, plus bridging finance fees of E3,000. However, in cross examination the Society demonstrated that the payrnent of El 6,000 recorded in his personal account was in fact a payment into that account, not a payment out. Moreover, the Society demonstrated also that there was a shortfall of E9,375 between the completion monies of {205,000 paid out to the seller's solicitors and the aggregate of the mortgage advance of El 83,625 and a payment of El 2,000 received from Mr Haque. Although Mr Pathania was adamant in his cross examination that no client account money was involved in these transactions, and that Mr Haque must have made good any shortfall, I am satisfied that both the payment of El 6,000 and the shortfall of €9,375 did in fact come from client account. The current position appears to be that, following a judgrnent obtained against him, Mr Haque is paying off the debt at the rate of E800 a month.

This debt, and the benefit of those payments, is vested in the Society.

statement, Mr Pathania said that he acquired Mr Djan's interest in a property in Rainham on 12 October 2007 for E15,000 or thereabouts. A legal charge was given on the same date. Mr Pathania in that statement acknowledged that he had previously said the money for the loan had come from client account, but he said that having checked the client account he could now say that the sum did not come from client account at all. In his seventh witness statement he said that Mr Djan had purchased two properties through his firm, the one in Rainham and another in Woolwich, and that although he had lent El 5,000 it did not come from client account. The Society relied on a cheque for E4,000 drawn in Mr Djan's favour on the Newlands client account dated 13 October 2007, which Mr Pathania said must have been a legitimate payment due to Mr Djan relating to the purchase; and also on the absence of any record of a payment from Mr Pathania's personal funds to Mr Djan, which Mr Pathania explained on the basis that he made a lot ofpayrnents from credit cards. I have had some difficulty with this transaction, but on balance have concluded that the Society is right, and that the cheque for E4,000 both demonstrates that part ofthe loan was funded directly from client account and gives rise to the inference, in the absence of any other observable source of ftnds, that the remainder was also fttnded from client account. I hold that this loan vested in the Society on intervention. The current position appears to be that Mr Pathania obtained a judgment in default for El 5,000 in the Romford County Court on 2 February 2010 and that an application to set aside the judgment failed; but no recovery appears to have been made under the judgment, and Mr Pathania says that there was nothing left after the mortgagee repossessed Mr Djan's property.

is different from those referred to above in that it does not relate to a loan. On 14 May 2007 E69,000 was paid out of the Newlands client account to Misba Property

Services, which was primarily a mortgage broker. Its principal was Misba Uddin. The money in client account was held on behalf of a client of Misba who had remortgaged his property. Misba falsely claimed that he had the authority of the client to receive the money, and the payment was made out of client account on that basis. The client complained to the Solicitors Regulation Authority, and according to Mr Pathania he was required to make good the deficiency. He claimed to have done so by borrowing from Keyform Consultants; but the Society disputed this, and contended that the monies obtained from Keyform were referable to a fransaction for another client called Taiwo. I am not persuaded that it is necessary for me to resolve that issue, since even if Mr Pathania did not repay the sum missing from client account it does not seem to me that it can be said that that sum is held by him or on his behalf. However, since he has obtained an unsatisfied judgment against Misba Uddin, I should resolve the issue in case payment is ever made in whole or in part under that judgment. I am satisfied that Mr Pathania's contention that he repaid the missing money is correct. What has persuaded me ofthat fact is the statement that he made to the police at the time of the misappropriation, which included the assertion that repayrnent had been made on 15 June 2007; and I also find it significant that the Solicitors' Disciplinary Tribunal dealing with the matter recorded, in paragraphs 9 and 10 of their factual finding, that most ifnot all of the missing sums had been refunded by Mr

Pathania. Accordingly, I hold that no part of the €69,000 vested in the Society on intervention, and nothing will subsequently vest if it is ever recovered under the judgment.

loan of El 0,000, made by two cheques, each of E5000 and each dated 21

are three types of fransaction relevant to this matter. First, in his third witness statement Mr Pathania said this: "He was a mortgage broker. He re-mortgaged his property with Bank of Scotland. The monies were paid into the clients account. The monies should then have been paid in large part to HSBC to discharge the first charge; as it was the HSBC charge was never discharged. This did not happen: the monies were paid to him via cheques and online transfers. When J retumed from India, I discovered that some monies were transferred to him and I confronted him. I contacted Bank of Scotland and told them what had happened and Mr Choudhury finally agreed to allow Bank of Scotland to register their charge on his property. (The clients' account is a Bank of Scotland account.) I did not take any money out of the clients' account to myself in relation to Choudhury. " It is difficult to make much sense of this, which was not explored in cross examination; but on the face of it, it suggests that monies were improperly paid out of client account to Mr Choudhury rather than to HSBC. If that is so, I do not see that those monies can at present be said to be held by or on behalf of Mr Pathania. Mr Pathania says that he has not taken any proceedings against Mr Choudhury; but it nevertheless appears to me that if anything is ever paid in respect of these monies, which appear to amount to over E200,000, they will vest in the Society. Secondly, the Newlands client account records show several payrnents to Mr Choudhury, which Mr Pathania says he was entitled to by way of commission. Again, little was made of this in cross examination; but most if not all of these payments referred to particular clients, and I am prepared to accept that they were legitimately made. Finally, on 24 October 2006 Mr Choudhury gave Mr Pathania a promissory note in respect of a loan of E20,000 plus finance fees of