Practice management special report: Partners’ right to work

The dissolution of a partnership may have unforeseen insurance consequences that could prevent a partner from being able to work, says Andrew Cromby.

Practice management special report: Partners' right to workIf you are considering a merger, takeover or dissolution of your partnership you may find it necessary to focus, for the first time in your career, on the rules that govern who is to be successor practice to your former business.

This can be crucial for the purposes of obtaining insurance, without which it is impossible to run your new business.

Rules and regulations

Most private practitioners are blissfully unaware of the rules which govern this situation, which are set out in the SRA’s “Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors Registered in England and Wales 2007” (the minimum terms). The minimum terms establish whether, when a firm of solicitors dissolves or fragments, a successor practice will come into existence. They also provide guidance on which firm is likely to become the successor practice. This will be the practice which is responsible for maintaining insurance cover for claims against the former partnership.

Why is this relevant? Not least because if a number of the partners in the former practice had bad claims records, the cost of obtaining insurance can be extremely high for the successor practice – perhaps prohibitively high.

If there is no successor practice, then run-off cover must be purchased. Solicitors experienced in obtaining insurance will know that run-off cover can be hugely expensive. It is quite possible that a new firm with partners burdened by run-off cover, as well as any new insurance costs, may find that staying in business is entirely impractical.

Unable to work

The minimum terms can actually have the effect of preventing a new firm from being financially viable. This raises what might almost be considered a Human Rights issue – could the requirements of the minimum terms actually prevent a solicitor from setting up a new business? In theory, at least, the answer appears to be “yes”.

Who, then, will be this successor practice? The minimum terms provide that there are several ways in which a practice can become the successor practice to a previous firm. Candidates include a firm which:

• Holds itself out as being the successor – often the key issue.

• Takes with it the majority of staff previously employed by the former practice.

• Is comprised of the majority of principles in the former practice.

• Trades from the former practice’s premises.

• Voluntarily assumes the liabilities of the former practice.

Sometimes the practical solution is for the partners in the former practice to agree to make contributions to continuing insurance cover in the hands of one party who is designated the successor practice, but agreement on who pays what is not always easy to come by in a partnership whose members are going separate ways.

Prevention better than cure

Usually this problem can be avoided if foreseen early enough. In circumstances where there is to be a merger/dissolution or variation to the structure of any partnership ask yourself, is there scope for a successor practice to be created and if so who will this be? Consider also whether any action needs to be taken to fix the liabilities of the former partnership so that they do not float dangerously off to one of the successor businesses which simply cannot afford the cost of the (necessary) continuing insurance.

Andrew Cromby is a partner at Bracher Rawlins