This article originally appeared in Solicitors Journal, titled Putting up the closed sign on your law firm.
Doug Preece and Wendy Chung take a look at the multitude of decisions that must be made when shutting up shop.
Your firm has merged with another firm, or has sold the major part of its business, or a founding partner has decided to retire. These are typical reasons for needing to close a firm. There are a host of other circumstances in which a firm may decide to close. As part of the decision to close, firms should consider the following matters.
The firm must decide who is to manage the closure. Often this is done by appointing a winding up committee. A closure can be a difficult and costly process if it is not carefully planned and managed. Agreement needs to be reached on who will look after the residual matters of the firm after the firm has stopped trading and the erstwhile partners have moved on to new firms. Where the closure is part of a merger transaction, the merger agreement will set out in detail what is to happen to the firm’s assets, liabilities, staff and existing client matters, with most of these being transferred to the new merged firm. Where there is a closure not connected to a merger, outstanding bills will need to be collected and the firm’s assets and liabilities will need to be disposed of or satisfied and any remaining balance distributed to the partners.
Additional costs
The closure plan will need to include the additional costs arising on closure. Where partners are moving their practices to other firms, Transfer of Undertakings (Protection of Employment) will need to be considered for the firm’s staff. Where the partners are not moving to other firms, the staff will be redundant on the closure and redundancy costs included in the closure budget. Firms should consider whether the closure will result in the firm being in default in relation to its finance arrangements and whether security has been given over any firm assets or personal guarantees given for firm liabilities. This may be relevant where real estate leases will continue to run after the firm has closed.
In addition to notifying staff, trade customers and suppliers, HMRC, banks and landlords, as much advance notice as possible of the closure must be given to existing clients and the Solicitors Regulation Authority. If the firm is transferring existing client matters to another firm, it must notify clients so that they have ample opportunity to consider instructing another firm. Where there is no transfer, firms may recommend another firm to the client. In either case, firms will need to act in the interests of the client in deciding that the transferee or recommended firm is suitable for the client’s needs. Where client money is held, the client’s instructions on a transfer will be needed in order to avoid a breach of trust.
Client obligations
The firm’s obligations to its clients on the storage of files must be reviewed and costed. The firm’s terms of business should include the right for the firm to destroy files after a set time. Former clients must be contacted in relation to the old files held by the firm. Client files will need to be securely archived, destroyed or returned to the relevant client in accordance with the client’s instructions. Files may only be destroyed without the client’s consent if the firm has reserved the right to do so. The SRA Accounts Rules require certain accounting records to be kept for specified periods.
The professional indemnity insurance provider will need to be informed and run-off insurance should be arranged. The cost of run-off insurance is often three times the cost of the firm’s annual premium. Where there is a successor practice, run-off insurance is not required and any claims relating to the dissolved firm are usually borne by the successor’s insurer. Successor practice issues can be complicated. The cost of run-off insurance is likely to be a significant closure cost, prompting many firms to find a successor practice as the starting point for the closure plan.
Following closure, the firm must not practise or hold itself out as practising (unless it is done through a regulated successor firm). Finally, the firm should ensure that the firm’s partnership agreement leaves no doubt as to how relevant assets are to be valued where they are being retained by partners and how to calculate partners’ entitlements to any surplus assets to be distributed when the firm is dissolved.
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