Closing down with care – planning your firm’s exit
The Solicitors Regulation Authority (SRA) has, in a recent press release, stressed the need for firms to have an exit strategy to close down their businesses in line with proper procedures. The press release revealed that the Solicitors Disciplinary Tribunal (SDT) had fined five solicitors in April in cases brought by the SRA where the firms failed to follow the correct process for closure.
The pressures on firms to survive grow ever greater and factors such as increased competition from outside of the legal sector, changes to law relating to personal injury, the continuing erosion of legal aid and a whole host of other factors mean that increasingly firms are vulnerable to closure. Any firm could find itself in the position of needing to close down and, although it is more likely to have a direct adverse effect upon them – it is not just sole practitioners who need to give practice closure some serious thought, as some of the high profile closures of larger firms over recent years has all to clearly shown.
The principal aim in any practice closure should, and must, be the protection of the interests of clients and third parties. Whilst other issues such as run-off cover and termination of the lease and services agreements obviously are important, it is the protection of the interests of clients and third parties that must take precedence. As Gordon Ramsay, SRA Director for Legal and Enforcement, said in the press release referred to earlier:
“Firms have professional responsibilities, and those responsibilities remain when a firm is closing down. The need to think about the impact on clients becomes more important when the firm faces closure, voluntary or otherwise.
“This is not an issue about affording run-off cover or finding a successor practice, which we know can often be a problem for those looking to close down. It is about ensuring the interests of clients and others are fully protected.”
The problem with planning for practice closure is that it is not something that anyone really wishes to give thought to and that really it should be something that is thought about when the practice is running successfully or just being set up. In other words it is something that is best planned when it is least needed. However, the message is not dissimilar to that which many firms give to clients about will making – you don’t know when the end might come so plan ahead.
Why do I need to make plans?
The obvious answer to this is because if you don’t and the worst happens you, or those you care for if you are not here, will suffer. Thus, planning for practice closure could make it easier for you to achieve in the event that it becomes necessary and will certainly make it easier for others to effect closure of your practice in the event that the reason for the closure is because you are no longer able to run it.
However, aside from the practical aspects there are a number of very relevant and persuasive regulatory ones to take account of.
Outcome 10.13 of the SRA Code of Conduct 2011 (the Code) places upon solicitors a duty to make adequate provision for closure of the practice in an orderly and planned manner.
“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.”
If you do not do so, and if the Solicitors Regulation Authority believe that as a result of your actions your clients, or the reputation of the profession, are being put at risk, then there will almost certainly be an intervention into your practice. That is something to be avoided in all circumstances.
If an intervention occurs then the SRA will take possession of client files, all money will be legally vested in the SRA, your funds will be frozen and you will be liable for the costs of that intervention. In many cases the SRA will make a referral to the Solicitors Disciplinary Tribunal – especially if they believe that there has been any dishonesty and your practising certificate, recognition or registration as a Registered European Lawyer will be suspended.
Intervention should not be regarded as a remote risk. Over the past year or so the SRA has been known to intervene in firms where it has been concerned that the firm would not be able to carry out an orderly closure of its practice if it needed to do so.
In addition to the reputational and administrative problems that would be associated with an intervention, you should not dismiss the financial implications. The SRA will inevitably seek to recover what could be a considerable cost of an intervention from you and is likely to refer you to the SDT which will involve you in yet further cost.
Having in place a plan for what will happen is also an integral part of the management of risk and failure to do so will mean that the firm is not managing risk adequately.
Chapter 7 of the Code requires, at Outcome O (7.2) that “you have effective systems and controls in place to achieve and comply with all the Principles, rules and outcomes and other requirements of the Handbook, where applicable;” whilst Outcome O (7.3) requires that you “you identify, monitor and manage risks to compliance with all the Principles, rules and outcomes and other requirements of the Handbook, if applicable to you, and take steps to address issues identified;”. Indicative Behaviour IB (7.4) also states that “making arrangements for the continuation of your firm in the event of absences and emergencies, for example holiday or sick leave, with the minimum interruption to clients’ business;” will be seen as good practice. In other words, planning for what will happen if things should go wrong is an integral part of running a successful practice.
Indeed, so concerned is the SRA that firms are able to effect an orderly closure that it has included an item on orderly closure at section 4.25 of the FA1 – Firm Authorisation application form which asks firms to assess the likelihood of “disorderly closure” and the controls put in place to deal with it.
The need for an exit plan
As we have already said, it is vital that you or your firm has an exit plan that deals with the eventuality of practice closure. The SRA has identified in its risk index the problems of “disorderly closure” (which it ranks as a 47% risk) and in its Risk Outlook 2014/2015 identified “Weaknesses in exit and succession planning” as one of the key drivers of risk. They said in the report:
“In 2013 we received 176 reports about firms that may have been abandoned, meaning they had closed without telling clients or us. This is an increase on 2012, when we had 120 reports. These reports are usually from clients who are not getting a response when trying to contact their firm. They are worried about what will happen to their case if the firm has closed.
“The reason behind many abandonments is a failure to plan for what will happen if the firm has to close or be sold. We are likely to see this risk increase as more solicitors reach retirement age but do not plan for the sale or closure of their firm.
“This risk can be reduced by planning in advance. Although there are many challenges when selling a law firm, it will help when there are clear business plans in place. We are consulting on changes to run-off insurance requirements, which will assist firms’ exit planning.”
Firms that do not already have an exit plan in place should draw one up as soon as possible and should review and where necessary update that plan in the event that it looks likely that the firm will need to close.
So what should be in that plan?
There are a number of key aspects which firms must address in their exit plan. These include:
- How clients will be informed of the closure;
- How those clients with active matters can have them transferred to other firms able to take on those matters – this may involve ascertaining beforehand details of firms able to undertake specialist work and whose details can be passed to clients;
- How the firm will deal with/archive/store client files;
- How papers, money and items of property can be returned to clients;
- How to deal with a bank of Wills;
- Run off professional indemnity insurance cover. Not only should you give thought as to how the run off cover will be paid for (bear in mind it could be 250% to 350% of your annual premium) but it might also be a good idea to discuss your closure plans with your indemnity insurer as they may have requirements or views as to how you should deal with certain issues including notifying current clients, returning papers and documents and the storage or destruction of other documents.
- Who needs to be notified of the closure – here keeping a regularly updated list will ease the process if and when the time comes to close down.
- How you will deal with debtors and creditors.
Closing the practice
As soon as you realise that the continued survival of your practice is not an option you should start to take steps to effect an orderly closure. The Lawyers Defence Group can assist you with this, if you wish, a quick call to our helpline number 0333 888 4070 is all it will take to start things going.
Depending upon the size of your practice and the number of client files that you hold, the process may either be relatively straight forward or extremely complex. In either case, the onus and the duty is upon the managers of the practice to ensure that clients are not put at risk during the process. You will find some guidance on the SRA web site.
Amongst the tasks you must undertake are:
- Notifying the SRA of the closure BEFORE it occurs. Your notification needs to be marked for the attention of the regulatory notifications team and can be emailed to email@example.com, but if your firm has a supervisor, you could instead contact him or her. The notification should include:
- The date on which the firm will cease to practice (all the managers/owners should agree on the date);
- The reason for closing (e.g. retirement, financial difficulties etc); this will enable the SRA to assess the risk to the public interest; and
- A request to revoke your firm’s authorisation or your recognition as a sole practitioner from the date of closure. Failure to request this will result in a delay and the details of your firm will continue to appear on the ‘Find a solicitor’ database.
If the date of the intended closure changes, you must let the SRA know and you should also notify the SRA when all matters have been dealt with and the firm is fully closed.
- Notify all of your current clients as soon as possible so that they have time to instruct another firm. Bear in mind that the choice of solicitor is theirs but that you may be asked to recommend someone suitable. Be particularly aware that:
- some matters may be very urgent – for example impending completion dates for a property transaction, hearing and deadline dates in court matters or the need for agreements to be finalised in commercial matters.
- you may hold money on trust for the client and therefore will need to obtain their informed consent to transfer that money.
- you may hold wills and deeds for clients for whom you are not currently acting in an active capacity and these will need to be returned to the client or other arrangements for their storage agreed – for example sent to another solicitor with the client’s consent.
- Notify your insurers – bear in mind that you will need to pay run-off cover to the insurer who was insuring you when the practice closed. The cost of the run-off will depend upon the firm’s annual premium but is usually between two or three times the annual premium.
- Notify everyone else associated with your practice. This will include, but is not limited to:
- Other solicitors firms / professionals with whom you have dealings,
- Land Registry / Land Charges Registry,
- Owners of panels of which you or the firm is a member,
- Legal Aid / LSC,
- Anyone using your office as a registered address,
- Counsel’s chambers,
- Service providers,
- Local authority,
- The managers of directories in which the firm has an entry,
- Information Commissioner,
- Introducers or any online referral sources,
- London Gazette / newspaper,
- Notify your staff – you will need to give consideration to issues such a redundancy, references and ensuring that there are sufficient staff to assist you in effecting an orderly closure. Be aware that staff may need time to look for other jobs and possibly attend interviews.
- Dealing with your client account in accordance with the Solicitors’ Accounts Rules. Bear in mind that client monies in respect of current transactions will need to be transferred to those firms who have taken current client matters on. Where possible you should also pay any unpaid disbursements, bill for any outstanding costs, and account to clients for any balances that you hold that are not required as part of an ongoing transaction. If you are unable to deal with any outstanding client money – either because the client be found or because it cannot be attributed to a particular client – then you must deal with that money under the provisions of Rule 20.1(k) of the SRA Accounts Rules 2011.
- Delivering a yearly accountant’s report if it is due and you still hold client money and then, at then deliver a cease to hold report within 6 months of ceasing to hold any client money. In the event that you only hold a small amount of client money then it may be possible for you to obtain a waiver of the requirement to submit an accountant’s report.
- Take steps to identify and retain any records that you are required to retain by law or regulations – including accounts information, VAT information and information held under financial services regulations.
- Complying with any outstanding undertakings or taking such other steps as are necessary to discharge them. Sole practitioners and managers in authorised bodies continue to be liable for undertakings given by them or anyone else within the firm even after the closure of the practice.
- Immediately on closure, ensure that a notice of closure is posted on the door to your offices, that callers to the office telephone number(s) are advised of the closure, faxes are dealt with appropriately, you web site indicates that the firm has closed (this is preferable to simply deleting the web site) and that any emails you receive are dealt with appropriately.
- Ensure that following closure you are not held out as a practising solicitor. You will need to amend any notepaper that you use and email templates to indicate that you no longer practice and you must not undertake work for clients in your capacity as a solicitor. Note, however, that notwithstanding the closure of the practice there are some things that you can do, including:
- submitting bills of costs,
- accounting to clients for monies which you hold on their behalf,
- dealing with outstanding balances under the SRA Accounts Rules, and
- making arrangements for the disposal or safekeeping of old files and documents.
You can even sign a bill of costs for work done when you were practising provided you make it clear that you no longer are.
However, be especially careful not to undertake anything which could be deemed to be advice or assistance. This could include, for example, dealing with the registration of a property transaction which you had completed prior to the firm closing down (even answering enquiries from HMLR).
- Decide, in relation to any trusteeships or matters where you are a personal representative, whether you continue in a personal capacity or whether the appointment was a professional one. In the case of the latter, you will need to make appropriate arrangements.
- Deal appropriately with any files and documents which you have. The fact that the practice has closed does not relieve you of your responsibility in relation to these. The options open to you include:
- returning papers and documents to clients,
- arranging for another firm to store them,
- arranging to store the papers and documents in a secure, confidential location,
- scanning (where appropriate) the papers and documents and storing them digitally, or
- where permitted, destroying them and disposing of them in a confidential manner.
You should note that if you opt to store the documents yourself – whether physically or digitally – you must ensure that they are secure and confidential and you must inform the SRA of where they are stored.
- You must also ensure that when you finally quit your premises that you do not leave any confidential information either physically in the building or stored on any electronic equipment or networks – for example cloud hosting. Additionally you will need to arrange for post to be redirected so that confidential post does not lie in a building to which you no longer have access.
There is no shortage of guidance on the topic of practice closure and so no excuse for firms not to have a plan for dealing with it.
The SRA produce a guide entitled “Closing down your practice” which lists most of the steps that firms need to give consideration to, and there is also a Law Society Practice Note “Closing down your practice: regulatory requirements” which covers much of the same ground.
In addition, many other legal jurisdictions around the world also produce guides and, whilst the actual detail and regulation will differ from country to country, many of the principles and requirements will remain the same. A simple Google search will point you in the direction of most of these.
Remember also that the Lawyers Defence Group can also assist you in achieving an orderly closure.
The steps needed to close down a practice are not difficult but, whilst they may be time consuming they are necessary.
If you do not take the steps you need to take then, as sure as night follows day, you will run the risk of intervention by the SRA. If that occurs then, not only will your reputation suffer but you will also be liable – as a personal debt due from you and your partners – to pay all of the agents intervention costs and any associated expenses. If you fail to pay then the SRA will take enforcement action to recover those costs. (See SRA intervention guidance – http://www.sra.org.uk/solicitors/enforcement/intervention-tribunal/intervention-reasons-costs.page)
Based on figures from the SRA (Consultation Paper entitled “Exercising the statutory power to pay the cost of firm interventions from the Compensation Fund”) the average cost of an intervention was £31,350 in 2012. This rose to £42, 833 in 2013. Remember that you are personally liable for the costs of an intervention and that the costs are recoverable as a debt. This is money you will have to find in addition to the run-off insurance costs and other debts of the practice. Little wonder then that many intervened solicitors are faced with no alternative but bankruptcy. If you are also referred to the Solicitors Disciplinary Tribunal, then you can expect to have to add the costs of that to the total as well.
The message therefore is a simple one. If you can’t keep going, close down and avoid intervention – under any circumstances.
Voluntary closure is bound to be less expensive than intervention.
Contact the Lawyers Defence Group
If you believe that you are going to need to close down your practice then the Lawyers Defence Group can assist you and help to make sure that all of the appropriate steps are taken and that the threat of intervention is avoided wherever possible.
For further information, or to contact the Lawyers Defence Group:
- phone on 0333 888 4070
- email on firstname.lastname@example.org
- request a callback using the form in the right hand menu and someone will call you back
- write to Lawyers Defence Group at one of the addresses on our contacts page.