That's axiomatic

English firm Axiom Ince was closed down last year by the Solicitors Regulation Authority, after an investigation revealed that £64 million was missing from the firm’s client account. Could a similar situation arise here? David Mulvihill and Rory O’Neill balance the books

Axiom Ince was created through the acquisition of Ince & Co (a maritime and shipping practice) and Plexus Law (a defendant-centric insurance firm) in April 2023 and July 2023 respectively. Ince & Co was purchased for £2.2m; Plexus Law was purchased for £1.1m. 

The firm grew from 200 employees to more than 1,500 in the space of two months. The firm appeared to be operating effectively until August 2023, when managing partner Pragnesh Modhwadia and two other senior solicitors were suspended by the Solicitors Regulation Authority (SRA) for suspected dishonesty. 

Shortly afterwards, the Metropolitan Police launched an investigation after a tip-off that the managing partner misappropriated client money. Consequently, Axiom Ince emailed clients to inform them that the firm was intending to cease practising in the near future. 

Modhwadia allegedly transferred approximately £57 million of client monies to high-yielding interest accounts at the State Bank of India – or at least, that is what he told his fellow equity partners. 

He produced a letter for his partners confirming the monies were with the bank. It appears as if this letter from the bank was forged, but it is not known whether it was forged by Modhwadia or some employee of the bank who was known to him. 

As a result of this, the matter is currently being investigated by the Serious Fraud Office, and seven arrests were made last November in connection with the collapse of the firm. Modhwadia confirmed in an affidavit that approximately £64m was taken from client accounts to buy the above practices, purchase six properties, and fund construction for another seven properties. 

Mr Modhwadia and his family are affiliated with the companies involved with the purchase/ construction of the properties, which were held by a company called Axiom DWFM Properties Limited. 

Axiom Ince filed a notice of intention to appoint administrators on 2 October 2023; this offers protection from other action by creditors – normally when attempts are made to secure a rescue deal. 

A freezing order was imposed by the High Court to the amount of £64m against Modhwadia. An injunction has also been put in place to prevent the sale of the properties purchased with client funds.

The SRA intervened and closed the practice with immediate effect as of 3 October 2023 – 14 offices in total were closed, and documentation was released to other solicitor firms to deal with matters. 

Clients had the option of following former Axiom Ince solicitors to their new firms or to have their documentation furnished elsewhere. Active matters were prioritised on a basis of urgency, such as if a file was an ongoing litigation issue. 

These events gave rise to questions about consumer protection and the role of the Compensation Fund:

• Is it possible to compensate current claims while continuing to ensure the Compensation Fund remains financially viable?
• How much can be recovered by Axiom Ince’s insurance? 

Major short-term problem 

It is unlikely that the Compensation Fund will have to reimburse the full amount, as Axiom Ince’s insurance will likely be able to cover some of the losses. However, a major short-term cashflow problem exists, as it will likely take years to recoup money. 

The Compensation Fund has £18m available to distribute. The administration costs of the Axiom Ince intervention alone are expected to be between £10m and £15m. It is expected that there will be more than 1,000 claims, and it is estimated that the total number of claims received by the fund will be in or around the £33 million mark. 

The usual approach by the Compensation Fund in this case is to deal with urgent claims first, and then deal with the remaining claims in order they are received. This approach is not viable considering the volume of possible applications to the fund and the losses on Axiom Ince. 

A prioritisation process has been applied to all the applications received – that is, where the impact of the loss is suffered is more immediate, and the person who applies will face significant hardship. 

The priority order is as follows: 

1) Emergency applications – risk of homelessness; client under contractual obligation to complete on private domestic residence; imminent insolvency; no alternative sources of finance or recourse available; social/economic disadvantage,

2) Individuals purchasing property to live in – residential conveyancing where the purchaser will live in the property,

3) Individuals who have paid for legal services that have not been completed, such as divorce proceedings, immigration, litigation, etc,

4) Individuals selling properties and individuals buying investment properties,

5) Trusts and probate matters,

6) Commercial transactions – large companies and corporate entities will not be eligible to apply to the fund.

Inevitably, there is going to be a massive shortfall in the Compensation Fund following Axiom Ince’s collapse, which has left the SRA with numerous questions as to how to bridge the gap:

• Solicitors may be required to make a once-off payment in order to salvage what will be left of the Compensation Fund (this measure was recently discounted by the SRA),
• The SRA has proposed increasing next year’s individual contribution from £30 to £90 and the firm contribution from £660 to £2,220 (these increases are proposed in order to avoid the imposition of a one-off levy),
• A possible overall cap on claims filed against the Compensation Fund – fund rules allows the SRA to impose a cap of £5 million, depending on the circumstances of the case. The SRA has said it will not impose an overall cap. 

The law societies of Birmingham, Bristol, Leeds, Liverpool, and Manchester have written to the oversight regulator, the Legal Services Board, asking for a re-examination of the SRA’s decision not to impose an overall cap. 

A full review of the SRA’s intervention was conducted by Carson McDowell Solicitors in Northern Ireland, which is not regulated by the SRA. The scope of the review included looking at management oversight and supervision, the quality of decision-making, and whether the SRA acted in a reasonable timeframe. 

At the time of writing, the Legal Services Board is in possession of the independent report from Carson McDowell, along with its findings and recommendations. The report has not been published. No explanation has been provided as to why it has not been published, and no date has been given for its publication. 

Irish eyes 

The Compensation Fund in Ireland works along similar lines to that in England and Wales, in that it is designed to compensate clients who have suffered a financial loss as a result of their solicitor dishonestly misappropriating client monies arising from that solicitor’s practice as a solicitor. 

It is also funded via annual contributions from members of the profession, which is determined by the Law Society’s Regulation of Practice Committee after giving consideration to the prevailing conditions and with the assistance of external professional advice. 

The fund currently has assets of approximately €27 million. In addition, insurance is held to provide cover in circumstances where there are large claims in any one year.

Could an ‘Axiom Ince’ happen in Ireland? We need only cast our minds back 17 years, to the closure of the practices of Thomas Byrne and Michael Lynn. The economic recession at the time saw the value of the Law Society’s Compensation Fund fall by over 50%. 

In addition, the dishonesty of these practitioners resulted in massive claims against the fund and, indeed, as the fund depleted, the Law Society eventually had to call on its insurers to cover the remaining losses. The result was a significant increase in the annual contribution.

Since then, the Compensation Fund has been put on a stable footing, with investments held in a relatively low-risk portfolio. Each year, the committee, in setting the contribution amount, is cognisant of the need to maintain the viability of the fund to ensure that it provides a reliable protection for consumers of legal services and upholds the reputation of the profession.

Unfortunately, anything is possible, and the collapse of a firm in the Republic of Ireland with extensive losses can never be ruled out. It is therefore imperative that the Compensation Fund is maintained at an appropriate level to protect against such a collapse. After all, the integrity of the profession is not something that can be quantified in monetary terms. 

David Mulvihill is the Law Society’s practice closures manager; Rory O’Neill is financial controller of the Compensation Fund. Special thanks to Kathleen Mooney.