An attempt by a trustee in bankruptcy to recover substantial costs from an insolvent solicitor's client account has failed following a hearing in the High Court.

John Gould, Senior Partner, and Andrew Pavlovic, associate, in the litigation team, recently acted for the Solicitors Regulation Authority (SRA) in successfully resisting a so-called 'Berkeley Applegate' application to recover accounting and other costs from a solicitor's client account.

In Bell v Birchall & Ors (2015 EWHC 1541 (Ch)), the court refused an application by a solicitor's trustee in bankruptcy that his costs in attempting to reconcile the client account and storing files be paid from client funds.  

Shortly after his appointment, the trustee froze the firm's client account and moved all of the firm's files into storage.  He claimed the files were unsafe and firm's client account was in disarray and required reconciliation before distribution to clients.

In February 2015, the trustee completed a 'Berkeley Applegate' application for an Order concluding that his costs in storing the files and carrying out reconciliations be deducted from the firm's client account.  In light of the application, the SRA exercised its statutory powers of intervention into the firm on the basis that it was clear client monies could not be protected by the bankrupt solicitor.

The court accepted that the solicitor's obligation to continue to comply with the Solicitors' Accounts Rules and to reconcile the client account continued notwithstanding his bankruptcy. If he did not or could not comply, the SRA could choose to intervene to protect clients and deal with funds under the statutory trust arising on intervention.  In neither of those scenarios would the cost of compliance be deducted from distributable client monies.  The court had no jurisdiction to make the Order as payment from client account for undertaking reconciliations was not permitted by the SRA Accounts Rules 2011 (to which the bankrupt remained subject) and the client monies had vested in the SRA by virtue of the intervention. 

The Judge also indicated that he would have dismissed the application on discretionary grounds in any event, as it was not the trustee's obligation to store files/reconcile accounts (such property not vesting in the bankrupt's estate) and if client files/monies were at risk this should have been communicated to the SRA before any costs were incurred.

Following the dismissal of the application, agreement was reached with the trustee for payment of the SRA's costs.

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Details of this case have been widely reported in the press.  Further details can be found on the Law Gazette and Legal Futures websites.