The Solicitors Regulation Authority has refused to comment on whether it knew about a client account shortage at crisis-hit firm Axiom Ince before rubber-stamping a major acquisition.
The High Court heard yesterday that there was a shortage of at least £57m in the client account on 30 June after the money was removed by former managing partner Pragnesh Modhwadia. His lawyers, responding to a freezing order application, said the money had been used to fund law firm acquisitions and the purchase and/or renovation of 13 properties.
Axiom Ince announced on 7 July that it had acquired Leeds-headquartered Plexus Legal LLP, safeguarding 540 jobs without the need for redundancies. On 14 August the SRA intervened to suspend Modhwadia and two other directors from practice.
The SRA is not specifically required to approve an acquisition but must be notified about a firm closing. According to its own guidance, the regulator should ask for details of each of the authorised bodies taking over a practice and a manager who can be contacted. The regulator will also need to know details of residual balances and outstanding undertakings, as well as the date the firm or authorised body will stop holding or receiving client money.
This timeline would suggest that the client account shortage existed at least a week before the Plexus deal was confirmed and the SRA notified. Yet more than a month passed after this notification before the regulator took any action to restrict practising rights.
The Gazette yesterday asked the SRA what checks were made on Modhwadia or Axiom Ince when they took ownership of the Plexus business and were given access to the firm’s client account. The regulator was further asked when its investigation into Modhwadia began.
The SRA responded today to say that it could not comment on these issues because this remains a live investigation. Clarifying the strict rules about the use of client money, it said solicitors or approved managers can withdraw client money from a client account only for the purpose for which it is being held, following receipt of instructions from the client, or with the SRA’s written authorisation.
At the time of his intervention, the SRA said it had reason to suspect dishonesty on the part of Modhwadia in connection with his practice as a solicitor. This is unproven and no formal allegations have been brought.
In theory, if any client money has been lost due to a solicitor’s dishonesty then those clients could seek to recover that money through the SRA’s compensation fund. To put the potential size of this case into context, the compensation fund paid out a total of £27m to clients in 2021 and held reserves of £50m - less than the value of the money missing from the client account.
Axiom Ince continues to be allowed to trade (and is not related to any other firm with Axiom in its name). Modhwadia’s lawyers yesterday said he intended to defend a claim for breach of duty and is cooperating with Axiom Ince. They also believe there are sufficient assets in the business to protect client money. The particulars of claims are expected to be filed in the coming weeks.