What to do when your client won’t pay

It is, sadly, inevitable that every accounting practice will, at some point, have to deal with a client who won’t pay.

In this situation, you probably won’t want to give them your work (how will you get paid if you do?) but it’s difficult to know what your rights are.

The books, records and documents used in your work belong to your clients, after all. So what’s your best course of action? Well, you may be able to exercise the right of lien: a creditor’s right to retain possession of a debtor’s property until they pay what is owed. But this is something of a grey area legally. You are unlikely to be able to exercise this right unless the following three conditions are met.

1. The documents belong to the client

Ownership in the eyes of the law can be tricky to determine. Your contract with the client should outline what you own and what the client owns. If any of the documents actually belong to a third party, you cannot hold on to them.

2. You’ve worked on the documents

Did you take possession of the documents by ‘proper means’ (that is, you didn’t take them without permission)? Have you worked on the documents? You’ll need to have done so to exercise the right of lien.

3. You’ve properly invoiced the client

Your client should have received an ‘adequately detailed’ fee note outlining the work you’ve completed, what you’re owed and your payment terms. Based on past cases, it’s likely that, without this note, your rights will be undermined.

When you lose your rights

You cannot exercise the right of lien if you’ve worked on the same documents – and been paid for that work – before. In the case of long-standing clients, this could be particularly relevant. If you have access to any of the company directors’ personal documents, these should be treated as separate from the company’s, as it has been established that no lien can exist over certain books or documents of a registered company. You should always get legal advice before exercising the right of lien. If your client disputes the lien, you should advise them to get legal advice too.

Member query: right of lien and professional clearance

A licensed accountant recently wrote to AAT’s Professional Standards team with an awkward problem: they’d received instructions from a new client but the former accountant wouldn’t release the client’s information or provide professional clearance because the client owed them money. So what’s the solution?

First and foremost, the licensed member needs to think about their obligations before taking any action. They could continue to act on behalf of the new client if they have documented evidence that reasonable steps have been taken to obtain the information.

For example:

  • A response has been chased and, if there is still no reply, a final letter has been sent, via recorded delivery, asking for a response by a specified date.
  • The client has been reminded that they need to correctly disengage with the previous accountant in writing and provide them with authority to contact the new accountant.
  • The member has been clear with the client about the work they are able to undertake, highlighting the threats of incomplete information in terms of professional competence and due care.
  • Any matters agreed on in the letter of engagement with the client are clear.

What is professional clearance?

Professional clearance is a safeguard that reveals any reasons for refusing a new engagement. It may be withheld for various reasons.These mainly relate to compliance (not outstanding fees).The old accountant isn’t giving permission for a new one to act for the client, but rather informing them of any issues they should be aware of. Members should also be cautious about what information is exchanged and whether it could amount to tipping off, as defined in the Money Laundering Regulations 2007.

For further information, refer to AAT’s client care policy.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.

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