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SRA wins appeal to recover £800,000 intervention costs

Out-Law Legal Update | 23 Oct 2018 | 2:57 pm | 3 min. read

SPEED READ : The Court of Appeal has allowed the Solicitors' Regulatory Authority (SRA) to recover £800,000 in costs incurred when it intervened in a solicitor's practice. Overturning the High Court's ruling, the appeal court found that the debt could be recovered from the sole owner of the firm and that the costs incurred by the SRA were liquidated sums under s.267(2)(b) of the Insolvency Act 1986 (IA86) 

The Court of Appeal's decision is the latest judgement in the long running battle over recovery of costs by the SRA following an intervention into the practice of Blavo & Co, and further reinforces the widely held understanding of the SRA's right in recovering these costs from individual partners personally following an intervention into a practice.

In October 2015 the SRA intervened into the legal practices of Blavo & Co Solicitors Limited and John Blavo, a solicitor and its sole manager, on suspicion of dishonesty. Blavo & Co subsequently went into liquidation, and the SRA sought the payment of its intervention costs from Blavo under Schedule 1 of the Solicitors Act 1974 (SA74). By February 2016, the SRA had served two statutory demands on Blavo, for £151,816.27 and £643,489.20.

Finding in favour of Blavo, the High Court set aside the statutory demands on the following reasoning: 

  • IA86 is clear that not every debt can form the basis of a bankruptcy petition; it is necessary that the liability is for a liquidated sum;
  • as a general rule, where the SRA's intervening agent is a solicitor, the liability to pay the intervention costs is not a liability for a liquidated sum. The solicitor, the subject of the intervention, has the right to a detailed assessment of the costs of the solicitor intervening agent, which could well reduce the costs payable; and
  • nothing had happened in this case to change the nature of the liability into a liquidated sum. Blavo had not agreed to fix the liability and the fact that Blavo was aware that he was able to apply for a detailed assessment of the intervention costs, but did not do so, was not sufficient to give rise to any binding implied agreement or estoppel.

The SRA appealed this decision, on the single ground that the liability created under paragraph 13 of Schedule 1 of the SA74 was a liability for a liquidated sum, and that the costs incurred, were in fact costs incurred by the SRA, and where, therefore, a debt.

The Court of Appeal, dismissed Blavo's argument that as he did not hold any client files or client monies he could not personally be the subject of the intervention owing to the specific wording of the SA74.  

The Court of Appeal said: "As sole owner and sole manager (as director) at the date of the interventions Blavo had complete control of the management and operation of Company. In those circumstances it is difficult to see how the Company's business would not all be within the scope of Blavo's activities or, to put it the other way round, how Blavo's activities as a solicitor did not extend to the whole of the company's business."

On the issue of whether the statutory demands made by the SRA against Blavo for intervention costs were liquidated sums or not, the appeal judges examined paragraph 13, S1 SA74 in depth to determine whether this definition created a "pre-ascertained liability", and in doing so, a debt for a liquidated sum.

The ruling said: “A liability where the amount due is to be ascertained in accordance with a pre-determined formula or machinery which, when operated, will produce a figure? In my view, the unequivocal answer to both questions is yes. The statutory provisions, namely 'any costs incurred by the society to the purposes of this schedule….shall be paid by the Solicitor', constitute a predetermined formula or machinery which, when applied, will produce a figure. This creates a debt for a liquidated sum. "

The Court dismissed Blavo's third argument that the intervention by the SRA breached his rights under the ECHR. The ruling said: "The intervention procedure 'has been recognised as 'draconian' in some respects, but necessary for the protection of the public interest' Holder v Law Society [2003]… there are powerful public policy reasons why any challenge to an intervention has to take place within a very short period. Put simply it is in the public interest as well as in the interests of the solicitor that any challenge must be made and addressed very quickly."

"There is no reason in this case to permit Mr Blavo to seek to challenge the interventions.... he considered whether to do so at the time and decided not to challenge the decision to intervene. It is now too late for him to seek to do so," it said.

This decision now paves the way for the SRA to formally pursue Blavo for the full £800,000 costs of the intervention which would otherwise have been funded from the monies collected annually by the SRA from the wider legal profession.

This decision came the same week that the Lord Chancellor commenced High Court proceedings in an attempt to recoup £22 million in legal aid payments from Blavo as director of Blavo & Co, with judgment being reserved following seven days of submissions.   

James Lemkes is an expert within our Professional Practices team at Pinsent Masons, the law firm behind Out-Law.com