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“… It is possible inadvertently to throw away these defences in the course of the process leading up to administration, a PVA and/or IVAs …”

It is an unfortunate fact of life that more and more professional practices are becoming insolvent.

This article describes the run-up to a professional partnership insolvency, and the choices faced by the partners who control the partnership. It then goes on to identify particular issues faced by salaried and fixed share partners, and the opportunities open to them to try to avoid personal liability for the firm’s debts.

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“… after a few hours of tight-lipped civility, one or other of the parties … cannot stop himself telling the other party what he really thinks …”

There are a number of factors which distinguish partnership disputes from other types of commercial dispute.  In consequence, different methods are sometimes required to achieve settlement.

In this article I include in “partnership disputes” any dispute between proprietor managers of a small business, be they disputes between partners in a traditional partnership, or members of a limited liability partnership (LLP), or boardroom disputes between director shareholders of a limited company.  The unifying factor is proprietors who have worked together shoulder to shoulder to build and run a small business.  In this article I refer to all of these scenarios when I refer to “partners” and “partnership”.

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“… the income of the firm may well diminish and/or partners may not account fully or at all for accrued WIP …”

Unless there is an express agreement between partners permitting retirement, no partner can retire from a partnership at will.  The only way to bring about termination of the relationship is for one or more of the partners to serve notice of dissolution on the other(s). 

However, on notice of dissolution being given, a firm may not immediately cease to trade.  Indeed, a firm may carry on trading for a considerable period.  This is driven by two factors, firstly the duty to clients/customers to complete retainers/contracts, and secondly the benefit if any of continuing the dissolved firm as a going concern until it can be sold (possibly to one or more of its partners, or otherwise to an outside purchaser) or merged into another firm, or otherwise dealt with so as maximise the benefit to partners and/or minimise the potential downsides.

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“… the conviction that a partnership will last forever in sickness or in health, for richer or poorer, may fade quickly …”

As is well known, under certain Middle Eastern legal systems a husband can divorce his wife by uttering, “I divorce thee” three times in her presence.

In contrast, in a partnership at will a great deal of breath can be saved, as “I hereby dissolve the firm” only has to be uttered once in order to bring about a dissolution.  (Unless, which is quite rare, the partnership at will is governed by a deed, in which case a short written notice of dissolution is required.)

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“… Possession being nine-tenths of the law, a partner/member in this position may have to sue to recover his capital …”

A worrying trend has been emerging.  It has become much more common for partners and LLP members leaving professional practices to have difficulty extracting their capital.

Typically professional practice governing agreements provide for capital to be repaid following or over a period of time after retirement. Partners falling victim to the new trend may not be told that the practice does not intend to repay their capital until just before the first instalment is due. One or more of a variety of reasons may be given:

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“… how beneficial will consolidation into fewer, larger entities be for consumers? …”

A great deal of time and money have been spent preparing for the arrival of Alternative Business Structures (ABS) in October 2011. 

The 2004 Clementi Report led the Ministry of Justice to formulate and pilot the Legal Services Bill through Parliament, and it passed into law in 2007.  The Solicitors Regulation Authority (SRA) is currently working on a new “outcomes-focused” code of conduct, and the regulators of the different legal professions (of which there are eight – can you name them all?) will themselves be regulated (by the newly-formed Legal Services Board (LSB)). 

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“… At the outset he has been lulled into a false sense of security, and may consider himself to be the victim of a scam …”

Lawyers and accountants have been very creative in their use of LLPs.  But sometimes our good work may be hijacked and applied creatively by others for purposes that we did not intend.  Here’s a disturbing example I’ve come across.  Employment and partnership lawyers may wish to take note.  

A businessman wants to engage a skilled workforce, pay them as little as possible with no employment rights, and avoid paying employer’s NI or accounting under PAYE.  (HMRC may be watching this one from the wings.)

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“… Typically the senior partner becomes complacent about the fabulous hand of cards that life has dealt him and starts to presume that he can do no wrong …”

It may come as no surprise that amongst professional practices that have no provision in their partnership deed for regular senior partner elections, an unusually high proportion of partner exits involve the senior partner.

Such partners are sometimes founder and/or name partners, and may be self-appointed to the senior partner role.  The other partners wouldn’t dare challenge the arrangement, or where they do dare (after it all becomes too much, see below), the repercussions can be explosive.

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“… The majority of professional practices are woefully deficient in detecting the “virus” at the point of introducing it/him into the practice …”

Last month I chaired an Association of Partnership Practitioners workshop on “Rogue Partners”.

What was striking was how many members attended (well over 100 leading partnership practitioners) and the intense interest in the topic.

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“… Recessions bring out the worst in people …”

(First published in the Law Society Gazette on 24 September 2009)

A recession has a way of exposing weaknesses in legal drafting. As practices try to respond to the economic climate, management teams consult the fine print of their partnership deed or LLP members’ agreement, and may find it wanting.

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