Practice and Procedure


PUBLISHED February 13, 2002

Client account money held by the Law Society following an intervention was not payable to the claimant client of the solicitor as it had been obtained by fraudulent means and the beneficial interest did not pass to the claimant but was held by the Society on a resulting trust for the victims of the fraud under Sch.1, para.6(1) Solicitors'(tm) Act 1974.Appeal by the claimant ('H') from a decision that he was not entitled to payment of money held by the Law Society ('L'). L had intervened in the practice of a sole practitioner ('W') on the grounds of suspected dishonesty and L had retained money stranding to H's credit in W's client account on trust for the persons beneficially entitled to it, pursuant to Sch.1 para.6(1) Solicitors' Act 1974. The question was whether H was entitled to a payment order as the person so entitled. The money allegedly represented commission paid in connection with H's investment programmes but the judge found that it was derived from fraud, in that banking instruments for which the commission was paid were in reality worthless, of which the judge found that H was aware. However, the judge found that such fraud was not by itself enough to bar H's claim, but found in favour of L on the grounds that H never had legal title to the money as it was obtained through fraud and so it could not now be restored to him. The judge applied the rule in Re Hallett's Estate (1880) 13 Ch D 696, that subsequent drawings made by H from the client account were deemed to have first been made on his own funds before those belonging to another and so H had drawn out all of (in fact, more than) his entitlement, leaving no balance which was regarded as belonging to him. H appealed from the judge's decision on those grounds and L cross-appealed from the rejection of its case based on fraud. H argued that the beneficial interest in the money was held by W, who acted as escrow agent, on trust for H and there could be no trust in favour of any of the victims of the scheme. L accepted the principle that fraudulent transactions were voidable, not void, and that the beneficial interest in the money did not revert to the victim of fraud unless the contract were rescinded, but argued that the principle did not apply here as the "contracts" were merely a dishonest device to obtain money and were not legally recognisable as contracts. L equated the position with theft, where no beneficial interest could pass to the thief, as the whole scheme was induced by fraud and had no legal effect.HELD: (1) The transactions did not result in a transfer of the beneficial interest in the client account money, whether to the victims of the fraud or otherwise, and H's appeal failed on that ground. There was no doubt that legal (but not beneficial) title in the money had passed to W and had then become vested in L by virtue of statute following its intervention, but H had failed to establish a right to payment. (2) The "contracts" on which H's claim relied were induced by false representations to which H was a party and in seeking to invoke the equitable jurisdiction of the court in his favour H could not distance himself from the fraud and it would be unconscionable for him to be granted the equitable relief now sought by him. The court would not assist H in reaping the rewards of his fraudulent actions. The "contracts" were not dispositions to H of the beneficial interest in the money as they were unenforceable. Since the transactions failed, the money was instead held on a resulting trust for the particular victim(s) who paid it.Appeal dismissed.