Exercising a Lien
What is a lien?
A lien is a creditor’s right to retain possession of a debtor’s property until the debtor pays what he or she owes to the creditor, or person in possession.
For instance, where a client wishes to transfer instructions to another accountant but has not paid an outstanding bill to the former accountant, the former accountant may be entitled to retain the client’s papers until the bill is paid.
Liens are most frequently considered in circumstances where there is an outstanding balance on a client account and the client wishes to transfer to a new accountant.
There is more than one type of lien within UK law and various factors to take into account when seeking to exercise a lien.
Note, this guidance is not a substitute for obtaining legal advice and you should always consider taking legal advice when considering whether or not to exercise a lien over a client, or former client’s property.
Particular lien
A particular lien is over a particular piece of property which can be retained only until payment of a particular debt due in respect of that property is paid.
You only have a right to exercise a particular lien when all the following conditions are met:
- The documents retained must belong to the client who owes the debt and not to a third party. This applies no matter how closely connected the third party may be with the client. For example, an accountant may be engaged to work for a company and by the Directors to prepare their end of year self-assessments. If fees remain outstanding in relation to the self-assessments, then no right of lien exists in relation to the company documents.
- The documents must have come into your possession by proper means. If you receive documents belonging to a client from a third party in error, you would not be entitled to exercise a lien over them.
- Work must have been done by the member in respect of the documents. In order for a particular lien to exist, there must be evidence that the work has been carried out. Case law also indicates that a particular lien may not exist if a fee note has not been submitted, or an oral demand for payment has not been made in a reasonable timeframe
- The fees for which the lien is exercised must be outstanding in respect of that work and not in respect of other unrelated work. Where documents have been created or belong to a client in relation to an earlier or alternative engagement where all fees have been paid, there is no right of lien over any documents which relate to those engagements.
For example, if an accountant is holding documents in relation to tax advice, where fees are outstanding, they are not entitled to hold documents relating to an earlier engagement (e.g. to complete the client’s financial statements) if the fees in relation to that engagement have been paid.
General lien
This allows the creditor to retain possession of any property belonging to the debtor in respect of any debt, which does not necessarily have to be the debt which relates directly to the retained property itself.
It should be noted that in the absence of an express contractual provision which states that a member is entitled to retain all client property where a debt is owed, such liens will rarely be established in law.
Exceptions
There are a number of exceptions established in law which must be considered when considering whether a lien can be established. They include, but are not limited to the following:
Statutory books of a Company
Established case law provides that a lien cannot exist over books or documents of a registered company which, either by statute or through the articles of association for the company, have to be available for public inspection or to be kept at the registered office or some other specified place or be dealt with in any special way.
This means that documents such as the register of members and directors’ minute books cannot be the subject of a lien.
Accounting records of companies
Similarly, a lien cannot be exercised over ‘accounting records’ (as defined in s.386 of the Companies Act 2006, which requires companies to maintain ‘adequate accounting records’). This is because there is a mandatory requirement to keep these records, which must be open to inspection.
Section 386(2) the Companies Act 2006 defines ‘adequate accounting records’ as records that are sufficient—
(a) to show and explain the company’s transactions,
(b) to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
(c) to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act.
Consequently, this will not necessarily encompass all the accounting records relevant to a particular company held by an accountant in the course of a professional engagement.
Administrations and liquidations and administration receiverships
In the event that a company becomes subject to an administrative order or is liquidated, it is still possible to exercise a lien over any records of the company where the administrator or receiver has no other way of obtaining them in line with the provisions of the Insolvency Act.
Equally, where an accountant has a lien over the books of a company, the appointment of a receiver does not affect the lien.
Providing that the above conditions have been met and there are no special exceptions, it may be lawful for an accountant to assert a particular lien over documents belonging to his or her client (e.g. a self-assessment return submitted on the client’s behalf) in respect of which the accountant has performed work (e.g. preparation of the self-assessment) and for which s/he has not been paid.
NOTE: Before seeking to exercise a lien over client property you should consider the information set out within this guidance. For anything but the most straightforward cases, you are strongly encouraged to seek legal advice.
