Law firms are primarily structured as sole proprietors, partnerships, incorporated companies. A trust account legal practice has unique legal features. The standard legal form for legal practice is characterized by the allocation of control rights, the authority to exercise the powers granted to the practitioners, and the authority to direct the use made of assets held in trust by the trust account practice (John Armour et al (2011) “The Essential Elements of Corporate Law: What is Corporate Law?” ( http://www.law.harvard.edu/programs/olin_center/ accessed 9 December 2023)). The core-element of a trust account practice is a ‘separate patrimony’ that involves the demarcation of a pool of assets that are distinct from other assets owned by the firm’s owners, and of which the firm in itself, acting through its partners, is viewed in law as being the owner.
The legal practice trust account is conceived as belonging to clients rather than the practitioners as they are unavailable for attachment by the creditors of the practice. Trust money must be kept separate from other money (Rule 54.11 made under the authority of ss 95(1), 95(3) and 109(2) Legal Practice Act 28of 2014 (LPA)). The core function of a ‘separate patrimony’ involves shielding the assets of the trust account from the creditors of the firm. The purpose of the trust account is to protect client funds.
‘Asset shieling’ involves a priority rule that grants trust creditor’s security of fidelity (John Armour et al (op cit)). The separation of business and trust account assets ensures the liquidity of the trust account. Creditors are limited to making claims against assets that are held in the name of the firm/practice itself and have no claim against the trust account of the practice. Corporate type ‘asset partitioning’ permits firms to isolate different lines of business by separately incorporating, as a distinct line of business, the assets associated with the trust account. Asset shielding is essential for the trust funds.
The funds in the trust account of the practice are not owned by the legal practitioner – they are controlled by the legal practitioner by virtue of a fiduciary relationship for the client. The client holds a legal title to the funds which are controlled by the practitioners on behalf of the trust creditors (client). It is the practitioner’s professional responsibility to manage these accounts with the utmost good faith. Legal practitioners have a primary responsibility for the trust account of the firm. The obligations of a trust account practitioner are set out in s 87 of the LPA. A legal practitioner operating a trust account must always ensure that the trust funds are held in a way that protects the interests of the persons for whom funds are held. The practitioners must act in furtherance of the client’s interest only in the management of the trust account.
It is a fundamental duty of every trust account legal practitioner to ensure that the books of the firm, of which he or she is a member, are properly kept and that there are sufficient funds at all times to meet the trust account claims (Law Society, Tvl v K and others 1959 (2) SA 386 (T) @ 39). It is the practitioner’s professional responsibility to manage these accounts with utmost good faith. Every director of a law firm has a fiduciary duty towards the firm. All partners and/or directors bear equal responsibility for ensuring that the trust account regulatory requirements are complied with. – See Hewetson v Law Society of the Free State (948/2018) [2020] ZASCA 49; [2020] 3 All SA 15 (SCA); 2020 (5) SA 86 (SCA) (5 May 2020)).
Partners/directors owe fiduciary duties to one another by virtue of their membership in the partnership. The partnership form is used to assign ownership of the firm in whole or in part to contributors of labour or of other factors of production. Practitioners are free to specify the delegation of authority amongst themselves. Partners do not enjoy limited liability. The liability of the partners is a form of the ‘fidelity shielding’ in legal practice (John Armour et al.) It is a regime of ‘asset partitioning’ whereby the trust account assets are protected against the trust creditors of the practice.
The general partnership form grants powers to manage the firm in the ordinary course of business (Jean-Philippe Robé “The Legal Structure of the Firm” (https://www.researchgate.net/publication/227377703 accessed 9 December 2023)). The contractual arrangements between members of an incorporated law firm i.e. the practitioners do not affect the responsibility of the individual practitioner for the trust account conducted by the practice. The directors of a law firm (practitioners) are personally (jointly and severally) responsible together with the juristic entity for the debts and liabilities of the commercial juristic entity as are or were contracted during their period of office – s. 34(7) of the LPA &s.19 (3) of the Companies Act 71 of 2008; and in respect of any theft committed during their period of office, from the trust account conducted by a juristic entity of which they are members.
Obligations attached to trust accounts are the responsibility of each individual trust account legal practitioner, whether they are practicing (or deemed to be practicing) for their own account, either alone or as a partner, or as a member or director of a juristic person. Where an attorney places a trust account ledger or trust bank account into a deficit or overdrawn position, the other directors of the corporate practice are not relieved of their legal responsibility in respect of the trust account , and the practice of which he or she was a partner or a member would be liable to refund client(s) (Laniyan v Negota SSH (Gauteng) Incorporated and Others (09/35083) [2013] ZAGPJHC 128; [2013] 2 All SA 309 (GSJ) (20 February 2013)). A practitioner is responsible and liable even if staff members or financial institutions make errors.
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