Law Society v Sephton & Company (A Firm)

JurisdictionEngland & Wales
Judgment Date06 February 2004
Neutral Citation[2004] EWHC 544 (Ch)
Docket NumberCase Nos. HC 020C01293
CourtChancery Division
Date06 February 2004
The Law Society
Claimant
and
(1) Sephton & Co. (a Firm)
(2) Tania Lindsay Mascord
(3) J A Sephton
(4) F L Houlston
(5) A W G Cunningham
Defendants

[2004] EWHC 544 (Ch)

Before:

Mr Michael Briggs Qc

(Sitting as a Deputy Judge of the High Court)

Case Nos. HC 020C01293

and HC 020C03605

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Timothy Dutton QC and Rosalind Phelps (instructed by Wright son & Pepper) appeared for the Claimant

Michael Pooles QC and Derek Holwill (instructed by Barlow Lyde & Gilbert) appeared for the Defendants, other than the third Defendant

APPROVED JUDGMENT

Introduction

1

This is the trial of preliminary issues in two claims by the Law Society ("the Society") against Sephton & Co. a firm of accountants. The Society seeks damages for professional negligence and fraudulent misrepresentation, arising from the preparation of a series of annual reports under section 34 of the Solicitors Act 1974 by a Mr. Ian Mascord (now deceased) then a partner in the firm, in relation to the solicitor's practice known as Payne & Co, carried on by a Mr Andrew Norman Payne until an intervention by the Society in May 1996. In the barest outline, Mr Payne stole substantial sums of money from his clients during the period 1990 to 1996. Following the Society's intervention, the Compensation Fund made grants to clients of Mr. Payne under section 36(2)(a) of the Solicitors' Act amounting in aggregate to £1.245 million odd. During the whole of the period in respect of which Mr. Payne stole from his clients, Mr. Mascord had signed unqualified reports ("the Reports"). The Society claims that the Reports were either negligent or fraudulent, and that Mr. Mascord's breach of his duty of care to the Society, or alternatively his dishonesty, caused loss to the Compensation Fund equivalent to the amount paid out by way of the grants just described.

2

The preliminary issues all relate to the question whether the Society's claims are statute barred. For reasons which will appear, the negligence claim and the fraud claim have been brought in two separate actions, the Claim Forms being issued respectively on 16th May and 2nd December 2002. The defendants (who include the partners in Sephton & Co. at the relevant time, and Tanya Lindsey Mascord, Mr. Ian Mascord's personal representative) say that both actions are statute barred, the causes of action in each claim having accrued more than six years prior to the issue of the proceedings. In relation to the negligence action, the Society claims that the cause or causes of action accrued within the six year period prior to the issue of proceedings, but says in any event that the defendants are estopped from advancing a limitation defence to that action, having promised not to do so in correspondence by their solicitors prior to the issue of proceedings. In relation to the fraud action, the Society lies upon a postponement of the commencement of the running of time pursuant to section 32 of the Limitation Act 1980, it being the Society's case that it did not discover and could not with reasonable diligence have discovered the fraud until a date well within the period of six years prior to the commencement of those proceedings.

3

The preliminary issues therefore fall under three heads:

(1) When did the cause or causes of action in negligence accrue?

(2) If the negligence claim were otherwise statute barred, have the defendants estopped themselves from relying on that defence?

(3) Upon what date was the alleged fraud upon which the second action is based discovered by the Society, or upon what date (if different) could the Society have discovered the fraud with reasonable diligence?

4

The defendants have in their pleadings in the negligence action admitted that Mr. Mascord committed breaches of his duty of care to the Society when delivering each of the Reports. They have however denied that Mr. Mascord was dishonest as alleged in the fraud action. Nonetheless, it is common ground that the preliminary issues should be addressed upon the hypothetical basis that the allegations in the Particulars of Claim in each of the actions, so far as those allegations go to establish the alleged causes of action, must be treated as true. By contrast, the other questions of fact relevant in particular to issues 2 and 3 must, to the extent that there is any disagreement about them, be determined. I must therefore make findings of all facts relevant to all the allegation of estoppel in issue 2, and of all facts relevant to the question when the alleged fraud (which I assume to be true as pleaded) was or could have been discovered with reasonable diligence by the Society under issue 3.

5

There is in the context of issue 3 an element of unreality in addressing, as a concrete question of fact, the issue when an assumed or unproven fraud was or could have been discovered. Nonetheless, the parties are agreed that I should proceed on the basis of assumed fact which I have described and therefore while I have misgivings about the logic of the process, I have endeavoured to swallow them.

The facts

6

Mr Andrew Payne was admitted to the Solicitors' Roll in June 1977, and from 1986 he practised as a sole practitioner under the title Payne & Co. from premises in Knowle, West Midlands.

7

Mr. Payne was obliged by section 34 of the Solicitors' Act to deliver to the Society a report signed by an accountant containing the information prescribed by the Accountant's Report Rules 1986 and 1991 in each period of 12 months ending with 31st October. For that purpose Mr. Payne retained the defendant firm, and between 1989 and 1995 Mr. Payne caused to be delivered to the Society the Reports signed by Mr. Mascord. The first was dated 5th January 1989 and the last was dated 8th November 1995.

8

In each of the Reports Mr. Mascord certified:

(a) that in compliance with section 34 of the Act and the Accountant's Report Rules he had examined to the extent required by Rule 4 of those rules the books, accounts and documents produced to him in respect of Mr. Payne's practice;

(b) that insofar as an opinion could be based on that limited examination, he was satisfied that during the relevant accounting periods Mr. Payne had complied with the Solicitors' Accounts Rules except so far as certain trivial breaches due to clerical errors or mistakes in bookkeeping all of which were rectified on discovery and none of which he was satisfied resulted in any loss to the client;

(c) that the results of comparison under rule 4(1)(A)(f) of the Accountant's Report Rules were that as at each of the dates selected by him for comparison the figures were in agreement ie that liabilities to clients as shown on the clients' ledger accounts matched the sums held in client account and clients' money held elsewhere than in a client account after allowance for outstanding cheques and lodgements cleared after date;

(d) that there were no matters in respect of which he Mr. Mascord had been unable to satisfy himself; and

(e) that there were no matters (other than trivial breaches) in respect of which Mr. Payne had failed to comply with the Solicitors' Accounts Rules.

9

In fact, (and this is admitted rather than merely assumed), none of the matters certified by Mr. Mascord in the Reports were true at any of the times to which the Reports referred. In other words, Mr. Mascord did not conduct an examination of Mr. Payne's books accounts and documents in compliance with rule 4 of the Accountant's Report Rules or generally in compliance with those rules, Mr. Payne was in breach of the Solicitors' Accounts Rules throughout, there was a large client account shortfall throughout and there were numerous matters in respect of which Mr. Mascord could not properly have been satisfied.

10

More seriously, during the period January 1990 to 31st March 1996 Mr. Payne misappropriated not less than £763,956.60 from client account and/or failed to account to clients in respect of monies deposited by them with him. This is not admitted on the pleadings but is a fact which I must assume for present purposes to be true. The precise dates upon which and methods by which Mr. Payne defrauded his clients are not material for the purpose of deciding the preliminary issues. It is sufficient for me to record that the documents suggest significant misappropriations both at the beginning and at the end of the relevant period. Having been struck off the Roll on 27th February 1997, Mr. Payne was convicted of theft, forgery and procuring valuable security by deception on 2nd July 1998, and sentenced to 5 years imprisonment.

11

It is admitted in the first (negligence) action that the misrepresentations made by Mr. Mascord in the Reports arose by reason of his negligence. In the second (fraud) action it is alleged but denied that the representations in the Reports were made either dishonestly (in the sense that he did not believe them to be true) or recklessly (in the sense that he did not care whether they were true). It will be necessary to examine the particulars of dishonesty alleged in the second action in more detail in connection with issue 3. At this stage I should record that it is not alleged that Mr. Mascord conspired with Mr. Payne to defraud Mr. Payne's clients.

12

Although it is not admitted, I must assume that the Law Society relied upon the Reports and upon the representations contained in them in deciding not prior to 1996 to exercise any of its powers either to investigate Mr. Payne or to send in an investigating accountant under Rule 27 of the Solicitors' Accounts Rules, or to exercise its powers of intervention under Part II of the First Schedule to the Solicitors' Act.

13

The Society first received a complaint about Mr. Payne on the 1st September 1995 in the form of a letter dated 30th August 1995 from a Mr. C. Bradley...

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