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	High Court of Justice in Northern Ireland Queen's Bench Division Decisions
You are here: BAILII >> Databases >> High Court of Justice in Northern Ireland Queen's Bench Division Decisions >> The Law Society of Northern Ireland v Bank of Ireland [2013] NIQB 130 (18 December 2013) URL: http://www.bailii.org/nie/cases/NIHC/QB/2013/130.html Cite as: [2013] NIQB 130

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Neutral Citation No. [2013] NIQB 130	Ref:	OHA8875
Judgment: approved by the Court for handing down	Delivered:	18/12/2013
(subject to editorial corrections)*


 


IN THE HIGH COURT OF JUSTICE IN NORTHERN IRELAND ________ QUEEN'S BENCH DIVISION ________

2007 No. 103618

BETWEEN:

THE LAW SOCIETY OF NORTHERN IRELAND

Plaintiff;

-and- THE GOVERNOR AND THE COMPANY OF THE BANK OF IRELAND

Defendant.

________ INDEX TO JUDGMENT

Paragraphs Topic

[1] - [4] Introduction

[5] – [11] Statutory provisions

[12] – [57] The plaintiff's involvement with DM

[58] – [65] The defendant's evidence

[66] – [70] Issues and submissions

[71] – [81] Discussion and findings

O'HARA J

Introduction

[1] Between July 2000 and December 2003 a solicitor, DM, wrote a number of generally crossed cheques on his client account to individuals who had no entitlement to receive that money. On each occasion the named payee took the cheque to the defendant's branch in Glengormley (or occasionally another branch) and presented it for payment. By the time the payee arrived DM had rung ahead and asked for the cheque to be cashed in favour of the payee. The defendant's officials agreed to that course. The payee was normally asked for identification which was given e.g. a driving licence.

[2] The plaintiff and the defendant have still to agree the total value of the cheques which were cashed in the manner described above but at the time when the plaintiff intervened in DM's practice in February 2004 and took control of it the shortfall in the client account was some hundreds of thousands of pounds.

[3] The issue in this proceeding is whether the plaintiff can recover from the defendant some or all of the money paid to those in whose favour the crossed cheques were cashed.

[4] The plaintiff was represented by Mr Humphreys QC with Mr A J S Maxwell. The defendant was represented by Mr Simpson QC with Ms J Simpson. I am grateful to all counsel for their detailed and helpful submissions and for the concise manner in which the evidence was presented.

Section 2

Statutory background

(i) Solicitors (Northern Ireland) Order 1976

[5] The plaintiff is the regulatory body for solicitors in Northern Ireland. Its powers and duties are found primarily in the Solicitors (Northern Ireland) Order 1976 ("the 1976 Order"). A particular reason for this control and regulation is that solicitors receive and hold money in their accounts on behalf of clients for various reasons.

[6] In order to protect those funds and the public a detailed regulatory scheme has been put in place by the 1976 Order. That scheme includes the following:

•    Articles 4-25 – qualification, admission and practising certificates.

•    Article 26 – power to make regulations as to professional practice, conduct and discipline.

•    Article 33 – duty to make regulations as to the keeping of accounts - an example of the exercise of this power is the Solicitors' Account Regulations 1991.

•    Article 35 – obligation on solicitors to present an accountant's report every 12 months.

•    Article 36 – power of Council of Law Society to pass a resolution where it has reasonable cause to believe that a solicitor has been dishonest in his practice or has caused undue delay in any matter or for any money held by him "is in jeopardy while in the control or possession of the solicitor …"

•    Article 43 – establishment of a Solicitors' Disciplinary Tribunal (with sanctions such as suspension, fines and removing solicitors from their Roll).

•    Schedule 1 Part II – High Court may appoint the plaintiff as the attorney of any solicitor named in a resolution passed under Article 36 (with the effect that under Article 22A and 23 the plaintiff can then take over the practice and act as if it was the solicitor).

[7] It is also relevant to note in the context of this case that Article 55 of the 1976 Order obliges the plaintiff to establish a Compensation Fund. Article 56 then provides for the plaintiff to make good from that fund any loss sustained by a person in consequence of dishonesty on the part of a solicitor in his professional practice. Every solicitor to whom a Practising Certificate is issued each year is obliged to make a contribution to the Compensation Fund by Schedule 2. In effect this means that losses suffered by members of the public as a result of the dishonesty of a solicitor in his practice as a solicitor are covered by every other solicitor in Northern Ireland.

[8] One other provision of potential relevance is Article 77 which is headed "Relief to banks":

"(1) Subject to the provisions of this Article, a bank or a building society shall not, in connection with any transaction on any account of any solicitor kept with it or with any other bank or building society (other than an account kept by a solicitor as trustee for a specified beneficiary) incur any liability or be under any obligation to make any inquiry or be deemed to have any knowledge of any right of any person to any money paid or credited to any such account which it would not incur or be under or be deemed to have in the case of an account kept by a person entitled absolutely to all the money paid or credited to such account.

(2)  Nothing in paragraph (1) shall relieve a bank or a building society from any liability or obligation under which it would be apart from this Order."

(ii) Bills of Exchange Act 1882

[9] Section 76 of this Act defines a generally crossed cheque as one on which there are two parallel transverse lines, either with or without the words "not negotiable".

[10] Section 79, headed "Duties of banker as to crossed cheques", then provides:

"(2) Where the banker on whom a cheque is drawn … pays a cheque crossed generally otherwise than to a banker … he is liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.

Provided that where a cheque is presented for payment which does not at the time of presentment appear to be crossed, or to have had a crossing which has been obliterated, or to have been added to or altered otherwise than as authorised by this Act, the banker paying the cheque in good faith and without negligence shall not be responsible or incur any liability, nor shall the payment be questioned by reason of the cheque having been crossed, or if the crossing having been obliterated or having been added to or altered otherwise than is authorised by this Act, and of payment having been made otherwise than to a banker or to the banker to whom the cheque is or was crossed, or to his agent for collection being a banker, as the case may be."

[11] Section 80 which is headed "Protection to banker and drawer where cheque is crossed" provides:

"Where the banker, on whom a crossed cheque … is drawn, in good faith and without negligence pays it, if crossed generally, to a banker … the banker paying the cheque, and, if the cheque has come into the hands of the payee, the drawer, shall respectively be entitled to the same rights and be placed in the same position as if payment of the cheque had been made to the true owner thereof."

Section 3

The Plaintiff's involvement with DM between 1999 and 2004

[12] The plaintiff's extensive regulatory powers have been referred to above. The first relevant exercise of those powers with DM was on 17 May 1999. Ms Paula Henry, one of the plaintiff's compliance officers, went to DM's offices on that date to conduct an inspection of his books to confirm the extent of his adherence to the Solicitors Accounts Regulations 1991. By this time DM had been in practice as a solicitor since December 1988 and had been a sole practitioner since 31 March 1995. (It appears that at times he employed assistant solicitors but no reference has been made in the course of the hearing to these individuals, of whom there was only one at any given time.) To all intents and purposes DM was a sole practitioner, with personal responsibility for compliance with the regulations.

[13] The plaintiff conducts random inspections of solicitors' accounts at least every two to three years and more often if required. If the inspection reveals nothing untoward or only minor issues, there is no follow-up. If serious issues are revealed there will be a follow-up which may involve a variety of steps such as requests for information, a re-inspection and/or referral to the Disciplinary Tribunal.

[14] The solicitor will receive very short notice of the inspection. That notice will include a list of documents which are to be available. Among those documents are returned client account cheques. Solicitors are required by the plaintiff to arrange with their banks that those cheques be returned to them. During the inspection the compliance officer will typically pick a period, e.g. March to June, and inspect the returned cheques for that period.

[15] Miss Henry's report on her inspection starts by stating that:

"The books of accounts appeared to be well kept and were written up to the 20^th February 1999 by the accountant."

She then goes on to record some concerns. One of them is an issue which appears frequently in inspections of the accounts of many solicitors – the failure to include in cheques written by solicitors the name or account number of the person whose account is being credited. That is a comparatively minor issue. Of more concern were questions about how one identified client in particular and an associated company were financing a large number of property transactions. Given the occupation of that individual it was not at all clear to Miss Henry how a series of transactions was being funded. Accordingly she asked for specific files relating to certain clients to be provided for further inspection. The conclusion of her report is:

"A further inspection is required to review the above files and ensure the books of accounts are written up to date before any conclusion can be reached."

[16] The handwritten notes of Miss Henry's inspection were before the court. I note from them that the returned client account cheques for the period 1 December 1998 to 20 February 1999 were to be examined. There is no record that anything unexpected was found nor should there have been – this period pre-dates the time when crossed cheques written by DM on his client account were cashed by the defendant's staff at the Glengormley branch at DM's specific request in favour of the payees named on the cheques who regularly gave personal information such as addresses and driving licence numbers to bank staff.

[17] It appears from the papers that Miss Henry received some files or at least some further information on 1 June 1999. There is a series of handwritten notes with her initials from that date. Her report was then considered by the relevant committee of the plaintiff on 3 June 1999, that committee being the Professional Ethics and Guidance Committee "PEGC". The relevant extract from the minutes is headed "[D M] & Co, Belfast – 17/5/99 and 1/6/99". They record the concerns noted by Miss Henry on 17 May about the source of funding for property investment and end as follows:

"A re-inspection must be carried out to review the files before a further report would be made back to the Committee. This was noted."

[18] On 4 June 1999 Mr Robert Crothers, who was then the plaintiff's in-house accountant, wrote to DM referring to the inspection of 1 June 1999. He asked DM to confirm a number of matters raised at the conclusion of the inspection. The third issue raised by Mr Crothers was:

"In respect of all monies received by you to purchase properties on behalf of [six named individuals] documentary evidence was to be obtained as to the source of the money, what it was for and any security given."

The information was to be provided by DM no later than 24 June.

[19] DM replied on 22 July giving only limited information. At a PEGC meeting on the same date Mr Crothers reported that he would meet DM and the relevant clients, a course approved by the committee. Mr Crothers was then to make "a full report to the next meeting". Remarkably the following series of minutes reveals that this meeting never took place due to the alleged recurring unavailability of the clients. Eventually on 15 June 2000 the PEGC was advised by a new compliance officer, Mr Martin McAlinden, that he was to meet the most relevant client in the coming weeks when she returned to the country. By that time Mr McAlinden had been assured by DM that this individual had "all the relevant statements and documentation required to confirm the source of funds" used in the purchase of numerous properties. Despite this belated progress the committee decided, as was recorded in their minutes, that:

"Members of the committee took the view that given money laundering regulations this might be an inappropriate step and the matter was to be closed in correspondence."

[20] Accordingly, having waited almost a year for reassurance about the legality of transactions and having been advised that the information would be available imminently, the plaintiff's committee decided that it was not appropriate to take matters any further. On the evidence before me this appears to have been as a result of a concern that any further pursuit of the issue might "tip off" the client that he/she was suspected of being involved in money laundering. Not only was the matter closed in correspondence, there is no evidence that it was pursued elsewhere. In fact on 28 June Ms Bryson, the plaintiff's Deputy Secretary wrote to DM, advised him that the PEGC "have now agreed that this meeting [with his client] should not proceed and concluded:

"I should like to apologise for any inconvenience caused to you or your client in this matter, which you should now consider closed."

[21] I conclude from this protracted episode that while DM's accounts were broadly in order in keeping with the relevant regulations there were underlying issues which the plaintiff recognised but never got to grips with. The statutory regime is in place to protect clients and the public. Regrettably the plaintiff simply did not follow through on its concerns either to reassure itself that everything was in order or to seek to uncover evidence of money laundering.

[22] On 10 January 2001 DM was advised by Ms Laura Hunter (now Kinloch) that she would be visiting his practice on 12 January 2001 to carry out a routine inspection under the Solicitors Accounts Regulations and the Solicitors Investment Business Rules. Ms Kinloch was employed by the plaintiff from August 2000 to 31 May 2003 as an accountant. In her previous employment she had prepared solicitors' accounts and was familiar with what was required under the regulations. Ms Kinloch's recollection of what she saw and didn't see before her inspection in January 2001 is unclear. This is inevitable given the passage of time. Her best guess is that she saw Ms Henry's report of 17 May 1999 but not the PEGC minute referring to money laundering. She testified that she would have wanted to know if there was a money laundering concern and that her job was not just to accept what a solicitor says but to follow the audit trail and check the core documents.

[23] Ms Kinloch's report of 17 January 2001 opens by stating that:

"This inspection was carried out at the request of the Deputy Secretary, as the accountant's report was over 4 months late."

What Ms Kinloch uncovered including the following:

•    The accounts up to 29 February 2000 were still not complete.

•    The books of account from 1 March 2000 to 15 January 2001 had not been written up by the solicitor's accountant when he was preparing the accounts.

•    A client's cheque (client X) for £80,000 written on 2 March 2000 had not been lodged and had to be rewritten by the client and lodged on 15 January 2001.

•    In the meantime, allegedly with the approval and on the instructions of X, a property developer, X made money available to DM to "lend" to DM's litigation clients whose work he had been neglecting because he was spending so much time on the business of X. DM explained that X accepted that if the litigation clients lost their cases X would lose his money. None of this was in writing – it was all agreed verbally and was what the £80,000 cheque (which DM had not lodged) was to cover.

•    This led her to carry out an analysis of the litigation files of the clients who had "loans".

[24] Ms Kinloch's report concluded:

"It was not possible to carry out an accounts inspection due to the fact that all reconciliations were draft and the accounts for YE 29/02/00 had not been finalised. The solicitor has therefore apparently been in serious breach of numerous Accounts Regulations."

[25] There is no record from this inspection of which, if any, returned cheques written on the client account were examined. Ms Kinloch's evidence was that she didn't think that on this visit she inspected any returned cheques because the state of DM's books was so inadequate. This is relevant because in these proceedings the plaintiff is asserting a claim for the period from 21 July 2000 to 5 January 2001 of £29,000 relating to 12 cheques made out to the same person "WL". Two of the cheques were for £10,000 each, one was for £1,600, another for £1,000 and the rest for £800 each. Each of the cheques had been crossed, made payable to WL and cashed by him at the defendant's Glengormley branch on the instructions of DM.

[26] When Ms Bryson saw Ms Kinloch's report she added the following at the end of it:

"… This report represents a truly bizarre set of circumstances. Obviously the client [X] has some sort of `hold' over the solicitor – why did someone with such a volume of commercial business wish to employ a sole practitioner? The payments to the clients probably do not represent the true value of claims; there is nothing to show that the clients were putting the solicitor under particular pressure and none of the matters were running for an unduly long time, although some may nonetheless have become statute barred. In due course how did the solicitor intend providing Forms of Discharge to defendants/insurers – would these have been forged?"

[27] The PEGC met on 18 January 2001 and considered Ms Kinloch's report on her inspection of 16 January. Its minutes record that in order to obtain background information and clarification which would allow the appropriate action to be taken DM was to be given notice to deliver the files reviewed by Ms Kinloch to the plaintiff pursuant to the provisions of Article 41B of the Solicitors (NI) Order 1976. That provision empowers the plaintiff to examine files in connection with complaints where there is an allegation of professional misconduct or an issue about the quality of any professional services provided by the solicitor.

[28] Ms Bryson wrote to DM on 23 January. She required him to produce various litigation files and all documents relating to X's loan of £80,000. DM was also warned that if his accounts for year ending 28 February 2000 were not delivered by 21 January 2001 the PEGC would recommend to the Council of the Law Society that it should apply Article 36 and Schedule 1 of the 1976 Order which might result in his client account being frozen.

[29] DM produced the files on 24 January. They were reviewed by Ms Bryson who then wrote to him on 26 January requiring him to meet her, Ms Kinloch and the plaintiff's then President on 30 January. He was advised that a number of matters required explanation, that he was to bring all of X's files and that his assertion that X's cheque of £80,000 was to redeem a mortgage did not accord with Ms Kinloch's recollection of his explanation (i.e. that it was to "lend" money to litigation clients who had been neglected by DM due to his commitment to X).

[30] The meeting on 30 January took place as scheduled. With some understatement Ms Bryson described it as an unusual meeting. I find the following from the notes which were kept and from the evidence of Ms Bryson and Ms Kinloch:

(i) DM had no good explanation for his accounts being late.

(ii) He gave inconsistent and contradictory explanations for the £80,000 advanced by X.

(iii) He also asserted that he had access to other funds from X over and above the £80,000.

(iv) He knew of no other solicitor who had an equivalent arrangement with a client.

(v) He did not advise X to seek independent legal advice before he accepted the £80,000 (or whatever the actual total was).

(vi) The purpose of the meeting was to give DM guidance and to advise him about the dangers of a dominant client.

[31] On 19 February Ms Kinloch carried out a follow-up inspection. By this time the books of account were up to date. She drew attention to some comparatively minor matters which were to be corrected and then recommended a re-inspection in 3-6 months in light of DM's assurance that matters would be regularised by his purchase of an appropriate software package and his employment of a part-time bookkeeper. Ms Kinloch's handwritten notes reveal that on this occasion she inspected returned client account cheques for the period November 2000 to February 2001. In respect of those cheques she made an entry:

"Nothing unusual noted".

The plaintiff's claim includes the sums paid out by the defendant on foot of seven cheques in this period. All were payable to WL with the total sum being £6,400. Six of these cheques were made out for £800 and the seventh for £1,600. They were paid out on a weekly basis from 17 November 2000 with the £1,600 cheque apparently covering a two week period over Christmas. I will return to the significance of Ms Kinloch's contemporaneous finding that she noted "nothing unusual".

[32] At the PEGC meeting on 1 March the concerns arising from the initial inspection on 17 January, the meeting on 30 January and the follow-up inspection were discussed. The outcome was:

(i) DM was referred to the Disciplinary Tribunal for breaches of a series of regulations.

(ii) Ms Kinloch was to re-inspect before the May meeting of the PEGC.

(iii) Confirmation was to be sought from the clients to whom payments had been made from the "X fund" as to whether they had in fact received the money. (Written confirmations were received in the following weeks.)

It is surprising to say the least that no decision was made to contact X, the person who was said by DM to have agreed (without independent legal advice) to this exceptional arrangement.

[33] On 7 March 2001 Ms Bryson wrote to Mr Gerry Daly, solicitor of Francis Hanna & Co. She asked him to draw up the disciplinary charges on behalf of the plaintiff. She attached relevant papers and summarised the background. Her summary referred to the concerns being "quite bizarre but investigations have not led us to conclude that there is any element of criminal activity." While such a conclusion may not have been reached there was a concern from January 2000 about money laundering which was not mentioned to Mr Daly.

[34] Mr Daly replied in very strong terms on 1 May 2001. The tone of his response can be gauged from the opening paragraph:

"I have read the paper three times now and I am still at a loss to understand what [DM] was doing. To say this is bizarre is an understatement."

Mr Daly went on to suggest that the plaintiff should require DM to provide a detailed written explanation as to the circumstances of the payments made to each of the clients. He then said:

"It is only on receipt of this information can the Society find out what he was doing and thereafter make a judgment as to whether he is fit to practice. I believe that this judgment needs to be made before proceeding with charges which are in themselves technical and will not I believe reflect the seriousness of his actions."

Mr Daly was obviously extremely anxious. His concern was that DM would "come to an unhappy end sooner or later if he wasn't taken to task immediately about what was going on in his practice."

[35] On 11 May Ms Bryson responded to Mr Daly, indicating that she would refer his letter to the PEGC but that she herself had reservations about going back to DM for further explanations. She said:

"I think it might only be open to us to make a very strong presentation/prosecution of this case, making it clear that despite [DM's] candour he has shown, at best, incredible naivety and at worst entirely reckless practice."

In her evidence Ms Bryson explained that she was reluctant to go back to DM for more information because the plaintiff has no power to compel responses to requests for information.

[36] On 24 May Ms Kinloch reported to the PEGC on her follow-up inspection. Remarkably she had to advise the committee that when she arrived at DM's office on 8 May she found that he had not yet employed a bookkeeper and had made no postings to the new computerised account system. She arranged a return on 24 May by which point she expected that everything would be up to date. She was to be disappointed – on that date the books of account were still not up to date though a newly employed bookkeeper had started work. Accordingly Ms Kinloch arranged to return on 31 May.

[37] In fact the next visit was not until 27 June. By then, finally, the accounts were well kept and up to date. However Ms Kinloch's report showed that on examining one particular file she found that:

(i) On 22 October 2000 £4,500 had been paid by DM on behalf of a client, BR, to BR's bank in order to satisfy an undertaking.

(ii) The money had been paid from funds provided by X.

(iii) The undertaking had been given by DM on 28 September 2000 when, DM had said, BR's case had been settled.

(iv) Proceedings had been issued within the limitation period but not until 8 June 2001 so the statement by DM that the case had been settled was false.

[38] Ms Kinloch's recommendation on foot of this report was to revisit the practice in 6-9 months' time. On 2 August 2001 the PEGC accepted the position as "reasonably satisfactory" but asked that the issue about the undertaking in BR's case be referred to Mr Daly. This was done by Ms Bryson on 9 August.

[39] The next development was a letter dated 19 September 2001 to Ms Bryson from Ulster Insurance Services Limited (UIS). It was headed "Possible Professional Misconduct". UIS were DM's Professional Indemnity Insurers and had engaged McCloskeys Solicitors to advise on a claim against DM for his negligent handling of a case for a client. McCloskeys had reported to UIS that DM had not issued proceedings in time with a result that the claim against the prospective defendant had become statute barred. Notwithstanding this DM had asserted to his own client that he had issued a writ (which he had not), that he had obtained a judgment (which he couldn't) and that he was pursuing the defendant to enforce the judgment (which was impossible). This had all happened between 1996 and 2000. It was aggravated by DM's failure to report the issue to his insurers. Instead he had personally guaranteed the debt with an agreement that he would make payments to his client until the debt was discharged. In fact he made a single repayment of £5,000 by way of cash borrowed from a friend but did not make any further payments.

[40] On 9 November 2001 Ms Bryson referred this matter to DM asking for his response by 6 December. On 27 November she advised Mr Daly, in response to his letter of 1 May, that in her view DM could not be required to provide information along the lines Mr Daly had suggested but that adverse inferences might be drawn against him at any disciplinary hearing.

[41] On 16 January 2002 DM replied to Ms Bryson's letter setting out the issue raised by UIS. He admitted that the allegations against him were true and apologised for his failure to manage his client's business properly. Of course his failings went far beyond that. They included lying to his client in an increasingly elaborate way in order to cover up his failures. The PEGC responded to this issue by recommending on 28 February that the matter be referred to a Disciplinary Tribunal.

[42] On 17 January 2002 the plaintiff finally received DM's accounts for the year ending 28 January 2001. The accountant added a series of notes which included a reference to payments made from funds supplied by X. It was also stated that:

"Further, in the case of payments made to [WL] totalling £30,600 no file was available."

[43] DM's own accountant identified five breaches of the Solicitors' Accounts Regulations 1991. Later that day the PEGC decided to add this issue of the late provision of accounts to those which were already destined for reference to a Disciplinary Tribunal.

[44] Ms Kinloch's report on her next inspection was prepared on 29 January 2002 and related to visits on 24 and 28 January. The thrust of this report was positive. By 28 January everything appeared to be up to date with the result that she recommended only that a further visit should take place in 9 months' time to ensure that DM maintained the accounts up to date. That satisfactory analysis was accepted by the PEGC on 28 February 2002 save that it decided that the next inspection would be in 3 rather than 9 months' time. DM was advised of this by letter dated 4 March 2002 from Ms Kinloch.

[45] This January 2002 inspection has turned out on closer analysis to be unsatisfactory. Ms Kinloch's working notes record that she selected the period "June 2001 to date" to "peruse client account cheques". On this occasion she has no entry in the adjacent box for comments. In her oral evidence Ms Kinloch said that she had no recollection of seeing in any of her inspections of DM's account any cheques which were stamped with an address or driving licence on the back. If she had, she thinks she would have asked for an explanation from DM. Not only did she not recall seeing this with DM, she did not recall seeing it with any other solicitor. She would have regarded it as "a little unusual".

[46] It is however the plaintiff's case that during this period five cheques were written to a "JB" for a total of £76,000, all of which were cashed at the counter by bank staff on DM's instructions. The value of these cheques ranged from £30,000 to £4,000. In the same period nine cheques were made out to a "JMcG" and were cashed for a total of £8,700. Their values ranged from £1,600 to £600. The plaintiff contends that the cashing of these cheques was irregular and entirely out of line with prevailing practice. If that is so, how did Ms Kinloch miss them? Either her inspection was not rigorous or she saw the cheques and did not in fact consider them to be irregular. On some of the cheques there is a handwritten note of how the cash was to be paid i.e. "40x20" meaning 40 £20 notes. That is further information which is only consistent with the cheques being cashed.

[47] It is clear from Ms Kinloch's report that she was precise and detailed in her inspections as one would expect an accountant and compliance officer to be. When the extent of DM's problems and/or wrongdoing was eventually uncovered in 2004 the cashed cheques were found along with DM's financial records in his office. They were not hidden or secreted somewhere else. I conclude from this that, contrary to the plaintiff's case, Ms Kinloch probably did see the cheques but did not think to ask questions even though she must have been alert to any unusual activity in light of the other problems which she had uncovered. The same applies to the cheques for the period November 2000-February 2001 noted above at paragraph 31.

[48] On 5 March 2002 Ms Bryson wrote to Mr Daly again on the issue of the Disciplinary Tribunal. She confirmed that the PEGC view was that DM could not be compelled to give information but that his failures to give explanations should be referred to at the hearing. She also formally referred the late delivery of the accounts for 2000/2001 and the UIS complaint. Mr Daly was asked to draft papers to refer these issues to a tribunal. Unfortunately this letter appears not to have reached Mr Daly or to have been missed in his office. The next correspondence from him on the disciplinary issues is dated 3 December 2003 and follows a recent conversation which he had had with Ms Bryson. Although letters do go astray from time to time, it is unacceptable that there was no follow-up by the plaintiff between March 2002 and December 2003. The plaintiff had decided, with very good reason, to refer DM for a disciplinary hearing. That hearing would be conducted before an independent panel. The onus was on the plaintiff, in its regulatory role, to ensure that it fulfilled its obligations to progress that hearing as quickly as it reasonably could. The fact that no hearing took place is the responsibility of the plaintiff and is not due to any failures or delay at the panel's end.

[49] On or about 16 May 2002 DM's accounts were inspected in accordance with the February decision of the PEGC. The report from Ms Kinloch to the PEGC which met on 30 May 2002 was noted as "satisfactory or showing only minor breaches." It is not apparent from the papers before me which, if any, returned client account cheques were scrutinised but the plaintiff's claim includes a cheque written by DM on 3 May 2002 for £5,500 again to JB, this cheque having been cashed by the defendant for JB on the instructions of DM.

[50] In August 2003 an entirely separate disciplinary hearing took place. The result of this was that DM was ordered to pay £1,045. While the hearing took place on 15 August and he was advised of the outcome on 19 September, DM did not pay the amount due until 26 November. On 28 November he was sent a fax by Ms Moira Neeson, Assistant Secretary to the plaintiff, referring to his agreement to appoint a senior solicitor to advise him with regard to his practice. Ms Neeson went on to say that the main priority for DM and for this senior solicitor would be the cases listed before the Disciplinary Tribunal, unresolved complaints and the general practices in his firm. It does not appear however that this senior solicitor was engaged before the next inspection of DM's accounts in February 2004. This was carried out by Ms Joan Rice, Ms Kinloch having left the plaintiff on 31 May 2003. Ms Rice's inspection was the first since May 2002. She uncovered a shortfall in the client account of £248,693.63. The largest debt balance was on X's account and was for £206,932.66. Her report raised a series of grave concerns about the accounts, about the lack of records and the difficulty in tracing money.

[51] On 12 February 2004, the day after it received Ms Rice's report, the plaintiff's council passed a resolution at a special meeting to the effect that it believed that DM's funds were in jeopardy. On foot of this resolution and Article 36 of the 1976 Order and an order made by Coghlin LJ on 19 February 2004 the plaintiff took control of the accounts.

[52] Solicitors and accountants were appointed to carry out a full investigation of DM's files and accounts. On 19 February 2004 DM (accompanied by a solicitor) met representatives of the plaintiff. It was confirmed that the actual shortfall in the client account was approximately £700,000. At a second meeting that day, with most of the same people attending, DM asserted that during the last two years he had yielded to threats against him and his family, including a threat to shoot him. He said that the people involved claimed to be connected to the UVF. The pattern was that he would write cheques and arrange for them to be cashed with all or part of the money going directly or indirectly to WL.

[53] A further meeting on 30 April 2004 added some more detail to DM's version of events. This included him saying that these threats had been hanging over him in January 2001 when he met the President, Ms Bryson and Ms Kinloch and received advice.

[54] On 4 March 2004 the plaintiff wrote to the defendant requesting an immediate investigation into the cashing of the cheques. The defendant's reply of 18 March 2004 explained that the cheques had all been cashed in accordance with the bank's standard procedures, that on most occasions the payees were asked to provide photographic identification and that on most occasions DM telephoned the branch to advise that an individual would be calling soon with a cheque to be cashed. On behalf of the defendant two further points were made. The first was that this practice was frequently adopted by customers in order to facilitate the payee and to provide the bank with additional confirmation of the authority to pay. The second point was that while the plaintiff claimed that the cheques which had been cashed were "numerous and substantial" the presentation of 97 cheques for encashment over a period of 4 years represented a very small proportion of the transactions undertaken and/or cash paid in a branch such as Glengormley. (In fact the number of cheques upon which the plaintiff now brings its case is 75 rather than 97, a point to which I will return below.)

[55] An agreed document attached to this judgment sets out the cashed cheques in chronological order. In that document the payee is named as is the date of the cheque, the amount it was made out for and the name of the relevant cashier (if that name is known). Also contained in the document on a chronological basis are the dates of the plaintiff's inspections and other relevant events such as the UIS issue. As appears from that chronology the cashing of cheques continued after Ms Kinloch's last inspection in May 2002. From 24 May to 20 December 2002 JMcL alone received almost £180,000 as a result of the encashment of 24 cheques. In August he cashed cheques for £16,000, £10,000 and then £21,000, a total of £47,000. In addition four cheques were cashed by three others for £33,000, two of these people having already received significant cash sums.

[56] In 2003 the pace slowed so that in May, September, October and November there were no payments in respect of which the plaintiff has sued. Even so the amount claimed by the plaintiff for 2003 is still in excess of £115,000. JMcL alone received £54,350 as a result of the encashment of 10 cheques between 13 January and 20 March 2003.

[57] Ms Bryson conceded in cross-examination that the plaintiff's inspection of the accounts of DM had failed. This concession was both appropriate and inevitable. According to her evidence solicitors might occasionally ask their banks to cash crossed cheques but only in limited circumstances and not repeatedly. She said that the plaintiff's case focussed on the frequency with which cheques were cashed, the small number of payees, the number of cheques which those payees received and the round figures which were typically involved. The fact is however that all of these features were or should have been apparent on the repeated inspections of DM's accounts.

Section 4

The Defendant's evidence

[58] The defendant bank called three witnesses to give oral evidence and also relies on affidavits sworn by a number of solicitors who are their customers. It also produced a series of cheques written by one firm of solicitors but without anyone from that firm swearing an affidavit to explain or put in context its dealings with the defendant. I attach no weight to those cheques.

[59] The affidavits sworn by the solicitors share a common theme. They indicate in broad terms that at the time which is relevant they arranged with the defendant for crossed cheques to be cashed. However they only did so on an occasional basis and in limited circumstances rather than regularly. For instance Mr Collins said he did this "sparingly" and where a client had no bank account or other method of cashing a cheque which represented the settlement of his claim. Mr Higgins suggested that the practice was "not uncommon" but he also explained it by reference to clients who did not have bank accounts but needed to cash "a damages cheque for a modest amount". Mr Henvey, Mr Gordon and Mr Eakin all swore affidavits along similar lines.

[60] This affidavit evidence does not suggest that what went on between DM and the bank from 2000 to 2004 was common practice in terms of the amounts paid or the repeated payments to a small number of individuals. On the contrary it suggests that what was going on between DM and the defendant was irregular.

[61] The defendant's main witness was Mr Mark O'Brien. He is currently the manager of the Belfast City branch and was a manager of the Glengormley branch for about 10 years from 1996 i.e. at the relevant time. DM was not one of his clients though other solicitors were. He described how solicitors were held in the highest regard, both personally and professionally, and that he had no experience of a solicitor dealing inappropriately with client funds. His evidence was that at the relevant time there was far more cash paid out by the defendant (and other banks) than is now the case. Mr O'Brien's view was that it couldn't be money laundering or a tainted transaction if, as here, the payee was verified by DM and provided identification upon request.

[62] A source of reassurance from Mr O'Brien was his understanding that the activities of solicitors were tightly regulated by the plaintiff. His evidence was that ten and more years ago the cashing of crossed cheques was "business as usual". The fact that they were cheques written by solicitors had the effect of lowering the defendant's guard as did the fact that DM's client account always had funds to cover the amounts in question. He also emphasised that more than £20 million was lodged in DM's client account between June 1999 and December 2003. The defendant says that the scale of that business puts the cheques in respect of which the plaintiff is suing in context in that they represent a relatively small proportion of the money going through a very busy account and a similarly small proportion of cheques – see paragraph 54 above.

[63] I have some sympathy with Mr O'Brien's evidence and the defendant's obvious frustration at being sued by the plaintiff which failed to intervene and bring an earlier end to DM's activities. However the strength of the defendant's evidence is undermined in at least three ways:

(i) None of the affidavit evidence from solicitors or bank staff undermines the plaintiff's case that the extent of DM's conduct in asking repeatedly for large cheques to be cashed was anything other than highly irregular.

(ii) Mr O'Brien's own affidavit of 1 October 2012, which is part of his evidence, summarises at paragraph 7(d) reasons why solicitors in the early 2000s might have wanted clients to be paid in cash. However none of those reasons matches what happened in the present case due to the number of cheques written by DM, the amounts payable and the regularity of payments to a small number of people.

(iii) The defendant's own circulars specifically warned staff about money laundering. One which is dated 21 January 1994 gives as an example of suspicious transactions "unusually large cash transactions by an individual or company whose business activities would not normally involve large cash dealings." Another circular dated 11 December 2001 includes a "Guide to Encashment" which states:

"DON'T … cash crossed items for strangers".

The individuals to whom DM's cheques were paid out were strangers, even if they were somehow endorsed by DM's advance phone calls and even if they produced identification.

[64] The defendant was unable to call as a witness the official in the Glengormley branch who dealt most often with DM in taking his calls and approving the encashment of the cheques. Unfortunately she died in 2006. Another witness was called who said she had approved for encashment "a couple of" crossed cheques written by DM. One of these was for £20,000 and was in favour of X. This is not a cheque which forms part of the plaintiff's claim because X was entitled to the money. It is notable that this witness said in her affidavit that she knew X personally and also knew that he had just completed a number of property transactions. That being so, she said, "I had no reason to query the transaction". The defendant put forward this evidence to support its defence that the cashing of cheques was not uncommon. The plaintiff's case is that the defendant can cash such cheques if it chooses to do so but at its own risk.

[65] I had the benefit of a written report from a banking expert on behalf of each party together with a note prepared as a result of a joint meeting between them, setting out the points on which they agreed and disagreed. It is clear to me in light of their evidence and all the evidence that just as the plaintiff's system for inspecting and regulating DM failed, so too did the defendant's monitoring and supervision of money flowing out of DM's client account by way of cash. It may very well be the case that custom and practice allowed some latitude for cheques to be cashed in limited circumstances but irrespective of the legal consequences of that trend what was happening here went far beyond any truly comparable example to which I have been referred.

Section 5

Issues and submissions

[66] DM has been charged with the theft of a chose in action, namely credit in his solicitor's client account in amount of £811,080 or thereabouts. The offence was allegedly committed between June 1999 and December 2003.

[67] The plaintiff has already sued and recovered £100,000 damages from the firm of accountants who acted for DM from September 2003. That case was based on the contention that the accountants provided accounts for the year ending 28 February 2003 upon which the plaintiff relied. The claimant included the contention that the accountants induced the plaintiff to believe that DM's affairs were in order and in compliance with the Solicitors' Accounts Regulations with the result that the plaintiff issued DM with a practising certificate. The plaintiff has not however sued DM's previous accountants who acted for him in the period up to September 2003. Nor has it sued any of the individuals who received the money from the defendant when the defendant cashed the crossed cheques at DM's request. This is despite the fact that the identities of those individuals are known from the information which they provided to the defendant, which information is within the knowledge of the plaintiff from the returned cheques.

[68] The plaintiff's main submission focused on Section 79 of the Bills of Exchange Act 1882 and was as follows:

(i) Each cheque was generally crossed i.e. each cheque had transverse parallel lines but without any writing between the lines such as "and co". If they had not been crossed they would have been payable on demand by virtue of Section 73 of the 1882 Act. The fact that they were crossed within the meaning of Section 76 brought Section 79(2) into play. The plaintiff's case is that the defendant is liable to the true owner of the cheque for any loss sustained by that true owner owing to the cheque being cashed rather than being paid to a banker. Since the true owner was DM's client account and since the plaintiff has made up the losses sustained by clients of DM through its Compensation Fund the plaintiff is entitled to recover the losses arising from the cashing of the crossed cheques.

(ii) The defendant would be protected in the circumstances of this case if it had not cashed the cheques but had instead paid them through a bank. It would defeat the framework of the 1882 Act, and the specific provision of Section 79(2), if the defendant escaped liability because it chose to accede to DM's requests and cashed the cheques. The terms of Article 77(2) of the Solicitors Order prevent Article 77 (1) being of any assistance to the defendant on this point.

(iii) An oral request by DM, accepted by the defendant, does not somehow "uncross" a cheque. It may encourage a bank to take a risk but that risk still lies with the bank.

(iv) The payees in this case were not and could never be the "true owners" of the cheques just because DM had made the cheques out to them. In Great Western Railway Company v The London and County Banking Company (1901) AC 414 the Earl of Halsbury, Lord Chancellor, held:

"The supposed distinction between the title to the cheque itself and the title to the money obtained or represented by it seems to me to be absolute illusory. The language of the statute seems to me to be clear enough. It would be absolutely defeated by holding that a fraudulent holder of the cheque could give a title either to the cheque or to the money."

The true owners of these cheques were those people whose money was held in DM's client account.

[69] The plaintiff further submitted that even if its primary argument failed, it was entitled to succeed against the defendant on the following bases:

(i) A bank has a contractual duty of care to transact its customers business with reasonable care and skill. If a bank knows or ought to know that its customer is acting dishonestly it cannot close its eyes to that fact, especially where the money in question is not the customer's own money but that of his clients.

(ii) In the circumstances of this case the number of transactions, the small number of repeat payees and the significant amounts of money involved all put the bank on notice of irregularities which it chose to ignore because DM was a solicitor in good standing.

(iii) The defendant owed the plaintiff a duty directly because the plaintiff is the trustee of the Compensation Fund established under the 1976 Solicitors Order.

(iv) Since the funds held in a client account are trust monies, held by the solicitor on trust for the benefit of his clients, the defendant is liable as a constructive trustee for knowing receipt if the defendant is on notice that funds are being withdrawn otherwise than in accordance with the terms of the trust. This arises where the defendant's officials allow repeated large payments of cash to a small number of people. The test is not whether there was any dishonesty on the part of the bank but rather whether there was a pattern which was such that the bank should have known what has happening and prevented it from continuing.

(v) The plaintiff has no duty to the defendant in the plaintiff's role as a regulatory body. Accordingly issues relied on by the defendants such as causation and contributory fault cannot arise.

[70] The defendant's main submissions are:

(i) Section 79(2) of the 1882 Act does not engage because in this case the "true owners" of the cheques which were cashed were the people to whom they were written and who identified themselves to bank staff.

(ii) It was the plaintiff rather than the defendant who knew or ought to have known far more about what was going on in DM's practice in light of all the unsettling issues which were identified during the inspections and which have been set out above.

(iii) The so-called pattern of payments could not have been readily apparent to bank staff given the amounts of money going through the client account and the number of cheques being written on it, never mind the general volume of business in a busy branch such as Glengormley.

(iv) The cashing of cheques was a more regular practice than the plaintiff contends.

(v) The plaintiff's failings, as a regulatory authority with the power and ability to intervene in DM's practice, caused cash payments to continue long after they should have ceased.

(vi) Given that the payees were openly identifying themselves the suggestion that this sequence of events constitutes money laundering is simply wrong.

(vii) If the defendant is liable at all there is considerable contributory fault on the part of the plaintiff.

(viii) The plaintiff cannot succeed by standing in the shoes of DM to sue the defendant since DM himself was, on the plaintiff's own case, the person responsible for the irregularities.

Section 6

Discussion and findings

[71] The plaintiff's case that cashing of cheques was only an occasional event gathers some support from the affidavit evidence of solicitors presented on behalf of the defendant. Paradoxically it is damaged by my conclusion that Ms Kinloch did see some of the cheques in the course of her various inspections but did not think they were sufficiently significant to mention in her report. If they should have raised suspicions at the defendant's end, there was even more reason for Ms Kinloch to be concerned. On balance I do not believe that the cashing of cheques payable to WL between July 2000 and February 2001 should have raised significant concerns, especially because eight of the eleven cheques were for £1,000 or less and they were payable to a single person. However I believe that a worrying pattern should have been spotted by both the plaintiff and the defendant when the defendant cashed larger cheques in favour of a different person, JB, for £27,000 in July 2001, £30,000 one week later in August and £11,000 a further three weeks later. This sequence was followed by two further cheques for £3,000 and £4,000 in September 2001. When JB sought the second cash payment on 3 August and then a third on 31 August alarm bells should have rung with the defendant that something was wrong. Whether or not the defendant would have got an honest answer if it had challenged DM is not the issue – all the defendant had to do, if only to protect itself, was to stop cashing DM's cheques. Instead it continued to cash them in 2001 (though during that year the pace slackened) and in 2002 and 2003 when the pace picked up again. For instance in 2002, between May and December, JMcL received more than £175,000 by cashing twenty four crossed cheques without any questions being asked. Between January and April 2003 he received a further £64,850. There is no evidence that JMcL fitted into any of the examples given by Mr O'Brien in his evidence on behalf of the defendant. Significant amounts were also received by others including JB again.

[72] I find that the cashing of cheques in favour of JB, from when he presented the third cheque for £11,000 on 31 August 2001, should have alerted the defendant to ask questions and, in the meantime, to stop cashing DM's cheques. I also find that these cash payments to JB should have been spotted in Ms Kinloch's inspection in January 2002 and that she should have raised that issue in her report, with DM being asked for an explanation.

[73] The question of the point in time at which repeated requests by DM to his bank to cash crossed cheques is of limited (if any) importance if the plaintiff's main contention based on Section 79(2) is correct. My findings on that issue are:

(i) DM's cheques were generally crossed within the meaning of Section 76(1).

(ii) The cheques were not in any way "uncrossed" at the time they were cashed.

(iii) Section 79(2) makes a banker on whom a cheque is drawn liable to the true owner of the cheque for any loss sustained by the true owner if the banker pays a cheque crossed generally other than to a banker.

(iv) The cheques in this case were not paid to a banker – they were cashed.

(v) The defendant took a risk upon itself by cashing the cheques, even though it did so at the request of a solicitor who was in good standing for the benefit of individuals who provided identification.

(vi) The payees such as JB and JMcL were not "the true owners" of the cheques. The unsatisfactory statements of DM and his inability to give evidence are unhelpful but I am satisfied that those identified as having received cash on foot of DM's cheques had no entitlement to it. I reject the defendant's submission that the named payees who produced identification to bank staff somehow became "the true owner". Those individuals had no title to the money in the client account and could not acquire title by DM making cheques payable to them, however that came about, because DM had no legal entitlement to transfer money from that account to anyone who did not own it.

[74] The result of the finding at paragraph 73 is that the defendant is liable to the plaintiff for each of the cheques which it cashed from July 2000 onwards. I also find that the plaintiff can succeed in this aspect of the claim as Trustee of the Compensation Fund rather than by standing in the shoes of DM. As the defendant pointed out in Section 9 of its closing submission, it was DM who brought about this state of affairs by his repeated requests to the defendant to cash crossed cheques. That would prevent DM himself from making any claim against the defendant in respect of those encashments. But for the Compensation Fund issue, the plaintiff would be similarly placed.

[75] In this context I reject the defendant's submission about the subrogation of X's claim against the Compensation Fund which is also found at Section 9 of its closing submission. I am not satisfied that X ever accepted that he might not recover any of his so-called loans which DM claimed he used for various purposes. I am certainly not satisfied that X ever authorized his money to be paid out to those who received the cash from the crossed cheques. That is not what DM claimed in any of his versions of events, questionable as those versions are.

[76] The finding that the defendant is liable to the plaintiff for the crossed cheques which it cashed does not bring an end to the case. There are two further issues to address – causation and contributory fault. I approach them in this way. There have been various references to and submissions about each party's state of knowledge about the pattern of events. However, the state of knowledge or expected state of knowledge is not the same for each party. I find that the defendant knew or should have known, even in a busy account in a busy branch, about the increasing and strange regularity of DM asking it to cash crossed cheques to strangers, especially once some of them were for substantial amounts. The fact that many of these requests went through the same official makes the point a stronger one for the plaintiff. At paragraph 71 I have fixed this point in time at late August 2001.

[77] On the other hand I find, as the plaintiff has conceded, that its regulation of DM's practice failed. At what point should the plaintiff have intervened decisively in that practice? Fixing a precise time is something of an arbitrary exercise as was deciding the point at which the defendant should have queried and stopped cashing DM's cheques. On the history established in Section 3 of this judgment I hold that this point had been reached by January 2002. By that time the plaintiff knew or should have known the following:

•    There was an issue from 1999/2000 which at the very least hinted at money laundering (paragraphs 17-20).

•    Ms Kinloch's report of January 2001 had raised a series of issues which were inadequately followed up (paragraphs 22-25).

•    DM's meeting with the President and others on 30 January 2001 did not probe what was going on in any meaningful way (paragraph 30).

•    Ms Bryson thought the issues raised were "bizarre" (paragraphs 26 and 33).

•    Mr Daly felt even more strongly about what was happening (paragraph 34).

•    DM was repeatedly failing to meet his responsibilities (paragraph 36 for example).

•    There was clear evidence of dishonesty on DM's part from the June 2001 inspection (paragraph 37) and in September 2001 from UIS (paragraph 39) which DM effectively admitted in January 2002 (paragraph 41).

•    The accounts up to January 2001, when finally delivered in January 2002, were not just late but were in breach of the statutory regulations according to DM's own accountant (paragraph 42-43).

•    Ms Kinloch's inspections should have noted and questioned the number of crossed cheques being cashed for substantial amounts (paragraphs 31 and 46).

[78] By the time Ms Kinloch provided her report on 29 January 2002 there was an abundance of information which the plaintiff either possessed or should have possessed which should have prompted it to mount a proper investigation and make the application to the High Court which it delayed until February 2004. It should also have challenged DM directly, personally and in detail about this whole range of activities, many of which the defendant could have known nothing about. The result would most probably have been that the plaintiff would have taken over DM's accounts and the running of his practice, thereby bringing to an end the losses which the Compensation Fund eventually had to make up.

[79] It seems to me to be entirely unjust that the defendant should be liable to the plaintiff beyond 29 January 2002 at the latest. The plaintiff has submitted that it cannot be liable for contributory fault since it owed no duty to the defendant – see Edwards v Law Society of Canada [2001] 3 SCR 562 and X v Bedfordshire County Council [1995] 2 AC 633. On the issue of causation it submitted that the defendant's conduct represents "the predominant proximate cause of the loss both in fact and in law" – see paragraph 29 of its closing submission.

[80] In light of these authorities I accept the plaintiff's submission on contributory negligence. Had I not done so I would have held that from 29 January 2002 the continuing losses in respect of which this claim is brought were entirely the fault of the plaintiff. On the issue of causation however I find that from 29 January 2002 the "predominant proximate cause of the loss" was the fact that the plaintiff was continuing to allow DM to run his practice despite a major accumulation of evidence that it was not safe or proper to allow him to continue to do so. The plaintiff's submission to the contrary focuses unduly narrowly on what the plaintiff could have found out about the cashing of cheques compared to what the defendant actually knew or should have known about the cashing of cheques. If the plaintiff had also taken into account what it actually and clearly knew about other aspects of DM's practice and added that to the information which it should have had about his cashing of cheques it could not have failed to intervene.

[81] Accordingly, I find for the plaintiff and against the defendant in respect of each crossed cheque on DM's client account which the defendant cashed up to and including 29 January 2002 but not beyond that date.