A Hull solicitor has become the latest to be struck off after borrowing millions from the controversial Axiom Legal Financing Fund which have not been paid back.
Paul Stott, who was the senior partner and owner of Ingrams Solicitors, drew down £3.15m of a £20m facility to prop up the firm, which accountants Baker Tilly had declared to be insolvent.
This is the sixth case before the Solicitors Disciplinary Tribunal (SDT) involving the Axiom fund. So far five solicitors have been struck off and three cleared, although a Solicitors Regulation Authority appeal against the ruling in favour of two of those three is due this month.
The Axiom fund – which lent money to a host of law firms – closed in October 2012 in the wake of allegations of fraud, and went into receivership in February 2013.
The receiver, Grant Thornton, subsequently demanded repayment of the loans from the law firms and separately issued legal proceedings to recover over £100m from various people connected with the fund, citing grounds such as fraud, conspiracy, breach of fiduciary duty and breach of contract.
The central allegations in Mr Stott’s case were similar to those in the others, namely that he used the loan, which contractually was to cover disbursements on personal injury cases, to pay the firm’s debts and running costs instead.
In common with other cases, he said that a representative of the fund manager had verbally agreed that it could be used for those purposes.
The tribunal heard that Mr Stott accepted the £3.15m in four tranches between May and August 2012. The amount owed, however, was nearly £5m as it included the standard Axiom ‘facilitation fee’ of 50% of the sum lent – £1.65m – as well as financial guarantee insurance of nearly £150,000.
A due diligence report completed by Baker Tilly for the fund showed that the firm was in “very serious financial difficulty”, the SDT heard.
In particular, Ingrams had significant cash flow problems which were originally caused by a retrospective repayment of the miners’ compensation scheme of £1.2m and a reduction in bank facilities of £400,000.
The firm also had winding-up petitions against it, and further there were bankruptcy petitions against Mr Stott and former partners in respect of VAT and PAYE arrears of £159,000 and income tax liabilities of £323,000.
Other significant liabilities were overdue for payment, including VAT and PAYE of £666,000, partners’ income tax liabilities of £252,000 and rent arrears of £46,000.
The report said Ingrams’ only security for the loan were the estimated £2m proceeds of the Sandon Dock group litigation, which remained unpaid. Baker Tilly concluded that the firm was insolvent, the SDT heard.
The Axiom money cleared the personal tax liabilities and some of the firm’s tax bills as well, among other things, while £2.33m went on keeping the firm afloat by paying bills, overheads and other costs.
The SDT found Mr Stott guilty on all counts and to have acted dishonestly.
It said he had not complied with the terms of the litigation funding agreement (LFA). While the SDT accepted that he had been led to believe that he could use the funds as practice funding, “such belief was unsustainable once he had seen and signed the LFA”.
It said a solicitor with his experience would have ensured that the terms of the oral agreement were properly and expressly documented. Further, he knew that the LFA was intended to protect the fund and the investors.
“In those circumstances it was improper for the firm to accept and use the monies from Axiom,” the tribunal ruled.
It also found he was reckless as to the repayment of the loan, given the firm’s financial difficulties and uncertainty over when the Sandon Dock costs would be received.
Ingrams received an interim payment in relation to the Sandon Dock costs in September 2012 and paid the post-VAT balance of £308,000 to Axiom.
Other charges upheld included that despite being on notice of the serious risk that the investment manager was acting fraudulently and/or in other serious breach of duty to the fund and investors, Mr Stott failed to satisfy himself that the payments the firm received were not part of this, and also that he unreasonably risked the firm being a party to such transactions. The SDT was not required to make a finding that there actually was fraud.
“The fact that Axiom were prepared to arrange a facility of £20m to a firm that was documented as being insolvent was in and of itself suspicious,” the tribunal said. It found that Mr Stott had “refrained from making enquiries lest he learned something that he would rather not have learned”.
This was the third occasion that Mr Stott had found himself before the SDT, having twice previously been fined for unrelated misconduct.
Striking him off, the ruling said: “The tribunal found that [Mr Stott] was completely culpable for his conduct. His motivation was to keep the firm in business, and to pay off his practice and personal debts. [His] actions were clearly planned.
“Over £3m was drawn down and misused by the firm. Including the facilitation fee and interest, the Axiom fund lost in excess of £4.5m. As at the date of the hearing, only a small proportion of the monies owed had been repaid to Axiom.
“Substantial harm had been caused to the fund and its investors, as well as to the reputation of the profession.”
The SRA also applied for an unusually high level of costs – nearly £275,000 – and the tribunal ordered an interim payment of £100,000 pending a detailed assessment