Withers LLP v Rybak & Ors [2011] EWHC 1151 (Ch)

[2011] EWHC 1151 (Ch)Case No HC09C00581
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 09/05/2011
Before
MR JUSTICE MORGAN
Between
Withers LLPApplicant1) Mariusz RybakRespondents2) CMC Crown Management Corporation LimitedRespondent3) Izabela RybakRespondent4) SCI AtolRespondent5) Magdalena RybakRespondent6) Langbar International LimitedRespondent
Ms Joanna Smith QC and Mr Sebastian Allen (instructed by Withers LLP) for ApplicantMr David Quest (instructed by Jones Day) for 6 th Respondent for The other Respondents did not appear and were not representedHearing Hearing date: 9 th March 2011
Judgment

Introduction

[1]This is an application which has been made by Withers LLP (“Withers”) for the purpose of determining the question whether they are entitled to assert a security interest, in particular, a solicitor’s common law retaining lien, over certain monies in their client account. The money in question was paid into that account pursuant to an order of the court on 19th December 2008, which order was later varied by an order of 11th September 2009. At the relevant times, Withers’ clients were the persons I will refer to below as “the Rybak parties”.[2]The First Respondent is Mr Rybak. The Third Respondent is his wife and the Fifth Respondent is his daughter. The Second and Fourth Respondents are companies connected with Mr Rybak. I will refer to the first five Respondents as the Rybak parties. It may also be necessary to refer separately to Mr Rybak and to the Fourth Respondent, SCI Atol (hereafter “SCI”). The Rybak parties did not appear and were not represented at the hearing of this application.[3]In the present proceedings, Langbar International Limited (“Langbar”) has obtained a substantial judgment against the Rybak parties. Following that judgment, the Rybak parties assigned to Langbar all their interest in the relevant monies in the Withers’ client account. Withers say that the Rybak parties owe them some £410,000 in relation to their fees incurred in conducting this litigation on their behalf. It is therefore in Withers’ interests to assert a retaining lien over the monies in their client account to give them security for payment of their fees. Langbar is the Sixth Respondent to the present application. It is in Langbar’s interests to defeat Withers’ claim to a retaining lien so that Langbar can have access to the relevant monies in the Withers’ client account by way of part payment of the monies owed to Langbar by the Rybak parties. The facts[4]The litigation between Langbar and the Rybak parties has a long history. From 2006 to 2008, Langbar and the Rybak parties were involved in proceedings in the Chancery Division in which Langbar claimed substantial damages against the Rybak parties. Those proceedings came on for trial in November 2007 before Mr Justice Blackburne and the trial continued until the proceedings were settled on 21st April 2008.[5]By a settlement agreement of 21st April 2008, the Rybak parties agreed to pay approximately £30 million to Langbar. That sum was warranted by them to equate to nearly the entirety of their worldwide assets. These assets included an apartment in Monaco. Title to the apartment was vested in SCI.[6]The settlement agreement of 21st April 2008 contained detailed terms providing for a payment or payments to be made by the Rybak parties to Langbar. The settlement agreement made different provision for the different circumstances in which the apartment might in the future be sold by the Rybak parties.[7]The settlement agreement of 21st April 2008 was varied by a supplemental agreement of 24th September 2008. The supplemental agreement varied the earlier agreement as to payments to be made by the Rybak parties to Langbar and the earlier terms as to the consequences of the apartment being sold in various circumstances. Under the supplemental agreement, in the event of the apartment being sold prior to 31st December 2008, the sums payable by the Rybak parties to Langbar were less than the sums which would have been payable if the terms of settlement had remained as recorded in the settlement agreement of 21st April 2008.[8]By December 2008, the Rybak parties had found a purchaser for the apartment, or the shares in SCI, and wished to proceed with a transaction of that kind. Langbar for various reasons wished to prevent a transaction of that kind taking place at that time. Langbar took certain steps in Monaco to prevent completion of such a transaction. On 19th December 2008, the Rybak parties made an application in the original proceedings for interlocutory relief which prevented Langbar interfering with the Rybak parties’ ability to conclude a transaction of the kind proposed. The Rybak parties gave short notice to Langbar of this application and the application was heard by me late in the afternoon of the 19th December 2008. The application was attended by counsel and solicitors for both the Rybak parties and Langbar. On that day I made an order, in effect, preventing Langbar from interfering with the transaction proposed by the Rybaks.[9]At the hearing on 19th December 2008, there was discussion as to the obligations of the Rybak parties to make payments to Langbar as a result of the sale of the apartment. The Rybak parties put forward their case as to their liabilities on completion of the sale and Langbar put forward a very different case as to its entitlement to be paid by the Rybak parties. The Rybak parties contended that the sums payable by them extended to only part of the proceeds of sale of the apartment whereas Langbar contended that, in the events which had happened, Langbar was entitled to be paid by the Rybak parties a sum which would consume all of the proceeds of sale and, indeed, Langbar would be entitled to further damages because the apartment was being sold at an undervalue.[10]Faced with these rival contentions as to the rights and obligations of the parties, the question arose as to what should happen to the proceeds of sale of the apartment. At the hearing on 19th December 2008, the Rybak parties put forward a draft order which included an undertaking by the Rybak parties to pay a part of the proceeds of sale:
“to the client account of their Monegasque lawyer Richard Mullot, such monies to be held in and not withdrawn from that account until further Order by the Court”
. When I indicated that I would make an order which allowed the sale to proceed, Langbar put forward two principal objections to the form of undertaking which had been proffered. It submitted that the full amount of the proceeds of sale should be dealt with by the undertaking and, further, the money should not be paid into a client account in Monaco but should be paid into the client account of Withers, who were the solicitors acting for the Rybak parties. At that hearing, Withers did not have instructions from the Rybak parties to give an undertaking on their behalf, as requested by Langbar.[11]In the event, the order which I made contained the following provisions:
“1. The injunction granted in paragraph 2 below shall be conditional upon the Applicants agreeing and undertaking forthwith to transfer or to procure the transfer of the net proceeds of any sale on or before 31 December 2008 of the apartment in Monaco owned by the Seventh Defendant/Applicant (“the apartment”) to a client account of their solicitors Withers LLP (“the account”) on terms that: 1.1 subject to paragraph 1.2 below, the monies will be held in and not withdrawn from the account until further Order by the Court; 1.2 the Applicants may direct payments to be made from the account to the Respondent in discharge of or on account of sums due from the Applicants to the Respondent under the settlement agreements scheduled to the Tomlin Orders in these proceedings dated 21st April 2008 and 23rd October 2008. 2. [The injunction ordered by the court] 3. The Applicants and the Respondent shall each have permission to apply, and in particular (but without limitation) the Applicants shall have permission to apply for an Order permitting payments for their living and legal expenses to be made from the account pending the resolution of any dispute that may exist as to who is entitled to the monies in the account.”
[12]By way of explanation of the terms of the order of 19th December 2008, I should say that the Applicants were the Rybak parties and the Respondent was Langbar. The Seventh Defendant/Applicant was SCI, the owner of the apartment. The references to the Tomlin orders of 21st April 2008 and 23rd October 2008 were references to two orders which gave effect to the settlement agreement of 21st April 2008 and the supplemental deed of 24th September 2008.[13]I have been shown a transcript of the hearing which took place on 19th December 2008. The proposal to place part or all of the proceeds of sale into an account was described in various ways. Counsel for the Rybak parties referred to it as a “blocked account”. Counsel for Langbar referred to a proposal that the money be put into “an escrow account”. In the course of the argument I also referred to an escrow account, adopting the description used by Counsel. Indeed, at one point, Counsel for the Rybak parties also adopted this description of the relevant account.[14]Before making my order on 19th December 2008, I gave a short judgment setting out my reasons for the order I intended to make. In paragraph 2 of that judgment I stated what was to happen in relation to the proceeds of sale. I stated that the proceeds were to be paid into “the relevant escrow account”.[15]Following the order of 19th December 2008, the transaction was completed on or before 31st December 2008. Although at one time it was envisaged that the transaction would be effected by way of a sale of the shares in SCI, in the event title to the apartment was conveyed by SCI to the purchaser. Accordingly, the proceeds of sale prima facie belonged to SCI, subject to the condition contained in the order of 19th December 2008, which bound the Rybak parties including SCI.[16]In December 2008 and January 2009, the net proceeds of sale were paid over in accordance with the condition set out in the order of 19th December 2008. I understand that the net proceeds of sale were in excess of €13 million and that the Rybak parties paid to Langbar a sum of €7.588 million, pursuant to paragraph 1.2 of the order of 19th December 2008. I understand that, accordingly, a sum in excess of €5 million was paid into a client account operated by Withers.[17]Thereafter, the Rybak parties brought a new action against Langbar and Langbar served a defence and counterclaim. These new proceedings raised issues as to whether the Rybak parties had complied with the terms of settlement of 21st April 2008 and as to the circumstances in which the parties had entered into the supplemental deed of 24th September 2008. Langbar asserted that the Rybak parties were in breach of contract and were liable in damages for misrepresentation. Langbar claimed a sum of money which exceeded the remaining net proceeds of sale by a very substantial amount.[18]On 5th August 2009, the Rybak parties applied for the release of the monies held by Withers pursuant to the order of 19th December 2008. That application was fixed to be heard on 11th September 2009 by His Honour Judge Waksman QC, sitting as a Judge of the Chancery Division. In fact, early in the day on 11th September 2009, the Serious Fraud Office applied to His Honour Judge Gordon in the Central Criminal Court for a restraint order preventing Mr Rybak from disposing of or dealing with his assets and Judge Gordon made such an order. In summary, the order made was a general worldwide freezing order in relation to Mr Rybak’s assets. The order stated that the freezing prohibition included the funds in the Withers’ client account, held pursuant to the order of 19th December 2008. In relation to that specified fund, it was provided that in addition to the restraint imposed on Mr Rybak himself, Withers were not to remove the fund or in any way diminish, dispose or deal with the monies in the fund.[19]Later on 11th September 2009, Judge Waksman heard the application by the Rybak parties for the release of the monies held by Withers pursuant to the order of 19th December 2008. Judge Waksman dismissed that application. I was shown a transcript of the judgment given by Judge Waksman on that application. It is clear from his reasoning that he regarded the order of 19th December 2008, in relation to the net proceeds of sale in the Withers’ client account, as a “freezing order”. He then considered whether it was appropriate to continue or to vary that order. He referred to a number of matters which are normally relevant when considering the making of a freezing order, such as whether a party claiming a freezing order has established a good arguable case and whether there was a risk of dissipation. I was also shown a transcript of submissions made by Counsel for both sides to Judge Waksman, following his judgment, as to the terms which were appropriate to reflect the desire of the Rybak parties to access the money in the fund for the purposes of paying living expenses and legal expenses. That argument is again consistent with the monies in the fund being treated as frozen pursuant to a freezing order.[20]The order as made by Judge Waksman on 11th September 2009 contained these provisions: “1. The Claimants’ application dated 5th August 2009 for release of funds held in the Withers Account (“the Account”) pursuant to the order of Morgan J dated 19 December 2008 is dismissed. 2. Subject to paragraph 3 below, the monies in the Account shall be held in and not withdrawn from the Account until further Order by the Court. 3. Subject to the terms of a Restraint Order made by His Honour Judge Gordon in the Central Criminal Court on 11th September 2009, the order of Morgan J dated 19th December 2008 is varied so as to permit the Claimants to direct payments to be made from the Account, as follows: i) all legal expenses incurred by the Claimants in relation to these proceedings shall be notified by Withers LLP to Jones Day and, upon confirmation from Jones Day that the Defendant consents to the reasonableness of those expenses (such consent being presumed in default of a response within seven days), the Claimants may direct that sufficient monies shall be released from the Account to fund those legal expenses; ii) the Claimants shall be entitled to monthly living expenses payable from the Account on the first day of each month in the sum of €25,000. Payment of these expenses is to commence immediately with the first payment for September 2009 to be made as soon as reasonably practicable. iii) [t]he Claimants shall be entitled to an immediate payment from the Account of €90,180 to cover outstanding expenses. 4. The Claimants may agree with the Defendant’s legal representatives that the above spending limits shall be increased or that this order shall be varied in any other respect, but any agreement must be in writing. 5. The Claimants and the Defendant shall have permission to apply, and in particular (but without limitation) the Claimants shall have permission to apply for an Order permitting additional payments for their living expenses and/or for any legal expenses not consented to under paragraph 3 above and/or for any other payments arising in the ordinary and proper course of business to be made from the Account pending resolution of the proceedings. Applications for living expenses other than those identified herein at paragraph 3(ii) may be made in writing to HHJ Waksman QC where appropriate.” i) all legal expenses incurred by the Claimants in relation to these proceedings shall be notified by Withers LLP to Jones Day and, upon confirmation from Jones Day that the Defendant consents to the reasonableness of those expenses (such consent being presumed in default of a response within seven days), the Claimants may direct that sufficient monies shall be released from the Account to fund those legal expenses; ii) the Claimants shall be entitled to monthly living expenses payable from the Account on the first day of each month in the sum of €25,000. Payment of these expenses is to commence immediately with the first payment for September 2009 to be made as soon as reasonably practicable. iii) [t]he Claimants shall be entitled to an immediate payment from the Account of €90,180 to cover outstanding expenses.[21]In this order, the Claimants are the Rybak parties and the Defendant is Langbar. It is also relevant to refer to another part of the order made by Judge Waksman on 11th September 2009. That order recorded an undertaking by Langbar in damages. The order required Langbar to fortify this undertaking by placing a sum of £200,000 in a client account of Langbar’s solicitors, Jones Day. Paragraph (iii) of schedule 1 to the order stated that the sum of £200,000 was to be held “as security” to meet any liability under the undertaking in damages.[22]On 22nd October 2009, Judge Gordon in the Central Criminal Court varied his earlier order of 11th September 2009. The order of 21st October 2009 referred to the sum in the Withers’ client account pursuant to the order of 19th December 2008, as being €5,589,390.25. Of this sum, €3,589,390.25 was excluded from the restraint order, although for the avoidance of doubt it was stated that this sum remained the subject of the order of 19th December 2008 and Judge Waksman’s order of 11th September 2009. The restraint order continued to apply to a sum of €2 million being part of the sum in the Withers’ client account. The order of 22nd October 2009 ordered Withers not to remove or in any way dispose of, deal with or diminish the value of that sum of €2 million together with any accrued interest thereon from that date. On 23rd April 2010, the restraint order made on 11th September 2009 was wholly discharged.[23]In around May 2010, as a result of a disagreement between the Rybak parties and Withers there arose a conflict of interest between Withers and the Rybak parties. In May 2010, the Rybak parties wished to instruct alternative solicitors, Devonshires and, in due course, the Rybak parties did instruct Devonshires.[24]On 20th May 2010, Norris J heard an application on behalf of Mr Rybak for an order releasing £150,000 from the money in the Withers’ client account. The application was put on alternative bases, either that the release should be made pursuant to paragraph 3 (i) of the order of Judge Waksman of 11th September 2009 or that Judge Waksman’s order of 11th September 2009 should be varied to allow for the release of £150,000. Mr Rybak wished this sum to be released so that he could use it for the purpose of instructing Devonshires. Norris J refused to order the release of this sum. I have been shown a transcript of the reasons he gave for his decision. The learned Judge took the view that paragraph 3 (i) of Judge Waksman’s order of 11th September 2009 only applied to legal expenses which had been incurred and not to prospective legal expenses. He then considered whether he should vary the order of 11th September 2009 to permit the release of the funds requested. He held that because Mr Rybak had access to other monies which would enable him to obtain legal representation in the litigation, it was not appropriate to release monies from the fund in the Withers’ client account. In his judgment, Norris J plainly regarded the monies as frozen pursuant to what was effectively a freezing order. The order drawn up to give effect to Norris J’s decision expressly referred to Judge Waksman’s order of 11th September 2009 as the “Freezing Order”.[25]On 24th May 2010, Withers (acting on behalf of the Rybak parties) applied to the court for an order that the sum of £456,166.12 should be released from the fund in the Withers’ client account pursuant to the orders of 19th December 2008 and 11th September 2009, in order to discharge the legal costs of the Rybak parties up to that date. The application was supported by the sixth witness statement of Mr Wass, a solicitor at Withers, and Langbar served a witness statement of Mr Brown of Jones Day, its solicitors. Mr Wass, in his witness statement, referred to the money in the account as the “Frozen Funds”. Mr Brown in his witness statement referred to the application being for a release of frozen money and made comments as to the attitude of a court to monies, the subject of a freezing order, being released to pay legal expenses.[26]The application of 24th May 2010 came before Mann J on 27th May 2010. He adjourned the application to the trial of the action, when it would be heard together with an application intended to be issued by Langbar to vary the order of 11th September 2009.[27]In July 2010, the proceedings brought by the Rybak parties against Langbar came on for trial before me. In the event, the action was not tried on its merits. This was because there were a number of preliminary matters which needed attention. I heard the matter for four days and, on 9th July 2010, I gave judgment on the matters which had been argued. I held that the Rybak parties were in breach of an unless order made on 20th May 2010, that the result of their breach was that their claim and their defence to counterclaim stood struck out and I declined to grant relief against that sanction of the claim and defence to counterclaim having been struck out. This produced the result that the proceedings before the court were restricted to a counterclaim to which there was no extant defence.[28]On 12th July 2010, I gave judgment for Langbar on its counterclaim against the Rybak parties. I entered judgment in the sum of €3,852,000 plus interest of €152,127. In addition, I ordered that damages, as claimed in a part of the counterclaim, should be assessed at a future hearing. I ordered the Rybak parties to pay to Langbar an interim payment of €1million in relation to the claim where damages were to be assessed. I further ordered the Rybak parties to pay Langbar’s costs of the action on an indemnity basis and I ordered a payment on account of those costs of €900,000. I ordered that the order of Judge Waksman of 11th September 2009 should be varied so as to permit payment to Langbar of the sums of €3,852,000 plus interest of €152,127 plus the interim payment of €1 million plus the costs of €900,000 from the fund which was the subject of the order. On such payment being made, I discharged the order of 11th September 2009. Paragraph 9 of the order made on 12th July 2010 provided as follows:
“All of the money in the Account shall be paid forthwith by Withers LLP to Langbar’s solicitors in partial discharge of the Rybaks’ liabilities under this order. Provided however that if Withers LLP give to Langbar a cross-undertaking in damages in the usual form then they may retain the amount of £410,000 in the Account until close of business on 14th July 2010. Withers LLP shall have liberty to apply on 24 hours notice to Langbar for an order extending the time for payment of the £410,000.”
[29]On 14th July 2010, I extended the time for Withers to make the application referred to in paragraph 9 of the order of 12th July 2010 and I ordered that the time for the transfer to Langbar of the remaining money in the account should be extended until further order of the court.[30]On 21st July 2010, in accordance with the earlier orders, Withers applied to vary paragraph 9 of the order of 12th July 2010 so that the £410,000 currently held by Withers in their client account for the Rybak parties could be retained by Withers on the following terms:(1) Withers’ reasonable legal costs, charges and expenses incurred acting on behalf of the Rybak parties (“the Reasonable Legal Expenses”) were to be assessed by the Supreme Court Costs Office;(2) the Reasonable Legal Expenses once assessed were to be paid to Withers out of the £410,000 currently held by Withers in the account together with interest on that sum; and(3) any of the £410,000 currently held by Withers and remaining in the account after payment to Withers of the Reasonable Legal Expenses and interest was to be paid to Langbar.[31]On 23rd August 2010, the Rybak parties assigned to Langbar all of their rights, title and interest, present and future in, under and to the relevant account and the balance of the account standing to their credit from time to time. Langbar agreed to apply such sums as it might receive from the account in reduction of the debt due to Langbar from the Rybak parties. Langbar has duly given notice to Withers of this assignment.[32]The hearing of Withers’ application of 21st July 2010 was deferred pending the determination of a separate application made by Langbar against Withers for a wasted costs order. I dismissed that application on 17th February 2011. The application of 21st July 2010 was argued before me on 9th March 2011. Ms Joanna Smith QC and Mr Sebastian Allen appeared on behalf of Withers and Mr David Quest appeared on behalf of Langbar. Did Langbar have a security interest in the monies in the Withers’ client account?[33]The first matter which I need to address is whether Langbar had any interest in the monies held in the Withers’ client account, as described above, before the Rybak parties assigned to Langbar the benefit of such interest as the Rybak parties held in those monies. If I hold that Langbar did not have such an interest, it will be important to analyse why that was so.[34]Ms Smith addressed me in detail on this question and submitted that my order of 19th December 2008 and Judge Waksman’s order of 11th September 2009 did not create any interest in the monies in the Withers’ client account by way of a security, for the benefit of Langbar, in respect of the monies claimed by Langbar against the Rybak parties. When Mr Quest came to make his submissions on behalf of Langbar, he made it clear that Langbar did not assert that it had any interest in the monies in the Withers’ client account until the time came when the Rybak parties executed the assignment of 23rd August 2010. Although this matter was not in dispute between the parties, it is helpful to explain why I agree that Langbar did not have a security (or any other) interest in the monies in the Withers’ client account pursuant to the orders of 19th December 2008 and 11th September 2009.[35]It is clear that the settlement agreement and the supplemental deed entered into by the Rybak parties and Langbar did not give Langbar any proprietary interest in the proceeds of sale of the apartment. Accordingly, in the absence of anything else, when SCI sold the apartment at the end of December 2008, the proceeds of sale belonged to SCI.[36]The next question therefore is whether my order of 19th December 2008 had the effect that Langbar acquired a security interest in the monies paid into the Withers’ client account in respect of its claim that the Rybak parties owed Langbar monies under the settlement agreement and/or the supplemental deed and were also liable to pay damages for breach of the settlement agreement and damages for misrepresentation.[37]It is established that an order of the court can create a security interest in favour of one party over a sum of money which is paid into court. Thus where money is paid into court by a defendant as a condition of the grant of permission to defend an action, the claimant has a security interest in the money in court; similarly, money paid into court under the relevant procedural rules is subject to such a security interest; the relevant authorities are referred to in Flightline Ltd v Edwards [2003] 3 All ER 1200 at [23]. Further, money paid into an account, out of court, but with the intention that the same consequences will follow as if it had been paid into court can give rise to a charge on the money so paid, to secure any judgment obtained by the other party: see Halvanon Insurance Co Ltd v Central Reinsurance Corp [1988] 1 WLR 1122. Conversely, a conventional freezing order does not confer on the applicant for the order a security interest in the assets which are frozen: the authorities are referred to in Flightline at [23]. Similarly, money which is paid into an account, out of court, but with the intention that the consequences will be the same as for a conventional freezing order will not be subject to a charge in favour of the party claiming against the party who has paid the money into the account: this was the decision in Flightline itself.[38]The judgment of the Court of Appeal in Flightline usefully explains why a freezing order, and similar arrangements, do not create a security interest in the monies which are frozen or which are the subject of the similar arrangement. The principles to be applied are those which identify when an arrangement in relation to a specific fund does, or does not, create an equitable charge over the fund. If the arrangement imposes an obligation on the debtor to pay the debt out of the fund, there is a charge over the fund to secure payment of the debt. If the arrangement merely imposes a restriction on the disposal of the fund, there is no such charge. These principles were stated by Lord Wrenbury, giving the judgment of the Privy Council, in Palmer v Carey [1926] AC 703 at 706-707 and were applied by the House of Lords in Swiss Bank Corp v Lloyds Bank Ltd [1982] AC 584. A conventional freezing order does not create a charge over the frozen assets because the order does not impose an obligation on the respondent to satisfy any judgment debt out of those assets. Flightline was recently applied in Tradegro (UK) Ltd v Wigmore Street Investments Ltd [2011] EWCA Civ 268.[39]If one applies the above principles to the order of 19th December 2008, in my judgment, that order did not impose on the Rybak parties an obligation to pay to Langbar any monies out of the sums to be paid into the Withers’ client account, whether the sums which in due course turned out to be payable by the Rybak parties were the sums contractually due under the settlement agreement or the supplemental deed or included sums due in relation to the damages which Langbar might claim in a future action. What the order did was to impose a restriction on the disposal of the monies in the Withers’ client account but that did not create a charge over those monies in favour of Langbar. The fact that paragraph 1.1 of the order refers to “further Order by the court” is not inconsistent with this interpretation of the[40]Applying the same principles to the order of 11th September 2009, in my judgment, that order did not create a security interest over the monies in Withers’ client account. The point is even more clear with this order than it was in relation to the order of 19th December 2008. Whereas the order of 19th December 2008 only gave the Rybak parties permission to apply in relation to living and legal expenses, so that it might be said that the court had not ruled that an order permitting payment of living and legal expenses could be made, the order of 11th September 2009 clearly provided that the monies could be spent by the Rybak parties on living and legal expenses and such permission was incompatible with there being a security interest over the whole of the monies.[41]If I had held that the order of 19th December 2008 created a security interest in favour of Langbar in relation to the monies in the account but that the order of 11th September 2009 proceeded on the basis that there was no such security interest, then a question might have arisen whether the security interest which existed prior to 11th September 2009 thereupon came to an end. Prima facie, it would have done but in view of my decision as to the effect of the order of 19th December 2008, it is not necessary to consider this point further.[42]The result of the foregoing is that the monies paid into the Withers’ client account in early January 2009 were the property of the Rybak parties and that Langbar did not have a security interest in relation to those monies. That means that when, on 12th July 2010, I varied the order of 11th September 2009 so as to permit payment to Langbar of the substantial sums it was entitled to receive pursuant to my judgment and orders for costs and an order for an interim payment, I was making that order on some basis other than pursuant to a security interest in those monies, on the part of Langbar. Does Withers have a security interest over the monies in the Withers’s client account?[43]The question then arises whether Withers have a security interest of their own in the monies in their client account, to secure payment to them of the fees payable to them by the Rybak parties. Withers put their case in two ways. First, they say that they had a conventional solicitor’s lien over the monies. Secondly, they say that on the detailed facts of this case, partly as a result of the orders which had been made and partly as a result of express agreement between Withers and the Rybak parties, they had an equitable charge over the monies.[44]The general principles which govern the existence and extent of solicitor’s liens are not in dispute. They are conveniently summarised in Halsbury’s Laws of England, 5th ed., Vol. 66 (2009), beginning at paragraph 996. At common law, a solicitor has two rights which are termed liens. The first is a right to retain property already in his possession until he is paid costs due to him in his professional capacity; this lien is called a retaining lien. The second right, called a lien, is the right to ask the court to direct that personal property recovered under a judgment obtained by his exertions stand as security for his costs of such recovery; this is called a preserving lien. In addition, a solicitor has by statute (now Solicitors Act 1974, section 73) a right to apply to the court for a charging order on property recovered or preserved through his instrumentality in respect of his assessed costs of the suit, matter or proceedings prosecuted or defended by him. The lien asserted by Withers is a common law retaining lien.[45]A retaining lien extends to any deed, paper or personal chattel which has come into the solicitor’s possession in the course of his employment and in his capacity as solicitor with the client’s sanction and which is the client’s property. Money in a client account may be the subject of a retaining lien, even where it is otherwise held by the solicitor on trust for the client: see Loescher v Dean [1950] Ch 491. The retaining lien does not extend to documents (or money) which did not come into the solicitor’s hands in his capacity as solicitor for the person against whom the lien is claimed, but as mortgagee, steward of a manor or trustee. Where documents are delivered to a solicitor for a particular purpose under a special agreement which does not make express provision for a lien in favour of the solicitor, as perhaps the raising of money, or money is paid to the solicitor for a particular purpose so that he becomes a trustee of the money, no lien arises over those documents or that money unless subsequently left in the solicitor’s hands for general purposes.[46]A retaining lien extends only to the solicitor’s assessable costs, charges and expenses incurred on the instructions of the client against whom the lien is claimed and for which the client is personally liable. The lien does not extend to costs which are due to the solicitor in a capacity other than that of solicitor or to loans or to sums paid by the solicitor at the client’s requests and thus in effect lent by the solicitor or to debts generally.[47]A solicitor having a retaining lien over property in his possession is entitled to retain the property as against the client and all persons claiming through him and having no better right than the client, until the full amount of the solicitor’s assessed costs payable by the client is paid. The solicitor has no better right to retain the property in question than his client would have had if he still had possession of it.[48]Withers submit that they satisfy all of the above requirements so that it follows that they have a retaining lien over the relevant monies in their client account as security for payment to them by the Rybak parties of their reasonable legal costs, charges and expenses in relation to Withers acting on behalf of the Rybak parties. I think I can summarise the submissions made by Withers, as follows: i) the monies in the client account can be the subject of a solicitor’s retaining lien; ii) those monies are in their possession; iii) those monies are in their possession in the course of the employment of Withers in their capacity as solicitor for the Rybak parties; iv) those monies are in their possession with the sanction of the Rybak parties; v) those monies are the property of the Rybak parties; vi) those monies did not come into their possession for a particular purpose which would prevent Withers from asserting a retaining lien; vii) the reasonable costs and charges and expenses claimed by Withers are sums due to Withers in their capacity as a solicitor; viii) although Withers can have no better right to the monies than the Rybak parties had, the Rybak parties had an absolute right to the monies and, in particular, Langbar did not have any prior proprietary or security interest in the monies; ix) the assignment by the Rybak parties to Langbar was subject to the prior lien of Withers.[49]I did not understand Langbar to disagree with the above submissions save in relation to submissions (iii) and (vi).[50]Withers drew my attention to a large number of decided cases which deal with the question when property should be considered to be in the possession of a solicitor “in his capacity as solicitor”. Further, cases were cited which bear on the question as to when property is in the possession of a solicitor “for a particular purpose” which is incompatible with the existence of a solicitor’s retaining lien. Langbar relied on one authority to seek to make good its submissions but principally emphasised the particular circumstances of the present case.[51]Withers drew my attention to two cases to show the wide variety of factual circumstances in which it has been held that property has been received by a solicitor in that capacity. The cases were Stevenson v Blakelock (1813) 1 M&S 535 and Loescher v Dean [1950] Ch 491. Withers then contrasted the general position with the exceptions where property is held but in a different capacity from that of a solicitor for the owner of the relevant property. These exceptions included Pelly v Wathen (1849) 7 Hare 350 (where the capacity was as mortgagee and not as solicitor) and In re Long, ex p Fuller (1881) 16 Ch D 617 and Barratt v Gough-Thomas [1951] Ch 242 (in both of which cases, the solicitor was not entitled to claim a lien over B’s documents as security for payment of fees owed to the solicitor by A). Next, Withers referred to cases where property was transferred to a solicitor for a specific purpose so that the solicitor held the property as trustee for that purpose and not just as a bare trustee in the ordinary way (Ex p Sterling (1809) 16 Ves Jun 258, Stumore v Campbell [1892] 1 QB 314 and Halvanon Insurance Co Ltd v central Reinsurance Corp [1988] 1 WLR 1122).[52]It is not necessary for me to analyse the above cases in detail as the essential principles were not in the end disputed. I will therefore make only some brief comments. In Stumore v Campbell [1892] 1 QB 314 the monies were paid to the solicitor for a particular purpose which had failed and which resulted in the solicitor holding the monies on trust to repay them to his client. It was conceded that the assertion of a lien or a set off for the solicitor’s fees was incompatible with the solicitor’s obligations under that trust. This case was discussed and distinguished in Loescher v Dean [1950] Ch 491 where the obligation of the solicitor under a particular purpose trust to repay his client was distinguished from the obligation of a solicitor who holds a client’s money as trustee in a client account. In the latter case, the solicitor’s obligation to repay such money to his client is not incompatible with the solicitor exercising a right of lien or set off. The solicitor is entitled to say to the client: “you have not paid my bill and I shall not pay you your money until you have”: see per Harman J at page 496.[53]In Halvanon, the defendant obtained leave to defend an action on terms that the sum in dispute should be paid into an account in the joint names of the solicitors for the plaintiff and the defendant. It was held that the money in the account belonged to the defendant but was subject to a security interest in favour of the plaintiff. The plaintiff changed its solicitors and wished its new solicitors to replace its former solicitors as the persons in whom account was vested (jointly with the defendant’s solicitors). The plaintiff’s former solicitors objected and asserted that their removal from control of the account would prejudice their lien for their fees incurred to date. The only lien discussed in the judgment of Hobhouse J is the preserving lien; there is no reference to a retaining lien. The judge analysed the rights of the various persons in relation to the monies in the account. He held that the solicitors who controlled the account were officers of the court and were bare trustees. They were not entitled to deal with the money, save pursuant to an order of the court. They were holding the account on behalf of the court. They had no interest or rights to the money in the account. The plaintiff’s former solicitors had no right to object to their replacement as one of the named holders of the account. The judge went on to consider the possibility of the plaintiff’s former solicitors having a preserving lien over the monies in the account. He pointed out that a preserving lien is not a true lien but is instead a right to ask the court to intervene on equitable grounds to protect the rights of the unpaid solicitor. The solicitor’s former client, the plaintiff, had a security interest in the monies in the account. The former solicitor’s preserving lien could attach to that security interest and any fruits of it.[54]Finally, Withers drew my attention to three cases concerning stakeholders, namely, Rockeagle Ltd v Alsop Wilkinson [1992] Ch 47, Manzanilla Ltd v Corton Property and Investments Ltd [1996] EWCA Civ 942 and Gribbon v Lutton [2002] QB 902. Those cases explain that the position of a stakeholder and the two potential claimants to a stake is the subject of a tripartite contract. The relationship between the stakeholder and the two potential claimants is contractual, not fiduciary. The money is not trust money. The stakeholder is not a trustee or agent; he is a principal who owes contractual obligations to the potential claimants to the stake. Although it may be that the following point is not decided in express terms in these three cases, it seems to me to be consistent with the reasoning in those cases that when the defined event occurs which results in the stakeholder being under a contractual obligation to pay the stake to one of the claimants, the stakeholder will in principle be able to exercise a right of set off in respect of any sum owed by that claimant to the stakeholder, subject always to the usual rules as to the availability of a right of set off.[55]I think that I can summarise Langbar’s submissions as follows. The relevant monies were not paid to Withers in January 2009, pursuant to the order of 19th December 2008, in their capacity as solicitors, but in some other capacity. The monies were paid, as paragraph 4 of that order states:
“pending the resolution of any dispute that may exist as to who is entitled to the monies in the account”
. The monies were paid to a secure and neutral place. It was mere happenstance that the Withers’ client account was used. The money could equally have been paid into court, or into an account with Langbar’s solicitors or retained in a bank account of the Rybak parties. Langbar relied on the decision in Halvanon. Withers were in effect a stakeholder or an escrow agent. A retaining lien is a general security. Therefore, if Withers had a retaining lien over the monies in the account, the lien would extend beyond the fees payable to them in connection with the litigation with Langbar and could be asserted in relation to wholly unrelated fees payable by the Rybak parties to Withers. The order of 19th December 2008 froze the monies for the benefit of Langbar and not for the benefit of Withers. Withers were always subject to the risk that the court might order the monies to be paid out of the account, for example into court or to another stakeholder, to Langbar or to the Rybak parties.[56]In my judgment, the question whether the monies are in the possession of Withers in their capacity as solicitors and the question whether the monies were paid to Withers for a particular purpose overlap to some extent. Langbar’s submission that the monies are not in the possession of Withers as solicitors was essentially on the basis that Withers were to hold the monies for a particular purpose which was not compatible with Withers being able to assert a general retaining lien over the monies. It is said that because Withers had the capacity of holding money pursuant to an order of the court, or as stakeholder, it cannot be said that they hold the money in their capacity as solicitors.[57]Apart from the suggestion that Withers had the capacity of holding money pursuant to an order of the court or as stakeholder, it would seem clear that Withers held the monies in their client account in their professional capacity as solicitors for the Rybak parties. Withers had acted as their solicitors in the lengthy litigation between 2006 and 2008. On 19th December 2008, Withers acted as solicitors for the Rybak parties in applying for the order which was made in relation to the proposed sale of the apartment. So the question is whether the terms of the orders of 19th December 2008 and 11th September 2009 resulted in Withers holding the monies in their client account for a particular purpose, which means it could no longer be said that they held the monies in their professional capacity as solicitors. An alternative way of putting the question is to ask: even though Withers held the monies in their client account in their professional capacity as solicitors, were those monies directed to be held for a particular purpose so that the assertion of a retaining lien would be incompatible with that purpose?[58]In deciding between the rival submissions, I attach importance to the discussion earlier in this judgment as to the conclusion that Langbar did not have the benefit of a security interest in the monies. If Langbar had a security interest in the monies, then that security interest would have had priority over a possible lien in favour of Withers. But Langbar did not have any such security interest. Instead, I consider that Langbar had much the same benefit from the order of 19th December 2008 and, later, from the order of 11th September 2009 as it would have had from a conventional freezing order, where one of the assets frozen was money belonging to the Rybak parties held in the Withers’ client account. Further, Langbar had the additional benefit, under the order of 19th December 2008, that the Rybak parties did not have complete freedom to use the monies in Withers’ client account for living and legal expenses. Under the order of 19th December 2008, the Rybak parties only had the right to apply to the court for an order allowing them to draw on the account for living and legal expenses. Under the order of 11th September 2009, the Rybak parties were able to direct payments to be made from the account for legal expenses incurred by them but only “in relation to these proceedings” and subject to a filter in relation to the reasonableness of the expenses.[59]The order of 19th December 2008 required the Rybak parties to pay the net proceeds of the sale of the apartment into “a client account of their solicitors Withers LLP”. In the ordinary case, the status of a client account is well understood. If the orders had provided, expressly or by necessary implication, that some feature of that status was not to apply, then the orders would have effect, as so provided. But if the orders did not so provide, then in my judgment, the ordinary status of a client account would be unaffected. This case is not like the position in Halvanon, where the effect of the creation of a one-off joint solicitors’ account was to make the solicitors trustees, holding the money in accordance with the directions of the court. A solicitor typically holds money in a client account on trust for a client. In my judgment, Withers held the monies in the client account on trust for their client but their client was subject to the express and implied constraints of the orders of 19th December 2008 and 11th September 2009.[60]In relation to monies in a solicitor’s client account, the solicitor is not a stakeholder for that client and any third party. In my judgment, it is not right in the present case to replace the ordinary relationship of a solicitor to his client, in relation to monies in a client account, with an implied tripartite contractual relationship involving Withers, their client and Langbar. I therefore consider that Withers did hold the monies in their client account in their professional capacity as solicitors.[61]In my judgment, the real question in this case is whether the orders of 19th December 2008 and 11th September 2009 produced the result that Withers held the monies in their client account for a particular purpose which was incompatible with Withers having a retaining lien for their fees over those monies. The point is more arguable in relation to the order of 19th December 2008 than it is in relation to the order of 11th September 2009.[62]In relation to the order of 19th December 2008, the Rybak parties were not able to withdraw monies from the account without the permission of the court: see paragraph 1.1. However, they were entitled to apply to the court for an order permitting them to pay, amongst other things, legal expenses from the account. If the Rybak parties applied to the court for an order permitting them to pay Withers from the account and the court permitted that, then the Rybak parties would be able to use the account to pay Withers’ fees. If the court permitted the Rybak parties to use the money to pay Withers but the Rybak parties then refused to pay Withers, I do not see that there would be anything in the order of 19th December 2008 in those circumstances which would be incompatible with Withers saying to the Rybak parties that they were able to assert the conventional retaining lien over the monies in the account.[63]Staying with the order of 19th December 2008, if the Rybak parties applied to the court for an order permitting them to pay Withers’ fees out of the account and the court had for some reason refused permission, then the Rybak parties would not be able to pay Withers from that account. If the court ordered the Rybak parties to pay the monies in the account in some other way, not involving any payment to Withers, then it may be that Withers would not be able to assert a retaining lien to prevent the Rybak parties complying with the order of the court. To that extent, the assertion of a retaining lien would be incompatible with the terms of, and the working out of, the order of 19th December 2008.[64]In relation to the order of 19th December 2008, there is a further question. Could the Rybak parties decline to apply to the court under paragraph 3 for permission to pay Withers’ fees out of the account and then contend that Withers could not assert a retaining lien in those circumstances? In my judgment, the right resolution of that difficulty is to say that whereas the exercise of a retaining lien by Withers would be incompatible with an order of the court requiring the Rybak parties to pay the monies elsewhere (and not to Withers), a retaining lien would not be incompatible with the order in a case where the Rybak parties had chosen not to apply for permission to pay Withers under paragraph 3 of the order.[65]The position in relation to the order of 19th December 2008 may not be material, save by way of background to a discussion of the order of 11th September 2009, because the position under the earlier order was altered by the later order.[66]Paragraph 3 of the order of 11th September 2009 expressly permits the Rybak parties to draw on the account to pay all legal expenses incurred by them in relation to these proceedings. This is subject to receiving confirmation from the solicitors for Langbar (confirmation being assumed if there were no response within 7 days) that the expenses are reasonable. If the solicitors for Langbar do not give the necessary confirmation, the Rybak parties can apply for permission to make the payment to Withers. Langbar is not entitled to withhold its confirmation as to the reasonableness of the expenses for a collateral purpose. Where it has no ground for objecting on the basis of reasonableness, it cannot refuse to give the necessary confirmation on the ground that it wants the Rybak parties to pay Withers from other funds which might be available to the Rybak parties and not from the account. That being the position under the order, I do not see that the terms of, and the operation of the order, are incompatible with a conclusion that Withers has the benefit of a retaining lien for its reasonable fees and expenses over the monies in the account. Because clause 3 of the order refers only to legal expenses in relation to these proceedings, it may be that Withers would not be able to assert a retaining lien for its fees for other matters. To that extent, the retaining lien might be cut down as the wider lien might be said to be incompatible with the terms of the order. But even if that were the case, I do not regard the fact that clause 3 is confined to the legal fees incurred in these proceedings as producing the result that there is no retaining lien at all; I would instead reach the conclusion that a retaining lien can be asserted as between Withers and its client but only in relation to the legal fees incurred in these proceedings.[67]It follows from the above, that I conclude that Withers is able to assert a retaining lien over the monies in the account. It seems to me that Withers is therefore entitled to the substance of the relief which it seeks on this application. However, I will hear counsel on the detailed drafting of any order drawn up to give effect to this judgment.[68]For the sake of completeness, I will deal with the alternative case put forward by Withers. It was submitted that an examination of the arrangements made between Withers and the Rybak parties showed that the Rybak parties had conducted themselves in relation to Withers in respect of the payment of Withers’ fees, out of the monies the subject of the orders of 19th December 2008 and 11th September 2009, in such a way as to amount to the informal grant of an equitable charge over those monies. Thus if, for whatever reason, the court held that the law did not impose a retaining lien in favour of Withers, they could rely upon an equitable charge created by the dealings between themselves and the Rybak parties. In the course of oral argument, a further possibility was discussed, namely, as to whether the Rybak parties had given a direction to Withers as trustees of the monies in question to pay themselves out of those monies. If such a direction had been given, the argument was that Withers then ceased to hold that part of the monies on trust for the Rybak parties and held that part for themselves beneficially.[69]The material which was said to be relevant to the alternative case put forward by Withers was contained in the sixth, seventh, eighth and ninth witness statements of Mr Wass. The sixth witness statement was prepared in support of an application of 24th May 2010 for the release of a part of the monies in order to enable the Rybak parties to pay Withers. The three later witness statements were prepared in support of Withers’ own contentions that they had the benefit of a lien for their fees over the monies in the account.[70]I have considered all the material relied upon by Withers. I find that the email communications between Withers and Mr Rybak, which are now said to be relevant for the purposes of this alternative submission, are not particularly clear and are very open to interpretation.[71]In view of the fact that the matter now being considered is an alternative case put forward by Withers and my determination of it will not affect the overall result which I will reach, I think I can take this matter shortly. My conclusion is that the material placed before me by Withers does not show that Mr Rybak directed Withers to pay themselves, out of the monies in the client account, the fees which they asserted were due to them. Thus, Withers did not become the beneficial owners of a part of the monies in their client account. Further, I conclude that the Rybak parties did not take on an obligation owed to Withers to pay, out of those monies, Withers’ fees as claimed. The Rybak parties were contractually obliged to pay Withers’ reasonable fees and the Rybak parties (at one time) wished to be able to access the monies in the client account in order to be able to pay those fees but I find that the Rybak parties stopped short of taking on a specific obligation to pay Withers’ fees out of the monies in the client account. Accordingly, in my judgment, the Rybak parties did not create an equitable charge over the monies in Withers’ client account. Conclusion[72]I conclude that Withers have established that they have a retaining lien over the monies they hold in their client account in respect of their reasonable legal fees and expenses in relation to these proceedings.

order

see the facts of Flightline and the position under a conventional freezing order. Further, the fact that the phrase “escrow account” was used at the hearing on 19th December 2008 and that one of the dictionary definitions of “escrow” is a “deposit held in trust or as security” does not conclude the matter in favour of the order creating a security interest. The legal effect of the order is to be determined by considering the express terms of the order which, in my judgment, clearly do not create a security interest. A similar point was made in Flightline itself: see at [38] and [50]. Further, I do not think that the reference in paragraph 3 of the order to the possibility of a dispute as to who was entitled to the monies in the account is of any real relevance. That was included in order to refer to a possible claim that, prior to the making of the order, Langbar was entitled to the proceeds of sale. It is now clear that Langbar had no proprietary claim to those proceeds but it had a right to be paid a sum of money to be calculated by reference to the amount of the proceeds and the date of the sale. I do not regard the wording in paragraph 3 in this respect as evidencing an intention that the order itself would bring into existence an interest in the monies in the account in favour of Langbar.

Cited in 1 later judgment