By Legal Futures Associate DG Legal
Planning for the unexpected absence or loss of a law firm’s key personnel is an essential part of risk and business management. There should also be a risk-focused succession plan in place, especially if a business is reliant on the involvement of one or two members of staff. It is alarming therefore how few firms have actually given this sufficient thought and have left themselves extremely vulnerable.
Unfortunately, we have assisted a number of firms over the last few years experiencing critical business continuity issues following the long-term incapacity or death of an owner or senior manager/compliance officer at the firm.
Quite apart from the operational issues that can arise in any business when someone is unexpectedly absent, there are critical regulatory matters which affect SRA-regulated firms. If the correct steps have not been taken to prepare for continuity, the regulatory issues often cannot easily be fixed, leaving the risk of clients without representation and staff without future employment.
Regulatory issues
In many cases, the death or long-term incapacitation of a sole practitioner, partner or director will necessitate some form of notification or application to the SRA.
Depending on the circumstances, it may be necessary to seek emergency temporary authorisation for other people to be appointed into regulatory roles or assume responsibility in their place (even if just for the short term and/or pending the submission of a full application).
Some firms may even need to apply for temporary authorisation just to be able to continue trading. In the case of the death or incapacity of a sole practitioner, for instance, another solicitor must obtain authorisation to assume their role or the firm will have to close. There is a very strict time limit to qualify for emergency temporary approval (commonly requiring some form of notification with seven days of the death or incapacity) and the SRA doesn’t have the ability to extend the initial time limited (although it can extend the period of temporary authorisation once it has been granted). If a firm fails to apply to the SRA in accordance with the rules, it may lose its authorisation to carry out reserved legal activities and, in some cases, this will result in the firm not feasibly being able to continue operating at all.
There are further complications in the case of an unexpected death of an owner of an SRA-regulated firm, as their estate and its executors then becomes the owner of the firm. We have seen particular complications arising where:
- the person has died without having made a will or the will is invalid
- the person’s will is contested and there are challenges relating to the ownership or control of business assets
- a firm operates as a limited entity and the Articles of Association do not make provisions for what should happen in the event of their death. On occasions, this can necessitate the need for an application to court to be able to make the necessary constitutional changes to appoint other managers and record the appointments at Companies House.
Non-solicitor executors
However, perhaps the most problematic and time-consuming scenario occurs when an owner of a Recognised Sole Practice or Recognised Body (i.e. a firm not authorised to have non-solicitors owners or managers) has appointed one or more non-solicitors to be their executor or trustee (or one of their executors/trustees).
Where a non-solicitor executor or trust assumes the legal responsibility for any business assets, s18(3) of the Legal Services Act is triggered and a Recognised Body automatically becomes licensable (i.e. has to be authorised as an Alternative Business Structure) and only has 90 days to rectify this (by removing the non-solicitor element or applying for a Licence). Due to the complexities and timeframes for obtaining probate and an executor officially renouncing their role, this commonly necessitates the need for a firm to apply and be authorised as a Licensed Body within 90 days.
All types of entities can be affected, although the risks and complexities are often exacerbated in the event of the death of a sole owner/manager (including a sole practitioner or sole director). In such cases, their estate becomes the sole manager and owner of the firm, leaving the firm without an authorised solicitor to assume legal responsibility for it in the interim and/or pending probate. Even if there are other employed solicitors who can and agree to assume responsibility of the person who has died (even temporarily), their appointment and approval can be complex and this causes undue distress to all involved.
Importance of business continuity & succession planning
Given the risks, all SRA-regulated firms must properly address the risk of the sudden incapacity or death of key personnel through formal succession planning for critical roles and documented and tested business continuity and contingency arrangements. It is essential that all firms actively assess and record their contingency plans to cover operational disruption and client impact. Critical processes, client relationships and technical knowledge should be documented and centrally stored.
Critical roles should be identified and, wherever possible, allow for at least one designated deputy or successor for each. These successors need to be aware of what to do in the event of long-term or permanent absence and be sufficiently trained and have the tools to ensure readiness.
Importantly, no single individual should ever be the sole holder of essential operational or client information and/or be solely responsible for any access to key systems and accounts.
All those holding ownership, management or compliance officer roles in SRA-regulated firms must also independently plan for what may happen upon their death or long-term incapacity. They should consider seeking independent legal and/or regulatory advice about the implications of any appointments or clauses in their wills and any powers of attorney.
The SRA has highlighted the importance of succession planning within its sole practitioners and small firms regulatory starter pack.
How we can help
Although DG Legal cannot assist with estate planning, we can help firms to take regulatory steps to anticipate or respond to incapacity or other business continuity events.
This can include the conversion of a firm to a Licensed Body in advance of any incapacity issues, significantly reducing the regulatory action required should the worst happen to any key role holders.
We can also help firms to promptly respond to business continuity events, assisting through the process of applying for the necessary authorisations to continue practising, reducing the impact on both the firm and its clients.
Contact us
To discuss how we can assist your firm to take regulatory steps to anticipate or respond to incapacity or other business continuity events, please get in touch by email: consultants@dglegal.co.uk or by phone: 01509 214 999.
