Loans made by firms before interventions do not go to SRA

Vos: SRA could have deducted money owed from compensation fund awards

The right to recover money under loans made by a law firm before an intervention does not vest in the Solicitors Regulation Authority (SRA), appeal judges have ruled.

A struck-off sole practitioner launched an appeal after the High Court held that he was entitled to some of the loans he had made but not others.

The Law Society v Pathania [2019] EWCA Civ 517 concerned the assets that are caught by the statutory trust which arises when the SRA intervenes in a solicitor’s practice.

Paragraph 6(2)(a) of schedule 1 of the Solicitors Act 1974 says that the regulator takes possession of “all sums of money held by or on behalf of the solicitor or his firm in connection with… his practice or former practice”.

The question was whether this included the right to recover loans made by the solicitor from his client account to third parties prior to the intervention.

Rajesh Singh Pathania was principal of East London firm Newland Solicitors, which the SRA closed in 2009. Mr Pathania was made bankrupt the following year.

He was struck off in 2011 for a variety of rule breaches, but he was not accused of dishonesty.

After being discharged from bankruptcy a few months later, he took assignments from his trustee in bankruptcy of the right to sue for various loans.

He obtained judgment against a third party in respect of one of the loans, and alleged that the third party’s solicitors had misappropriated the sums intended to satisfy the judgment. He made a claim against the Solicitors’ Compensation Fund, leading to the litigation.

John Martin QC, sitting as a deputy High Court judge, ruled that all or part of 10 of 18 loans under scrutiny came from client funds and were covered by paragraph 6(2)(a), meaning they vested in the Law Society (on behalf of the SRA) as a chose in action.

Giving the ruling of the Court of Appeal, Sir Geoffrey Vos said that, under the normal use of language, the phrase “all sums of money held” by a solicitor in connection with his practice indicated “monies available to the solicitor at the date of the intervention”.

Sir Geoffrey, Chancellor of the High Court, said that if the draftsman behind paragraph 6(2)(a) intended otherwise, he could “easily have added words” to indicate that the rule applied retrospectively.

He concluded that the paragraph covered only the monies held by Mr Pathania in bank accounts or that were immediately accessible to him, and monies later received by Mr Pathania in respect of the repayment of the loans.

However, Sir Geoffrey said it would not have been unreasonable for the SRA to deduct any money owed to it by Mr Pathania from any compensation award to which he might have been entitled.

He said the SRA was right to argue that the fund was entirely discretionary and there was “no legal right to a payment from the fund”.

Lords Justice Flaux and Jonathan Baker agreed with Sir Geoffrey.

A spokesman for the SRA said: “Given the significant amount of money involved in what is an unusual situation, we will continue to explore all the options for recovery.”

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