Client Money: Amount Due to the Client and Amount Due by the Client

The rule is the reason the accounting in chapter [Basic Principles of Accounting: The Double Entry, and What an Account Is] separates a fee receipt, which is income, from an expenses receipt, which is a liability.

Rule 27: tell the client

"Where any amount is received or given to him on behalf of his client, the fact of such receipt must be intimated to the client, as early as possible."

Short, and it is the rule that decided Harish Chandra Tiwari v. Baiju, AIR 2002 SC 548. Compensation of Rs 8,118 was deposited in court for a client the disciplinary committee described as an old, helpless, poor illiterate person; the advocate applied for its release, withdrew it on 2 September 1987, and neither paid it over nor told him. The Bar Council of India suspended him for three years; the Supreme Court enhanced the punishment to removal from the roll.

Rule 28: appropriation after the proceeding

"After the termination of the proceeding, the advocate shall be at liberty to appropriate towards the settled fee due to him, any sum remaining unexpended out of the amount paid or sent to him for expenses or any amount that has come into his hands in that proceeding."

Three conditions: after the termination of the proceeding; towards a settled fee; and out of money paid or sent for expenses, or that came into his hands in that proceeding.

Rule 29: where the fee was not settled

"Where the fee has been left unsettled, the advocate shall be entitled to deduct, out of any moneys of the client remaining in his hands, at the termination of the proceeding for which he had been engaged, the fee payable under the rules of the Court, in force for the time being, or by then settled and the balance, if any, shall be refunded to the client."

So where no fee was agreed, he may deduct the fee payable under the rules of the Court or as by then settled, and the balance, if any, shall be refunded. The measure is the court's own scale, not the advocate's opinion of his worth.

Rule 30: give the client a copy

"A copy of the client's account shall be furnished to him on demand provided the necessary copying charge is paid."

This is why the client's ledger must be kept separately, as chapter [The Books a Lawyer Keeps: Cash Book, Ledger, Journal and Trial Balance] explains. An advocate who cannot produce a client's account on demand is in breach whatever the state of the money.

Rules 31 and 32: no loans either way

Rule 31: "An advocate shall not enter into arrangements whereby funds in his hands are converted into loans."

Rule 32: "An advocate shall not lend money to his client for the purpose of any action or legal proceedings in which he is engaged by such client."

Explanation to rule 32: an advocate is not guilty of a breach if, in the course of a pending suit or proceeding, and without any arrangement with the client in respect of it, he feels compelled by reason of the rule of the Court to make a payment to the Court on account of the client for the progress of the suit or proceeding.

So the advocate who pays a small court fee out of his own pocket to prevent a matter being dismissed, without any arrangement, is protected. The advocate who funds his client's litigation is not.

Rule 33: not for the other side

"An advocate who has, at any time, advised in connection with the institution of a suit, appeal or other matter or has drawn pleadings, or acted for a party, shall not act, appear or plead for the opposite party."

Included here because it completes Section II, and it is worked in chapter [Duty to the Client II: Conflict of Interest and the Duty of Confidence] and in Chandra Shekhar Soni v. Bar Council of Rajasthan, AIR 1983 SC 1012.

A worked example

Advocate Rahim is engaged by Ms D'Cruz in a suit. The fee is settled at Rs 60,000. The transactions:

The client's ledger, which is the account rule 25 requires:

Note six things, each a rule in action.

The Rs 30,000 of fees received on 4 June is not in this ledger at all. It is income, credited to Professional Fees. Rule 26 requires the entries to show whether money was received for fees or expenses, and the cleanest way is to keep the two apart entirely.

The Rs 15,000 costs recovered from the defendant is the client's money, not the advocate's, and goes to the credit of this account. Rule 25 covers amounts received "on his behalf".

Nothing was appropriated towards fees until 30 September. Rule 26 forbids diverting expenses to fees during the course of the proceeding except with the client's written consent.

On 30 September, the proceeding having terminated and the fee being settled at Rs 60,000 with Rs 30,000 already paid, rule 28 permits appropriation of the balance of Rs 30,000 out of the sums in hand.

The remaining Rs 1,000 was refunded. Rule 29 speaks of the balance being refunded, and rule 28 permits appropriation only towards the settled fee, so anything above it is the client's.

The closing balance is nil, and by rule 30 Ms D'Cruz may demand a copy of this account on paying the copying charges.

Amount due to the client at each stage is the credit balance in the last column. Amount due by the client at 4 June was Rs 30,000, the unpaid half of the settled fee, and it appears not here but as a debtor in the practice's own books until it is discharged on 30 September.

Three variations

One: the fee was never settled. Rule 29 applies. Rahim may deduct at the termination of the proceeding the fee payable under the rules of the Court in force, or as by then settled, and the balance, if any, shall be refunded. He cannot pick his own figure.

Two: he needs Rs 2,000 for an urgent court fee and the client has sent nothing. If he pays it himself without any arrangement with the client, feeling compelled by reason of the rule of the Court to make the payment for the progress of the suit, the Explanation to rule 32 protects him. If he agrees in advance to fund the litigation and recover later, that is a loan and rule 32 forbids it.

Three: he is short of money and uses Rs 20,000 of the client's expenses money for his office rent, intending to replace it. Every element of misconduct is present. Rule 26, diverting expenses during the proceeding without written consent; rule 31, converting funds in his hands into what is in substance a loan to himself; and on Prahlad Saran Gupta v. Bar Council of India, AIR 1997 SC 1338, merely retaining a client's money without justification was conduct not befitting an advocate even though dishonesty was not established. The intention to replace it is not a defence.

How the account protects the advocate

Worth saying, because students see these rules as a burden.

It answers a complaint. An advocate who produces a dated client ledger closing at nil, with a copy furnished under rule 30, has met the allegation before it is made.

It fixes the fee dispute. Where the fee is settled and recorded, rule 28 gives a clear right of appropriation at the end. Where it is not, rule 29 sends the parties to the court's scale.

It separates his money from theirs, which is what makes it possible to say, at any moment, that the bank balance is sufficient to meet the client liabilities. Chapter [Financial Statements: The Income Statement and the Balance Sheet] shows what a shortfall looks like on a balance sheet.

What beginners get wrong

Fees received are not client money. They are income.

Money recovered from the other side is client money.

No appropriation during the proceeding without written consent.

Rule 28 needs a settled fee; rule 29 governs where there is none, by the court's scale.

Paying a court fee out of your own pocket is not automatically a breach; the Explanation to rule 32 protects the unarranged, compelled payment.

Intending to replace client money is no defence.

A copy of the account is due on demand, on payment of copying charges.

Quick revision

• Amount due to the client: a credit balance in his ledger, a liability in the balance sheet. Amount due by the client: a debit balance, a debtor.
• Rule 25: accounts showing amounts received from or on behalf of the client, expenses incurred, debits on account of fees, with dates and all other necessary particulars.
• Rule 26: entries must state fees or expenses; no diverting expenses to fees during the proceeding except with the client's consent in writing.
• Rule 27: intimate any receipt on the client's behalf as early as possible. Harish Chandra Tiwari: Rs 8,118 withdrawn on 2 September 1987, client neither told nor paid; removal from the roll.
• Rule 28: after termination, appropriate towards the settled fee any unexpended sum paid for expenses or that came into his hands in that proceeding.
• Rule 29: where the fee was unsettled, deduct the fee payable under the rules of the Court or as by then settled, and refund the balance.
• Rule 30: a copy of the client's account on demand, on payment of copying charges.
• Rule 31: no converting funds in hand into loans. Rule 32: no lending to the client for the proceeding; Explanation, a payment to the Court made without arrangement, under compulsion of the Court's rule for the progress of the suit, is not a breach.
• Rule 33: having advised, drawn pleadings or acted for a party, no acting, appearing or pleading for the opposite party.

Test yourself

1. What must a client's account show under rule 25? The amounts received from the client or on his behalf, the expenses incurred for him, and the debits made on account of fees, with their respective dates and all other necessary particulars.

2. May an advocate take his fee out of money sent for expenses while the case is going on? No, except with the consent in writing of the client concerned. Rule 26 forbids diverting any portion of the expenses towards fees during the course of the proceeding without such consent.

3. When may he appropriate money in hand towards his fee, and on what conditions? Under rule 28, after the termination of the proceeding, towards the settled fee due to him, out of any sum remaining unexpended from money paid or sent for expenses or any amount that came into his hands in that proceeding.

4. What if no fee was ever agreed? Rule 29 applies. At the termination of the proceeding he may deduct out of any of the client's money in his hands the fee payable under the rules of the Court in force for the time being, or as by then settled, and the balance if any must be refunded.

5. An advocate pays a small court fee from his own pocket to stop a suit being dismissed. Has he broken rule 32? Not if he did so without any arrangement with the client and felt compelled by reason of the rule of the Court to make the payment on the client's account for the progress of the suit. The Explanation to rule 32 covers exactly that case. An agreed arrangement to fund the litigation would be a loan and would breach the rule.

6. Costs are recovered from the opposite party and paid to the advocate. Whose money is it? The client's. Rule 25 covers amounts received "on his behalf", so the sum is credited to the client's account, and by rule 27 the receipt must be intimated to him as early as possible.