Voluntary closure - retirement without a successor
It is fair to say that modern practice as a solicitor has its fair share of stressful situations but one of the most stressful and emotional events is the contemplation of closing your practice.
In this series, written by solicitor Richard Nelson, we outline some of the key issues surrounding closing your practice. In this article we focus on voluntary closure - retirement without a successor, although many of the issues covered and steps required will be relevant for closing a practice for any reason.
The Solicitors Assistance Scheme offers up to an hour of free advice on the issues which arise on closure.
Closure will usually be relevant on the retirement of a sole practitioner or a partner in a small practice. It may of course become relevant in a larger entity or if the principal choosing to retire is a key figure upon whom the firm relies for its viability.
The good news is that in the absence of ill health this is something for which one can plan and therefore achieve a gradual and orderly wind down of the practice.
A key consideration will be whether or not there is interest on the part of another firm to purchase the goodwill and if so whether they are prepared to become a successor practice for insurance purposes. Even if they are not to be a successor practice which nowadays is an increasingly relevant aspect, there are ways in which the firm and its goodwill can be passed on.
Where the practice can continue help is available if required to identify and to negotiate the terms of the retirement of the outgoing principal. Here we focus on a closure where there is to be no succession.
It is key to protect the interests of the clients, their ongoing work and their assets, such as Wills, deeds, powers of attorney, trust documents, and files both live and dead. The onus is on the retiring solicitor(s) to protect confidentiality and privilege and to ensure that consent is obtained for the transfer of any documents or their return.
The obligation to notify clients can prove expensive, particularly if email is not an option and hard copy letters have to be sent through the post.
Storage of closed files
The cost of the continued storage of closed files can be significant but unless alternative arrangements are made that ongoing cost remains the responsibility of the outgoing principal(s). Hopefully a destruction policy following the closure of the file will be in place and agreed by the clients. If so destruction of files in accordance with this policy can take place.
If the accounts are up-to-date and the reconciliations show that there is no shortfall on client account a distribution of the funds to the individuals entitled must be undertaken. In the event that there is a shortfall it is very important that advice is taken from a regulatory lawyer who specialises in SRA regulation before any money is paid out. A shortage in a general client account results in a shortage in respect of each client and so no client can receive their full entitlement.
Eventually following the closure of the practice and the reduction of the client account to zero, evidence must be sent to the SRA that no client funds are held.
Notifying relevant parties of closure
All relevant parties will need to be notified of the closure of the firm. These parties include the firms acting on the other side of cases, the courts, and any others with whom the firm has current dealings including the LAA, the bank, HMRC, accountants, et cetera.
The practice may have ongoing liabilities in respect of maintenance contracts, loans, hire purchase, or other debts. These will have to be considered and may be continuing liabilities of the individual principal depending on the contract terms.
Consideration will need to be given to the premises occupied by the practice. The ongoing liabilities under a lease including dilapidation charges need to be addressed.
A major issue is that of PII. Run-off cover to ensure that claims arising in the six year period following closure are covered on the same terms as for the last year of the practice, must be provided by the insurer and this is at a cost to the principals who were in post at any time during the last period of insurance.
Check your policies because many contracts specify that individuals who were principals or shareholders during the period of insurance are personally liable for unpaid premiums, excess payments due, and the cost of run-off cover, and thereby the insurer goes behind the veil of incorporation or limited liability.
What will happen about claims that come to your attention following the six year run off period is still unclear. The SRA have announced their decision to close the Solicitors Indemnity Fund which currently offers insurance cover for the period beyond run off, but there is no clear option as yet for further cover.
Advice should be sought on the issue of insurance payments and the cost of run-off cover is often negotiable.
A principal retiring from practice should exit altogether. It is important to note that (subject to the solicitor being covered under another contract of insurance-See below) once run-off cover has been taken the provision of any legal services will invalidate that cover.
Destroy marketing literature. A message should be placed on any answerphone explaining to callers that legal work is not being undertaken and explaining where queries about administrative issues including payment of outstanding bills should be directed.
The firm’s website should be taken down subject to a notice explaining that the firm is no longer in existence and explaining how clients can access deeds or documents and where administrative questions should be directed.
The firm’s letterheaded stationery should preferably not be used but if it is used it should contain a clear statement that the firm is no longer in practice.
Any advice lines should be withdrawn and any other vehicle for the provision of advice to potential clients should also be withdrawn.
"After closure the retiring solicitor should not offer any help to a former or potential client or casual acquaintance whatsoever. This means that the retired solicitor must not submit a form, offer pro bono advice, answer requisitions or tell a client what they should do to progress their matter. Any such advice or assistance whether or not for reward will invalidate the run-off cover and will also constitute misconduct."
While still on the Roll of solicitors the retiring party may use the term solicitor but should make it clear that they are not practising. Thus business cards if used must be amended to say “non-practising solicitor” subject only to what is set out below.
To the outside world partners are jointly and severally liable for the debts of a practice or partnership other than a limited liability entity. Internal agreements or indemnities will apply as between the principals themselves but have no relevance to outside creditors.
On a positive note the practice is entitled to payment for the work done up to the date of closure and is able to bill clients and to collect debts. This constitutes administration rather than the provision of legal services and so does not invalidate run off cover.
If the former principal wishes to continue to work either full or part-time or in a self-employed role there are options available.
Richard Nelson is a solicitor in private practice at Richard Nelson LLP specialising in solicitors disciplinary, regulatory and practice management matters. He is a member of the Solicitors Assistance Scheme and the Regulatory Processes Committee of The Law Society. Any comments made or views expressed are his own and not those of or on behalf of any other organisation or party.
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