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High Court refuses to grant injunction to bar claims against solicitors as constructive trustees in respect of funds received for payment of legal fees

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management - Other

06-09-2021

AA v BB [2021] EWHC 1833 (Ch)

Facts of the case

  • This briefing concerns an application by the first defendant (“D”), who was the subject of a worldwide freezing order (“WFO”) and proprietary injunction, for an injunction to prevent the Claimants (the “Cs”) from suing his solicitors (“S”) in relation to funds which D had paid to S as legal fees in defence of the claim, and over which the Cs claimed a proprietary interest.
  • The facts of the case and procedural history are summarised in our previous post on this case which can be found here.
  • Following letters from the Cs reserving their rights to make claims against S and D’s counsel, S and D’s counsel were concerned that if the Cs’ claim against D succeeded they might find themselves accountable as constructive trustees for sums received from D in legal fees for defending the claim.
  • D argued that the court had jurisdiction to make the order as part of its power to make ancillary orders to give effect to WFOs and proprietary injunctions, and that the carve-out in the WFO to allow for payment of reasonable legal fees would be ineffective without it on the basis that D would be unable to obtain legal advice.

The Decision

  • Miles J rejected the application on the basis that:

1. the order sought was not one merely holding the ring pending the determination of the parties’ rights at trial, but one which would in practice extinguish the Cs’ substantive rights. This was in circumstances where the court was not in a position to make any determination about such matters, including because the relevant evidence was not before it; and

2. it was not ancillary to the WFO or the proprietary injunction since (i) no further order was needed to give effect to the exception for legal fees and (ii) the purpose of that exception was to delimit the extent of the prohibition, not to provide the respondent’s lawyers with protection from a possible claim in constructive trust.

Analysis and Practical Advice

  • Where a claimant brings a proprietary claim against a defendant and the defendant uses the claimed assets to pay a solicitor to defend the claim, the solicitor will be a purchaser for value. However, the claimant may nonetheless seek to bring a claim against the solicitors in respect of the fees as a knowing recipient of the claimed assets.
  • In such circumstances, the solicitors liability will turn on their state of knowledge (actual or imputed) at the date when they received payment of their costs (per Carl Zeiss Stiftung v Herbert Smith & Co (No.2) [1969] 2 CH 276). Mere notice of a proprietary claim being made against the defendant will not be sufficient to amount to notice of a trust or misapplication of the moneys. Rather it will need to be shown that the solicitors have knowledge that would make it unconscionable to retain receipt. This will not be the case where the defence is genuine, even if the solicitors have doubts about their client’s case or the claim subsequently turns out to be well founded.
  • That a solicitor may be subject to regulatory obligations concerning the source of their fees does not affect this principle. This is because such obligations do not create duties for the benefit of claimants, but are to do with money laundering and the proceeds of crime.
  • While the court in this case recognised the Cs’ reservation of rights against S and D’s counsel had the potential to leave D without legal representation, (i) this was not a case in which it would therefore be impossible for D to have a fair trial, given the court is well used to cases involving unrepresented parties and to making allowances for such parties to ensure that the process is fair, (ii) granting the injunction would in effect deprive the Cs of potential claims without a proper determination of their substantive rights, which would be unlikely to be compliant with Article 6 of the ECHR or the overriding objective in the CPR and (iii) the test for bringing a tracing claim against a solicitor (as set out in Carl Zeiss) is a high one and therefore there was a reasonable prospect that there would be lawyers willing to act for D even if his current ones were not.

 

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