Intervention: Loans made from client account formed part of statutory trust
A sole practitioner who was struck off six years ago has won the right to sue for loans he made before his East London firm was closed by the Solicitors Regulation Authority (SRA).
John Martin QC, sitting as a deputy High Court judge, ruled that eight out of 19 loans at issue in the hearing did not vest in the Law Society (acting through the SRA) on the date of the intervention into Newland Solicitors.
Rajesh Singh Pathania was struck off in 2011 for a variety of rule breaches, including acting where there was a conflict of interest, taking unfair advantage of a client and failing to disclose facts to a lender. He was not accused of dishonesty.
Mr Pathania challenged the scope of the statutory trust into which client account money goes when the SRA intervenes in a practice.
Following the 2009 intervention, Mr Pathania was made bankrupt in June 2010 and struck off in February 2011.
He was discharged from bankruptcy in June 2011 and took assignments from his trustee in bankruptcy of the right to sue for various loans he had made prior to the intervention.
The judge said the Law Society found out about this when Mr Pathania tried to make a claim against the SRA Compensation Fund in respect of one of the loans.
“The society’s case is that the loans made by Mr Pathania were made with monies improperly taken from the Newlands’ client account and on intervention vested in the society, to be held subject to the statutory trust arising on intervention.
“Mr Pathania’s case is that the loans were made out of his own money and never became subject to the statutory trust.”
Mr Martin held that “on principle” any loans made by Mr Pathania using monies derived from client account vested in the society on the date of intervention, together with the right to recover them.
It followed that “none of those loans vested in his trustee in bankruptcy, and any assignment of the benefit of them made by his trustee in bankruptcy was ineffective”.
Mr Martin QC said that though Mr Pathania had a number of sources of credit available to him, particularly on
However, the society still had to prove that client money was used to fund each of the loans, since it was “not open to the society to reverse the burden of proof and rely upon the absence of proper records as establishing that all payments must have come from client account”.
Mr Martin QC said that of the 19 loans at issue at the start of the trial, one was conceded by the Law Society. Of the remaining 18, he ruled that seven did not vest in the Law Society.