Legal protection: Why accountants should practice what they preach
misery and aggravation can follow when there are no binding written agreements between practice owners.
As a solicitor, I spend much of my time dealing with accountancy practices that are looking for advice in relation to their mergers and acquisitions, as well as resolving disputes between existing owners. Although I work with a range of practices of all sizes, I am frequently confronted by accountancy firms that have no documentation or badly drafted agreements regulating the owners\' affairs. While most accountants advise their own clients to seek properly drawn up binding legal agreements in order to avoid problems in business partnerships, the accountants themselves are not practicing what they preach, and many are neglecting their own arrangements.
The following examples illustrate cases where accountants often fail to record their arrangements properly:
A partnership with no written agreement leaves any one partner with the negative power of having the partnership wound up. This can lead to a real mess and could, in the case of an emotional fall out, lead to a forced sale of the firm at considerably less than its normal goodwill value.
A practice trading through a limited company without a shareholders agreement with standard form Memorandum & Articles of Association can severely disadvantage a shareholder wishing to \'retire\' where the articles leave the control of share transfers in the hands of the directors.
The objectives of properly binding agreements should provide a mechanism for dispute resolution without recourse to expensive, uncertain and commercially unwise litigation. It needs to be understood that the legal remedies (if any) under company law are very different to partnership law.
Cautionary tales
I recently came across a practice with two partners who used a partnership agreement for their general accountancy work and registered as a limited company for their tax work, which is not an uncommon situation. The problem arose when one of the partners wished to leave. Due to regulations under partnership law, this partner was in a stronger position, as he was able to sell his interest in the general practice and, without recourse to the courts, he could not force his co-shareholder to buy his shares. The result was a stalemate. Had they drawn up a legally binding agreement that covered both these structures in advance, there would not have been a problem.
Some accountants are resistant to the fees charged by some solicitors and therefore try to produce DIY agreements. In one case, a partner tried to implement a deal whereby he could leave the practice but keep his capital value locked in. To avoid situations like this, it\'s important to seek impartial expert advice, which will ensure that any agreement drawn up is fair to all parties involved.
Death or incapacity can also lead to wider nervous tension and stress, not just for the remaining practice owners but also for the family who have become bereaved or who need to look after a loved one. For example, I came across a death case where the trusts were badly worded with respect to the partner\'s cross life assurance. The widow was handsomely paid out by the insurance company and yet there was no legal compulsion for her to buy out her deceased husband\'s share in the practice. She attempted to maintain that she was standing in her late husband\'s stead and wanted to claim his erstwhile share of the profits in future. Conversely, there are also cases where the remaining owners are paid out of the policy proceeds and the widow has no rights to that money.
Another problem that can arise from having no written agreement drawn up is that practice owners who choose to leave can sometimes take their clients with them, thus leaving their previous practice at a disadvantage and with no legal recourse.
