High Court gives guidance on the proper process by which a Tribunal should determine sanction and the level of fine to be imposed.

Judgement date: 05 February 2014

Background

The First Appellant is a West End firm of solicitors, whilst the Second and Third Appellants are the equity partners of the firm. The Appellants were engaged in a significant amount of commercial and commercial property work as well as acting on the panel of a professional indemnity insurer and various banks.

The Appellants were instructed by Portsmouth City Football Club Limited (the Club) and it is from this instruction that the allegations in this matter arose. At the time of instruction the Club was in a perilous financial state and subject to negotiations for its purchase by a consortium of potential buyers for whom the First Appellant was also acting. Ultimately, the Club entered a Company Voluntary Arrangement in June 2011 and was liquidated later that year, although the football club itself continued its activities through another corporate structure.

It was alleged that the Appellants had allowed the First Appellant’s client account to be used by the Club as a banking facility from 5 October 2009 until 08 February 2010 and that for the majority of this this period the Club’s own banking facilities had been withdrawn in consequence of winding up petitions initially presented on 1 October 2009 and then subsequently withdrawn on 12 November 2009 and reissued on 22 December 2009. The above allegation was particularised as follows:

  1. … made improper use of the Firm’s client account by using it as a banking facility of a client;
  2. … operated their client account contrary to Rule 15 of the Solicitors’ Accounts Rules 1998;
  3. … provided services to a client other than those a recognised body is permitted to provide contrary to Rule 14 of the Solicitors’ Code of Conduct 2007;
  4. … acted in a way which was likely to diminish the trust the public placed in them and the profession contrary to Rule 1.06 of the Solicitors’ Code of Conduct.

There was a further allegation that the Second and Third Defendants (as they were then) had acted recklessly but in the event the Solicitors Disciplinary Tribunal (the Tribunal) acquitted on this particular.

Law

The following matters of law were considered in the course of the decision of the Tribunal and subsequent appeal:

  1. Rule 15 note (ix) Solicitors Accounts Rules 1998, which states, ‘… it is not a proper part of a solicitors everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not…’
  2. Rule 14 of the Solicitors Code of Conduct 2007, which states, ‘The business of a recognised body may consist only of the provision of: (a) professional services of the sort provided by individuals practising as solicitors and/or lawyers of other jurisdictions;…’.
  3. Section 127(1) of the Insolvency Act 1986, which provides, ‘In a winding up by the court, any disposition of the company’s property…made after the commencement of the winding up is, unless the court orders, void’.

Also of note in these proceedings was ‘the Football Creditor Rule’, about which it suffices to say there has been some disquiet in Parliament and the Courts, in that it constitutes a series of agreements whereby the Football League, and its member clubs, enter into a series of agreement with the effect that the revenues of a football club from certain sources are held by the Football League who will not release the monies expect for certain designated purposes one of which is to pay off first, and if possible in full, a category of creditors who are designated as “football creditors” in preference to other unsecured creditors.

Decision

The position of the Appellants before the Tribunal was that there was no breach of the Rules as charged and that as such they had not committed any misconduct. This position was ultimately abandoned on appeal as will be seen below.

It was originally argued that the Defendants (as they then were) had the Football Creditor Rule in mind when the transactions to which the allegations related to took place and that under the exceptions contained in Section 327(2) and (4) of the Financial Services and Markets Act 2000 solicitors were allowed to do certain acts if they were incidental to the work carried out and that in this case the transactions carried out were ancillary work. However, the Tribunal were not satisfied that the payments from the First Appellant’s client account were made with the Football Creditor Rule in mind or incidental to the provision of professional services especially in view of the Tribunal not having seen the retainer with regard to which these transactions were said to be incidental. Given this the Tribunal was satisfied that the Appellants had provided a banking facility to the Club and that this was contrary to Rule 15 note (ix) of the Solicitors’ Accounts Rules 1998 and Rule 14 of the Solicitors’ Code of Conduct 2007.

In light of the above the Tribunal was satisfied that that members of the public would take a dim view of conduct whereby a solicitors account was used a technical device to deprive creditors of their funds and favour certain creditors. Further the Tribunal took the view that, in light of all the circumstances of the case, the breaches were not trivial or technical but very serious indeed.

The Tribunal found the charges of misconduct listed above at points 1-4 proved against the Appellants and imposed fines in the following amounts:

The First Appellant - £50,000

The Second Appellant - £20,000

The Third Appellant - £5,000

Appeal

The Appellants appealed the fines imposed by way of sanction on the grounds that the Tribunal had fallen in to error in that:

  1. The individual sums [were] disproportionate and [did] not reasonably reflect culpability;
  2. The Third Appellant ought not to have been fined at all;
  3. It [was] wrong to penalise the individual partners so substantially in addition to the Firm.

The Appellants also challenged the costs award made against them; £56,250 split between the Appellants in the same proportions as the fines.

Judgement

It was submitted on behalf of the Appellants that it was an error of fact for the Tribunal to have found that the Football Creditor Rule was not in the mind of the Appellants at the time that the transactions had taken place. The Court held in respect of this point that it was not critical to the outcome of the appeal. In any event the Tribunal had addressed the position on the alternative hypothesis that the Football Creditor Rule was in the mind of the Appellants.

Necessarily the substantive appeal was concerned with the proper process by which a Tribunal should determine sanction and in respect of the first ground of appeal it was held that there was a three stage process that should be adopted [28]. These stages were expressed in the following terms, ‘The first stage is to assess the seriousness of the misconduct. The second stage is to keep in mind the purpose for which sanctions are imposed by such a Tribunal. The third stage is to choose the sanction which most appropriately fulfils that purpose for the seriousness of the conduct in question’ [28].

When assessing the seriousness of the misconduct the Court held that the most important factors would be, ‘(1) the culpability for the misconduct in question…(2) the harm caused by the misconduct…(3) aggravating factors…(4) mitigating factors’ [29]. It was noted that the Solicitors Disciplinary Tribunal Guidance Note on Sanctions reflects these factors.

At the second stage it was held that the tribunal ‘must have in mind that by far the most important purpose of imposing disciplinary sanctions is addressed to other members of the profession, the reputation of the profession as a whole, and the general public who use the services of the profession, rather than the particular solicitors whose misconduct is being sanctioned [30] (Bolton v The Law Society [1994] 1 WLR 512 applied).

At the third stage the tribunal ‘will first consider which category of sanction is appropriate form the range available’ [33] and where a fine is the appropriate category factors influencing the appropriate level will include the seriousness of the misconduct.

In the immediate case the Court held [43] that:

  1. The Second and Third Appellants had consciously and deliberately allowed the First Appellant’s client account to be used a banking facility;
  2. In doing so the Second Appellant had consciously enabled the First Appellant to perform the function of a bank in circumstances were he knew the Club’s banking facility had been withdrawn;
  3. The Second Appellant had involved himself in making decisions as to which creditors should or should not be paid, and;
  4. In doing to given favourable treatment to some unsecured (non-football) creditors over others, and;
  5. That this was made more serious because of the risk payments would become void subsequently under Section 127 of the Insolvency Act 1986 and the Appellants would be liable for this;
  6. That members of the public who were aware that the solicitor’s account had been used as a technical device to favour certain creditors over other creditors in particular circumstances would take a dim view of such conduct and that that behaviour was likely to diminish the trust and confidence placed in the profession.

Ultimately, having considered the matters detailed above as they related to the immediate case, it was held that the misconduct could ‘properly be characterised as serious’ [46] and indeed that it was ‘sufficiently serious that the Tribunal might reasonably have considered imposing a suspension’ [46].

Turning to the points raised specifically in the appeal the Court noted that if there was to be no suspension then it was appropriate for the Tribunal to impose the highest level of fine taking in to account the Appellants’ financial circumstances and overall financial consequences of the Decision. Counsel for the Appellants raised the point that the previous highest fine awarded by the Tribunal had been £40,000 in 2013 whereas in this case the fine totalled £75,000. Having considered the Appellants financial circumstances and the fact that the Second Appellant had been clear that the First Appellants turnover for the past 4 years had been approximately £1 million the Court held that a total fine of £75,00, representing as it does six months profits for a notional firm making 15% profit on an annual turnover of £1 million, was not disproportionately large or excessive, let alone clearly so [52].

In respect of the second ground of appeal it was clear that the position in respect of the Club’s bank account had been discussed with the Third Appellant who had, ‘obviously sanctioned that course’ [53]. In view of this it was held that it could not be said that it was ‘clearly inappropriate that [the Third Appellant] should be subjected to a person fine, or that the sum of £5,000 was disproportionate or excessive’.

Finally, in respect of the third ground of appeal, it was submitted that imposing a sanction on two equity partners individually as well as the Firm was in effect double jeopardy as they would personally bear both elements of the sanction. These submissions ultimately fell away with the finding that £75,000 was not an excessive fine, nonetheless it was held that there was no error in the Tribunal imposing a penalty on the Firm as distinct from its partners.

The appeal was dismissed.

Costs

As regards costs the Court noted that no error of principle had been identified or any factors which the Tribunal had erroneous taken in to account or failed to take into account. As such the court could not interfere with eh exercise of the Tribunal’s discretion.