Russell-Cooke has succeeded in bringing an appeal against solicitors who used the proceeds of a loan for purposes which did not comply with the terms of a loan agreement.

John Gould, Paolo Sidoli and Michael Stacey, in our professional regulation team acted for the Solicitors Regulation Authority (SRA) in disciplinary proceedings brought before the Solicitors Disciplinary Tribunal (SDT) in December 2015 and in subsequent appeal proceedings in December 2016 which confirmed that the Respondents had indeed breached Principles 2, 6 and 8 of the SRA’s Code of Conduct.

The SDT’s 117 page Judgment in the original case of Solicitors Regulation Authority v Wingate & Evans was produced after a five day hearing in December 2015.

The subsequent Appeal Judgment, was delivered on 21 December 2016.

The case

The SDT proceedings arose following an SRA investigation into WE Solicitors and that firm’s receipt and improper use of loan monies it had received from the Axiom Legal Finance Fund (Axiom) a collapsed Cayman Islands based litigation-finance fund established by a struck-off solicitor, Timothy Schools.  The fund provided litigation funding to a number of UK law firms, which collectively received in excess of £100 million from the collapsed fund amid allegations of fraud involving, inter alia, the Axiom fund’s investment manager.

The central allegation in the proceedings concerned the receipt and misapplication of the monies the firm had received from Axiom and whether it was improper for Mr Wingate (W) and his partner, Mr Evans (E), to use the monies inter-alia, for general practice overheads and to discharge personal liabilities.

The Respondents were the partners in a two-partner firm specialising in personal injury litigation which was conducted mainly on a conditional fee basis. W concentrated on management and finance, whilst E concentrated on litigation.

The firm owed a large sum of money to a bank which was pressing for repayment.  After failing to secure replacement funding from other banks, in August 2012, W on behalf of the firm, signed a written funding agreement with Axiom along with a collateral loan letter.  The loan documentation made it clear that the loan monies were to be used by the firm for an agreed purpose, namely exclusively to fund litigation cases, and that the monies had to be repaid in full within 12 months.

The firm drew down £900,000 from Axiom which included a facilitation fee and insurance premium. The money was used to pay the bank, arrears of VAT and dividends of the Respondents. The balance funded the firm's general office expenses.

The Respondents contended that although they had signed the written agreement, the loan monies had been received pursuant to an oral agreement, although the oral agreement was not documented in any way.  They claimed that the purpose of the loan was not restricted to the terms of the written agreement but extended to their being permitted to use the loan monies to discharge the firm’s general overheads, banking and personal liabilities and the repayment date was extended from 12 to 24 months.

The SDT decision

Following a five day hearing the SDT found that the SRA had not proved to the criminal standard its allegations against the Respondents save for one breach of the Solicitors Accounts Rules which was admitted. 

It found W to be “credible and honest” and E’s evidence as “straightforward and clear”. It accepted that W said he had believed that the unrecorded oral agreement took precedence over the terms of the written funding agreement the Respondents had signed. 

The SDT found that the Respondents had not been dishonest, but determined that a fine in respect of the Accounts Rules breaches and an order to pay costs in respect of the investigation and proceedings were appropriate sanctions.

The appeal

The SRA appealed on grounds including that W must have been aware that the funding agreement was a sham and that his actions demonstrated a lack of integrity and undermined public confidence in the solicitors' profession.  It also submitted that W and E had acted incompetently and had not run their firm properly, as a consequence of entering into the finance arrangements in breach of the SRA's Code of Conduct which provides that solicitors must act with integrity (Principle 2) and behave in a way that maintains public confidence in the provision of legal services (Principle 6).

Separately, it was also submitted that W and E had not run the firm effectively and in accordance with proper governance and sound financial and risk management principles (Principle 8) as a result of a practice they had adopted of withholding cheques in respect of disbursements which were recorded as paid in the firm’s books.

​The Appeal Court’s findings

Holman J agreed that the case clearly engaged the SRA’s Principles.  The Court underscored that maintaining the reputation of the solicitors' profession meant that every solicitor should discharge his or her professional duties with integrity, probity and complete trustworthiness in accordance with the case of Bolton v Law Society.  Trustworthiness included acting with competence and it was not possible for the public to trust someone who had exhibited incompetence (see Iqbal v SRA).  The issue of competence fell within Principle 6 and it had to be determined whether the level of competence undermined the trust that the public placed in solicitors and the profession.

The Court noted that as a matter of principle an appeal court will not interfere with a tribunal's decision, unless it is plainly wrong and it had reached a decision which no tribunal could have rationally reached on the evidence of the case, or failed to reach a decision they rationally must have reached on the evidence.

In this case it concluded there had been errors in the SDT’s reasoning which justified the Court’s interference. 

The SDT had not asked itself whether it was professional misconduct for a solicitor to sign a contract when he knew that it was not what was agreed and he could not comply with repayment. The written contract was a sham. A contract for borrowing such a large sum of money should not be signed by a solicitor lightly and public confidence is undermined when a solicitor signs up to such a sham contract.

The Court concluded that as a result of his actions, W lacked integrity in breach of Principle 2 and the conduct of both W and E had demonstrated manifest incompetence in breach of Principle 6.  At a minimum, E should have read the funding agreement signed on the firm's behalf and was under a duty to take basic steps such as checking the correctness of the loan instead of only leaving matters for W to deal with.  Further, the Court concluded W and E had not run their firm properly, in breach of Principle 8. 

The issue of sanctions and costs will now be dealt with separately.

The appeal has received press coverage in The Law Society Gazette and Legal Futures.

Richard Coleman QC of Fountain Court was instructed in the SDT proceedings and subsequent appeal.

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