Advice and Information related to Rule D4: Solicitors Ceasing their Practice
There are many reasons why a solicitor will give up practise - retirement, illness, money pressures or simply that they have had enough. Whatever the cause, arrangements need to be made for the transfer of the business, disposal of all the client files and to deal with the completion of accounting procedures. Most solicitors have not been through these processes before and these notes are intended as a guide as to how to transfer the business successfully, what needs to be done by way of reporting and some of the pitfalls to be avoided. In short, how to think ahead.
Master Policy for Professional Indemnity Insurance
Ceased practices in run-off
Since the Master policy commenced in 1978, many practices have had their Master Policy cover placed into run-off when they ceased business, often as a result of mergers, acquisitions, de-mergers, or retirement of principal(s).
The Society's brokers, Lockton, do not have contact details for the majority of these practices, and therefore are unable to provide them with up-to-date policy terms and conditions.
Practices in run-off benefit from the policy terms and conditions currently in force when intimation of a claim or circumstance is made. If the former principles of practices in run-off wish details of the latest Master Policy terms and conditions and/or wish to intimate a claim or circumstance under their Master Policy run-off cover, they should contact the Society's brokers as follows:
The Master Policy Team
22 Rutland Street
Telephone: 0131 345 5550
Transfer of ongoing business
- Will all the files or only some of the files be taken by the purchasing solicitor?
- How will goodwill be treated?
- How will Work in Progress be treated?
- How will outlays expended be treated?
- How will liabilities be treated?
- How will book debts be treated?
- How will stationery and other stock be treated?
- How will office equipment be treated?
- Will the office premises be sold to the purchasing solicitor?
- Will indemnities be furnished to either of the parties?
- Will the existing name of the firm continue?
- Notice to clients.
Cessation of business
- Who is going to complete current matters?
- A practising certificate and current master policy cover are required to complete current matters.
- Run off cover does not provide protection to cover any client work involved during the winding up process.
- Where files are passed to another practice unit clients must be informed and invited to nominate new solicitors.
Collection of fees and outlays
- Accounts and fee notes can be drawn up in respect of all files and the amounts due collected as the files are distributed.
- This work does not necessarily require the solicitor to have Master Policy cover in force.
- This process is subject to your Accountant's advice on the procedures and dates for the finalisation of your business accounts.
- Current files where new solicitors have not been nominated.
- Completed and closed files.
- Wills and Title Deeds
- Solicitors may carry out a selective destruction exercise on the remaining files.
- Arrangements should be made with another practice unit to take the current files and any for safe storage, pending instructions being received from clients.
Professional indemnity insurance
- Lockton, the brokers to the Master Policy, should be contacted at an early stage if a practice is considering cessation.
- Cover under the Master Policy is on a "claims made" basis. This means that (for current practice units) cover is provided under the Master Policy on the basis of the Certificate of Insurance in force at the date of intimation of the claim, potential claim or circumstance and not the Certificate of Insurance in force at the time when the error/omission or act of dishonesty etc. occurred or was alleged to have occurred.
- Whose Certificate of Insurance will provide indemnity in the event of a future claim arising out of the past work of a practice which has ceased?
Run off cover
- If the professional liabilities of a dissolving practice unit are not assumed by any continuing practice unit, then, for the purposes of the Master Policy, the ceased practice unit is treated as going into "run-off".
- Run-off cover means continuing cover under the Master Policy on terms and conditions stated in the Master Policy itself.
- This provides protection for the benefit of the former principals and employees of the former practice unit and their personal representatives.
- Run-off cover does not apply to client work conducted after the date of the practice unit's cessation.
- There may be a charge to a practice unit for run-off cover depending on the claims experience of the ceased practice unit and there is no entitlement to any rebate of any premium already paid for the current year.
Date of cessation
Although the partner(s) ("managers") intend a practice unit to cease on a given date it should be noted that while the practice unit continues to hold or receive client funds the practice unit will not have ceased.
Accounts Certificates require to be submitted on a monthly basis with a final certificate being due up to the date of cessation - being the date that no client funds are held. The final certificate must be submitted within one month of the date of cessation.
Distribution of client balances
In order to arrive at the position where you no longer hold client funds you should consider the following matters.
- Prepare a full listing of all client balances, including invested funds.
- Review debit balances to determine whether they represent:
• outlays and fees as part of ongoing cases
• outlays and fees which are recoverable
• outlays and fees which are not recoverable
- Determine whether any ongoing matters are to be concluded prior to cessation or passed on to another practitioner.
- Where cases are passed to another/ other practitioner(s), the related funds must also be passed on together with full accounting information for each client.
- A list of the client balances immediately prior to passing them over should be prepared and retained. It should clearly state to whom the balances were passed and on what date.
- A copy of the list of client balances immediately prior to them being passed over should be given to the practitioner(s) who is/are receiving the balances.
Client credit balances
The actual funds held for clients should be passed over by way of a cheque or bank transfer together with the list of client credit balances and the full accounting information for each client.
Invested funds balances
The invested funds balances require to be handed over together with the accounting information for each client.
Client debit balances
- If the balances represent unrecoverable outlays and/or fees then you should write them off, bringing the client ledgers to a nil balance.
- If the balances represent recoverable fees and/or outlays, where the transaction has concluded, you may wish to retain this balance. It is acceptable for you to recover fees, which have been rendered prior to cessation, and outlays, which have been met by your practice prior to cessation, after cessation.
- Alternatively, you may wish to pass these balances to the practice taking over your credit balances. These balances however will represent sums due to you and you should keep records and reach an agreement with the practice unit to which same are transferred as to how and when such sums are to be refunded to you. Again the recovery of these balances from the other practice unit after cessation is acceptable.
- If the balance represents outlays and/or fees relating to an ongoing transaction you should pass these to the practice unit taking over the file. Again these balances represent sums due to you and you should reach agreement as to how they will be repaid to you once they have been recovered.
Client bank account
After paying over all client credit balances to another practitioner, or disbursing all funds to the clients, the only funds remaining in the client bank account should represent the surplus. That is, practice unit's funds. Once this stage has been reached you are in a position to submit an Accounts Certificate to cessation. It would be appropriate to close the client bank account at this point, provided there are no cheques issued but not presented for payment.
Work in progress
At the date that balances are handed over there may be work in progress. Where possible you should raise an interim fee prior to cessation. If that is not a suitable course of action then you should agree the work in progress with the practice unit taking over the file to ensure you have agreement as to how much is due to you once the fee is eventually rendered to and paid by the client.
Accounting records should be retained, generally speaking, for [six] years from the date of the last entry. You should retain a record of where and by whom the records are retained.
- There may be current files for which there are no ledger balances.
- A full review of all files should be undertaken.
- Any current files should be passed to another practitioner to deal with. Clients should be advised of where you intend to transfer their files and be given the option to mandate their files to a practitioner of their choice.
- All completed files should be reviewed to determine what requires to be retained.
- The guidance notes at Appendix 3 refer to what needs to be retained and for how long.
- The files remaining after the destruction exercise should also be transferred to a solicitor for storage.
- A full listing of all files should be prepared showing where and by whom the files are held.
- Intimation of the results of this exercise should be given to the Registrar's Team of the Society for future enquiries.
Investment Business Files
If you handle any investment business, either under FSA authorisation and regulation or under the Society Licence to conduct incidental financial business, you must ensure files relating to such business are passed to someone who is authorised or licensed to carry out that type of business or can deal with it by referral to a third party who is.
- You must make suitable arrangements to ensure all correspondence addressed to you is received and dealt with timeously. It is recommended that you redirect your mail to the practice unit which is dealing with your ongoing cases. If there is more than one practice unit you should decide where your mail should be redirected and make suitable arrangements to distribute mails to other practice units.
- If at all possible you should make yourself available to the person taking over your records and files to ensure your former clients receive continuity and the best possible level of service.
Letters of obligation
When a solicitor gives an undertaking in a Letter of Obligation he or she undertakes a personal liability for which the solicitor continues to be responsible, even if the practice unit is sold or wound up.
Implement of letters of obligation
A Letter of Obligation is an undertaking which can be enforced at law. It cannot be enforced by the Law Society although the recipient of the Letter of Obligation may make a formal complaint to the Scottish Legal Complaints Commission, particularly if correspondence seeking implement is ignored. That, however, would be considered a matter of conduct by the solicitor concerned. If a retired solicitor is required to implement the Letter of Obligation this may result in a personal financial cost to the solicitor.
A classic Letter of Obligation as defined in the Master Policy is covered by that Policy.
Sale of practice
If a practice is sold, each Letter of Obligation should be noted. The purchasing solicitor should write to the solicitor on the other side in each case notifying them of the sale of the practice and thereafter the purchasing solicitor should make every effort to ensure that the other solicitor is left in a position, as near as possible to that in which they would have been, had the retired solicitor still been in practice.
Cessation of practice
Where a solicitor retires without selling the practice, clients should be advised to instruct a new solicitor and the file should be forwarded to the new solicitor on receipt of a mandate. The retiring solicitor will have the benefit of continuing run-off cover under the Master Policy which will deal with any claim in respect of any standard Letter of Obligation previously granted.
If the retiring solicitor has a trainee, the Law Society should be notified of the situation and will do whatever possible to assist the Trainee to find another firm with which to complete his or her training contract. Enquiries should be addressed to the Registrar's Team.
A solicitor who intends to cease practice, if he or she is authorised to conduct mainstream investment business by the FSA should follow FSA Rules and Guidance relative to cessation.
Licensed to conduct Incidental Financial Business
- Advise all clients for whom the practice provides incidental financial business advice from whom such clients should obtain such advice in the future.
- Ensure that any Documents of Title relating to investments held on behalf of clients are either returned to the clients or passed to the practice which will be providing incidental financial business advice to such clients in the future.
- Complete and submit the final Incidental Financial Business Compliance Certificate to the Society for the period from the date of the last certificate to the date of cessation.
Law Society of Scotland
Whether a practice is sold or wound up, the Law Society should be sent formal written notification of the matter in accordance with Rule D4 so that the Registrar's Team can be updated. Notification should include information on who to contact in the event of future enquiries.
The Registrar's Team at the Society requires information on the partnership and needs to receive written advice of the cessation together with dates and new contact details of all Solicitors and Trainees.
Transfer of files
The Registrar's Team of the Society should be informed of the identity of any solicitor to whom files have been transferred. This is important so that the Law Society personnel are in a position to answer queries from clients in relation to the whereabouts of their files.
Where the firm is Licensed by the Law Society of Scotland to carry on Incidental Financial Business notification of cessation to the Registrar's Team should include reference to this.
A solicitor continues to be subject to the regulatory machinery as set out in the Solicitors' (Scotland) Act 1980 (as long as that solicitor remains on the Roll of Solicitors even if he or she does not hold a Practising Certificate.).
If, at the time of ceasing practise, there are ongoing complaints, then it is suggested that the solicitor should contact the Scottish Legal Complaints Commission or the Society (as appropriate) to discuss the position to ensure that arrangements are in place to enable these matters to be dealt with and concluded as quickly as possible.
Membership of the Law Society
When a solicitor ceases practise he or she can maintain one of three categories of membership of the Society.
i) Full practising membership,
ii) Non-practising membership,
iii) Retained on the Roll of Solicitors.
There is a different annual charge for each type of membership. Only those in categories i) & ii) will receive publications, including the Journal, be able to vote in elections and at General Meetings and attend Seminars and Conferences.
Who else should you notify
Legal Aid Board
They should be advised that the practice unit has ceased trading and notified of the status of any solicitors within the firm registered with the Board, whether for criminal or legal aid work. Accounts can be submitted, where appropriate, for work carried out to the date of cessation. However, particular care should be taken in relation to the recovery of outlays.
Arrangements should be made by the acquiring practice unit or new solicitor for the transfer of legal aid certificates held by the former practice unit for those clients for whom they are now acting. In the case of Advice and Assistance, generally these certificates cannot be transferred and the acquiring practice unit or new solicitor requires to have the client complete a fresh application.
HM Revenue and Customs
HM Revenue & Customs should be notified that the practice unit has ceased and guidance may be required from your Accountants in relation to the returns to be produced.
Registers of Scotland
It is important to advise Registers of Scotland that from the date of cessation, all deeds and correspondence should be forwarded to the acquiring practice unit or some other suitable person to ensure that no deeds are lost.