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When is a solicitor acting as a solicitor?

The High Court has recently given some guidance on whether, when operating its client account, a firm is acting in its capacity as a solicitor. The case will have ramifications for insurers who are faced with claims that insureds have "wrongfully" paid monies out of client account on behalf of their clients.

The minimum terms provide cover in relation to “any civil liability to the extent that it arises from private legal practice in connection with the insured firm’s practice”. The definition of “private legal practice” provides cover for “professional services provided by the firm” and then carves out a number of scenarios where cover is not provided, for example providing services without remuneration to friends.

A firm had allowed its client account to be used by the Portsmouth Football Club between 5 October 2009 and 8 February 2010, with around £10 million passing through the client bank account. During that period the Club’s banking facilities had been withdrawn due to two winding-up petitions presented by HMRC in October 2009 (withdrawn in November 2009) and again in December 2009. In an appeal from the Solicitors Disciplinary Tribunal, the firm challenged the sanctions imposed on the basis that the work conducted related to their conduct as solicitors and accordingly could not be said to have been an improper use of their client account.

The appeal depended in part on the application of Rule 15 note (ix) of the Solicitors Accounts Rules. The firm argued that Rule 15 did not define banking facilities and the transactions carried out were ancillary to its work, as the firm was acting where its knowledge and expertise was required in deciding who could be paid when. The firm was deciding based on the application of insolvency law to football clubs who to pay first. The quirk in this case being that football clubs pay certain creditors, for example players, first before other creditors.

The High Court upheld the Solicitors Disciplinary Tribunal decision comparing the firm’s actions with that of a bank: “... it is objectionable in itself for a solicitor to be carrying out or facilitating banking activities because he is to that extent not acting as a solicitor. If a solicitor is providing banking activities which are not linked to an underlying transaction, he is engaged in carrying out or facilitating day to day commercial trading in the same way as a banker ... This is all the more so if the solicitor is not merely allowing the client to use the client account to pay trade debts, but is himself involved in directing the payment of creditors and making decisions as to who to be paid ... that is not an activity for which a solicitor is qualified or regulated ...”.

Although the decision is fact specific, the case could have a more general application. For example, what if a firm is acting for a company in an acquisition and is asked to discharge some trade debts out of the sale proceeds – does this not fall within the definition of “private legal practice” or what if a firm is acting for an insolvency practitioner and pays out creditors – does this fall outside of "private legal practice"? If "he is not acting as a solicitor" when disbursing funds then presumably, from a coverage perspective, he will not be undertaking "private legal practice" ?

This article first appeared in RPC’s Professional and Financial Risks Blog and has been reproduced with their permission.

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