Bank account: Solicitor said circumstances were unusual
A solicitor acting as a company’s in-house lawyer who said he had to use his client account to make various payments while its bank account was frozen has been sanctioned by the regulator.
The Solicitors Regulation Authority (SRA) rebuked and fined Justin Fletcher of niche City firm JPF Law for allowing the firm’s client account to be used as a banking facility, in breach of the rules.
He argued that to do otherwise in the circumstances risked his client going bust unnecessarily.
Mr Fletcher was acting for ‘Client A’, a financial technology start-up, on retainer as its in-house counsel.
In September 2015, a dispute arose between Client A and a digital recruitment company, Company B, about a lead generation project.
Client A believed Company B had underperformed on a contract and Client A disputed that it owed over £80,000 to Company B for services provided.
Company B’s lawyers issued a formal demand for payment and then presented a winding-up petition against Client A.
Negotiations continued as the matter was brought before the court, which adjourned the petition. However, the following day, Companies House notified Client A’s bank that it had registered a winding up petition against Client A.
As a result, the bank froze Client A’s bank account, leaving it unable to make the payments it had agreed with Company B as well as other payments to contractors and creditors.
Company B agreed to make an immediate application to court for leave to withdraw the petition, and the same day an investor in Client A deposited money into Mr Fletcher’s client account, enabling him to start making an eventual 41 payments on the client’s instruction.
The bank only lifted the freeze once it had a copy of the sealed consent order, a week after the court ordered that the petition be withdrawn.
In a regulatory settlement agreement that means the Solicitors Regulation Authority will not refer him to a disciplinary tribunal, Mr Fletcher admitted allowing his firm’s client account to be used as a banking facility, where there was not an underlying legal transaction or other legal service justifying it.
Further, as the sole signatory of the firm’s client account and whilst holding the position of Client A’s in-house counsel, he allowed his independence to be compromised.
As the firm’s compliance officer for finance and administration (COFA), he also failed to ensure or take adequate steps to ensure compliance with the firm’s regulatory obligations under the Solicitors Accounts Rules.
In mitigation, Mr Fletcher said he was acting in good faith and that these were unusual circumstances.
The agreement continued: “In view of the fact that there had been an agreement between the parties to withdraw the petition (and that the court could not refuse the consent order to withdraw the petition for it had not yet been advertised), there was no risk that the court would refuse the withdrawal and hence no risk to any potential creditors.”
The solicitor said he considered that he was acting in the best interest of Client A – notwithstanding that it led to the breaches – “because to do otherwise would, more likely than not, have resulted in the financial demise” of Client A.
Mr Fletcher added that he knew Client A was not insolvent and could repay the monies, and that processes had been put in place to ensure a similar eventuality did not happen again.
The SRA said a rebuke and fine of £1,750 reflected the mitigation and that, while the conduct was “neither trivial nor justifiably inadvertent, it did not involve dishonesty or a lack of integrity”.
Meanwhile, 19 COFAs were referred to the Solicitors Disciplinary Tribunal for financial irregularities at their firms in the year to 31 March 2019, up from just seven four years ago, according to accountancy firm Hazlewoods.
The firm said this reflected “the SRA’s crackdown on financial mismanagement at law firms, and suggests that the SRA is doing more than ever to stamp out financial irregularities”.
At the same, other research from Hazlewoods found that the number of qualified accountant’s reports fell by 13% in 2018 to 1,194, suggesting that law firms are broadly improving their financial management.