Mitchell v Revenue & Customs Prosecutions Office & Anor [2008] EWCA Crim 1741

[2008] EWCA Crim 1741Case No 200801597 C5
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CRIMINAL DIVISION)
ON APPEAL FROM CROWN COURT AT SOUTHWARK
HHJ Stone
POCA No 90 of 2007
IN THE MATTER OF THE PROCEEDS OF CRIME ACT 2002
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 30/07/2008
Before
LORD JUSTICE TOULSONMR JUSTICE JACKRECORDER OF HULL (SITTING AS A JUDGE OF THECOURT OF APPEAL CRIMINAL DIVISION)
Between
MESSRS IRWIN MITCHELLAppellantsTHE REVENUE AND CUSTOMS PROSECUTIONS OFFICERespondentABDULLAH ALLADRespondent
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr Kennedy Talbot instructed for AppellantsMr Jonathan Hall instructed for RespondentHearing Hearing dates: 22 July 2008
JudgmentLord Justice Toulson :Introduction
[1]Solicitors are instructed by a client to advise and act for him in connection with a Revenue and Customs investigation. They are paid money on account of their fees. Subsequently a restraint order is made against the client under the Proceeds of Crime Act 2002. By the time that the solicitors receive notice of the order their fees exceed the amount which they have been paid on account. May the funds held by these solicitors be applied in part satisfaction of their fees? That is the issue in this case.

The facts

[2]On 11 October 2007 Irwin Mitchell were instructed by Mr Abdullah Allad in connection with a Revenue and Customs investigation which he was facing. Mr Allad was and remains under suspicion of VAT evasion, cheating the revenue and money laundering.[3]On 22 October 2007 Mr Allad paid Irwin Mitchell £5000 on account of the firm’s legal costs. The funds were paid into the firm’s client account.[4]On 27 November 2007 the Revenue and Customs Prosecutions Office (RCPO) obtained a restraint order against Mr Allad under s 41 of the Act. It was in the usual form and provided, in particular, that Mr Allad must not “In any way dispose of or deal with or diminish the value of any of his assets whether they are in or outside England and Wales whether in his own name or not and whether solely or jointly owned.”[5]The order was served on Mr Allad on 6 December 2007 and came to the notice of his solicitors at the same time. By then the firm’s professional fees for work done under their retainer amounted to over £5000.[6]By rule 19(2) of the Solicitors Account Rules 1998 a solicitor who properly requires payment of his or her fees from money held for the client in a client account must first give or send a bill of costs to the client. Once that has been done, rule 19(3) provides that the money earmarked for costs becomes office money and must be transferred out of the client account within 14 days.[7]On 13 December 2007 Irwin Mitchell wrote to RCPO to inform it that the firm was about to issue a bill which would, as the letter put it, transfer the money from client account to the firm’s office account and sought RCPO’s confirmation that it had no objection.[8]RCPO did object. It contended that such a step was prohibited by the restraint order. So Irwin Mitchell applied to Southwark Crown Court for a variation of the order. Their application was dismissed by His Honour Judge Stone QC. He ruled, firstly, that Irwin Mitchell could not apply the funds in payment of their fees without a variation of the restraint order, and secondly, that the court had no power under the Act to make such a variation.[9]Irwin Mitchell appeal against his decision by leave of the single judge.

Statutory provisions

[10]Section 41 of the Act includes the following provisions:
“(2). A restraint order may provide that it applies (a) to all realisable property held by the specified person whether or not the property is described in the order;… (3). A restraint order may be made subject to exceptions, and an exception may in particular (a) make provision for reasonable living expenses and reasonable legal expenses;… (4). But an exception to a restraint order must not make provision for any legal expenses which- (a) relate to any offence which falls within subsection (5)… 5.

(b) …”

[11]Section 40 empowers the Crown Court to make a restraint order under s 41 if any of 5 conditions is satisfied. Section 40 (2) provides:
“(2) The first condition is that (a) a criminal investigation has been started in England and Wales with regard to an offence, and (b) there is reasonable cause to believe that the alleged defender has benefited from his criminal conduct.” (a) a criminal investigation has been started in England and Wales with regard to an offence, and (b) there is reasonable cause to believe that the alleged defender has benefited from his criminal conduct.”
[12]It is accepted that the Crown Court had jurisdiction to make the restraint order by virtue of s 40(2) and that Mr Allad instructed Irwin Mitchell in relation to the relevant criminal investigation.[13]Realisable property, referred to s 41(2), is defined in s 83 as including “any free property” held by the defendant. Property is “free” unless it is the subject of an order made under any of a number of statutes listed in s 82, none of which applies in the present case.[14]Property and the holding of property are defined in s 84. This provides:
“(1). Property is all property wherever situated and includes (a) money; (b) all forms of real or personal property; (c) things in action and other intangible or incorporeal property. (2). The following rules apply in relation to property (a) property is held by a person if he holds an interest in it… (h) references to an interest, in relation to property other than land, include references to a right (including a right to possession).” (c) things in action and other intangible or incorporeal property. (a) property is held by a person if he holds an interest in it… (h) references to an interest, in relation to property other than land, include references to a right (including a right to possession).”
[15]Sections 79 and 80 contain rules for determining the value of property. Section 79 provides:
“(1). This section applies for the purpose of deciding the value at any time of property then held by a person. (2). Its value is the market value of the property at that time. (3). But if at that time another person holds an interest in the property its value, in relation to the person mentioned in subsection (1) is the market value of his interest at that time, ignoring any charging order under a provision listed in subsection (4).”
Section 79(4) is not relevant in this case.[16]Section 69 provides:
“(1). This section applies to- (a) the powers conferred on a court by sections 41 to 60… (2) The powers- (a) must be exercised with a view to the value for the time being of realisable property being made available (by the property’s realisation) for satisfying any confiscation order that has been made or may be made against the defendant; (b) must be exercised, in a case where a confiscation order has not been made, with a view to securing that there is no diminution in the value of realisable property; (c) must be exercised without taking account of any obligation of the defendant …if the obligation conflicts with the object of satisfying any confiscation order that has been made or may be made against the defendant; (d)… (3) Subsection (2) has effect subject to the following rules- (a) the powers must be exercised with a view to allowing a person other than the defendant or a recipient of a tainted gift to retain or recover the value of any interest held by him;…” (a) must be exercised with a view to the value for the time being of realisable property being made available (by the property’s realisation) for satisfying any confiscation order that has been made or may be made against the defendant; (b) must be exercised, in a case where a confiscation order has not been made, with a view to securing that there is no diminution in the value of realisable property; (c) must be exercised without taking account of any obligation of the defendant …if the obligation conflicts with the object of satisfying any confiscation order that has been made or may be made against the defendant; (d)… (a) the powers must be exercised with a view to allowing a person other than the defendant or a recipient of a tainted gift to retain or recover the value of any interest held by him;…”

The judge’s reasoning

[17]In considering the nature of Mr Allad’s interest in the £5000 held in Irwin Mitchell’s client account the judge began with the general proposition that property held by a solicitor on account of his client is held in trust for the client, but is subject to a lien which entitles the solicitor to retain it until payment of his costs. He concluded that Mr Allad’s interest in the money was a beneficial interest and therefore constituted realisable property capable of being restrained by the restraint order.[18]He also concluded that s 41(4)(a) and (5) precluded the court from making an exception for the expenses in question in this case. He considered that s 69(3) provided no assistance to Irwin Mitchell, since that section merely regulated the way in which the court should exercise its powers under s 41 (and other provisions of the Act), whereas in the present case the court had no power under s 41 to make an exception in respect of the relevant funds.

Irwin Mitchell’s submissions

[19]Irwin Mitchell’s primary submission was that Mr Allad no longer had any beneficial interest in the relevant funds. As Lord Hoffmann put it in Twinsectra Limited v Yardley [2002] UKHL 12, [2002] 2 AC 164, at para 12, “Money in a solicitor’s client account is held on trust. The only question is the terms of that trust.”[20]It was submitted that the terms of the trust must depend on the purpose for which the money was paid, and that in this case it was paid for no other purpose than to meet Irwin Mitchell’s fees. As the remuneration to which they were entitled grew, so his beneficial interest in the fund diminished. Once their proper fees reached £5000, Mr Allad no longer had any beneficial interest in the fund. Procedurally they were prohibited from transferring the fund from client account to office account by rule 19 of the Solicitors Account Rules until they had provided him with a bill of costs, but that was in order that he should have an opportunity of challenging their entitlement to the money. It did not mean that he continued to have a beneficial interest in the money until that formal step had been taken. It would be absurd to regard him as beneficially entitled to £5000 (or any part of it) when the work which they had done entitled them to that amount and the fund had been created for the sole purpose of their payment in those circumstances.[21]Irwin Mitchell’s alternative submission was that, if the restraint order would otherwise prevent it from lawfully acting in the way that it proposed, the judge was wrong to hold that there was no power to vary the order so as to permit it to do so.

RCPO’s submissions

[22]RCPO submitted that the judge was right for the reasons which he gave. The solicitors had a lien over the monies in the client account in respect of their unpaid services (Loescher v Dean [1950] Ch 491). A lien confers a right to possession, but not to ownership. The beneficial interest in the money in the account therefore belonged at all times to Mr Allad. That being so, it formed part of his realisable assets frozen by the restraint order and the judge was right to hold that s 41(4) prevented him from making an exception in the present case. The remedy for solicitors in the position of Irwin Mitchell was to render interim bills quickly and frequently so as to minimise the risk of being owed money at the time of a restraint order.

The purpose of a restraint order

[23]The purpose of a restraint order is to preserve the value and accessibility of assets held by the defendant which may be available to him for satisfying a confiscation order which may be made against him at the end of the criminal proceedings. This objective, which underlies the power of the court to make a restraint order, is affirmed in s 69(2)(a) concerning the exercise of the court’s powers under the sections of the Act which deal with restraint orders.[24]In the proceeding before the judge, there was no challenge to the evidence of the solicitors about having done work for which they are entitled to charge in excess of £5000. The argument was about matters of principle.[25]Assuming that the solicitors were properly entitled to charge £5000 for the work which they had done, it was accepted in argument by Mr Hall on behalf of RCPO (rightly in our view) that the money in the client account could not be used to satisfy any confiscation order which may in the future be made against Mr Allad. He conceded that the security of the solicitor’s lien would prevent any receiver appointed by the court from being able to obtain those funds in part payment of the order. (In the Serious Fraud Office v Lexi Holdings PLC [2008] EWCA Crim 144 the court considered the potential impact of a confiscation order on the rights of secured and unsecured creditors, but we are not concerned with the latter in this case).[26]The purpose of a criminal restraint order, as with a civil freezing order, is not to prevent third parties from enforcing civil rights against a defendant if those rights would be unaffected by any order which may be made against the defendant at the end of the proceedings.[27]Mr Hall argued that there was a good public purpose in preventing Irwin Mitchell from being paid now, even if their claim was a good one (which he was not questioning), in that a receiver subsequently appointed by the court would be able to look into the legitimacy of the claim. This would be valuable because there might well be other cases involving perhaps less reputable lawyers where it might suit the lawyers and their client to agree a figure of costs which the prosecution would at that stage have no means of investigating. However, an unscrupulous lawyer could easily do as Mr Hall suggested that Irwin Mitchell should have done, that is, render bills at frequent intervals. Moreover, if solicitors were to render what might appear a suspiciously large bill, whether before or after a restraint order had been made, it would always be open to the prosecution to ask the court to freeze the payment pending further investigation whether it was a proper payment or a payment for inadequate consideration (in which case it would fall within the tainted gift provisions of the Act).[28]The purpose of the restraint order is important, particularly since Irwin Mitchell are not the putative debtor against whom the order was made but are a third party.

Restraint orders and third parties

[29]The courts have had to consider on a number of occasions the effect of freezing orders on third parties who are given notice of the order. It is now established that such an order may have an effect upon third parties in two ways. First, it would be a contempt of court for a third party to aid and abet a breach of the order by the person against whom it was made (Mr Allad). Secondly, it would be an independent contempt of court for a third party to do an act which deliberately interfered with the course of justice by frustrating the purpose for which the order was made. See HM Commissioners of Customs and Excise v Barclays Bank PLC [2006] UKHL 28 para 29 (Lord Hoffmann) and paras 56-59 (Lord Rodger).

Discussion and conclusion

[30]Two questions must be asked. Would Mr Allad commit any breach of the restraint order made against him restraining him from dealing with or diminishing the value of his assets if Irwin Mitchell act as they propose? Would Irwin Mitchell’s conduct be a contempt of court because their proposed conduct would undermine the purpose of the order by diminishing the assets available to satisfy any confiscation order? In our judgment the answer in each case is no.[31]When Mr Allad instructed Irwin Mitchell they entered into a contract under which they would be entitled to proper payment for the work done by them. To secure performance of that obligation by Mr Allad they took the sum of £5000 on account. When they paid the money into their client account two sets of contractual relationships were involved. As between the bank and Irwin Mitchell, there was a relationship of debtor and creditor. As between Irwin Mitchell and Mr Allad, there was the contractual relationship already described. But the relationship between a solicitor and client is not merely contractual; it may involve fiduciary obligations. Equity regards funds placed by a client with a solicitor as subject to a trust; see Twinsectra cited above. So if Irwin Mitchell had become insolvent before doing any work for Mr Allad, the £5000 would not have gone to the firm’s general creditors. But in the case of a contractual fiduciary the terms of the contract are important in determining the scope of his equitable as well as his legal obligations.[32]In the present case the £5000 was paid and received for a single identified purpose, namely payment of Irwin Mitchell’s fees as and when they had earned them. If they had used the fund for any other purpose, without Mr Allad’s informed consent, they would have committed a breach of trust. And until they had earned that level of fees, they were bound to hold the money on Mr Allad’s behalf. Once they had earned that amount in fees, the value of Mr Allad’s interest in the fund was reduced to nil. In order to protect a client from a solicitor transferring funds from the solicitor’s client account to office account in payment of his fees when such fees have not been properly incurred, the Solicitors Account Rules prescribe the steps which the solicitor must take. Those provisions govern the means of exercise of the solicitors’ contractual right to payment from the fund, which arose from the agreement and the work done. The bill, if properly served, reflects the solicitors’ entitlement to payment by virtue of the work done. Once they were entitled to payment of that sum, Mr Allad’s “interest” in the relevant account became literally nominal; that is to say, the account bore his name, but he no longer had any interest of substance in it. It is important to distinguish between substance and form.[33]We accept that the relevant funds are held “for” Mr Allad within the meaning of rule 19(2) of the Solicitors Account Rules:
“A solicitor who properly requires payment of his or her fees from money held for the client…in a client account must first give or send a bill of costs, or other written notification of the costs incurred, to the client…”
[34]It falls within that provision because the receipt of the money will have been entered into the client account against Mr Allad’s name, and the object of the rule is to see that the money is not transferred without him knowing. We do not accept that it follows from the wording of this rule that he still has a substantial beneficial proprietary interest in the money. However, even if we are wrong about that, on the factual premise that the bill intended to be served properly reflects work done (which has not been questioned) and that Irwin Mitchell therefore have a contractual right to payment of those fees, for which the money on account was paid, we are unable to see that it would deplete the true value of Mr Allad’s assets or frustrate the purpose of the restraint order if Irwin Mitchell were now to do as they propose.[35]Looking at the matter as one of substance, the situation is analogous to that in Re K [1990] 2 QB 298. K had a deposit account with the bank. A restraint order was made under the Drug Trafficking Offences Act 1986 prohibiting K from disposing of, diminishing or otherwise dealing with his assets within the jurisdiction including the deposit account. K also had an overdraft facility with the bank, which the bank agreed to advance against a lien over the funds in the deposit account. After the restraint order was made the bank proposed to set-off its rights under the overdraft facility against its liability in respect of the deposit account by consolidating the accounts. It was held that the bank was entitled to do so since the exercise of the set-off would not diminish the value of K’s assets.[36]It would be otherwise if the funds would be available to meet a confiscation order made against Mr Allad, but, as already explained, that is not the case (on the footing that the fees claimed are proper).[37]Mr Hall referred to text books and a number of authorities on the nature of a solicitor’s lien over money paid into their client account. For the purposes of considering his argument it is sufficient to refer to Loescher v Dean [1950] 1 Ch 491. The purchaser in an action for specific performance obtained an order that the defendant vendor should convey the property to the plaintiff on the plaintiff paying a stated sum. The plaintiff paid that sum to the defendant’s solicitors, who paid it into their client account. The plaintiff then served on the defendant’s solicitors a garnishee order nisi in respect of the plaintiff’s costs against the defendant. The defendant’s solicitors, who had not rendered a bill of costs to their client, took out a summons for a charging order under s 69 of the Solicitors Act 1932 on the sum paid by the plaintiff. Harman J noted (at p 495) that the money was not entrusted to the solicitor for any specific purpose, but was paid to him in the ordinary course of his business as solicitor of the client. He received it as the client’s agent. The judge held (at p 496) that on receipt of the money the solicitor had a lien over it for his unpaid costs and that therefore a creditor could not attach it.[38]Mr Hall relied on the case as authority for the proposition that the only interest of a solicitor over money in his client account is that he holds a lien over it for his unpaid costs, and that this merely gives to the solicitor a right to retain possession.[39]In the present case we are not concerned with solicitors’ interest in money paid by a third party to the solicitors as agent for their client in connection with a transaction between the third party and the client. We are concerned with a different situation. We are concerned with a payment made by the client to the solicitors for the solicitors’ own benefit once they had done the work for which the money was to pay them. Those are the critical features of the present case.[40]It was submitted on behalf of RCPO that if Irwin Mitchell’s argument is correct, there would be nothing to stop a solicitor from taking a very large payment on account before a restraint order is made and using the money to pay for services provided after notice of the restraint order. That is not so. On Irwin Mitchell’s argument if at the time when the firm received notice of the restraint order it had taken £100,000 on account of fees and done £5000 worth of work, the client would have a substantial beneficial interest in the money paid to the solicitors, which at that moment would be potentially available to satisfy a future confiscation order. It would be a breach of the order for the client to incur further expenditure which would enable the solicitors to extinguish his beneficial interest in that money. The solicitors would aid and abet him in that breach if they agreed to continue to run up legal costs and to recoup themselves by recourse to the remaining £95,000 of the money in the account.[41]However, in the present case we conclude that Irwin Mitchell were and are entitled to take the course proposed without committing any contempt of court. It was right for them to notify RCPO in advance, in case there was any challenge to the size or propriety of their bill, but we do not consider that any variation to the restraint order was required in order to enable them to utilise the fund in payment of their fees.[42]It is therefore unnecessary for us to say anything more about Irwin Mitchell’s alterative argument that the court had jurisdiction to vary the terms of the restraint order.

Cited in 2 later judgments