England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		March 14 2006

Mr Justice Lawrence Collins:

I The Law Society and its powers of intervention

1. The Law Society is a corporate body which represents the solicitors of England and Wales. The Law Society's regulatory functions under the Solicitors Act 1974 ("the 1974 Act") are exercisable against solicitors regardless of whether or not those solicitors are members of the Law Society, and are exercised by the Law Society as a public body and in the public interest.
2. Under section 35 of the 1974 Act, the Law Society has power to intervene into solicitors' practices. Every year, there are between 50 and 100 such interventions. The grounds for an intervention are set out in Part I of Schedule 1 to the 1974 Act. Typically, interventions will occur when the Council of the Law Society has reason to suspect dishonesty on the part of the solicitor concerned (or his employees) or where there has been failure by the solicitor to comply with the Solicitors' Accounts Rules 1998. Interventions are also necessary in other circumstances, such as when a solicitor is incapacitated by age or illness, is made bankrupt, is imprisoned, has been struck off or suspended from practice, abandons his practice, is practising uncertificated, has previously been the subject of an intervention on grounds of suspected dishonesty and within 18 months is found practising as a sole solicitor, or when the personal representative of a deceased solicitor practising alone prior to death is guilty of undue delay in connection with the solicitor's practice.
3. The powers exercisable on intervention are set out in Part II of Schedule 1 to the 1974 Act. By paragraph 5(1) the court may, on the application of the Law Society, order that no payment shall be made without the leave of the court by any person of any money held on behalf of the solicitor or his firm. By paragraph 6:

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

(2) This paragraph applies...

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

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

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

4. By paragraph 9, the Law Society may require production of the solicitor's practice documents. The powers to vest monies in the Law Society and to obtain possession of practice documents can be exercised in combination: Sritharan v Law Society [2005] EWCA Civ 476, [2005] 1 WLR 2708, at [46].
5. If the Law Society takes possession of any sum of money to which paragraph 6 applies, it must pay it into a special account in the name of the Law Society or in the name of a person it has nominated on its behalf or in a client account of a solicitor nominated on its behalf. The monies in the hands of the nominated person or solicitor are held on trust on the same terms as the Law Society holds it on trust, that is (paragraph 7(1))

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

6. These powers are exercisable notwithstanding any lien on the money or documents concerned or any right to their possession: paragraph 12.
7. Under paragraph 13, the costs incurred by the Law Society for the purposes of Schedule 1, including the costs of any person exercising the powers in Part II of Schedule 1 on behalf of the Law Society, are to be paid by the solicitor (or his personal representatives, if appropriate) and are recoverable as a debt owing to the Law Society.
8. By paragraph 16 of Schedule 1: "The Society may do all things which are reasonably necessary for the purpose of facilitating the exercise of its powers under this Schedule." This is an ancillary power which is confined to facilitating the exercise of the express powers conferred by the Schedule: Rose v Dodd [2005] EWCA Civ 957, at [29]; see also Dooley v Law Society, November 27, 2001, unreptd, at [13].
9. Intervention does not give the Law Society the power to take over the practice and to carry it on or to close it down. The Law Society does not become the administrator of the practice, nor a receiver or manager. The focus of the legislation is on precautionary and preventive powers. The ownership of the assets (apart from practice monies) and the goodwill of the practice remain with the solicitor and can be disposed of notwithstanding the intervention; but the solicitor's practising certificate is automatically suspended under section 15(1A) of the Act where the intervention is on grounds of suspected dishonesty or breach of the Solicitors' Accounts Rules or the solicitor has been committed to prison: Rose v Dodd [2005] EWCA Civ 957 at [24], [27].
10. The right to recover sums due from former clients to the solicitor remains vested in the solicitor. The solicitor alone can commence and pursue recovery proceedings, and the Law Society has no duty to pursue such proceedings. But any recovery effected by the solicitor would vest automatically in the Law Society subject to the statutory trust: Dooley v. Law Society, supra, at [9], [10].
11. The Law Society is required to serve on the solicitor or his firm, and on any other person having possession of sums of money to which paragraph 6 applies, a certified copy of the Council's resolution and a notice prohibiting payment out of any such sums of money: paragraph 6(3). A payment out at a time when such payment is prohibited by a notice by a person on whom the notice has been served constitutes an offence: paragraph 6(6).
12. The intervention process is compliant with Article 1 of the First Protocol to the European Convention on Human Rights, in that, although it does constitute an interference with a solicitor's peaceful enjoyment of his property, the interference is necessary in proper cases in the public interest: Holder v The Law Society [2003] EWCA Civ 39, [2003] 1 WLR 1059.

II The Compensation Fund

13. The Compensation Fund is established under section 36 of the 1974 Act, funded by annual contributions paid by practising solicitors (Schedule 2, paragraphs 2 and 6(a)), out of which grants may be made by the Law Society for the purpose of relieving loss or hardship caused by dishonesty or failure to account. The Compensation Fund is not a legal entity, and the fund is held and administered by the Law Society.
14. Such a fund was first established under the Solicitors Act 1941, the purpose being then to relieve or mitigate losses sustained by any person in consequence of dishonesty on the part of a solicitor.
15. The Council of the Law Society may make a grant out of the Compensation Fund where it is satisfied that:

(1) a person has suffered or is likely to suffer loss in consequence of dishonesty on the part of a solicitor, or of an employee of a solicitor, in connection with the solicitor's practice or purported practice or in connection with any trust of which that solicitor is or formerly was a trustee; or

(2) a person has suffered or is likely to suffer hardship in consequence of failure on the part of a solicitor to account for money which has come into his hands in connection with his practice or purported practice or in connection with any trust of which he is or formerly was a trustee; or

(3) a solicitor has suffered or is likely to suffer loss or hardship by reason of his liability to any of his or his firm's clients in consequence of some act or default of any of his partners or employees in circumstances where but for the liability of that solicitor a grant might have been made out of the Compensation Fund to some other person.

16. The purpose of the grant must be to relieve the loss or hardship of which the Council was satisfied in order to consider making the grant. It is possible for the Compensation Fund to make a grant under (c) above in the form of a loan: section 36(3). The Council has to give reasons for a refusal of a grant: section 36(7).
17. The Compensation Fund Rules 1995, together with the guidelines published by the Law Society, give an indication of how the Law Society is likely to exercise its discretion when faced with an application for a grant. In particular:

(1) Applications should be delivered to the Law Society within 6 months after the loss or likelihood of loss or failure to account first came or reasonably should have come to the knowledge of the applicant. This period of time can be extended in exceptional circumstances by the Council: Rule 6.

(2) The Compensation Fund is reliant upon the applicant for full and frank disclosure of all material dealings between the applicant and the solicitor in cases where the solicitor's records are so bad that it is very difficult for the Law Society to establish with any degree of certainty what the state of the account was between the applicant and the solicitor. The Council may require an application to be supported by a statutory declaration and accompanied by any relevant documents. The failure to provide such documentation or co-operate with the Council's enquiries may be taken into account when consideration is given to the application: Rule 7.

(3) The Council may require an applicant to pursue an alternative civil remedy prior to the making of a grant; Rule 8. The Fund is a fund of last resort and grants may be refused where the loss is an insured loss or is capable of being made good by recourse to another person: Guideline 1(c). The Council does not usually make a grant where the application is based on the failure of a solicitor to comply with an undertaking. The purpose of the Fund is not to underwrite solicitors' undertakings: Guideline (3)(g).

(4) There is a cap of £1,000,000 on any grant made out of the Compensation Fund in respect of any individual transaction or matter: Rule 11.

(5) Where a grant is made, the Council may also consider an application for a further grant in respect of the reasonable costs properly incurred by the applicant with either his solicitor or other professional adviser exclusively and necessarily in connection with the preparation, submission and proof of the application: Rule 9.

(6) Where a grant is made, the Council may also consider an application for a further grant in lieu of lost interest on the principal grant. Such interest is normally calculated in accordance with rates prescribed from time to time by the Council: Rule 10.

(7) It is possible for the Council to make a payment of an interim grant, in cases of severe hardship, prior to completion of full investigation of the entire application, but only if it is satisfied that loss of an amount at least equal to the amount paid out by way of interim grant has been suffered: Guideline 5.

18. Paragraph 1 of Schedule 2 provides that the Compensation Fund is held on trust by the Law Society, "for the purposes" set out in section 36 of the Act and in Schedule 2.
19. In R v Law Society, ex p Mortgage Express [1997] 2 All ER 348 Lord Bingham CJ said (at 359) that the Law Society would be in breach of trust were it to make a grant out of the Compensation Fund when the statutory criteria set out in section 36(2) were not satisfied. But it is clear from that decision that the trust is not an ordinary private law trust, but is a fund in relation to which (once the applicant qualifies for a grant) the Law Society has to exercise discretion or judgment in accordance with public law principles. Lord Bingham CJ said (at 360):

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

20. Applicants do not have a right to compensation which they are entitled to enforce; all they have is a right to seek a favourable exercise of discretion: ibid. See also R v Law Society, ex p Reigate Projects Ltd [1993] 1 WLR 1531, at 1543-1544; R v Law Society, ex p Ingman Foods Oy Ab [1997] 2 All ER 666; R v The Law Society, ex. p. Nielsen, December 3, 1998, unreptd.; The Mortgage Corporation v Law Society, December 15, 2000, unreptd. at [13], [14].
21. The powers of intervention on grounds of "reason to suspect dishonesty" enable the Law Society to exercise control over those solicitors whose conduct might give rise to claims against the Compensation Fund, claims which ultimately have to be met by the profession as a whole: Sritharan v Law Society [2005] EWCA Civ 476, [2005] 1 WLR 2708 at [18]; Pine v Law Society [2002] EWCA Civ 175, [2002] 1 WLR 2189 at [12].
22. The Compensation Fund pays the cost of interventions where the ground for intervention is reason to suspect dishonesty: Schedule 2, paragraph 7(e). This is because interventions on grounds of dishonesty are in the interests of the profession as a whole, in that they may prevent further dishonesty on the part of the intervened in solicitor, which would, otherwise, result in further claims on the Compensation Fund from the victims of that dishonesty: Law Society v KPMG Peat Marwick [2000] 1 All ER 515, affd [2000] 1 WLR 1921. A consequence of the Law Society's exercise of its two basic powers of intervention (document possession and money vesting), in suspected dishonesty cases, is protection of the Compensation Fund.
23. To the extent that the Compensation Fund has made a grant to a person entitled to client account monies, it will be subrogated under section 36(4) to the right to receive any money that person would have received from the Law Society. Such recoveries will then be carried back to the credit of the Compensation Fund pursuant to Schedule 2, paragraph 6(f).
24. In practice, the Compensation Fund is subrogated to a significant number (in some cases, the overwhelming majority) of such persons' rights to such money in any given intervention. This is because, following an intervention, a significant number of persons usually make claims upon, and receive grants from, the Compensation Fund.

III The problem and the applications to the court

25. The same factors that prompt the Law Society to intervene into a practice frequently make the Law Society's task following intervention extremely difficult. In particular, it is often the case upon intervention that the solicitor's records (such as accounting records, client files and client ledgers) are in disarray, incomplete, or sometimes partially or completely non-existent, whether through dishonesty, incompetence, incapacity, abandonment or otherwise. Such problems may be long standing.
26. Moreover, there are often significant discrepancies between the sums of money recovered following an intervention and the money that should have been present in the solicitor's client accounts. In cases where there are such shortfalls, the Law Society must then determine how best to deal with the shortfall, in terms of distributions to be made of the funds recovered on intervention.
27. A solicitor stands in a fiduciary relationship to his clients: Nocton v Lord Ashburton [1914] AC 932; Moody v Cox & Hatt [1917] 2 Ch 71; Brown v IRC [1965] AC 244; Boardman v Phipps [1967] 2 AC 46; Clark Boyce v Mouat [1994] 1 AC 428; Bristol & West Building Society v Mothew [1998] Ch 1; Hilton v Barker Booth & Eastwood [2005] UKHL 8, [2005] 1 WLR 567. Money on client account has often been said to be held on trust for the client: In re a Solicitor [1952] Ch 328; Target Holdings Ltd v Redfern [1996] 1 AC 421, 436; Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, at [12] where Lord Hoffmann said: "Money on a solicitor's account is held on trust. The only question is the terms of that trust."
28. The solicitor's duties are underpinned by a regulatory regime whereby (a) the Solicitors' Accounts Rules require client money to be held in separate client bank accounts, prescribe the records which must be kept and the circumstances in which the solicitor is permitted to draw on client money and guard against the mixing of client money and office money; (b) clients have the right to apply to court (inter alia) for delivery of a cash account, a list of money held for the client and payment over of that money: CPR, r 67.2.
29. In intervention cases, the Law Society frequently inherits a disordered and chaotic situation, and must seek to understand, as best it can, such records as there are with the available resources it has, in order to distribute the monies it has removed from a solicitor's control to the clients or other persons who appear to the Law Society in all of these circumstances to be entitled to it.
30. It emerged, in the course of proceedings by Mr Halley against the Law Society (Halley v Law Society [2003] EWCA Civ 97, [2003] WTLR 845), that there might have been inadvertent breaches of trust by the Law Society in its dealing with money vested in it upon intervention. In particular, the Law Society became concerned that insufficient efforts had been made pro-actively to identify, contact and account to clients (and others) for whom money was held. On intervention, current clients were generally told that there had been an intervention and who the intervening agent was, and told to apply to the Compensation Fund if they considered that they were owed monies (i.e. rather than being repaid money held for them in trust). The concentration upon current clients and the reactive nature of the process of expecting clients to apply to the Compensation Fund meant that there had been apparent failures to contact or account to clients for whom the solicitor had been holding money. There was also concern about the transfers being made into the Compensation Fund from money which was held on statutory trust in purported exercise of the Compensation Fund's rights of subrogation. As a result a continuing review was instigated.
31. It was found that in some dishonesty intervention cases (usually where there was a shortfall on client account) the money received from the intervention agents was paid direct into the Compensation Fund without waiting for aggregate grants from the Compensation Fund to exceed the amount received, probably because it was assumed that grants would in due course exceed that amount. In addition, funds in long-standing statutory trust accounts had been transferred into the Compensation Fund as part of a concern to clear old balances held.
32. As a result of detailed investigations a total of £2.7 million was in June 2004 repaid by the Compensation Fund to be held on statutory trust. The money represented repayment of erroneous transfers into the Compensation Fund since February 1999.
33. Subsequently the intervention processes have been reviewed and improved, and there has been a detailed analysis of all the trust accounts which the Law Society holds in order to ensure that so far as possible beneficiaries were accounted to where they could be identified and traced, and there has been put in place a system of evidence gathering to enable to Law Society to discharge its duties as statutory trustee.
34. Detailed instructions to intervention agents were issued and revised from time to time.
35. As a result of the new processes, instead of beneficiaries being required unnecessarily to apply to the Compensation Fund, intervention agents and/or the Law Society have been able to distribute funds to beneficiaries where the client account has been reconciled and verified as intact, and almost £15.8 million was distributed in this way in relation to interventions effected between April 2002 and April 2004.
36. But there are significant problems relating to client accounts which impact on the ability of the Law Society to identify and trace beneficiaries and distribute funds. For example (i) there may be a shortfall of funds on client account; (ii) there may be no proper records detailing amounts held or on whose behalf they are held (since dishonest solicitors sometimes deliberately destroy all records); (iii) documents, files or other records may be missing; (iv) there may be a lack of accounting material to enable the Law Society to reconcile the accounts at the date of intervention or subsequently; (v) there may be false accounting entries concealing misappropriation, and, consequently, the beneficiaries; (vi) books may purport to balance but the solicitor's "clients" who have been providing funds to the solicitor may themselves be involved in fraud, money laundering, theft or false accounting and may not be the true beneficial owners of the funds; (vii) the intervened solicitor may not cooperate; (viii) the firm's staff may not cooperate because they have not been paid; and (ix) there may be a generally chaotic situation, involving angry and upset clients, utilities being cut off and equipment being repossessed.
37. These problems make it difficult, and sometimes impossible, for the Law Society as statutory trustee to establish who is beneficially entitled to the funds on client account.
38. Where there are problems, some clients will receive in effect their full beneficial entitlement by way of payments from the Compensation Fund, and in those cases the Compensation Fund has rights of subrogation under section 36(4) of the 1974 Act, and as a consequence distribution may be possible to the Compensation Fund (like any other beneficiary) from money held on statutory trust. But before any money can be paid to the Compensation Fund it is necessary to determine how much of that money belonged to the recipient of the grant.
39. The consequence is that there are the following problems. In the past when clients came forward to claim funds, unless the accounts were clearly intact, they were generally told to apply to the Compensation Fund, whereas in fact they were entitled to their share of the money held on statutory trust and should not have had to apply to the discretionary Compensation Fund. As a result it is possible that clients who were entitled to money but were refused a discretionary grant would have been left uncompensated (e.g. as a result of the expiry of the time limit for applications to the Compensation Fund).
40. As a consequence of what is described as the aggregated basis, excessive sums were transferred from the statutory trust to the Compensation Fund. For example a client may have been paid 100% by the Compensation Fund, in a case where the client account was deficient by 50%, and yet the whole amount was transferred to the Compensation Fund from the statutory trust where the amount payable from the money held on statutory trust to the client would only have been 50%. The problem would be compounded if only some of the clients had been paid by the Compensation Fund. In addition the Compensation Fund was wrongly treated as having a subrogated claim in respect of interest and costs paid to the client.
41. It is accepted that the approach was mistaken. Section 36 of the 1974 Act does give the Compensation Fund a right of subrogation, in respect of the full amount of the grants made, but in exercising that right the Compensation Fund can have no greater claim against the client account than the client would have had. The client would only be entitled to recover from the client account his or her remaining share of the monies in that account and such interest as has accrued on that share (not any shortfall, nor interest on the shortfall). Further, the client could not claim against the client account for the costs of making a claim on the Compensation Fund (which the Compensation Fund reimburses in exercise of its discretion).
42. Where the statutory trust account is incomplete, the Law Society now recognises that, before making any distribution (including pursuant to a right of subrogation) the Law Society as trustee needs to have, so far as possible, identified precisely whose money has been lost or, where this has not been possible, to have arrived at a proper scheme of distribution for the remaining trust funds.
43. As a result of these problems, the Law Society has reviewed and rewritten intervention agent's instructions. It has established a new unit, the Post Intervention Unit ("PIU"), to ensure that clients are properly accounted to for their funds, and to correct past errors. The Law Society has separated decision making in relation to Compensation Fund grants and decisions about payments from monies held on statutory trust to the Compensation Fund. It has investigated possible overpayments to the Compensation Fund from statutory trusts, resulting in repayments of almost £3 million. The PIU has created a template to record all relevant information in respect of each statutory trust to enable an informed decision to be made by the Law Society as statutory trustee about distribution. The template acts as a guide to Law Society officers to enable them methodically to acquire all relevant evidence in relation to each statutory trust.
44. Very few people appear to have complained that they have not received what they would have been entitled to, and only two cases have been brought before the High Court of which the Society is aware, in respect of the Law Society's conduct under paragraph 6, post intervention. The first involved an unsuccessful claim by a broker involved in dishonesty: Halley v Law Society [2003] EWCA Civ 97, [2003] WTLR 845. The second involved proceedings brought by the Law Society for directions, and again the court was not critical of the Law Society: Law Society v Soulimov, May 27, 2002, unreported. Two cases were also pursued by claimants arising from an intervention into a firm called J.R. Sierzant & Co, but the amounts involved totalled less than £10,000 and the matters were dealt with in the County Court.
45. Because of the difficulties inherent in identifying persons entitled to any given amount of money, no payments have been made to the Compensation Fund by way of subrogation since 2001, except in cases where the client account was intact (or what is known as a top up grant was made) and therefore full distribution was possible. As at November 30, 2004, the total sums amounted to some £44 million. There were over 950 statutory trust accounts, although some of them were very small, and 85% of the funds were held in 161 of the accounts. By October 31, 2005 the amount locked up in the statutory trusts had increased to £52.55 million (of which 35% represent funds to which the Compensation Fund might be entitled by way of subrogation). It is undesirable for the Compensation Fund and the profession to have uncertainty, not least because this may affect the size of the Compensation Fund and the level of contributions which may be required from the profession in each year to maintain it.
46. The Law Society has applied to the court for directions relating to the exercise of its powers as statutory trustee, and in particular as to whether its duties are the same as those of a trustee under a private trust, or are affected by the statutory nature of the trust and its status in public law. The court plainly has jurisdiction. If the trust is to be treated as a private law trust the court obviously has jurisdiction to lend assistance in the form of guidance concerning specific questions that arise in the execution of the trust, and in particular whether some proposed action is within the trustees' powers, or is a proper exercise of the trustees' powers.
47. Should the Law Society be exercising public statutory functions under statutory trusts and not private law trusts, then the Law Society brings these matters before the court in order to demonstrate how it has been reaching decisions to date and resolving difficulties to date and how it would propose to do so going forward. If statutory power to seek directions were required (which I do not think it is) paragraph 16 of Schedule 1 would provide it.

IV The applications and the issues

A. Four test cases

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

(1) Ahmed & Co

49. Mr Sheikh Rahim Ahmed practised in Wembley. His practice involved a large amount of immigration work. An inspection of Mr Ahmed's books of accounts and documents began in October 2000. Mr Ahmed told the Forensic Investigation Unit that he was practising alone, not in partnership, with eleven members of staff.
50. The Law Society's Compliance Board Adjudication Panel ('the Panel') resolved to intervene into Ahmed & Co on December 20, 2001 and intervention notices were served on January 3, 2002. The intervention was on grounds of (a) suspected dishonesty on the part of Mr Ahmed and (b) failure to comply with the Solicitors' Accounts Rules and/or the Solicitors' Practice Rules.
51. The Panel's resolution included a resolution under paragraph 6. The sum of £75,662.03 was frozen in the general client account and designated deposit accounts held by Ahmed & Co.
52. When compared with other interventions, the accounting records of Ahmed & Co were, in fact, very good. The amounts shown as due in the solicitor's accounting records tallied with the amounts recovered from the Ahmed & Co bank accounts. The accounts were up to date to the end of December 2001, a few days before the intervention, and when updated they reconciled. On the basis of all the available information, there did not appear to be any deficit.
53. The Compensation Fund paid out grants to a substantial number of Ahmed & Co former clients and/or others beneficially entitled to money in the client accounts. Its subrogated claims amounted to about £38,000 (inclusive of interest), which was paid to it on December 22, 2004.
54. As a result of such good records and, most importantly, the fact that there was not a shortfall in funds as at the date of intervention, the Law Society decided that it was possible, in this case, to distribute to those entitled whom it was possible to locate and contact. Just over £10,000 of the trust fund remains undistributed.
55. The Part 8 Claim in respect of this intervention was issued on January 17, 2005 with the Court's permission without any defendants.
56. Mr Ahmed was served several times at different addresses with the claim form and evidence in support of the claim. The papers first served on Mr Ahmed at 54 High Road, Willesden Green, under cover of a letter dated January 19, 2005, were returned. Service was effected at a different address found in Law Society records, 48 Hazel Road, London, by letter dated July 1, 2005. Nothing was heard from Mr Ahmed. However, Mr Ahmed and others involved in the firm have been struck off the Roll of Solicitors.

(2) Biebuyck Solicitors

57. Anthony Biebuyck had been a sole practitioner since 1993, practising in Chelmsford. He had a general practice, for the purposes of which he employed 14 staff, including an assistant solicitor.
58. There was an inspection of Mr Biebuyck's books of account and other documents carried out in August 2002. Following this, the Law Society intervened into Biebuyck Solicitors on grounds of (a) suspected dishonesty and (b) failure to comply with the Solicitors' Accounts Rules. The Professional Regulation Adjudication Panel's resolution included a resolution under paragraph 6. Intervention notices dated 14th October 2002 were served on Barclays Bank Plc and the Royal Bank of Scotland.
59. £180,267.54 was frozen in the practice's general client accounts on October 15, 2002. A further £32,547.71 was recovered after the intervention.
60. Mr Biebuyck was struck off the Roll of Solicitors on October 30, 2003.
61. The records were up to date to 2 months before the intervention, but the client accounts were not intact at the time of the intervention. Not all of the money that should have been in the accounts was present, and many of the client files were missing, hampering attempts to understand and reconcile, if at all possible, the discrepancies. The shortfall identified is the sum of £130,311.83. There are some examples of ledger debit entries for some clients, which if netted off would lessen the shortfall.
62. The Compensation Fund has submitted subrogated claims to £364,100.13 principal. This sum is clearly well above the amount of money (just over £200,000) currently held by the Law Society, highlighting the deficit existing in this case. It is also an indicator that the majority of persons potentially entitled to funds have probably made a claim on and received a grant from the Compensation Fund (which is now subrogated to their entitlements).
63. The possibility was contemplated of an interim distribution of the sum of £166,050.56 to the Compensation Fund from the funds, which sum must on any view (that is, on the basis that the existing uncertainties are resolved unfavourably as far as its potential entitlement is concerned) be due to the Compensation Fund. In this case, it has not yet, in fact, been made.
64. The Part 8 Claim in respect of this intervention was issued on January 17, 2005 with the Court's permission without any defendants.
65. Mr Biebuyck was served, under cover of a letter dated January 19, 2005, with the claim form and evidence in support, and replied by e-mail on January 20, 2005 confirming that, whilst he was willing to help if he could, he did not want to be represented in the proceedings.

(3) Dixon & Co

66. Anne Christine Dixon had a general practice as a sole practitioner in Oxford Street, London. She also practised in partnership under the name of Dixon Emberton. However, this partnership was not the subject of an intervention.
67. An inspection of Ms Dixon's books of accounts and other documents was commenced in November 2001. Ms Dixon told the Forensic Investigation Unit that she had been practising alone since 1987 and that she had been severely affected by the death of her partner and office colleague and, as a result, had allowed matters relating to the proper running of her practice to drift.
68. The sole ground for intervention into Dixon & Co was failure to comply with the Solicitors' Accounts Rules. The Professional Regulation Adjudication Panel also resolved that all monies within paragraph 6(2)(a) would be vested in the Law Society. Intervention notices were served dated March 5, 2002, and sums totalling £31,120.75 were recovered from the Dixon & Co general client accounts.
69. The records were written up to six days before the intervention, and the practice bookkeeper then wrote them up to the intervention date. The client accounts were not intact at the time of the intervention. In fact, a considerable shortfall in funds has been identified, in the order of £251,000. Corresponding with this shortfall is a very large debit balance in the name of one client, a Mr H, who was sued to judgment by the Law Society for the money he was overpaid from the Dixon & Co client accounts. However, whilst a judgment has been obtained, Mr H has declared himself bankrupt and there do not currently appear to be any assets against which the judgment can effectively be enforced.
70. After the intervention, Ms Dixon remitted to the Law Society sums totalling £14,563 to seek to reduce the shortfall in funds somewhat. The shortfall identified takes into account these additional sums.
71. The Compensation Fund has submitted subrogated claims amounting to £288,275.74 principal. A sum that is clearly substantially more than the funds (£45,683.75) available for distribution. This does indicate that many persons have made claims against the Compensation Fund and that the Compensation Fund grants have, in many cases, alleviated the problems of the deficient client accounts for the client/person entitled to the funds in the account, leaving the Compensation Fund to bear the loss (in that it is unable, through its subrogated claims, to recover all of the money it has paid out by way of grants).
72. However, some discrepancies appeared, in the course of investigation, between the Compensation Fund's subrogated claims as calculated by the Compensation Fund itself and as calculated by the Law Society in its capacity under paragraph 6. These discrepancies have been the subject of ongoing investigation and resolution.
73. The Part 8 claim form for this claim was issued, without defendants with the permission of the court, on July 4, 2005.
74. Ms Dixon was served with a copy of the claim form and accompanying evidence in support under cover of letter dated July 5, 2005. Ms Dixon responded with some comments on the evidence on July 14, 2005. She indicated that she did not wish to be joined to these proceedings, but indicated that she may write again with further comments.

(4) Zoi & Co/Lancaster Bailey

75. Farooq Zoi practised under the name of Zoi & Co and under the name of Lancaster Bailey in Plaistow and Edgware Road. He had previously operated in partnership, but at the time of the intervention was a sole practitioner. His was a general practice employing 20 un-admitted staff.
76. The Law Society carried out an inspection into Mr Zoi's books of accounts and other documents between October 2000 and June 2001. The Professional Regulation Adjudication Panel resolved to intervene into any practices or the remainder of any practices, which Mr Zoi conducted as a principal, on the grounds of (a) suspected dishonesty and (b) failure to comply with the Solicitors' Accounts Rules. The resolution included a resolution under paragraph 6.
77. An intervention notice dated June 14, 2002 was served on Barclays Bank and a total sum of £37,002.47 was frozen in the client accounts of Lancaster Bailey and Zoi & Co.
78. The accounting records recovered at the time of the intervention were (compared with the other three cases) very unreliable. They were significantly out-of-date and much of the underlying material, such as client files, was missing. The accounts had only been written up to 18 months before the intervention, and it was not possible to reconcile the accounts from the client ledger list.
79. However, once served with these proceedings, Mr Zoi produced a client ledger list for May 2002, the month before the intervention, which appeared to reconcile to the bank statements for that month. The additional material has been the subject of analysis by the accounting department working for Russell-Cooke, the solicitors for the Law Society, albeit with an element of caution given the manner in which the additional material was produced.
80. The Compensation Fund has thus far made subrogated claims amounting to £21,669.40, and there are some applications made for grants to be paid out of the Fund still pending.
81. The new information produced by Mr Zoi does not alter the approach in his case. It may result, subject to further verification if possible, in additional sums being distributed to other clients, if they can be located, shown in the client ledger list for May 2002 produced by Mr Zoi. The amount remaining undistributed, even if the information can be verified and relied upon, will be £6,075.11.
82. The claim form for this case was issued, again without defendants but with the permission of the Court, on July 4, 2005.
83. Mr Zoi was served by way of letter dated July 5, 2005 with the claim form and supporting evidence. He has been involved in proceedings with the Law Society, appearing at the Solicitors Disciplinary Tribunal in August 2005. He confirmed by way of e-mail dated July 26, 2005 that he does not wish to be joined to the proceedings.

B. The issues

84. The Law Society has identified the following issues:

(1) What, on a proper construction, is the nature of any obligations imposed upon or powers vested in the Law Society under section 35 and paragraph 6? The Law Society's submission is that references to trusts in paragraph 6 should be construed as references to statutory public law trusts, as opposed to private law trusts.

(2) If considered to be a private law trustee, is the Law Society entitled to take into account the issue of proportionality, as between cost incurred and results achieved, when identifying beneficial entitlement and beneficiaries of the trust funds vested in it under paragraph 6, and in discharging any obligation as a private law trustee to identify, ascertain and contact beneficiaries of the trust?

(3) Is the Law Society entitled to verify accounting records from a sample of client files, as opposed to every client file that has been uplifted at the time of intervention, the sample being selected on a case by case basis, reasonably and proportionately appropriate to the facts of each particular case?

(4) Where it is not reasonably and proportionately possible to reconcile and verify the client account monies with a client ledger list or lists as at the date of intervention, may the Law Society compile a best list of entitlement to the funds (known as "the Best List") from the material (including accounts records, primary accounts material such as bank statements, client files, client ledger lists and Compensation Fund information) reasonably and proportionately available to it?

(5) May the Law Society net off debit and credit ledgers in the name of the same client, so that that client's entitlement, if any, to the funds vested in the Law Society is calculated using the aggregate balance over all of his or her ledgers, where the Law Society has taken reasonable and proportionate steps to verify that the debit ledger represents money withdrawn from the client account for or on behalf of the client whose name appears on the ledger?

(6) May the Law Society re-allocate transactions posted to a suspense ledger to named ledgers where, following reasonable and proportionate inquiries into those transactions, there is sufficient information, applying a reasonable and proportionate approach, to indicate that it is correct to do so?

(7) May the Law Society rely on the balances shown on ledgers and the debit postings made to those ledgers, save where there is evidence which puts the Law Society on notice that particular balances may be wrong and that particular debit postings may not be reliable as an indication of the solicitor's use of a particular client's money? If so, the Law Society then need only conduct reasonable and proportionate enquiries, before coming to a view as to what is to be regarded as the correct balance on any particular ledger. Where there is evidence that a debit transaction out of the client account was made for or on behalf of the client or with the client's money, to whose ledger the debit was posted, should that debit posting remain posted to the ledger, notwithstanding the fact that the debit was or may have been unauthorised by the client?

(8) May the Law Society, in its capacity as statutory trustee under paragraph 6, rely on the verification exercise carried out by the Compensation Fund, to identify what subrogated claims the Compensation Fund has to the funds vested in the Law Society under paragraph 6, and only investigate such claims where the amount of any particular claim exceeds that which the Law Society, in its capacity under paragraph 6, believed, prior to intimation of the claim by the Compensation Fund, could be claimed in respect of that particular client?

(9) Where there is no evidence of a bill, or other written notification of the costs incurred, having been sent to the client or paying party, are sums of money on a client ledger, which might represent payments made on account of costs or be equivalent to the costs incurred on behalf of that client, to be held for the client and not for the solicitor? In determining whether the sums of money should be held for the client or the solicitor, need the Law Society only conduct reasonable and proportionate enquiries?

(10) May the Law Society determine entitlement to the funds vested in it, having regard to any shortfall in the client account(s) at the date of intervention, and the most reasonable and proportionate manner of allocating the shortfall as between all of the clients who had money deposited in the client account(s) prior to the intervention, taking note of principles of private trust law governing allocation of deficiencies in trust funds?

(11) Is the Law Society's advertising campaign, which has regard to section 27 of the Trustee Act 1925, a rational approach in seeking to determine entitlement to funds vested in the Law Society under paragraph 6, alternatively, if held to be a private law trustee, is it a proper discharge of the Law Society's obligation to ascertain beneficial entitlement to the trust funds?

(12) Should the Law Society make reasonable and proportionate attempts to contact persons entitled to the funds vested in the Law Society under paragraph 6, including a current general approach, but without fettering discretion, and dependent upon the given facts, of contacting persons with an apparent entitlement over about £75 where current contact details are known or considering tracing persons with a ledger balance over £500 where current contact details are not known?

(13) May the Law Society retain, from the undistributed surplus of funds, money as reimbursement for its costs incurred properly and reasonably in determining entitlement to the funds and effecting a distribution of the funds to those entitled thereto?

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

(1) An order approving the process adopted by the Law Society to create a best list of beneficiaries of the trust and their entitlements to trust money ("the Best List") as a proper discharge of its obligation as a trustee to ascertain the beneficiaries of its trust.

(2) An order directing that the Law Society may in creating the Best List, in the cases of clients with both verified credit and debit balances, net the same off against each other.

(3) An order approving the process adopted by the Law Society to create the list of beneficiaries of the trust (including the process of verification of a sample of client files as opposed to every single client file) as a proper discharge of its obligation as a trustee to ascertain the beneficiaries of its trust.

(4) A declaration as to the beneficial entitlement of the solicitor to trust money on account of unbilled work carried out for some of the clients whose ledgers are included in the Best List.

(5) An order approving that distribution to the beneficiaries of the trust be approached based on the Best List of beneficiaries and their respective entitlements to trust money.

(6) An order approving that distribution to the Compensation Fund be approached based on its subrogated rights to trust money as set out in the Law Society's distribution list.

(7) Given that there is a shortfall in trust money as compared to the entitlement to trust money recorded in the Best List, an order approving distribution, allocating the identified shortfall on a pro rata basis, to all beneficiaries, including the Compensation Fund by way of subrogation, without retention of any trust money or other security, save for the undertaking given by each claimant to repay any overpayment of trust money made to the claimant, as set out in the claim form filled in by the claimant.

(8) An order approving an approach to distribution to the Compensation Fund based on its subrogated rights to trust money and, in so far as is necessary, the determination of the existence and/or extent of those subrogated rights.

(9) An order approving the process adopted by the Law Society to contact and obtain information from beneficiaries, in order to distribute to them their share of the trust money, as a proper discharge of its obligation as a trustee to notify beneficiaries of the trust and to seek to make a distribution of trust money to them.

(10) An order approving distribution (without retention of any trust money or other security, save for the undertaking given by each claimant to repay any overpayment of trust money made to the claimant, as set out in the claim form filled in by the claimant) in which the trust money is allocated between all beneficiaries, including the Compensation Fund by way of subrogation, on a last in last out basis applying the rule in Clayton's Case, and in which, in the absence of evidence identifying all of the beneficiaries to the trust money on the foregoing basis, all those beneficiaries identified recover their full entitlement to trust money.

(11) An order directing that any money remaining, after a distribution to beneficiaries has been effected so far as is reasonably possible, can be retained by the Law Society as reimbursement for its costs and expenses in administering the trust.

86. The Law Society accepts that, if the court holds that the Law Society, whilst bound by statutory duties, is not a private law trustee, there may be no need to continue to determine the majority of the other matters. But the Law Society submits that it would still be necessary or desirable to consider the specific issues arising in these test cases for the following reasons: (a) given the complexity of the points in issue, the Law Society needs to be confident that the court has considered its approach; (b) consideration of these matters should serve to demonstrate to the court some of the very considerable difficulties encountered by the Law Society in administering these funds, even where, as in the test cases, very considerable resources have been devoted to them and reinforce the points made in support of the Law Society's primary submission that there are difficulties inherent in construing paragraph 6 as creating private law trusts; (c) consideration of these matters enables the court to have a factual matrix against which to make the decision as to how best to construe paragraph 6.
87. In summary the Law Society in its capacity as statutory trustee argues that the trust is subject to public law for these reasons. First, monies held on trust under paragraph 6 are expressly subject to the powers conferred by Part II of Schedule 1, and the fact that the trust may be subject to such powers is inconsistent with a private trust. Second, the Law Society's position as statutory trustee is analogous to that of a trustee in bankruptcy in that a trust is created in circumstances where there is often financial chaos and the trustee has no idea who all the beneficiaries are or how the trust will be divided. Third, the expression "trust" is not a term of art and its meaning depends on the context. Fourth, it would be highly inconvenient if the trust were a private law trust: it might fail for uncertainty of beneficiaries; it might fail for evidential uncertainty owing to the often uncertain or incomplete nature of the solicitors' records in these cases. Consequently, paragraph 6 creates two stages. Stage one creates a statutory purpose trust whereby monies are held to exercise in relation to them the powers conferred by Schedule 1, including determining entitlement to the funds. Stage two creates a secondary statutory trust for those who have been determined to be entitled in stage one.
88. In its capacity as trustee of the Compensation Fund, the Law Society puts forward for the assistance of the court the contrary arguments. They are in summary these: the fact that a trust does not fulfil all the traditional criteria does not mean that it is not a private law trust. The relevant feature of a trust is that there is a separation of legal title and beneficial interest. The fact that the interest cannot be ascertained until claims are established and verified does not prevent the court from recognising the trust. Parliament would not have intended that private law trust duties over client account monies should be converted to public law duties on intervention. This is further confirmed by the absence of any express obligation to distribute or power to recover costs. If it had been intended to remove the pre-existing private trust there would be clear wording to that effect. The legislative history provides no evidence that Parliament intended to impose a public law trust. A private trust analysis is not unworkable. Proportionality is relevant in private law. Conceptual and evidential uncertainty relate solely to express trusts. There is no absolute need to inform beneficiaries of claims. It would be sufficient for the statutory trustee to take out insurance in respect of any liability from late-emerging beneficiaries or alternatively to provide undertakings to replace any overpayment. The statutory trustee's duty to act reasonably and proportionately would be fulfilled in these circumstances by the compilation of a Best List.

V The paragraph 6 trust

89. The Solicitors Act 1974 was a consolidating Act. The wording now contained in Section 35 and Schedule 1 was first introduced in the Solicitors (Amendment) Act 1974, section 8 and Schedule 1.
90. The origins of the intervention jurisdiction were in the Solicitors Act 1941, by which the Compensation Fund was established. The Compensation Fund was established to make discretionary grants in dishonesty cases, and by section 2(2) it was to be "held by the Society in trust for the purposes" provided in section 2 and the First Schedule, and any rules made under section 2. The power to intervene was confined to dishonesty cases, and to a power to require production of documents and a power to ask the court to prohibit payments by the solicitor's bank without the court's permission: Schedule 1, paragraphs 4 and 5.
91. The power to intervene was subsequently extended to cases where a solicitor had been struck off or suspended: Solicitors (Amendment) Act 1956, section 9. No provision was made by that Act for the funding of interventions on this ground.
92. Those provisions were consolidated in the Solicitors Act 1957, which by sections 31 and 32 introduced separate Schedules for intervention (Schedule 1) and the Compensation Fund (Schedule 2). Schedule 1, paragraph 7, provided for the Law Society to apply to the court for an order prohibiting payments from bank accounts of the solicitor or his firm. By Schedule 2, paragraph 1, the Compensation Fund was to be held on trust by the Law Society, and by paragraph 7(e), it was provided that the costs of interventions on the grounds of dishonesty should (as before) be borne by the Compensation Fund.
93. The Solicitors Act 1965 extended the circumstances in which the intervention powers could be exercised (to encompass also undue delay, bankruptcy etc, and deceased solicitors' practices in certain circumstances). It also extended the nature of the powers, giving the Law Society for the first time a power to resolve to take control of monies: all the powers were set out in Schedule 1 which was substituted for Schedule 1 to the 1957 Act.
94. Schedule 1 to the 1965 Act enabled the Law Society to require production of documents and (for the first time) to take control of monies:

(1) By paragraph 7, the court was given the power, on the application of the Law Society, to order that no payment be made by a bank from any account in the name of the solicitor or his firm without leave of the court.

(2) By paragraph 10, the Law Society was given the new power, exercisable on a resolution of the Council, to take control of all sums of money due from the solicitor to clients, or held by the solicitor for clients, or subject to a trust of which the solicitor was trustee.

(3) By paragraph 12, the Law Society was able to pay such monies into special accounts and "may operate on, and otherwise deal with, such special …accounts as the solicitor or his firm might have operated on, or otherwise dealt with, the said banking account."

(4) By paragraph 13(1), the Law Society was able to serve a notice on the solicitor or other persons directing the transfer of monies in accordance with the directions of the Society "provided that …no such directions shall be given by the Society except with the approval of the person to whom the said moneys belong, being in the case of a trust the trustee, and, where the solicitor is the sole trustee or a co-trustee thereof only with one or more of his partners, clerks or servants, the person beneficially entitled to such moneys". By paragraph 13(2), the Law Society was given express power to apply to the Court for directions "where the Society is unable to ascertain the person to whom the said monies belong or where the Society otherwise thinks it expedient so to do."

(5) By paragraph 17, the Law Society was given express power to make regulations with respect to the procedure to be followed in giving effect to the provisions of, inter alia, paragraphs 10, 12 and 13(1), and with respect to any matters incidental, ancillary or supplemental to those provisions.

95. The Solicitors (Amendment) Act 1974 replaced the existing powers, by repealing section 31 of the 1957 Act, the substituted Schedule 1 thereto and the relevant provisions of the 1965 Act. In Schedule 1 the 1974 Act set out both the circumstances in which the powers could be exercised (which were extended to include failure to comply with accounts rules or indemnity rules) and also the powers themselves. There was no change to the position whereby the Compensation Fund continued to fund dishonesty interventions. The Solicitors (Amendment) Act 1974, Schedule 1, paragraph 6(1) (which is reproduced in the 1974 Act, Schedule 1, paragraph 6(1)) introduced the trust concept for the first time in the context of interventions.
96. A review of the potentially admissible materials from 1973-4 (including minutes of the relevant Standing Committee) has revealed nothing that sheds light on the meaning of the word "trust" in paragraph 6 of Schedule 1 to the 1974 Act (or on that word in the Solicitors (Amendment) Act 1974)).
97. There are a number of differences between the trust created by the Act under Section 36 and Schedule 2 and that created under Section 35 and Schedule 1.
98. First, paragraph 3 of Schedule 2 contains a specific power to invest the Compensation Fund. There is no such specific power in relation to the trusts created under paragraph 6. I accept the Law Society's point that this is consistent with the view that the Compensation Fund is a trust fund which it is expected that the Law Society will hold onto, maintain and administer, as paragraph 1 of Schedule 2 states, and from which grants will be made from time to time in the exercise of the Law Society's discretion: but the trusts created by paragraph 6 are expected to be transient, short term trusts, in respect of which it is envisaged that the Law Society will distribute the funds to those entitled to it as soon as it is in a position to do so following the intervention.
99. Second, there is provision made for the Law Society to protect itself against too many claimants against the Compensation Fund. Paragraph 5 of Schedule 2 permits the Compensation Fund to insure the Fund for such purposes and on such terms as the Council may deem expedient. In fact, this has not been done since it would prove to be too expensive. There is no such provision made in respect of the funds vested in the Law Society under paragraph 6. There is no explicit guidance in the Act as to how the Law Society should handle a situation, following intervention, when the client accounts prove to be deficient and there are insufficient funds to meet all of the claims made (notwithstanding the fact that this is, unfortunately, a very common situation).
100. Third, grants are made out of the Compensation Fund according to the exercise of its discretion, which it exercises specifically and explicitly to compensate the most deserving of applicants: cf R v Law Society, ex p Mortgage Express [1997] 2 All ER 348, 360. By contrast, on an intervention, the Law Society holds the money on trust for the purpose of the exercise of its powers, and according to the beneficial interests in it. "It has no general discretion to pay it to the most deserving of beneficiaries": Halley v Law Society [2003] EWCA Civ 97, [2003] WTLR 845, at [41].
101. The wording of the trust created by Schedule 2 is more obviously in line with the creation of a statutory purpose trust than that of the wording of the trust created by paragraph 6. Paragraph 1 of Schedule 2 states "the fund … shall be held by the Society on trust for the purposes provided for in Section 36 and this Schedule", whereas paragraph 6 states "all such sums…shall be held … on trust to exercise in relation to them the powers conferred by this Part of this Schedule and subject thereto upon trust for the persons beneficially entitled to them."
102. If the paragraph 6 trust were a private law trust, then it would import the duties of a private law trustee. Those duties would include the following: first, a trustee has to ascertain the identity of the beneficiaries, and to ascertain their beneficial entitlement. Second, a trustee is obliged to inform a beneficiary of full age and capacity of his interest in and rights under the trust: Lewin on Trusts (17th ed. 2000, Mowbray et al), para 23-03. Third, a trustee is obliged to give beneficiaries a full and accurate record of the stewardship and management of the trust, and is required to keep and render proper, clear and accurate financial accounts: Lewin on Trusts, para 23-05. Fourth, a trustee has to distribute to the correct beneficiaries of a trust fund, and that obligation is a strict obligation: Lewin on Trusts, para 26-03. This principle is onerous and places a trustee in a demanding position, in terms of correctly distributing to the right beneficiaries of the trust.
103. The Law Society argues that in practice the imposition of private law trust principles on the Law Society might render the scheme created by Schedule 1 unworkable. The reality is that the Law Society is in a fundamentally different position from that of a private law trustee. When (unlike a private law trustee) the Law Society is required to try to reconstruct from (often extremely poor or possibly fraudulent) records who might be entitled to the client account monies, and how much of the monies those persons might be entitled to receive in any distribution, it is unworkable to impose upon the Law Society a strict obligation to distribute to the "right" beneficiaries only. Such a conclusion overlooks the reality that seeking to ascertain who are the "right" beneficiaries involves numerous decisions and the exercise of discretion on the part of the Law Society. Normally a trustee would be under a duty to look to trust records which would ordinarily exist in a private law trust to inform the trustee about the state of the trust, the identity of the trust property and trust beneficiaries etc. The Law Society is in a very different position. It must look to the solicitors' accounting records, but it must do so in a situation where the very reason why it has become a trustee of the client account monies, in the first place, is usually linked to some deficiency in those accounting records. If the Law Society is not able to take those decisions, and exercise its discretion, in a manner which will only be overturned if it has acted in an irrational and unreasonable manner etc, it becomes almost impossible to administer the funds vested in it upon each intervention. To obtain any kind of certainty, the Law Society may well have to burden the court with frequent applications for directions and approval of the decisions it had taken or was proposing to take.
104. I am satisfied that the Law Society's position, that its duties in relation to the paragraph 6 trust are grounded in public law, is correct. This is so for the following reasons.
105. There is no doubt that the duties of the Law Society in relation to the Compensation Fund are duties grounded in public law. Grants are made out of the Compensation Fund according to the exercise of its discretion, which it exercises specifically and explicitly to compensate the most deserving of applicants: cf R v Law Society, ex p Mortgage Express [1997] 2 All ER 348, 360. The wording of the trust created by Schedule 2 is more obviously in line with the creation of a statutory purpose trust than that of the wording of the trust created by paragraph 6. Paragraph 1 of Schedule 2 states "the fund … shall be held by the Society on trust for the purposes provided for in Section 36 and this Schedule."
106. In Law Society v Soulimov, May 27, 2002, unreported, it was assumed that paragraph 6 involved a private law trust. Mr Soulimov demanded payment of money (which he alleged was his) from the client account vested in the Law Society following intervention into Mr Simms' practice. The Law Society was concerned as to the propriety of paying the money out, because of the quality of the evidence it had, and commenced an application for directions from the court, as a private law trustee would. In the application, the Law Society took a neutral role and surrendered its discretion to the court. In that case the primary question now before the court was not the subject of argument.
107. In regulating the profession, the Law Society performs a public duty: Law Society v KPMG Peat Marwick [2000] 1 All ER 515, [33], affd [2000] 1 WLR 1921 at [16], [19] and [23]. In Swain v Law Society [1983] 1 AC 598, at 607-608, Lord Diplock said that the Law Society has both a private capacity and a public capacity. When acting in its private capacity it was subject to private law, but

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

108. Similarly Lightman J said in Law Society v Dooley, supra, at [12] that the approach of the Law Society – namely, to allow the solicitor supervised access to these documents for the purposes of the solicitor recovering unpaid costs due to him at the time of the intervention (notwithstanding the fact that the costs of such supervision might make costs recovery economically unattractive or unviable) - reflected a fair and reasonable balance in accord with the Law Society's public law duties as a public body to protect the interests of the solicitor's former clients.
109. The starting point is the construction of paragraph 6 in Schedule 1. The wording does not give an answer, and, as has been seen there is no relevant legislative history. But Parliament must be taken to have known that the Law Society might well be acquiring depleted funds, that it might not know where the beneficial interest lay, and might not know who the potential beneficiaries might be. The Law Society had to look to the solicitor's accounting records, in a situation where the very reason why it has become a trustee of the client account monies, in the first place, would often be linked to some deficiency in those accounting records.
110. The use of the word "trust" does not conclude the matter. The word "trust" is defined in the Act as follows (at section 87(1)): " 'trust' includes an implied or constructive trust and a trust where the trustee has a beneficial interest in the trust property, and also includes the duties incident to the office of a personal representative, and 'trustee' shall be construed accordingly." This definition is not exhaustive and is of no assistance in relation to the present question. The same word "trust" is used in both Schedule 2 and Schedule 1 to impose different obligations on the Law Society and "trusts" of differing natures, which indicates that the word is not a term of art, but means different things even within the same Act.
111. There is no doubt that when the word "trust" is used in a statute it does not necessarily mean a classic private trust. Thus in Tito v Waddell (No. 2) [1977] 1 Ch 106 the relevant Ordinance described the resident commissioner as being paid compensation to hold on trust on behalf of the former owner or owners of a native or natives of the colony subject to such directions as the Secretary of State may from time to time give. Sir Robert Megarry V-C said (at 211) that, when the word "trust" was used one has to look to see whether in the circumstances of the case, a sufficient intention to create a true trust is manifested: "One cannot seize upon the word 'trust' and say that this shows that there must therefore be a true trust" (at 227).
112. In Ayerst v C& K (Construction) Ltd [1976] AC 167 it was held that an order winding up a company divested the company of the beneficial ownership of its assets for the purposes of its unrelieved losses and capital allowances being used by a successor company. In the context of the question whether the company still retained legal ownership of its assets, Lord Diplock discussed the analogous position of the assets of a bankrupt, the legal title to which vests in the trustee in bankruptcy. Lord Diplock referred (at 178) to the example of a trustee in bankruptcy as a "trust" imposed by statute which clearly did not have all the indicia of a private law trust. One of the reasons for this was that, in the course of administration of the bankrupt's estate, prior to the submission of all the proofs from the creditors of the bankrupt, the trustee had no way of knowing all of the beneficiaries for whom he was administering the estate, and the shares in which he would distribute the estate. Lord Diplock went on to say that the label "statutory trust" can be understood as characterising a trust that does not bear all the indicia of a trust as would be recognised by a Court of Chancery apart from the statute. He said (at 180) that all that may be meant by the use of the word "trust" was giving property the essential characteristic which distinguishes trust property from other property; namely, it cannot be used or disposed of by the legal owner for his own benefit but must be used or disposed of for the benefit of others.
113. Accordingly, it does not follow that, when the word "trust" is used, that brings with it the full range of trust obligations attendant upon a traditional private law trust, particularly so when the trust is imposed by statute and is in the context of the exercise of a public function. The meaning of a word depends on its context. Thus in Brooks v Brooks [1996] AC 375, where the question was the meaning of the word "settlement" in the Matrimonial Causes Act 1973. Lord Nicholls said (at 391): "In English law 'settlement' is not a term of art, with one specific and precise meaning. Its meaning depends on the context in which it is being used."
114. In my judgment the background to the need for the powers and the structure of Part II of Schedule 1 make it clear that the paragraph 6 trust was not intended to be, and could not have been intended to be, an ordinary private law trust. The Law Society inherits, like a trustee in bankruptcy, a situation not of its own making including records which are often in a chaotic state, in which it does not know initially where all the funds lie, and then, having recovered the funds, does not know who the claimants to the funds are. It has, nonetheless, to determine entitlement to the funds and distribute to those identified as claimants to the funds. It would be difficult if the Law Society were, in that context, to be burdened with overly excessive or onerous duties as a private law trustee under paragraph 6. I accept the Law Society's submission that the trust created under paragraph 6 can be labelled a statutory trust. Similarly, the term "beneficiaries" can be used, in the sense of statutory beneficiaries entitled under paragraph 6 to a share of the funds vested in the Law Society (as opposed to beneficiaries of a private law trust).
115. This approach is also supported by the consideration that the Law Society needs to be able to act efficiently in circumstances where there may be many clients involved (cf. R v Takeover Panel, ex p Datafin plc [1987] 1 QB 815, 840), and it is not likely that it could have been envisaged that the Law Society would constantly be applying to the court for directions of the kind sought in this case.
116. Such an interpretation would also avoid the danger that the trust might be void. Were the trust under paragraph 6 a private law trust it would be a fixed trust, and not a discretionary one. A fixed trust with conceptual and/or evidential uncertainty is a void trust, and a fixed trust is only valid if it is possible to draw up a complete list of the beneficiaries at the time of distribution: Lewin on Trusts, para 4-30. I accept that it is by no means certain that failure to identify the clients would make such a private law trust invalid, and certainly a court would do everything it could to find it valid, but it would be an odd interpretation of paragraph 6 to allow it to result in a situation where it is possible that some trusts were valid, because of the good level of accounting records maintained by the solicitor prior to intervention, and others (those, often in fact, where intervention was required the most) were void for evidential uncertainty. The only way in which to ensure that all of the trusts created under paragraph 6 are valid, no matter how bad is the level of evidence as to beneficiaries, is to recognise that the trust created under paragraph 6 is not a trust subject to the usual rules, such as evidential certainty, imposed upon such fixed private trusts.
117. I consider that the analogy of liquidators and trustees in bankruptcy is an apt one. They inherit the company's or individual's affairs when they are financially in a mess and, very often, there is a deficit between the available assets and the total potential claims for a share in the assets. The purpose of their appointment is to wind up the company's or individual's affairs and distribute such assets, as are recovered and available, to the creditors. Similarly, the Law Society intervenes and, in some, limited, senses, winds up the practice that is the subject of the intervention. It is not an administrator, but it is terminating the practice of the individual solicitor, at least so far as it relates to historic client matters. It inherits a situation, often, financially in a mess where there is a deficit between the funds in the client accounts and the potential claims to those funds and it, too, has to distribute the monies it recovers to identified claimants.
118. Consequently, I do not consider that in exercising the power under paragraph 6 the Council of the Law Society is effecting an assignment of the trusts constituted by the client accounts, such as it was in the hands of the solicitor. It is legally divesting the solicitor of legal ownership of the funds and vesting the same in the Law Society, and also creating a new trust upon which the funds are to be held. The solicitor did not hold the funds on trust to exercise in relation to them the powers conferred by Part II of Schedule 1. On the other hand, paragraph 6 specifically provides that the funds are to be held on trust to exercise in relation to them the powers conferred by Part II of Schedule 1, and only subject thereto on trust for the persons beneficially entitled to them.
119. This solution effectively involves two forms of statutory trust. A statutory purpose trust first arises whereby the monies are held to exercise in relation to them the powers conferred by Schedule 1, which includes the ancillary power in paragraph 16. The statutory purpose trust must include the purpose of determining who are beneficially entitled to the funds in order that the funds can be held for those who are entitled to them. A second statutory trust arises under paragraph 6, namely, for the persons beneficially entitled to the funds.
120. The Law Society therefore has a statutory power to determine who is entitled to the funds under paragraph 6. That does not mean that it has a discretion as to who is beneficially entitled: cf Roy v Kensington and Chelsea and Westminster Family Practitioner Committee [1992] 1 AC 624; Trustees of the Dennis Rye Pension Fund v Sheffield City Council [1998] 1 WLR 840; Steed v Secretary of State for the Home Department [2000] 1 WLR 1169. In taking steps to determine who is beneficially entitled, it must exercise the power in a way that is bona fide, rational, reasonable, takes into account relevant considerations and does not take into account irrelevant considerations. The exercise of the power would be subject to review on public law grounds. So also the statutory power to distribute must be exercised in accordance with public law principles.
121. The Law Society accepts that private law trust principles and the claims of the clients to the monies prior to the intervention would be relevant: cf R v Tower Hamlets LBC, ex p Chetnik Developments Ltd [1988] AC 858, 882, per Lord Goff of Chieveley. The Law Society, in exercising its power rationally and reasonably, would need to take into account and give due weight to principles of trust law in, for example, arriving at a Best List of whom it reasonably considers to be, on the available information, the most probable persons entitled to the fund vested in itself.

VI Other matters

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

A Unbilled costs

123. The first relates to the position of unbilled costs. I am satisfied that the Law Society is right to proceed on the basis that where there is no evidence of a bill, or other written notification of the costs incurred, having been sent to the client or paying party, sums of money on a client ledger, which might represent payments made on account of costs or be equivalent to the costs incurred on behalf of that client, are to be held for the client and not for the solicitor. In determining whether the sums of money should be held for the client or the solicitor, the Law Society need only conduct reasonable and proportionate enquiries.
124. It is common for clients to pay solicitors money on account of the solicitors' costs or on account of unpaid professional disbursements. This money is client money and, as such, has to be held in a client account: Solicitors' Accounts Rules ("SAR 98"), r.13 and the notes thereto, and r.19(4). One of the fundamental principles of the SAR 98 is that client money is kept separate from office money, which belongs to the solicitor; see SAR 98, r.1(b), r.13(c), r.19(1)(a)(i).
125. In order for money to be transferred properly from a solicitor's client account to office account, certain procedures have to be followed, as laid down in the SAR 98. Under rule 19(2), the solicitor must first give or send a bill of costs or other written notification of the costs incurred to the client or to the paying in party, whenever he properly requires payment of his fees. Once that has been done, the money then becomes office money and must be transferred out of the client account within 14 days: see r. 19(3). Consequently it has been held that a solicitor cannot transfer small, old balances existing on client ledgers to his office account without raising a proper bill prior to the transfer: Doggett v Law Society, February 21, 2000, unreported.
126. These are provisions of the SAR 98 that are often breached by solicitors who are then subject to intervention. It is not uncommon for solicitors who are the subject of inspections and/or interventions to have made round sum withdrawals on account of costs generally without reference to precise figures as should be contained in a proper bill of costs. Such round sum withdrawals are prohibited: note (x) to r. 19.
127. The Compensation Fund operates a policy whereby it may deduct, from any grant it makes to an applicant, the costs that would have been due to the solicitor provided that the work had been properly completed, so that the applicant is not in a better position by reason of a grant than he would otherwise have been. This is so, even if the intervened in solicitor did not hold a practising certificate at all material times: Guideline 11(a). It can mean there are situations in which the Compensation Fund makes a grant to an individual of less than the balance shown under the name of the individual on the Best List, having calculated itself what the likely costs of the work done by the intervened in solicitor on behalf of the applicant would have been. This leaves a small residual balance on the client's ledger, the beneficial entitlement to which the Law Society, in its capacity as statutory trustee, must determine.
128. While it is justifiable for the Compensation Fund, in the exercise of its discretion, to choose not to award a grant which includes sums of money, which it considers equivalent to the amount of work the solicitor concerned had carried out on behalf of the applicant, the Law Society is determining existing entitlement to the funds at the date of intervention.
129. I accept the Law Society's submission that the Law Society should treat money on a client ledger as held for the client and not for the solicitor. To do so would not undermine the solicitor's entitlement to be paid for work he has done and for fees properly incurred, should there be any. This is a personal remedy as between the solicitor and the client. It (and the lien which it triggers) is a separate question to that of entitlement to the money physically sitting in the client account at the date of intervention, subsequently vested in the Law Society.
130. The Law Society is mindful of the fact that the solicitor who has been the subject of an intervention may well have a considerable interest in being able to recover costs properly due to him, but in respect of which he has not been able, prior to the intervention, to bill his respective clients. To ensure that the interference with the solicitor's property is as little as is reasonably possible, the Law Society usually agrees to allow the solicitor supervised access to the files in order that he may take steps to recover costs due to him. The Law Society is entitled to do so, even though the costs of providing supervision of the solicitor (recoverable from the solicitor himself under paragraph 13 of Schedule 1) may render costs recovery by the solicitor economically unviable: Dooley v Law Society, supra, at [11]-[12].

B Distribution in cases of deficiency

131. The second question to which I shall refer is the application of the Rule in Clayton's Case where there is a deficiency. I accept that the Law Society may determine entitlement to the funds vested in it, having regard to any shortfall in client account at the date of intervention, and the most reasonable and proportionate manner of allocating the shortfall as between all of the clients who had money deposited in client account prior to the intervention, taking note of principles of private trust law governing allocation of deficiencies in trust funds.
132. It is very common for there to be a deficit between the amount of money recorded as supposedly in client account at the time of the intervention and the amount of money that is, in fact, there and becomes vested in the Law Society. This may arise as a result of debit balances, representing the fact that sums of money have been spent on behalf of other clients who did not have money in the client account at the time the money was withdrawn on their behalf. Alternatively, the solicitor may have been dishonest and withdrawn money, to which he was not entitled, for himself or others and either posted such withdrawals dishonestly to named clients, or not bothered posting the withdrawals to any ledger. Alternatively, the solicitor may have failed properly or accurately to record withdrawals made from the client accounts for some time prior to the intervention.
133. The rule in Clayton's Case is still treated as the starting point: Lewin on Trusts, para 41-52. Under that rule, those funds which are deposited with the solicitor first are the funds which are presumed to have been the first to leave the client account. However, it takes only a very small counterweight to displace the rule in Clayton's Case: Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 Ch, [2003] 2 All ER 478 at [55]. It is commonly recognised that a pari passu solution, in which all of the beneficiaries share the loss pro rata in accordance with the proportion of their beneficial entitlement to the fund as a whole, is the usual solution: Commerzbank Aktiengesellschaft v IMB Morgan Plc [2004] EWHC 2771 (Ch), [2005] 1 Lloyd's Rep. 298 at [47] and [48]. This solution was adopted in Barlow Clowes International Ltd (in Liquidation) v Vaughan [1992] 4 All ER 22.
134. In most intervention cases, there will be a counterweight. Payments into solicitors' general client accounts do not generally get paid out in the same sequence. Nor would any of the clients of the solicitor expect them to. Some clients' money sits in solicitors' accounts for some time, for example, if paid in as a payment on account of costs in ongoing litigation. Other money comes in and goes out again in a short space of time, for example, the purchase money remitted by a mortgage company to complete a conveyancing transaction. In Russell-Cooke Trust Co v Prentis Lindsay J said (at [58]) that he considered the pari passu approach to be the system least unfairly distributing loss on an account that should have been dealt with in accordance with SAR 98.
135. Accordingly, the pro rata approach is, in most cases, likely to be the most appropriate approach, simply because of the very nature of a solicitor's general client account. In addition, attempting to allocate a deficit on the basis of the "first in first out" rule would also be extremely impracticable. The evidence is that it is difficult enough, given the commonly found levels of available evidence, to reconstruct the accounts as at the date of the intervention with sufficient accuracy. The following problems arise in the application of the "first in first out" rule:
136. It would require the identification of all of the misappropriations from the client account. This would, itself, not necessarily be straightforward. Ledger balances which are in debit at the time of the intervention are an obvious place to start, but they are not the only possible source of misappropriations. There may have been unauthorised or improper withdrawals from the client account which were posted to a ledger sufficiently in credit, so that the net effect was that the credit on that ledger was reduced as opposed to creating a negative debit balance. The only way in which those misappropriations could possibly be identified is if the Law Society went behind all the ledgers in credit, checking every transaction that had been posted to that ledger.
137. Even if all of the misappropriations from the client account could be successfully identified, then, in order to allocate them on a "first in first out" rule, a reconciliation of the account would be necessary as at the date of each misappropriation, together with a list of dates on which all of the funds present in the reconciled account had been deposited. The difficulties in achieving reconciliation at the time of the intervention demonstrate how difficult, time-consuming and expensive such a process would be. Equally, the further back in time the reconciliations go, the less evidence there may well be from which a reconciled account could be drawn up, and the greater chance that attempting to chase down evidence from missing files etc. would produce inconclusive or no results.
138. Assuming misappropriations could be successfully identified and reconciliations effected at each of the relevant dates, it may well be that the client's money presumed to have been used under the "first in first out" rule would have subsequently been used in a legitimate transaction. The rule in Clayton's Case is only an evidential presumption, rebuttable by contrary evidence. It would be incredibly onerous, and most likely not possible, to attempt to undo all of the legitimate withdrawals that took place after a misappropriation on the basis of an evidential presumption that money legitimately withdrawn for a client had earlier been presumed withdrawn under the rule.

C Costs reimbursement from undistributable sums

139. The third issue is whether, as it proposes, the Law Society may reimburse itself for costs out of undistributable sums. The relevant sums arise because there may be historic balances, which have remained on ledgers for long periods of time without any further movement on the ledger. There may be clients for whom up-to-date contact details are not available and who do not come forward in response to advertisement. There may be small sums for which any further work would be completely disproportionate to the amounts of money involved. These small sums, when added together over numerous interventions, amount to significant amounts of money.
140. The Law Society is proposing to retain the undistributable sums as reimbursement of the Law Society's properly incurred costs in determining entitlement to the funds and taking steps to distribute the funds to those it has determined to be entitled thereto. Costs would only be reimbursed from property that would not otherwise be distributed to clients, those clients not being reasonably and proportionately identifiable or contactable.
141. In addition, the Law Society has offered an undertaking to repay money retained as reimbursement to late-emerging beneficiaries. The undertaking would be limited to the total sum of money it had received as reimbursement for its costs. It would also be limited to a period of one year. The limitation of one year has been chosen in order that the Law Society may have some certainty after a reasonable period of time, in order to be able to know what financial liabilities it has going forwards, and rule out contingent liabilities going forward after a period of time has elapsed.
142. This would present no problem if the Law Society were a private law trustee, since it would be entitled to be indemnified out of the trust property for all expenses and costs incurred in connection with the performance of its duties: Lewin on Trusts, paras 21-03–21-03E; Trustee Act 2000, section 31(1).
143. But if a public body is to levy a charge, there must be clear statutory authority to that effect: Attorney-General v Wiltshire Dairies Limited (1921) 37 TLR 884, affd (1922) 38 TLR 781, HL. Consequently, a public body charged with a public duty may not charge for carrying out the duty without specific statutory authority: Goff and Jones, Law of Restitution, 6th ed. 2002, paras 10-019 – 10-024; Woolwich Building Society v IRC [1993] AC 70 at 155 per Lord Keith (dissenting), and 164-165 per Lord Goff of Chieveley. The authority must be express or arise by necessary implication: R v Richmond upon Thames London Borough Council, ex p McCarthy & Stone (Developments) Ltd [1992] 2 AC 48, at 74, per Lord Lowry. See also R v Greater Manchester Police Authority, ex p Century Motors (Farnworth) Ltd, March 24, 1998, unreported.; R v Liverpool City Council, ex parte Barry [2001] EWCA Civ 384.
144. With some hesitation I have come to the conclusion that the Law Society is entitled to make the deduction from the undistributable funds. The fact that the relevant funds are undistributable is not relevant to the existence of the power, although it does mean that it is unlikely that there will be any prejudice to anyone if it should turn out that, contrary to my view, the Law Society has no power to deduct its costs. My reasons are these.
145. The essential question is whether, in the absence of an express power, there is any necessary implication that there is such a power. Against such an implication are the express provisions for costs. First, paragraph 13 of Schedule 1 provides that the solicitor is responsible for the costs, but the solicitor may have disappeared, and/or be bankrupt, and/or simply be unable to raise sufficient money to pay the costs. Second, the effect of paragraph 7(e) of Schedule 2 is that the Law Society's costs in dishonesty interventions are payable out of the Compensation Fund (about one-third of interventions). Nevertheless I consider that there is the necessary implication because although, in fact, the Law Society has sufficient funds to carry out the intervention exercise, it is not publicly funded and it might be possible to envisage cases in which it could not carry out the intervention exercise unless it could be satisfied that the costs would be met. The potential sources of recovery from the intervened in solicitor and the Compensation Fund should not preclude the Law Society being reimbursed out of money that will not otherwise be distributed, particularly if it may be that, in a given intervention, recovery under paragraph 13 is theoretical only and will not result, in reality, in recovery of all or part of the costs incurred. I do not consider that the ancillary power in paragraph 16 is a safe basis for reimbursement, but I do accept the alternative submission that the power to reimburse can derived from the general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred in connection with the administration of the property: cf Re Berkeley Applegate [1989] Ch 32.
146. I should record my gratitude to counsel and solicitors for the excellent and extremely thorough presentation of this interesting matter.
147. I will hear submissions of the form of the order.
      
     
Appendix

A1. I will set out in this Appendix the contentions of the Law Society in relation to the subsidiary matters which do not strictly arise for decision in the light of the ruling that the Law Society's duties are not those of a private law trustee, together with in each case my view of the procedure adopted or proposed to be adopted.

A. Verification of accounting records from a sample of client files

A2. The Law Society first seeks to reconcile such accounting records as it has following the intervention. Under rule 32(7) of the Solicitors' Accounts Rules ("SAR 98"), solicitors are obliged every five weeks (a) to compare the balance on the client cash accounts with the balances shown on statements and passbooks (after allowing for unpresented items) of all general client accounts and separate designated client accounts, (b) as at the same date to prepare a listing of all of the balances shown by the client ledger accounts of the liabilities to clients and compare the total of those with the balance on the client cash account, and (c) to prepare a reconciliation statement which must show the cause of any difference in these comparisons. Although the strict obligation is to effect a reconciliation once every five weeks, the notes to the accounting rules strongly recommend writing up (and effecting a reconciliation of) the accounting records weekly, even in the smallest of practices, and daily in the case of larger firms.

A3. The current balance on each client ledger account must always be shown or be readily ascertainable from the solicitor's records: r.32(5).

A4. Often, when the Law Society intervenes, the solicitor has not been complying with these obligations and the Law Society must carry out its own reconciliation to ascertain whether or not the sums recorded in the solicitor's records, as held by the solicitor for each client, amount to the total the bank has recorded as deposited in the bank account(s). Even where there has been compliance, the records may not be up to date at the date of the intervention and may need to be brought up to date prior to effecting a reconciliation at the date of the intervention.

A5. In Ahmed & Co, Mr Ahmed's accounts were up to date as at the end of December 2001, a few days prior to the intervention and, when updated to the date of the intervention, they reconciled. Biebuyck Solicitors' records were up to date as at August 30, 2002, two months prior to the intervention, and also reconciled. Dixon & Co's records were also written up, six days prior to the intervention. The practice bookkeeper, upon request by the intervention agent, then wrote the records up to the date of the intervention. In the case of Mr Zoi's practices, at the time of the Law Society's first evidence, it appeared that the accounts had been written up to September 30, 2000 pre-dating the intervention (in June 2002) by over a year and a half. It was not possible to reconcile the accounts, from that client ledger list, as at the date of the intervention. Mr Zoi subsequently produced a client ledger list for May 2002, the month prior to the intervention, which appears to reconcile to the bank statements for that month.

A6. The Law Society proceeds to verify, if possible, the accounting records which are present. Verification involves looking at underlying client files in order to ascertain whether or not the client ledgers accurately reflect transactions that have taken place in relation to a particular client or matter.

A7. Some form of exercise of verification is important given that some solicitors who are the subject of interventions are known to falsify entries on ledgers in order to make the client ledgers reconcile with the amounts of money held in the solicitors' client bank accounts. When faced with an investigation into their accounts and records (often a precursor to an intervention), solicitors have been known to falsify records in order to eliminate discrepancies and achieve a reconciliation.

A8. But the number of files a solicitor holds is usually very considerable. It includes "dead" files concerning matters closed a long time prior to the intervention. In theory, it would be possible for a solicitor to falsify the client ledgers to make a ledger balance appear to be a nil balance and, therefore, a finished matter, when it was not in fact so. The only – and wholly impracticable – way in which the Law Society could know for certain that all of the seemingly finished matters were indeed finished is if it were to revisit all of the files relating to finished matters, and not just the files relating to live matters. Live matters are usually the focus of an intervention, because the client is more likely to be affected by the intervention.

A9. If the Law Society were required in all cases to examine all of the files a solicitor holds, it would make the process of intervention vastly more expensive and time-consuming than it already is. The Law Society has adopted the approach of examining a sample of client files in order to verify reasonably and proportionately, if possible, the accounting records. By way of example, in Ahmed & Co, 10% of live client files were examined by the intervention agent. The sample represented client balances amounting to more than 50% of the funds held on trust under paragraph 6. The sample tallied with the accounting records, strongly suggesting that such records were accurate.

A10. The verification undertaken varies according to the circumstances of the individual case. For example, in Biebuyck Solicitors, the intervention agents had identified unusually large billing and, therefore, wished to examine more closely the reasonableness of billing in general. To do so, they examined dead files with a nil balance on the client ledger, as well as files relating to live matters, in order to examine the reasonableness of the billing of those cases and to identify any cases in which the client's ledger had gone into debit historically and the reasons for the client's ledger being allowed to go into debit.

A11. This reconciliation procedure reflects the procedure which the solicitor should have been following in any event, had he been complying with SAR 98. It is in line with private trust law requiring trustees to acquaint themselves with the trust and to read and consider the trust records. I accept, therefore, that it is a rational approach for a public body exercising public statutory functions to adopt, as well as being a proper discharge of a private law trustee's obligation to acquaint itself with its trust.

B Compiling a "Best List" of entitlement to the funds

A12. In the case of Ahmed & Co, the sample of files examined verified the accounting records, which was a relatively unusual case. It is possible in an intervention for there to be insufficient files to verify, as in the practices of Mr Zoi. It is also often the case that there are concerns when the files are examined, in relation to the accuracy of the accounting records, as in Biebuyck Solicitors.

A13. The initial reconciliation exercise, even if successful, may also throw up doubts because of the presence of debit ledger entries. Under SAR 98, r. 22(7), money held for a client in a designated client account must not be used for payments for another client. Under rule 22(6), a solicitor may make a payment in respect of a particular client out of a general client account even if no money or insufficient money is held for that client in the solicitor's general client accounts, so long as sufficient money is held for that client in a designated client account and the appropriate transfer is made immediately from the designated client account to the general client account.

A14. Overdrawn client ledgers (arising from debit ledger entries) suggest that withdrawals have been made from the client account, in breach of SAR 98, over and above the amount that that particular client had deposited in the client account, and that, therefore, another client's money has been withdrawn and used. Rule 1(d) states that solicitors must use each client's money for that client's matters only. Overdrawn ledgers suggest strongly that the client account is not intact and that there is insufficient money in the bank account to meet the claims of clients who have deposited money with the solicitor.

A15. The notes to SAR 98, r.32(7) also state that, when effecting a reconciliation, solicitors should not use the credits of one client against the debits of another, when checking whether the total client liabilities tally with the amount recorded as deposited in the client bank account. This is described as improper since it fails to show up the shortage. The initial reconciliations achieved in Biebuyck Solicitors and Dixon & Co only tally with the bank statements because the credits of one client are used against the debits of another client so that the net position is shown. This, superficially, conceals the shortage in trust funds. The shortage is revealed when a list of all of the ledgers in credit (ignoring the ledgers in debit) is compared with the available trust funds. The ledgers in credit represent potential beneficiaries of the trust funds and their respective claims on the trust funds and this should be compared to the trust funds available for distribution. This has been done in both Biebuyck Solicitors and Dixon & Co and the shortage has been exposed.

A16. Although a reconciliation, in which debit ledger balances are used against credit ledger balances and the net position alone is compared against the bank balance of the client account(s), is limited in that, without more, it would conceal the extent of any shortfall on the account, it does, it is submitted, have some value: if a reconciliation can be achieved on that basis, it does suggest that the solicitor has recorded all of the withdrawals made out of the client account accurately, even if those withdrawals should not have been made since a client did not have the requisite money in the client account to permit a withdrawal in his name. It is always possible that a solicitor could have forged such postings in order to achieve a reconciliation, but, in the absence of evidence to suggest that that is so, and given that interventions can occur where the solicitor has been incompetent (for example, by permitting withdrawals in the name of a client when there was insufficient money in the client account to do so) but not dishonest, a reconciliation which demonstrates that the withdrawals have all, or mainly all, been accurately recorded by the solicitor is a useful starting point in the investigation into the entitlement to the funds.

A17. In cases such as Biebuyck Solicitors, Dixon & Co, or the practices of Mr Zoi, the Law Society must then proceed to consider how best it can arrive at a list of beneficiaries and beneficial entitlement to the trust funds.

A18. It does so by identifying the most up–to-date list that it can find of client ledger balances. If no list of ledger balances can be found, then alternative sources could be used, such as the list of applicants for a grant from the Compensation Fund or a list of current clients. The Law Society's agents then review such accounting information as there is (both primary and secondary such as solicitor's vouchers, solicitor's bank reconciliations, cheque book stubs, paying in books and bank statements) to see if the identified list can be updated by, for example, reposting un-presented items back to ledgers, or identifying unidentified transactions and posting them to the specific client to whose matter they related (this involves writing to third parties, such as banks, for details about unidentified transactions posted to suspense accounts).

A19. Compensation Fund information comes from all of the applications made to the Compensation Fund. In relation to those that are withdrawn, it is possible that they are withdrawn because, when the solicitor was notified of the intention to award a grant under Rule 14 of the Compensation Fund Rules, he made a direct payment to the applicant, obviating the need for a grant to be made from the Compensation Fund. If the direct payment made was made in respect of funds which were in the client account at the date of the intervention, the solicitor will then expect to be entitled to receive a share in the distribution based on an entitlement to those funds.

A20. The inherent difficulty in compiling a Best List is similar to that encountered in verification. It is theoretically possible to investigate further, in terms of investigating all of the nil balances and their underlying dead files. The client ledger balances represent, in some cases, months or years of different transactions in relation to a matter. It would theoretically be possible, but, again, obviously completely impracticable, for the Law Society to re-visit every single one of those transactions to see if what is entered on the ledgers accurately represents the transaction that took place, as recorded in the client file.

A21. Were the Law Society required to carry out such an activity, the costs in terms of time and finance would, again, be very substantially increased from the considerable level which they already reach. Interventions would, in all probability, become a wholly unmanageable burden for the Law Society.

A22. It is far from certain that such an exhaustive exercise would produce better results. Many of the dead files may date back considerably and further information from the client may be difficult to obtain, given the lapse in time. The files themselves may appear to tell a different story to the accounting records because the files were not kept properly or have missing information. It may not be possible to find up-to-date contact details for third parties, such as clients, from whom additional information may be required to make sense of the files and/or of individual transactions that took place many months or years previously.

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

A24. I accept that the decision to compile a Best List and the manner in which it is compiled by the Law Society, in situations where reconciliation and verification are not possible on the available evidence, is a rational approach for a public body to adopt in exercising public statutory functions in determining entitlement to funds vested in it under paragraph 6. It is both reasonable and proportionate in the context of a body with finite resources exercising statutory powers given to it by Parliament in the interests of the public at large. If the Law Society were a private law trustee, such an approach would be a proper discharge of its obligation to ascertain beneficial entitlement to the trust funds.

C Ability to net off debit and credit ledgers

A25. It is normal for clients to instruct solicitors on various matters and to remit to the solicitor different amounts of money in relation to each separate matter. Under SAR 98, r. 29 the Council of the Law Society may publish guidance with the concurrence of the Master of the Rolls to assist solicitors in complying with SAR 98. The guidance is in SAR 98, Appendix 3. Paragraph 2.4 of the guidance states that ledger accounts should include the name of the client and contain a heading providing a description of the matter or transaction concerned. This means that it is common for the same client to have several ledgers headed with different matters, should that client have instructed the solicitor on more than one matter.

A26. If a client has a ledger balance which is in debit, this prima facie suggests that money was withdrawn on behalf of the client and for his benefit when the client had not deposited sufficient funds with the solicitor in relation to that matter for the withdrawal to be permissible. The client has effectively received an unauthorised windfall of funds that were not his.

A27. The loss of such a withdrawal is borne by the remainder of the clients who had deposited money in the client account, unless the client, in whose favour the withdrawal was made, had deposited other money in the client account in respect of other matters which had not been withdrawn at the time of the intervention. Such deposits would be represented by ledger balances in the same client's name but headed with the description of other matters, which were in credit at the time of the intervention.

A28. Such examples have arisen in these cases and the Law Society proposes to net off the ledger balances in credit and those in debit in the same client's name relating to different matters, since, then, the loss to the client account arising as a result of the debit balance will be borne solely by the client for whose benefit the withdrawal was made, as opposed to being borne by all of the other clients who did not receive any benefit from the withdrawal.

A29. The netting off approach can be said to be accepted implicitly by SAR 98. Rule 22(5) only prohibits the paying out of money from a general client account in relation to a particular client if the money to be paid out exceeds the money held on behalf of that client in all the solicitor's general client accounts. There is no requirement for the money not to exceed the money deposited by that client in respect of that particular matter. The solicitor must simply be aware of the total of all of the money deposited by that client in his general client accounts, and ensure that money paid out on behalf of that client does not exceed that total.

A30. Netting off is different to adjusting ledger balances by posting back to those ledgers sums that should not have been debited from them, e.g. because of post-intervention receipts correcting mistakes made earlier or because of un-presented cheques, or by reducing ledger balances to reflect sums which should have been debited from them, e.g. because of transactions going out of the client account posted to a suspense ledger that should have been properly posted to the client's ledger. Netting off occurs once the ledger balances have been finalised, so far as possible, and occurs in respect of ledgers that are in relation to different matters, so that, when receiving a share in the distribution of the funds, each client's entitlement to such a distribution is based on his aggregate position across all his ledgers, at the date of intervention.

A31. In clear-cut cases, there may seem to be no problem with the above approach. However, as is repeatedly the problem for the Law Society in the intervention context, it is possible that a debit balance under a client's name is not a genuine debit balance or that the money withdrawn from the client account, although posted to that client's ledger, was not used for that client's benefit. In some cases, it is not possible to be satisfied either way on the evidence.

A32. It is in that context that the Law Society does what is reasonably and proportionately possible in investigating the debit balance before proposing to net it off against credit balances in the same client's name.

A33. In the absence of any evidence (or any reasonably and proportionately sufficient evidence) suggesting a ledger balance is wrong, it takes the ledger balances at face value as genuinely representing withdrawals made on behalf of the named client for the amount recorded on the ledger.

A34. By way of example, in Biebuyck Solicitors five debit ledgers have been identified in the name of five persons who also are named on ledgers with credit balances. The five balances are for the following amounts: -£623.10, -£451, -£205, -£100, -£36. These are relatively small balances. The point of principle is important because, in some cases, very large balances may be involved. In any event, over numerous interventions, the amount of money affected by this point of principle will be significant.

A35. The corresponding balances under the same names which are in credit are, respectively, £623.10, £1085.80, £80, £151 and £36. If netting off were to take place on all of the above, the shortfall in funds in Biebuyck solicitors would be lessened by the sum of £1,290.10. The benefit of this lessening in the overall shortfall would be shared by all of those entitled to the funds, since the general shortfall is to be allocated on a pro rata basis between all.

A36. Verification of the debit balances involves finding the files for those clients and those matters. This is what will happen in the case of these five ledger entries. If they are all successfully found, they can be examined. Should there be nothing on the file, which suggests that the sums debited from that client's ledger should not have been, then the debit ledger balance is usually considered to be verified. This is the general approach. It is difficult and undesirable to fashion an absolute, automatic approach from which there is never any variation, since each case and even each ledger entry involves different facts and may require further investigation.

A37. I accept that the netting off approach is a rational approach for the Law Society to adopt in exercising public statutory functions in determining entitlement to funds vested in it under paragraph 6. If the Law Society were a private law trustee, it would be a proper discharge of the Law Society's obligation to ascertain beneficial entitlement to the trust.

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

A38. Suspense ledgers are not (generally) supposed to be used by solicitors, although they are relatively common in accounts of solicitors who are the subject of an intervention. SAR 98, r. 32(16) states that suspense client ledger accounts may be used only when the solicitor can justify their use; for instance, for temporary use on receipt of an unidentified payment, if time is needed to establish the nature of the payment or the identity of the client. Frequently, the suspense ledgers in the accounts of solicitors who are the subjects of an intervention have been used for long periods of time, the solicitor writing transactions to the ledger, instead of properly attributing the transaction and writing it to a properly named client ledger.

A39. Credit transactions, that is, transactions comprising money coming into the general client account, will, if they remain unnamed, be for the benefit of all of the named clients recorded as having money deposited in that general client account. The money coming into the general client account, in real cash terms, swells the money available in that account and, assuming that that account has an overall deficit (as is often the case), lessens the deficit to be borne by all the named clients.

A40. However, the Law Society does not presume that these credit transactions cannot be allocated, and, instead, attempts to identify the person for whose benefit money was being deposited in the account. The Law Society seeks, if reasonably possible, to identify the transaction and re-post it to a named ledger, either existing at the time of the intervention or (if there is none already existing) created by the accountants working on the accounts on behalf of the Law Society.

A41. Likewise, debit transactions are investigated, when they have been posted to suspense ledgers. If such transactions remained unnamed, and therefore unallocated, they will be a loss that falls on all of the clients who are recorded as having deposited money in the client accounts. It may be that this remains the case, even if the transaction can be identified. However, if identified in the name of a client with an existing credit balance on a ledger relating to that specific matter, then the debit transaction can be posted back to that ledger, thereby reducing the credit balance; or, if the ledger relates to another matter (see the principles discussed in the previous section), then the debit transaction can be netted off against that credit balance and, thereby, borne by that client alone.

A42. Again, in clear-cut cases there may seem to be no difficulty with that approach and, at times, there is enough accounting material for the accountants to be confident about the re-allocation of transactions posted to a suspense ledger, from that ledger, to a named ledger. The issue arises where there is an absence of information and a need to decide the level of information to justify, acting in a reasonable and proportionate manner, a decision to re-allocate or not re-allocate transactions from suspense ledgers.

A43. By way of example, there was a suspense ledger in Dixon & Co with a balance of -£2,283.75. This balance represented a transfer from the Dixon & Co client account to the office account effected by Ms Dixon without attribution to any particular named client. Ms Dixon provided information to the Law Society stating that the transfer was on account of costs whilst she was away and that she knew one transfer was in relation to Mr B and one in relation to Mr and Mrs H. She believed that there should be a bill on the respective files.

A44. Both of these clients had ledgers which were in credit: Mr and Mrs H in the sum of £547.49 and Mr B in the sum of £421.87. No file could be found for Mr and Mrs H and it was not possible to contact them. Mr B's file, which was found, suggested that the costs had already been paid.

A45. Ms Dixon, subsequently, informed Russell-Cooke on November 7, 2005, that the Mr and Mrs H matter may have been taken over by Dixon Emberton. A request has been made of that firm for the file and a response is awaited. Mr B was contacted by Russell-Cooke and said that he had no recollection on the issue of costs and had no records. Ms Dixon, in her letter of November 7 2005, also said that there were two Mr B matters and, therefore, there should be two bills. Only one file has been found, and it may be that the costs were due and/or bill was raised on the other matter, in respect of which no file has been found.

A46. The Law Society has reached a decision on the currently available evidence, in these two cases, that this level of evidence is not sufficient to warrant reallocating the debit postings from the suspense ledger to the respective ledgers of Mr and Mrs H and Mr B.

A47. The point of principle is that of proportionality in setting the level of evidence on which the Law Society can properly act in re-allocating transfers posted to suspense ledgers and in setting the level of inquiries which the Law Society should make into transactions posted to suspense ledgers.

A48. I accept that this is a rational approach for the Law Society to adopt in exercising public statutory functions to determine entitlement to funds vested in it under paragraph 6. If it were a private law trustee, it would be a proper discharge of its obligation to ascertain beneficial entitlement to the trust funds.

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

A49. It is not uncommon for a solicitor who is the subject of an inspection and an intervention to create postings in his accounting records. It is also possible that entries may be wrong through human error and not dishonesty.

A50. Unlike common private law trusts, a solicitor's general client accounts may be dealing with numerous transactions each day, with money coming into and out of the account, all having to be accurately recorded.

A51. Whilst a private law trustee should always investigate prior misfeasance by his predecessors, should he become aware of it, the context in which the Law Society inherits the client accounts is such that it is possible in most cases to question whether or not the ledger balances as at the date of the intervention are 100% accurate.

A52. However, to have to go behind all of the ledger postings as a matter of course, because of the context in which the Law Society is intervening, would impose an extraordinarily onerous burden on the Law Society in terms of time, money and human resources. The Law Society's position is that, if reasonably sufficient specific evidence emerges in the course of the intervention to cast doubt on a particular posting or postings, it will do all that it reasonably and proportionately can to investigate the posting and to rectify it should it emerge with reasonable certainty that it is wrong.

A53. The Compensation Fund has, in some cases, made grants to individuals based on the information then available as to the amounts deposited in the client account by that individual. As the investigation has continued, it has become clear that the Best List compiled by the efforts of the Law Society and its agents, in its capacity under paragraph 6, varies from the basis on which the Compensation Fund made a particular grant or grants.

A54. Moreover, it has been known for a solicitor to certify that money lent to him in his personal capacity was "client funds" in order to deceive the Compensation Fund into making grants to the lenders, on the basis that those lenders were individuals who had suffered loss or hardship as a result of the solicitor's dishonesty or failure to account for the client money in his hands: Holder v Law Society [2002] EWHC 1559, [2003] 1 WLR 1059, at [13] to [15].

A55. Insofar as these discrepancies have emerged, the Law Society has taken or will take all reasonable and proportionate steps to investigate and to seek to ascertain the cause of the discrepancy. The Law Society does not propose to apply a fixed threshold to its investigations; in other words, there should be no fixed minimum amount of discrepancy, less than which no investigation will be carried out. It would be very difficult to set a fixed threshold, given the manner in which each individual discrepancy depends on its own individual facts. However, the guiding principle in all investigations is what is reasonable and proportionate in that set of facts.

A56. By way of example, various discrepancies arose in Dixon & Co, several of which have been resolved since these proceedings were commenced.

A57. The remaining discrepancies, those of Mr R as executor of Mr H, a discrepancy of £4,824.62, of Mrs P, a discrepancy of £208.75, of Mrs C, a discrepancy of £944.97 and of Mr W, a discrepancy of £250, all relate to one issue: where there is evidence that points to a solicitor removing a client's money from the client account, albeit in an unauthorised manner, whether the loss of that money from that client account should be borne by the individual client (or the Compensation Fund by way of subrogation in this case) or pro rata amongst all clients. All of the discrepancies concern transfers of money on account of costs from the client account to the office account, when there was no bill, or it appears that there was no bill, sent to the client. This could also be characterised as an allocation of loss question.

A58. Mrs P made an application to the Compensation Fund for a grant representing funds which she had paid into the client account on account of costs, amounting to £1,007.50. A total of £767.95 had been transferred by Ms Dixon from her client account to the office account on account of costs and posted to Mrs P's ledger. The Compensation Fund could find evidence of only one bill having been sent to the client for the sum of £558.12. It took the view that there was no evidence of bills for £150 and £58.75 having been raised to justify the transfers on October 31, 2000 posted to Mrs P's ledger.

A59. Accordingly, the Compensation Fund made a principal grant of £449.38, being the sum originally remitted to Ms Dixon less the sum of £558.12 properly billed. The Compensation Fund then asserted a claim by way of subrogation to the full amount of the grant of £449.38.

A60. The ledger shows Mrs P as entitled to receive £240.63, since the ledger also reflects the (possibly) unauthorised transfers out of the client account on account of costs in the sums of £150 and £58.75 on October 31, 2000.

A61. The question arises as to whether the Compensation Fund should receive a distribution of the funds based on the higher figure of £449.38, monies which it says should have been in the account had the solicitor complied with SAR 98, or the lower figure of £240.63, the amount which the Law Society, in its capacity as trustee under paragraph 6, believes was left in the client account at the date of intervention in the name of Mrs P.

A62. The Law Society, in its capacity as trustee under paragraph 6, conducted further investigations and examined the underlying materials that might shed light on the veracity of the debit postings to the client ledger. In essence, the ledger card shows the transfers out of the client account to the office account on account of costs. The file shows nothing of use either way. The relevant bank statements show that there were transfers from the client account to the office account on the relevant days, albeit not in the precise amounts listed above, but this is not surprising, since it is common for solicitors to make one transfer from the client account to the office account which include several clients' costs all in one go.

A63. On the basis of the investigations carried out, it would appear that the sums of money were transferred out of the client account to the office account and, therefore, lost from the client account. The Law Society, in its capacity as trustee under paragraph 6, is concerned solely with establishing and determining entitlement to funds in the solicitor's client account at the date of intervention. This is a question of tracing so far as is possible on the evidence and identifying the location and movement of funds. If there is evidence that a particular client's funds were removed from the solicitor's account on a particular day, albeit that such removal might have been unauthorised, the Law Society is of the view that it is reasonable to allocate that loss of money from the client account to that particular client.

A64. The Law Society is reliant upon the postings made by the defaulting solicitor and there is a valid concern that those postings, in certain cases, may not be accurate but may be self-serving, for example, in the case of a solicitor taking randomly from the client account and posting to unrelated ledgers where he or she thinks the misappropriations will be least noticed. A measure of reliance on the solicitor is inevitable, since very often the only tools which the Law Society has, with which to identify entitlement to the funds vested in it, are whatever accounts and records the solicitor kept. The decision of how to allocate loss is not a decision as between the loss falling on the innocent client and the loss falling on the defaulting solicitor, where the presumption may well be that the solicitor should bear the loss, but it is a decision between innocent clients. Should the ledger not be relied upon and the posting of debited costs be reversed, this would increase the loss falling on other clients of the solicitor.

A65. On the available information in Mrs P's case, since there is evidence that the transfers took place out of the client account, and there is nothing to suggest that they were not transfers effected on account of costs incurred on her behalf, it may be that the Law Society should rely on the current ledger balance for Mrs P and the debits that have been made to that ledger. On the other hand, it may well be considered necessary to ascertain some positive evidence (as opposed to the absence of any contrary evidence) suggesting that the transfer was effected on account of actual costs incurred on Mrs P's behalf (albeit unbilled), so that the transfer is evidenced as referable to something related to the client, justifying the allocation of the loss of money from the client account to that particular client. In Mrs P's case, a review of the file has shown that work has been done on Mrs P's matter, which indicates costs were incurred on her behalf, albeit it is not clear if they were billed properly so as to be debited in accordance with SAR 98. It is possible that further information could be obtained from Mrs P or Ms Dixon. However, the costs involved in doing so, given the costs already incurred in investigating what is a discrepancy of £208.75, may well be disproportionate. If so, and the debit postings of costs that might not have been billed are reversed, this increases the general shortfall in the client account at the time of the intervention by £208.75, which will be borne pro rata, see below, by all the clients on the Best List. As a general policy, the Law Society favours the first solution, namely, reliance on the current ledger balance, given the absence of evidence to suggest that it was wrong.

A66. The Law Society in its capacity as trustee under paragraph 6 submits that the same approach must be adopted where the costs debited exceed what is considered by the Compensation Fund to be reasonable for the work in progress. The Compensation Fund in making a discretionary grant will assess what it considers to be a reasonable value for the work in progress being carried out by the solicitor and deduct that from any grant that it makes. In the case of Mr R as executor of Mr H, mentioned above, where a discrepancy remains between the Compensation Fund and the Law Society in its capacity as trustee under paragraph 6, the Compensation Fund came to the view that whilst £12,036.77 incl. VAT had been deducted from the client ledger on account of costs, incurred in the course of the administration of the estate, only one bill had been rendered in the sum of £2,131.50. However, rather than award a grant based on the difference between those two figures, the Compensation Fund commissioned an informal assessment as to the value of the work done by Ms Dixon on behalf of the estate. The value of the work was assessed at £7,212.15 inclusive of VAT and the Compensation Fund made a grant for the difference between the value of the work and the actual sums deducted from the client ledger. The difference between £12,036.77 and £7,212.15 is £4,824.62.

A67. The Compensation Fund has asserted a claim by way of subrogation for the amount of £4,824.62 granted, in addition to the balance remaining on client account of £11,852.45. Since the sums deducted from the client account on behalf of the solicitor's costs incurred on behalf of that client are a loss to that particular client, even if unauthorised, then it must follow that it is still a loss to that particular client, even if the sums deducted were too high and could have been the subject of assessment. Whilst it is right that the Compensation Fund, in the exercise of its discretion, can take such matters into account in deciding what level of grant it will award in its discretion, the Law Society, in its capacity under Paragraph 6, is concerned to identify and determine entitlement to a specific fund of money existing at the date of intervention, applying principles of tracing. All that concerns the Law Society in identifying entitlement is the movement and identity of funds deposited by clients in the client account.

A68. Were it to be said that the Law Society, in its capacity as trustee under paragraph 6, had to take into account what the reasonable value of the work done by a solicitor for a client was, this would require the Law Society to conduct informal assessments into that value, which, as can be seen from the Compensation Fund records referred to above, are by no means necessarily simple or cheap inquiries. There may be situations, as in the case of Mr R, where the Compensation Fund has already carried out such an inquiry, upon which perhaps reliance could be placed. However, the principle, if a correct principle, which the Law Society, in its capacity as trustee under paragraph 6 contends it is not, would have to be applied in all situations, including those where the Compensation Fund has not been involved and has not conducted its own inquiry into what might have been a reasonable cost for the work done by the solicitor on behalf of the client.

A69. The usual form of discrepancy concerns situations where the Compensation Fund's view of the subrogatable element of its grant exceeds the adjusted and updated ledger balance of the client (in the Best List) to which the Compensation Fund is subrogated. It is also the case that the subrogatable element of the Compensation Fund's grant may be less than the ledger balance. It is common for there not to be an exact match. The Law Society would not generally investigate differences where the Compensation Fund grant was less than the ledger balance. However, in the case of Biebuyck Solicitors, the Compensation Fund has raised a specific example of this where the Compensation Fund grant is less than the amount of the ledger in the name of Mr F, and it believes that the client ledger may overstate the client's entitlement to funds at the date of the intervention.

A70. This is a highly fact sensitive area, which needs to be considered on a case by case basis. The general approach of the Law Society is to (i) rely on ledgers save where there is evidence to suggest the ledger balance might be wrong, (ii) conduct reasonable and proportionate inquiries into differences over what should be the correct ledger balance (and this would be done whether the beneficiary pointing out the discrepancy was the Compensation Fund or a non-Law Society beneficiary, and discrepancies include those that arise when a non-Law Society beneficiary emerges claiming an entitlement to funds when he or she is not recorded even as having a ledger in the records held by the Law Society), and (iii) treat deductions from the client account as losses of a particular client's money where there is reasonably and proportionately sufficient evidence to indicate that the transfers were made in relation to that client, in respect of that client's money, albeit unauthorised.

A71. I accept that this is a rational approach for the Law Society to adopt in exercising its public statutory functions to determine entitlement to funds vested in it under paragraph 6. If it were a private law trustee, it would be a proper discharge of the Law Society's obligation to ascertain beneficial entitlement to the trust funds.

F Reliance on Compensation Fund verification exercise

A72. In order for the Compensation Fund to exercise its right (under section 36(4) of the Act) of subrogation to the rights of a recipient of a grant from the Compensation Fund to the funds vested in the Law Society under paragraph 6, it must identify how much money it believes that recipient had in the client accounts of the relevant solicitor at the time of the intervention and, therefore, how much of the money vested in the Law Society at the time of the intervention belonged to the recipient of the grant.

A73. Grants made by the Compensation Fund are also made in respect of items, such as lost interest, the costs of instructing new solicitors to rectify work badly done or to complete work incompletely done by the original solicitor, the costs of instructing solicitors or other professionals to prepare the application to the Compensation Fund or certain compensatory items such as penalties for late payment of stamp duty.

A74. Each composite grant has to be broken down into all its elements. A subrogated claim will only be maintained in respect of the sum or sums that represent money the Compensation Fund believed, at the time of making the grant, to be money which the applicant should have had in the solicitor's client accounts at the time of the intervention.

A75. In order to identify this element of the grant, the Compensation Fund staff carry out a verification exercise.

A76. The Law Society is mindful of the need to ensure that the Compensation Fund is treated no differently – neither worse nor more favourably – than any other person entitled to a share of the funds vested in the Law Society under paragraph 6. As other non-Law Society persons do, so must the Compensation Fund submit a claim form verifying the number of subrogated claims it is making to any funds vested in the Law Society under paragraph 6.

A77. When considering how far the Law Society, in its capacity under paragraph 6, should re-verify the claims submitted by the Compensation Fund, it is important to bear in mind that the Compensation Fund is itself a trust and the administrators of the Compensation Fund will have had to carry out their own checks upon receipt of an application for a grant, to satisfy themselves of the basis on which an application was being made to the Fund.

A78. There are times when the Compensation Fund has access to better, different or just more evidence relating to entitlement to the money in the client accounts at the time of intervention and, as such, is a useful source of information in compiling the Best List.

A79. The Compensation Fund is part of the Law Society's regulatory arm. Both the funds within paragraph 6 and those administered by the Compensation Fund are subject to the same statutory framework, in the context of the Law Society exercising the public function given to it by Parliament to regulate the solicitors' profession. To require the Law Society, in its capacity as trustee under paragraph 6, automatically to re-consider everything done by the Compensation Fund staff, when there is nothing to suggest that there is any need to do so, would be unnecessary duplication, and render the Law Society's exercise of its statutory powers far more onerous.

A80. The Law Society has adopted the approach whereby it relies on the claims submitted to it by the Compensation Fund and does not seek to go behind the verification exercise carried out by the Law Society's staff who administer the Compensation Fund, save where it, in its capacity as trustee under paragraph 6, has conflicting evidence which suggests that the Compensation Fund's assessment of how much money a particular client should have had in the client account at the time of intervention cannot be relied upon or might be questioned.

A81. In the practices of Mr Zoi, such is the state of evidence available to the Law Society from the solicitor's own records that, in respect of some of the claims submitted by the Compensation Fund to the trust fund, it has to rely entirely on the Compensation Fund. It has no evidence to suggest that the Compensation Fund might be wrong or inaccurate in any respect in its analysis of the subrogated claims it can properly maintain to the funds, save for the further investigation now being carried out in Zoi & Co in light of further evidence.

A82. I accept that the reliance upon the Compensation Fund's record of its verified claims by way of subrogation to funds vested in the Law Society, save where a claim exceeds that which the client, to whose claim the Compensation Fund is subrogated, is a rational approach for the Law Society to adopt in the exercise of its public statutory functions in determining entitlement to funds vested in it under paragraph 6. If it were a private law trustee, it would be a proper discharge of its obligation to ascertain beneficial entitlement to the trust funds.

G Entitlement in respect of unbilled costs

A83. I have dealt in the judgment with the principles relating to unbilled costs, and I set out here the Law Society's evidence.

A84. In each of the cases now before the court, where this issue has arisen, the solicitor concerned has been contacted. But these are all cases in which the solicitor is interested neither (i) in ascertaining current entitlement to the sums of money concerned, in terms of helping to identify whether or not a bill exists and has been sent to the client already, rendering the money office money under SAR 1998, r. 19(2) nor (ii) in recovering the costs himself.

A85. In seeking to ascertain whether or not there has been a bill, or written notification, prepared and/or sent to the client, in the absence of assistance from the solicitor concerned, the Law Society has to decide how far it should look to see if it is possible to establish evidence either way. Investigations - involving looking for files that may not exist, looking through the files that do exist or are found, for information that may not be recorded in that file, trying to contact clients or third parties when no addresses or up-to-date addresses and/or contact details for those persons are available and/or the individual concerned may not be able to recall whether or not a proper bill, or written notification of costs incurred, was sent - can be extremely onerous in terms of time and financial expense, with far from sure prospects of success or certainty.

A86. A line has to be drawn which is both reasonable and proportionate and which makes sense in the context of a body with finite resources exercising statutory powers given to it by Parliament in the interests of the public at large. The Law Society has done and will do what it reasonably and proportionately can to ascertain whether or not a bill has been sent in the cases that have arisen and, on the basis of the available evidence, will reach a decision as to whether the matter was properly billed.

A87. By way of example, in Biebuyck Solicitors, the Compensation Fund refused Miss M a grant on the basis that the balance of £20.75 on her ledger was in respect of work carried out by the solicitor. The grant awarded to Mr S was reduced by £616.88 to reflect the costs incurred by Mr Biebuyck. This balance remains on Mr S's ledger once the Compensation Fund has been paid its entitlement to the funds based on its subrogated claim of £23,000, the amount of the grant which it gave to Mr S.

A88. Neither of the files showed any evidence which might assist on the question of whether or not a bill or written notification had been sent to the client or paying party. Mr Biebuyck has said he is not asserting any claim to the funds held by the Law Society based on costs due to him. Responses are awaited from Mr S and Miss M and, should any be forthcoming, they will be considered prior to distribution.

A89. As far as Miss M is concerned, subject to any response from her or further information provided by her, there is insufficient evidence to say that the balance on her ledger is office monies. It will be treated as client account monies held for her.

A90. The Compensation Fund has shed some further light on the deduction on account of costs it made in the case of Mr S. The matter related to the release of a charge held by Mr S, where the Compensation Fund were of the view that the chargor was to pay the legal costs. The sum of £616.88 was paid over and above the amount required to release the charge, which the Compensation Fund considered to be evidence that the chargor must have been notified of the legal costs incurred as being £616.88. SAR 1998, r. 19(2), does allow for written notification of the costs incurred to be sent or given to the paying party as opposed to the client, and this may be a case where, even without evidence of a bill having been raised and sent, rule 19(2) can be considered to have been complied with and the balance of £616.88 should be treated as having been office money at the time of the intervention.

A91. The question of unbilled costs arises in respect of ledgers where there has been no Compensation Fund involvement. For example, in Biebuyck Solicitors, the ledger of Mr G shows a credit balance of £115. However, Mr G has returned a claim form stating that his claim was settled and that no money was owing to him and that Mr Biebuyck had deducted his fees from his claim. Notwithstanding the fact that Mr Biebuyck appears not to be attempting to assert any claim to such monies, in the light of Mr G's comments, the Law Society takes the view that it is reasonable and proportionate to treat the balance of £115 as office money at the time of the intervention.

H Allocation of a deficit in trust funds

A92. I have dealt in the judgment with the legal aspects of distribution where there are deficits, and I set out here the Law Society's evidence.

A93. The Law Society does not presume that the most applicable evidential presumptive rule will be the pro rata rule. The case of the practices of Mr Zoi is an unusual case, but a good example of a case in which the accountants reconstructing the solicitor's accounts identified a situation in which the rule in Clayton's Case would be more apt on the specific facts of that case.

A94. From an analysis of the bank statements immediately prior to the intervention date, it became clear that one of Mr Zoi's client accounts (the one with the largest amount of money in) had gone overdrawn shortly before the intervention. Once an account is overdrawn, the money that had been deposited therein has been dissipated and, should the account go back into credit at a later date, the credit balance is clearly created by new money and not the money which was originally deposited in the account (unless it can be shown that the "new money" represents the traceable proceeds of the money originally deposited in the account and then dissipated): Bishopsgate Investment Management Ltd v Homan [1995] 1 WLR 31.

A95. The fact that the client account had become overdrawn less than a month prior to the intervention gave the accountants a much narrower window to survey and in which to assess all the payments coming in and out of the client account in those few days. It was also thought to render consideration of deposits made into the account prior to the point in time at which it became overdrawn more or less academic.

A96. Moreover, it became clear from the bank statements that a substantial proportion of the trust funds had been paid into the client account just 3 days prior to the intervention, and that there had only been one relatively small payment out of the account after that receipt. The sum of £19,300 was received from PKP French solicitors on behalf of Mr M on June 11, 2002, 3 days prior to the intervention on June 14, 2002. On June 14, 2002 a cheque in the sum of £1,770 was paid out from the client account. Compensation Fund information revealed that it was paid out on behalf of Mr M. There were no payments out of the client account other than this one payment after receipt of the sum of £19,300. Thus, clearly, the sum of £17,530 remained in the account of the money paid in on behalf of Mr M.

A97. The application of a last in-last out rule does seem more appropriate in this case, and, on that basis, the sum of £17,480 will be paid to the Compensation Fund, since it paid a grant to Mr M for this amount on account of the monies deposited in the Zoi & Co client account at the date of intervention. The balance of £50 may be paid to Mr M, subject to the investigation concerning the sum of money paid to Mr A by the Compensation Fund, which was also supposed to relate to the sum of money received on behalf of Mr M.

A98. The remaining funds in the Zoi & Co client account will also be dealt with on a last in-last out basis; however, this is the subject of some further investigation, as a result of recent information provided by Mr Zoi which might shed a little more light on sums that were previously unidentifiable.

A99. I accept that the Law Society's approach of determining entitlement to the funds vested in it, having regard to any deficiencies in the client account at the date of the intervention, and the private trust law principles of allocating deficiencies between beneficiaries to deficient mixed trust fund, is a rational approach. If it were a private law trustee, I would have approved the pro rata method of allocating loss in Biebuyck Solicitors and Dixon & Co and the application of the rule in Clayton's Case in Zoi & Co.

I Advertisement

A100. In cases where private law trustees are concerned as to whether or not they have sufficiently identified all of the beneficiaries of their trust, they can obtain some protection under section 27 of the Trustee Act 1925 by giving notice by advertisement in the Gazette. This provision only applies to trustees for sale of personal property as opposed to all trustees of personal property. The Law Society is a trustee of personal property, but not a trustee for sale of personal property.

A101. The Law Society has carried out an advertising campaign which mirrors the requirements of section 27. Advertisements have been placed both in the Gazette and in newspapers circulating in the area where the majority of the solicitor's known clients were located; this being the best equivalent to land comprising the trust property, as provided for in section 27.

A102. In all of these cases, the advertisements have been repeated in a manner which would not have been required under section 27. This has been part of doing everything possible in the context of these test cases and goes beyond what the Law Society would consider, in general, to be proportionate. It has served to highlight how, even deploying unrestricted resources and imposing no limit upon the steps taken in the name of proportionality, results may not be forthcoming. In general, the advertisements have produced only a handful of responses at best.

A103. I accept that the use of the advertising campaign is a factor to be taken into account in demonstrating that the Law Society has adopted a rational approach to its exercise of its power to determine entitlement to the funds vested in it under Paragraph 6 or, if it were a private law trustee, in demonstrating that the decisions reached by the Law Society could be approved as a proper discharge of the Law Society's obligation to ascertain beneficial entitlement to the trust funds.

J Contacting persons entitled to funds: £75 limit

A104. The Law Society adopts various methods for contacting persons who might be entitled to a share in the funds. Advertising, described above, serves not only as a mechanism of identifying entitlement for the Law Society as a result of any information that it obtains following the advertising campaign, but also as a method of alerting those who have been identified as entitled to a share in the funds to the possible existence of their rights to claim against the funds.

A105. All clients with live matters should have already been contacted by the intervention agent at the date of intervention. The Law Society has now adopted an approach of only writing again to those clients with ledgers recording over £75 in the client account at the date of intervention.

A106. The cost of the steps which are involved in writing to a client, where up-to-date contact details are known, and then processing any response and making any payment that might be due once the response has been processed are estimated by the Law Society to be on average £233. These costs will be increased where the file has to be requested from Law Society archives, or from a solicitor to whom it was released, in order that contact details can be obtained.

A107. Substantial costs will already have been incurred in reconciling the accounts, verifying them if possible, compiling a Best List and resolving all of the uncertainties arising as a result of compiling that Best List, ascertaining any shortfall, deciding how to allocate that shortfall and advertising. All of these costs have to be incurred before it can be determined to what any one client who deposited money in the general client account might be entitled and, therefore, before the stage is reached when a client can be written to.

A108. Moreover, in cases of shortfall, a client may have a ledger balance in credit with the sum of £75 but, if loss is allocated on a pro rata basis, his or her entitlement to funds may be considerably less. For example, in Dixon & Co, a client such as Miss D who has a ledger balance of £70.50 will only be entitled to £10.64 out of the funds vested in the Law Society and a client such as Miss M who has a ledger balance of £84.52 will only be entitled to £12.75 out of those funds. To incur, say, between £82 and £233 worth of costs, on top of substantial costs that have already been incurred, in order to be able to effect a distribution of £10.74 or £12.75 is, in the Law Society's view, disproportionate. In many cases, it may not be known, until the letter is written and sent, whether or not the contact details are up–to-date for the client. If not up-to-date, the costs of tracing that client will increase the costs of distribution of whatever sums that client is entitled to, and the costs of sending the letter will have been incurred with no success in effecting a distribution.

A109. In the case of Biebuck Solicitors, Mr S made an application to the Compensation Fund for a grant of £50, but was rejected since he could not demonstrate hardship as a consequence of the failure of Biebuyck Solicitors to account for money to him.

A110. On the basis that Mr S had a ledger in credit for the sum of £50, the amount he would receive on a pro rata distribution of the funds would be in the order of £30, given the shortfall in the client account at the date of the intervention. The Compensation Fund has said that it has Mr S's address as at April 24, 2003, but that address dates back over two and a half years and it may no longer be up–to-date. The only way in which the Law Society would know whether or not it is, would be if a letter were sent, by which time the costs (which would certainly exceed £30) would have been incurred, possibly in vain.

A111. In these circumstances the Law Society submits that it is rational (i) for the Law Society to apply, as a general current approach, a limit of £75 on a client ledger, less than which it will not write again to clients in addition to the letter that should have been written at the time of the intervention, whilst (ii) recognising that there may always be particular cases which merit not following the general approach. If it were a private law trustee, that would be a proper discharge of its obligation to contact beneficiaries and inform them of the trust.

A112. If a client comes forward, perhaps in response to the earlier letter written by the intervention agent or having seen the advertisement or having contacted the Compensation Fund, and requests distribution of what he or she is entitled to, the Law Society is likely to effect a distribution, even though the costs incurred in doing so may exceed the amount being distributed. This also means that, should the client come forward and approach the Compensation Fund seeking a grant from the Compensation Fund, he or she could be referred on to the Law Society, in its capacity as trustee under paragraph 6.

A113. Where contact details or up-to-date contact details are not available for clients who might be entitled to substantial amounts, the Law Society considers the use of tracing agents. In the Law Society's experience, the effectiveness of using tracing agents has not been high, and is extremely dependent on the amount of information available for the client being traced. The amount of money invested in tracing also affects the effectiveness of the tracing exercise, and the amount of money that can be spent proportionately and reasonably is directly affected by the value of the ledger balance. A guideline level of £500 has been adopted now above which tracing will be considered by the Law Society. A flexible approach has been adopted so that, in Dixon & Co, where the shortfall was considerable, the level of £500 was applied as referable to the amount to be distributed to those entitled as opposed to their ledger balances.

A114. I accept that this is a rational approach.

K Disputes between beneficiaries

A115. There may be situations where proper determination of entitlement is outside the bounds of what it can achieve from the material available to it e.g. the solicitor's books and records and accounting materials. Entitlement may well depend on factual and evidential matters in dispute between two would-be beneficiaries. The name on a client ledger list may not always reveal what dealings there may have been with the entitlement to the money recorded on that ledger. In such a situation, the Law Society may ask for directions as trustee.

L Distribution

A116. Many balances left on client ledgers are small balances and swiftly dwarfed by the costs even of locating the client file, finding a current address for the client and writing to the client in an attempt to notify the client of the trust and the existence of his or her possible claim to a share in the trust funds. These costs are increased where, as often is the case, repeat letters have to be sent to the client chasing the client for a response to the initial letter and/or attempts have to be made to find an up-to-date contact address for the client by means of tracing agents if necessary.

A117. Ordinarily, a private law trustee would exert a right to reimbursement for the expenses incurred in administering the trust, recoverable from the trust fund itself: Trustee Act 2000, section 31(1). Exercising the right to reimbursement against the trust fund itself, in the case of a private law trustee, acts as natural barrier to carrying out exhaustive disproportionate attempts to locate and contact beneficiaries who have disappeared. Since the Law Society's own funds are being expended in determining beneficial entitlement to these trusts and effecting a distribution, the natural barrier against disproportionate enquiries into the whereabouts of beneficiaries is not present, albeit that the Law Society does not have inexhaustible funds and is funded by the profession itself.

A118. The Law Society is mindful of the desirability of ensuring speedy distribution to those who have been determined as entitled to funds. To that end, the Law Society has formulated an approach of interim distribution, which involves distributing to an identified person the minimum to which on any view he must be entitled, even were outstanding matters resolved eventually by the Law Society wholly contrary to the interests of that particular person.

A119. Although interim distributions will only take place where the Law Society is confident of the minimum entitlement of the person to whom it is proposing to effect an interim distribution, it is possible for there to be others entitled to the funds of whom the Law Society is unaware, given, for example, the fact that investigations are ongoing at the time of an interim distribution. Accordingly, recipients of an interim distribution will usually be asked to give undertakings to repay any amount, subsequently determined to have been overpaid in the interim distribution. The reality is that the most common recipient of an interim distribution is likely to be the Compensation Fund, since the Compensation Fund is often entitled to the largest proportion of the funds, by way of subrogation. Whereas, for the purposes of the interim distribution, resolving uncertainties against a particular individual (e.g. presuming that that individual bears the entire shortfall in funds by himself) would often eliminate the entitlement of an individual who was not the Compensation Fund, this is often not so for the Compensation Fund, because of the size of its entitlement.

A120. Where there is evidence of potential discrepancies between additional information (more likely than not provided by the Compensation Fund) and the ledger balances held by the Law Society in its capacity as trustee under paragraph 6, and whilst investigation into those discrepancies is ongoing, the balance that reflects the least favourable distribution as far as concerns the recipient of the interim distribution will be used in calculating the distribution. To calculate entitlement based on a possible higher ledger balance for the recipient would risk overpaying. It may be correct to calculate the overall claims to funds using the higher ledger balance in order that the potential overall claim is as high as possible, whilst the calculation of the entitlement of the individual to a share in the funds is calculated using the lower of the two possible ledger balances to reduce the risk of overpayment. The principles on which interim distributions are to be made is the subject of discussion between the Compensation Fund and the Law Society. In the case of Biebuyck Solicitors, Mrs N was the beneficiary of a trust; from evidence supplied by the trustee the balance of the trust funds at the time of the intervention should have been £194,000, but the Best List indicated a ledger balance of £164,000. The shortfall of £30,000 indicates misappropriation, or at least erroneous debits. Whilst further investigation is ongoing, the most prudent course would be to calculate an interim distribution using the higher value of her ledger for calculation of the total potential claims on the funds so that that figure is in the order of £370,000 as opposed to £340,000, whilst using the lower balance to calculate the Compensation Fund's entitlement to funds by way of subrogation to her ledger, so that that figure is in the order of £164,000 as opposed to £194,000. An alternative would be to rely on the lower balance for both the calculation of the total potential claims on the funds, and, therefore, the shortfall, and for the Compensation Fund's entitlement to funds by way of subrogation to that ledger balance.

A121. The standard claim form used to date has included an undertaking in the following form:

"I hereby formally confirm that I am entitled to the sum claimed and acknowledge that any payment I receive will be made in reliance upon my confirmation.

In the event that it transpires that I am not entitled to all or part of any sum paid to me, I undertake to return that sum to The Law Society within seven days of notification."

A122. The intention has been for undertakings to be given in both the interim and final distribution contexts. This standard form is not limited in terms of time.

A123. The Law Society has considered whether to ask, as an extreme precaution, for an undertaking from persons to whom distribution is effected, even if the Law Society is held only to be amenable to judicial review. The undertaking would guard against the remote possibility of judicial review of the Law Society's determination as to entitlement. However, the Law Society regards guarding against such a remote possibility in this way (save in unusual cases) as unattractive and unlikely to achieve a better or fairer solution overall than not seeking the undertaking, and paying the wronged person who emerges later claiming an entitlement to funds.

A124. I see no objection to the Law Society effecting distribution to those it has determined are entitled or identified as entitled, without any further retention or other security save for that which has been mentioned above.

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

A125. I have dealt with this in principle in the judgment. I set out here the Law Society's evidence.

A126. In Zoi & Co, once all the funds have been distributed to those who can be identified as entitled to a share in the funds, there will remain an unidentified surplus of £6,075.11, and it is possible that that unidentified surplus may be greater. This unidentified surplus is unidentified in the sense of there not even being names of clients to whom the funds might be payable.

A127. In Dixon & Co, potential entitlement to the funds far exceeds the funds. The shortfall in Dixon & Co in the client account at the time of the intervention was considerable and calculated at the time of the Law Society's original evidence as £250,181.31. Therefore, any undistributed surplus in this case would not arise as a result of an inability to identify those entitled to the funds. It might well arise, though, when distribution is effected. Clients may well have moved since the intervention in March 2002 and there may be no up-to-date address or contact details for some clients. Other clients have a ledger balance under £75 in credit and no further attempts would be made to contact them for the reasons explained above, given the considerable costs involved, the extremely small amounts that would be distributable to them and the amount of work that has already been done in Dixon & Co in compiling a Best List and in notifying clients by way of advertisement etc. In Dixon & Co the agent has confirmed that all clients whose files were uplifted at the time of the intervention were written to, regardless of whether their matter was a finished or current matter. The number of ledgers with balances under £75 are 28, with balances ranging from £3.50 to £70.50 and a total value of £1,106.45. Bearing in mind the amount of shortfall in the Dixon & Co client account at the time of the intervention, this is in fact only £160.39 of the funds to be distributed in Dixon & Co. This would be the undistributable surplus in Dixon & Co solely attributable to the application of limit of £75 under which no further letter would be sent to the client. Moreover, if any of the clients with one of the small balances in credit approached the Law Society, perhaps in response to the advertisement, or the letter from the intervention agent, or information from the Compensation Fund, their entitlement would be likely to be distributed to them, thereby reducing the undistributed surplus.

A128. On the current available evidence, the amount of money which will remain undistributed on ledgers over £75, as a result of the absence of contact details or response from the person entitled to the funds is estimated to be £1,122.92.

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

A130. In some cases, such as Ahmed & Co and Zoi, all reasonably and proportionately identifiable and contactable beneficiaries have received the most they were recorded as entitled to at the time of the intervention in the solicitor's records. In Ahmed & Co, the practice monies were intact and, therefore, all those who could reasonably and proportionately be found received all that they were recorded as entitled to at the time of the intervention. In Zoi, once all reasonably and proportionately identifiable and locatable persons have received that to which they appear to be entitled there remains a surplus for which there are no known beneficiaries.

A131. However, in other cases, such as Dixon & Co and Biebuyck Solicitors, the practice monies were not intact and there was a shortfall at the time of the intervention. In determining entitlement, the Law Society has considered and taken into account private law trust methods of allocating deficiencies in trust funds as between beneficiaries of a mixed fund, and arrived, in both, at a pro rata method of allocation of loss. The entitlement of individuals to the funds in the Law Society's hands is their pro rata entitlement. Once they receive their pro rata entitlement, those persons will have received their full entitlement to the funds in the Law Society's hands. Although this is the case, if it transpires that there is a surplus after distribution in such cases, an alternative way of dealing with the surplus might be to distribute a second amount to those who have already participated in the initial distribution, pro rata to the amount they are recorded as having deposited with the solicitor at the time of the intervention.

A132. The disadvantages of this approach are that to do so may well be, in some cases, disproportionate, given the small amounts of surplus there may be and the costs of effecting a second distribution. Dixon & Co is a good example of this. More importantly, in dealing with any surplus, there need to be safeguards to protect any late-emerging persons, who have been identified by the Law Society as entitled to the money, but who were not reasonably and proportionately contactable by the Law Society at the time of the initial distribution. It would be far harder to ensure that a late-emerging person would be paid his entitlement, if the surplus (which was not distributed in the initial distribution) were distributed in a second wave of distribution to those who had received their entitlement already in the initial distribution. If the surplus is used to reimburse the Law Society for its costs incurred under paragraph 6, that could be underwritten by an undertaking given by the Law Society to repay the relevant amount of money to such a late-emerging person. The Law Society considers that such an undertaking should be confined (i) to one year and (ii) to those who had been previously identified as entitled to a share of the funds but were not traceable or contactable by the Law Society at the time of distribution.