Be sure before disbursing trust money

19 October, 2018

When acting as stakeholder, you need to check that any conditions for disbursing the money have been strictly met and keep appropriate documentary evidence.

In one claim, a practitioner acted for a company that was to be nominated by an affiliate as the purchaser of a property for development. The client needed to raise capital and was referred to another firm to advise on the financing aspects and document loan arrangements.

The loan was conditional on the client being nominated as purchaser. The loan agreement also provided that the loan funds were to be held in the practitioner’s trust account until the purchaser provided the lender with written evidence of the nomination.

The purchaser was duly nominated and the loan funds were paid into the practitioner’s trust account. This caught the practitioner by surprise as he had not been informed of the loan arrangements and his stakeholder role. He sought instructions from the client and was provided with a copy of the loan agreement and the nomination form. He said he subsequently sent a copy of the nomination form to the lender under cover of a letter before disbursing the money to the purchaser, but the letter made no reference to including the nomination clause.

When the development later failed, the lender alleged he did not receive written evidence of the nomination and therefore the practitioner had paid the money to the purchaser in breach of trust. The practitioner was unable to produce any written evidence to the contrary.

The practitioner allowed use of his trust account as a stakeholder without being involved in the whole transaction and fully conversant with the terms of the stake. This could have been a factor in his failure to appreciate the significance of the clause in the loan agreement and the need for him to have documentary evidence of its satisfaction. It appears that, when sending the letter, the practitioner just assumed the lender was already aware of the nomination.