Contingency and succession planning: a sole principal’s plan for the unexpected

Sole principals are particularly vulnerable to disruption if suddenly unable to manage their practice due to illness, injury or death. While a lot of time may be spent thinking about plans and strategies for how to run and grow the business, often not as much consideration is given to how to exit the business, especially if that were to become unexpectedly necessary.

Appointing a manager to a law practice

If a sole principal becomes unable to manage their practice and there is no contingency plan, it may be necessary for the Law Society to formally appoint a manager to the practice. In these circumstances, the fees, costs and expenses of the appointment would be payable by the practice. If the interests of the public are not being properly addressed, the Law Society may exercise its right to formally appoint a manager to the law practice under Part 6.1 of the Legal Profession Uniform Law (‘Uniform Law’). This could be a significant financial burden for the practice to carry. Managerships in NSW currently cost between $10,000 and $200,000. 

Suggestion – have a contingency plan

One way to alleviate this potential burden is to nominate a ‘Personal Representative’ (a person nominated to take control of the law practice of a sole authorised principal if they are no longer able to manage it) and ‘Alternate’ (a person nominated to take control of the law practice of a sole authorised principal if the nominated Personal Representative is not able to do so), who would be responsible for conducting and, if necessary, disposing of the legal practice if the principal was unable to do so.

Nominating a Personal Representative has the effect of safeguarding clients’ interests, minimising adverse impacts on the principal’s family and limiting the need for regulatory intervention by the Law Society.

Nomination of a personal representative

Nomination of a Personal Representative can be either formal or informal and the nature of the appointment will depend on the circumstances in which they will be acting.

Formal nomination

For example, if a Personal Representative is appointed under a power of attorney, the representative may be permitted to take over and manage the law practice if the sole principal becomes incapacitated due to serious illness or injury. However, a power of attorney only operates during the lifetime of the donor.

In addition, a Personal Representative may be appointed as a limited or joint executor under a will; or a law practice can be left to a Personal Representative as trustee, for the purposes of winding up or selling it.

Informal nomination

An alternative is to nominate a Personal Representative by informal agreement. However, in order to enable the representative to take control of a legal practice in the event of death or incapacity, the Law Society would formally appoint them by commencing an external intervention under Chapter 6 of the Uniform Law.

An appointment as a Manager under the Uniform Law imposes obligations on a Personal Representative, including regular reporting requirements and an obligation to report any potential misconduct discovered during the Management (Legal Profession Uniform General Rules 2015, r 105).

Who can be a personal representative or an alternate?

Both Personal Representatives and Alternates must have the same qualifications as the sole principal, that is, they must have a good working knowledge of the area of practice, hold a principal’s practising certificate and be able to step into the role at short notice.

Trust account

If the sole principal operates a trust account, then any appointed Personal Representative and Alternate must be permitted under their practising certificates to receive trust money.

Corporation Act 2001

If the sole principal is of an incorporated legal practice, then the appointed Personal Representative and Alternate must meet any further requirements imposed on directors under the Uniform Law and the Corporations Act 2001 (Cth) (‘Corporations Act’). In these circumstances it may be prudent to also appoint the nominated personal representative as an alternate director under s 201K of the Corporations Act. This would negate the need for the nominated Personal Representative to be appointed as a director later.

Location list of important documents

It is recommended that a succession plan include a list of important information which a Personal Representative will need if they are called to act, such as the location of the following:

• keys to access the business premises, filing cabinets, safe custody register and packets;
• contact numbers for employees of the practice;
• location of business insurance documents, including PI Insurance;
• list of any outstanding insurance claims and location of insurance claim files;
• business leases and supplier

Charging

A Personal Representative is entitled to charge clients for work undertaken during the period they act as a Personal Representative. However, any work undertaken on clients’ files must be charged in accordance with the practice’s existing costs agreements.

If there is no contingency plan in place

It is advisable to develop a good contingency plan, as if there is no contingency plan in place and a sole principal suddenly becomes unable to manage their practice due to illness, injury or death, the Law Society may need to appoint a Manager under the Uniform Law. This is a lengthy, disruptive and very costly process requiring a legal practitioner to conduct a full audit of the practice before attempting to sell or transfer all current matters to other law practices.

*(Modelled in part on the New Zealand Law Society’s Sole Practitioner Power of Attorney Guidelines (updated April 2013)

Frances Moffitt is a regulatory compliance solicitor with the Professional Support Unit of the Law Society of NSW.