Archived ethics guidance

Important: The guidance below was written and issued before the introduction of the SRA Handbook on 6 October 2011. On 10 May 2013, it was replaced by new guidance on closing down your practice. It is available below for reference purposes only.

Closing down your practice (archived guidance)

Professional Ethics – May 2010

Introduction

There are a number of issues you need to consider when closing down your practice. The aim of this guidance is to help you in dealing with those matters, thereby ensuring that you do not inadvertently find yourself in breach of any of the requirements. It highlights the various conduct and regulatory matters you need to consider, whether the closure is due to retirement, financial difficulties or insolvency, or for any other reason.

This guidance is not mandatory. However, if you do not follow it, you may be required to show how you have complied with the ethical and regulatory requirements.

Terminology

In this guidance reference to:

  • 'the Code' means the Solicitors' Code of Conduct 2007;
  • 'the Accounts Rules' means the Solicitors' Accounts Rules 1998;
  • 'you' means:
    • a recognised sole practitioner;
    • a recognised body and its managers;

Sources of Help

Depending on the reasons, closing your practice can be very stressful and there is a lot to think about. Help and support is available from the following sources:

If your reasons for closing down are financial, or you are facing the possibility of being struck off or suspended, your local law society may also be able to assist in providing you with details of firms interested in a merger or in buying your practice.

The importance of closing your practice properly

It is important to ensure that you comply with the regulatory requirements and the relevant rules of conduct (for example, rule 4 of the Code in respect of confidentiality), because even if you do not intend to continue practising, failure to close your firm in a proper and orderly manner could lead to disciplinary action and financial losses:

  • a complaint by the client to the Legal Complaints Service. If the LCS finds that you have provided an inadequate professional service to the client, it can award compensation up to a maximum of £15,000, and/or require you to take some action at your own expense.
  • a complaint of misconduct to us. Apart from a breach of a specific rule, there could be a breach of rule 1 of the Solicitor's Code of Conduct if the manner of closure is likely to diminish the trust the public places in you or the profession.
  • in serious cases, a referral to the Solicitors Disciplinary Tribunal. The SDT has the power to fine, suspend or to strike a solicitor off the roll.
  • an intervention by us (for example, if you abandon your practice). We would seek to recoup the cost of doing so from you. These costs are generally quite high.
  • an obligation to pay the excess in respect of any claim made on your indemnity policy.

Who to inform

Your clients

You must inform all clients for whom you are currently acting. You should give them as much notice of your intended closure date as possible to enable them to instruct another firm.

If time is short and you have arranged for another SRA regulated firm to take over outstanding client matters, you should still write to your clients, explaining that they are free to instruct this firm or any other firm, but that if you do not hear from the client to the contrary within a specified time, the file (and any monies you are holding for the client) will be transferred to the new firm.

If you are selling your practice as a going concern, see 'Selling your practice' below for the information which should be given to your clients.

As a matter of good practice, you should also notify any former clients who may be affected, e.g. those who have appointed you executor in a professional capacity and those clients for whom you hold documents such as wills or title deeds.

The SRA

You must notify us of the date your practice closes (rule 20.05(2)(b) of the Code)

Others

Your firm's professional indemnity insurers.

You will need to consider who else whould be notified. For assistance in this respect, see the checklist of other bodies to notify.

Client account

Prior to closing

Where possible, it is advisable before closing your practice to arrange for the transfer of all client money (or as much of it as you can) out of your firm's client accounts by, for instance, accounting to clients, paying counsel, and billing for your outstanding costs. Any withdrawals must be in accordance with rule 22 of the Accounts Rules.

Client money held or received after closure

Notwithstanding the closure of the practice, you must deal with any monies still remaining in the client account, or received after your practice closes, in accordance with the Accounts Rules.

If you are a sole practitioner and you no longer hold a practising certificate or are no longer registered as a REL, you will need to come to an arrangement with a practising solicitor or REL (and your bank) in order to withdraw monies from your client account in accordance with rule 23 of the Accounts Rules. If you receive outstanding fees which include unpaid professional disbursements, you can pay the money into your office account provided you pay the professional disbursements within two days (see rule 19(1)(b)), or 14 days if it is legal aid money (see rule 21(1)(b)).

Clients who cannot be traced

If the amount held for each client matter is £50 or less, rule 22(1)(ga) of the Accounts Rules allows you to withdraw these balances without first obtaining authorisation from us, provided the monies are paid to a charity and you comply with the safeguards in rule 22(2A).

In all other cases (e.g. where the amount held is more than £50 or you have outstanding costs), you will still need to make an application to us for authorisation under rule 22(1)(h) of the Accounts Rules to withdraw the monies.

Accountant's report

You must also continue to deliver yearly accountant's reports until you stop holding client money.

If you only hold a small volume of client money or undertake only a small number of transactions, you may apply for a waiver of the requirement to submit an accountant's report. A waiver, if granted, is for one year only, and we do not normally grant more than three waivers in a row. To make the application, contact us.

You must deliver a final accountant's report to us within 6 months of ceasing to hold client money. Accordingly, you should notify both your accountants and the Caseworking and Applications Unit of the date as soon as you cease to hold all client money.

Acquisition of the practice

If another solicitor(s) will be taking over the practice from you, the new owners will have to set up a client account in the name of the practice. If the name of the practice is to remain the same, and the client account will be at the same bank, there will have to be some method of distinguishing it from your own client account as long as this is still in operation.

Indemnity

The position in respect of any claims made following the closure of your practice depends on whether there is a successor practice. 'Successor practice' for this purpose is defined in the Minimum Terms and Conditions in the Solicitors' Indemnity Insurance Rules. This is a complex area and whilst it is ultimately a matter of law (and one on which we cannot therefore give authoritative advice), you can seek guidance from the Client Protection Policy Unit by emailing professionalindemnity@sra.org.uk or calling 0121 329 6425/6305.

No successor practice

Your insurer on cover at the date you close your practice is obliged to provide run-off cover for a period of 6 years from the date of expiry of your policy.

Run-off cover is necessary because of the way professional indemnity operates. This is on a 'claims made' basis rather than 'losses occurring' basis – i.e. the responsibility for paying the claim lies with the insurer on cover when the claim is made (or the insurer is notified of circumstances that may give rise to a claim), which will not necessarily be the insurer on cover when the alleged negligence took place.

Your insurer can charge an additional premium for this cover if there is provision for such a charge in your policy. If you are in the Assigned Risks Pool, you will be required to pay the equivalent of the annual premium.

Any excess under the policy will apply to the run-off cover unless otherwise agreed and you will be liable for that excess in the event of a claim.

In respect of the period following expiry of the run-off cover, the Board of the Solicitors Indemnity Fund Ltd, with the endorsement of the Law Society, has put in place an insurance programme which provides post run-off cover for the period up to 30 September 2017 . The terms of this cover will be the same as that provided by your qualifying insurer, but there will be no extra premium. Arrangements with regard to the provision of cover beyond 2017 will be discussed at a future date.

Successor practice

Run-off cover will not be triggered if there is a successor practice. Instead, any claims made after the closure of your practice will be dealt with by the qualifying insurer providing cover for the successor practice at the time the claim is notified (or when the insurer is notified of circumstances that may give rise to a claim).

Whether you will be liable for any excess depends on the contractual agreement between you and the successor firm. If you will be liable, then you should ensure that your successors will provide you with details of their future insurance and any excess, as well as the provision in the event that the successor practice closes.

Practising post closure

Following the closure of your practice, you must take care not to practise or be held out as practising when tying up loose ends. For example, you will not be practising if you submit bills of costs, account to clients for monies held on their behalf, deal with outstanding balances under rule 22 of the Solicitors Accounts Rules or make arrangements for the disposal or safekeeping of old files and documents. However, if you were to respond to a query from the Land Registry or submit an application for registration in respect of a client's matter, you would be practising.

The consequence of practising following the closure of your practice is that your run-off cover will be revoked and you will automatically fall into the Assigned Risks Pool from the date of closure. There are implications of being in the Assigned Risks Pool, that you should be aware of.

Whilst you can continue to use your firm's notepaper in dealing with outstanding administrative tasks, you will need to adapt the notepaper to make it clear that the firm has closed and to ensure that you (if you are a sole practitioner) or the managers are not held out as practising. When taking telephone calls after the firm has closed, you should ensure where necessary that it is made clear to the caller that the firm has closed.

Undertakings

If you are a manager in a recognised body, then you personally, as well as the recognised body, are responsible for undertakings given by you or anyone within the firm. Similarly, if you are a recognised sole practitioner, you are responsible for any undertakings given by you or your staff (see rule 10.05(1) of the Code). This responsibility does not cease with the closure of your practice. If you are a manager in a recognised body, you will continue to be liable in respect of such undertakings even if the recognised body ceases to exist.

Bearing in mind that you cannot unilaterally withdraw from an undertaking, nor can you vary its terms unless the recipient agrees, you will need to review all outstanding undertakings and so far as possible, take any necessary action to discharge them.

For example:

  • Where you are under a continuing obligation to hold monies, it may be possible to arrange for another firm to take over responsibility for complying with the undertaking (for example, the client's new solicitors), but bear in mind that you will continue to be liable unless the recipient specifically agrees to release you from the undertaking.
  • If you are unable to discharge the undertaking because it depends on the recipient taking certain steps which they have failed to do, you can write to us asking for notice to be given to the recipient that unless these steps are taken within a period of time, the SRA will not consider a complaint in respect of the undertaking. Such requests should be marked for the attention of 'RADC' and sent to Victoria Court, Dormer Place, Leamington Spa, Warks CV32 5AE.

Where it is not possible to discharge the undertaking, you should ensure that you keep it under periodic review.

Retention of records

Bear in mind that you have obligations both at law and in conduct to retain certain documents for specified periods.

In conduct, for example, there are obligations:

  • under the Solicitors' Financial Services (Conduct of Business) Rules 2001 ('COB rules'), to retain records for a period of 6 years;
  • under the Solicitors Accounts Rules 1998, to retain various records for various periods (see rule 32(9), rule 33 and rule 38(2));
  • under rule 9 of the Code, to have available for inspection any agreement you have with an introducer which includes a financial arrangement (this may be relevant in any conduct complaint made against your firm following closure of your practice).

An example of the legal requirements to retain documents includes records for VAT purposes and the requirements under the Money Laundering Regulations.

In addition, whilst there is no specific requirement in conduct, it may be prudent to retain evidence of clients' consent to your firm retaining commission under rule 2.06 of the Code (but see the COB rules for the requirements in respect of commission which arises from regulated activities).

Files and documents

Most firms hold old files and other documents for former clients. If this is the case with your firm, you will need to consider what to do with these. There are a number of options, including:

  • continuing to hold them (eg in a secure storage facility);
  • handing them back to the former client where possible;
  • arranging for another firm to take over storage of the files;
  • destroying old files;
  • storing documents electronically.

The Code does not deal specifically with the storage of files, but you need to bear in mind the following points:

  • As a matter of conduct, you owe a continuing duty of confidentiality to former clients (see rule 4.01 of the Code). Whatever arrangements you make must not put you in breach of this duty.
  • As a matter of law, some of the papers on the file may belong to you, but many will belong to the client. Unless you reserved the right to destroy the file after a specified time at the outset of the retainer or this was subsequently agreed with the client at the end of the retainer, you will need to assess the risk involved if you destroy files without the client's consent, both in terms of a potential claim on your indemnity policy and a complaint to the Legal Complaints Service that you have provided an inadequate professional service.
  • You must inform us of the address where the papers are stored and give contact details which can be passed on to clients wishing to access their papers.

Continuing trusteeships

If you personally have been acting as a personal representative or trustee, then following the closure of your practice, you will need to consider the implications involved in either continuing to act in a professional capacity or doing so in your personal capacity and take the necessary steps-for additional guidance, see Do I need a practising certificate? - Temporary Break or Retirment.

Financial difficulties: regulatory implications

Solicitors Assistance Scheme

Closing down as a result of financial difficulties may not be inevitable. The Solicitors Assistance Scheme and the Pastoral Care Helpline both offer confidential advice.

There are particular considerations to bear in mind if you personally, or your firm, are insolvent.

Notifying the SRA

The rules and regulations contain obligations to notify us of certain insolvency events:

  • Under rule 14.07(4) of the Code, the managers of a recognised body must tell us within 7 days if a relevant insolvency event within the meaning of paragraph 32(1A) of Schedule 2 to the Administration of Justice Act 1985 occurs in relation to the recognised body.
  • A similar provision applies in relation to an overseas company or a societas Europea which is registered outside England , Wales & Scotland (see rule 14.07(5) of the Code).
  • Under regulation 14 of the SRA Practising Regulations 2009, if you are a solicitor, a registered European lawyer or a registered foreign lawyer, you must inform us within 14 days if:
    • you are made the subject of bankruptcy proceedings, or
    • you make a proposal for an individual voluntary arrangement (IVA); or
    • you are a manager of a firm which makes a proposal for a company voluntary arrangement ('CVA') or a partnership voluntary arrangement ('PVA') under the Insolvency Act 1986.

Bankruptcy orders

If you are declared bankrupt, your practising certificate or registration will automatically be suspended by virtue of section 15(1) of the Solicitors Act 1974.

You can apply to us for the suspension to be lifted. Although we cannot consider your application until the bankruptcy has occurred, it is advisable to contact us as soon as a bankruptcy becomes likely. If the suspension is lifted, we will usually impose a condition restricting you to practice in employment approved by us. To apply for the suspension to be lifted, please contact us.

Once you become bankrupt, you will not be able to continue practising or operate your client account until the suspension is lifted (you may however ask another solicitor or REL to authorise withdrawals or transfers on your behalf).

As a last resort, we can intervene into your practice as a result of your bankruptcy. If this happens, the costs of the intervention will be payable by you. To avoid this, if bankruptcy is a possibility, you should consider what arrangements can be made to avoid an intervention, such as:

  • closing down or disposing of your practice before the bankruptcy order(s) is made;
  • amalgamating with another firm;
  • arranging for your clients to go elsewhere.

If you are a manager in a recognised body, you will need to step down as a manager until the suspension is lifted.

Individual voluntary arrangements and partnership voluntary arrangements

An individual voluntary arrangement ('IVA') or a partnership voluntary arrangement ('PVA') does not suspend your practising certificate. However, the position is otherwise similar to bankruptcy, in that:

  • You must inform us.
  • We may impose conditions on your practising certificate or registration. These commonly limit you to practising in approved employment or partnership, or require you to deliver more frequent accountants' reports. If the IVA or PVA is likely to involve the disclosure of confidential information to the supervisor, you should ensure that the supervisor is a practising solicitor.
  • Entering into an IVA or a PVA is a ground for intervention. However, this is unlikely if there is no evidence of any risk to clients' money or the interests of the public or the profession.

Appointment of administrator, administrative receiver or liquidator

To ensure that your duties to your clients continue to be met, (for example, in respect of confidentiality and independence), it is important to ensure that any appointment of an insolvency practitioner, whether as administrative receiver, administrator or liquidator, is a solicitor. This may not be necessary in the case of a pre-pack administration sale, which is unlikely to involve the disclosure of confidential information. You will need to continue to hold a practising certificate.

You must inform us following such an appointment, and you should also inform your insurers.

Closure due to striking off or suspension

If this were to occur, we would seek to recover the costs of the intervention from you. To avoid this, if you are a sole practitioner and you are facing a possible striking off or suspension, you should make arrangements in advance either to:

  • close the practice down from the date of the striking off or suspension, or
  • to dispose of the practice - for example, by arranging for another solicitor to take over your practice in the event that such an order is made.

Since you would no longer be entitled to be a recognised sole practitioner, it would not be sufficient to arrange for a locum to take over the day-to-day management; you would have to dispose of the practice.

If you are struck off or suspended, you must tell your clients and explain how their matters will be affected. You must also inform us, as well as your insurers and your bank. Bear in mind that you could not be employed or remunerated by your former practice (or any other practice) unless you have our written permission (see sections 41 and 42 of the Solicitors Act 1974).

For guidance on how to describe yourself, see rule 5, guidance note 37 of the Code.

Selling your practice

Your clients

If you are selling your practice as a going concern, you must inform all of your clients of the change in ownership in advance.

Whilst there are no restrictions per se as to whom you can sell your practice, you do have duties under rule 1 of the Code to act with integrity, to act in the best interests of the client and to provide a good standard of service to your clients.

To comply with these obligations, you will therefore need to consider:

  • the information which you should give to your clients to enable them to make a decision on an informed basis as to whether to instruct the 'new' firm, or to instruct a different firm; and
  • how to deal with the issue of confidentiality.

In addition, you should take basic steps to safeguard the clients' interests. We are aware of at least one instance where monies were stolen from a firm's client account following a sale of the practice to an individual who stole the identity of a solicitor for that purpose; in another case, a practice was sold to an overseas lawyer who absconded overseas with client money.

To protect against possible fraud, as well as to enable you to give the appropriate information to your clients, you are therefore advised to take the following steps:

  • check the identity of the proposed purchaser;
  • obtain confirmation in writing from the professional body of the purchaser(s) that the purchaser(s) is entitled to practise and is not subject to any condition or other restriction which would preclude that person running a practice;
  • obtain confirmation from the purchaser(s) in writing as to the basis on which the purchaser(s) intends to run the practice – for example, as a firm regulated by the SRA or by one of the other authorised regulators (for a list of the other authorised regulators, see rule 12, guidance note 2);
  • inform us (preferably before completion of the sale) of the name, status and contact details of the purchaser(s), together with an indication as to how they intend to run the practice – for example, as a firm regulated by the SRA or by one of the other authorised regulators (see rule 12, guidance note 2 for a list).

New firm to be regulated by SRA

If the new owner(s) will be practising as an SRA-regulated firm, then prior to completion of the sale, you should seek instructions from your clients as to whether they wish to instruct the new firm, or to go elsewhere. You can add that if you do not receive instructions on or before completion of the sale, then the new firm will assume responsibility for the file and the monies held for the client in the client account, until they hear from the client.

Bear in mind that whilst the new owners can continue to practise through your existing recognised body if it is a company or an LLP, they cannot continue to practice through your recognised body if it is a partnership and would have to apply for their own recognition prior to commencing practice. If there is likely to be a hiatus before the new owners are in a position to practice, your clients should be informed.

New firm not regulated by SRA

If the new owner(s) will not be running the firm as a practice regulated by the SRA, then the client should be made to understand that the rules governing the practice, and the scope of work which the practice can undertake, will be different from an SRA regulated firm. In particular, you should give your clients the following information:

  • the status of the new firm and the regulator responsible for it;
  • that the statutory protections available to clients of an SRA regulated firm (i.e. the indemnity arrangements, the Compensation Fund and the protection afforded to client monies under section 85 of the Solicitors Act 1974) will not necessarily be available to them should they instruct the new firm; and
  • that the rules governing the new firm are different and that the duties the new firm owe to their clients will not necessarily be the same.

You are not expected to explain the differences in any detail, merely to flag them up to the client so the clients can make further enquiries or seek their own advice if they wish to do so.

You will also need to seek the clients' consent to passing their files and any client monies to the new firm. Since the new firm will not be regulated in the same way as an SRA regulated firm, it would not be appropriate to pass client files or money to the new firm without the clients' specific consent. You should therefore make it clear to clients that unless they have instructed you what to do with their files before completion of the sale, you will continue to hold their file and any monies on your client account, but no further work will be done on their matter.

Failure to provide your clients with the appropriate information may result in a breach of rule 1 of the Code, or a finding of inadequate professional services.

Your position following closure

Joining another practice

Solicitors, RELs and RFLs - If you are joining another practice (which includes a practice regulated by another 'approved regulator' – see rule 12, note 2) as either a manager or employee, you must provide us with details of your new practice within 14 days of starting in your new practice (rule 20.05(2)(b) and section 84(1) of the Solicitors Act 1974);

Non-lawyer managers – Under rule 20.05(2)(b), you must notify us if you join a new practice.

Your new firm - If your new firm is regulated by us and you will be joining it as a manager, the firm cannot take you on without first satisfying itself as to your eligibility. The checks it is required to make are set out in rule 14.02. In addition, the firm must notify us within 7 days using form NM1 (rule 14.07(2)).

Ceasing to practise

Notification - If you are a solicitor, a REL or an RFL and following the closure of your practice, you intend to retire or to take a temporary break from practising (for example, while you seek alternative employment), you must inform us within 14 days that you have ceased to practise and provide us with a contact address (see regulation 14.2 of the SRA Practising Regulations 2009).

Future activities - For information on what you can do without a practising certificate, and the circumstances in which you could be deemed to be practising, see Do I need a practising certificate? – Temporary break or retirement.

If you are an RFL who is no longer practising in one of the ways set out in rule 12.03(1), bear in mind that you must not be held out or described as an RFL, or in any way which suggests that you are entitled to practise as a lawyer of England and Wales.

Checklist of other bodies to notify

You may need to contact some or all of the organisations listed below to inform them of the closure of your practice. This list is meant as a guide only, and is not exhaustive.

  • Your accountants
  • Your bank / building society
  • Companies or LLPs using your office as a registered address
  • Counsel's chambers
  • Court offices / court records
  • Crown Prosecution Service / police
  • Directories – professional / telephone
  • Information Commissioner (data protection)
  • Introducers with whom you have an arrangement
  • Land Charges Registry (key number)
  • Landlord
  • Land Registry (re current matters)
  • Legal Services Commission
  • Local authority (business rate)
  • London Gazette and one other newspaper (not necessary for mergers)
  • Mortgage lenders where you are on the panel
  • Tax authorities

Closing down checklist

You must:

  • Inform clients of the firm and seek instructions;
  • inform the SRA of:
    • the date of closure of your practice;
    • the whereabouts of client files and documents;
    • any change in your practice details (eg if you will be joining a new firm or the date on which you cease to practise);
  • notify your insurers;
  • deal with monies outstanding in your client account in accordance with the Solicitors' Accounts Rules;
  • continue to deliver yearly accountant's reports whilst you continue to hold client money unless you have a waiver;
  • submit a final accountant's report within 6 months of ceasing to hold client money;
  • identify any records which you are required to retain by law or under the rules of conduct and ensure their safekeeping;
  • following the closure of your practice amend your notepaper to make it clear that you are not practising
  • in relation to any matters in which you are a trustee or personal representative, decide whether to continue in a professional capacity or not and take the necessary steps;

You should:

  • notify the SRA of the date on which you cease to hold client money;
  • consider what arrangements to make in respect of old files and any deeds and documents you are holding;
  • notify former clients for whom you are holding deeds and documents or other items;
  • consider what other persons or bodies should be notified of the closure of your practice;
  • identify any undertakings given which remain outstanding and take any necessary action to comply with them;
  • if you are selling your practice:
    • check the identity of the buyers;
    • obtain confirmation from the relevant professional body(ies) that the buyer is entitled to practise and is not precluded from running a firm;
    • obtain confirmation from the buyers as to who will regulate the practice;
    • inform the SRA in advance of completing the sale and provide information concerning the new owners, including their contact details.

You must not:

  • practise through the firm once it has closed.
 
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