What is a trust account deficiency?

S. 259 of the Legal Profession Act 2007 ("the Act") provides that a practitioner must not cause a deficiency in any trust account or trust ledger account.

Traditionally, we have understood the term "deficiency" to mean a shortfall in trust funds.

Example 1 - a law practice held $1,000 in trust for client A but inadvertently, or intentionally, paid the sum of $2,000 from trust for client A. There is a shortfall (deficiency) of trust funds to the extent of $1,000. This is a general trust account deficiency in that the shortfall (deficiency) of $1,000 has been proportionately funded by all the remaining clients on whose behalf money was held in the trust account. The loss is borne proportionately by all of them.

Example 2 - funds were held in trust for one client and were misapplied for the benefit of another client. $20,000 was held in trust for client B and a practitioner paid the sum of $10,000 from client B's funds for the benefit of client C, without client B's authority. This is a specific trust account deficiency. The loss is borne in full by Client B.

Example 3 - funds were received for deposit to a trust bank account but were stolen by a practitioner and deposited to the practitioner's personal bank account. This is another example of a specific trust account deficiency. The loss is borne in full by the client on whose behalf the money was received.

Ss 259(3) of the Act provides that a deficiency in a trust account or trust ledger, includes the non-inclusion, or exclusion, of the whole or any part of an amount that is required to be included in the account.

A fraudulent payment of $100,000 from a trust account to a practitioner, or some other person or entity, not entitled to receive the payment, in circumstances where the payment is not recorded in the trust accounting records, is an example of such a deficiency. It is a general deficiency in that there is a general shortfall (deficiency) of $100,000 that is borne proportionately by all the clients on whose behalf money was held in the trust account at the time the payment was made.

Ss 259(3) merely gives 2 examples of deficiencies. It does not provide a definition of the term.

Trust Account Statements - are law practices issuing them?

To determine whether law practice is complying ,Trust Account Investigator to review transaction file
– if copy of trust account statement is located on file - no further action
– if no copy of trust account statement on file ask law practice if statements issued
o if no, report as breach
o if yes, sight actual copies retained by law practice

Small trust Account Balances - Procedure to be followed

Agreed procedure is as follows:
• Review the relevant transaction file to determine whether the law practice has recovered all outlays (note outlays now need to have been paid prior to reimbursement).
• If all outlays have not been recovered, prepare a bill of outlays and forward them to the client's last known address (assuming that the law practice has no knowledge that the client has changed address). I remind you that a Notice of withdrawal/request for payment (s58(3)(b) of the LPR needs to be given or sent to the client (most law practice seem to be placing this as a footer to their bills of cost).
• If all outlays have been recovered and the client's whereabouts is unknown, then a unclaimed money return needs to be prepared for the Public Trustee (see s713 of the LPA and section 12.0 of the Trust Accounting Guide).
• If additional costs have been incurred in trying to disburse these funds, I believe that the law practice is entitled to prepare a bill of costs for follow up work, stop payment of cheques, telephone calls, electoral roll searches and other searches eg Whitepapges. The bill of costs should be prepared and given to the client. If the client's whereabouts are unknown then the bill of costs should be presented to the Public Trustee as a deduction from the funds included in the unclaimed money return prepared for the Public Trustee.

Is a trust account authority required to transfer a person's trust money to another trust account?

Ss. 249(1) of the Legal Profession Act 2007 provides, inter alia:

"A law practice must -
(a) hold trust money ............................. exclusively for the person on whose behalf it is received; and
(b) disburse the trust money only under a direction given by the person.

There is no definition of "disburse" for the purposes of S. 249.

The ordinary meaning of "disburse" is "pay out; expend".

The transfer of trust money from one ADI trust account maintained by a law practice to another ADI trust account maintained by that same law practice is not a payment out of the client's trust money. The law practice continues to hold the money for the client.

Accordingly, there is no requirement for a law practice to obtain an authority, from the person on whose behalf trust money is held, in order to transfer that person's trust money to another ADI trust account maintained by the law practice.

Is a law practice partnership required to open a new trust account upon the resignation of a partner

Section 33 of the Legal Profession Regulation 2007 provides that a law practice may establish a general trust account at any time.

The term "law practice" is defined in Schedule 2 to the Legal Profession Act 2007 to mean:

1. an Australian legal practitioner who is a sole practitioner; or
2. a law firm; or
3. an incorporated legal practice; or
4. a multi-disciplinary partnership.

Except in the case of a law firm consisting of 2 partners, a law firm does not cease to be a law firm as the result of the resignation of a partner. The resignation of a partner simply changes the composition of the law firm. Similarly, the appointment of a new partner changes the composition of the law firm.

Accordingly, whilst it is open to a law firm to open a new trust account each time there is a change in the composition of the law firm, it is not a requirement of the legislation that the law firm do so unless the law firm changes from a law firm to a sole practitioner (as the result of the resignation of one or more partners).

Can MYOB or Quickbooks be used to record trust account transactions?

MYOB and Quickbooks do not satisfy the requirements of section 31 of the Legal Profession Regulation 2007 and therefore do not qualify as a computerised accounting system for the purposes of sections 29 - 32 of the regulation.

Notwithstanding that, MYOB and Quickbooks can be used to keep the trust accounting records provided that updated trust account cash books and trust ledger accounts are printed at the end of each day and retained as a record until they are replace by updated printouts.

Is it necessary to give a notice of intention to open a trust account?

No but it is required, pursuant to subsection 46(1) of the Legal Profession Regulation, that written notice be given to the Queensland Law Society of the opening of a trust bank account, within 15 days of the opening of the account.

Further information in relation to the opening of a trust bank account is available at http://www.qls.com.au/content/lwp/wcm/resources/file/ebacfe05c5a68e7/Opening%20a%20Trust%20Account.pdf

What is the difference between controlled money and investment money?

Essentially, the only difference is how the money is dealt with in the trust accounting records.

Both controlled money and investment money are trust money that is invested on behalf of the client so that the client receives the interest earned on the money. Money held in a general trust does not earn interest for the benefit of the client. Interest on this money is paid to the Department of Justice & Attorney General's Legal Practitioners Interest on Trust Accounts Fund ("LPITAF").

If a client provides trust money to a law practice and instructs the law practice to invest the money so that the client receives the interest on the money, the law practice can either:

1. issue a trust account receipt, deposit the money to a general trust account, withdraw the money from the general trust account and deposit the money to an investment account opened in the name of the law practice as trustee for the client - the invested money will be accounted for in the Investment Register and must be returned to the general trust account before the money is distributed to the client or as the client directs; or
2. issue a controlled money receipt, open a controlled money bank account in the name of the law practice as trustee for the client and deposit the money to that controlled bank account - the controlled money will be accounted for in the Controlled Money Register and can be distributed to the client, or as the client directs, from the controlled money account.
   

Calculation of Prescribed Account deposit when there is an existing deposit?

If a law practice has an existing deposit with the prescribed account, it is unlikely that the amount deposited in the previous calendar year would have been the same throughout the entire year.

If we assume that the law practice increased the amount deposited to the prescribed account on 16 January in the previous calendar year, the law practice will need to proceed in the following manner to determine the lowest combined balance held in that year:-

1. determine the lowest approved ADI statement balance during the period from 1 January to 15 January and add the amount of the prescribed account deposit during that period to determine the lowest combined balance held on any day during that period from 1 January to 15 January;
2. determine the lowest approved ADI statement balance during the period from 16 January to 31 December and add the amount of the prescribed account deposit during that period to determine the lowest combined balance during the period from 16 January to 31 December; and
3. calculate two-thirds of the lower of the two figures determined in 1. and 2. above to calculate the required deposit amount.

An example of how to calculate the required deposit amount when there have been a number of changes in the amount deposited to the Prescribed Account during the previous calendar year can be seen at:

http://www.qls.com.au/content/lwp/wcm/connect/QLS/For+the+Profession/Trust+Accounting/Trust+Accounting+FAQs#faq19

External Examiner - reporting obligation if money disbursed by Electronic Funds Transfer (EFT)

A law practice can only disburse trust money by EFT if it has been approved to do so by the Queensland Law Society (QLS).

The Law Practice Statutory Declaration & Trust Money Statement (QLS Form 4 (LPR)) is to be completed by law practices and provided to external examiners prior to the commencement of the final examination. QLS Form 4 (LPR) requires a law practice to state whether funds were disbursed by EFT and whether the law practice has complied with the QLS' EFT Guidelines.

If trust funds were disbursed by EFT and the law practice did not have approval from QLS to do so, or did not comply with the QLS' EFT Guidelines, or stated in QLS Form 4 (LPR) that it had not disbursed trust funds by EFT, the External Examiner is required to report this at Item 2 of the External Examiner's Report (QLS Form 5 (LPR)).

It is suggested that the External Examiner should sight the letter of approval from QLS and the QLS' EFT Guidelines.

Where is there a definition of ADI

Schedule 2 of the Legal Profession Act 2007 (LPA) defines ADI to mean an authorised deposit-taking institution within the meaning of the Banking Act 1959 (Cwlth)

Section 237 of the LPA definies “approved ADI” to be an ADI approved by the Queensland Law Society (QLS) under section 280 of the LPA. A list of approved ADI's can be found on the QLS website at www.qls.com.au.

Does a new law practice get an exemption from making a deposit to the Prescribed Account until it has practised for at least 12 months?

No. All law practices that held trust money during the previous calendar year are required to make a deposit to the Prescribed Account unless exempted pursuant to section 70(5) of the Legal Profession Regulation 2007(LPR).

Section 70(5) of the LPR allows an exemption if the amount of trust money held on any day in the previous calendar year, after money was deposited to the trust account, was less than $3,000.

The required initial deposit to the Prescribed Account is two-thirds of the lowest approved ADI statement balance in the previous calendar year .

What is a law practice required to do to be entitled to withdraw trust money for legal costs?

A law practice may withdraw trust money for legal costs pursuant to one of the 2 procedures set out in subsections 58(3) and 58(4) of Legal Profession Regulation 2007 (LPR).

Subsection 58(3) only applies if a law practice has a costs agreement that authorises the withdrawal, OR the law practice has received instructions that authorise the withdrawal, OR the law practice is owed the money by the person by way of reimbursement of money already paid on behalf of the person.

In any of these 3 situations, a law practice may withdraw trust money for legal costs if the law practice, before withdrawing trust money, sends to the person whose money is to be withdrawn, a request for payment (section 58(3)(b)(i) of the LPR) referring to the proposed withdrawal, OR a written notice of withdrawal (section 58(3)(b)(ii) of the LPR).

Subsection 58(4) provides that a law practice may withdraw trust money for legal costs if a bill has been given to the person whose money is to be withdrawn and the person has not objected, within 7 days after being given the bill, to the withdrawal of the money.

Is it possible to obtain an exemption from making a deposit to the Prescribed Account?

Law practices are exempt, pursuant to s70(5) of the Legal Profession Regulation 2007 (LPR) from making a deposit to the prescribed account if the lowest amount of trust money held in the previous calendar year was less than $3,000.00.

For this purpose, the amount of trust money held on any day is the cumulative balance of the approved ADI general trust accounts kept by the law practice and the amount deposited to the Prescribed Account.

Withdrawing trust money for legal costs — before effecting the withdrawal a Request for payment/Notice of withdrawal must be given/sent to the person

A law practice must provided to the person (the entitled beneficiary, the client) a written request for payment or a notice of withdrawal.
The Regulation requires a law practice to give or send the Request/Notice to the person.
The Society's interpretation of s58(3)(b) Legal Profession Regulation 2007 is that the Request/Notice is provided in the normal course, eg. Hand delivered to client, posted to the client and is beyond the recall of the law practice. It should be noted that s58(3)(b) only applies when a law practice is withdrawing funds:
1. in accordance with a costs agrreements;
2. in accordance with instructions received by the law practice that authorise the withdrawal (eg. Trust account authority); and
3. that is owed to the law practice by way of reimbursement of money alreadt paid by the law practice on behalf of the person.

Disputed moneys - Is there a similar provision to section 12(4) of the Trust Accounts Act 1973 in the Legal Profession Act 2007?

There is no similar provision in the Legal Profession Act 2007 (LPA). Pursuant to section 249 of the LPA, a law practice must disburse trust money pursuant to a direction given by the person on whose behalf the trust money is held.

If there is a dispute as to the ownership of funds held in a trust account:

1. If it is believed that one of the parties is entitled to the money, a letter should be sent to the other party advising that it is proposed to pay the money to the party believed to be entitled to the money, upon the expiry of a stipulated period (say - 1 month) and the other party should make an application to the Court if the other party wishes to prevent you from doing that.
2. If there is doubt as to who is entitled to the money, both parties should be advised that the money will be retained in the trust account until both parties give consistent instructions (in writing) as to how the money is to be disbursed, or an Order is made by the Court how the money is to be disbursed.
3. If there is no agreement (in writing) or a Court Order directing how the money is to be disbursed, and as at 1 April the money has been held in trust for more than 2 years, the law practice is required to lodge a return with the Public Trustee seeking a direction to pay the money to the Public Trustee pursuant to s713(2) of the LPA.In these circumstances, it is suggested that the law practice advise both parties that the law practice has requested the Public Trustee to take the money .

Is a client agreement needed if professional fees are likely to exceed $750 plus gst as was the requirement under the Queensland Law Society Act 1952?

No, the position is rather different under the Legal Profession Act 2007 (LPA). There is no requirement to enter into a client agreement.

There is a disclosure requirement under sections 308 and 309 of the LPA if the professional fees are likely to exceed $1,500.00. Prior to 18 July 2008, the disclosure requirements had to be met if the professional fees were likely to exceed $750.00.

Subsection 311(2) of the LPA provides that if disclosure was not made because it was expected that professional fees would not exceed $1,500.00, there is an obligation to satisfy the disclosure requirements when the law practice considers that the professional fees are likely to exceed $1,500.00.

Do I need the Society's permission to open a new Law Practice Trust Account?

No, you are required pursuant to section 46 of the Legal Profession Regulation 2007 (LPR) to notify the Society within 14 days that you have opened a new trust bank account. The notification should include the name of the ADI, Branch, account number and account name of the new trust account.

All new trust bank accounts opened after 1 July 2007 (pursuant to subsection s33(2) of the LPR must:

1. be kept with an approved ADI;
2. be kept within this jurisdiction (Queensland);
3. include within the name of the account the name of the law practice or business name under which the law practice engages in legal practice;
4. include within the name the expression “law practice trust account” or “law practice trust a/c”.
   

An ADI is defined in the Dictionary in Schedule 2 of the Legal Profession Act 2007 (LPA) as an authorised deposit-taking institution within the meaning of the Banking Act 1959(Cwlth).

Section 237 of the LPA definies “approved ADI” to be an ADI approved by the Queensland Law Society (QLS) under section 280 of the LPA.

A list of Approved ADIs can be accessed on the Queensland Law Society website on the trust account page.

Who can be authorised to withdraw money from a trust account ?

Subsection 37(3) of the Legal Profession Regulation 2007 (LPR) prescribes who is able to withdraw money from a trust account by signing a trust account cheque.

Subsection 38(2) of the LPR prescribes who is able to withdraw money from a trust account by authorising an electronic funds transfer (EFT).

The provisions of both subsections are the same. They provide that money can be withdrawn from a trust account by:

1. An authorised principal of the law practice, solely.
2. An authorised (by the law practice) Australian legal practitioner who holds an Unrestricted Practising Certificate, solely, if an authorised principal of the law practice is not available.
3. An authorised (by the law practice) Australian legal practitioner associate (employed solicitor of the practice), irrespective of whether the employed solicitor holds an Unrestricted Practising Certificate, solely, if an authorised principal of the law practice is not available.
4. Any two (2) or more authorised associates (including non-solicitors), jointly, if an authorised principal of the law practice is not available.

Am I still required to issue general account receipts in respect to funds received to my general account?

Prior to 1 July 2007, law practices were required, pursuant to Rule 91 of the Legal Profession (Solicitor) Rule 2006, to issue general account receipts . The Legal Profession (Solicitor) Rule 2006 was repealed on 30 June 2007 and there is no equivalent requirement in the Legal Profession (Solicitors) Rule, which commenced on 1 July 2007.

Whilst there is no longer a legislative requirement to issue general account receipts for money received by law practices that is deposited to a law practice general or business account, it is good accounting practice to issue general account receipts and it is strongly suggested that law practices do so.

Do I need to maintain a register of receipt forms?

The Legal Profession Regulation 2007 (LPR) does not require a law practice to maintain a register of trust account receipt forms.

It is recommended, however, that a register of receipt forms be kept to record the serial numbers of all trust account receipt forms supplied to the law practice by the law practice's printer and issued to office staff for normal daily requirements.

Trust account receipt forms not issued to office staff should be kept in a secure location.

A sample register of receipt forms can be accessed from:

http://www.qls.com.au/content/lwp/wcm/connect/QLS/For+the+Profession/Trust+Accounting/Trust+Accounting+FAQs#faq8

Is money received for disbursements incurred but not yet paid trust money?

Trust money is defined in section 237 of the Legal Profession Act 2007 (LPA) as money entrusted to a law practice in the course of or in connection with the provision of legal services by the practice and includes money received on account of legal costs.

Money received for disbursements incurred but not yet paid is received on account of legal costs and is therefore trust money.

Who is "the Chief Executive" referred to in the Legal Profession Act 2007 and Legal Profession Regulation 2007?

The Chief Executive of the Department of Justice and Attorney-General.

Are external examiners required to hold professional indemnity insurance?

There is no requirement in the Legal Profession Act 2007 (LPA) or Legal Profession Regulation 2007 (LPR) for external examiners to hold professional indemnity insurance but most persons entitled to be appointed as an external examiner will be required as registered auditors under the Corporations Act, or as members of a professional association, to hold professional indemnity insurance.

An external examiner must be a registered auditor under the Corporations Act, or a member of CPA, or ICAA, or NIA entitled to practise as a public accountant, or a person approved by the Chief Executive to perform the duties of an external examiner.

What is the "relevant account" in s58(6) of Legal Profession Regulation 2007?

Subsection 58(3)(iii) of the Legal Profession Regulation (LPR) provides:

"The law practice may withdraw the trust money -
(a) if
(i) ......
(ii) .....
(iii) the money is owed to the practice by way of reimbursement of money already paid by the practice on behalf of the person; and"

Subsection 58(6) of the LPR provides:

"For subsection (3)(a)(iii), money is taken to have been paid by the law practice on behalf of the person when the relevant account of the practice has been debited."

It has been suggested that the relevant account is the client's debtors ledger account. If this is the case a law practice could reimburse itself for a disbursement before the disbursement is paid from the law practice's general or office bank account.

It is the view of the Queensland Law Society that the "relevant account" is the law practice's general or office bank account, meaning that the disbursement must have been paid from the general or office bank account before the law practice can withdraw money from the trust account to reimburse the law practice for the disbursement.

Do law practices have to apply to QLS for authorisation of trust account cheque signatories?

No.

Law practices now only need to notify the Society within 14 days the names of the people the law practice has authorised to withdraw money from the law practice's general trust accounts and controlled money accounts.

Law practice associates who are not legal practitioners can only be authorised to withdraw money jointly with another person.

Do trust account cheques still have to be pre-printed to pay to order?

Pursuant to section 37(2)(a) of the Legal Profession Regulation 2007 (LPR) a trust account cheque form must be made payable to or to the order of a stated person or persons and not to bearer or cash.

Therefore law practices should ensure that their trust account cheque forms are pre-printed with a direction to pay to order (of a stated person).

Pursuant to subsection 37(2)(b) of the LPR, trust account cheques are also required to be pre-printed with a crossing "not negotiable".