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Solicitors’ client accounts: whose money is it anyway?

Proprietary rights v personal claims

If a potential defendant is insolvent, it is a matter of critical importance to the potential claimant if they are able to assert a proprietary right over money or goods as opposed to a mere personal claim for damages.

Assume I agree to buy a car from a garage and pay some or all of the money up front before the car is delivered. The garage then goes bankrupt. If the purchase money is kept separate from the garage, it can be returned to me. Alternatively, if the title to the car has already been passed to me, I am its owner and will be entitled to take delivery. If on the other hand the money was placed in a central account or the title documents had not been completed, I would only have a personal claim, and would have to stand in line amongst the other creditors.

The vital task for any court in the above two examples would be to identify whether or not I had a proprietary interest in either the money or the car.

The task is made more difficult where the money is not paid to the garage directly but to the garage’s solicitors. The solicitors will hold the money on behalf of somebody, but is it their client or the third party? The answer to that question will affect the authority needed before the money can be paid out by the solicitors.

Bellis v Challinor

This was the issue faced by the Court of Appeal in Juliet Bellis & Co & Others v Challinor & Others [2015] EWCA Civ 59. The case arose from a disastrous commercial property investment. RBS provided a short-term loan of £7m to Albermarle Fairoaks Ltd (“AFL”) who then used the money to purchase Fairoaks Airport. Various investors then collectively paid £2.28m to Bellis, the solicitors representing AFL in the purchase. In turn, Bellis paid this money to RBS.

The question for the court was whether the investors retained a proprietary right to the money paid to Bellis, or whether the money constituted an immediate loan to AFL. If so, the proprietary rights had passed to AFL.

More specifically, the question was whether the money paid to Bellis created a "Quistclose-type trust" in favour of the investors, ie whether objectively the money was transferred by the investors to Bellis on terms which restricted its subsequent use.

Importantly, none of the investors informed Bellis what it should do with the money. Accordingly, the court only looked at the so called "teaser" email from AFL and the loan note issued by AFL to each investor (but not signed). On a proper construction of these notes Briggs LJ found that they were an invitation to make immediate investments by way of loan to AFL, ahead of formal fundraising.

It followed from this conclusion that Bellis were not trustees of the investors’ money, but instead held the money on trust for AFL.This meant they were not in breach of trust when they paid the sums to RBS. The result was that the investors were found to have borne some commercial risk that the scheme was undersubscribed: they had only personal claims against AFL at best.

The result did not absolve the solicitors fully. The Court of Appeal agreed with Hildyard J’s criticism of the solicitors that they ought to have made a “diligent enquiry” as to the terms on which the money was received. However, as on a proper analysis the investors had loaned the money, no duties were owed to them and so there was no question of damages.

Solicitors must make diligent enquiries

It will be a relief to solicitors (and their insurers) that, contrary to the first instance decision in Bellis, there is no presumption that money from a non-client is held on trust for that non-client. However, where a third party places money into a solicitors’ client account, a trust may well arise if the solicitor is on notice that the money should be used for a specific purpose.

Solicitors therefore need to be vigilant as to the source and purpose of money placed into their client account before paying it to third parties. The money will almost certainly be held on trust, the question is to whom. Solicitors should strive to resolve any uncertainty quickly and ensure they have adequate authority to pay the money away. If they do not do so, they will be at risk from a proprietary claim by either the third party or their client.

See Barclays Bank v Quistclose Investments Limited [1970] AC 567 and Twinsectra v Yardley [2002] 2 AC 164.