Offshore cheques in trust accts

Thousands removed from trust account

Offshore cheques that get dishonoured may attract a fee of several thousand dollars, as one law firm found out when more than $5,700 was removed from its trust account.

Wellington firm Peter C Gilbert is keen to alert practitioners not only to this, but also to another trust account woe that struck the following week.

This firm recently was involved in a transaction involving receipt of an offshore cheque. The client produced a cheque drawn on the Hong Kong branch of a well-known Chinese bank. As required, the cheque was receipted and lodged for clearance at the firm’s bank.

The proceeds of this cheque were not paid out as it was necessary to ensure the cheque cleared. Subsequently, the firm was advised the cheque had been dishonoured as counterfeit.

That was not the end of the matter, however.

The difficulty arose when the firm realised that some $5,720 more than the amount of the cheque had been removed from its trust account as a result of the dishonour. The bank where the firm has its trust account debited the extra $5,720, consisting of the overseas bank’s dishonour fee and its own exchange costs.

That transaction drew down $5,720 from the collective total of other clients’ funds.

It was only with the intervention of an NZLS inspector that the bank accepted it could not deduct the dishonour fee from the trust account and repaid the money.

However, the bank continued looking to the firm to pay the dishonour fee and exchange difference, though it finally agreed not to continue seeking such a recovery.

Peter C Gilbert says it has received cheques from the United States and from Australia on more than one occasion. These cheques are receipted in the normal fashion, delivered to the bank where the exchange rate is determined and the New Zealand amount credited to the trust account in the meantime pending clearance.

Never before has a cheque been dishonoured attracting a fee of several thousand dollars, the firm says.

There does not appear to be any way around the situation when acting for offshore clients except to demand bank cheques or international wire transfers.

“You would think that the woes of trust accounts would go away for a while after such a disheartening experience,” Kevin Smith of Peter C Gilbert says. However, it was a case of “not at all”.

The following week, when approaching a settlement, the firm received confirm-ation from another New Zealand registered bank (Bank A) that mortgage funds had been deposited to the credit of the trust account.

The settlement was set down for 21 October and the faxed confirmation of direct credited funds was as at 21 October.

Somewhat shell-shocked from the previous dishonour fee levied, the firm approached the bank with some trepidation, asking for a bank cheque in reliance upon Bank A’s confirmation of direct credited funds to effect the settlement.

The funds were not in the firm’s trust account. The firm held only an undertaking from Bank A that the funds were in the account.

When an inquiry was made, Bank A advised that the funds were lodged but would not show in the trust account until the following day. That presented a difficulty for settlement, as the firm’s bank would not allow a bank cheque to be drawn on funds that were not clearly in the trust account.

The firm’s bank, of course, adopted the correct view.

Bank A’s mortgage lending service advised the firm that it was the bank’s practice to expect law firms to fund the mortgage advance overnight on the basis of the undertaking given and for that purpose the law firm should go into overdraft on the trust account to ensure settlement proceeded.

Such advice could not be followed because of Law Society rules regarding trust accounts.

Bank A advised that this had been its practice for years and intimated that the firm was being very awkward in not funding the mortgage advance from its trust account pending confirmation of the receipt of funds the day following settlement.

The matter was resolved by Bank A confirming that it would make available a bank cheque for the firm’s bank to uplift and credit to the trust account, allowing a bank cheque to be drawn from the trust account for the purposes of settlement.

“I took the opportunity to talk to a well-respected man of the law about the conundrum I faced, as he was the solicitor on the other side of the transaction,” Kevin Smith says.

“He advised me that banks were indeed looking at law firms funding from their trust account pending actual receipt and expected law firms to rely on the undertaking that funds would be ‘seen’ the following day.

“Well, I suspect that is in itself a technical breach and would be available only if, as with a bigger firm, there was a sufficient “balance” of other clients’ funds enabling the drawing of a cheque in such an instance. In a small firm, that generally would not be possible.

“The second warning, therefore, is to be very careful in respect of confirmation of direct credited funds to one’s trust account because that confirmation appears in this particular instance to not have been worth the paper it was written on.

“The only solution immediately apparent is to ‘draw down’ in every instance the day before settlement and ask the client to consent to that process.”

Kevin Smith says his firm is very grateful for the assistance given by the NZLS inspector on these matters.

This was published in LawTalk 741, 16 November 2009.