I. INTRODUCTION

4.1 In this and the next chapter we consider aspects of the law and practice relating to the handling of trust moneys by solicitors. We do so under the following headings:

• Paying Money into Trust Accounts (chapter 4, section II)
• Withdrawing Money from Trust Accounts (chapter 4, section III)
• Issues Relating to Professional Costs and Disbursements (chapter 5)

In relation to each issue considered, we describe the present position in New South Wales, discuss whether or not there is a need for reform, and make specific recommendations.

4.2 Existing legislation in New South Wales about solicitors’ trust accounts¹ is less extensive and specific in relation to the handling of trust moneys than the corresponding legislation in many other jurisdictions (notably Queensland,² England,³ Ontario,⁴ New Zealand,⁵ and, to a lesser extent, Tasmania).⁶ We have pointed out in chapter 2 that trust account mishandling appears to be markedly more prevalent in New South Wales than in these other jurisdictions. This comparison reinforces our view that there is much to be gained from a close analysis of the rules in these other jurisdictions, and we make frequent reference to them in this chapter. When we make general comparisons with “ other Jurisdictions we are referring to the Australian jurisdictions other than New South Wales, and to England, Ontario and New Zealand.

II. PAYING MONEY INTO TRUST ACCOUNTS

A. Introduction

4.3 Clear distinctions are made in some trust account legislation, notably in Ontario,⁷ between moneys which, respectively, must, need not and must not, be paid into a solicitors trust account. We regard these distinctions as helpful, both in discussion and in legislation, and we adopt them in this chapter.

B. Money which Must be Paid into a Trust Account

4.4 In this section we look at the following issues:

• the capacity in which money is received;
• the receipt of money outside New South Wales; and
• the time within which money must be paid into a trust account.

The Capacity in which Money is Received

4.5 The Present Position: The money which is required by law to be paid into a solicitors’ trust account is money which is received “for or on behalf of any person by any solicitor”.⁸ By contrast, the Solicitors’ Fidelity Fund’s responsibility to repay losses caused by solicitors’ dishonest failure to account, applies to any money entrusted to a solicitor” in the course of his practice as a solicitor (including any money ... entrusted to him as a solicitor-trustee).⁹ The compulsory professional indemnity insurance scheme covers solicitors’ liability for losses caused by them other than through dishonesty, provided that the losses arose from “the business of practising as a solicitor’ which is defined in the Master Policy as” including the acceptance of obligations as Trustee, Executor, Attorney-under-Power, Tax Agent or Company Director provided that “any fees or income...there from ... inure to the benefit of the solicitor”.¹⁰ There is some case law about the meaning of such phrases as “in the course of practice as a solicitor”, but considerable uncertainty and ambiguity remains.¹¹

4.6 Discussion: There can be little doubt that solicitors should not be required to pay into their trust accounts money which they receive in a capacity, such as treasurer of a musical society, that is entirely separate from their practice as a solicitor. The present law in this State would probably be interpreted to that effect but it is not entirely clear since it merely refers to money received by “any solicitor” for or on behalf of “any person” (rather than, for example, any client’). Problems of a more serious nature can arise, however, because there are many capacities in which solicitors may receive money for or on behalf of people, and it is often difficult to determine whether the money was received in the capacity of solicitor or in the capacity of, say, trustee, agent, stakeholder, bailee, company director or mortgage broker or in the capacity of solicitor and also one or more of these other capacities. Accordingly, there may be doubt about whether the money must, indeed even must, be paid into the solicitors’ trust account.

4.7 People entrusting money to solicitors are commonly aware in a general sense of the professional qualifications which solicitors must acquire, and of the system of regulations to which solicitors are subject both generally and specifically in relation to the handling of money. Indeed, the Law Society of New South Wales gives prominence to these matters in promotional and educational material published on behalf of its members. It seems reasonable to conclude that in many cases this awareness plays a significant part in decisions to entrust money to solicitors. Yet such decisions are commonly, and understandably, made without considering whether the particular transaction is within an area of work to which the special regimes of qualifications and regulation apply. Even if consideration is given to this question there may be great difficulty under the present law in determining the answer.

4.8 We have mentioned above the differing terminology used to define the ambit of protection provided by the trust account regime, the Fidelity Fund and the compulsory professional indemnity insurance scheme. Anomalies and injustices may arise from such differences. For example, it may be considered anomalous that certain moneys do not have to be paid into a solicitor s trust account yet are protected by the Fidelity Fund scheme, or vice versa.

4.9 Several possible alternatives to the current wording of the trust account provisions in this State can be drawn from equivalent provisions in other jurisdictions. The possibilities include expressions such as

• in the course of practice as a solicitor”;¹²
• in connection with, practice as a solicitor”;¹³ or
• in the course of acting as a solicitor, or of acting, in connection with practice as a solicitor, as a trustee, agent, ballee, stakeholder or in any other capacity.”¹⁴

In our Discussion Paper we suggested wording somewhat akin to the third of these options.¹⁵ The Law Society subsequently indicated that it had “no objection in principle” to this suggestion.¹⁶

4.10 Recommendation: In our view, the circumstances in which money received by a solicitor is subject to the special regime of solicitors’ trust account regulations should be defined as clearly as possible. Some degree of vagueness may be unavoidable, but at the least the definition should deal specifically with some of the common circumstances about which uncertainty might otherwise arise. It is important, also, that the definition, and thus the protection afforded to the public, should be generously drawn. It should, we believe, cover those circumstances in which some people entrusting money to a solicitor are likely to have been motivated to a significant extent by the fact that the person is a solicitor. We foreshadow in this context a later recommendation¹⁷ that, generally speaking, people should be entitled, by written directions, to instruct a solicitor that their money is to be dealt with in some way other than payment into the solicitor’s trust account. This avoids what might otherwise be a disadvantage of a broad definition of the circumstances in which solicitors must pay money into their trust accounts.

4.11 Accordingly, we recommend that solicitors should be required to pay into their trust accounts any money entrusted to them “in the course of acting as a solicitor or of acting, in connection with their practice as a solicitor, in the capacity of trustee, agent, bailee, stakeholder, mortgage broker, company director or any other capacity”. This would require an amendment to section 41(1) of the Legal Practitioners Act, 1898. It would also be desirable for the Law Society to develop guidelines for the interpretation of this provision in particular contexts. We are inclined to the view that the respective ambits of the Fidelity Fund scheme¹⁸ and the compulsory professional indemnity insurance scheme¹⁹ should be similar to those of the trust accounts regime, but it is beyond the scope of this Report to make firm recommendations about those areas. The question of money received not by a solicitor as such but by a company which he or she controls is considered in a later chapter dealing with a range of issues about such companies.²⁰

Money Received outside New South Wales

4.12 The Present Position: The requirement that New South Wales solicitors must pay money into a trust account applies only to money received by them “in New South Wales”.²¹ If they receive money in another State or Territory in the course of practising as a solicitor of that jurisdiction, they are subject to the trust account legislation of that jurisdiction But it is neither uncommon nor necessarily illegal for New South Wales solicitors to receive money in a jurisdiction in which they are not admitted to practice, or to receive it in a jurisdiction where they are admitted and have a practice but the particular money in question is received in the course of practising as a New South Wales solicitor. It seems that in each of these situations the receipt and handling of the money is not governed by any existing legislation, whether of New South Wales or the other State or Territory dealing with solicitors trust accounts.

4.13 Discussion: There seems little doubt that if a solicitor is entrusted with money in the course of, or in connection with, practice as such, the manner in which he or she handles the money should be governed by solicitors’ trust account legislation. But should it be governed by legislation of the Jurisdiction in which it is received or of the jurisdiction of which the recipient is practising as a solicitor when he or she receives the money? The former alternative raises considerable legal and practical difficulties. For example, the legislation in the place of receipt may be confined to solicitors practising in that jurisdiction (or at least to those who are admitted there). Also, it may be unreasonable and unfair to expect solicitors to open trust accounts in another jurisdiction and comply with complex trust account rules if, for example, they do not practise in the jurisdiction rarely receive money in it and, when they do receive money there, usually transfer it without substantial delay to their “home” jurisdiction. Moreover, solicitors are less likely to be fully cognisant of the trust account rules in the place of receipt than those in the Jurisdiction in which they are practising.

4.14 In our Discussion Paper we suggested, in effect, that New South Wales trust account legislation should apply to any money entrusted to a solicitor in the course of practising as a New South Wales solicitor, whether or not the money was received inside New South Wales.²² We added that if the money was received outside New South Wales and never brought into this State, the New South Wales legislation should apply, save for the current requirement that the money be paid into a bank in New South Wales. The Law Society of New South Wales responded that it had no objection in principle to these suggestions provided that” there is no conflict with the law of the place of receipt.”²³ Under existing trust accounts legislation in the various Australian jurisdictions, it seems that no such conflict would arise from adoption of our suggestions. By contrast, some conflicts would arise if, for example, New South Wales sought to apply its legislation to all money received by solicitors in New South Wales, regardless of whether the money was received in the course of practising as a New South Wales solicitor.

4.15 Recommendations: We recommend that the requirement for solicitors to pay money into a trust account in a bank should apply to any money received by a solicitor in the course of practising as a New South Wales solicitor, regardless of whether the money was received in New South Wales or elsewhere. Where the money is received outside New South Wales and never brought into this State, the requirement that the money be paid into a bank in New South Wales should not apply, but in all other respects the trust account requirements of this State should apply.

4.16 We recognise that where a solicitor is entitled to practice in New South Wales and one or more other Jurisdictions, it may sometimes be difficult to determine whether particular money was received by him or her in the course of practising as a solicitor of this State or some other jurisdiction. This applies especially to solicitors having offices near the border between two States or who are members of one of the increasing number of firms which have off ices in more than one State.

4.17 In the absence of a national system of regulation of the legal profession, which we do not necessarily favour, we can see no comprehensive and convenient solution to these difficulties. We recommend, however, that the Law Society of New South Wales should seek the co-operation of other law societies in developing specific guidelines for the handling of trust moneys received by solicitors who practise in more than one State and in making agreements as to which jurisdiction’s rules are to be applied to a particular firm or a particular transaction. In order to give effect to such guidelines and agreements, the Law Society should be given power to direct that certain money which falls within the ambit of New South Wales trust account legislation should be dealt with in accordance with the legislation of another State.

Prompt Deposit

4.18 Present Position: Although solicitors in New South Wales are obliged to pay certain types of money into a trust account, there is no explicit time limit within which the payment must be made. However, a “Guide to Solicitors’ Trust Accounts”, produced by representatives of the Law Society and the two principal associations of accountants in New South Wales²⁴ states that

“ordinary financial prudence indicates that trust moneys should be banked as soon as possible after they are received. This means, in practice, either on the day that they are received or the first banking day after receipt.”²⁵

4.19 Discussion: The system for regulating solicitors handling of trust money is weakened substantially if solicitors fall to pay the money promptly into a trust account. The risk of mishandling increases, and the likelihood of such mishandling being detected decreases. If prompt payment is to be expressly required by statute there are two possible approaches which could be adopted. One is to use a general expression requiring, for example, that payments must be made “forthwith” (as in Victoria),²⁶ “without delay” (as in England),²⁷ or “ daily save where it is not reasonably practicable so to do” (as in Queensland).²⁸ The other is to fix a specific time limit such as “twenty four hours” excluding holidays (as in Tasmania)²⁹ or the end of the next banking day.”³⁰ Specificity is obviously desirable in such an important requirement,³¹ provided that the time limit is long enough to be reasonable and practicable but short enough to achieve its purpose. In our view, “the end of the next banking day” best meet these criteria.

4.20 Recommendation: We recommend that where money is required to be deposited in a solicitors’ trust account it should have to be deposited without delay and in any event not later than the end of the next banking day after the day on which it is received by the solicitor.

C. Money which May, but Need Not, be Paid into a Trust Account

The Present Position

4.21 There is considerable uncertainty in New South Wales about the circumstances, if any, in which solicitors need not pay trust money into a trust account. The relevant statutory provision merely states that such money

“shall be held by [the solicitor] exclusively for [the person for or on whose behalf it is received], to be paid to such person or to be disbursed as he directs, and until so paid or disbursed the moneys shall be paid into a bank in New South Wales to a trust account, whether general or separate.”³²

4.22 In practice, it is common for solicitors not to pay trust money into a trust account if, at or before the time of receipt, they are expressly or impliedly instructed by their client to do something else with it forthwith. For example, the client may direct that the money be paid to a designated person or that it be paid into a bank account in the client s name. However, if execution of the clients instructions is unlikely to occur within a day or so after receipt, the usual practice amongst solicitors is to pay the money into their trust account in the interim, unless the client expressly directs to the contrary. Indeed, failure to do so almost certainly would constitute a breach of the statutory requirement quoted in the previous paragraph.³³

4.23 Before discussing the specific circumstances, if any, in which solicitors should be permitted not to pay trust money into a trust account, we refer to two general considerations. First, money which passes through a solicitors trust account attracts the Financial Institutions Duty on banking transactions which was introduced by the New South Wales Government in 1982.³⁴ This duty, which is currently at the rate of 3 cents per $100 (up to a maximum duty of $300), is payable on all deposits and withdrawals into a bank account, such as a solicitors trust account, but does not apply where money is paid without passing through such an account. There seems little doubt that the advent of this duty has increased the incidence of payments being made by methods other than through a solicitor s trust account.³⁵ These methods include payment directly between parties and payment via a solicitor but in such a form (for example, cash or an endorsed cheque) that it does not go through a trust account.

4.24 Secondly, an increased incidence of trust money passing through solicitors’ hands but not through their trust accounts may have substantial implications for the Solicitors’ Fidelity Fund and other beneficiaries of the interest earned on solicitors’ trust accounts. in particular, although the Fidelity Fund bears potential liability for loss of such money through dishonesty on the part of the solicitor,³⁶ the money does not earn any interest which is available for allocation to the Fund.³⁷ In most cases, of course, the money is not in solicitors’ hands for very long, but nevertheless the total interest “lost” by the Fund on all such transactions involving solicitors may be quite substantial.

Discussion

4.25 Introduction: The principal purpose of requiring trust money to be paid into a trust account before being disbursed is to ensure a degree of formality in the manner in which the money is handled and recorded. This formality increases the likelihood that the money will be handled properly and that the manner in which it is handled can be ascertained by others such as the client, another person in the practice, an outside accountant or auditor, or a Law Society inspector. On the other hand, there are circumstances in which the passing of money through a trust account can seem to both solicitor and client to be a cause of unnecessary delay, inconvenience and expense. It may be argued that in these circumstances solicitors should not be under an obligation to pay the money into their trust account, provided perhaps that they maintain adequate records of the manner in which they do handle the money.

4.26 In several other jurisdictions, the circumstances in which solicitors need not pay trust money into a trust account are expressly defined. For example, in England it is not necessary for a solicitor to pay into a trust account money

“(a) which is received by him in the form of cash and is without delay paid in cash in the ordinary course of business to the client or on his behalf to a third party; or

(b) which is received by him in the form of a cheque or draft which is endorsed over in the ordinary course of business to the client or on his behalf to a third party and is not passed by the solicitor through a bank account; or

(c) which he pays into a separate bank account opened or to be opened in the name of the client or of some person designated by the client in writing or acknowledged by the solicitor to the client in writing.”³⁸

In addition, a solicitor must not pay into a trust account money

“which the client for his own convenience requests the solicitor to withhold from such account, such request being either in writing from the client or acknowledged by the solicitor to the client in writing.”³⁹

4.27 These and other provisions⁴⁰ raise three broad categories for consideration as exemptions from the general requirement to pay trust money into a trust account. They relate to

• payment elsewhere in accordance with written instructions;
• payment elsewhere in the form in which the money is received (such as cask or an endorsed cheque); and
• payment to a bank account designated by the client.

We look at each of these categories in turn.

4.28 Written Instructions: As a general principle, clients’ instructions about the way in which their trust money is to be handled should be paramount. On the other hand, those instructions may be expressed ambiguously, may be the subject of subsequent dispute, or may have been given without an adequate appreciation of their consequences. It is presumably for these reasons that, in South Australia, for example, the only exemption from the requirement to pay trust money into a trust account is where the client gives instructions in writing to handle the money in some other way.⁴¹ Moreover, in some jurisdictions solicitors are specifically required to record details of their handling of trust money which is received by them but does not pass through their trust accounts. In South Australia, for example, prescribed details must be entered in a Direct Payments Register which is subject to independent scrutiny as part of the solicitor s trust account records.⁴²

4.29 If payment in accordance with a clients instructions is to constitute an exemption from the requirement to pay trust money into a trust account, the question arises whether the money must not, or merely need not, be paid into the account. It seems that the answer should depend on the nature of the instructions. They may state clearly that the money must not be paid into the account or must be dealt with in some way which clearly precludes such payment. On the other hand, the instructions may direct that the money is to be handled in a certain manner, but may not preclude it being paid into the trust account pending execution of these instructions. In the latter situation there seems to be no good reason for prohibiting the solicitor from paying the money temporarily into the trust account if he or she so wishes. Indeed, consistently with views we have expressed earlier in this chapter there is good reason to require the solicitor to do so if the money remains in his or her hands beyond the next banking day after receipt.

4.30 The difference between the two types of instructions described in the previous paragraph may explain why in England the relevant legislation specifies that solicitors “shall”⁴³ not pay into a [trust] account” money which the client” requests [them] to withhold from such account”,⁴⁴ but in South Australia it is “lawful”⁴⁵ for solicitors to “dispose of [trust moneys] in a manner specified” in a “written direction by the person entitled to them”.⁴⁶ The English provision arguably applies only to the first of the two types of instruction which we have identified, where as the South Australian provision may have been drawn with the second type principally in mind.

4.31 Payment in the Same Form: In some Jurisdictions, Such as South Australia, the only exemption from the requirement to pay trust money into the trust account is where the client gives written instructions for the money to be handled in some other way.⁴⁷ In others, such as Victoria,⁴⁸ England⁴⁹ and Ontario,⁵⁰ an exemption applies where the money is passed on in the form in which it is received (that is, where cash is passed on as cash, or cheques or drafts are passed on by endorsement). This exemption may be restricted (as in England) to situations where the money is passed on “without delay [and] in the ordinary course of business,”⁵¹ and in some Jurisdictions (such as Victoria⁵² and Ontario⁵³) the solicitor must record details of the transaction.

4.32 The case for an exemption of this kind rests principally on the alleged simplicity of the transactions in question the consequently low risk of mishandling or confusion, and the disproportionate degree of delay, expense and inconvenience which might arise from requiring passage through a trust account. On the other hand, there is considerable scope for mishandling or confusion in these transactions, at least if there is no specific limit on the time within which the money must be passed on or no adequate requirement that details of the transaction must be recorded and subjected to independent scrutiny in the same manner as trust account records. Moreover, as the Law Society of New South Wales has stated, expressions such as “without delay” or “in the ordinary course of business” may be insufficiently precise to prevent abuse.⁵⁴

4.33 Payment to Other Accounts: We have referred earlier to the English exemption concerning payment to a bank account in the clients name or in the name of some other person designated by the client in writing.⁵⁵ Somewhat similar exemptions apply in Victoria⁵⁶ and Ontario,⁵⁷ subject to requirements concerning the recording of such transactions. It is difficult to identify any compelling reason for such an exemption. It lacks distinctive characteristics analogous to those which may be regarded as Justifying the two types of exemption discussed earlier. The Law Society of New South Wales⁵⁸ takes the view, in effect, that direct payment to another account should be permissible only if the client so instructs in writing and the instructions are accompanied by a prescribed form of acknowledgment by the client that he or she understands that the money otherwise would have had to be paid into the solicitors trust account. It may be doubted, however, whether requiring this form of acknowledgment would have significant utility.

Recommendations

4.34 In our view, the general requirement to pay trust money into a trust account is of great importance in reducing the risks of mishandling and disputation. Exemptions from that requirement should be limited to situations in which those risks are especially low and the inconvenience occasioned by the requirement may be substantial. Moreover, where an exemption applies, the manner in which the money is handled should have to be recorded, and be subject to independent scrutiny.

4.35 Accordingly, we recommend that solicitors should not be required to pay trust money into a trust account provided that, not later than the end of the next banking day after its receipt, the money is disposed of by the solicitor

• in accordance with written instructions by the person for or on whose behalf it was received; or
• in the same form in which it was received and in accordance with instructions, whether written or oral, by the person for or on whose behalf it was received.

Where there are express written instructions that the money is not to be paid into a trust account, the solicitor should not be permitted to pay it into such an account.

4.36 We also recommend that where trust money is not paid into a trust account, details of the manner in which it has been dealt with should have to be recorded by the solicitor in a prescribed form of Direct Payments Register. The Register should constitute part of the solicitor’s trust account records and be subject to independent scrutiny in the same manner as those records. Appropriate details should also be recorded in the trust receipt book and ledger.⁵⁹

4.37 Several aspects of these recommendations call for elaboration. First, in our view “trust money” includes cheques which clients make payable to a third party and then give to a solicitor for transmission to that party.⁶⁰ Our recommendations mean that such cheques would have to be recorded in the Direct Payments Register and, unless passed on as directed before the end of the next banking day, would have to be paid into the trust account if capable of being so paid.

4.38 Secondly, by “payment in the form in which it was received” we mean that

• in the case of payment in cash, the amount of cash paid must be the same as the amount of cash received; and
• in the case of payment by cheque or draft, payment must be effected by endorsement of the cheque or draft received.

4.39 Thirdly, we suggest that the Direct Payments Register should be required to indicate

• the amount of money received;
• when the money was received;
• the name and address of the person for or on whose behalf the money was received;
• whether the money was in cash, cheque or other form;
• where the money was in cheque form the cheque number and the bank on which the cheque was drawn;
• the name of the person from whom the money was received;
• the manner in which it was received (for example, in person or by post);
• the nature, and date of receipt, of any direction for payment made by the person for or on whose behalf the money was received;
• the amount of money which was paid;
• the name and address of the person to whom the money was paid;
• the date on which the payment was made;
• the form in which it was made (for example, cash, endorsed cheque, cheque): and
• the manner in which the payment was delivered (for example, in person or by post).

These details are broadly similar to those which the Law Society of South Australia considers practitioners should include in Direct Payments Registers in that State.⁶¹

D. Money which Must Not be Paid into a Trust Account

The Present Position

4.40 There is no statutory provision in New South Wales which explicitly specifies types of money which must not be paid into a solicitors trust account. However, it is a widely held view that both at common law and by inference from a number of legislative provisions relating to solicitors trust accounts, solicitors must not pay into their trust accounts any money to which they are solely and absolutely entitled.⁶² This does not preclude the common practice whereby a solicitor who receives a cheque which is partly his or her own money and partly money received on trust for others may pay the cheque into a trust account and then withdraw the amount to which he or she is personally entitled.

4.41 There has been considerable debate amongst lawyers in recent years about a related question, namely the propriety of retaining in a trust account money which was trust money when paid into that account but subsequently becomes the solicitor’s own money. This arises especially where the money becomes due to the solicitor for professional costs or disbursements, and we consider it in the next chapter when considering the general topic of costs and disbursements. In the present section we are concerned primarily with payment into trust accounts rather than retention in or withdrawal from, such accounts.

Discussion

4.42 There is a general principle of law that trustees must not mix their own money with money which they hold on trust.⁶³ The primary reason for this rule is to reduce the risk of deliberate or careless mishandling of the trust money occurring, and of any such mishandling as does occur going undetected or being exceedingly difficult to unravel.⁶⁴ The principal argument on the other hand, for allowing trustees to pay some of their own money into a trust account relates to the situation where a trustee receives a cheque which is partly his or her own money and partly trust money. In this situation it is convenient, and provides greater protection for the trust money, if the cheque is paid into the trust account and the trustee’s own money is then withdrawn.

4.43 In several jurisdictions, there are explicit legislative provisions to the effect that, subject to specified exceptions, no money other than trust money may be paid into a solicitor’s trust account. In England, for example, the exceptions permit payment into the trust account of

• money which is partly trust money and partly the solicitors own money;
• money which was incorrectly withdrawn from the trust account; and
• money necessary to open or maintain the account.⁶⁵

The first and second of these exceptions apply also in Ontario, although the first of them is restricted to situations where “it is not practicable to split the payment” and is conditional on the solicitors’ money then being withdrawn from the trust account “without delay”.⁶⁶ In Queensland, the only exception relates to money which consists partly of professional costs or disbursements “already incurred or disbursed”.⁶⁷ In South Australia, the general prohibition on payment of a solicitors money into his or her trust account is subject to the proviso “unless the Supreme Court otherwise approves.”⁶⁸

4.44 In our Discussion Paper we suggested adoption of provisions similar to those in Ontario, but we added, in effect, that the exception relating to payments comprising a mixture of trust money and the solicitor s own money should state that the latter money must then be withdrawn “within a prescribed time, say within the first three working days of the month following the receipt of the money.”⁶⁹ The Law Society responded that solicitors should be entitled to pay their own money into a trust account. It said that, if properly kept, the trust account records will clearly indicate “the respective entitlements of I the solicitor and of each trust creditor.⁷⁰ This view was expressed before the basic principle that trust money should not be mixed with other money was given fresh emphasis by the court of Appeal in New South Wales in 1982.⁷¹ The Law Society appears now to have accepted that solicitors Must Comply with that principle.⁷²

4.45 In its response to our Discussion Paper, the Law Society also said that if solicitors were to be required to transfer their own money out of their trust account, the time limit for doing so should “be no more strict than that the transfer be made without unreasonable delay”.⁷³ They opposed a fixed time limit, “particularly in cases of sole practitioners and small practices, as pressing day-to-day demands of clients’ urgent business or the practitioner being on vacation or away at seminars or in court, may well have to take priority over a solicitor attending to seeing himself paid.⁷⁴ This objection seems to relate principally to transfers concerning professional costs and disbursements.

Recommendation

4.46 In our view, the general principle that trust money should not be mixed with other money is sound and is of great importance in the context of solicitors’ trust accounts. That rule, and any permissible exceptions to it, should be clearly stated in legislative form. One substantial exception which we regard as Justifiable relates to money which is partly trust money and partly other money. As we have mentioned,⁷⁵ a similar view has been taken in several Jurisdictions where specific legislative provisions on this topic have been made.

4.47 Where the solicitor s own money is paid into a trust account pursuant to the exception mentioned in the previous paragraph it should not be allowed to remain there for a lengthy period. A requirement to withdraw it “without delay” is, in our view, too vague to be useful. On the other hand, any fixed time limit should not be so short as to place unreasonable burdens on solicitors, and must take into account the time needed to ascertain precisely how much of the money belongs to the solicitor. Special difficulties may arise in relation to ascertainment of costs and disbursements, but these could be dealt with by a special rule and are considered in the next chapter.

4.48 Another Justifiable exception arises from the uncertainty which may arise in some circumstances about whether particular money constitutes trust money within the meaning of the legislation. This may occur, for example, where the money is received in another Jurisdiction,⁷⁶ or in a capacity other than that of a solicitor.⁷⁷ Solicitors ought not to be deterred, let alone prohibited, from paying into their trust account money which they believe, on reasonable grounds, may constitute trust money.

4.49 Accordingly, we recommend specific legislation to the effect that money must not be paid into a solicitor’s trust account unless it is

• trust money;
• money which is partly trust money and partly the solicitor’s own money, provided that the latter is then withdrawn from the trust account within one month;
• money which the solicitor considers on reasonable grounds is, or may be, trust money;
• money incorrectly withdrawn from the account; or
• money necessary to open or maintain the account.

4.50 Where a solicitor receives money in relation to professional costs or disbursements, difficulties may arise in determining when the money becomes the solicitors own money in the sense referred to above. This issue is discussed in the next chapter.

III. WITHDRAWING MONEY FROM TRUST ACCOUNTS

A. Introduction

4.5 1 In this section we consider three issues concerning withdrawals from trust accounts. They are:

• should solicitors be required to obtain written instructions before withdrawing a client’s money from their trust account?
• should there be restrictions on the forms in which payments from trust accounts may be made?
• what should be the effect on a solicitor s trust account of a garnishee order against the solicitor?

A number of other issues concerning withdrawals from trust accounts arise in the context of costs and disbursements and are discussed in chapter 5.

B. Written Instructions

The Present Position

4.52 We have discussed the question of instructions concerning trust money which has not yet been paid into a trust account.⁷⁸ We are concerned here with withdrawal of money after it has been paid into the account. In New South Wales, such withdrawals can be made for only two purposes, namely to pay the person for or on whose behalf the solicitor received the money or to make such other payment “as [that person] directs”.⁷⁹ There is no requirement that such direction be in writing, nor that it be express rather than implied.

Discussion

4.53 It is by no means uncommon for disputes to arise about whether a particular withdrawal was made in accordance with the relevant client’s instructions. The dispute may be whether any relevant instructions were given or about the precise terms of the instructions. The latter type of dispute has arisen on many occasions in recent years over the nature of investments made by solicitors on their clients’ behalf For example, clients have asserted that they instructed that the investment be secured in a certain way, or be made at not less than a specified rate of interest.⁸⁰

4.54 Disputes of the kind to which we have referred can cause considerable harm to both solicitors and clients. Moreover, uncertainty about the terms of clients’ instructions in substantially increase the difficulty, time and expense involved in inspecting or auditing solicitors’ trust accounts. Where a defalcation occurs, the Management Committee of the Solicitors’ Fidelity Fund may find it exceedingly difficult if not impossible, to ascertain whether the solicitor acted dishonestly (in which case the Fund may be liable) and how much pecuniary loss has been incurred.⁸¹ For example, the amount of loss incurred through an unauthorised investment may depend on whether the client is telling the truth in claiming that the solicitor was instructed not to invest without a certain amount of security or at an interest rate below a certain percentage. The Management Committee has had to grapple with many issues of this kind in recent years, often involving large sums of money.⁸²

4.55 These considerations suggest that it might be desirable to require that no withdrawals be made from a trust account save in accordance with written instructions by the person for or on whose behalf the money was received. On the other hand, a general requirement of this kind could cause considerable inconvenience in many instances. One of the most common reasons for putting money in a solicitor s trust account is to facilitate simple and speedy payments by the solicitor as and when they become appropriate.

4.56 Moreover, if written instructions were required in all instances, many solicitors might obtain general instructions from their clients giving “blanket” authorisation for payments of such kind, and at such time, as the solicitor considers appropriate. Indeed, general instructions of this kind would be almost essential in many instances. For example, if a client pursuing litigation provides a sum of money in advance to meet the various disbursements which will be made by his or her solicitor in the course of the case, it would be extremely burdensome if separate written instructions had to be given for each disbursement Yet a requirement that all withdrawals must be authorised in writing would provide little protection for clients if solicitors responded by obtaining blanket written authorisations as a matter of course.

4.57 We know of no jurisdiction in which all withdrawals Must be in accordance with a written instruction. Some, however, require written instructions for certain types of withdrawals. In Queensland, for example, all withdrawals “for the purpose of the investment howsoever of the money withdrawn must be authorised in writing in advance, save where the withdrawals “for the purposes of paying for any land, chattels or livestock for the purchase in the name of the client of which the moneys in question were paid into the trust account.”⁸³ In some jurisdictions, written Instructions must be obtained in certain circumstances where the withdrawal is to pay the solicitor’s costs and disbursements, this particular issue is considered in the next chapter.

4.58 In our Discussion Paper we suggested that there should not be a general requirement that withdrawals be made only in accordance with written instructions.⁸⁴ One of us, however, suggested that withdrawals for the purposes of investment should have to be authorised ill writing in advance.⁸⁵ The Law Society of New South Wales responded by agreeing that there should be no general requirement, but proposed that written instructions should be required for a wide range of withdrawals for the purposes of investment,⁸⁶ and for payments into a trust account other than at a bank. The Society agreed with our suggestion that a general requirement would “interfere seriously with the ordinary business of solicitors”.⁸⁷ The Society said, however, that its “policy is to encourage solicitors to consider in every case whether it is desirable for any reason to seek written instructions, or alternatively to confirm oral instructions, for disposition of trust money.”⁸⁸

4.59 Other responses to our Discussion Paper agreed that there should be no general requirement but some, including the New South Wales Auditor-General,⁸⁹ agreed with the Suggestion by one of us that written directions should be required ill relation to investments.

Recommendation

4.60 We believe that a general requirement for written directions would be unduly onerous for solicitors and clients in many circumstances. However, we consider that there should be such a requirement, in relation to withdrawals for the purposes of investment. We make a recommendation to that effect in chapter 11, which is concerned with the general topic of investment of client’s money.⁹⁰

4.61 Accordingly, we recommend that, generally speaking, solicitors should not be required to obtain written authorisation in advance before withdrawing money from trust accounts.

C. Forms of Payment

The Present Position

4.62 There is no restriction on the form in which money may be withdrawn from a solicitors trust account Thus, for example, withdrawals can be made by cheque payable to the bearer.

Discussion

4.63 The Commonwealth Bills of Exchange Act 1909 provides that if a cheque is unendorsed and payable to order, there is a rebuttable presumption that the money was received by the payee.⁹¹ If the cheque is in some other form, however, there is no such presumption and the drawer has the burden of proving receipt by the payee, if any, named on the cheque. This distinction, for which there are obvious justifications, presumably reflects a belief that cheques made payable to a particular person are substantially more likely to transfer money to that person if they are payable to order. it may be argued, however, that many solicitors and clients would be inconvenienced on occasion by a requirement that withdrawals from trust accounts must be made only by cheques payable to order.

4.64 In some jurisdictions there is no restriction on the form in which money may be withdrawn from trust accounts. In Queensland, however, withdrawals must be made by the solicitor s cheque, or a bank cheque, which is “crossed and marked on its face ‘not negotiable’ and payable to order.”⁹² In South Australia, they must be made by cheques which are “crossed either generally or specially and marked ‘not negotiable”’, or are “endorsed by the recipient before being handed to him by the practitioner.”⁹³ In Ontario, cheques drawn on a trust account must not be “made payable either to cash or to bearer.”⁹⁴

4.65 In our Discussion Paper, we said that we were not presently inclined to suggest any change to the position in New South Wales in this respect.⁹⁵ The Law Society made no response to this view, but it may be reasonable to assume that it agreed with it.

Recommendation

4.66 We have referred earlier in this Report to the extremely high level of trust account defalcations in New South Wales both in absolute terms and by comparison with other jurisdictions.⁹⁶ Despite the Law Society’s predictions to the contrary, the position has not improved in recent years. We, now consider that the forms in which payment may be made from trust accounts ought to be restricted in such a way as to reduce the possibility of payments being made improperly or in a form which is not readily traceable. We note that substantial restrictions of this kind have been adopted in several Jurisdictions which in many respects are comparable to New South Wales except that their levels of defalcation are not as serious as in this State. Accordingly we recommend that all payments from trust accounts should have to be made by crossed cheques which are marked “not negotiable” and payable to order.

D. Garnishee Orders against Solicitors

The Present Position

4.67 Trust moneys received by solicitors are, by virtue of the Legal Practitioners Act, 1898,

“not available for the payment of the debts of the solicitor to any other creditor of the solicitor, [nor] liable to be attached or taken in execution under the order or process of any Court at the instance of any such creditor.”⁹⁷

However, as this Commission pointed out in a Report in 1966,⁹⁸ if a garnishee order is issued by a creditor attaching the moneys of a solicitor held to the credit of his or her account with a bank, the bank is required, under existing legislation to freeze all accounts of the solicitor, including any account which may be a trust account. This is because it remains for the court to determine whether or not all moneys in the account are, in fact, trust moneys.

4.68 People who have money in the trust account of a solicitor maybe prejudiced if money in that account becomes the subject of garnishee proceedings out of a judgement debt of the solicitor. They can be denied access to their money pending the determination of its ownership by a Court. However, officers of the Supreme Court and the District Court have informed us that this problem seldom occurs in practice and that, where it does occur, the solicitor’s affairs are usually in such a sorry condition that the problem can be resolved quickly by the appointment of a receiver of the solicitor s property.⁹⁹ The receiver is entitled by statute to withdraw money from the solicitor’s trust account, pay it into an account in his or her own name, and operate on that account.¹⁰⁰ Of course, there may be circumstances in which this course of action is inappropriate where, for example, there is genuine doubt about whether all of the money in the account is trust money rather than the solicitor s own money.

Discussion

4.69 There are obviously strong arguments against depriving a judgement creditor of access to any of the solicitor’s own money which may be in the trust account. However, in assessing the practical significance of this issue it must be borne in mind that, as mentioned earlier, the Court of Appeal in New South Wales recently re-affirmed the basic principle that solicitors should not keep their own money in their trust account, and the Law Society has brought this decision to the attention of its members.¹⁰¹ Moreover, we make recommendations elsewhere in this Report which, if adopted, would reduce the likelihood of substantial sums of solicitors’ money being paid into, or retained in, their trust accounts.¹⁰²

4.70 In many other jurisdictions the position concerning garnishee orders and solicitors trust accounts is broadly similar to New South Wales. In England and Ontario, however, clients’ money in solicitors’ trust accounts has no statutory protection from garnishee orders against solicitors. Nevertheless, it is arguable that protection is afforded by the general law relating to such orders.

4.71 In Queensland, the statutory protection is wider than in New South Wales, since it applies to all moneys held in the trust account irrespective of whether they are trust money or the solicitor s own money.¹⁰³ But, as we have mentioned earlier, there is a general statutory prohibition in Queensland against paying money other than trust money into a trust account.¹⁰⁴

4.72 In our Discussion Paper we suggested that one possible approach is to provide that solicitors’ trust accounts are liable to garnishee orders against solicitors only by a special procedure under which the judgment creditor has an onus of showing what money in the account is the solicitor's money rather than his or her clients’ money.¹⁰⁵ This approach would need to be supplemented by a requirement that solicitors’ trust accounts be designated in a prescribed way, such as “The Solicitors’ Statutory Trust Account of (X)”.

Conclusion

4.73 Garnishment proceedings are part of the general law relating to enforcement of money judgments. Moreover, the problems which may be experienced with garnishee orders against solicitors in relation to solicitors’ trust accounts are similar to those which arise with garnishment in other contexts. Accordingly, we do not consider that it is appropriate to deal with the problems referred to in earlier paragraphs other than in the context of a general review of garnishment and enforcement of money judgments. We are reinforced in this view by the lack of evidence of substantial difficulties having occurred in practice in relation to the effect on solicitors trust accounts, of garnishee orders against solicitors.

FOOTNOTES

1. See, esp., Legal Practitioners Act, 1898, ss.41-44, and Solicitors Trust Account Regulations.

2. See, esp., Trust Accounts Act 197 3, ss.4, 7,8,12 and Trust Accounts Regulations 197 3, reg.5.

3. See, esp., Solicitors’ Accounts Rules 1975.

4. See. esp., Law Society Regulations, reg.18.

5. See, esp., Law Practitioners Act 1982, s.89; Solicitors Audit Regulations 1969, regs.34,35; and Solicitors Trust Account Rules 1969.

6. See, esp., Rules of Practice 1977. rr.20,22.

7. See Law Society Regulations, reg.18(4)-(6)).

8. Legal Practitioners Act, 1898, s.41(2).

9. Id., s.56(1).

10. See Certificate of Insurance, cl. 1(b), published in New South Wales Government Gazette, No.57, p.1634 (8th April 1983).

11. See our Discussion Paper, paras.4.12-4.14, and Baker v. Law Institute of Victoria [1974] V.P, 388.

12. Cf., Solicitors (Audit and Practising Certificates) Rules, 1965, r.2(1) (Victoria). See also the relevant Fidelity Fund provision in New South Wales (para.4.5 above).

13. Cf., Legal Practitioners Ordinance (A.C.T.) 1970, s.46(1).

14. Cf., Solicitors’ Accounts Rules, 1975, r.2(1) (England). Note the special rules in England relating to “solicitor-trustees” Solicitors’ Trust Account Rules, 1975. See also the Master Policy for the professional indemnity insurance scheme in New South Wales (para.4.5 above).

15. Discussion Paper, paras.4.10-4.20.

16. Law Society’s Response, para.2.1.

17. See paras.4.28-4.30 and 4.35 below.

18. See Legal Practitioners Act, 1898, s.56(1).

19. See current Certificate of Insurance, cl. 1(b).

20. See chapter 11.

21. Legal Practitioners Act, s.41 (1).

22. Discussion Paper, paras.4.21-4.25.

23. Law Society’s Response, para.2.4.

24. The Australian Society of Accountants and the Institute of Chartered Accountants.

25. “Guide to Solicitors’ Trust Accounts” (1980), p. 3.

26. Legal Profession Practice Act 1958, s.40(1)(a).

27. Solicitors’ Accounts Rules 1975, rule 3.

28. Trust Accounts Act 1973, s.7(3).

29. Rules of Practice 1977, r.20(1) (b), (2).

30. See, e.g., note 4.18.1 above; Travel Agents Act, 1973 (N.S.W.), s.42B(3); Solicitors Trust Account Rules 1969 (New Zealand), r.4.

31. The Law Society of New South Wales has described expressions such as “without delay” as being “capable of abuse” (Law Society’s Response, para.2.8).

32. Legal Practitioners Act, 1898, s.41 (1).

33. See also note 4.18.1 above.

34. See Stamp Duties Act, 1920, Division 29 and Second Schedule.

35. See, e.g., Law Society of New South Wales, “ Important Circular to Members: Stamp Duties (Financial Institutions Duty) Amendment Act 1982” (published in the Society’s newsletter, Caveat (19 January 1983)).

36. Legal Practitioners Act 1898, s.56.

37. Accumulation and allocation of this interest is described in paras.2.5-2.7 above.

38. Solicitors’ Accounts Rules, 1975, r.9(1).

39. Id., rule 9(2) (a).

40. E.g., Legal Practitioners Act 1981 (S.A.), s.3 1(2); Solicitors (Audit and Practising Certificates) Rules 1965 (Vic.), r.24; Law Society Regulations (Ontario), reg. 18(5).

41. Legal Practitioners Act 198 1, s.3 1(2).

42. Id., s.31(2) and (5) and Law Society of South Australia, Legal Practitioners Trust Accounts Manual, pp.15,18-19. See also Law Society Regulations (Ontario), reg.18(5); Solicitors (Audit and Practising Certificates) Rules 1965 (Vic.), r.24.

43. Our emphasis added.

44. Solicitors’ Accounts Rules, 1975, r.9(2)(a).

45. Our emphasis added.

46. Legal Practitioners Act 198 1, s.31(2).

47. Ibid.

48. Solicitors (Audit and Practising Certificates) Rules 1965, r.24(1).

49. Solicitors Account Rules 1975, r.9(1)(a) and (b). See para.4.26 above.

50. Law Society Regulations, reg. 18(5).

51. See note 4.31.3. above. In Ontario payment Must be made “forth with” and “in the ordinary course of business”: Law Society Regulations, reg. 18(5)(c).

52. See note 4.31.2 above.

53. See note 4.31.4 above.

54 .Law Society’s Response, para.2.8.

55. See para.4.26 above.

56. Solicitors (Audit and Practising Certificates) Rules 1965, r.24(2) and (3).

57. Law Society Regulations, reg.18(5)(b).

58. Law Society’s Response. para.2.8.

59. See, e.g. Law Society of South Australia, Legal Practitioners Trust Accounts Manual, p. 19.

60. See, e.g., Law Society of South Australia, Legal Practitioners Trust Accounts Manual, p.2. On the issues dealt with in this paragraph, see also Solicitors (Audit and Practising Certificates) Rules 1965 (Vic.), r.24(1)(b)(ii): Solicitors’ Account Rules, 1975 (England), r.9(1)(b).

61. Id., p.18. See also the Law Institute of Victoria’s “Rule 24 Book” which is a suggested form for a Direct Payments Register.

62. See, eg. Johns v. Law Society of N.SW, [1982] 2 N.S.W. L.R.1, esp. at p.20, per Hope J.A. (also Moffitt P. At pp.17-18); R.P. Meagher and W.M.C. Gummow, Jacobs’ Law of Trusts in Australia (4th ed, Butterworths, Sydney, 1977), p.317. 4.42 1. Ibid.

63. Ibid.

64. Ibid.

65. Solicitors’ Accounts Rules, 1975, r.4.

66. Law Society Regulations, reg. 18(4) and (6).

67. Trust Accounts Act 1971, s.7(2).

68. Legal Practitioners Act 1981, s.31(6). There is a specific exception in relation to costs and disbursements but it does not cover payment into, as distinct from retention in, a trust account (Legal Practitioners Regulations 1982, reg.19).

69. Discussion Paper, para 4.5 1.

70. Law Society’s Response, para 2.9.

71. See note 4.40.1 above.

72. “Special Bulletin to All Members: Statement on Trust Account Treatment of Costs and Disbursements”, 28 March 1983.

73. Law Society’s Response, para.2.9(d).

74. Id., para.2.9(c).

75. See para.4.43 above.

76. See paras.4.12-4.17 above.

77. See paras.4.5-4.11 above.

78. See paras.4.28-4.30,4.34-4.39 above.

79. Legal Practitioners Act, 1898, s.41(1).

80. See eg, the Solicitors’ Statutory Committee cases of Florance, Butler, Miller and Bridges (No.1 of 1982), Cummins (No.4 of 1982) and Roper (1981) 20 Law Society Journal 20.

81. For the scope of the Fund’s liability, see Legal Practitioners Act, 1898, esp.s.56.

82. See note 4.53.1 above.

83. Trust Accounts Act 1973, s.8(2).

84. Discussion Paper, para.4.57.

85. Ibid.

86. See paras.11.16 below, and draft Solicitors Trust Account Regulations, reg.14, in Appendix III of this Report.

87. Law Society’s Response, para.2.10.

88. Ibid.

89. See para. 11.16 below.

90. See paras. 11.12-11.17 below.

91. s.88C.

92 .Trust Accounts Act 197 3, s.12(1).

93. Legal Practitioners Regulations 1982, reg.22.

94. Law Society Regulations, reg.18(10).

95. Discussion paper, para.4.78.

96. See chapter 2.

97. s.41(2).

98. Report on Proposed Amendments to the Legal Practitioners Act, 1898-1960 (L.R.C. 2), p 9.

99 .Legal Practitioners Act 1898, s.65 B.

100. Id., s.65F(4).

101. See para.4.44 above.

102. See paras.4.49 above, and 5.46 and 5.52 below.

103. Trust Accounts Act 1973, s.10.

104. Id., s.7(2).

105. Discussion Paper, para.4.102.