Statutory obligations of legal practitioners in respect of trust money

July 1st, 2022

The topic of the obligations of legal practitioners relating to the handling of trust money is one that has been covered before by the office of the Legal Practitioners’ Fidelity Fund (LPFF), but the peremptory nature of these sections stand to be repeated in order for legal practitioners to beware of both the obligations placed on them by the Legal Practice Act 28 of 2014 (LPA) and the consequences of not adhering strictly to these obligations.

In terms of ss 84 and 85 of the LPA, a legal practitioner operating a trust account practice is obliged to apply for and be in possession of a Fidelity Fund Certificate (FFC). In terms of s 84(2), no legal practitioner ‘may receive or hold funds or property belonging to any person unless the legal practitioner concerned is in possession of a Fidelity Fund Certificate’. This equally applies to persons employed or supervised by such a legal practitioner, as well as to deposits taken on account of fees or disbursements in respect of legal services to be rendered. An FFC is valid until 31 December of the year in respect of which it was issued. Legal practitioners who are beginning a practice for their own account must, within the period and after payment of the fee determined by the Legal Practice Council (LPC), complete a legal practice management course, which is approved by the LPC (see Rampela Mokoena ‘Handling of trust money – dealing with the obligations of a trust account legal practitioner’ 2019 (May) DR 6).

It must be noted that, in terms of s 84(6), the LPC ‘may withdraw a Fidelity Fund Certificate and, where necessary, obtain an interdict against the legal practitioner concerned if he or she fails to comply with the provisions of [the LPA] or in any way acts unlawfully or unethically’.

In terms of ss 86(1) and (2), every legal practitioner that practices for their own account (either alone or in a partnership), or as a director of a practice which is a juristic entity must operate a trust account, which must be kept at a bank with which the LPFF has made an arrangement, in terms of statutory provisions. Legal practitioners have an obligation in terms of s 86(2) to deposit, ‘as soon as possible after receipt thereof, money held by such practice on behalf of any person’. Additionally, in terms of s 86(3) a trust account practice may invest, in a separate trust savings account or other interest-bearing account, money which is not immediately required for any particular purpose in terms of any instruction. It is important to note that interest accrued in terms of the accounts listed above (ss 86(2) and 86(3)) must be paid over to the LPFF and vests in the LPFF (see Mokoena (op cit)).

Additionally, and in terms of s 86(4) of the LPA, a legal practitioner operating a trust account practice may, on the specific instruction of a client, open a separate investment account for the purposes of investing money received in the trust account, on behalf of such client over which the trust account practice exercises exclusive control as a trustee, agent, or stakeholder or in any other fiduciary capacity. Legal practitioners must take note that interest accrued on money deposited in terms of s 86(4) of the LPA accrues to the person on behalf of which such money has been invested, provided that 5% of the interest accrued must be paid over to the LPFF and vests in the LPFF.

The LPA under s 87 states legal practitioners operating a trust account practice have a duty and obligation to keep proper accounting records detailing things such as –

‘(a) money received and paid on its own account;

(b) any money received, held or paid on account of any other person;

(c) money invested in a trust account or other interest-bearing account referred to in section 86; and

(d) any interest on money so invested which is paid over or credited to [the legal practice]’.

These accounting records may be the subject of an inspection conducted by the LPC or the LPFF, with a view to these organisations satisfying themselves that the provisions of the LPA are being complied with. In the event that non-compliance is identified, the LPC or the LPFF may write up the accounting records and recover both the costs of the inspection and the writing up of the accounting records from the identified trust account practice.

Trust account practitioners occasionally face a situation of unidentified trust money. Section 87(4)(a) of the LPA provides that where the identity of the owner of trust money is unknown or trust money, which is unclaimed after one year, must, after the second annual closing of the accounting records following the date of the deposit, be paid over to the LPFF by the trust account practice. If at any stage the owner of the money is identified, they are not precluded from the right to claim from the LPFF any portion they may be able to prove entitlement to.

Trust account practitioners are advised that any amounts standing to the credit of any trust account does not form part of the assets of the trust account practice or the practitioner and may not be attached by any creditor to the trust account practice. This is subject to the provision of s 88(1)(b) of the LPA, which provides that any excess remaining after all trust creditors have been accounted to, and ‘all claims in respect of interest on money invested, are deemed to form part of the assets of the trust account practice concerned’.

The most severe consequence for trust account legal practitioners is contained in s 89 of the LPA, which provides for the LPC or the LPFF, through application to the High Court, to prohibit any trust account legal practitioner from operating in any way on their trust account, and to appoint a curator bonis to control and administer that trust account.

Legal practitioners operating trust account practices must follow the peremptory provisions in the LPA relating to the way trust money must be handled in order to remain compliant, and to avoid severe risks and consequences. Legal practitioners should employ relevant risk mitigation tools to ensure continued compliance with these obligations, bearing in mind that the obligation to remain compliant vests with the legal practitioner.

Arniv Badal LLB (UKZN) is a Practitioner Support Supervisor in the Risk Management Department at the Legal Practitioners’ Fidelity Fund in Centurion.

This article was first published in De Rebus in 2022 (July) DR 11.