The decision to close any business is never an easy one to make; however, closing a practice within the legal services industry can be a fairly complex process. Struggles in obtaining professional indemnity insurance, retirement, changes to the legal landscape, and financial issues are some of the main reasons leading solicitors to make the decision to close their practice.
When a law practice decides to close their doors, there are many things that must be considered to ensure the firm closes in an orderly manner, avoiding any compliance issues and ensuring clients are well looked after when the firm ceases to practise. The key to an orderly law firm closure, ensuring SRA compliance, is to plan well in advance, making sure the process is made as seamless as possible for clients, any successor practices, and all other parties involved with the closure of the firm.
Michelle Garlick from Weightmans Solicitors has provided some guidance below on closing a law firm or exiting a legal market, ensuring all compliance issues are avoided.
The importance of a compliant law firm closure
A disorderly closure of a law firm can be disastrous for all parties involved, leading to high stress and financial issues. It is often indicative of a failure to monitor and manage financial stability and business viability leading to a serious breach of the SRA Standards and Regulations and potential disciplinary action resulting, in the most serious cases where dishonesty/lack of integrity is proven, in a solicitor being struck off/suspended or in other less serious breaches, in fines and restrictions on a solicitor’s ability to practice in the future being imposed.
Breaches of regulatory requirements may also lead to claims for negligence or breach of confidentiality, claims for loss of documents and complaints to the Legal Ombudsman regarding poor service.
Orderly closure of a law firm
An orderly closure ,whilst time consuming, will undoubtedly reap rewards in the long run. It will lead to less stress, avoids adverse publicity of your firm, avoids scrutiny from the SRA, and of course, it makes financial sense.
- Plan well in advance – Think carefully about what you want to achieve? Do you just want to close your business or are you looking for a buyer? It is important that you identify and engage expert advisors as early as possible. Key elements such as marketing, due diligence, legal, financials and regulatory consents all take time and can be stressful if you haven’t planned.
- Prepare your firm for buyers – Don’t lose out by giving buyers an opportunity to reduce the value of your firm because of skeletons, urgency or distress etc. Organising your firm before a sale is very important. For example, the cost of archive can be a massive issue for any firms taking over a firm; this could put potential buyers off and it can be costly for the partners of the closing firm. Reducing the size of your archive whilst ensuring that files are kept for the required length of time for limitation purposes is crucial, and again, financially worthwhile.
- Engage with the SRA – It is important to inform the SRA of your plans to close your law firm. Weightmans have acted as the middle-man in complex situations before, arranging meetings with the closure team at the SRA to demonstrate that the client firm is taking all necessary steps to ensure it is an orderly closure. Guidance on closing a law firm with checklists of those who may need to be informed can be found on the SRA website.
- Successor Practice issues – There has been much discussion in recent years over the difficulties of finding a successor practice prepared to take on the potential risks of future claims against the closing firm. Insurers of a potential buyer will often prefer the firm being acquired to purchase run off cover but this comes at a significant cost to the closing firm with post six year run-off cover being a further risk for individual partners of closed firms if the SIF is to close (the decision in respect of which is, at the time of going to press, still awaited).
- Consent and data protection/confidentiality requirements – Maintaining client confidentiality during the due diligence process can be tricky. Understandably, a buyer will want to understand the nature of the client base, worktypes, financial and staff information etc yet the closing firm has very clear obligations to maintain client confidentiality under the rules contained in the SRA Standards and Regulations as well as under the Data Protection Act. The SRA is very strict on consent requirements and has disciplined firms for breaching these rules so both parties need to carefully manage this process, including carrying out a Data Protection Impact Assessment, redacting personal data and ensuring that client engagement terms and privacy notices sufficiently cover such situations (Many don’t!).
- Inform your clients – You should provide all current clients with as much notice as possible when planning the closure of your firm so that they can understand their rights and make informed decisions on who they wish to instruct. You will require your clients informed consent to transfer any money within the client account to someone else under rule 5.1 of the Accounts Rules.
How Weightmans can assist
Weightmans’ Compli team provides legal advice, support and assistance to both closing and acquiring law firms on the regulatory and compliance requirements of a closure/acquisition. Because it is part of a regulated law firm, clients have the benefit of legal professional privilege and a “one-stop shop” for all their legal needs including legal and regulatory due diligence, sale and purchase agreements, property and employment advice.
For a free, no obligation discussion on how Compli can assist, contact Michelle Garlick by email on firstname.lastname@example.org or by telephone on 07515 975385.
How R&R Solutions can assist in closing a law firm
The R&R Solutions model can be used to assist closing law firms in the orderly run off of files, ensuring all compliance issues are avoided and client files are well looked after. It can also help to avoid any successor practice issues and post six year run-off cover issues that may arise.
We also provide a complementary service for professional advisors that assist in the closure of law firms, such as advisory only accountants and indeed solicitors specialising in regulatory matters advising their peers.
Our process involves discreetly selling a firm’s cases to multiple purchasers on our panel of solicitors. This mitigates the risks to the buying firms and results in a higher value for the work in progress (WIP) being recovered, whilst ensuring SRA compliance.
Our team manage the transfer of files from start to finish, placing case files with the best firms suited to deal with their unique client matter.
If you would like to find out more about Recovery First’s process, feel free to get in touch today via email at email@example.com, or 07887796989, or contact Sally Dunscombe at firstname.lastname@example.org or 07774 205 870.
Retirement Project - Grant Saw Solicitors LLP
“With our claimant personal injury partner retiring in we decided the time was right to step back from PI work. We reviewed the market options, were disappointed at the discounts being applied by potential buyers of the WIP and were referred to R&R’s offering the full realisation of WIP over time. It has effectively delivered what it “said on the tin” - over the project period we have seen a steady flow of receipts being accounted for to us, allowing us to recover the full value we had built up in the files."
- Mike Clary, Partner
Restructuring Project - Copley Clark
“Having taken a strategic decision to be completely step out of the claimant personal injury sector we were R&R’s first client to step back on a phased basis. R&R customised their offering specifically for us and I am happy to say it has worked a treat. We could focus our own resource on matters where we had a possibility of concluding within our timetable and utilised R&R’s panel firms to continue to work on other matters. Not only have their services allowed us to retain the value we had built in the files, the nature of the services ensured we were able to offer our clients the option of moving to firms with the skill sets required to best service their specific needs. For firms considering restructuring we would have no hesitation recommending R&R Solutions."
- Malcolm Lawrence, Partner
Restructuring Project - Farley Dwek Solicitors
" We had an extremely positive experience working with R&R Solutions after making the strategic decision to move away from an area of law and retune our business model. The process was very straightforward, and we were really pleased with the overall outcome. We would highly recommend the Recovery First model as a practical solution to any law firm wishing to exit a specific sector.”
Jonathan Dwek, Director
Ticking all the boxes for a quick, clean, confident exit from legal markets due to restructuring or retirement.
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