A trust shortage occurs when more funds are paid out on a client matter than what is available to the credit of that client. Even though the trust account may have a positive balance, it may be short regarding a specific client. Shortages also occur when trust funds are deposited to an account which is not designated as a trust account, such as a general, operating or personal account.
Here is an example: Client A gives you $10,000 in trust. Client B gives you $21,000 in trust and Client C gives you $18,000. If these are the only three clients, you now have $49,000 in trust. Client B asks you to make a payment out of trust in the amount of $25,000 and you do so. By doing this, you have now created a shortage under Client B’s trust ledger in the amount of $4,000. Why? Because Client B only had $21,000, yet you paid out $25,000. So, even though you still have a positive balance in your trust account of $24,000 ($49,000 – $25,000 = $24,000), it is considered a shortage because Client B did not have enough funds to make the payment and you ended up using some of Client A & Client C’s funds towards Client B’s payment.
Rule 119.24(1) requires that a lawyer must always maintain sufficient funds on deposit in each trust account to meet all obligations to clients.
When the Responsible Lawyer becomes aware of a trust shortage, the lawyer is required to immediately report to the Law Society. A report cannot wait until the end of the reporting period.
In the event you discover a shortage, Rules 119.24(2) & 119.24(3) apply.
Law firms are required to submit a Trust Account and Client Ledger Shortages form if:
- A shortage exists that cannot be attributed to a client file and is greater than $50 or not corrected within 30 days, or
- A shortage exists on a client file and
- The law firm does not correct the deficiency within 7 days of the time the shortage arose, and/or
- The deficiency is an amount greater than $2,500, regardless of when the deficiency is corrected.
How to report a shortage:
To report a trust shortage, you should complete the Trust Account and Client Ledger Shortage Form available on the Law Society website.
Proper care should be taken when completing this form to ensure that all required fields are completed. Provide a detailed explanation of how the shortage occurred and when it was corrected in the explanation box provided.
The Responsible Lawyer signs the shortage report, rather than the lawyer responsible for the file.
Once the form is completed, attach the client trust ledger card, bank statement and any other applicable documents evidencing the correction of the shortage and send the information by email.
Documents to support proof of a shortage correction:
- Trust bank statement – This is a printed record of the balance in a bank account and the amounts that have been paid into it and withdrawn from it. The statement is issued periodically to the holder of the account and can be directly from the bank or an online printout. It must contain the name of the law firm and account number.
- Proof of Deposit – This is a document issued by the bank, verifying that funds have been deposited into a bank account. It must have the bank stamp.
- A client trust ledger card – This is maintained for each client matter. It records receipts and disbursements for each client file. Always review the individual client ledger card before issuing a trust cheque. You will have a shortage if there are not sufficient funds to the credit of a client, or if funds deposited to a client’s credit have not cleared.
- A copy of the payment instrument i.e. cheque, credit card, electronic transfers, etc. showing that the shortage from the trust account has been replenished.