High Court backs SRA over bankruptcy costs claim

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8 June 2015


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Judge: trustee had no right to deduct costs from client accounts

The High Court has backed the Solicitors Regulation Authority (SRA) in denying a trustee in bankruptcy the right to deduct his costs from client funds held by a solicitors’ practice after the principals were made bankrupt.

In Bell v Birchall & Ors [2015] EWHC 1541 (Ch), HHJ Pelling QC found that he did not have the jurisdiction to order that the trustee’s costs and expenses should be paid nor, if he had, would the court have exercised its discretion so to order.

The trustee, John Paul Bell, had sought access to the funds after the two partners of the law firm Birchall Ryan, John Dominic Ryan and Anthony Warren Birchall, were successively declared bankrupt in 2012 and 2013.

He argued that because following his appointment the SRA had decided not to intervene, to let Mr Birchall wind down the firm, he had had no choice but to arrange for a large number of files to be held securely in order to reconcile the client accounts for the protection of the clients.

The SRA argued that the trustee had no role to play in safeguarding client monies, which is the responsibility of the solicitor in the absence of an SRA intervention. In either case, there would be no cost to clients.

Mr Bell relied on the Berkley Applegate principle – from the judgment in Re Berkeley Applegate (Investment Consultants) Limited (In Liquidation), Harris v Conway [1989] 1 Ch 32 – that a liquidator is entitled to deduct costs from trust assets, for his argument that the court had jurisdiction to make the order.

HHJ Pelling disagreed, accepting the SRA’s argument that the effect of the Solicitors Accounts Rules was that a solicitor who had been made bankrupt was under the same obligations concerning client monies as he had been before being made bankrupt, and without charge to those entitled to those funds.

The judge concluded that the court did not therefore have jurisdiction to make the order and that, even if necessary, the work carried out by the trustee should have been done at no cost to the clients.

In any event, he said he would not have exercised his discretion by permitting the trustee to recover his costs and expenses. The trustee should have told the SRA that he considered client money was at risk and any duty to safeguard client money would have then been satisfied.

Secondly, there was an “almost complete mismatch” between the funds in the client accounts, which were held for a limited number of clients, and the files, which were mainly in respect of matters long since completed.

It would be “clearly unfair” to the beneficiaries of the sums in the client accounts “to be charged with the costs of storing files that predominantly do not relate to their affairs”, all the more so because there was an obligation on a solicitor, or the SRA following an intervention, to store the files without cost to clients.

The judge concluded: “To permit the trustee to reimburse himself from client funds would be to inflict clearly avoidable financial harm on the beneficiaries.”

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