Ex-partner fails in challenge to City firm’s accounts

Accounts: Agreement allowed for difference between statutory and partners’ accounts

A law firm was wrong to make provision in its statutory accounts for all of the money owed by a fixed-share partner, but not when it came to the partners’ accounts, the High Court has ruled.

This was because, by the time the partners decided how to distribute the profits of the 2015/16 financial year, they knew it would almost certainly not be repaid – something that was not so clear as at 30 April 2016.

The decision of James Pickering QC, sitting as a deputy High Court judge, is the third and final leg of a claim brought by Peter Tribe, a former equity partner of City firm Elborne Mitchell, who retired on that date.

In the first, he was awarded £93,500 plus interest and costs for sums due under his capital and current accounts.

In the second, he was ordered to pay indemnity costs after failing in his challenge to the discretionary allocation of profit shares among the partners for the 2014/15 and 2015/16 years.

The third trial concerned whether the profits figure for the purposes of the partners’ accounts for 2015/2016 should take account of a provision for £128,500 due from the fixed-share partner, called ‘F’ in the ruling.

F joined the firm in September 2013 on the basis that he would draw £4,000 a month as a loan against his fixed-share profit – F was entitled to a proportion of any fees billed and collected by the firm from work he introduced.

The agreement provided that, if his account was overdrawn, he had to refund the amount overdrawn immediately or as requested by the senior partner.

“Unfortunately, F’s practice was not a success,” the judge observed. “By way of example, by June 2015, his total profit share entitlement… had reached little more than £12,000.”

In 2016, one of F’s matters, with nearly £50,000 of work in progress, was written off, while projects that he thought he could bring on did not materialise.

F eventually resigned in October 2016, with Elborne Mitchell seemingly on the verge of terminating his contract.

He owed £152,300 by then and told the firm that he could not repay it, saying the partners could make him bankrupt if they wanted. The firm gave up on trying to recover the money.

The firm’s 2015/16 statutory accounts made full provision for the £128,500 owed at 30 April 2016, showing a profit of £2.1m as a result.

Mr Pickering held that, while the firm was justified in making some provision for the debt, it should have been 50% – as contended by Mr Tribe’s expert – and not 100%.

At that time, the firm had not “entirely discounted” the possibility of F generating fee income to extinguish or at least reduce his debt. The partners had also not totally ruled out the possibility of recovering the debt by way of enforcement.

However, Mr Tribe’s claim concerned the partners’ accounts and the judge noted that the partnership agreement “expressly contemplated” that the profit figure in them could be different from the statutory accounts.

He continued: “While the profit figure in the statutory accounts is a question of fact which has to be settled on well-established accountancy principles… the profit figure in the partners’ accounts involves an element of discretion where commercial considerations may be taken into account.”

Following “various glimmers of hope in May and June 2016”, in July F told senior partner Tim Brentnall that another project had fallen though. Mr Brentnall emailed the firm’s finance director, saying: “End of the road, I think?”

So, by 31 October 2016, when the partners decided how to distribute the profits, the hope that F would generate some fee income had evaporated.

While “there remained a glimmer of hope that F would be able to meet some of the debt from his own resources”, the judge said, this was “the smallest of glimmers” – Mr Brentnall was “largely going through the motions rather than having any real belief that his formal demand would result in any recovery”.

Given the position as it was then known, the judge concluded, “it does not seem to me that the commercial decision to approve a distribution of profits which assumed that F’s debt would not be recovered can be criticised.”

Leave a Comment

By clicking Submit you consent to Legal Futures storing your personal data and confirm you have read our Privacy Policy and section 5 of our Terms & Conditions which deals with user-generated content. All comments will be moderated before posting.

Required fields are marked *
Email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.


Commercial real estate: The impact of AI and climate change

There is no doubt climate change poses one of the most complex challenges for the legal industry; nonetheless, our research shows firms are adapting.

Empathy, team and happy clients

What has become glaringly obvious to me are the obvious parallels between the legal and financial planning professions, and how much each can learn from the other.

Training the next generation lawyer

Since I completed my training and qualified over 10 years ago, a lot has changed. It’s. therefore imperative that law firms adapt and progress their approach to training and recruitment.

Loading animation