In BCS Corporate Acceptances Limited and others v Terry, Morris J discussed third party debt orders and whether such an order could be made over sums held in solicitors’ client accounts.
Background to the case
The initial proceedings arose out of a claim and counterclaim in fraud in connection with a financial guarantee bond. The claimant issued proceedings against the defendant on 13 November 2012. In 2013 the claimants were granted judgment in default.
The defendant attempted to set aside the judgment but was unsuccessful. At the time of the hearing on 7 September 2018, a judgment was in force for £1,686,874.92 and €578,801.
On 19 December 2015, a worldwide freezing order was granted against the defendant.
In 2016, the defendant applied to strike out the claim for abuse of process and to set aside the judgment on the basis of fraud and perjury. The claimant then applied for orders that this application be stayed until the defendant discharged costs orders and gave security for costs. The defendant stated that his legal costs for making the application had been provided by his employers, the Prodani Family.
On 23 February 2017, the court ordered that the defendant pay £267,450 into court. This sum reflected the total costs of the action with a further sum of £10,000 to be paid over to the claimant on account of the claimant’s costs.
In February 2017, the claimant then issued an application to commit the defendant for contempt due to his failure to explain where funds for the application for strike out and set aside had come from. As explained above, the defendant stated that his employers had provided the funds, almost £475,000. The claimant disputed the source of the monies. The order for payment into court was satisfied by the defendant’s solicitors, and they also wrote to the claimants stating that the balance of the funds held in client account were not subject to the freezing injunction as they did not actually belong to the defendant.
Following payment of outstanding legal fees to the defendant’s solicitors and counsel the sum of £89,348.21 was left in the defendant’s solicitor’s client account. The claimant sought to garnishee those sums and made an application pursuant to CPR 72.
The defendant made an application following receipt of the interim order, but before the final hearing for the third party debt order had been heard.
The defendant claimed that the third party debt order should fail for three reasons:
- The claimants at the time of the application were in breach of their duty of full and frank disclosure.
- By 24 June 2017, the claimants were in breach of their ongoing duty of disclosure.
- The claimants improperly used the interim order procedure for a collateral purpose.
In his judgment, Morris J discussed the issues of third-party debt orders and monies held in a solicitors’ client accounts in depth. He went through the process required to be completed in order to obtain an interim third-party debt order pursuant to CPR 72.
Morris J rejected the defendant’s application. He stated:
“… as regards any interest on the part of the solicitors in the funds the claimants were entitled to rely upon the statements made at the hearing on 8 May 2017 that these have been largely paid up to date and that the balance in the client account was free from any claim by the solicitors and at the time of the application the claimants were entitled to rely upon documents before the court and earlier judgments”.
Morris J went on to say there was no relevant nondisclosure related to the source of the funds or the interest of any other party in the monies in the client account.
In relation to the continuing duty of disclosure, Morris J held that an applicant for a third party debt order duty only continues:
“… whilst the proceedings remain on an ex parte basis. By 24 June 2017 the proceedings were no longer on an ex parte basis and any further issues would be the very sort of issues falling for consideration at the full hearing.”
The issue relating to collateral purpose was similarly dismissed by Morris J.
“… there is no evidence to support the proposition that but for the ulterior purpose an alleged desire to deprive the defendant of funds with which to continue the litigation, the claimants would not have made the third party debt order application at all and that the claimants were not interested in enforcing the judgment. Rather the evidence shows that over time the claimants have sought to enforce the judgment by a variety of means.”
The issue of funds held in solicitors’ accounts was then discussed in detail. The defendant argued that, if such an order was allowed, any sums received by a party’s solicitors and held on account of future legal costs would be susceptible to being taken by a further interim order. The defendant argued that solicitors must be allowed to hold money on account for future legal expenses.
Morris J did not agree:
“… unless and until a bill is rendered and allowing 14 days thereafter there is no debt due from the client to the solicitor. Accordingly the money standing in the solicitor’s client account even if held on account and even if there are unbilled fees is and remains a debt due from the solicitor to the client it is still the client’s money.”
He went on to state that any disputes relating to the validity of the monies owed could be disputed at a further final hearing.
Note for practitioners
The judgment is a useful reminder of the procedure provided for under CPR 72. As the judgment also deals with monies held on a solicitor’s client account, it provides insight into how those monies are viewed, in accordance with the Solicitors Regulation Authority’s Solicitors’ Accounts Rules.