Gazette 43703

On 11 September 2020, the Minister of Justice announced that the mora interest rate had changed. This rate is critical to the operation of legal practice and specifically collecting judgment debt.  Simply, where a court grants judgment, and no other arrangements apply concerning interest on that judgment, the Prescribed Rate of Interest Act regulates the applicable interest rate. The Act is clear and the regulations make it easy to know what the interest rate is when judgment is given.

11 SEPTEMBER 2020 Gazette 43703

PRESCRIBED RATE OF INTEREST
(SECTION 1 OF THE PRESCRIBED RATE OF INTEREST ACT, 1975)

Under section 1(2)(b) of the Prescribed Rate of Interest Act, 1975 (Act No. 55 of 1975), I, Ronald Lamola, Minister of Justice and Correctional Services, hereby publish a rate of interest of 7,75 percent per annum as from 1 June 2020 for the purposes of section 1(1) of the said Act.

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Except when it does not. It does not provide clarity when legal facts are altered retroactively. The Minister announced on 11 September 2020 that the prescribed mora interest rate had changed on 1 June 2020 – backdating the effective by more than three months! 

Imagine any judgment given after the effective date in June. Judgment debts have been calculated. Writs and warrants have been issued. The Sheriff may have already attached, and sold. Proceeds, including interest, has been calculated, and distributed. All of this has been done based on the legal fact of an interest rate that now, no longer exists. On 11 September 2020, legal certainty was cast aside and chaos lurks in halls of justice.

And in an unexpected move, another update was published, and once again backdated:

09 OCTOBER 2020 Gazette 43781 

PRESCRIBED RATE OF INTEREST
(SECTION 1 OF THE PRESCRIBED RATE OF INTEREST ACT, 1975)

Under section 1(2)(b) of the Prescribed Rate of Interest Act, 1975 (Act No. 55 of 1975), I, Ronald Lamola, Minister of Justice and Correctional Services, hereby publish a rate of interest of 7,25 percent per annum as from 1 July 2020 for the purposes of section 1(1) of the said Act.

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Yes, as unbelievable as it may seem, we have two examples of public backdating in the span of a month.

Nobody knows what will happen next. Perhaps judgments granted on the original (higher) rate will remain as is, causing endless headaches many years from now. Or, court applications will alter judgments to bring them in line with the new reality. Or, the courts may simply issue a directive to its registrars, taxing masters and clerks to assume that the September (June?) interest rate is the only rate to apply. Or something else all together may happen.  Nobody knows what the future holds, but an arbitrary act retroactively changing the past has now caused practical problems.

It is fair to expect corrections on corrections to remedy the problems caused by an out of time fix. This will be interesting to watch.

It is seldom the case that such a thoughtless acts of backdating a decision are so widely published, with such far reaching implications.

But backdating is in fact very common. It is so common in fact that there are several definitions available on the internet. A good working definition is this one

Backdating is the practice of marking a check, contract, or other legally binding agreement with a date that is prior to the current date. Backdating is usually not allowed and even can be illegal or fraudulent in some situations. Backdating Definition – Investopedia

Lawyers Trust Accounting requires compliant bookkeeping. Compliance requires certain minimum standards of conduct to be followed and reports produced. One such behaviour is the recent balancing of the books. In a nutshell this means transactions must be recorded and compared as required to external documents, confirming the validity of the transactions and the integrity of the system. Compliance is not merely balancing the books, but doing so in the given time frame provided.

A common problem with trust banking accounts is that bank charges may occasionally exceed the available interest. The Fidelity Fund is the designated trust creditor for all interest, and a ledger account reflecting all the trust banking charges and interest should be completely and accurately captured. Only at the end of the audit cycle can any excess bank charges be recovered, while interest must be paid over monthly.  In the long run, this should sort itself out, but at the end of any given month, there is the risk of carrying less money in the trust bank account than the obligation to pay towards trust clients.

If the books are maintained monthly, as required, the problem can be detected and fixed quickly.  If a problem occurs and is rectified within its accounting period, it can safely be assumed that there is no problem at all. Compliance requires recognition of the issue, steps to rectify, confirmation that the problem no longer exists and depending on the nature of the event, notice to the relevant authorities.

However, if the books are not kept month to month, excessive bank charges may go unnoticed. In current market conditions with increased costs and lowest interest rates in 40 years one should expect and anticipate bank charges exceeding available interest.  Unless properly managed, this could become a serious, recurring, uncontrolled problem.

Bank charges are largely beyond our control, but very real, and can be managed. But what happens when fees are backdated, or a disbursement is backdated to an account? Not only do balances change, but it may also affect VAT liability and cause unexpected ripple effects on reports thought of as final: Trial Balances no longer match the current figures, Cash Book balances and Bank Reconciliations no longer match original reports. In short we cannot rely on any reports, our accounting reality is disturbed and chaos follows.

Backdating in an attorneys books may cause specific problems with at least the following

  • VAT liability
  • Trust creditor balances
  • Compliance reports
  • Bank Reconciliations

Imagine an attorney focused solely on the relevant trust balances on individual files. The bank charges and interest are assumed to be sorted, but never monitored. During the course of a given month long ago, such as May, bank charges exceeded interest and a portion of the trust funds were applied to cover this cost. The bank will never rectify this deficit and will not even be aware that the trust banking balance does not correspond with the trust creditors. Individual matters may balance, but controls are never consulted, system wide verification is never inspected. Only when the transaction processing is complete and all bank statement transactions have been captured to a ledger, will the lack of funds be revealed. In a compliant environment this will be rectified almost immediately. 

In a non-compliant environment, months, or a year may go by before the problem is detected, and then it cannot be rectified. The result is a historic trust deficit, carried forward month by month. Not even backdating a transaction can remedy this situation.

Compliance requires more than merely waiting for the auditor to sign off on a annual report. Compliance requires the active use of sophisticated cloud based attorneys accounting solutions for the identification and rectification of any debit trust ledger debit balances. 

The solution requires more than merely inspecting each individual ledger account. Control documents, and regular remedial action is required. The value and liability of a law firm is more than merely the sum of the balances on it’s client ledger accounts. For more information on how Dynamic’s Trust to Business Analyzed Transfer can guarantee the integrity of your trust, and distinguish fees from disbursements, please scan the link below.

Dynamic Practice Management

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