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Insolvency: When is intervention necessary?

Solicitors should understand their professional obligations following bankruptcy rather than relying on the SRA and insolvency practitioners, advises Susanna Heley

The relationship between the Solicitors Regulation Authority (SRA) and insolvency practitioners (IPs) should be fairly straightforward. Both have statutory obligations to fulfil certain duties and there should, in theory, be limited crossover between the SRA’s interests (i.e. the protection of client funds and files) and the insolvency practitioner’s interests (collecting and distributing assets for the benefit of the creditors).

This is not always the case in practice, and differences between IPs and the SRA can be exacerbated by commercial considerations as well as misunderstandings as to the status of client funds and files. Take, for example, the recent case of Bell v Birchall and others [2015] EWHC 1541 (Ch), in which a trustee in bankruptcy took control of client files and client account, and then applied to the court for an order that the costs of doing so should be paid from client account monies under the principle in Re Berkeley Applegate [1988] 3 All ER 71.

Unsurprisingly, the application – to which the SRA was a named defendant – failed. The court made clear that a bankruptcy order does not interfere with a solicitor’s professional responsibility to keep client files safe and to ensure compliance with the SRA Accounts Rules.

Reading between the lines of the judgment in that case, the court implied that the SRA and the trustee in bankruptcy could have communicated more effectively, and that each knew of certain issues which could have been disclosed to the other, thus correcting the misapprehensions under which each was working.

Bankruptcy order

The making of a bankruptcy order against a solicitor is a ground on which the SRA can intervene into that solicitor’s practice under paragraph 1(d) of schedule 1 of the Solicitors Act 1974. It also has the effect of automatically suspending a solicitor’s practising certificate. Although it is frequently possible to get the suspension lifted by the SRA in short order, the SRA will normally look to impose conditions restricting the holding of client monies on the reinstated certificate.

In many cases, this will not be an issue because client funds and files will be held by an entity rather than a single solicitor, and any disruption will be fairly minor where the insolvency of an individual does not have the effect of closing the entity.

Where a sole practitioner is made bankrupt, the SRA should consider whether it is necessary to intervene to protect clients’ funds and files. Where one partner in a two-partner firm is made bankrupt, the remaining partner should ensure that there is no breach of the SRA Authorisation Rules which could result in the firm’s closure.

For the bankrupt solicitor, it is likely to be preferable to avoid an intervention if possible, not least because the costs of an intervention are treated as a statutory debt recoverable from the solicitor by the SRA. If the intervention postdates the bankruptcy, the debt may not be caught by the bankruptcy, which creates a situation where a solicitor is not freed of debt upon discharge but rather faces a bill from the SRA which may run into many tens of thousands of pounds.

That said, of course, the solicitor must have regard to their continuing professional obligations, and if they are unable to discharge them, there may be no alternative but to ask the SRA to intervene.

IP involvement

From an IP’s perspective, there can be problems caused by an intervention as well as the lack of an intervention. The former are most obvious in the context of the liquidation of a recognised body which is a company or limited liability partnership. The problem faced by the IP is that, on intervention, the SRA effectively takes away all of the assets of the company and there is no asset base from which the IP can be paid.

What that means in practice is that it can be difficult to persuade an IP to take on whatever is left of a corporate entity after intervention for the purposes of a formal winding up process.

Conversely, the lack of an intervention creates uncertainty as to continuing obligations and difficulties concerning file storage and management of client account, which may, at least nominally, fall into the control of the IP.

Solicitors should take steps to ensure that they understand which professional obligations remain their own following an insolvency event and not simply rely on the SRA and the IPs to get it right. SJ

Susanna Heley

This article was first published by Solicitors Journal and is reproduced by kind permission. You can read the original article by clicking here.


This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.