Capital retention woes

“… 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:

• We can’t afford it, maybe later.
• Before you joined us, you said you could bring in work worth £x per annum, but you haven’t, and we are retaining your capital as damages for misrepresentation.
• There have been a number of serious problems in your department, and we think you are to blame, so we are retaining your capital as damages for negligence.
• Since you left the practice you have breached your obligations not to solicit and/or act for clients, so we are retaining your capital as damages for breach of your covenants.

Not all such allegations are true. It is troubling in some instances to come across highly-regarded professional practices making such allegations in circumstances in which they must doubt whether they can prove them.

Possession being nine-tenths of the law, a partner/member in this position may have to sue to recover his capital. Unless he can find solicitors who will back him with a conditional fee agreement and/or after-the-event insurers to cover the risk of an adverse costs order, he will have to incur (and may not recover) substantial amounts of his own money for his own legal fees, and pay the other side’s costs in addition if he loses. His opponents may find ways to drag the proceedings out, hoping that the partner/member runs out of money and gives up. As much money or more can be spent on the proceedings than the amount of the retained capital. The resources of one man are pitted against the resources of a professional practice.

Typically the amount of capital may represent something like six months’ gross pay for the partner/member. It is a lot of money, but on the other hand it is possible over time to recover from such a loss. Partners sometimes prefer that route rather than risking everything in legal costs.

On the other hand, some partners/members “go for it”, sometimes backed by their new partners.  Any demonstration of force/intention to sue can have an immediate effect, and it is gratifying when an individual’s former practice that knows it is in the wrong backs down.

Alternatively, by negotiating the right exit terms in the first place, problems such as this an be avoided altogether.

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Tagged as: ATE insurance, Capital, CFA, Covenants, Expulsion, Partner exits, Retirement