SRA v Libby  EWHC 973 (Admin)
The Appellant regulator appealed a decision of the Solicitors Disciplinary Tribunal ("the Tribunal") dated 26 August 2016, dismissing three allegations of misconduct on the part of the Respondent solicitor. The Respondent cross-appealed the Tribunal's order, directing him to pay 50% of the Appellant's costs. The Court allowed the appeal on the first ground. The first ground was that, given the Tribunal's finding that the Respondent carelessly allowed the firm to use the loan for impermissible purposes, the Tribunal was wrong to conclude he had not caused or permitted the firm to accept and use the money in circumstances where it was improper for him to do so in breach of Principle 6. It also allowed the cross-appeal, setting aside the order that the Respondent pay the Appellant's costs. The Court found the Tribunal had erred in its approach to the question of costs.
The Respondent set up a legal firm ("the Firm"), of which he was the sole fee earner. From early 2012, he was looking to expand his business, but had been unable to secure a bank loan. The Respondent was introduced to an investment company, Tangerine Investment management Ltd ("Tangerine"), who was acting on behalf of certain sub funds within Axiom Fund. The Axiom Fund was promoted as a means of providing funding for law firms to finance the conduct of cases and some non-litigious work. The Respondent submitted a business proposal to Tangerine. He then met with a representative of Tangerine in May 2012 and was told Tangerine was an investment manager for Axiom Fund. In June 2012, Baker Tilly, a firm of accountants prepared a draft report based on the (then) proposal for funding per case of £1,800. Baker Tilly noted that, amongst other points, the Firm appeared to be insolvent; the proposal loan carried 'substantial risks'; and there was no 'historical information' available to underpin the projections. In early July 2012, the Respondent received a call indicating a new funding plan was available of £3,600 per case, which was more suitable for the Firm. Baker Tilly was not asked to review the draft report, following the changed funding model.
The Respondent signed a loan agreement on 30 July 2012 ("the Agreement"). The Firm borrowed a total of £716,400 during the period 2 August 2012 – 16 October 2012. Of this sum, £401,608 was used by the Respondent for purposes not permitted by the Agreement. The Tribunal's determined that the Agreement only permitted the use of funds for the purpose of paying eligible legal expenses for specific claims defined in the Agreement, and did not permit the use of money for general practice funding.
The Appellant authority accepted it was not open to it to challenge the Tribunal's findings that the Respondent honestly believed he could use the loan monies for general practice funding, and was not reckless as to that belief and that he had not acted with a lack of integrity. The Appellant submitted that, given the Tribunal's finding that the Respondent carelessly allowed the Firm to use the loan for impermissible purposes, the Tribunal was wrong to conclude he had not caused or permitted the Firm to accept and use the money in circumstances where it was improper for him to do so in breach of Principle 6.
At paragraph , the Court stated that the Tribunal did err in failing to address the question of whether the carelessness exhibited by the Respondent, absent dishonesty or any lack of integrity, amounted to a breach of Principle 6. It said:
"…in our judgment, on the facts found by the Tribunal on this particular case, the only conclusion that the Tribunal could reach was that the conduct complained it did involve such a failure to show the care and attention to be expected of a reasonably competent solicitor as would undermine the trust and confidence that the public would place in a solicitor" (our emphasis).
In summary, the reasons were as follows [paragraphs 36 – 41]:
- This was a substantial loan transaction involving the borrowing of a large amount of money from the Axiom Fund;
- The Tribunal had found the Respondent was in breach of the Agreement (by drawing down substantial sums and using them for purposes not permitted by the Agreement);
- The Tribunal had found the Respondent was careless in not ensuring he complied with the Agreement. The Court noted the reality, recognised by the Tribunal, was that the Respondent had failed to take the care that would be expected of a reasonably competent solicitor to ensure he understood the Agreement;
- The Court, referring to Bolton v Law Society  1 W.L.R. 512, noted that it is recognised that the professional standards expected of solicitors extend to acting with integrity and honesty at all time. Further, that the obligations can extend to ensuring that a solicitor demonstrates the degree of competence required in circumstances involving the handling of others monies.
The Court stated, in allowing the appeal on the first ground, that:
"...The public would expect a solicitor to make sure he properly understood, and acted in accordance with, a signed Agreement entered into for the purpose of regulating the loan. The public could not be expected to have confidence in the solicitor's handling of their own affairs if, in the context of the firm's affairs, the solicitor borrowed large sums of money for his own firm, and then failed through carelessness, to ensure that the monies were properly used."
The Court remitted the matter back to the Tribunal to determine the appropriate sanction.
In relation to the second ground, the Court was not satisfied that three indicia relied upon by the Appellant (and submitted to be indicators of potential fraud by Tangerine), did in fact amount to indicia of fraud. The Court referred to the evidence, accepted by the Tribunal that the Respondent did not know of any risk of fraud, or close his eyes to an obvious risk, or refrain from asking questions in order to avoid confirming any suspicions he had. In addition, the payment of a large facilitation fee by the Respondent for any sums he borrowed was not an indication that the transaction involved fraud or serious wrong doing on the part of the investment manager. In relation to the third ground, the Court only heard limited legal argument and stated that it would have wanted full argument from both parties before reaching a conclusion.
On the cross-appeal, the Court found the Tribunal had erred in its approach to the question of costs. The fact that the proceedings were properly brought was justification for not making the Appellant liable for the Respondent's costs, as the regulator had been acting in the public interest. However, that of itself did not justify ordering that the Respondent (who had successfully resisted all allegations) should be ordered to pay the costs: Bloomhead v Solicitors Regulatory Authority  EWHC 2772.
The Court noted that the Tribunal had found all the allegations unproven. There was no other factor justifying the imposition of costs and there was nothing in the way that the Respondent conducted his response to the case to cause the Appellant to incur additional costs. The Court stated that the position was not materially altered by the fact that one part of the allegation was to be remitted to the Tribunal to determine the appropriate sanction. In addition, the Court found that the Tribunal had not adequately explained its reasoning in relation to the Respondent's means, so as to support the justification for the order. It therefore set the order aside.
In this case, the Court found the Tribunal had erred in failing to address the question of whether the carelessness exhibited by the Respondent in dealing with the loan money, and failing to ensure that it was only used for the permitted purposes, amounted to a breach of Principle 6 (falling to behave in a way that maintains the trust the public places in legal professionals), notwithstanding an absence of dishonesty or lack of integrity. The Court also found that the Tribunal erred in its decision on costs.