Giles J. Kennedy (carrying on practice under the style of Giles J. Kennedy & Company) (applicant) v Incorporated Law Society of Ireland, Patrick Joseph Connolly and Aisling Foley (respondents).

Investigation - Books and ac- counts of solicitor's practice investigated - 50 per cent of investigation taken up with investigation into processing of fraudulent claims - Whether investigation can extend to examining fraudulent activity - Whether powers of investigation being used for an improper or irrelevant purpose - Whether duty to disclose nature of investigation to the subject of investigation - Solicitors' Accounts Regulations (No. 2) 1984, article 29.

The High Court (before Mr Justice Kearns); judgment delivered 5 October 1999.

AN investigation of the books and records of a solicitor under the Solicitors' Accounts Regulations (No. 2) 1994 should not be impugned unless it can be shown that the investigation of the books and records was merely a colourable device or cover for the pursuit of some other unauthorised or improper considerations. Given that the investigation was divided 50/50 between the books and records on the one hand and the processing of fraudulent claims on the other, the portion of the investigation which related to the books and records could not be described merely as a "colourable device". This was especially so since that portion of the investigation had uncovered irregularities which would be dealt with by the Disciplinary Tribunal of the Law Society. Further, there was no duty, in the context of an investigation into fraudulent activity, to disclose the nature of the investigation to the subject under investigation unless specifically asked. While proper disclosure had not been made, the applicant had not been prejudiced thereby.

Mr Justice Kearns so held in refusing the applicant's claim for certiorari of the decision to investigate his firm, and for damages for wrongful use of a statutory power.

James Gilhooly SC and John McCoy BL for the applicant; Kevin Feeney SC, Donal O'Donnell SC and Tom Fallon BL for the respondents.

MR JUSTICE KEARNS said that the background to the proceedings was that the first respondent had decided in 1993 to investigate the practice of the applicant, who was a solicitor. The minutes of the particular meeting of the Compensation Fund Committee which made the determination on behalf of the Law Society simply recorded a decision to "reinvestigate" the applicant's practice, which had been the subject of earlier investigations in 1983 and 1985. (The deficit uncovered by the first investigation had been resolved to the satisfaction of the first respondent, and the second investigation had discovered no substantial irregularity.)

By 1993, it was the policy of the first respondent to investigate every legal practice at least every five years. The second respondent, who was Registrar of the Law Society had given evidence that the society felt that it was "under siege", because the Compensation Fund had been reduced from £13 million to £25,000 as a result of the default or fraudulent behaviour of a number of solicitors. The society had built up its own panel of investigating accountants, and developed important co-operation with the Garda Fraud Squad and the insurance industry.

Because a defendant who pleads fraud in a personal injury case will be fixed with costs if he fails to prove it, insurance companies had been slow to plead fraud. The courts, therefore, had not discovered fraud because cases are dealt with on their pleadings. A breakthrough was made in 1991 when the High Court had dismissed a personal injury case on the basis of fraud. The evidence was that one Mr Rossi Walsh, a notorious criminal, had promoted the claim. The applicant had acted for the plaintiff, but no criticism was made of the applicant's firm in the judgment, nor was there any basis for doing so. In fact, the applicant had come off record in 1991 and 1992 in a number of cases with suspect claimants.

In 1993, the third respondent was assigned as investigating accountant under article 29 of the Solicitors Accounts Regulations (No. 2) 1994 and authorised to inspect the books of account and other documents of the applicant's firm and to report thereon to the society. None of the documentation suggested that the investigation of fraudulent claims was part of the instruction given to the third respondent. The first respondent had written to the applicant stating that she would "act as an accountant within the meaning of the . . . Regulations."

Mr Justice Kearns said that in the course of the hearing, he had made two findings of fact. The first was that the third respondent had been specifically instructed by the Law Society to look for evidence of fraudulent claims passing through the practice. The second was that this aspect of the inquiry had not been disclosed to the applicant either prior to or at the commencement of the investigation. This was consistent with the concession made by the first respondent at the outset that about 50 per cent of the investigation work undertaken by the third respondent was in respect of the books and accounts and financial records of the applicant firm, and the other 50 per cent was related to the presence or otherwise of fraudulent claims passing through the practice.

When, as the investigation progressed, the applicant wrote to the Law Society expressing alarm at the number of files being requested by the third respondent, and suggesting a "hidden agenda", the second respondent denied this. The third respondent had also denied it when asked. Mr Justice Kearns said that this sort of approach was no longer possible as section 14 of the Solicitors (Amendment) Act 1994 now required the person seeking to inspect a solicitor's documents on behalf of the Law Society to inform the solicitor of the purpose of his attendance at the solicitor's place of business.

Mr Justice Kearns said that the Solicitors Acts of 1954 and 1960 contained a number of provisions allowing the Law Society to regulate the keeping of accounts by solicitors and providing for inquiry into possible misconduct or dishonesty on the part of a solicitor. The investigation in this case was carried out under the Solicitors' Accounts Regulations, which set out the obligations of solicitors with regard to the keeping of proper books of account and proper accounting for clients' monies, and in particular article 29 thereof which provides: "In order to ascertain whether these Regulations have been complied with, the Council [of the Law Society] acting either on its own motion or on a written complaint lodged with it, may approve and appoint an accountant for such purposes as hereinafter mentioned." When the Council approves and appoints an accountant, in this case the third respondent, the solicitor under investigation is obliged to produce for inspection his books of account, bank statements or pass books, statements of account, vouchers, files and any other necessary documents and to afford to such accountant all other facilities which the accountant may consider necessary for completing the inspection.

A work programme for "reporting accountants" published in 1991 by the Institute of Chartered Accountants in Ireland set out procedures for the reporting accountant when examining the records of a solicitor's practice in order to establish compliance with the 1984 Regulations. This was not an audit exercise and virtually all of the tests required to be performed by the reporting accountant related to the financial records of the practice. Specifically, article 23 of the 1994 Regulations provides that it shall not be necessary for a solicitor to disclose a client's entire file to the reporting accountant. Mr Justice Kearns said that the evidence disclosed that a reporting accountant has no interest in the entire file, but only in the financial records contained therein. He does not in the ordinary way have any interest in the merits of claims to which the files relate.

The applicant claimed that the 1994 Regulations contained no authority for an investigation of the type which the Law Society conceded they had in mind in investigating the processing of bogus claims. It was further submitted that the Charter of the Law Society provided no authority for such an intrusive investigation: specific statutory authority would be required. Finally, the applicant had submitted that the investigation of fraudulent claims was either the dominant purpose of the investigation or, in the alternative, and irrelevant consideration prompting this investigation. The entire decision to investigate should, accordingly, be quashed, and damages awarded to the applicant for wrongful use of a statutory power.

The respondents had argued that article 29 of the 1994 Regulations provided that an investigating accountant, whose duties should be distinguished from the reporting accountant, enjoyed unfettered access to the files of a solicitor, and also obliged an investigating accountant to consider the propriety of disbursements drawn from a client account. An investigating accountant had at least the duties and obligation of an audit accountant. Audit accountants must keep considerations of fraud and error to the forefront of their minds when executing audit or investigatory work: per Lord Justice Denning in Fomanto (Sterling Area) Limited v Selsdon Fountain Pen Co Limited [1958] 1 All ER 11.

Mr Justice Kearns said that in October 1993, the third respondent had submitted an interim report to the Law Society with a request for comments. This report had identified a significant number of apparent irregularities in the books and accounts. Specifically it identified an admitted area of fraudulent activity. This concerned a legal executive, who had since left the practice, who had received bonus or commission payments for the introduction of new business. The applicant claimed to have been unaware of this activity, which had continued for three years, involved a sum of £24,000, and extended ov er some 30 files or cases.

Mr Justice Kearns said that the expert evidence from both sides had been to the effect that where an investigating accountant stumbles across fraud, his obligation was, as far as may be practicable, to get to the bottom of it. This was not spelled out in the Regulations, but arose from the general law, from the principles and guidelines by which accountants bind themselves, and, in certain circumstances, by the instructions which accountants receive from their principals. Mr Justice Kearns said that an accountant employed by the Law Society to conduct an investigation of a solicitor's practice was in a different position from an auditor reporting to a limited liability company because his instructions may often be to dig deeper and the reporting duty is to the employer.

Mr Justice Kearns said that a separate issue arose as to what was the duty of disclosure to the person the subject of an investigation where fraud was suspected. Published standards and guidelines for auditors suggested that one does not disclose such a consideration to a subject who may be suspected of involvement in the fraudulent activity, but to the next level of authority not so suspected. If the investigating accountant therefore, had the right and duty to consider and investigate fraud, the question arose as to when, if ever, he reached a line or point beyond which he could not go. Mr Justice Kearns said that it seemed to him that where an instance of fraud was uncovered in the accounts and records of a solicitor, the investigating accountant had a right and duty to explore any area of possible fraud which might be reasonably connected with the fraud found within the books, even if that connected area of fraud was not to be gleaned form the books themselves, assuming that the accountant had instructions to do so and was willing to undertake that task.

Mr Justice Kearns said that in this case, such a reasonable connection did exist, because the same area of litigation was involved, the same individual who was in receipt of fraudulent payments within the office was in charge of personal injuries litigation and the payments were specifically made to him for client referrals, which was the very subject matter of the Law Society's concern, in that they believed that a notorious criminal was at the time referring bogus personal injury claims to the applicant's office. The extended investigation was therefore a proper one within the meaning of the Regulations.

Mr Justice Kearns said that it might be suggested that the investigating accountant erred in looking files which she suspected might contain evidence of fraudulent claims before she completed her inspection of the accounts and records. However, that could not be a matter of any importance if, having found the admitted instance of fraud within the books, the third respondent would in any event have arrived at the same state of knowledge at the end of her three month investigation by extending inquiries to their next logical stage.

Mr Justice Kearns said that if he was mistaken in this view, he could not hold that the investigation of fraudulent claims was the dominant purpose of the investigation so as to invalidate the entire exercise. It was certainly an important consideration, and a relevant and proper one, because the applicant's own expert conceded that such activities could have implications for the books and records also. Where found, there may also be found irregularities in the records. Accordingly, an investigation under the regulations should not be impugned unless it can be shown that the investigation of the books and records was merely a colourable device or cover for the pursuit of some other unauthorised or improper considerations.

Mr. Justice Kearns said that he did not believe that there was any irrelevant or improper consideration at work in this case. Both sides accepted that the time and energy expended on this investigation could be divided 50/50 between the books and records on the one hand and fraudulent claims on the other. In such circumstance, the portion of the investigation relating to books and records could not be described as a "colourable device". On the contrary, that portion of the investigation was extremely wide-ranging and turned up a large number of apparent irregularities, the merits or otherwise of which remained to be dealt with by the Disciplinary Tribunal of the Law Society.

Mr Justice Kearns said that, in addition to the above, he was also making the following findings: (1) The Charter of the Law Society did not contain any provision which would authorise the particular form of investigation in this case. That power could only derive from the Regulations and the general law. (2) There was no requirement for a prima facie case before the Law Society could commence an investigation of a solicitor under the Solicitors' Accounts Regulations. It could be done routinely, and some inspections might be more extensive than others, if relevant concerns so dictate. (3) In respect of the matter of non-disclosure, the evidence did not disclose an absolute duty of disclosure to the subject matter of an investigation where fraud was suspected. However, where clarification of the full remit of the investigating accountant was sought, it then became incumbent upon the investigating authority to disclose it or at least not to deny the true remit when asked about it. Mr Justice Kearns said that such a denial did occur in this case, and this must be deprecated because it soured relations between the parties from the outset. However, Mr Justice Kearns said that he was satisfied on the evidence that by 5 July 1993, the applicant was in no doubt that the Law Society were investigating the possibility that fraudulent claims were being processed through his practice and that, as a result, his position was not prejudiced by the non-disclosure. (4) Since the investigation was authorised under the Regulations, no defence of client privilege could be raised in the case. (5) As the investigation of the applicant's practice was still at a preliminary stage, no issue could arise concerning the applicant's rights under In Re Haughey [1971] IR 217. Further, given that the respondent had a statutory right to inspect entire files, and given that none of the information sought or retrieved went outside matters contained in the files, the applicant could not invoke the rights addressed in Haughey v Moriarty (Supreme Court, 28 July 1998, unreported). Alternatively, any such considerations had been adequately addressed at a hearing in these proceedings before Mr Justice Costello in 1993. His ruling had not been appealed.

Mr Justice Kearns made other findings, including a finding that the investigating accountant was not, in her report, guilty of any behaviour which could invalidate her report on the grounds that it lacked objectivity or independence. Accordingly, the applicant's claim was dismissed.

Solicitors: Giles J. Kennedy & Company (Dublin) for the applicant; Joan O'Neill (Dublin) for the respondent.

This decision is under appeal.]