Practice Closure

Introduction

There are a number of reasons why it may be necessary to close a practice down and the introduction of more stringent successor practice rules has meant that, to all practical intents and purposes, it may commercially be impossible to dispose of a practice by way of sale on the open market or even to give it away.

It is vital to ensure that the correct steps to close a practice are followed and that all of the appropriate rules and regulations which apply to it are followed. Even if you have no intention to continue to practise as a solicitor, failure to follow the correct steps could still lead to disciplinary action and financial loss and leave you with a problem potentially as great as any you experienced prior to the practice closure. In serious cases, you may even be intervened in before you have the opportunity to close the practice, leading to potential fines and the costs of the intervention itself.

If you have any concerns about the closure of your practice, or have any worries that you may be about to be intervened in, then you should contact the Lawyers Defence Group as a matter of urgency and we will assist you. We may even be able to negotiate with the SRA on your behalf and avoid an intervention from taking place.

Why close your practice

The need for a practice to close can arise in a number of circumstances including:

• the death of a sole principal,
• the ill health of a sole principal,
• a partnership dispute, where no simple resolution can be achieved,
• to avoid an intervention,
• as the result of prohibitive conditions being placed on a partner’s practising certificate,
• retirement,
• difficulties in securing working capital,
• cash-flow problems,
• difficulties in obtaining professional indemnity insurance,
• being in the assigned risks pool for six months, or
• bankruptcy or insolvency of a sole practitioner

Often, realising that the practice cannot continue, and taking the appropriate steps sooner rather than later is the best way forward, even if the best option is to voluntarily close the practice.

Avoiding intervention

Closing a practice voluntarily should almost certainly be viewed as the only practical option when it appears that the firm may be intervened in. Allowing the Solicitors Regulation Authority to intervene should be avoided wherever possible because of:

• the significant costs of intervention – intervention agents charges alone will be quite considerable and could easily force a principal into bankruptcy,
• the loss of control of recovery of bills and reimbursement for work in progress,
• the automatic referral of the principal(s) to the Solicitors Disciplinary Tribunal,
• the automatic suspension of practising certificates,
• the disruption to client matters and the subsequent loss or reputation so far as those clients are concerned,
• the immediate freezing of bank accounts,
• the general humiliation of, and the stigma which can attach to, the principals in the firm

Whilst a voluntary closure of the practice will not avoid all of the problems that can arise from the cessation of a business, nevertheless it will avoid many of the problems detailed above. However, it should be borne in mind that a voluntary closure will and can only work if the SRA is satisfied that the closure will be undertaken properly and is prepared to defer the intervention until such time as the voluntary route has been explored. This is something which may only be able to be achieved if the firm closing down is assisted by another firm whom the SRA regards as being able to do so in such a way as adequately to protect the interests of the public.

Keeping the SRA informed

Before you start to take steps to wind down your practice, it is worth bearing in mind a couple of important preliminary points that are set out in Chapter 10 of the SRA Code of Conduct.

Outcome O(10.3) requires that “you notify the SRA promptly of any material changes to relevant information about you including serious financial difficulty” and Outcome O(10.13) requires that “once you are aware that your firm will cease to practise, you effect the orderly and transparent wind-down of activities, including informing the SRA before the firm closes.”

The Outcomes are backed up by indicative behaviours, IB(10.4) requiring that you notify the SRA promptly “when you become aware that your business may not be financially viable to continue trading as a going concern, for example because of difficult trading conditions, poor cash flow, increasing overheads, loss of managers or employees and/or loss of sources of revenue” and IB (10.9) which requires that you have in place “appropriate arrangements for the orderly transfer of clients’ property to another authorised body if your firm closes”.

In other words there are, so far as the SRA are concerned, two key points at which you must consider notifying them of factors relating to your firm:

• the point at which you realise that you are going to need to take steps to address the financial viability of your practice; and
• the point at which you decide that the practice will need to close down.

What steps need to be taken in closing down a practice

In any practice closure there are a number of important steps which have to be performed if those involved in the firm are to comply with the SRA Handbook and in particular the provisions at Outcome O(10.13).

These steps include:

• clients for whom you are currently acting need to be informed of the closure giving them as much notice of the intended closure date as possible so that they can instruct other firms to act for them. If you have made arrangements with another firm to take over any files, the clients should be advised of this, together with their right to instruct a different solicitor should they wish to do so;
• clients for whom you have acted in the past need to be informed if your closure is likely to affect them – for example those for whom you are executor or where your firms holds a will, deeds or other documents or items;
• Continuing trusteeships – if you have acted as a personal representative or trustee you may need to take appropriate steps either to cease acting or to change the basis in which you do so;
• disposing of all client balances – either by returning funds to clients or by paying disbursements, counsels fees or issuing bills for outstanding costs. If you cannot trace the clients to whom the money belongs then the usual steps will need to be followed;
• filing a ceasing to hold report with the SRA in respect of client monies;
• considering and, where appropriate, destroying all dead files. Note that all dead files that are not able to be destroyed must be stored or copied electronically and kept;
• informing the SRA of the closure of the practice, issuing the appropriate notices and placing adverts;
• dealing with any undertakings which have been given by you or your staff since this is a responsibility which does not cease on closure of the practice;
• dealing with outstanding bills and work in progress;
• redirecting post;
• resolving any outstanding complaints;
• obtaining professional indemnity run-off cover (see separate section Solicitors Professional Indemnity Insurance elsewhere on this web site);
• deal with all staff related issues including redundancies;
• deal with any outstanding office commitments e.g. tax, VAT, the lease, bills for services, etc.;

This is an understandably daunting list of responsibilities which cannot be avoided. If you are planning to close your practice and would like assistance in doing so, then contact the Lawyers Defence Group who will be able to assist you in ensuring that all of the necessary steps are taken. Bear in mind that if it looks as if there may be an intervention, the SRA may take a greater degree of comfort if the closure is supervised and the supervising firm is able to undertake, or even just monitor, the closure and report regularly to the SRA.

Contact Lawyers Defence Group

For further information, or to contact the Lawyers Defence Group about a problem which you have:

• phone on 0333 888 4070
• email on help [Email address: help #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ]
• request a callback using the form in the right hand menu and someone will call you back at a pre-arranged time
• write to Lawyers Defence Group, Richard Nelson LLP, Priory Court, 1 Derby Road, Nottingham, NG9 2TA

Updated May 2012