Partners in crime?
Susanna Heley considers that clients may not be the only victims when a trusted partner commits fraud.
Proper stewardship of client money is one of the essential tenets of the solicitors’ profession. Disciplinary offences involving the misuse of client money are generally treated as very serious and dishonest misuse of client money will inevitably lead to a solicitor being struck off with practically no prospect of ever being readmitted.
It is quite easy – or at least convenient – to suggest that those who misuse client money should be held to account for their defalcations and to build a regulatory landscape from that foundation. But what of ‘innocent’ partners?
We all know (hopefully) that breaches of the Solicitors Regulation Authority (SRA) Accounts Rules are matters of strict liability and that disciplinary allegations can therefore theoretically be made out against any partner in a firm where money has dishonestly been removed from client account irrespective of a partner’s direct knowledge or involvement.
The regulatory protection available for innocent partners in these circumstances is down to the lack of public interest in pursuing partners for the sake of it; where they have personally done nothing wrong and where the firm has systems in place to prevent fraud, it would be inimical to the purpose of regulation to take action.
When it comes to issues of civil liability though, the picture can be very different as is highlighted by the discussion in Lord Bishop of Leeds v Dixon Coles And Gill (A Firm) & Ors  EWHC 2809 (Ch), which concerned summary applications for various remedies against innocent partners and insurers following discovery of a long running fraud.
The case concerned the firm of Dixon Coles and Gill, which was intervened in 2016 following the discovery of fraudulent activity by a trusted partner, Mrs Box. Her partners, Mr Gill and Ms Wilding had discovered the fraud, confronted Mrs Box, promptly expelled her and reported her to the police in January 2016.
Although the firm had to formally close in January 2016, the SRA intervened in April 2016 and the firm later entered into a Partnership Voluntary Arrangement (PVA). Mrs Box was struck off in October 2016.
It is clear from the high court judgment that Mr Gill and Ms Wilding were innocent partners although one might infer that they have had some rather stressful times since 2016 having presumably faced liability for intervention costs and dealing with the PVA and (also presumably) having gone through the worrisome process of dealing with SRA enquiries during and following the intervention.
Published SRA records reveal that both Mr Gill and Ms Wilding were issued practising certificates free of conditions in early 2020, which suggests that some form of regulatory process had sadly been part of their lives for four years. In itself, that is not surprising given that a PVA had been entered; dealing with long term fallout is a pretty standard consequence of a dishonest partner, particularly within a small firm.
As investigations into Mrs Box’s activities had continued, the estimated extent of her dishonesty grew from tens of thousands of pounds to potentially several million pounds. By the time of the hearing, a final figure had not been established however Mrs Box had pleaded guilty to 12 offences involving misappropriation of a little over £4m.
The firm had been an unlimited partnership and claims were made against the firm by some of the victims of the fraud. Insurers raised the issue of aggregation and sought to limit their total liability to £2m. Part of their argument was that a substantial ‘teeming and lading’ exercise was a unifying factor in the acts of dishonesty.
In a lengthy judgment, Judge Saffman (sitting as a judge of the high court) ordered declaratory relief of an account in relation to matters which were in the ordinary course of the firm’s business but declined to order a payment on account on a summary basis due to a lack of certainty.
Saffman J. found that it was not open to insurers to aggregate all claims in the circumstances. Aggregation as between clients in similar circumstances – such as the charity beneficiaries of a will of which Mrs Box and Mr Gill had been named as executors – was not determined.
The judgment is interesting on a number of levels. Much commentary focussed on the court’s approach to aggregation, but in fact the approach taken in this instance is very consistent with the reasoning in previous cases, including the supreme court’s decision in AIG Europe Ltd v Woodman.
The main takeaway in terms of aggregation is the court’s expressed view that each misappropriation of client funds was a separate act for the purposes of rule 7 of the SRA Accounts Rules 2011 which required that any breach be remedied promptly upon discovery.
Insurers had sought to argue that the effect of rule 7 combined with the minimum terms and conditions (MTC) definition of claim to include an obligation to remedy a breach of the Accounts Rules, was to consolidate all shortages on client account into one claim. That argument did not succeed.
Perhaps of more fundamental importance is the reminder that liability under the Partnership Act 1890 is extensive. The combined effect of sections 9 – 13 of the Partnership Act and section 21 of the Limitation Act 1980 meant that there was no limitation period on which the innocent partners could rely where they were affixed with liability for the dishonest acts of Mrs Box by the terms of the Partnership Act.
Paragraph 137 of the judgment succinctly summarises the issue: “I do not see a realistic basis for arguing that Mr Gill and Mrs Wilding are not party or privy to the fraud where the Partnership Act fixes them with a direct liability in respect of Mrs Box’s fraud.
“I accept that in one very obvious sense they are not party or privy because they knew nothing about the fraud but the fact is that the Partnership Act deems them to have been party or privy in the context of actions undertaken by the errant partner in the ordinary course of business or within the scope of apparent authority – as the conveyancing transactions quite obviously were.”
This case serves as a reminder, if one were needed, of the civil and regulatory fallout which can (and does) impact innocent partners. Mrs Box had held a longstanding position of trust for many years. The judgment records that she had been the registrar for the diocese of Wakefield until 2005 and had then become chancellor of the diocese of Southwell and Nottingham.
Despite the obvious trust reposed in Mrs Box by her partners and clients, she engaged in a very substantial and deliberate course of fraudulent dealing, which resulted in the personal consequences of a strike off and prison sentence for her, but also resulted in the closure of a 200-year-old well-respected firm and years of litigation and obviously unpleasant consequences for her partners and losses for her clients and others.
Susanna Heley is a partner at RadcliffesLeBrasseur rlb-law.com