The rapid rise in popularity of alternative business structures (ABS) in the legal profession is attracting increasing numbers of non-lawyers into the managerial ranks of professional firms. It is essential that directors bringing business skills to these organisations also understand the additional duties that they are subject to when compared to normal trading businesses. The recent demise of a Cornwall based law firm highlights some of the issues directors could be confronted with if things go wrong.
Rebuke from the Regulator
The Solicitors Regulation Authority (SRA) has rebuked three law firm' directors who failed to report that their practice was in serious financial difficulties. In a statement on their website, the SRA stated that Mr Pearse, Mr Lingard and Miss Higgins from Follet Stock LLP had all failed to comply with regulatory obligations and deal with the regulator in an ‘open, timely and co-operative manner’.
In particular the directors failed to notify the SRA of any material changes to relevant information about the firms and delayed informing the SRA of the financial difficulties of Follett Stock LLP and its subsidiary FSHL Limited. The regulator intervened at the practice of Follet Stock LLP in November last year after the firm was declared insolvent.
The SRA Code of Conduct
This comes as a reminder that, apart from the directors' general statutory duties to a company, the SRA Code of Conduct imposes additional obligations on directors who run legal professional practices.
The number of incorporated law firms in the UK has risen sharply in the last few years. However, irrespective of the firm's structure, the practice is strictly regulated by the SRA and directors must comply with its principles.
The regulator has stated that financial instability is a major concern and should be addressed at an early stage. Directors should seek advice and notify the SRA. According to Crispin Passmore, the executive director of SRA, financial instability in small and medium firms often leads to misuse of clients’ money.
Best Practice for Law Firm Directors
Directors who run law firm practices should actively monitor the financial stability and viability of the firm in order to identify any risk to the public. The SRA Code of Conduct states that indicators of serious financial instability include inability to pay professional indemnity insurance premium, rent, salaries or breach of bank covenants. When directors become aware that their business might not be financially viable to continue trading as a going concern, the Code of Conduct advises they notify the SRA promptly.
According to Outcome 10.3 of the handbook, directors must report any material changes to relevant information about them including serious financial difficulty, action taken against them by another regulator and serious failure to comply with or achieve the principles, outcomes and other requirements of the handbook. It is a mandatory principle that directors in professional practices must comply with their legal and regulatory obligations and deal with their regulators and ombudsman in an open, timely and cooperative manner.
Further requirements imposed by the Code of Conduct include that directors must report serious misconduct by any person or firm authorised by the SRA, or any employee, manager or owner of any such firm, comply with the SRA’s requests for other information and inform the SRA when they become aware that their firm will cease to practice.
Breaches of the duties imposed by the Code of Conduct may result in sanctions from the regulator, which include a fine, written rebuke and reprimand. It may also lead to disqualification proceedings or claims against the directors personally.