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High Court finds that a third party debt order (“TPDO”) can be used to attach funds held in a solicitor’s client account.

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management - Third Party Debt Orders

04-12-2018

BCS Corporate Acceptances Limited & Ors v Daniel Terry [2018] EWHC 2349 (QB)

Facts of the case

– The Claimants (“Cs”) were granted judgment in default in 2013 against the Defendant (“D”).

– In 2015, the Cs were granted a worldwide freezing order against D, as well as a substantial costs order. D applied to strike out the default judgment, and these proceedings continue.

– In 2017, the Cs were granted an interim TPDO (the “Interim Order”) on sums held in D’s solicitor’s client account (the “Client Account”). In response, D’s solicitors stated that the funds were not owed to D or held to his credit, but were to be used to fund the incurred and future legal costs of D’s ongoing litigation with the Cs.

– This briefing concerns an application by D before the hearing to determine whether the Interim Order should be made final, seeking inter alia: 

– to set aside the Interim Order on the grounds of (i) non-disclosure (Cs’ failure to disclose that the Client Account funds were not a debt owed to D, but were to meet D’s legal costs, and that others had a claim on those funds) and/or (ii) abuse of process (it being contrary to the public interest in access to justice for the Cs to obtain a TPDO over funds earmarked to meet D’s legal costs, as well as contrary to the terms of the freezing order which included the standard exception for payment of reasonable legal fees);

– in the alternative, to amend the Interim Order by inserting a provision to permit the payment of legal costs; and

– a declaration that there was no debt due or accruing due from D’s solicitors, such that there was no debt to which the Interim Order could attach.

The decision

– Morris J held that: 

– There was no relevant non-disclosure. While the Cs had a duty of disclosure when applying for the Interim Order, they satisfied this on the basis of the information available to them at the time. There was also no ongoing duty of disclosure after D was informed of the Interim Order, as then the proceedings were no longer on an ex parte basis. 

– There was no abuse of process, on the basis that a TPDO is a means to enforce an existing judgment and is distinct from a freezing injunction which acts in personam to prevent dissipation prior to judgment. In any event, the Judge did not accept that D would be unable to obtain funding to continue the litigation from elsewhere. 

– The Client Account funds were a debt owed by D’s solicitors to D. The Judge, by reference to the SRA Solicitors’ Accounts Rules, considered that in the normal course money held in a solicitor’s client account is money owed by the solicitor to the client until an invoice is raised and the money is transferred to an office account. A solicitor’s lien over money in a client account, giving it priority over a TPDO, will only be established in respect of services rendered and for which it has delivered a bill. 

Analysis and practical advice

– As would be expected, this decision confirms that the duty of full and frank disclosure does not continue beyond the point at which the respondent is informed of the TPDO. It is also a reminder that the extent of that duty and the gravity of any lack of frankness will depend on the circumstances. Where the consequences of the TPDO are potentially serious, and the grounds for making the order debateable, the duty of full and frank disclosure will be commensurately higher.

– The decision is also a reminder of the difference between a TPDO and a freezing order, namely that a TPDO, unlike a freezing order, gives a proprietary right over an asset in the form of an equitable charge over the debt in question. This prevents the use of that asset (e.g. to pay legal fees), in circumstances where in the normal course such payment would be allowed under a freezing order.

– Accordingly, a freezing order does not stop or prevent enforcement of a judgment. Once judgment has been entered, the judgment creditor is entitled to take steps to enforce it. If that enforcement threatens to deprive the judgment debtor of sums with which to fund an appeal or more generally continue any litigation, then the appropriate remedy would be to seek a stay of execution or to obtain third party funding. 

– Finally, this application was unusual in that normally such issues would be resolved at the hearing for the final TPDO. Morris J did not comment on the appropriateness of D’s application nor criticise D for bringing it, although he did note that some of the issues raised were properly matters for the final TPDO hearing.