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Cite as: [2005] 1 WLR 2708, [2005] 4 All ER 1105, [2005] EWCA Civ 476, [2005] WLR 2708

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		Neutral Citation Number: [2005] EWCA Civ 476
		Case No: A3/2004/2689

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE HART)
HC04CO3722, HC04CO3692

Royal Courts of Justice
Strand, London, WC2A 2LL

27 April 2005

B e f o r e :

LORD JUSTICE CHADWICK
LORD JUSTICE MAY
and
LORD JUSTICE RIX
____________________

Between:

	MURUGESU KANAPATHIPILLAI SRITHARAN	Appellant
	- and -
	THE LAW SOCIETY	Respondent

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
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____________________

Mr Manjit Singh Gill QC and Mr Kenneth Hamer (instructed by Thakrar & Co of 38A & 38B, The Broadway, Southall, Middlesex) for the Appellant
Mr Gregory Treverton Jones QC and Mr Nicholas Peacock (instructed by Wright Son & Pepper of 9 Gray's Inn Square, London WC1R 5JF) for the Respondent
____________________

HTML VERSION OF JUDGMENT
____________________

Lord Justice Chadwick:

This is an appeal from an order made on 16 December 2004 by Mr Justice Hart in proceedings between the Law Society and Mr Murugesu Kanapathipillai Sritharan who (until the events to which I am about to refer) carried on practice as a solicitor under the firm name of MK Sri &Co.

On 24 November 2004 the Law Society resolved to exercise its power to intervene in Mr Sritharan's practice on the grounds of suspected dishonesty, pursuant to paragraph 1(1)(a) of schedule 1 to the Solicitors Act 1974. Before serving notice of that resolution on Mr Sritharan, the Law Society applied to the High Court for a freezing injunction in respect of his assets, up to a value of £1.2 million. That application was made to Mr Justice Evans-Lombe. He granted the injunction sought on 25 November 2004.

Proceedings (HC04CO3692) were issued on the same day, 25 November 2004, seeking payment by Mr Sritharan of the sum – being not less than £1.2 million – which was said to be required "to reconstitute the fund of monies now vested in [the Law Society] as trustee pursuant to paragraph 6 of Schedule 1 Part II of the [1974 Act]". The injunction was continued by Mr Justice Mann at a hearing on 2 December 2004, at which Mr Sritharan was represented by counsel.

On 26 November 2004 notices of the Law Society's intention to exercise its powers of intervention were served on Mr Sritharan and on his salaried partner Mrs Sivakalanithy Sivasanthiran. On 29 November 2004 a claim form under CPR Pt 8 was issued on the instructions of Mr Sritharan seeking an order pursuant to paragraph 6(4) of schedule 1 to the 1974 Act directing the Law Society to withdraw its intervention notices. Mrs Sivasanthiran was named as co-plaintiff in those proceedings (HC04CO3722).

Both sets of proceedings were before Mr Justice Hart on 11 December 2004. In addition to the principal relief sought – an order directing the Law Society to withdraw the intervention notices – there were linked applications for the restoration of Mr Sritharan's practising certificate and for access to the firm's files, and an application to discharge or vary the freezing injunction. On 16 December 2004 the judge handed down a written judgment in relation to the principal relief sought; and, on the same day, he gave judgment on the other applications. He refused to direct withdrawal of the intervention notices; he refused to restore the practising certificate (holding that he had no jurisdiction to do so); he refused to direct that Mr Sritharan be given access to the files; and he refused to discharge the freezing injunction, although he reduced the amount of the assets frozen to £1.1 million. His order of 16 December 2004 reflects the conclusions reached in his judgments.

It is from that order that Mr Sritharan appeals to this Court. Mrs Sivasanthiran was named as co-appellant in an appellants' notice issued by solicitors purporting to act on her instructions. But, by the time that the appeal came on for hearing, Mrs Sivasanthiran, acting through other solicitors who had not come on the record, indicated that she did not wish to pursue an appeal. She took no part in the hearing. In those circumstances the Court dismissed her appeal.

Mr Sritharan appeals with the permission of the judge. In granting that permission the judge may be taken to have had in mind the concern which he had expressed at paragraph 27 of his first, written, judgment, [2004] EWHC 2932 (Ch):

"I am not at all sure that the balance which the statutory scheme strikes between the Protocol 1, Article 1 rights of claimants and the same rights of the clients (ie their rights not to have their monies misappropriated by the claimants) pays sufficient attention to the private law rights of those clients who have contracted for the continued performance of the services of the firm and whose contracts are frustrated by the intervention. If I had thought I had the power to do so I would have wished to fashion a remedy which more satisfactorily addressed the problem."

The judge returned to the question whether the court's powers were circumscribed (as he had held them to be) at paragraph 5 of his second judgment, [2004] EWHC 3127 (Ch):

". . . the question of whether or not the court will set aside the intervention is necessarily intimately involved with the question of whether it has any power to do anything other than either set aside the intervention or allow it to continue. If, contrary to my judgment, the court does have some other powers then it seems to me arguable that the existence of such powers are relevant to the question of whether or not the intervention should be set aside. I think it is also arguable that, insofar as such powers can be founded on the statutory language in the Solicitors Act, the point is not covered by the decision of the Court of Appeal in [Holder v The Law Society [2003] EWCA Civ 39, [2003] 1 WLR 1059] . . . ."

The appeal was given an expedited hearing in this Court. At the conclusion of that hearing we indicated that the appeal would be dismissed. In this judgment I set out the reasons which led me to concur in that decision.

The regulatory framework

Paragraph 1(1)(a) in Part I of schedule 1 to the Solicitors Act 1974, read with section 35 of that Act, provides that the intervention powers conferred by Part II of schedule 1 shall be exercisable where the Council of the Law Society "have reason to suspect dishonesty on the part of (i) a solicitor, or (ii) an employee of a solicitor . . . in connection with that solicitor's practice . . .".

Where the intervention powers are exercisable, the Council may pass a resolution under paragraph 6 in Part II of schedule 1 to the effect that any sums of money to which that paragraph applies, and the right to recover or receive those sums, shall vest in the society. In those cases where the powers conferred by paragraph 6 are exercisable by virtue of paragraph 1 in Part I of the schedule (which includes cases in which there has been reason to suspect dishonesty), the paragraph 6 powers apply to all sums of money held by or on behalf of the solicitor or his firm in connection with his practice. So, in such cases, the powers apply both to monies held in any client account and to monies in the firm's office account. The effect of a resolution under paragraph 6 is that "all such sums shall vest accordingly . . . and shall be held by the Society on trust to exercise in relation to them the powers conferred by [Part II of the schedule] and subject thereto upon trust for the persons beneficially entitled to them".

Subparagraphs (3) to (5) of paragraph 6 are in these terms:

"(3) The Society shall serve on the solicitor or his firm and on any other person having possession of sums of money to which this paragraph applies a certified copy of the Council's resolution and a notice prohibiting the payment out of any such sums of money.

(4) Within 8 days of the service of a notice under subparagraph (3), the person on whom it was served, on giving not less than 48 hours notice in writing to the Society . . . , may apply to the High Court for an order directing the Society to withdraw the notice.

(5) If the court makes such an order, it shall have power also to make such other order with respect to the matter as it may think fit."

In cases where the powers conferred by Part II of the schedule are exercisable by virtue of paragraph 1 in Part I, paragraph 9 provides that the Society may give notice to the solicitor or his firm requiring the production or delivery to any person appointed by the Society of all documents in the possession of the solicitor or his firm in connection with his practice. The Society shall serve on the solicitor a notice that possession has been taken by the person appointed on its behalf – paragraph 9(7). The solicitor may apply to the High Court (within 8 days of the service of the notice) for an order directing the Society to deliver the documents to such person as the applicant may require – paragraphs 9(8) and (9). On an application under paragraph 9(8) the court may make such order as it thinks fit – paragraph 9(11).

Section 1(c) of the 1974 Act provides that no person shall be qualified to act as a solicitor unless he has in force a practising certificate. Section 15(1A) – which was introduced by section 91(2) of the Courts and Legal Services Act 1990 – provides for the suspension of a solicitor's practising certificate in a case where intervention powers are exercised on suspicion of dishonesty. The section must be read with section 15(1B):

"15(1A) Where the power conferred by paragraph 6(1) or 9(1) of Schedule 1 has been exercised in relation to a solicitor by virtue of paragraph 1(1)(a)(i) . . . [reason to suspect dishonesty on the part of the solicitor] . . . the exercise of that power shall operate immediately to suspend any practising certificate of the solicitor for the time being in force.

(1B) Subsection (1A) does not apply if, at the time when the power referred to there is exercised, the Society directs that subsection (1A) is not to apply in relation to the solicitor concerned."

Where a solicitor's practising certificate is suspended by virtue of section 15(1A) the solicitor may (at any time before the certificate expires) apply to the Society to terminate the suspension – section 16(3) of the 1974 Act. If the Society refuses an application under section 16(3), the solicitor may appeal against the Society's decision to the Master of the Rolls – section 16(4) of the Act.

It is important to keep in mind that the intervention powers conferred by Part II of schedule 1 to the 1974 Act are exercisable where the Council "have reason to suspect dishonesty" – paragraph 1(1)(a). Whether or not dishonesty on the part of the solicitor is established is a matter for the Solicitors' Disciplinary Tribunal on an application made by the Society under section 47 of the Act. But, where dishonesty in connection with the operation of the solicitor's client account is established before the Tribunal, the solicitor is almost invariably struck-off the Roll of Solicitors – see the observations in this Court in the recent appeal in Bultitude v Law Society [2004] EWCA Civ 1853 (unreported, 16 December 2004).

The origin of the provision in paragraph 1(1)(a) of schedule 1 to the 1974 Act - formerly enacted as section 31(1) of the Solicitors Act 1957 and re-enacted in the 1974 Act on consolidation - is found in paragraph 4(1) of the First Schedule to the Solicitors Act 1941. The power to intervene on reasonable suspicion may be seen as draconian; but it is clear from the 1941 Act that that power was thought to be a necessary incident of the requirement – imposed on the Law Society by section 2 of that Act – that a Compensation Fund be established, maintained and administered "for enabling the Society to make grants thereout . . . for the purpose of relieving or mitigating losses sustained by any person in consequence of dishonesty on the part of any solicitor or any clerk or servant of any solicitor in connection with any such solicitor's practice as a solicitor . . ."

It is, to my mind, important not to lose sight of the link between the obligation to maintain the Compensation Fund (now imposed by section 36(1) of the 1974 Act) and the power to intervene on reasonable suspicion of dishonesty (now contained in paragraph 1(1)(a) of schedule 1 to that Act). It is the power to intervene on suspicion of dishonesty which enables the 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.

The approach of the court on an application under paragraph 6(4)

The judge reminded himself, correctly, that the task of the court on an application by a solicitor under paragraph 6(4) of schedule 1 to the 1974 Act – that is to say, on an application for an order that the Law Society withdraw a notice served under paragraph 6(3) – is, first, to decide whether the grounds for intervention upon which the Council relied have been made out. If satisfied that the grounds for intervention have been made out, it is then necessary for the court to consider whether, in the light of all the evidence before it, the intervention should continue. That, second, question requires the court "to carry out a balancing exercise between the need in the public interest to protect the public from dishonest solicitors and the inevitable very serious consequences to the solicitor if the intervention continues" – see the observations of Mr Justice Neuberger in Dooley v Law Society (unreported, 1 September 2000), cited by Lord Justice Carnwath in Holder v Law Society [2003] EWCA Civ 39 at paragraph [15], [2003] 1 WLR 1059, 1065C-D.

The grounds for intervention in the present case

The judge addressed the first question – "whether the facts as presented to the Law Society, and as now presented on the evidence before the court, establish 'reason to suspect dishonesty'" – at paragraphs 9 to 16 of his first judgment. He concluded that "there were and are reasons for suspecting dishonesty" on those facts. His conclusion that there was reason to suspect dishonesty, both at the time of the decision to intervene and at the time of the hearing before him, was not challenged on appeal to this Court.

Notwithstanding that there is no challenge to the judge's conclusion on the first question, it is necessary to have in mind – when addressing the second question – the facts which led the judge to take the view that there was reason to suspect dishonesty. Those facts may, I think, fairly be summarised as follows:

(1) Over a period of some years – from July 2002, if not before - Mr Sritharan had made substantial round sum transfers, month by month, from client account to office account. Particulars are set out at Appendix 4 to the report dated 22 November 2004 of Mr M J Calvert, Head of Forensic Investigations at the Law Society. The transfers were substantially in excess of any amounts properly due to Mr Sritharan's firm for costs and disbursements. Of the total transferred between July 2002 and October 2004 (£3,262,389.50) only £839,471.97 was allocated to client matters – the balance (£2,422,917.53) was unallocated.

(2) Those transfers had been made on the instructions of Mr Sritharan or his salaried partner, Mrs Sivasanthiran, in order to keep the office account within the overdraft limit (£75,000) agreed with the firm's bankers. It is said that the firm had been finding it difficult to meet its cash flow requirements from the office account following the loss, in 2003, of its legal aid franchise in relation to immigration matters; but it is clear that the problem pre-dated the loss of that franchise.

(3) The effect of the transfers from client account to office account was such that, by December 2003, the deficit on client account was £1,360,500. In January 2004, Mr Sritharan had paid into the client account the sum of £550,000 – obtained from the re-mortgage of properties which he owned jointly with his wife. That injection of funds had the effect of reducing the deficit on client account to £810,500 or thereabouts; but the pattern of round sum transfers in excess of amounts properly due in respect of fees and disbursements continued thereafter. By the end of September 2004 the deficit on client account was £1,673,828.10. On 1 October 2004 Mr Sritharan paid into the client account the further sum of £676,613.

(4) That further sum of £676,613 represented monies raised by re-mortgaging five properties owned by Mr Sritharan and his wife. The re-mortgage transactions were completed in August or September 2004. Mr Sritharan's firm acted for the lender, GMAC Residential Funding. Mr Sritharan signed the certificates of title which led the lender to release funds. But he did so without having redeemed the existing mortgages – in the amount of £341,479. The effect was that, of the further sum of £676,613 paid into the client account on 1 October 2004, £341,479 represented monies which had been advanced by GMAC Residential Funding in the mistaken belief (based upon certificates of title signed by Mr Sritharan) that those monies would be applied to discharge existing prior charges – or, to put the point another way, £341,479 represented monies due to existing mortgagees.

(5) The Law Society's investigation led it to the conclusion that the deficit on client account as at 31 October 2004 was £1,543,972.30. Mr Calvert's report of 22 November 2004 records, at paragraph 16, that:

"At a meeting with Mr Sritharan on 18 November 2004, he agreed the cash shortage amounting to £1,543,972.30 and informed Mr Ireland [one of the investigating officers] that on 15 November 2004, the sum of £400,000 and on 16 November 2004 a further £70,000, was paid into the firm's client account from Mr Sritharan's personal bank account. In addition, Mr Sritharan provided Mr Ireland with a list of bills identified to date, totalling £157,944.05, which Mr Sritharan contended represented costs due to the firm and where amounts, in respect of those bills, were included as balances on the client matter listing."

Allowing for the further payments (£470,000) and for the full amount said to be due under the bills identified by Mr Sritharan (£157,944.05), the deficit as at 18 November 2004 would reduce to £916,028.25.

The judge observed (at paragraph 12 of his first judgment) that Mr Sritharan had sought to explain, and to reconcile, the shortfall by reference to two balancing figures:

"One was a credit in the monthly reconciliation summaries of the client account of £514,000 described as "Business Reserve Account". This entry referred to personal investments in the names of Mr Sritharan and his wife which had been notionally earmarked as available to meet the cash shortage. The other was a debit described as "unbilled bills of costs" which was intended to represent the total sum that the firm would be entitled to transfer from client account to office account once its clients had been billed for the work done."

But, as the judge pointed out, Mr Calvert's report (at paragraphs 8 and 19) demonstrated that Mr Sritharan's figures for unbilled costs could not be correct having regard to the amounts held on client account and required for conveyancing completions.

The judge went on to record that it was not in dispute, before him, that breaches of the Solicitors' Accounts Rules had taken place. But, as he explained, it was submitted that, nevertheless, there was no reason to suspect dishonesty. He summarised that submission at paragraph 13 of his first judgment:

". . . If I understood the submissions correctly, they were that the cause of the shortage was that the round sum transfers had been made in anticipation of the sums in due course becoming due to the firm as a result of the billing process, and that, through pressure of over-work, the firm had simply been slow to raise the necessary bills; moreover, the essential honesty of [Mr Sritharan and Mrs Sivasanthiran] could be inferred from the fact that whenever they appreciated that there might be a real shortage, steps had been taken to transfer monies (£550,000 in January 2004 and the £676,613 in October 2004) into the client account to cover the shortage as well as throughout to maintain the £514,000 in the "Business Reserve Account". Moreover, in November 2004 during the course of the investigation a further £470,000 had been introduced into the client account. If account were taken of this, and of the £514,000, and a reasonable estimate made of the amount which the firm was entitled to bill its clients, it could be demonstrated that there would in fact be no continuing deficit on the client account. In addition [counsel] pointed out that his clients had been entirely co-operative during the investigation, and had not sought to hide the accounting shortcomings from the investigators."

The judge rejected those submissions. At paragraphs 14 and 15 of his first judgment he said this:

"14. I was not persuaded by those submissions, or the evidence on which they were based. On the contrary, I was entirely satisfied that there were and remain reasons to suspect dishonesty. . . . My reasons for so concluding can be shortly stated. The need to keep client monies in a separate client bank account is fundamental in the Solicitors' Accounts Rules. The reason is obvious. It provides a mechanism whereby the client's money is protected from the consequences of the solicitor's insolvency. The rules which implement it provide an obstacle if complied with to the solicitor falling prey to the temptation of using his client's monies as if they were his own. There are, to say the least, grounds for supposing that these two professional people [Mr Sritharan and Mrs Sivasanthiran] knew of this fundamental principle as well as being bound by the rules which applied to them. There are, to say the least, grounds for suspecting that the persistent breaches of those rules of which they were guilty were deliberate. Even after the first injection of cash in January 2004 (the £550,000), when on any view the fact of a cash shortage as a result of the previous round sum transfers had become starkly apparent, the practice of making such round sum transfers continued with unabated and depressing regularity: the relevant figures are summarised at Appendix 4 to the Report. The argument that the "maintenance" of the Business Reserve Account demonstrates an essentially honest approach suffers from a number of insuperable flaws. First, its introduction as an item into the monthly reconciliation summaries of the client account demonstrates an acute awareness by Mr Sritharan that there was a cash shortage on the client account which could not be accounted for by unbilled work. Secondly, its "maintenance" does not necessarily betoken either willingness or an ability to use it to repair the deficiency in the client account. On the contrary, it supports an inference that, while Mr Sritharan had been willing to use client monies for his own purposes, he was only prepared notionally to earmark his own (and his wife's) monies to make good the defalcation. An honest man would have used his own money in the first place. Thirdly, save for its existence as a paper entry, it is unclear what assets are in the Business Reserve Account or in whose names. There is evidence that at one stage Mr Sritharan and his wife had financial assets of over £700,000. According to the information now available to the court (in the affidavit sworn pursuant to a freezing order) Mr Sritharan's financial assets are considerably less than the £514,000 figure. Yet he continues to maintain that this figure should be taken to be a credit, or potential credit, to the Business Reserve Account.

15. In addition, there are grounds for suspecting that the figure included in the monthly reconciliations for "unbilled bills of costs" is not an honest figure for the reasons given in paragraphs 8 and 19 of the Report. Indeed, there are reasons for suspecting that that figure is a pure balancing figure, i.e. a figure arrived at simply by deducting the £514,000 from the cash shortage and ascribing the balance to "unbilled bills of costs" without making any genuine attempt to calculate the amount which might be billable to clients. Those grounds of suspicion were not removed when examination of a sample of bills raised during the course of November 2004 revealed some cases in which a bill was apparently being raised in respect of work which had not been done."

Although, as the judge made clear, he was not saying that he was sure that there was dishonesty, the factors which led him to conclude that there were reasons for suspecting dishonesty are damning enough in themselves. The judge found it difficult to avoid the conclusion that the regular transfer of round sum amounts from client account to office account – in persistent breach of the Solicitors Accounts Rules and in the knowledge of the cash deficit – was a deliberate violation of the principle that clients' money is not to be used by a solicitor as if it were his own. I share that difficulty. And I, too, find it difficult to accept that an honest solicitor can advance the suggestion that that principle is maintained by designating as a "Business Reserve" monies or assets held in his wife's name; a fortiori when, as it appeared on examination of the relevant documents in this Court, those assets included investments held by his wife in a Personal Equity Plan (or PEP). And, to my mind, Mr Sritharan's readiness to sign misleading certificates of title, as solicitor for the lender, in order to procure re-mortgage advances from GMAC Residential Funding – at a time when he had not redeemed the existing mortgages and, it seems, had made no arrangements to do so out of the re-mortgage advances – is a matter which must call his honesty into question.

On 3 December 2004 Mr Sritharan swore an affidavit in response to the affidavit sworn on behalf of the Law Society in support of the original application for a freezing order. He exhibited to his affidavit a document in which he had set out his response to Mr Calvert's report of 22 November 2004. In that response, he accepted that clients' monies had been transferred from client account to office account at a time when bills had not been raised against the clients; but contended that that involved no breach of the Solicitors' Accounts Rules – although in his affidavit (at paragraph 5) he resiled from that position. He disputed the suggestion in Mr Calvert's report that he had accepted the amount of the shortfall as at 31 October 2004 (£1,543,972.30). He disputed that there had been improper withdrawals from client account. He stated that "as soon as it was discovered that excess monies had been transferred, such excess monies were immediately replaced in the firm's Client Account". At paragraph 3 of his affidavit of 3 December 2004 he said this:

". . . it is clear that there are no grounds of suspected dishonesty and as far as I am concerned, the report which Mr Calvert prepared and which was presented to the Adjudication committee of the Law Society which authorised the intervention, is totally misleading and had the Adjudication Committee been provided with the true and actual facts as stated in my response which facts were available to Mr Nike Ireland, I am certain that the Law Society would not have authorised the intervention."

Mr Sritharan may yet make good his contentions that "there are no grounds of suspected dishonesty" and that Mr Calvert's report is "totally misleading". His response to that report was not before the Council of the Law Society when it resolved to intervene. But the affidavit and the response were before the judge in December 2004. And, as I have said, there is no challenge in this Court to the judge's conclusion – with which the judge expressed himself "entirely satisfied" - that there were and remained reasons to suspect dishonesty.

The second question –whether the intervention should continue

Mr Sritharan's response to Mr Calvert's report had no part in the decision to intervene. That response – and the affidavit to which it was an exhibit – were before the judge, but did not lead the judge to conclude that the decision to intervene on grounds of suspected dishonesty was ill-founded. But the relevance of the response and the affidavit does not end there. The response and the affidavit could have been taken into account - and in my view should have been taken into account - when the judge addressed the second question which was before him. For my part I think it was relevant to that question – whether, in the light of all the evidence which had become available at the time of the hearing of the application under paragraph 6(4) of schedule 1 to the 1974 Act, the intervention should continue – that the solicitor had not recognised the importance of the principle that clients' money is not to be used as if it were his own; and had not recognised the role of the Solicitors Account Rules in preserving that principle and the need to observe those rules. Whether or not Mr Sritharan is found by the Disciplinary Committee to have acted dishonestly – or merely foolishly – it was, I think, relevant to the question whether the intervention should continue (following a finding that the decision to intervene on the grounds of suspected dishonesty was well-founded) that, as appears from his response and his affidavit, Mr Sritharan showed no understanding or appreciation of the reasons why his conduct in relation to the transfer of monies from client account to office account was unacceptable.

The judge accepted that, if it were necessary for him to choose between the intervention continuing or being wholly reversed, the balance must fall in favour of allowing the intervention to continue. At paragraph 26 of his first judgment he said this:

". . . There is simply no other way of countering the adverse consequences for clients of the abuse of the client account which has undoubtedly taken place, which has not been repaired and which abuse cannot (absent the intervention) be guaranteed not to continue in the future."

On the basis that the choice was between the intervention continuing or being wholly reversed, the judge was plainly correct to reach that conclusion. I did not understand the appellant to suggest otherwise in this Court. This is not a case in which the solicitor can be allowed to continue to carry on as he has in the past. The judge has accepted that there is a substantial deficit on client account. That deficit has not been made good. And there is no reason to think that the cash-flow problem in relation to the office account, which has led to that deficit on client account, would not persist in the future. Some form of supervision and control is required; and, if that cannot be provided by the exercise of powers short of full intervention, there is no alternative to the intervention continuing.

The judge went on to address the question whether the choice was, indeed, between the intervention continuing or being wholly reversed. He reached the conclusion that it was. On his appeal to this Court, the appellant challenges that conclusion. It is said that the judge ought to have accepted that the Law Society's powers under schedule 1 to the 1974 Act – and his own powers under paragraph 6(4) and (5) of that schedule – were not so circumscribed.

At paragraph 27 of his first judgment, in the passage which I have already set out, the judge expressed regret that he had found it necessary to hold that the choice was between the intervention continuing or being wholly reversed. He was not convinced that the balance struck by the statutory scheme between, on the one hand, the rights of clients not to have their monies mis-appropriated by the solicitor and, on the other hand, the rights of clients not to have the continued performance of the services of the firm (for which they have contracted) frustrated by the intervention gave sufficient weight to the latter. He indicated that, if he had had the power to do so, he would have wished "to fashion a remedy which more satisfactorily addressed the problem".

But the judge was satisfied that the statutory scheme provided no power to do so. After referring to the submission advanced on behalf of Mr Sritharan that "a properly tailored and proportionate response would be to fashion a remedy which would safeguard (and restore) the client account while permitting the firm to continue in practice and service its clients" and to the submission that that could be achieved by the court "setting aside the notices and making appropriate ancillary orders" under which "the remedial measures which Mr Sritharan would, if permitted, have undertaken" would take place and be monitored, the judge said this, at paragraph 24 of his first judgment:

"I remain, however, unpersuaded that the course which is urged upon me is achievable by the court within the statutory framework or indeed was or is available to the Society. The only jurisdictional basis suggested for the necessary orders of this court is that contained in paragraph 6(5). That, however, is premised on the court having first decided that the Society should be ordered to withdraw its notice. I do not think it a proper approach to that decision to take into account the possibility of the court substituting some different remedy from that which Parliament has laid down as available for application by the Society. To adopt such an approach would be to fall into the same error as was committed by Peter Smith J. and corrected by the Court of Appeal in Holder, namely judging the Society's actions by reference to some hypothetical alternative procedure devised by the court rather than by reference to the procedure laid down by Parliament."

The judge had taken a similar view in Barnet v Law Society (unreported, 17 September 1999). That was an application for interim relief, pending the substantive hearing of the applicant's challenge to the exercise by the Law Society of intervention powers under schedule 1 to the 1974 Act. The exercise of those powers had had the effect, under section 15(1A) of the Act, of suspending the solicitor's practising certificate. The interim relief sought was intended to enable the solicitor to continue to practise until the substantive hearing of the challenge. The judge reminded himself that suspension of the practising certificate under section 15(1A) was automatic (subject to a contrary direction under section 15(1B)); and that the Act provided, in section 16(4) and (5), for termination of the suspension on application to the Law Society, or (on appeal) by the Master of the Rolls. The judge said this (transcript, page 6D-F):

"It is clear from that brief summary of the statutory framework Parliament has understandably considered that the Law Society is the appropriate body to decide on the circumstances in which a suspension should be lifted, whether it should be lifted at all and if it is to be lifted, whether that should be conditionally or unconditionally."

In his second judgment in the present case (at paragraph 4) the judge observed that, having regard to the way in which this Court had expressed itself in Holder v Law Society (supra), he saw no reason to alter the approach which he had adopted in Barnet some five years earlier.

The decision of this Court in Holder v Law Society

It is pertinent, therefore, to have in mind the issues that were before this Court in Holder and the way in which the court dealt with those issues. The facts may be taken from the headnote at [2003] 1 WLR 1059. An investigation by the Office for the Supervision of Solicitors into the claimant's practice as a solicitor had revealed that the claimant had not maintained any client account records for some 14 months past, that there was a cash shortfall on client account of at least £200,000 and that the claimant had withdrawn a large amount of money from client account for his own purposes. The Law Society resolved to intervene in the claimant's practice pursuant to schedule 1 to the 1974 Act by vesting the practice monies in the Society (paragraph 6 of schedule 1) and requiring the claimant to deliver practice documents to the Society's agent (paragraph 9 of schedule 1). The claimant applied (under paragraph 6(4)) for an order directing the Society to withdraw its notice of intervention. On the Society's application for summary judgment the master dismissed the claim. The claimant's appeal to the judge (Mr Justice Peter Smith) was allowed. The judge held that the claim should go to trial, on the basis that he could not conclude that there was no real prospect of the claimant establishing that there had been an infringement of the right to peaceful enjoyment of his possessions guaranteed by article 1 of the First Protocol to the Convention on Human Rights and Fundamental Freedoms.

In the course of his judgment, [2002] EWHC 1599 (Ch), Mr Justice Peter Smith had rejected the submission, made on behalf of the claimant, that "under no circumstances" could the statutory powers of intervention be justified, given that the exercise of those powers would, in effect, destroy the solicitor's practice (ibid, paragraph [38]). But he had accepted the alternative submission that the exercise of the powers could, in some circumstances, infringe the Convention right guaranteed by article 1 of the First Protocol. He thought that it was a question of fact and degree in each case. He then went on to describe the features which led to the conclusion that the exercise of the intervention powers would lead to the destruction of the practice and would cause "the clients to be scattered to the winds and the recovery of moneys made virtually impossible" (ibid, paragraph [69]). At paragraph [70] he asked himself whether the exercise of powers which would lead to the destruction of the solicitor's practice was necessary. He said this:

"In some cases it may be necessary because it might be a necessary evil to correct a much greater one. The more interesting question is, is it always necessary. In that case I am not convinced that it can be said that an intervention in the way in which the procedure is currently permitted to be exercised, is always necessary. It follows from that analysis that if the procedure was not necessary in that way, and it resulted in the interference in the right to possession of property, the procedure itself will infringe the claimant's human rights. I do not see that it can be said that there is no other alternative. If a report for example, is prepared along the lines of the present case there would have been no difficulty in making an appointment at short notice to go to court for an order for an intervention or some lesser order if the court thought that appropriate. There would then be an independent review and the court (like a search order or a freezing order) would act on the evidence. If the evidence was made out, there would be an independent review of the procedure. Intervention in a full blown way might be required on occasions. Alternatively the court might feel a lesser intervention (such as a receiver, a manager) would be appropriate.. . ."

He continued in paragraph [70] – and in paragraphs [71] and [72] – by identifying the advantages which, in his view, would follow from the appointment of a receiver over a solicitor's practice, as an alternative to the exercise of the statutory powers of intervention. At paragraph [79] he said this:

"On the evidence before me at the moment I cannot conclude that there is no real prospect of the claimant establishing that his human rights have been infringed. I say that because it seems to me that the procedure in the present case was not necessarily the only way to address the problem. I do not see why a receivership could not have been contemplated as an adjunct to the intervention powers in advance of the intervention or in tandem with the intervention."

The Law Society appealed to this Court. The appeal was allowed. The lead judgment was delivered by Lord Justice Carnwath. At paragraph [23] of his judgment ([2003] 1 WLR 1059, 1068C-D) he identified the issues which the court needed to address:

"Mr Dutton, for the Law Society, submits that the judge was wrong to find that the intervention procedure raised any issue under the Human Rights Act 1998, and in particular that he was wrong to think that there was an alternative procedure. Mr Engelman [counsel for the claimant], on the other hand, repeats his submission that the intervention procedure itself offends article 1 [of the First Protocol], and he supports the judge's finding of a possibility of a breach on the facts of this case."

In an earlier paragraph of his judgment (paragraph [19], ibid 1066F-1067A) Lord Justice Carnwath had set out the passage at paragraph [70] of the judgment of Mr Justice Peter Smith to which I have already referred. In paragraph [30] of his judgment Lord Justice Carnwath said this:

". . . Peter Smith J appears to have approached the matter on the basis that it was for the court to determine what was 'necessary' in the public interest, and in doing so to compare other possible procedures devised by the court. In my view, this was fundamentally wrong."

He went on to explain why. In relation to the intervention powers it was necessary, in addressing the question whether "a fair balance had been struck between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights", to keep in mind the "margin of appreciation or discretion" allowed to the legislator and the decision maker. That required consideration at two stages: "first, the discretion allowed to the legislature in establishing the statutory regime, and secondly, the discretion of the Law Society as the body entrusted with the decision in an individual case" (paragraph [30], ibid, 1070D). He observed that there were no arguable grounds for thinking that the margin allowed to the legislature (in establishing the statutory regime) had been exceeded. He then turned to the Law Society's decision to intervene in the particular case. He said this (paragraph [32], ibid, 1070G):

"Having reached that point, the Law Society's actions must be judged by reference to the procedure laid down by Parliament, not to some hypothetical alternative procedure."

That made it unnecessary to rule on the submission, advanced on behalf of the Law Society that the alternative procedure suggested by the judge, involving an application to the court for a receiver, was not in fact available to the society.

It can be seen, therefore, that Lord Justice Carnwath (with whom Lord Justice Aldous agreed - paragraph [39], ibid, 1072C) was satisfied: (i) that the statutory regime under which powers of intervention were conferred on the Law Society was not, of itself, inconsistent with the guarantee provided by article 1 of the First Protocol: and (ii) that the Law Society was not to be criticised for taking the view that it should act in accordance with the statutory regime, rather than seek to adopt some alternative procedure – say, an application to the court for the appointment of a receiver. Those conclusions – with which, if I may say so, I respectfully agree – are binding on this Court. I would add two further observations in this context. First, the conclusion that the powers of intervention conferred by the statutory regime are not, of themselves, inconsistent with convention rights does not depend upon giving the provisions in schedule 1 to the 1974 Act some strained or extended meaning – so as to read those provisions in a way which is Convention compliant. As Lord Justice Carnwath recognised (paragraph [32], ibid, 1070H): ". . . if the intervention procedure on its own had been found to be non-compliant, it might be necessary, to avoid incompatibility, to 'read in' such a power (applying the beneficial interpretation required under the 1998 Act, s 3)". But he did not find it necessary to rely on section 3 of the Human Rights Act 1998. Second, although the Law Society could not be said to have acted in a manner inconsistent with the solicitor's Convention rights because it took the view that, if it were to act at all, it should act in accordance with the statutory regime, rather than seek to adopt some alternative procedure, there could be cases in which the decision to intervene – rather than not to intervene – was a decision which breached Convention rights. This, I think, is what Sir Christopher Staughton had in mind when he said (paragraph [38], ibid, 1072B) that he could imagine "circumstances where the Law Society might be found not to have complied with the Convention, or with the Human Rights Act 1998".

That left for consideration, in Holder, the question whether, on an application under paragraph 6(4) of schedule 1 to the 1974 Act, the court itself should seek to "fashion a remedy" as an alternative to allowing intervention to continue. That was the question addressed by Lord Justice Carnwath at paragraph [33] of his judgment, when he said: ". . . the court has a separate duty to consider the merits of the case, in accordance with the principles I have discussed". The principles to which Lord Justice Carnwath referred in that passage were those which he had earlier identified (paragraph [29], ibid, 1069G-H) as relevant to the "public interest justification" in the context of article 1 of the First Protocol: "the court must determine whether a fair balance was struck between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights" and "There must be a reasonable relationship of proportionality between the means employed and the aim sought to be realised by any measure depriving a person of his possessions." But those principles must be applied "while paying due regard to the views of the Law Society, as the relevant professional body". In making that last observation, Lord Justice Carnwath was adopting the observations of Mr Justice Sedley in this Court in Giles v Law Society (1995) 8 Admin LR 105, 118H-119B:

". . . it is by common consent a matter for the court's judgment [on an application under paragraph 6(4) of schedule 1] (I prefer not to use the word discretion in this context) whether it should direct withdrawal – a judgment which may be significantly, though not conclusively, affected by the Law Society's own view of the facts, since the view taken by the professional body charged with the regulation of solicitors' practices is in itself a relevant evidential factor to which the judge not only can but must have regard."

Lord Justice Carnwath observed (paragraph [33], [2003] 1 WLR 1059, 1071B) that "this meets any 'fair balance' requirement". He went on to say this:

"The judge found that, viewed by reference to the Solicitors Act itself, the society's intervention was 'entirely justified'. I agree. In my view, that should have led him to have upheld the society's view as to where the balance lay on the facts of this case."

It is, I think, clear that this Court took the view in Holder that, when deciding whether to dismiss an application under paragraph 6(4) of schedule 1 to the 1974 Act – in circumstances where the Law Society's decision to exercise its statutory powers of intervention could not, itself, be said to be flawed - a court was not required to ask itself whether it should fashion an alternative remedy. Parliament had given to the Law Society powers to intervene when the Society was satisfied that the circumstances required intervention; and had prescribed the form that intervention under those powers should take. It was not for the Law Society to seek some other remedy from the court; and it was not for the court to substitute some remedy of its own in the place of that which Parliament had prescribed and which the Law Society (acting properly) had brought into effect. It is, of significance that, in the course of his judgment, Lord Justice Carnwath cited, with apparent approval, the judgment of His Honour Judge Behrens QC (sitting as a Judge of the High Court) in Wright v Law Society (unreported, 4 September 2002):

"The Law Society has to take into account the public interest in deciding whether to exercise its powers of intervention at all. The public interest requires a balance to be struck between the draconian effect of intervention and the matters referred to earlier in this judgment. Second, I have considerable doubts about the jurisdiction of this court to adopt the sort of solution envisaged by Peter Smith J in paragraphs 70 and 71 of his judgment. Intervention in its full form is the statutory remedy entrusted by Parliament to the Law Society in order to regulate the profession. It is not, in [my] view, open to the courts to devise a different and less draconian remedy. . . "

This appeal

It follows that I think that the judge was right to take the view that, having regard to the way in which this Court had expressed itself in Holder, there was no reason to alter the approach which he had adopted in Barnet (supra) some five years earlier. Further, his observations in Barnet – where the question was whether to lift the suspension of a practising certificate - apply with equal force, as it seems to me, where the question is whether to order that an intervention notice served under paragraph 6 of schedule 1 to the Act should be withdrawn. Parliament has provided statutory powers to intervene in cases of suspected dishonesty; has prescribed the form which intervention may take under those statutory powers; and has entrusted the exercise of those powers to the Law Society, as the body charged with the task of regulating the solicitors' profession and of maintaining a compensation fund for the benefit of those who are the victims of dishonesty. The court is concerned to see that those powers are exercised lawfully. But, where the decision to intervene was well-founded when made and there is no new material which requires the decision to be set aside, the court should be very slow to substitute some other remedy for that which Parliament has thought appropriate, even if it has power to do so.

For my part I think that it would have open to the judge, in the present case, to take the view that, even if he had power to "fashion a remedy which more satisfactorily addressed the problem", this was not a case in which that power should be exercised. This was not a case in which the court should substitute some other remedy for that which Parliament had prescribed. To adopt the words of Sir Christopher Staughton in Holder (paragraph [37], [2003] 1 WLR 1059, 1071H-1072A) "If ever there was a case where it was desirable in the public interest that the Law Society should intervene in a solicitor's practice, this was that case. It is the habitual task of solicitors to have in their charge in the course of their practice large sums of their clients' monies. They must be honest and reliable people". And, if the judge had taken that view, I think he would have been correct.

But, the judge did not take that view. He made it clear, at paragraph 27 of his first judgment, that if he had thought that the court had power to fashion an extra-statutory remedy, he would have wished to do so. He appreciated, however, that that would be a difficult task in the circumstances of the present case. At paragraph 25 of his first judgment he had said this:

"At one point during the argument I mooted the possibility of a solution under which the practice monies might continue to be vested in the Society under paragraph 6 but the files returned to the claimants under paragraph 9(11) with a view to their being able to continue to service those clients. On consideration, however, such a scheme simply offers no practical solution since it pre-supposes (1) that the claimants would be able to operate a client account in relation to those clients (which they would not) and (2) that the suspension of their practising certificates has been lifted (which is not in my power to order)."

It has been a striking feature of the appellant's arguments in this Court that, although the judge was criticised for not devising some extra-statutory remedy, it was never explained to us what that remedy should have been. Indeed, despite a number of requests from the Court, counsel was never able to put before us, in other than the vaguest terms, a proposed form of the order which he invited us to hold that the judge should have made.