The High Court has refused to issue an order to prevent a high-profile collapsed company’s investors from trying in the future to reclaim the legal fees paid by its boss in defending him from a civil claim.
Mr Justice Miles said that even if the lawyers withdrew as a result, the defendant could continue as a litigant in person or may well find other lawyers to represent him.
Michael Andrew Thomson was a director of London Capital & Finance (LCF), which raised £237m from 11,625 often first-time investors in high-risk bonds which the company had aggressively marketed over four years before it collapsed in 2019.
An independent investigation led by Dame Elizabeth Gloster last year found shortcomings in the way the Financial Conduct Authority supervised LCF, including authorising the company despite it generating no income from regulated activities.
Exceptionally, the government has decided to establish a compensation scheme to provide 80% of LCF bondholders’ initial investment up to a maximum of £68,000 where they have not already received payments from the Financial Services Compensation Scheme – which most have not.
Around 97% of all LCF bondholders invested less than £85,000 and the scheme is expected to pay out around £120m.
There is also the civil claim alleging that LCF’s business was carried on with intent to defraud the bondholders and that more than half of the funds raised were misappropriated and paid to 10 defendants.
Mr Thomson, the first defendant, is subject to both a worldwide freezing order and a criminal restraint order.
In the hearing before Mr Justice Miles, he sought an order that the claimants were not entitled to pursue legal action against his lawyers – Bivonas Law and Iain Quirk QC – in respect of funds he has paid them but over which the claimants claim a proprietary interest.
The judge said the claimants’ solicitors have written a number of letters reserving their right, in the event their claims succeed, to contend that the lawyers were accountable as constructive trustees for any fees received.
The lawyers indicated that they would be unable to continue to act for Mr Thomson unless the court made the order.
Miles J ruled that, as the application was not for an order ancillary to the existing orders, the court did not have jurisdiction to grant it.
But even if he were wrong on that, he said he would have decided against making it.
The judge said this was not the same as exercising the court’s discretion to include an exception for legal expenses where there was a proprietary injunction in place.
“The present application is for an order which would effectively extinguish the claimants’ potential tracing claims, and I do not think it could properly be determined simply by balancing the risks of irremediable injustice to the claimants and Mr Thomson…
“In effect, the court is being asked to sanction the conduct of the solicitor blind in advance. This is a powerful reason against making such an order.”
It would be “very unfortunate” if the claimants’ reservation of their rights to pursue Mr Thomson’s lawyers meant he was left without legal representation in what were “heavy and complex proceedings”, Miles J acknowledged.
But he would still be able to have a fair trial, the judge continued. “The court is well used to cases involving unrepresented parties and to making allowances for such parties to ensure that the process is fair.”
Miles J continued: “Moreover, the requirements of fairness arising from article 6 and the overriding objective apply both ways and to all parties.
“The relevant claim here is a possible one by the claimants against the solicitors for knowing receipt. It seems to me that to make the order sought would in effect be to deprive the claimants of potential claims without a proper determination of their substantive rights (whether by trial or summary procedures).
“It is very hard to see how that could be compliant with article 6 or the overriding objective.”
Miles J said he also took account of the “high hurdle in front of any claimant seeking to bring a tracing claim against solicitors” – the Court of Appeal in the “famous” 1969 Carl Zeiss case held that solicitors would not be liable unless they knew that their client had no defence.
This meant the risks to the solicitors “need to be kept in perspective” – there was “no present prospect” of the claimants being able to overcome the “serious legal and evidential obstacles” to bring such claims.
The judge added: “It is possible that even if Mr Thomson’s current lawyers are not prepared to carry on acting, other lawyers may be prepared to do so.
“There are many cases of proprietary claims in the Business and Property courts where defendants are legally represented throughout the proceedings and solicitors are prepared to act despite the possible risk of tracing claims being brought against them.”