Key Things to Consider When Exiting a Law Firm

There are several reasons as to why a law firm may close down. Generally, the decision is made voluntarily – for example, you are leaving a practice area, taking on a role with another firm or leaving the legal profession entirely – but there are instances when a law firm must close down involuntarily. Written by By Daireann Gibson, Managing Partner at Gibson & Associates

Regardless of the reason why, the decision to move away from a law firm is not an easy one to make, as special consideration will need to be made in regards to the specific obligations and responsibilities you will need to uphold to ensure an exit is efficient and legal.

As such, leaving a law firm requires a strong exit strategy and a certain degree of succession planning, in order to make sure you are able to move on smoothly to the next phase of your career while still upholding the responsibilities owed to clients who depend on uninterrupted legal support. Here, we take a look at the reasons why an exit may be necessary and the key considerations when exiting a law firm.

Why exit a law firm?

As we have already mentioned, there are a number of reasons why a law firm may need to close, the first of which is for financial reasons. Like many companies across the sectors, if the business is simply no longer viable then it will become necessary to close the firm down to sever the financial losses.

Secondly, if the managing partner or senior partner becomes seriously ill, then the decision may be taken to close the firm. In the event of the principal’s death, this decision may be taken out of the firm’s hands, as the business may become a subject of probate.

Other major life events involving the managing partner can also lead to a law firm closing, such as relocation, retirement, imprisonment and so on, particularly among smaller practices.

Finally, a law firm’s ability to operate may come under threat from regulatory action. While the regulatory action in itself may not force the firm’s closure, it could result in a loss of confidence from clients and staff, making the business unviable.Whatever the reasons, a prudent law firm should have an exit strategy in place to handle all these eventualities.

How will coronavirus impact the legal sector?

Prior to COVID-19, the legal sector was already changing at an accelerated pace, but the

impact of the virus on countries and economies is forcing law firms to reconsider their business strategy, as well as think about what the legal workplace of the future will look like.

The coronavirus pandemic has caused a significant reduction in new instruction and payment of fees. This has resulted in law firms that are not faring well amid economic uncertainty having to cut salaries, focus on collecting debts and deferring distributions to try and raise additional capital in order to fight for their survival during these unprecedented times.

Many law firms will struggle to pull back their profitability after the pandemic. They should focus on what they are good at in terms of specialisms and go after that work by creating sensible marketing programmes, including reaching out to clients to ask what their needs are at this time of uncertainty.

What are the steps to exiting a law firm?

Once the decision has been made that the law firm must close, departing lawyers will need to take a number of factors into account before the date of cessation. Firstly, lawyers must give reasonable notice of their intentions to leave their role so a suitable plan can be created in relation to handling clients upon exit.

1. Make a list of outstanding undertakings

Firms should draw up a list of any and all outstanding undertakings and seek to ensure compliance with these. Even after the firm has closed, those in charge will remain liable in conduct for undertakings.

2. Finalise files

As many files as possible should be finalised before the firm closes. After the date of closure, no work can be carried out on any file. By six months after the closure of the firm, arrangements must be made for all remaining files – manual or electronic, current or closed. These can be transferred to another firm on a ‘storage only’ basis or sold to another firm through a file acquisition service.

3. Take care of your clients

Solicitors have an ethical obligation to ensure their clients’ interests are represented competently and diligently despite their departure. Clients should be informed of the impending closure and asked to choose a new firm to take delivery of their files and documents. Where there is no undertaking on the file, the client can be given their files directly.

In all instances, a record must be kept of the destination of all files sold, transferred or distributed to clients.

4. Closing client accounts

A firm should work to keep clients informed of any changes to their representation, and clients should be consulted on how they would like their case to be handled going forwards.If court proceeds have begun at the time of departure, solicitors must follow the proper procedures for coming off record.

Firms are advised that they should cease to hold, control, receive or pay client monies within two months of the date of cessation. As such, work on closing client bank accounts should be initiated before the closure deadline.If the law firm is sold to another firm, any remaining balance on a client’s account should be transferred to the new firm prior to the date of cessation.

By addressing each of these points, law firms will be able to ensure their transition out of the legal market is a smooth transition.