CLOSING DOWN OR SELLING A LAW FIRM

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1 Introduction There are a variety of reasons why a practitioner might cease being in practice, including: retirement, incapacity, wanting a life style or career change, a practitioner has died, partners have agreed to dissolve the partnership, the practice is no longer profitable, the practitioner is bankrupted, imprisoned, suspended or struck off, or they merely no longer want the responsibility of management. There are a number of regulatory and procedural requirements if a practitioner decides to close down or sell a law firm. Because of the number of steps to be taken, doing so will require forward planning. The information in this Practice Briefing is not exhaustive. Steps: communication with clients and staff You must communicate your plans to your clients promptly so they can decide whether they wish to instruct another firm. Otherwise, if this is not possible, a sole practitioner may have to make arrangements for another firm to take on any remaining clients. Consideration should be given to whether public notices are required in local publications and/or LawTalk. It is important to remember to close down any websites and any other social media type presence that the firm may have. This may also include updating any LinkedIn profiles as well. Advising the Law Society Under Regulation 11 Lawyers and Conveyancers Act (Lawyers: Practice Rules) Regulations 2008 Page 1

2 (Practice Rules), every lawyer must disclose to the Law Society, as soon as practicable, if any of the information the Law Society keeps on the register about that lawyer changes, so the Law Society may fulfill its obligation to keep the register accurate and up to date. Trust Accounts Under Regulation 15(1) Lawyers and Conveyancers Act (Trust Account) Regulations 2008 (Trust Account Regulations), if a practice ceases to provide regulated services the practice must immediately: (a) Deliver all unused trust account receipt forms relating to the practice to the relevant society or dispose of them as directed by that society; and (b) Ensure all trust accounts are closed and all money in them paid to persons entitled; and (c) If it generates receipt forms electronically, take appropriate steps to ensure no further trust account receipts are generated. Incorporated Legal Firms If the practice is an incorporated law firm the Companies Office will need to be notified of any closure. Provided the firm is not in financial difficulty or insolvent, it can be deregistered through a members voluntary winding up or by application for voluntary deregistration. Disposal of Practice Where the sale is the result of the death of a sole practitioner, the donee under the Power of Attorney (POA) may wish to speak to the executors/trustees of the estate to determine how the sale of the practice should proceed. The donee s actions are covered under clause 9(1) of schedule 1of the Lawyers and Conveyancers Act Sale of Practice You might be wanting to sell the practice to another lawyer outside or inside the practice, to another law firm, to another firm who wishes to merge the two, or to another practice that wishes to establish a branch. The sale of the practice may be advertised through local branch legal bulletins or LawTalk. If clients are transferring to either an existing firm or a new firm, the practitioner needs to receive the clients authority for this to happen and to take over any ongoing work. Page 2

3 Valuing a Practice Various accountancy and consultancy firms specialise in the valuation of law firms. The Law Society is unable to value legal practices so practitioners who may be considering the purchase of a practice are advised to engage a suitably qualified professional. Financial Matters The following matters should be considered: Terminate or retain insurance cover for liabilities after closedown. Make arrangements to dispose of unused letterhead, business cards, compliment slips, for example. Determine the amount of work in progress and what proportion of it is expected to be able to be invoiced to clients. Implement a system to follow up all overdue accounts for fees. Ensure full and regular system back-ups. Consider whether any leases have been or need to be varied/terminated where appropriate in relation to office space, office and communications equipment and computers. Consider whether the IRD has been advised re GST, PAYE, RWT and FBT. Make arrangements to dispose of any assets the firm may have. All bank accounts including IBDs and MD schemes should be closed down, or if the account is being retained as a business account then re-designated accordingly. Your internal trust accounting system should be run down to zero. Update the register of assets. Staff entitlements. Powers of Attorney (Sole Practitioner) If a sole practitioner is closing down due to incapacity, the responsibility for reporting falls to the donee under the power of attorney required by s44 of the Lawyers and Conveyancers Act 2006 (LCA). An attorney has to step in for a number of reasons as set out in clause 7(a) (h) and clause 8(a) (h) of Schedule 1 LCA. The power of attorney does not terminate by reason of death of the donor or the donor becoming of unsound mind. For more information see sole practitioner powers of attorney guidelines on: data/assets/pdf_file/0003/47982/sp-poa-for-wesbite-april-2013.pdf Page 3

4 Practising Certificates If you decide to cease practising, you may choose to surrender your practising certificate and apply to the Law Society for a refund once the practice is closed. Associate membership is available for those who wish to remain involved with the legal profession. Client Files and Deeds The practitioner must consider client confidentiality and authority at all times when transferring client files or monies or storing files. Archiving closed files is one of the highest costs of closure and you need to manage your firm actively and prudently to fund archiving services and to ensure that closed files are archived and destroyed promptly. It is recommended that a detailed record be kept of which files and deeds are transferred, and the Law Society Registry is advised which firm receives what so any future queries can be answered. Client authority is needed to transfer files and deeds to another lawyer. A common question asked is how long a practitioner should retain records once the instruction to act has ceased. For information see: data/assets/pdf_file/0003/69762/ Ownership-and-retention-of-records-opinion-Apr-2014.pdf. Professional Indemnity Insurance Insurers or brokers need to be promptly informed in relation to any PII policy. The practitioner needs to remain clear over what matters do and don t remain covered and when the period of cover ceases. Undertakings Sole practitioners remain responsible for any undertakings given when in practice. You should therefore discharge any undertakings wherever possible. The practitioner remains liable unless the recipient(s) releases the practitioner from the undertaking. Practising Post Closure Following the closure of a practice, you must take care not to practise while tying up loose ends if you have surrendered your practising certificate. If you were to submit an application for registration in respect of a client s matter, that would be classed as practising, which may be an offence under the LCA. If in doubt check with the Law Society. Page 4

5 Continuing Trusteeships and Executorships If you have been acting as a personal representative or trustee, following the closure of the practice you will need to consider whether you should continue to act in a personal or professional capacity or at all. If you hold any existing appointments as Executor of a Will then these clients will need to be identified and written to with a view to them changing their Will. To continue to act in a professional capacity you will need to continue to hold a practising certificate and practise through an authorised structure. To act in a private capacity you will need to: Stop referring to yourself as a lawyer; Notify all parties involved and inform them that you will no longer be undertaking the work as a lawyer and the consequences of that; and Explain to all parties the effects of ceasing to be a practising lawyer, particularly the position regarding professional indemnity, and charging as a professional trustee or executor. Trust Accounts Whether closing a practice with a trust account or just closing down the trust account, it is important you undertake several key steps to comply with the Trust Account Regulations and the Practice Rules. If you choose to close down the practice or dissolve the partnership, for whatever reason, the initial responsibility falls to you to advise the Law Society. This must happen within two weeks of the event occurring; but earlier notification is encouraged. You must: Notify the Law Society Registry at [email protected] with the intended date of closure (Regulation 18 (1) (d) of the Trust Account Regulations). Reconcile the trust account and any interest bearing deposit (IBD) accounts up to the date of closure. Complete a full back up of the accounting records at that date. Effect closure of all trust bank accounts and IBD accounts at the due date and issue final RWT certificates as required. Refund credit balances to clients. Provide the Law Society Inspectorate copies of the final bank statements showing a zero balance, together with a letter from the bank confirming that the account is now closed. Even if there is a nil balance, there may be a requirement for the trust bank account to be held open for a period of time to collect debtor monies payable by automatic direct credit (only). In these Page 5

6 circumstances the practitioner must liaise with the local Law Society Inspector to ensure the trust account remains monitored during this period. Monthly trust account certificates will need to continue to be filed. Notification should be given when the account is finally closed. Any dormant or stale client balances remaining must not be taken as fees, and final monthly/ quarterly certification should still be submitted. Ensure client authorities exist or are obtained to disburse monies from the trust account. Disburse all client funds to the relevant clients, or if unable to locate the clients, remit the funds to the IRD, under s337 LCA, as unclaimed monies after appropriate and exhaustive inquiries have been made. Unclaimed Monies Inland Revenue Department PO Box Wellington Mail Centre Trust Account Records Under Regulation 15 of the Trust Account Regulations when closing down the trust account you are required to deliver all unused trust receipts to the Law Society. In practice a letter to the Law Society certifying that they have been destroyed will suffice. Number sequences should be advised. You are to retain all trust account records for a period of at least six years from the date of the last recorded transaction in the trust account (r11(5) Trust Account Regulations). Exit Review The Law Society Inspectorate must be advised of your decision to close the trust account operation and will need to carry out an exit review. The local Inspector will decide whether an exit review is required in person at the firm s premises or completed through relevant records being provided. The target month for the exit review will be the month of closure but practitioners need to ensure all prime records are complete and up to date. Lawyer Nominee Company Lending If you have a lawyers nominee company (LNC), either inactive or still with current lending, it will be necessary to take steps to close this operation. You must: Notify the Law Society of the intention to close the company; Notify the Companies Office that the company has ceased trading; Page 6

7 Ensure all lending is effectively discharged and monies repaid to all contributors as appropriate; All contributors and borrowers notified; and Ensure arrangements are in place to discharge any securities that are still in place. In Summary Ensure your firm is closed in an orderly and transparent fashion. Any failure to do so may prove costly and stressful. Simply abandoning the practice could lead to complaints, disciplinary action or even an intervention and would not be in the clients or the profession s best interests. Although the practice may signal its intention to close on a given date this does not mean everything stops on that day. The process may take some months depending on the circumstances. Updated October 2014 New Zealand Law Society Law Society Building 26 Waring Taylor Street Wellington 6011 PO Box 5041 Lambton Quay Wellington Information in the Practice Briefing series is provided by the Law Society as a service to members. This briefing is intended to provide guidance and information on best practices. Some of the information and requirements may change over time and should be checked before any action is taken. Page 7