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Law Society v Naomi Southall (2001)

Summary

There was no evidence from which the judge could have properly concluded that the Law Society had a real prospect of succeeding on its claim under s.423 Insolvency Act 1986 to set aside transfers of chattels made by a deceased solicitor.

Facts

Defendant's ('D') appeal from that part of the order of Hart J dismissing her application for summary judgment on that part of the Law Society's claim based on s.423 Insolvency Act 1986 to set aside transfers made by D's late husband ('S'). S was a successful businessman and sole equity partner in his firm of solicitors ('the firm'). In 1960 he purchased a property ('the Hall') in the name of D. From 1960 onwards until his death in January 2000 he purchased a large number of pieces of furniture and other chattels ('the chattels') at auction that he had delivered to the Hall. The evidence was that in all cases it was S's intention that D should be the owner of the chattels. S also spent large sums of money in carrying out improvements to the Hall and its facilities. In 1996 the Law Society began to investigate the firm for alleged breaches of the Solicitors Accounts Rules 1991. One of the principal allegations against S was that he had used client account monies to fund a species of banking business for property development companies. S, in an affidavit of 1996, stated that he had obtained an overdraft facility from his bank that he used to provide working capital for his firm and to lend to property companies to finance projects. On 11 July 1997 the Office for the Supervision of Solicitors charged S with making two transfers in 1996 from client to office account in breach of the Solicitors' Accounts Rules 1991. There was no suggestion of dishonesty and the clients concerned were long-standing clients of the firm who had been told that the monies had been placed in a secured office account. On 27 February 1998 the Solicitors' Disciplinary Tribunal accepted that no loss had been incurred by the clients and took into account that in fact they had benefited financially but because S had breached the rules he was reprimanded. In April 1999, further breaches were reported and the Law Society intervened in the practice under Part II Sch.1 Solicitors Act 1974. The costs incurred by that intervention were recoverable from S's estate as a debt. The Law Society advised the executors of S's will that those costs amounted to #283,000 and invited their proposals for settlement, drawing attention to the recently advertised sale of the principal contents of the Hall. D's solicitors responded that they understood that the executors did not intend to apply for a grant as the assets of the estate were at best minimal, and that the Hall had been purchased in D's name and the contents belonged to her. On 23 March 2000 the Law Society wrote a letter before action to D's solicitors stating that it intended to commence proceedings against her under s.423 of the 1986 Act in respect of some or all of the chattels, and invited their proposals for settlement. None was received and on 19 May 2000 the Law Society commenced proceedings against D, claiming a declaration that the chattels had not been validly transferred to D and, alternatively, an order that such transfers be set aside under s.423. On appeal D contended that the judge: (i) was wrong in refusing to strike out the s.423 claim as it was not possible on the evidence to say that the Law Society had any real prospect of showing that S's purpose of the gift of the contents of the Hall was to remove assets beyond the reach of creditors; and (ii) had made an unreasoned and unjustified logical leap in holding that, because various memoranda gave rise to a possible inference that S's principal concern had been to protect assets from possible creditors, there was no reason to suppose that that was not his purpose at the time of each gift. D contended that there was no evidence to support that inference. The Law Society submitted that unless the judge had made an error of principle the appellate court could not interfere even if it might have reached a different conclusion.

Held

(1) If an appellate court was of the view that the judge was plainly wrong and that inferences were not supported by the evidence before the judge then the appellate court could and was bound to interfere. (2) The Law Society's evidence consisted of three witnesses, none of whom were able to give direct evidence concerning any of the disputed gifts. The evidence was characterised by its generality. The judge had dismissed clear evidence from those who knew S well that he was not a man who took risks. There was no reason to believe from any of the evidence that at any material time S was in financial difficulty or was conducting a risky business. The Law Society's evidence, when set against the evidence in support of S's case, was singularly unimpressive. (3) It appeared that the judge based his conclusion on the memoranda. When considering the purpose of those documents the court had to have regard to the clear evidence directed to this point that was placed before the judge. That included evidence that S had been advised to give D the chattels and leave records that he had made such gifts so that upon his death there would be no estate duty or inheritance tax payable on the gifted assets. On the evidence, that was precisely what occurred and it was pure speculation that S was attempting to defeat creditors. (4) The correct question for the judge to answer was whether it could be said that on the evidence the Law Society had a real prospect of showing with regard to each gift to D that S knew he was conducting a risky business so that it might be inferred that the purpose of each gift was to put assets beyond the reach of creditors. There was no evidence of a single example of S's knowledge that he was indulging in risky business. (5) It was quite wrong to allow a case to go ahead on the basis that the issues went to the credit of one of the witnesses. (6) If one looked objectively at the facts and the evidence, it was clear that S was following the advice of his accountant to put his assets into D's name, the sole purpose of which was fiscal. In light of all the evidence, the judge was plainly wrong to reach the conclusion that there was a real prospect of the Law Society's claim succeeding. This was an inherently improbable and difficult case and the court was surprised that the Law Society should think it right to bring speculative litigation against an elderly lady in light of the evidence.

Appeal allowed. Section 423 claim dismissed.

Court of Appeal
Peter Gibson LJ, Mantell LJ, Wall J
Judgment date
14 December 2001
References

LTL 14/12/2001 : [2002] BPIR 336 : [2002] WTLR 1151 : Times, January 7, 2002 : [2001] EWCA Civ 2001