Applicants seeking recognition of a new incorporated practice should note that these applications can be complex and their assessment and determination can take some time. Rule D5.3 requires that applications for recognition are submitted at least 30 days prior to the date the business seeks to operate. The Society aims to assess and determine all applications as quickly as possible but timeframes are highly dependent on the content of the application material.
The material which the Society will require to assess any application for recognition is set out in Rule D5 and related Guidance, Forms and Fees and this Advice and Information. No application can be assessed until all of the required material is submitted, in the required form.
The Society will require to check that the terms of the incorporation documents of the proposed incorporated practice meet the requirements of the 1980 Act and the practice rules, in particular those at D5. Those requirements include:
- if the proposed incorporated practice is a company - the Articles of Association must contain provisions which:
(i) prohibit anyone being appointed as a director who is not a member (shareholder of the company) and qualified (in terms of Rule D5) to be such a member;
(ii) provide that no person other than a person duly qualified to act as a director (in terms of Rule D5) may be appointed as an alternate director;
(iii) provide that a director or alternate director shall vacate office if he/she/it ceases to be a member of the incorporated practice or to be qualified to act as a director;
- whether the proposed incorporated practice is a company or a limited liability partnership (LLP), the incorporation documents must provide:
(i) that no person shall be qualified to be a member of the incorporated practice or (subject to sub-paragraph (d) of rule D5.4.1) enjoy any of the rights of members (i) if that person is prohibited from practising as a manager in terms of rule 2.1 and (ii) unless he/she or it is a solicitor, registered European lawyer or registered foreign lawyer or firm of solicitors or an incorporated practice (all those terms as defined in the practice rules – the definitions in the incorporation documents must be consistent);
(ii) that (subject to sub-paragraph (d) of rule D5.4.1) any member who ceases to be duly qualified within the meaning of sub-paragraph (b) of rule D5.4.1 shall forthwith transfer his/her or its shares or other interest in the incorporated practice to another person who is so qualified, or otherwise cease to be a member of the incorporated practice;
(iii) that, in the case of an incorporated practice which has a share capital, the executor of a deceased member of the incorporated practice shall have no voting rights in respect of his/her membership of the incorporated practice; and
(iv) that, in the case of an incorporated practice limited by guarantee, membership shall cease on death;
- whether the proposed incorporated practice is a company or an LLP, the incorporation documents must contain provisions to anticipate and to deal with the situation where, for whatever reason, there is no longer a person qualified to do so in terms of rule D5 exercising the day to day management and control of the incorporated practice. Without prejudice to the foregoing, the incorporation documents must contain specific provisions for: -
(a) the operation in the situation aforesaid of all client accounts in the name of the incorporated practice; and
(b) suitable arrangements in the situation aforesaid for making available to its clients or to some other regulated person instructed by its clients or itself:-
(i) all deeds, wills, securities, papers, books of account, records, vouchers and other documents in its possession or control which are held on behalf of its clients or which relate to any trust of which it is sole trustee or co-trustee only with one or more of its employees; and
(ii) all sums of money due from it or held by it on behalf of its clients or subject to any trust as aforesaid.
(‘regulated person’ is defined in the practice rules as a solicitor, an REL, an RFL or a practice unit)
These provisions set out the contingency arrangements proposed by the proposed incorporated practice to manage the risks explained in the Guidance on Rule D5.
Acceptable Contingency Arrangements
The rules at D5 do not specify exactly what provisions are required because the Society recognises that different practices may wish to adopt different provisions, depending on their own particular circumstances. All those seeking recognition as an incorporated practice will, however, have to demonstrate that they have complied with the rules at D5 before recognition can be granted.
The provisions adopted most often allow for the appointment of a suitably qualified nominee to act in the place of the managers (to ensure compliance with rule D5.4.2) where none of those appointed as managers are qualified and able to act.
The nominee needs to be an individual, group of individuals or incorporated practice within the categories of individuals or entities which are permitted to be managers of an incorporated practice in terms of the 1980 Act and the practice rules. The nominee cannot be an RFL acting alone but can include a practice unit which is a multi-national practice.
Where a business is seeking recognition as a new incorporated practice – and proposes to have 3 or fewer human individuals appointed as managers at commencement – then the Society will accept provisions in the incorporation documents which require a nominee to be appointed immediately (to act only in the circumstances outlined in Rule D5.4.2) accompanied by evidence of the making and acceptance of that nomination.
Where a business is seeking recognition as a new incorporated practice – and proposes to have 4 or more human individuals appointed as managers at commencement – then the Society will accept provisions in the incorporation documents which require a nominee to be appointed as soon as the number of managers drops to 3 or fewer – with evidence of the making and acceptance of that nomination to be provided to the Society at that time.
Wherever there is provision for the appointment of a nominee, the task of finding that nominee, appointing same and obtaining an acceptance of appointment rests on the incorporated practice and its managers - not on the Society. A provision in the incorporation documents which states that the Society (or any staff member or office bearer of the Society) can appoint a nominee is only acceptable as a fall-back position – where the nominee already appointed by the managers/incorporated practice has refused to act – or is unable to act – a last, not first, resort.
Provisions which purport to give the Society (or any staff member or office bearer) the power to act directly themselves – which purport to make the Society or any staff member of office bearer a nominee or alternate director, for example – are not acceptable.
Alternatives to the approaches described above need to be referred to the Practising Certificate Sub-Committee before any recognition or approval can be granted, so extra time should be allowed for their consideration.
Several incorporation agents have style Articles of Association for incorporated practices which have been drafted with the requirements of Rule D5 in mind and those may be helpful, but responsibility for ensuring that the incorporation documents satisfy all of the requirements of Rule D5 (not just those relating to contingency arrangements) rests on those applying for recognition.
Changes to incorporation documents
The rules at D5 require submission of the proposed incorporation documents of any new proposed incorporated practice (whether a company or LLP) to the Society before any approval or recognition is granted and the incorporated practice is then not permitted to alter its incorporation documents without the approval of the Society.
Any new incorporated practice recognised without active contingency arrangements being put in place (because the practice is starting out with 4 or more individuals appointed as managers) must advise the Society if the number of managers drops to 3 or fewer. If that happens the practice needs to be asked to activate the contingency arrangements and evidence to the Society that they have done so.
Where incorporated practices have appointed nominees we may ask them to evidence the continuing acceptance by the nominee on a periodic basis.