The Court of Appeal has allowed the Solicitors Regulation Authority (SRA) to try and recover the £800,000 it spent intervening in collapsed law firm Blavo & Co.
It overturned a decision last year by a bankruptcy judge to set aside statutory demands issued by the SRA against the founder of what was the UK’s leading mental health practice.
John Blavo was the sole director of 18-office Blavo & Co, which the SRA closed in October 2015 on the grounds of suspected dishonesty. It employed 200 staff and had contracts with 150 consultants.
The SRA used seven different firms of solicitors to undertake the intervention because of the number of offices. The Solicitors Act 1974 allows the regulator to recover its costs of intervention from those at the receiving end.
However, His Honour Judge Klein, sitting as a judge of the High Court in the Bankruptcy Court, ruled that a statutory demand under the 1986 Insolvency Act needed to be for a liquidated sum, and that to be one there had to be “a pre-ascertained liability under the agreement which gives rise to it”.
He concluded that the costs of intervention were therefore unliquidated because they could be subject to detailed assessment.
But giving the appeal court’s ruling, Lord Justice Moylan said: “It is clear to me that the basis or nature of a solicitor’s claim for their charges is separate from the ability to seek an assessment.
“The existence of such a right does not turn what is otherwise a claim for a liquidated sum into a claim for an unliquidated sum.”
He said the case came down to whether the legislation that allowed the SRA to recover the costs of intervention created a “pre-ascertained liability” and, accordingly, a debt for a liquidated sum.
Moylan LJ explained: “Is it… a liability where the amount due is to be ascertained in accordance with a pre-determined formula or machinery which, when operated, will produce a figure?
“In my view, the unequivocal answer to both questions is yes. The statutory provisions, namely ‘any costs incurred by the [SRA] for the purposes of this schedule … shall be paid by the solicitor’, constitute a pre-determined formula or machinery which, when applied, will produce a figure. This creates a debt for a liquidated sum.”
The Court of Appeal dismissed Mr Blavo’s argument that, because he did not have any clients or files of his own, he did not have a practice which could be subject to intervention.
As the sole owner and manager, “the business conducted by the company was Mr Blavo’s practice for the purposes of the regulatory framework”, Moylan LJ found.
Mr Blavo’s bid to argue that the intervention was flawed, and thus he should not be liable for the costs, was rejected as well.
“There is no reason in this case to permit Mr Blavo to seek to challenge the interventions,” the judge said.
“As set out in his statement, he considered whether to do so at the time and decided not to challenge the decision to intervene. It is now too late for him to seek to do so.”
Mr Blavo has also been in court recently to defend a bid by the Legal Aid Agency to recover £22m in legal aid payments made to his firm. Judgment has been reserved.