Accountants' guide to liens

In determining when accountants can exercise a right of lien over clients' records the following issues are relevant:

• liens - what are they and when do they arise ? 
• how is ownership of documents determined?
• the situations where liens do not arise 
• the overriding rights of third parties 
• liens in the context of tax refund cheques

Before attempting to exercise a lien members should carefully consider whether such a right in fact exists and when in doubt a member should obtain their own legal advice.

Members are also reminded that although a legal right to exercise a lien may exist, members are expected to act in a professional and ethical manner when dealing with clients. Compliance with the fundamental ethical principles contained in APES 110 Code of Ethics for Professional Accountants is mandatory. Members should also consider all alternatives for resolving disputes and settlement of outstanding fees before exercising a lien.

The improper exercise of a lien may result in disciplinary action being taken against the member under Article 39 of the Constitution.

What is a lien?

A lien is a form of security. It is a common law right which permits A to retain B's property until B satisfies an outstanding claim to A. For example, an accountant is engaged to prepare and balance a general ledger and prepare a draft income tax return. If the accountant performs these services and the client refuses to pay, the accountant may be entitled to exercise a lien over the documents until such time as payment is made.

Types of liens

Liens are divided in two categories, possessory and non-possessory. Possessory are the category relevant to accountants and in turn are divided into ‘general’ and ‘particular’ liens.

The right to exercise a possessory lien can only arise if a person has possession of the relevant goods or documents.

1. General liens are recognised in favour of a particular class of person, e.g. solicitors, bankers and stockbrokers. General liens entitle a person in possession of property (A) to retain the property until the owner (B) has settled all his outstanding obligations to (A). For example, (A) can retain (B)'s goods until all of (B)'s obligations are fulfilled even if those obligations are not associated with the goods being retained.
2. With a particular or specific lien, there is a right to retain a particular piece of property until the obligation in respect to that property has been settled by the owner.

What sort of lien do accountants have?

Although the question has not been settled by the Australian courts, it is prudent to proceed on the basis that the law does not recognise a general lien in favour of accountants over their client's property unless such right has been expressly granted in writing by the client to the accountant (for example in a contract or letter of engagement between the accountant and client).

When will a 'particular lien' arise?

 A 'particular lien' will be available to an accountant where each of the following criteria are satisfied:

1. The documents held by the accountant are the property of the client who owes money (not the property of a third party irrespective of how closely connected).
2. The documents must have come into the possession of the accountant by proper means.
3. Work must have been done by the accountant upon the documents retained. Whilst the law is not entirely clear in this area, the better view is that a lien only attaches to items of property on which the accountant has expended labour and thereby made the property more valuable. For example, Australian courts have determined that a lien would attach over a general ledger, balance sheet and draft income tax return prepared by an accountant but it would not attach to a sales journal and invoices as these had been provided to the accountant for checking only and not as a result of the accountant's labour.
4. The fees for which the lien is exercised must be outstanding in respect of such work and not in respect of other unrelated work, i.e. the documents retained must be particular to the outstanding fees.

An accountant’s lien then is a particular lien that is limited to the particular records on which the accountant has performed work.

The above criteria are not always straight forward, particularly when determining 'ownership' of the documents.

Ownership of documents

A lien claimed by an accountant is only effective if the documents over which the lien is exercised belong to the client who owes the accountant fees.

For example:

• If the accountant owns the property (e.g. a document), the client has no claim to it and the issue of a lien is not relevant. Of course the accountant may choose to make the information contained in the document available to a client. 
• If the property is owned neither by the accountant nor the client then the accountant is not permitted to exercise a lien over that property (for example where a client provides the accountant with a document such as a share certificate which the client holds on trust for a third party).

In determining ownership, three matters should be considered:

1. capacity: whether the accountant is acting as an agent for his client or as a principal 
2. purpose: the purpose for which the documents and records have been brought into existence
3. contract: the contract or letter of engagement between the accountant and his client

Capacity

An accountant is acting as agent for his client when, for example, preparing taxation returns or filing company accounts with Australian Securities and Investments Commission (ASIC) or negotiating a matter on behalf of his client. This relationship of agency would encompass the most common forms of dealing between an accountant and his or her clients.

The general rule applicable is that whilst acting as an agent for a client, all documents brought into existence by the accountant are the property of the client and are therefore, capable of being subject to a lien if the client has outstanding debts owing to the accountant in respect of work carried out on or in relation to the documents.

For example, the following documents would belong to the client, correspondence with the ATO, tax returns and accounts prepared by the accountant, letters of advice (once paid for), books of accounts and financial statements prepared by an accountant for the client. The drafts of such statements would not belong to the client unless the client specifically instructs the accountant to prepare such drafts for the client.

Australian courts have decided that where an accountant conducts an audit, the accountant is not acting as agent. In this situation, the accountant owns the documents which they or their staff have prepared to assist the accountant in such work (for example working drafts and notes brought into existence during the course of performing the work). The accountant would be entitled to retain possession of such documents as owner, without recourse to a lien. Documents sent by the client to the accountant which have been delivered to enable the accountant to provide professional advice or conduct an audit remain the property of the client, e.g., original bank statements of the client.

Purpose

The purpose for which documents exist also determines the ownership of records .

Contract

APES 305 Terms of Engagement recommends that members deal with the issue of ownership of documents in the contract or letter of engagement and set out clearly an agreed position between the accountant and the client regarding the ownership of books, records, and other documents on which the accountant will work or which are created in the performance of the work. Paragraph 4.9 of APES 305 also suggests that if a member has a policy of seeking to exercise a right of lien over documents in the event of a dispute with the client, that this policy be disclosed in the terms of engagement and include the process for dealing with disputes over the lien.

It may be that ownership is determined under the contract by implication and therefore, ownership of books, records, and other documents will vary according to either the express or implied terms under the contract or letter of engagement. If it can be established under the terms which party owns the documents, there is no need to look further.

If the contract or letter of engagement is silent as to the subject of ownership of documents, then the accountant must consider the exact instruction given by the client and the nature and purpose of the work completed. For futher information read ownership of client documentation.

A lien cannot be applied in the following circumstances

1. Where the client has become bankrupt.
2. Where a client is an incorporated body, over the books and documents which either by statute or the Constitution of the client company have to be available for public inspection. The Corporations Act 2001 does require the company register to be kept at the registered office of the company and therefore, an accountant cannot retain possession of the register or other books, records and documents that must be held at the company’s registered office.

A third parties' right to possession of documents despite the existence of accountant's lien

1.  The Commissioner of Taxation has the power to serve a notice concerning a client's affairs requesting the accountant to produce any documents in his or her possession even though they are the subject of a lien.
2. Police in conducting an investigation may seek information from a client's books and records or from an accountant's working papers. The accountant must provide such information. Should the police wish to take possession of the books and records of a client and the accountant's own working files they must first obtain a search warrant. The search warrant empowers them to impound the accountant's files and client's documents in the possession of the accountant.
3. ASIC, pursuant to its powers of investigation, may order an accountant to produce all a client company's documents. Such an investigation resulting in inspection or seizure of books will not prejudice the accountant's lien (see Section 37(6) Australian Securities and Investments Commission Act 2001).
4. The appointment of a receiver to any or all of a company's assets should not affect a lien over the books of account or other documents of the company. Where a receiver is appointed by the court, the accountant's lien will not be affected unless the court orders otherwise.
5. Where a liquidator is appointed an accountant will not generally lose an existing lien, however, a lien cannot be claimed over documents which come into the possession of the accountant after commencement of the liquidation. Where a compulsory liquidation has been ordered by the court, the court is empowered to require an accountant to produce any books or documents in his or her custody. The production of such books by the accountant, where the accountant claims a lien is without prejudice to that lien. (See section 597(10) of the Corporations Act 2001).
6. Under Commonwealth privacy laws, individuals have a right to access personal information which organisations hold about them. Personal information is information which identifies an individual or from which the identity of an individual can reasonably be ascertained. In some situations, the privacy laws will require accountants to provide to a client (where the client is an individual) access to records which contain the client's personal information.
   
   Accounting practices are required to comply with the privacy laws regardless of whether they are working as sole practitioners, in a firm or otherwise. As a general rule, the privacy Laws only apply to those accounting businesses that have exceeded an annual turnover of $3 million since the privacy laws came into effect or which are 'related' (as defined in the Corporations Act 2001) to a business with such a turnover.
   
   If the privacy laws apply, the accountant must adhere to a set of standards known as the National Privacy Principles (NPPs). The NPPs give individuals a right to access their personal information. A lien will not be effective to circumvent the NPPs unless one of the exceptions to these principles can be established.
   
   Accountants should note that 'access' under the NPPs does not necessarily mean giving a client a copy of the records. In most cases allowing clients to inspect the records will be sufficient. As the right of privacy is granted to individuals, the privacy laws will not give corporate clients a right to access materials the subject of a lien.
   
   The privacy laws are complex and accountants should seek legal advice about them to ensure they are compliant and to ascertain what to do in the event of an access request made under the NPPs.

Does an accountant acting as a tax agent have a lien over his client's tax refund cheque?

 It is general practice for the ATO to post refund cheques to a taxpayer 'care of' a tax agent where that tax agents' address has been specified as the address for service of that tax payer.

The relationship between the tax payer and his tax agent is contractual and it is open for the parties to agree or contract that the tax agent negotiate the tax payer's cheques or deduct the professional fees from the proceeds of the cheque. Paragraph 9.2 of APES 220 Taxation Services requires that an accountant not appropriate tax refunds to settle fees unless agreed to by the client in writing. Any such authorisation granted to an accountant should be expressly stated in a written agreement or engagement letter. In the absence of such authorisation there is no implied authority for a tax agent to deduct their professional fees from the proceeds of a tax refund cheque. Members who incorrectly negotiate a tax refund cheque or who deduct fees without written permission may be subject to disciplinary action as well as being held liable for conversion to the client.

The question as to whether an income tax refund cheque may properly be the subject of a particular lien is unclear and the conservative answer to the question would be no.

Even if a particular lien was exercised successfully over a tax refund cheque, such possessory lien only entitles the accountant to hold or 'possess' the cheque until the outstanding fees in respect of the work done in preparing and resubmitting the client's income tax return, is paid. Such right would not entitle the accountant to bank the cheque and access the funds or hold the cheque pending payment of outstanding fees for other accounting work.

For members in Queensland, regard must also be had to the Trust Accounts Act 1973, particularly section 8 which prohibits members applying client trust money towards outstanding fees unless the client has authorised the member to do so in writing.

[Whilst every care has been taken to ensure that this guide is appropriate at the time of publication, it is published for general guidance only and should not be relied on either as a complete representation of the law or as being appropriate to a specific set of circumstances. The guide is not intended to provide legal advice upon which members can rely and it is recommended that members seek legal advice before taking action to exercise a lien over the books and reports of a client if they are uncertain as to their rights and obligations.]