ACCOUNTING FOR LEGAL PRACTITIONERS 2019/20

INTRODUCTION TO TRUST ACCOUNTS

1. CASE LAW

Meticulous stringent control over trust funds constitutes the most important aspect
of the legal practitioner’s accounting system. In Cape Law Society v MDA 1971 (2)
SA 201, at 204, the importance was summarised as follows:
“Without doubt, records by an attorney relative to his dealing with trust monies
is foundational to the legislature’s endeavor to protect the interest of the public in
its dealing with the legal profession. It is not sufficient that trust monies should
not be misappropriated. It is equally necessary that an attorney’s dealings with
such monies should be properly recorded”
and in Law Society Transvaal v Matthews 1989 (4) SA 389 at 395, Kirk-Cohen J
put it thus:
“Where trust money is paid to an attorney it is his duty to keep it in his possession
and to use it for no other purpose than that of the trust. It is inherent in such a
trust that the attorney should at all time have available liquid funds in an
equivalent amount. The very essence of a trust is the absence of risk. It is
imperative that trust money in the possession of an attorney should be available
to his client the instant it becomes payable. Trust money is generally payable
before and not after demand. See Incorporated Law Society, Transvaal v
Visse and Others; Incorporated Law Society, Transvaal v Viligen 1958
(4) SA 115 (T) at 118F-H. An attorney’s duty in regard to the preservation of
trust money is a fundamental, positive and unqualified duty. The rule thus
obliges attorneys to keep proper records and books of account in accordance with
generally accepted accounting practice and procedure containing a full and
accurate record of all financial transactions and distinguishing in readily
discernible manner between trust account and business account transactions.
An undigested mass of figures from which it may be possible to find out something
(or, indeed, everything) about the condition of the trust account is not keeping
proper books in a business sense. It is no answer to say ‘I have no bookkeeper
or my accountant is too busy’. If any attorney cannot deal properly with a matter
he must not undertake it. This is an absolute rule; it has to be so – the public is
at risk. Thus it is so that the particulars and information of trust moneys must
be contained in the narrative of the entries of the books of account and it should
not be necessary to resort to documents and files to obtain such information.”

See also:
1. Law Society of Zimbabwe v Chiwara HC-H 49/89
2. Law Society of Zimbabwe v Sibanda HC-H 7/90
3. Nyekete v Law Society of Zimbabwe SC 39/94
4. Chizikani v Law Society of Zimbabwe 1994 (1) ZLR 382 (S) (SC 54/94)
5. Mugabe and Mutezo v Law Society of Zimbabwe 1994 (2) ZLR 356 (S)
(SC 181/94)
(See summary of last three cases on pages 7 & 8 of this Handout)

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2. STATUTORY PROVISIONS

The specific prescriptions in relation to the handling and recording of trust moneys
are contained in the following statutes:

a) Legal Practitioners Act, [Chapter 27:07] (Since the publication of the 1996
revised edition the Act has been amended by the Legal Practitioners Amendment
Act, 1996 (No. 11 of 1996, the Legal Aid Act, 1996 (No. 18 of 1996), the
Agricultural Finance Corporation Amendment Act, 1999 (No. 14 of 1999), the
Legal Practitioners Amendment Act, 2000 (No. 10 of 2000), the Criminal
Penalties Amendment Act, 2001 (No. 22 of 2001) and the General Laws
Amendment Act, 2005 (No. 6 of 2005)
b) Legal Practitioners (General) Regulations, 1999, S.I. 137 of 1999
c) Law Society of Zimbabwe By-Laws, 1982, S.I. 314 of 1982 as amended by
Law Society of Zimbabwe (Amendment) By-Laws, 1986, (No. 1) S.I. 191 of
1986; Law Society of Zimbabwe (Amendment) By-Laws, 1989, (No. 2) S.I. 24 of
1990; Law Society of Zimbabwe (Amendment) By-Laws, 1990, (No. 3) S.I. 155
of 1990.
d) Legal Practitioners (Law Society Compensation Fund) Rules 1981, S.I. 635
of 1981 as amended by Legal Practitioners (Law Society Compensation Fund)
(Amendment) Rules (No. 1) S.I 36 of 1987, (Amendment) Rules (No.2) S.I. 352
of 1990 and (Amendment) Rules (No. 3) S.I. 248 of 1992.

2.1 TRUST MONEYS

Section 13 of the Legal Practitioners Act stipulates that every legal practitioner who
holds or receives any monies for or on behalf of another person shall open and keep
a current account at a bank1 as a separate trust account in which account he shall
deposit all such moneys.

Trust moneys include money received from a client as (i) a deposit towards the client’s
obligations in respect of services to be rendered in the future, (ii) money received from
a client pending client’s further instructions and (iii) money received for onward
transmission to a client or other person.

The trust current account so kept must be used exclusively for the deposit and
withdrawal of trust money. Business funds must not flow through this account. (A
separate current account is kept for business transactions i.e., a Business Current
Account).

2.2 BOOKS OF ACCOUNT

In terms of section 14 of the Legal Practitioners Act, proper books of account must be
kept to provide particulars and information on:

a) moneys received, held or paid for or on behalf of any other person.

b) moneys deposited in trust accounts.
c) interest paid on any trust moneys.

1
The Act defines a bank as one which is registered as a commercial bank in terms of the Banking Act
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2.3 INVESTMENT OF TRUST MONEY

In terms of section 13(2) of the Legal Practitioners Act, a legal practitioner may invest
money deposited in the trust current account in a separate account bearing interest
at a bank or building society2 or other institution approved by the Council [i.e., Trust
Savings Account]. In terms of section 5 of the Regulations, the account must allow
for withdrawal of funds on not more than 7 days notice. Any interest on money so
deposited is payable to the Compensation Fund (less any portion which the council
may allow towards the cost of operating trust accounts [Legal Practitioners Act,
Section 13(5)].

If so instructed by the client, a legal practitioner may in addition to the investment

referred to above {Trust Savings Account] open a separate investment account in
which he will deposit trust moneys received from that client (Act, Section 13(3)). Any
interest received on such deposits belongs to the client [i.e., Special Investment
Account]. The provisions of section 5 of the Regulations do not apply to such an
account.

2.4 LAW SOCIETY COMPENSATION FUND

In terms of section 68 of the Legal Practitioners Act, the Law Society Compensation
Fund is administered by a Board of Trustees. The Fund derives its income largely
from interest on moneys deposited in trust savings accounts, (Section 13(2) and 13(5)
of Act and interest earned from the Fund’s own investments. Section 70(1) of the Act
provides that the Law Society can direct the Fund to make a grant to any person who
has satisfied the Council that he has sustained loss in consequence of theft, fraud,
forgery or other dishonesty committed by a legal practitioner (or his employee) in the
practice of his profession.

2.5 DEPOSITS AND WITHDRAWALS

Any deposits into an investment account opened in terms of section 13(2) i.e., Trust
Savings Account, or section 13(3) i.e., Special Investment Account, of the Legal
Practitioners Act must be made from the Trust Current Account. Any withdrawal
from the investment account must be made in favour of the Trust Current Account.
[Legal Practitioners Act, section 13(4)].

2.6 ASSETS OF THE LEGAL PRACTITIONER

In terms of section 15 of the Legal Practitioners Act, an amount standing to the credit
of a trust account shall not be regarded as forming part of the assets of the legal
practitioner unless there is an excess remaining after satisfying the claims of client
depositors and interest belonging to the Compensation Fund.

2
The Act defines a building society as one which is registered in terms of the Building Societies Act
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2.7 SAVING OF LIABILITY OF BANKS

A bank or similar institution shall not, in terms of section 18 of the Legal Practitioners
Act, be deemed to have knowledge that a legal practitioner is not entitled absolutely
to all moneys in the trust account.

2.8 AUDIT CERTIFICATE

Section 81 of the Legal Practitioners Act requires a legal practitioner who intends to
practise on his own account or in partnership with any other person to, before
commencing practice, submit to the secretary of the society an audit certificate issued
by a registered accountant. The form of the certificate is prescribed in the Law society
of Zimbabwe (Amendment) By-Laws and states that the accountant has explained to
the legal practitioner a system of bookkeeping which complies with the Act and By-
Laws.

Section 81(1) of the Legal Practitioners Act as read with the Law Society By-Laws
requires every legal firm which is required to keep a trust account to submit an audit
certificate annually. (See notes on Law Society By-Laws below).

2.9 PRACTISING CERTIFICATE

In terms of section 12 of the Legal Practitioners Act, no legal practitioner shall practise
without a valid practicing certificate. (See notes below).

2.10 CONTRAVENING OF ACT AND REGULATIONS

In terms of section 22 of the Legal Practitioners Act, a legal practitioner who

contravenes the provisions of Part IV (section 13 to 22) is liable to a fine not exceeding
level eight or to a year’s imprisonment or both.

The Tribunal established in terms of section 24 comprises a chairman and deputy

chairman (who are or were judges of our courts) and two other members selected
from time to time by the chairman from a panel of ten submitted by the Law Society.
The Tribunal hears allegations of misconduct against legal practitioners brought
before it by the Council of the Law Society. It has the power in terms of section 28 to:

- issue an interim order to prohibit a legal practitioner from operating a trust or

business account and appoint a curator bonis to administer such accounts,
- suspend a legal practitioner from practising,
- direct the deletion of a legal practitioner from the register,
- order the legal practitioner to pay a fine not exceeding level six,
- censure,
- caution and postpone any further action on certain conditions.

2.11 THE LAW SOCIETY BY-LAWS

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Part IXA of the Law Society By-Laws lay down certain requirements –

2.11.1 TRUST ACCOUNT BALANCES

In terms of by-law 70B, at least once every month and within 30 days of the end of
that month the credit balances in respect of each client must be extracted and noted
in a prominent manner in the ledger. The list so extracted must be preserved for not
less than 3 years.

2.11.2 BALANCING OF BOOKS

In terms of by-law 70C, books of account must be written up at least once in each
month and balanced within 3 months of the extraction of balances as required by by-
law 70B.

2.11.3 NOTIFICATION TO COUNCIL OF TRUST ACCOUNTS DETAILS

In terms of by-law 70D, the firm shall immediately after opening a trust account notify
the Council the name and address of the bank or building society. If so required by
the Council, the firm must within 10 days furnish statements issued by the bank or
building society certifying the balances of such accounts.

2.11.4 ACCOUNTING TO CLIENTS

By-laws 70E requires every firm to render a statement of account to the client within
a reasonable time after the performance of the mandate. The statement must show:

a) details of all amounts received in connection with the matter,

b) particulars of all disbursements and fees and other charges,
c) the amount payable to or by the client.

Any amount due to the client must be paid within a reasonable time.

2.11.5 RECEIPTS AND PAYMENTS

Trust money must be deposited promptly in the Trust Current Account either on the
day of receipt or the first banking day thereafter. Payments must be made promptly.
(By-law 70F).

2.11.6 FEES AND DISBURSEMENTS

Debits in respect of fees or disbursements must be made within a reasonable time of

making the claim (By-law 70G).

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2.11.7 TRUST CHEQUES

By-law 70H stipulates that cheques drawn on the Trust Current Account shall not be
made payable to “cash” or ‘bearer” but to the order of a specific payee designated on
the cheque. The cheque itself must indicate that it is drawn on a “trust account”.

2.11.8 TRUST SHORTFALLS

In terms of by-laws 70I, shortfalls are not allowed in the trust accounts. The total of
the clients’ credit balances must not exceed the total moneys in the firm’s Trust
Current Account, any investment accounts (Trust Savings Accounts & Special
Investment Accounts) and the trust cash on hand.
Trust Creditors <= TCA + TSA + SIA

2.11.9 PRACTISING CERTIFICATES

By-law 71(A) stipulates that a new application (in terms of section 74 of the Act) for a
practising certificate is to be made to the secretary of the Society 30 days before the
commencement of practice accompanied by the prescribed fee, contributions (if such
have been prescribed by the Compensation Fund) and any audit certificate required
in terms of section 58 of the Act. Renewal of practising certificates must be applied
for 30 days before the expiry date accompanied by similar requirements.

2.11.10 AUDIT CERTIFICATES

By-law 71C requires a legal firm to submit to the secretary of the Society an audit
certificate at least once in every calendar year.

a) within two months of the annual audit, or

b) within 6 months of the annual closing of the trust books of account, or,
c) at the same time as application is made for a practising certificate, whichever
is the earlier.

In addition, an audit certificate covering the relevant periods both before and after:

a) the retirement from the partnership by a legal practitioner to thereafter practise

in another firm,
b) the joining of partnership (as a partner or employee) by a legal practitioner who
has hitherto practised on his own, must be submitted to the secretary.

A legal practitioner who has practised on his own account is, upon retirement required
to submit an audit certificate covering the period up to the date of retirement.

2.11.11 INTEREST ON TRUST MONEY

By-law 77 stipulates that the interest due to the fund accruing during the period
covered by the audit certificate shall be paid at the same time as application is made
for a practising certificate.

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2.11.12 COLLECTION COMMISSION

By-law 70 provides that:

A legal practitioner instructed to collect an uncontested claim for trade debt shall be
entitled and obliged, in lieu of any other fees and charges, save for disbursements,
and save as in hereinafter provided, to charge his client a collection commission at
the rate of:

a) ten per centum on the first $x thousand dollars, and

b) five per centum on the next $y thousand dollars;
c) two comma five per centum on the balance of any payment or instalment
collected:

Provided that whenever payment is recovered in one lump sum in response to a letter
of demand only, the maximum commission payable shall be the sum of $z dollars.
(The figures are set from time to time by amendment to the by-laws.)

3. A SELECTION OF CASES

Chizikani v Law Society of Zimbabwe S.C. 54/94 (1994 (1) ZLR 382 (S)

The tribunal had found Chizikani guilty of unprofessional, dishonourable or unworthy

conduct in that he had misappropriated clients’ trust funds, and ordered that his
name be deleted from the Register of Legal Practitioners.

The facts of the case were that Sibanda, a client of Chizikani, was dissatisfied with
the way Chizikani was attending to the transfer of his property and he suspected that
Chizikani had misused the $8000 that he had deposited with him on 3 October 1990
for the purchase of the property. Chizikani’s bank statement revealed that Sibanda’s
$8000 cheque was credited to the trust account on 3 October 1990. Cheques drawn
on the account reduced the balance to an overdraft of $170,26 by 31 October 1990
thereby creating a shortfall of $8170,26 at that date. [Trust Creditors < TCA]

The Supreme Court upheld the decision of the Tribunal and reaffirmed that “It is
undoubtedly an offence if trust money is withdrawn for a purpose other than that
authorised by the trust creditor.” Incorporated Law Society TVL v Visse and Ors. On
the sentence, the Supreme Court took the position that in each case the facts usually
determine the punishment but that in applications by the Law Society against a
member, the paramount consideration is maintaining the integrity, dignity and the
respect the public must have for the officers of the courts. Moreover Chizikani had
lacked transparency and had been intransigent and obdurate.

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Mugabe, Mutezo v Law Society of Zimbabwe S.C.181/94 (1994 (1) ZLR 356 (S)

The tribunal had found MM guilty of unprofessional, dishonourable or unworthy

conduct and ordered that their names be deleted from the Register of Legal
Practitioners, Notaries Public and Conveyancers.

The facts of the case were that an audit of the books of the partnership had revealed
trust shortfalls of $49 505,19 and $36 657,40 in July and October 1992 and $158
604 in May 1993. The auditors found numerous instances where trust monies
received were not banked intact and funds were being transferred to the business
account without appropriate bills being raised against trust creditors resulting in
funds being transferred in excess of the amount available for a particular trust
creditor. The records were also found to be in such a state of disarray that it was not
possible to check certain details.

The Supreme Court held that misappropriation of funds was a criminal offence which
had to be proved beyond reasonable doubt. In this case it found it strange that the
auditors could not link shortfalls to the trust account or accounts of any specific
client. Nor had any client come forward to claim that the partnership owed it money
which had not been paid on demand. The shortfall could therefore have been a result
of the chaotic accounting system. “No book entry to the financial prejudice of any
trust client having been established, the finding of theft or misappropriation cannot
be sustained.”

The Supreme Court however found that MM had failed to keep proper books of
accounts. They were suspended from practising for a year and fined $4 000 each.

Nyekete v Law Society of Zimbabwe S.C. 39/94

The tribunal had found Nyekete guilty of unprofessional, dishonourable or unworthy

conduct in that he had misappropriated trust funds and failed to account to his
clients. Nyekete had not maintained an adequate system of book-keeping, had trust
shortfalls of $23 755,91 and $30 764,93 on 31 March 1991 and 31 December 1990,
had failed to prepare and retain monthly lists of trust credit balances and practised
during 1993 without a practising certificate.

On the charge of misappropriation, it was common cause that Nyekete received $12
000 on behalf of one client in May 1992. He then made out cheques in favour of his
client which he then stopped because there was no money in the trust account. The
Supreme Court agreed that “he was clearly guilty of misappropriation of trust funds
because he was paid the money, and when he was called upon to pay, the money was
not there”.

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