Case No: A3/2011/1435
Neutral Citation Number: [2011] EWCA Civ 1419
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE MORGAN
[2011] EWHC 1151 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 5 December 2011
Before:

LORD JUSTICE LLOYD
LORD JUSTICE KITCHIN
and
SIR ROBIN JACOB
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Between:

	WITHERS LLP	Applicant
Respondent	
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	LANGBAR INTERNATIONAL LTD	Defendant
Appellant	

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Andrew Fletcher Q.C. and Ms Charlotte Eborall (instructed by Jones Day) for 
the Appellant
Joanna Smith Q.C. and Sebastian Allen (instructed by Withers LLP) for the Respondent

Hearing date: 8 November 2011
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Judgment
Sir Robin Jacob: 
INTRODUCTION
1.	By his judgment and order of 9th May 2011 Morgan J held, [2011] EWHC 1151 (Ch), that Withers (a firm of solicitors) had a common law lien over money (“the Money”) held in its client account (“the Account”) pursuant to a court order.  He rejected Withers’ alternative claim that it had an equitable charge over the Money.   
2.	I must explain briefly how and why the Money came into the Account. Morgan J gives a fuller account at [4-32]. Withers’ clients (collectively “Rybak” - for details see the judgment of Morgan J at [2]) had been sued for a substantial sum by the Respondents, Langbar.   In April 2008 the proceedings were settled by an agreement by which Rybak agreed to pay about £30m to Langbar.  The £30m was warranted by Rybak to equate to nearly all their worldwide assets.  These included a Monaco apartment owned by SCI Atol, the 4th defendant and a member of “Rybak” as defined.
3.	The agreement contained a provision about the payment to Langbar of a sum of money which would be raised by a sale or mortgage of the apartment.   The agreement was varied by an agreement of September 2008.   This provided that in the event of a sale before the end of the year, Rybak would pay €7,588,000 from the net proceeds of the sale, regardless of the actual price achieved.   
4.	In December 2008 Rybak found a potential purchaser and wished to proceed.   Langbar wished to prevent the transaction going through and to that end had lodged letters of opposition with a notary in Monaco which would have prevented the sale.  
5.	Rybak applied in the original proceedings for an order preventing Langbar from interfering with the sale.  Morgan J heard the application on notice on 19th December 2008.  He granted the order sought subject to conditions about what was to happen to the proceeds of sale.  Langbar objected to these being paid into the account of Rybak’s Monegasque lawyer.  It suggested that the money should be paid into a client account of Rybak’s solicitors who were then Withers.  The money would thereby be safeguarded within the jurisdiction.  Morgan J acceded to that proposal, saying in his judgment that the proceeds were to be paid into “the relevant escrow account.”   He made an order (“the Morgan order”) to which I shall have to return in detail.
6.	The sale went through for a sum exceeding €13m.  In accordance with the Morgan order the money was paid into the Account.  Pursuant to a provision of the Morgan order €7.588m was paid over to Langbar, leaving a sum in excess of €5m in the Account.   
7.	Rybak then started a new action against Langbar and Langbar counterclaimed.  The dispute was about whether Rybak had complied with the settlement agreement and whether Rybak were liable for misrepresentation.   By the counterclaim Langbar were claiming a lot more than was in the Account.
8.	In August 2009 Rybak applied for release of the money held in the Account, doing so pursuant to a provision of the Morgan order.   Shortly thereafter, in early September, HHJ Gordon in the Central Criminal Court on the application of the SFO made a general freezing order over Mr Rybak’s assets.  The order expressly included the funds held in the Account.
9.	Rybak’s application for release of those funds came before HHJ Waksman Q.C. sitting as a High Court Judge.   Following a disputed hearing (which he treated as an application to vary a freezing order) he made an order dated 11th September 2009 varying the Morgan order (“the Waksman order”).   
10.	Later in October HHJ Gordon varied his earlier order so as to prevent the sum in the Withers account being diminished below €2m.  In April 2010 the Gordon order was wholly discharged.
11.	In May 2010 Withers, acting for Rybak, applied for an order that £456,166 should be released from the Account to pay the legal costs of Rybak up to that date.   The application was adjourned to the trial of the new action and counterclaim.  That came on before Morgan J in July.  In the event there was no trial on the merits because he held that Rybak were in breach of an unless order, that the consequence of that was that the defence and counterclaim were struck out and that relief against that consequence should not be granted.  
12.	The result was a judgment for Langbar against Rybak in the sum of €3,852,000 plus interest, and an order for an assessment of damages for a claim included in the counterclaim.  Rybak were ordered to pay €1m interim damages in respect of that, the costs of the proceedings on an indemnity basis and to pay €900,000 on account of those costs.
13.	Morgan J made specific provision as what was to happen to the money in the Account.  Langbar wanted all of it transferred to it but by now Withers was claiming a retaining lien or equitable charge over the Money.   To hold the ring until the validity of that claim could be decided, Morgan J’s order contained the following provision:
9.	All of the money in the Account shall be paid forthwith by Withers LLP to Langbar’s solicitors in partial discharge of the Rybaks’ liabilities under this order. Provided however that if Withers LLP give to Langbar a cross-undertaking in damages in the usual form then they may retain the amount of £410,000 in the Account until close of business on 14th July 2010. Withers LLP shall have liberty to apply on 24 hours notice to Langbar for an order extending the time for payment of the £410,000.
14.	Time under the order was extended and on 21st July 2010 Withers applied for an order that the £410,000 in the account (the balance having been paid to Langbar) could be retained whilst their reasonable legal expenses were assessed and that when they had been assessed Withers could be paid the assessed sum out of that money, any balance to go to Langbar.
15.	In August Rybak assigned to Langbar all its rights in the money in the account on the basis that any money recovered would be applied to reduce its debt to Langbar.
16.	Thus the upshot as it came before Morgan J to decide the lien/equitable charge point is that there was €410,000 in Withers’ client account.  It had got there pursuant to the Morgan order which had been varied by the Waksman order.   
The Two Orders
17.	The Morgan order provided:
1.	The injunction granted in paragraph 2 below shall be conditional upon the Applicants [i.e. Rybak] agreeing and undertaking forthwith to transfer or to procure the transfer of the net proceeds of any sale on or before 31 December 2008 of the apartment in Monaco owned by the Seventh Defendant/Applicant [i.e. SCI] (“the apartment”) to a client account of their solicitors Withers LLP (“the account”) on terms that:
1.1 subject to paragraph 1.2 below, the monies will be held in and not withdrawn from the account until further Order by the Court;  
1.2 the Applicants may direct payments to be made from the account to the Respondent [i.e. Langbar] in discharge of or on account of sums due from the Applicants to the Respondent under the settlement agreements scheduled to the Tomlin Orders in these proceedings dated 21st April 2008 and 23rd October 2008.
2. [The injunction ordered by the court]
3. The Applicants and the Respondent shall each have permission to apply, and in particular (but without limitation) the Applicants shall have permission to apply for an Order permitting payments for their living and legal expenses to be made from the account pending the resolution of any dispute that may exist as to who is entitled to the monies in the account.
18.	The Waksman order provided:
2. Subject to paragraph 3 below, the monies in the Account shall be held in and not withdrawn from the Account until further Order by the Court.
3. Subject to the terms of a Restraint Order made by His Honour Judge Gordon in the Central Criminal Court on 11th September 2009, the [Morgan order] is varied so as to permit the Claimants [i.e. Rybak] to direct payments to be made from the Account, as follows:
i) all legal expenses incurred by the Claimants in relation to these proceedings shall be notified by Withers LLP to Jones Day [Langbar’s solicitors] and, upon confirmation from Jones Day that the Defendant [i.e. Langbar] consents to the reasonableness of those expenses (such consent being presumed in default of a response within seven days), the Claimants may direct that sufficient monies shall be released from the Account to fund those legal expenses;   
ii) the Claimants shall be entitled to monthly living expenses payable from the Account on the first day of each month in the sum of €25,000. Payment of these expenses is to commence immediately with the first payment for September 2009 to be made as soon as reasonably practicable.
iii) [t]he Claimants shall be entitled to an immediate payment from the Account of €90,180 to cover outstanding expenses.
4. ..
5. The Claimants and the Defendant shall have permission to apply, and in particular (but without limitation) the Claimants shall have permission to apply for an Order permitting additional payments for their living expenses and/or for any legal expenses not consented to under paragraph 3 above and/or for any other payments arising in the ordinary and proper course of business to be made from the Account pending resolution of the proceedings. Applications for living expenses other than those identified herein at paragraph 3(ii) may be made in writing to HHJ Waksman QC where appropriate.
The Lien Point
19.	Halsbury’s Laws (Vol.66, 2009, para. 997) says (omitting footnotes):
The general rule is that the retaining solicitor’s lien extends to any deed, paper or personal chattel which has come into the solicitor’s possession in the course of his employment and in his capacity as solicitor with the client’s sanction and which is the client’s property. … 
The lien does not extend to ... (d) documents which did not come into the solicitor’s hands in his capacity as solicitor for the person against whom the lien is claimed … but as … trustee.  
Moreover, where … money is paid to the solicitor for a particular purpose so that he becomes a trustee of the money, no lien arises over … that money unless subsequently left in the solicitor’s possession for general purposes.
The passage was cited by Evans-Lombe J in Euro-Commercial Leasing v Cartwright and Lewis [1995] 2 BCLC 618 at pp.621-2.
20.	The key question seems to me to be whether money in a client account is there “for general purposes.”   
21.	It is not so where it is the subject of a purpose trust, for instance where money is provided to a solicitor for a particular purpose which then fails.  Then the solicitor holds it in trust for the provider as in Stumore v Campbell [1892] 1 QB 314.   
22.	But a purpose trust is not the only way in which a lien over money in a client account will not arise.  The question must always be, why is it there?  And if the reason is inconsistent with a lien, then there will be no lien.   A purpose trust is merely an example of inconsistency with a lien.   In deciding whether there is inconsistency a key question will therefore be whether the money is there “for general purposes” or for a particular purpose?  
23.	The Judge reasoned thus:  when the money came into the account it was effectively money held and frozen subject to a freezing order.  Such frozen money does not give the claimant any security over it:  it remains the property of the defendant.  All that the freezing order does is to restrain dissipation so that the money will be available to meet any ultimate judgment, see Flightline v Edwards [2003] 3 All ER 1200 and Tradegro v Wigmore Street Investments [2011] EWCA Civ 268.
24.	So, the reasoning went on, when  the money came into the account pursuant to the Morgan order it was not, albeit frozen, subject to a security interest or trust.  There was no charge over it, even though at the hearing it had been described as going into an “escrow account.”  So it belonged to Rybak.  He considered the position to be even clearer following the variation made by the Waksman order.   
25.	Given that it was Rybak’s money placed into a client account pursuant to client instructions, the Judge then concluded that it followed that there was a lien over it.
26.	Now by the conclusion of the argument before Morgan J, Langbar (to whom Rybak had assigned all of its interest in the Money) was not contending that it had a security interest in the money.   Mr Andrew Fletcher QC (with Ms Charlotte Eborall, neither of whom had appeared below) for Langbar does not so contend before us.   He submits that does not matter.  The money went into the account so that it would remain available and subject to the court’s directions as to its disposition.  Thereby, if the court thought fit, it could be used towards the satisfaction of any claim of Langbar.   That is inconsistent with Withers having any lien.   For otherwise to the extent of the lien the money would not be available to satisfy the claim.  
27.	Ms Joanna Smith QC (with Mr Sebastian Allen) for Withers accepted that no actual lien arose when the money went into the account following the Morgan order.  But not for the reason advanced by Mr Fletcher.  She said there was no lien because control over the money had passed to the Court:  the money “will be held in and not withdrawn from the account until further Order by the Court.”   However, she submitted, the Morgan order was not inconsistent with a lien arising later if and when Rybak in some way became entitled to the money in the account or the purpose for which it was in the account expanded to include payment of Withers’ fees.
28.	And that happened, she submitted, on the making of the Waksman order (or, more accurately when the overriding Gordon order was later discharged).  For under the Waksman order Rybak did have sufficient control over the money in the account.  It could direct that sufficient moneys be released from it to pay legal expenses.  
29.	True it is that there was a prior procedure to be gone through (notification to Jones Day followed by consent as to reasonableness) but that was essentially only procedural: if Jones Day did not consent as to reasonableness the matter could be ruled upon by the court pursuant to the permission to apply given by paragraph 5.  Mere lack of “automaticity” (by which she meant an immediate right to exercise it) was not an essential requirement of a lien – there could be prior procedural hoops to be gone through. Thus, for instance, a retaining lien is not inconsistent with s.11(3)(c) of the Insolvency Act 1986 which prevents the taking of any steps to enforce a security over a company’s assets save with the consent of the administrator or the leave of the court, see Euro-Commercial Leasing.  Similarly the fact that the Solicitors’ Accounts Rules requires a bill to be submitted to the client before money can be transferred from a client account to an office account does not prevent money in the client account from being subject to a lien, Irwin Mitchell v HMRC [2008] EWCA Crim 1741, [2009] 1 WLR 753.
30.	Nor, she submitted, did the fact that the order provided for living expenses of €25,000 per month make it inconsistent with a lien.  There was enough money in the account to provide for that for so many years that in reality there was no inconsistency.
31.	I am unable to accept Miss Smith’s submissions.   Firstly I think that Mr Fletcher was right in contending that the Morgan order was inconsistent with a lien coming into existence at the time the money was paid in.  The whole purpose of the order was to ensure that the money was held in this jurisdiction so as to be available, if the court thought fit, to satisfy, or go towards satisfying, Langbar’s claim.  The payment had no other purpose.  The money could easily have been paid into court or into a joint solicitors’ account instead.  No-one could realistically have supposed, when Langbar (for it was Langbar) proposed that the money be paid into a Withers client account that Withers would have any claim ahead of Langbar over the money.   
32.	It is true that the Morgan order did not create a purpose trust in favour of Langbar.  But it is equally true that the order did not create any proprietary right, actual or potential, in favour of Withers.   Suppose the Waksman order had never been made and Langbar applied at that stage for the money to be paid to it.  Surely Withers could not have asserted a lien over it.
33.	Nor do I accept the implicit assumption in Miss Smith’s argument that if the money was not subject to a purpose trust it was Rybak’s and that it followed that a lien arose automatically.  There is room for an undistributed middle, namely that the deposit of the money was inconsistent with a lien arising, actually or potentially.   
34.	I think there is a good analogy here with Halvanon Insurance v Central Reinsurance [1988] 1 WLR 1122.  There a defendant had paid into a joint account of his and the plaintiff’s solicitors a sum as a condition of leave to defend.  The sum was “to abide the event of the action.”   The plaintiff’s solicitors later contended that they had a lien over the money in the joint account.  Hobhouse J held that they did not.  He worked by analogy with a payment into court and held that the money was held as bare trustees who had no interest of their own in it.   I do not see why the fact it was in a joint account makes any difference (Hobhouse J did not rely on that point).   Nor do I see any real difference of the purpose of the payment in that case and the present.
35.	I turn to Miss Smith’s contention that following the Waksman order Rybak were essentially entitled to the money in the account for the purpose of paying Withers subject to merely procedural steps.  The suggestion was that the Waksman order expanded the purpose of retention of the money in the Account so as to encompass Withers’ fees.  
36.	But the steps which would or could be involved were more than merely procedural.   First of all Rybak had to direct. Then Jones Day had to be asked to consent to reasonableness.   Unless Jones Day consented, there was no entitlement.  In the absence of consent an application would have to be made to the Court.  It is not certain that such an application would succeed – for instance suppose it appeared on such an application that the Rybaks had sufficient funds to meet the bills?  Surely the court would not then have reduced Langbar’s protection against dissipation which was the fundamental purpose of the Morgan order.  Moreover the whole order remained subject to potential variation and in those circumstances the Waksman order itself would very likely have been varied.
37.	The procedural steps which might be involved were not merely administrative as for instance sending a bill as in Irwin Mitchell or a prior check by the court (in the absence of administrators’ consent) that there is an existing lien or other proprietary right as is provided for by s.11(3)(c) of the Insolvency Act.  Note that in both these cases there is nothing contingent about the existence of the lien – merely hoops which have to be gone through before it could be enforced.
38.	Morgan J said: at [61]
“the real question in this case is whether [the orders] produced the result that Withers held the monies in their client account for a particular purpose which was incompatible with [a retaining lien].”
39.	He thought the point was “more arguable” in the case of the Morgan order but that Waksman order was not incompatible with a lien.  I do not agree.  Rybak did not have control over the money in the Account.  Even if it wanted to pay the fees there were obstacles in the way which were not purely administrative.  And the real purpose of the money being in the Account, to protect Langbar’s interest in non-dissipation, remained.   
40.	Accordingly I would allow the appeal.
Equitable Charge?
41.	Morgan J ruled against Withers on this point which is therefore raised before us by way of cross-appeal.
42.	The law was undisputed, being clearly set out by Lord Wrenbury in Carey v Palmer [1926] AC 703:
The law as to equitable assignment, as stated by Lord Truro in Rodick v. Gandell 1 D.M. & G. 763, is this: 
"The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers."
An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a Court of equity will decree specific performance.
43.	So what we have to look for is an agreement for valuable consideration – a contract – that the money shall be applied in a particular way, namely for payment of Withers fees.   Unless there is such an agreement there is no equitable charge.
44.	The Judge dealt with this briefly.  He referred to the fact that he had been taken through a number of witness statements (some of which, I interpose contained inadmissible material of the kind “The common understanding and practice of Withers, the Rybaks and Langbar has always been …”) and emails.  He concluded that:
The Rybak parties stopped short of taking on a specific obligation to pay Withers’ reasonable fees out of the money in the client account.
45.	Miss Smith had to contend that he was wrong.  She too took us through a number of witness statements and emails.  The high point was an email exchange on 21st May 2010.   Mr Wass of Withers wrote:
We have asked repeatedly for your consent to make an application to the court for the discharge of your outstanding legal fees from the Frozen Account..
Please will you now consent to Withers making an immediate application to court for the discharge of all outstanding fees excluding [a disputed bill] from the Frozen Account.
46.	The reply from Mr Rybak, who by then was acting without legal advice, was:
I have no problem of you discharging the fees as we have suggested in your previous emails …
At the same time by granting you permission to discharged (sic) I would ask you and instruct you ..
There then followed a list of requirements such as advice as how to obtain an extension of time, to return all personal documents, help and assistance to the new lawyer, to provide all files from April 2008 to the present and so on.
47.	If one assumes Mr Wass’s email to constitute an offer, then it is clear that the response is a counter-offer.  It was never accepted.  So there was no contract.   It is not necessary to go into whether there was any consideration.
Conclusion
48.	I conclude that the Langbar appeal should be allowed and the cross-appeal of Withers dismissed.
Lord Justice Kitchin
49.	I agree with the judgments of Sir Robin Jacob and Lloyd LJ, and I therefore agree that the appeal should be allowed and the cross-appeal dismissed.
Lord Justice Lloyd
50.	I agree with Sir Robin Jacob that the appeal should be allowed and the cross-appeal dismissed for the reasons he gives.
51.	The distinction drawn in the older cases between money held in a solicitor’s account for general purposes on the one hand or, on the other, for a particular purpose may seem a little odd nowadays.  Mr Fletcher pointed out that, whatever may have been the practice in the past, today, since the imposition of regulatory controls aimed at preventing money-laundering, generally speaking solicitors can only hold client’s money if it is either (a) for use in relation to a particular transaction (or is received from a third party as a result of a transaction, as on the completion of a sale of property of a client) or (b) paid on account of costs.  A solicitor cannot now be his client’s banker.  Therefore, in practice, money paid to the solicitor on account of costs is within the “general purpose” category laid down in the old cases, and, in the ordinary way at least, is likely to be subject to a lien.  Other money will fall into the “special purpose” category and will not be subject to a lien.
52.	However, I also agree with Sir Robin Jacob that the question in the present case is whether the terms on which the money was paid into and held in Withers’ account were compatible with the money being subject to a lien in favour of Withers, and that the answer is that they were not so compatible.  
53.	The solicitor can have no better right to assert a lien over the money than his client has to use the money for payment of the sums due to the solicitor.  When the money was first paid into the account it was not at the disposal of the Rybaks to any extent, and, as Ms Smith accepts, it was not then subject to a lien.  Later the restrictions on the money in the account were relaxed a little, by Judge Waksman’s order and by the variation of Judge Gordon’s order in the criminal proceedings.  Even after that it was still necessary for the Rybaks to obtain the consent of Langbar to any withdrawal from the account of any sum to be paid out by way of legal expenses (over and above the one-off payment provided for in paragraph 3(iii) of the order).  That seems to me to make it impossible to contend that the money held in the account at that stage was available for payment of legal costs by the Rybaks.  If it was not, then I do not see how it can have been subject to a lien to secure the payment of such costs on the part of Withers.