England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
ON APPEAL FROM THE SOLICITORS DISCIPLINARY TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		18/07/2012

Mr Justice Bean :

1. This appeal pursuant to Section 49 of the Solicitors Act 1974 is brought by Mr Bass and Mr Ward, who at the material time were the two equity partners in the firm of Milners in Leeds. Johanna Perring, another solicitor, joined the firm on 1^st May 2007 as a "fixed share partner" and resigned on 29^th October 2007. In January 2008 the Forensic Investigation Department of the SRA carried out an inspection and discovered that improper withdrawals and/or transfers had been made from the client bank account by Ms Perring. She had made transfers to office account of residual balances held on behalf of clients in the firm's client account without client authority and without justification. She did not deliver bills of costs nor written intimation to the clients concerned.
2. In total, 44 transfers were made in this way. All were under £500, some for very small amounts indeed. The total was £4,296.31. After making adjustments for sums which the Appellants considered were or might have been due to the firm, there remained a client account shortage of £3,513.73.
3. The sums were comparatively modest; and it is important to note that Mr Goodwin, who presented the case for the SRA before the Tribunal, told them early in the hearing that "we do not, in any shape or form, allege dishonesty against any of the respondents before you." Nevertheless these were, as Mr Dutton QC for the SRA described them, improper transfers of monies belonging to individual clients in breach of the fundamental duty owed by solicitors to maintain client funds as sacrosanct.
4. Following consideration by an Adjudicator the conduct of the appellants and of Ms Perring was referred to the Solicitors' Disciplinary Tribunal ("SDT"). There were four allegations: as is not uncommon in such disciplinary proceedings there was considerable overlap between them. Mr Bass, Mr Ward and Ms Perring were all charged with the first three allegations, namely that:-

"(a) contrary to Rule 6 of the Solicitors' Accounts Rules 1998 ("the 1998 Rules"), they failed to ensure compliance with the Rules;

(b) they transferred money from client account, contrary to Rule 19(2) and/or Rule 22(3)(b) of the 1998 Rules;

(c) they withdrew money from client account, contrary to Rule 22(1) of the 1998 Rules."

A fourth allegation was made against Mr Bass and Mr Ward only, namely that:-

"(d) they failed to exercise adequate or appropriate supervision, contrary to Rule 5 of the Solicitors' Code of Conduct 2007."

5. All three solicitors admitted each of the first three allegations. Mr Bass and Mr Ward disputed the fourth, but it was found proved. They gave evidence before the Tribunal; Ms Perring did not, although she was present and represented. The sanctions imposed by the Tribunal, which did not distinguish between the various allegations, were that Mr Bass and Mr Ward each be fined £10,000 and Ms Perring £5,000. Mr Bass and Mr Ward between them were ordered to pay a further £20,000 and Ms Perring a further £5,000 in costs, these sums being agreed between the parties.
6. Mr Bass and Mr Ward appeal against the finding that the fourth allegation was proved and also against sanction. Ms Perring has not appealed.

The improper transactions and their aftermath

7. By letter of 9^th November 2007 to the Fraud Intelligence Unit of the SRA the Appellants reported breaches of the Solicitors Accounts Rules by Ms Perring. The letter stated:

"Johanna Perring was recruited as an experienced commercial property lawyer, joining as a fixed share partner on 1 May 2007. Although she had only qualified as a solicitor in September 2004, she had previously passed the examinations of the Institute of Legal Executives and indeed had been a Fellow of that Body. She boasted an impressive C.V. and professed to have a significant following of commercial property clients. She would replace Robert Kelly who had resigned as the Firms commercial property partner earlier in 2007.

Prior to joining the Firm and following her arrival (from Walker Morris Solicitors), there were discussions regarding her billing expectations and her expected performance. At an early stage after her arrival she volunteered to take on the role of Money Laundering Officer.

During the early months, apart from building her caseload, some of her time was required to tidy up and finalise property files left by her predecessor, Robert Kelly. The Partners were aware that this work needed to be done and that it might be time consuming. In each month Miss Perring provided monthly billing expectations upon request, which were below previously discussed projections and it was becoming apparent that the work predicted to follow her was not materialising.

On Wednesday 3^rd October 2007 a review of all fee earner billing was conducted to coincide with the half year end (30 September 2007). Because of the lower than expected billing performance particular focus was placed on Miss Perring. This revealed a number of very small denomination bills usually with pence figures included. Such billing amounts were by themselves unusual but especially so for a commercial property partner, who would be expected to bill larger round numbered amounts. An investigation was immediately started, which from ledgers alone suggested that the amounts billed as profit costs coincided with residual balances on finished files, yet to be archived. In total 46 bills were identified, with profit costs bill ranging from £0.19 and £408.51.

As part of the investigation, on Friday 5 October Miss Perring was invited to attend a meeting on Monday 8 October. At that meeting Miss Perring offered an explanation for these bills, namely that she was simply billing amounts which Robert Kelly had agreed to bill clients for, but for some reason had then failed to do so. When challenged that not all of the files were Robert Kelly's, she declined to say more, suggesting she had been 'ambushed'. The meeting subsequently was adjourned to be reconvened on the Wednesday, by which time Miss Perring could have looked at the files and the Partners consider her explanation. A minute of that meeting is attached.

Unfortunately Miss Perring went home that afternoon, stating that she had a chest infection. A sick note for 2 weeks was subsequently produced, but no further explanations provided.

The investigation however continued, with each file being reviewed. The cashier, who processed the bills was also interviewed and a statement taken, which is attached. It became apparent that in some cases files had been billed and residual balances transferred from client to office account even though the file in question had not been located.

An investigatory meeting proceeded on Friday 12 October, despite Miss Perring's absence. It concluded that Miss Perring had breached SAR's by billing residual client account balances as profit costs, without authority and effecting the transfer of these sums from client to office account. A minute of that meeting is also attached.

Aware of our obligation under SARs and particularly Rule 7 – duty to remedy breaches promptly upon discovery immediate action has been taken to credit the bills in question and replace the client monies. This has been completed.

It was also resolved to proceed with disciplinary action against Miss Perring and she was invited to a meeting on 22 October 2007. She did not attend that meeting, producing a sick note citing work induced stress as a reason not to be present. As a result that meeting was postponed. However, in view of the seriousness, with which we considered the breaches of SARs to be, the meeting was rescheduled for Monday 29 October.

One hour prior to that meeting starting we received an email from Miss Perring seeking to tender her resignation with immediate effect. Such a resignation was not in accordance with the terms of our contract with her and accordingly the meeting was conducted again in her absence. A copy of the notice of hearing and minute of the meeting are attached. She was determined to have not only breached SARs and SCCR, but to have done so to deceive fellow partners as to her true billing performance. Her contract with Milners was therefore terminated.

Please note that no clients have been prejudiced by these matters and nor do they form the basis of any query or complaint by the relevant clients."

8. Ms Perring did not deny that balances had been incorrectly cleared off by bills being rendered (but not sent) which could not be justified by work done and that bills were not properly recorded or delivered to the clients. She claimed that the transfers were carried out as a result of a standing instruction on the part of the equity partners to deal with residual balances in that way. The Appellants denied that any such instructions had been given. They maintained that Ms Perring had acted on her own accord and had circumvented the accounting procedures in place.

The fourth allegation

9. Rule 6 of the Solicitors' Accounts Rules 1998, the subject of the first allegation, provides that;-

"All the principals in a practice must ensure compliance with the rules by the principals themselves and by everyone else working in the practice. …"

10. It is common ground that this is a strict liability obligation, though plainly the seriousness of a breach varies from case to case.
11. Rule 5.01 of the Solicitors' Code of Conduct 2007, the subject of the fourth allegation, is headed "Supervision and Management Responsibilities" and, so far as material, provides:-

"(1) If you are a recognised body, a manager of a recognised body or a recognised sole practitioner, you must make arrangements for the effective management of the firm as a whole, and in particular provide for:-

(a) compliance by the firm and its managers with the duties of a principal, in law and conduct, to exercise appropriate supervision over all staff, and ensure proper supervision and direction of client's matters; …"

12. The important paragraphs of the SRA's statement pursuant to rule 5(2) of the Solicitors Disciplinary Rules 2007 were as follows:

"53. The First and Second Respondents had responsibility for the overall supervision and management of the firm and to ensure compliance with their duties as principals, and in particular, the duty to ensure compliance with the Solicitors Accounts Rules on their own behalf and by all those working in the practice. In that regard they failed. Adequate and appropriate supervision and checks would have identified the Third Respondent's approach.

54. The First and Second Respondents concede that they instructed the Third Respondent to deal with the closure of the backlog of completed matters, which included dealing with the client ledger balances. The First and Second Respondents had an obligation to ensure that the Third Respondent conducted matters properly and in accordance with the Rules. The First and Second Respondents concede that an initial meeting took place with the Third Respondent shortly after her joining the firm. The First and Second Respondents were at that point, unaware as to her competence and should have made arrangements for the effective management and supervision of the Third Respondent in her work generally, and specifically in relation to the task that she was to undertake in respect of dealing with the residual balances on client bank account. In that regard they failed."

13. At the start of the hearing before the SDT Mr Goodwin applied to withdraw the fourth allegation. He was supported by Mr Sachdeva, who appeared for Mr Bass and Mr Ward before the Tribunal as he has before me. Mr Sachdeva's principal submission on this issue was that one partner has no duty to supervise another; he cited Akodu v Solicitors Regulation Authority [2009] EWHC 3588 (Admin) and two decisions of the SDT itself in support of that proposition. Mr Goodwin put the application to withdraw on a different basis. He said that the Forensic Investigation Report which formed the basis of the proceedings left the SRA unable to determine whether Mr Bass and Mr Ward were right to say that Ms Perring acted on her own in making the transfers from client to office account, or whether she was right to say that she dealt with the residual balances in accordance with a standing instruction given to them by the equity partners.
14. The Tribunal refused to allow the fourth allegation to be withdrawn. After referring to Akodu and the previous SDT cases which had been cited to them, they continued (as set out in the Tribunal's written judgment, reproducing essentially verbatim a decision given orally):

"We have also read paragraph 15.11 of the commentary [in] the Solicitors Handbook that was referred to us and in particular the section that says:

'It is submitted that the better view is that unless a disciplinary offence is one of strict liability (such as an Accounts Rule breach), a solicitor should only face disciplinary consequences if he or she is some way culpable.'

This is a case involving breaches of the Solicitors Accounts Rules and therefore one of strict liability. As such, in this case, we do not agree to the withdrawal of allegation 1(d)."

15. This is curious reasoning: and despite Mr Dutton's elegant attempts to explain or rephrase it in argument, I still find it curious. It would have made more sense if the penultimate sentence had read "This allegation, in contrast to the first three, is not one involving breaches of the Solicitors Accounts Rules and therefore not one of strict liability". Even then it would not be easy to follow. The wording of the oral decision was reproduced essentially in the written judgment; so it cannot be dismissed as a slip of the tongue.
16. At the close of the SRA's evidence Mr Sachdeva submitted that there was no case to answer on the fourth allegation. He repeated the submission he had made on the withdrawal application, that Ms Perring as a fixed share partner (and, indeed, the firm's Money Laundering Officer) could not be a member of "staff" for the purposes of Rule 5. He also submitted that since the Solicitors Code of Conduct 2007 only came into force on 1^st July 2007, and did not have retrospective effect, the Tribunal could not consider events prior to that date under the fourth allegation.
17. The Tribunal rejected the submission of no case to answer without saying (either orally or in the written judgment) anything about the commencement date issue. Mr Goodwin apparently accepted the argument, even if the Tribunal did not. In the course of his cross-examination of Mr Bass we find this exchange:

"MR SACHDEVA: I am sorry to interrupt but given that the Code started on 1^st July 2007 I would be grateful if my learned friend would confine his questions to that date onwards. It clearly cannot operate retrospectively and the question in relation to relying on the CV as soon as she arrived, for instance, is one that is not sustainable on the Code.

MR GOODWIN: Fair point. Mr Bass, from 1^st July 2007 until 4^th October 2007 it is fair to say that you did not look at one of the bills that Ms Perring prepared, did you?"

18. The Tribunal found the fourth allegation proved. On the issue of Ms Perring's status, they "found as a fact that whatever title the Third Respondent may have had, she came within the expression 'staff' contained in Rule 5.01(1)". They went on:

"41.7 Even if this was not the case, there was an overriding obligation that if a solicitor is a principal in a firm, that solicitor must ensure that the firm has in place a system for supervising client matters. That was a reference to Rule 5.03(1) and included the closure of client files to deal with residual balances on client account which fell within this Rule and matters specifically referred to at paragraph 54 of the Applicant's Rule 5 Statement. Also, in this regard, the Tribunal had heard evidence from the First Respondent, Mr Bass, in which he accepted that if checks had been carried out on the ledgers and bills earlier than in October 2007, he would have spotted the problem. Mr Bass accepted that he would have been suspicious if he had seen the entries that had been made. However, no proper systems were in place to identify the problem.

41.8 Having regard to the provisions of Rule 5 of the Solicitors' Code of Conduct 2007, and the requirements set out for principals to make arrangements for the effective management of the firm as a whole, the Tribunal found as a fact that the First and Second Respondents fell short of what was required and that allegation 1(d) was proved."

The "member of staff" issue

19. Mr Sachdeva criticises the Tribunal's finding that Ms Perring had to be supervised as a member of "staff". Rule 5.01(1) refers to "the duties of a principal, in law and conduct, to exercise appropriate supervision over all staff". "Principal" in Rule 5.01(1) must clearly have the same meaning as it does in Rule 6 of the Accounts Rules. Ms Perring had admitted failing to ensure compliance with the Accounts Rules, a duty which Rule 6 imposes on "all the principals in a practice", and the Tribunal had not queried that admission. Although they were troubled by the question of Ms Perring's actual status within the firm, and although it is a nice question whether she was a "principal" or a member of "staff" within the terms of Rule 5 of the Code of Conduct, I do not see how she could be both at the same time.
20. However, I accept Mr Dutton's submission that this does not defeat the fourth allegation. As the Tribunal rightly found, the obligation under Rule 5.01 is to "make arrangements for the effective management of the firm as a whole". Ensuring compliance with the duty of a principal to exercise appropriate supervision of all staff is only one aspect of it: for example, Rule 5.01(1)(a) also requires that arrangements are made to "ensure proper supervision and direction of clients' matters". (Mr Sachdeva complains of the Tribunal's reference to Rule 5.03(1), which requires a system to be in place for supervising client matters; but this is so similar to the requirement just mentioned in Rule 5.01(1)(a) that I consider nothing turns on the distinction.) It would be better if the Tribunal had said that whether Ms Perring was properly described as a member of staff made no difference, but if it were not for the next point the appeal against the finding of liability would fail.

The commencement date issue

21. The commencement date issue, technical as it may seem, was highly significant in this case; and despite Mr Sachdeva having raised it fairly and squarely in the course of the hearing, the Tribunal never grappled with it. Acts and omissions of the Appellants prior to 1^st July 2007 could be considered for the purposes of the first three allegations, the Accounts Rules having been in force for many years, but not the fourth. It is unnecessary to consider whether Mr Goodwin could have applied successfully to amend his statement of charges to include an allegation of breach of the equivalent provisions in force up to 30^th June 2007: the fact is that he did not do so.
22. The question which the Tribunal judgment does not answer, and had to answer, is this: what is it that Mr Bass and Mr Ward failed to do between 1^st July and 4^th October 2007 which amounted to a failure to ensure proper direction and supervision of clients' matters? The SDT find in paragraph 41.7 that a system for supervising client matters [should have] "included the closure of client files to deal with residual balances on client account". But surely, at least on the Appellants' case, that was part of what she was asked to do on her arrival at the start of May. If she was given inadequate instructions when she arrived, or at any time in her first two months, that would have been a breach of the old Rules, but not of the new Rules.
23. The alternative basis of liability is the Tribunal's finding in the last sentence of paragraph 41.7 that "no proper systems were in place to identify the problem". They do not say what such systems would or should have been. If the Tribunal found, for example, that compliance with Rule 5.01(1)(a) requires bills about to be rendered by every lawyer in the firm (including a fixed share or salaried partner) to be checked by an equity partner or the firm's accounts department before they are sent out, or that there must be a sample check on every lawyer's client files and ledgers by an equity partner every two months, either of these findings, if sufficiently reasoned, might have formed a logical basis for the conclusion that the fourth allegation was proved. But they do not make such findings. They record the acceptance by Mr Bass that if checks had been carried out earlier than in October 2007, he would have spotted the problem. But that is a statement of the obvious. It does not prove that he should have carried out a check between 1^st July and 4^th October. On the contrary: the evidence of Ms Young, the SRA's investigator, was that she could not say that twice yearly checks were unacceptable.
24. None of this would matter if Rule 5.01(1) created strict liability, since there would then be a continuing breach after 1^st July 2007: but then the fourth allegation would have added nothing to the first, and the Tribunal's time and trouble in investigating it would have been misdirected. Mr Dutton, rightly in my view, did not seek to argue that the fourth allegation was one of strict liability.
25. I therefore conclude that the finding that the fourth allegation was proved is not soundly based in law and must be quashed.
26. Both counsel invited me, if I was of that view, to decide on the appropriate sanction for the remaining three allegations myself, rather than cause yet further costs to be incurred by remitting the issue to the Tribunal. Mr Sachdeva submitted that a reprimand of each of his clients would suffice. Mr Dutton argued that there should still be a financial penalty on the Appellants, though he accepted that it would be less than the £10,000 each imposed by the Tribunal.

Sanction

27. Both counsel accepted that an up-to-date and authoritative statement of the proper approach of this court on appeal from the SDT is to be found in the judgment of Jackson LJ in Salsbury v Law Society [2009] 1 WLR 1286 at paragraph 30:

"It is now an overstatement to say that "a very strong case" is required before the court will interfere with the sentence imposed by the Solicitors Disciplinary Tribunal. The correct analysis is that the Solicitors Disciplinary Tribunal comprises an expert and informed tribunal, which is particularly well placed in any case to assess what measures are required to deal with defaulting solicitors and to protect the public interest. Absent any error of law, the High Court must pay traditional respect to the sentencing decisions of the tribunal. Nevertheless, if the High Court, despite paying such respect, is satisfied that the sentencing decision was clearly inappropriate, then the court will interfere."

28. There is no dispute that in most cases the need to maintain public confidence in the profession means that breaches of the Accounts Rules must result in at least a financial penalty. However, Mr Sachdeva submitted that this is not an invariable rule, as shown by Hazelhurst v Solicitors Regulation Authority [2011] EWHC 462 (Admin). The appellants in that case were partners in a firm one of whose legal executives, Mrs Morley, stole over £100,000 from client account during a period of three years. The partners were thus in breach of the Accounts Rules on a strict liability basis. The SDT imposed a penalty of £4,000 each.
29. Nicola Davies J, who has great experience of professional disciplinary matters, set aside certain findings of the Tribunal but was satisfied that they were entitled to find "a lack of tight and rigorous control of cheque requisitions" which contributed to the lack of supervision of the fraudulent employee; and that there was evidence of some inadequacies in the system of file review. She noted that where breaches of the Accounts Rules are allowed to take place it "raises a strong inference of lack of supervision"; but that in this case the SDT had failed to address the appellants' submissions not only that Mrs Morley was a long-serving and trusted employee, but also that independent auditors and a representative of the Law Society had seen and assessed the books and her files and found nothing untoward. No appellant had behaved dishonestly. The partners had themselves referred the matter to the SRA. Nicola Davies J also attached importance to the fact that each appellant had personally contributed monies so that full reparation was made to every client. She quashed the financial penalties and substituted reprimands. The orders for costs were unaltered.
30. I do not read this as a decision that in every case of breaches of the Accounts Rules, partners who have been entirely honest and who have themselves reported the firm to the SRA should not be the subject of a financial penalty. The difference between Hazelhurst and the present case, apart from the fact that the present Appellants have not had to pay reparation to clients, is that in Hazelhurst the auditors and the Law Society had examined the books and themselves been deceived. Here the Tribunal evidently considered that – to use layman's language rather than the wording of the Rules – the equity partners had not kept a close enough eye on Ms Perring's work when she first arrived at the firm. That was a view which the Tribunal were entitled to form. It meant that what Nicola Davies J described as the "strong inference of lack of supervision" was not rebutted, and that therefore some financial penalty, and not merely a reprimand, was merited.
31. I consider that justice would be done by reducing the penalty imposed on each of the Appellants to the same amount as that imposed on Ms Perring, namely £5,000.