Industry cop in the dock

Feathers fly as regulator is accused of getting itself into a mess over interventions


Nobody loves a regulator. They are either too hard or too soft, too hands on or too arm’s length. If the SRA had not already learnt this lesson the row swirling around Midlands high street practice Challinors must have brought it home with a bang.

The watchdog – which enjoyed something of an extended honeymoon with the profession following its launch five and a half years ago – is having to duck brickbats over its approach to the firm’s appointment of administrators a fortnight ago.

First, SRA officials maintained there was no need for it to intervene because Challinors was unlikely actually to be going into administration. It claimed clients were not at risk and the best course was to allow the firm to carry on unhindered, meaning the partners could concentrate on finding a potential buyer.

Nonetheless, a groundswell of comment grew, suggesting the SRA was being too laissez-faire, especially when it emerged that the 13-partner firm was nursing a debt mountain of more than £11m – and what’s more, over the past few years had borrowed a total of some £650,000 from two clients.

Both those clients are now twitchy about the prospect of never seeing their capital again. One has launched a court action, while the other says he has filed a complaint with the SRA and is calling for it to get off the fence, intervene in the firm and close it down.

But the profession’s policeman remains adamant that it is playing with a straight bat. A spokesman told The Lawyer that the SRA “would not discuss whether or not we are considering decisions to close a firm. Also, we don’t normally confirm or deny if we have received a complaint about a firm, it’s only if disciplinary action becomes necessary that it becomes a matter of public record.”

The spokesman then laid out the SRA’s policy towards firms that appear headed for the rocks: “Intervening into a firm because of financial instability is something we do only when all other options have been exhausted. It is without question in the clients’ best interests if, through constructive engagement, we can either help the firm wind down in an orderly manner or provide assistance that keeps the firm solvent and trading while it explores other options.”

But some partnership specialist solicitors are sceptical.

“I can’t work out how the SRA can be so confident there’s no risk to clients in this case,” comments Ronnie Fox, the London-based doyen of the partnership brigade. “The risk is not just in relation to money in the client account, it’s also in relation to the completion of jobs. If a lawyer is halfway through a job and the firm goes into administration, how do you know the solicitor dealing with the file will be there on Monday morning?”

His comments fall against a backdrop of speculation that the real reason the SRA is so reluctant to send in its boys with blue lights flashing is internal concern over its budget. By the authority’s own reckoning, it has already considerably exceeded this year’s expenditure pot for interventions.

The SRA’s role in the saga has ignited fiery debate on The Lawyer website, with one commentator saying the regulator “has got itself into a mess on this”. The comment went on to compare the authority’s approach in March when it intervened without notice in Blakemores. In that case, maintains the commentator, the SRA put the brakes on “a wind-down strategy that appeared to be working, for no good reason”.

“Let’s ask the SRA a few questions,” posited the commentator. “Why haven’t you followed your own precedent that you set at Blakemores – or do you now acknowledge you made the wrong decision there? You have been monitoring the situation at Challinors during the period of these client loans, so why did you allow them to go ahead?”

Indeed, arrangements around the loans look problematic for Challinors. Specifically difficult are two tranches of £200,000 each that Solihull businessman Dharmendar Khag claims to have loaned the partnership in the past two years. Despite code of practice rules to the contrary, Challinors failed to advise Khag that he should seek independent legal advice before cutting the deal.

“If a law firm is doing a commercial deal with a client,” says Fox, “ethical principles stipulate you have to tell the client to take separate legal advice. On first principles, whenever a lawyer does any sort of transaction with a client other than supplying legal services he ought to tell the client to be separately advised.”

Challinors may have a strong defence to suggestions that it breached the code of conduct in relation to the loans, but so far it has refused persistent requests for comment.