People trust their accountants with a wide variety of materials, ranging from receipts, invoices, business records and documents evidencing private tax arrangements, to original trust deeds, certificates of title, estate planning documents and sometimes their personal will. This can create problems where, for whatever reason, the accountant's bill is left unpaid. A claim for a lien against release of the documents might then be expected.
What is a lien, and when can an accountant assert one?
A lien is a right that exists at common law and can also be created by statute or by contract.[1] In general terms it is a legal right to hold a person's property as security for the payment of debt. Liens are specifically excluded from the operation of the Personal Property Securities Act 2009 (Cth) when certain conditions are met.[2]
Whether a right of lien exists or not is question of fact in each circumstance. For accountants or tax agents, it can very much depend upon the terms of the letter of engagement between the client and the firm. Where that letter of engagement is silent on such matters like ownership of documents, and how an unpaid invoice might impact upon that ownership, it is likely there is no right to assert a general lien over the entire client file. The firm may, however, be able to assert what is called a "particular" or "specific" lien over certain documents relevant to the work that was undertaken.
The Australian Tax Practitioners Board have issued guidelines which state that the firm must satisfy the following criteria in order to assert a lien:
- it must be claiming the lien in its own right, and not merely as an agent of another creditor;
- it must have possession of the property over which a lien is being asserted (whether actual or constructive), and that possession must have come about by proper means; and
- the outstanding debt must be connected to the property over which the lien is being claimed.It must the property of the particular client who owes money, (not the property of a third party or a related company).
Accountants who are CPAs must ensure they comply with fundamental ethical principles contained in the Code of Ethics for Professional Accountants, including Section 270 of the Code which states that "a member in public practice shall not assume custody of client monies or other assets unless permitted to do so by law and, if so, in compliance with any additional legal duties imposed on a member in public practice holding of assets". If they improper exercise a lien they could therefore face disciplinary action.
What type of documents are covered by a lien?
There is as yet no accepted right for an accounting firm to claim a general lien over an entire client file. It might nevertheless be able to assert a lien over particular documents where it can be established that:
- the accountant has performed work on or in relation to a specific document(s); and
- that work has added value to that document for which the firm has not been paid.
A good example of the distinction would be an income tax return, where the accountant requires documents like receipts and similar to prepare the income tax return, but the only document that it can assert a claim over would be the tax return itself, not the underlying source documents required to prepare the tax return.
The Guidelines indicate that, unless there is anything indicating the contrary in the terms of engagement, the following documents are likely to belong to the client and therefore cannot be the subject of a particular lien:
- source documents like receipts, invoices or journals; and
- correspondence with authorities like the ATO and ASIC, and notices of assessment.
Original documents like trust deeds, mortgages, wills or company registers are also properly the property of the relevant client, and by extension cannot be retained by the firm. The accountant could, however, generally assert a lien over the following types of items (again, depending on the terms of engagement):
- their own working papers; and
- letters of advice, tax returns, trust deeds, Articles of Association, Constitutions, financial statements and other similar items, provided they have been prepared by the accountant.
If the client is a company and the accounting firm has asserted a lien over financial records, section 288 of the Corporations Act 2001 (Cth) provides some comfort to directors, in that they can request that they be permitted to inspect hard copies of financial records held by another person, with that permission required to be granted within a reasonable time of such request.
Interesting twist - care required
An accountant might attempt to assert a lien if the relevant client is placed into liquidation. In such circumstances, the expectation is that the accountant (if unpaid) would lodge a proof of debt in order to be considered as a creditor in the winding up.
In Re International Tyre Co Pty Ltd (in liq) (1979) 4 ACLR 553, an accountant for a company that was being wound up lodged a proof of debt in which he stated that he held no security for any part of the sum which he claimed to be owed. During the course of the winding up, the liquidator requested that the accountant deliver up documents of the company in his possession, which he refused to do on the basis of a lien for his professional services.
The Court held that, while the accountant might have a right to assert a lien over particular documents which he had performed work on, he had surrendered any right to such security by lodging a proof of debt as an ordinary unsecured creditor.
Key takeaways
While the remedy for a client who might have concerns arising from an accountant's lien might seem relatively simple - that is, pay any amount outstanding - disputes regarding payments are sometimes unavoidable. Some practical steps that may assist to avoid those concerns include:
Make sure the letter of engagement provides clear guidelines on:
- what happens to the client file at the termination of the retainer, or if there is a dispute about fees, and that each party understands the effect of non-payment on their records; and
- whether the accountant has any right to a security interest in order to ensure payment of their fees.
Consider whether certain documents really need to be provided to the accounting firm: are they records that are better retained by you until requested by the accountant? If so, it is more prudent to hold onto them until asked.
If a lien is asserted, consider whether there has been any admission by the accountant that they do not hold security (for example, by way of a proof of debt or similar).
[1] Examples of statutory liens include the unpaid seller's lien under various Sale of Goods legislation, and Warehousemen’s Liens legislation in various States. Back to article
[2]See sections 73(1) and 93 of the PPSA. Note, contractual liens are included in the PPSA regime. If an accountant seeks to rely on a contractual lien, they need to perfect their lien, generally either by registration or possession of the goods. The priority rights obtained against other creditors will depend on the circumstances. Back to article