In name and in fact: measuring the extent of partners’ responsibilities

At a time when regulators and insurers are hardening their stance, prospective partners need to understand what they are letting themselves in for, says Susanna Heley

In my experience, the ambition of most prospective solicitors is to become a partner, either as the pinnacle of their career or as a stepping-stone to a political or judicial career. It is, sadly, an all too regular occurrence that solicitors accept the mantle of “partner” without undertaking a proper investigation into what that means and what they could be letting themselves in for.

At the risk of teaching Grandmother to suck eggs, accepting an offer of partnership is not merely a change in title. It carries quite heavy responsibilities and there may be very serious consequences arising from a failure to meet those responsibilities.

I would like to think that most solicitors would conduct a proper due diligence exercise both before signing on the dotted line and during their tenure as partners. The reality of practice though is that many don’t. Either they trust the people they have been working with and assume that all is in order, or they don’t fully understand what checks they should be doing.

Shaky ground

I have written before about the perfect storm the legal profession has been facing. While some of the storm clouds on the horizon may be abating, it is right to say that the outlook for those with disciplinary records (however undeserved in a strict moral sense) are on increasingly shaky ground in light of the publication of decisions and hardening attitudes of the SRA, professional indemnity insurers, lenders and accreditation schemes. While it is no longer the case that those with disciplinary records have necessarily personally fallen below the standards expected of them, it remains the case that a disciplinary record can be a serious career impediment. So what steps should prospective partners consider before signing up?

In my view, the very first question one should ask is: why me? Do you understand the reasons why you’re being asked to be a partner? Are you satisfied that it is a genuine arrangement? Are you qualified to undertake the role? It may sound obvious but more than one solicitor has been left to bear the fallout of dishonesty, fraud or simple mismanagement as a result of accepting a partnership without asking questions.

Whenever you undertake a due diligence exercise, there are judgements to be made as to the extent of the exercise. However, in my estimation there are three key areas that a prospective partner needs to understand and investigate before agreeing to take on that responsibility: compliance, status and potential civil liability.

Status involves consideration of the form of partnership and your employment status. Will you be a self-employed partner, member of an LLP or perhaps a director of a limited company? Will you still have a salary or take drawings; how will these changes affect your personal finances, taxation and employment rights? Will you have to buy an equity share?

Potential civil liability involves consideration of your potential relationships with the suppliers and creditors of the firm. Will you be asked to act as a guarantor for the firm’s debts? If the firm is an unlimited partnership, what is its financial position? Are you at risk, bearing in mind that, once held out as a partner, you could be jointly and severally liable for the partnership debts.
To a certain extent, status and civil liability are relatively straightforward. The issues can be governed by contract and indemnities although, of course, indemnities are only as good as the person giving them.

Sensitive issue

The issue of compliance is more difficult and potentially more sensitive. You will need to investigate the firm’s compliance and complaints records – or at least discuss these issues with relevant personnel. You need personally to be happy that there are appropriate policies and procedures in place to ensure compliance. You may want to review Lexcel reports, if the firm has accreditation and I would highly recommend reviewing the firm’s annual accountants’ report. In view of the SRA’s current focus on financial viability of firms, you may wish to satisfy yourself as to the procedures the firm has in place to monitor cashflow and budgeting.

Some of these issues can be difficult to raise, particularly for a prospective junior partner and, as noted above, there will be questions of judgement involved depending on the size and type of firm and its risk profile. That said, it is difficult to underestimate the importance of being fully and properly informed.

Susanna Heley
RadcliffesLeBrasseur

This article was first published by Solicitors Journal and is reproduced by kind permission. You can read the original article by clicking here.


Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.