New Zealand Law Society - Closing down or selling a law firm

Closing down or selling a law firm

There are a variety of reasons why a firm might close, merge with another firm, or be sold. These include retirement, incapacity, lifestyle or career change or dissolving of the partnership. There are some regulatory and procedural requirements when a firm is closing down, merging or being sold. Forward planning will assist with the process. The information in this Practice Briefing is not exhaustive, and we recommend seeking your own legal advice.

Communication with Clients

Communicate your plans to the affected clients promptly so that they can decide whether they wish to stay with any new structure or instruct another firm. In some situations, the firm may have to make arrangements for another firm to take on any remaining clients.

Handing over client matters can only occur with the consent of clients. If there is to be such a transfer, the succeeding practice will have to ‘engage’ with the client. This might largely be achieved by their signalling that they will honour the terms of the retiring practitioner.

Communication over trust accounts

If the retiring practice operates a trust account, authority is required from clients if any monies are to be transferred from the trust account being closed to any other law firm, as may occur in a merger or purchase of the practice.

Evidence of such authority must be secured. Under both the Act and Trust Accounting Regulations, a practice must obtain a client’s instruction or authority to transfer money (s110 & reg 12: LCRO A v Z 40-2009, Abbot v Macclesfield). Explicit authority is preferred, however an alternative method that may be sufficient is when the practice writes to the clients and advises them of the proposed transfer and offers the client an opportunity to provide alternative directions and/or ask any questions of the proposal.

For the securing of such default authority a reasonable period of notice is expected; to avoid any suggestion of fait accompli. This notice period is usually at least one month before the proposed transfer. If email or phone is used rather than a posted letter, then the notice period may be reduced. If the client provides a response, that constitutes an explicit direction and this issue of default authority falls away; for that, or those, responding clients.

Consideration should be given as to whether public notices about a firm closure or merge would be of assistance to the public. These notices could appear in local publications or notify the profession in New Zealand Law Society Branch e-newsletters.

Communication with Staff

All staff should be notified of the intentions as appropriate. Staff entitlements such as unused annual leave, long service leave and redundancy payments may need to be considered. If there is a new employer, new contracts may need to be entered into.

Social Media

Remember to close down any social media presence the firm may have, including the website, and to update any LinkedIn, Twitter or Facebook etc profiles.

Advising the Law Society

Regulation 11 of the Lawyers and Conveyancers Act (Lawyers: Practice Rules) Regulations 2008 (Practice Rules) requires every lawyer to disclose to the Law Society, as soon as practicable, of any changes, so that the Law Society may fulfill its obligation to keep the Register of Lawyers accurate and up to date.

Incorporated Law Firms

If the practice is an incorporated law firm then the Companies Office should be notified of any closure. Provided the firm is not in financial difficulty or insolvent, it can be deregistered through a members’ voluntary winding up or by application for voluntary deregistration.

Trust Accounts

Whether closing a practice with a trust account or just closing down the trust account, it is important you undertake several key steps in order to comply with the Lawyers and Conveyancers Act (Trust Account) Regulations 2008 (Trust Account Regulations) and the Lawyers and Conveyancers Act (Lawyers: Practice Rules) Regulations 2008.

The responsibility falls to you to advise the Law Society. There can be quite a substantial lead time to get everything done so earlier notification is encouraged.

You must:

  • Notify the Law Society Registry with the intended date of closure, pursuant to reg 18(1)(d) of the Trust Account Regulations.
  • Close of all interest bearing deposit (IBD) accounts
  • Return credit funds to clients or to such a payee as instructed by your client.

You must also complete closure or redesignation to an office account of all trust bank accounts:

  • Reconcile the trust account and any IBD accounts up to the date of closure (or redesignation) of these bank accounts.
  • Complete a full back up of the trust accounting records at the date of closure.
  • Destroy any unused trust account cheques or return them to the bank, keeping a note of the numbers.
  • Provide to the Inspectorate or Registry a letter from the bank confirming the date that the trust account was closed or redesignated.
  • File the final reg 17 certificate with the Law Society (a manual certificate can be provided upon request).
  • Assist the Inspectorate to complete an ‘exit’ review of that trust account.

Regulation 15 (1) of the Trust Account Regulations requires that if a practice ceases to provide regulated services the practice must immediately:

  1. Deliver all unused trust account receipt forms relating to the practice to the relevant society or dispose of them as directed by that society; and
  2. Ensure all trust accounts are closed and all money in them is paid to persons entitled (or at their direction); and
  3. If it generates receipt forms electronically, take appropriate steps to ensure that no further trust account receipts are generated.

Even if there is a nil balance, there may be a desire for that bank account to be held open for a period of time to collect debtor monies payable by automatic direct credit (only). In such situation these deposits are not trust monies and you may wish to approach the bank to change the designation to a normal practice account. If this occurs (re-designation), the Inspectorate will require evidence from the bank of the changed designation; an email from a bank officer showing his/her ‘signature’ eg title, bank logo and contact details will usually suffice.

Monthly/quarterly trust account certificates will need to continue to be filed as long as a trust account remains open. A final monthly/quarterly certification should still be submitted for any part month when the trust account is closed. Notification should be given to the Law Society when the trust bank account is finally closed or re-designated as discussed above.

Any languishing monies (sometimes called dormant or stale client balances) remaining must not be taken as fees unless the client has authorised the deduction and an invoice is sent. Efforts need to be made to locate the clients and return the monies to them. This should not be difficult if the firm has been reporting on such monies at least annually as reg 12(7) requires. If the firm has not been meeting their reporting duties and the quantum is at all substantial, commensurate efforts to locate the client will be required. Outsourcing to a credit agency might be helpful in the process of locating the clients. Costs of these efforts will not be recoverable from the client credit balances unless the client approves such.

If after reasonable efforts have been made, you are still unable to locate the clients, you can then remit the funds to the IRD, under s 337 of the LCA, as unclaimed monies. Such a payment to the IRD can only be made after appropriate inquiries have been made.

The IRD website and our Trust Account Guidelines detail how such payments can be made.

Trust Account Records

Regulation 11(5) of the Trust Account Regulations requires that all trust account records are to be retained for a period of at least six years from the date of the last recorded transaction in the trust account. This will probably require the payment of ongoing licence fees to the software supplier but they may be receptive to some negotiation as it is just access, not ongoing use, that is required.

Exit Review

The Inspectorate must be advised of the decision to close the trust account and will usually need to carry out an exit review. The Inspectorate will decide whether an exit review is conducted in person at the firm’s premises or through relevant records being provided eg by email.

Practitioners need to ensure all records are complete and up to date.

An exit review might take some time and thus again, early communication with the Inspectorate is strongly encouraged.

Advertising Sale of a Practice

To reach a number of potential purchasers, the sale of the practice may be advertised through local branch enewsletters, LawTalk or LawPoints. For information regarding this, please email advertising@lawsociety.org.nz

Valuing a Practice

Various accountancy and consultancy firms specialise in the valuation of law firms. Lawyers who may be considering the sale or purchase of a practice are advised to engage a suitably qualified professional.

Some Financial Matters

The following matters list some issues (non-exclusive) that should be considered:

  • Terminate or retain insurance cover for liabilities after closedown.
  • Make arrangements to dispose of unused letterhead, business cards, or compliment slips, etc.
  • Review the amount of work in progress (WIP), how and by when it will be completed.
  • Invoice all completed WIPs.
  • Follow up all overdue accounts for fees.
  • Ensure that a full system back-up is undertaken.
  • Consider whether any leases have been or need to be varied/terminated where appropriate in relation to office space, communications equipment and computers etc.
  • Consider whether the IRD has been notified re GST, PAYE, RWT and FBT.
  • Make arrangements to dispose of any assets the firm may have.
  • All bank accounts including IBDs should be closed down, or if the account is being retained as a business account then re-designated accordingly.
  • Any trust account must have a $0 balance before being closed.
  • Update any register of assets.
  • Consider staff

Power of Attorney for Sole Practitioners

An attorney may step in for a number of reasons as set out in clause 7 (a) to (h) and clause 8 (a) to (h) of Schedule 1 of the Lawyers and Conveyancers Act 2006 (LCA). The power of attorney (POA) does not terminate by reason of death of the donor or by the donor becoming of unsound mind. When active the responsibility for reporting falls to the donee under the power of attorney as required by s 44 of the LCA.

Where the disposal of a practice is as the result of the death of a sole practitioner the donee under the POA should speak to the executors/trustees of the estate to determine how the disposal of the practice should proceed. It is worthy of note that the estate will have an interest in the commercial value of the practice but has no claim or control over client monies, deeds or files etc.

The donee’s actions are covered under clause 9(1) of schedule 1 of the LCA.

Practising Certificates

If a lawyer decides to cease practising, they may choose to surrender their practising certificate and apply to the Law Society for a pro-rated refund once the practice is closed.

Associate membership may be available for those who wish to remain involved with the legal profession. However, a lawyer is expected to retain and renew their practising certificate until the trust bank accounts are closed or redesignated.

Client Files and Deeds

The practitioner must consider client confidentiality and authority at all times when transferring client files, monies or storing files. Archiving closed files is a cost of closure and you need to manage any archiving services to ensure that closed files are archived and destroyed appropriately.

It is recommended that a detailed record be kept of which files and deeds are transferred, and that Registry is advised of where the documentation is held so that any future queries can be answered. Client authority is needed to transfer files and deeds to another lawyer.

For guidance regarding what documents should be retained and for how long after the instruction to act has ceased, please refer to: Retention of Records.

As noted above, the Trust Account Regulations require retention of records for at least six years from the date of the last transaction. The client file (electronic or hard copy) falls within the definition of trust account records. Most firms store files for ten years from the date of archival (archiving usually requires a ‘zero-ing’ of the trust account ledger for that matter.

Professional Indemnity Insurance

Insurers or brokers need to be promptly informed in relation to any Professional Indemnity Insurance policy. Consideration should be given to the amount of runoff insurance (provides liability coverage against firms that have closed, merged or been sold) that may be appropriate.

The practitioner needs to remain clear over what matters remain covered and when the period of cover ceases.

Post Closure

If you have surrendered your practising certificate, you must take care not to practise in the areas of law reserved for lawyers or call yourself a lawyer while tying up loose ends. Submitting an application for registration in respect of a client’s matter, would be classed as practising which may be an offence under the LCA. Refer to s 6 regarding the reserved areas of work, and s 21 regarding what you cannot call yourself. If in doubt check with the Law Society.

Undertakings

Former lawyers remain responsible for any undertakings given when in practice, so any undertakings should be discharged wherever possible. The lawyer remains liable unless the recipient(s) releases them from the undertaking.

Continuing Trusteeships

If you have been acting as a personal representative or trustee, then following the closure of the practice, you will need to consider whether you should continue to act in a personal or professional capacity or at all.

To continue to act in a professional capacity you will need to continue to hold a practising certificate and practise through an authorised structure. To act in a private capacity you will need to:

  • Ensure that you do not call yourself any of the titles restricted under s 21 of the LCA;
  • Notify all parties involved and inform them that you will no longer be undertaking the work as a lawyer and the consequences of that; and
  • Explain to all parties the effects of ceasing to be a practising lawyer, particularly the position regarding professional indemnity, and charging as a professional trustee or executor.

In Summary

This Practice Briefing has provided some guidance to assist in the closing down or selling of a law firm to make the process smoother for the firm, the public and other members of the profession.

If you need to update your details or advise us of changes to the management of your practice and/or Trust Account, please use a form from Change your details, email our Registry or call 0800 22 30 30. If you need further information on the process for closure of a Trust Account, you can email our inspectorate.