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 legal advice should be obtained.

The improper exercise of a lien may result in disciplinary action being taken against the member under Article 26.

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 is subject to the person wishing to exercise it having 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 it 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. Particular or specific liens are a right to retain a particular piece of property until the obligation in respect of 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 made more valuable. For example, Australian courts have decided that a lien would attach over a general ledger, balance sheet and draft income tax return prepared by an accountant. However, it would not extend to a sales journal and invoices as these had been provided to the accountant for checking only and did not embody the 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.

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 belongs to the client who owes the accountant fees.

For example:

• if the accountant owns the property (eg 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. whether the accountant is acting as an agent for his client or as a principal
2. the purpose for which the documents and records have been brought into existence
3. the contract or arrangement between the accountant and his client

The ownership of documents may be expressly or impliedly varied by contract or engagement letter between the parties. If the contract or engagement letter (if any) 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 of the work completed (see further information on ownership of client documentation).

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 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 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 them.

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 he or his staff have prepared to assist him 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. However, 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.

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 third parties' right to possession of documents despite 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 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 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. Receiver – 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. Liquidator – 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 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. Privacy law – 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, these 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. But as a general rule, the laws only apply to those accounting businesses that have exceeded an annual turnover of $3 million since the privacy laws began or which are 'related' (as defined in the Corporations Act) 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 Australian Tax Office 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. Any such authorisation granted to an accountant should be expressly stated in a written agreement or engagement letter. There is no implied authority to do so. 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 hold the cheque pending payment of outstanding fees for other accounting work.