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Understanding SRA and law firm insolvencies
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Written by: Jonathan Munnery
What happens if a solicitor's practice or law firm closes down?
If a solicitor's practice or law firm closes down, the Solicitors Regulation Authority's (SRA) code of conduct must be followed. An SRA intervention will take place (solicitor firm closure) to protect client monies and an independent Accountant's report may need to be obtained for compliance purposes.
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Understanding SRA and law firm insolvencies
Heavy regulation of the legal profession means that law firms and sole practitioners must adhere to strict rules and regulations concerning the treatment of client monies. This is an understandable requirement that provides essential protection for members of the public whose money is held.
When a legal company enters insolvency their inherent connection with the regulatory body, the Solicitors Regulation Authority (SRA), adds greater complexity to an already complicated situation, however.
The SRA monitors firms and individual solicitors to ensure compliance with their code of conduct, and has various powers of enforcement where necessary. The SRA board oversees their work, and consists of 15 members comprising legal experts and lay members alike.
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What is the Solicitors Regulation Authority (SRA)?
The SRA regulates solicitors and law firms in England and Wales. They set the principles and code of conduct by which legal entities must abide, and have the power to take action against individuals or firms who breach the regulations.
Amongst other roles, they:
- Set the standards for training and qualification as a solicitor
- Monitor firms, including Alternative Business Structures and individual solicitors, to make sure they’re complying with the code of conduct. An Alternative Business Structure, or ABS, allows for an individual who isn’t legally trained to invest in, and become a partner of, a legal firm.
- Close down practices to protect client monies
- Instigate disciplinary procedures against solicitors where necessary
SRA account rules and the annual accountant’s report
Protection of client funds is a key aspect of operations within any law firm, and there’s a requirement to obtain an independent Accountant’s Report (although there are some exemptions) to confirm compliance with SRA rules in this respect.
An independent, fully-qualified accountant uses their professional judgement when deciding whether the firm has complied with the rules, or if there has been a breach, in which case they must qualify the report with their findings.
If no breaches have occurred, the report doesn’t need to be submitted but must be retained by the accountant and solicitor for a period of six years.
What can the Solicitors Regulation Authority do when a law firm enters insolvency?
When a law firm is experiencing financial distress, and enters insolvency, the SRA can intervene by taking control of the company, transferring monies, documents and legal paperwork held on behalf of clients to safekeeping.
An ‘intervention’ essentially freezes the firm’s accounts, transfers client monies away from perceived risk, and results in job losses and office closure. It can be instigated by the SRA under a number of circumstances, including:
- A winding up order from the court
- A voluntary winding up resolution
- On entering company administration
- If a solicitor in the firm is being made bankrupt
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A huge issue for law firm directors is the cost of intervention, which can be very high, and may be reclaimed from directors on a personal basis by the SRA.
If your law firm is experiencing financial distress and you’re concerned about the future, Real Business Rescue can provide the professional insolvency advice you need. We’ll assess your current position, and offer guidance on your best options. Call one of the team to arrange a fully confidential, free same-day meeting.
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