Partner on retirement repayment, capital, annuity
Did you hear on the grapevine that Bob’s finally retiring? We’ll miss him, but God knows what we’re going to do about repaying him his money.
I think you’ll find, if you look back at the partnership agreement, that it’s all well catered for. You shouldn’t have to worry too much about finding the money.
But it’s well over £100,000, especially since we’ve just had a good year.
Well you’ve got to sort out when the different bits may be payable. You remember I persuaded you a few years back to separate the partners’ funds into current and capital accounts? When you get to the end of the year, and have the draft accounts done, you’ll know what the current account balance is. That’ll be his profit for the year, less his drawings, and his share of the tax reserve.
OK, so what do we do with that?
That’s payable within a month of ascertainment. I think we put in a long-stop of a year from retirement, so he didn’t get penalised if you and the others were messing around getting the accounts done. And there was a sort of understanding that, if you reasonably believed there was to be a hefty surplus, you’d pay some on account anyway.
I remember. And wasn’t there something about paying his family for a few months after he left?
No, that was only if he died in service. You all thought it was reasonable for the dependants then to get some cash quickly, to cover the interval before any cash started to come in from policies etc.
Right, so that sorts out the current account. What about his capital?
Like many partnerships, you agreed that that would only be paid back over a period, by pre-set instalments. In effect, Bob will have no choice but to make a loan to you of the amount of his capital. He’ll get interest on the reducing balance, but he can’t insist on payment earlier than you agreed.
That’s good from our point of view, but it seems a little rough from where he’s standing. After all, we’re not giving him any security, are we? I mean, it may not be too long before I go!
No, but he can rely on a joint and several promise from all of you.
What about if we follow your advice and convert to a limited liability partnership (LLP)?
Assuming that it’s after Bob’s retired, it won’t affect him. The LLP will simply take over the payment of the debt, and indemnify the partners. It would perhaps affect you though, if you retire after conversion. Then, of course, the promise to pay you will come from the corporate LLP, not from the individuals who make up the business. What you might want to argue for, in the interests of those like you who are coming up for retirement, is a shorter period for repayment. That way, you are less at risk of things going wrong before you get your money out!
Right, I’ll make sure I remember that. Going back to the payments to Bob, what really worries me are the cash-flow implications if Anne decides to leave as well. You know she’s been talking about leaving and having a career change. Presumably we’d have to pay her on the same basis, and two lots of payments would hurt.
Don’t worry, we thought of that. What the agreement says is that if there are two or more retirees at the same time, the periods get lengthened so that, although there are two sets of payments, each set is in smaller instalments, because they are spread over a longer period. Another possibility, if you can get Anne to give you an idea of when she might realistically want to go, is to accelerate the payments to Bob, if cash allows, so you’ve got his debt off the books before Anne’s kicks in.
I remember you made us get rid of the old annuity provisions we had in. Why was that?
There were two reasons, and between them, for many firms, they add up to a powerful argument. First, the theoretical concept which used to underlie the idea has simply gone. You remember that the annuities were really a way of coping with the fact that you thought it wasn’t fair only to pay someone what was in their capital account, because that didn’t reflect the true value of the firm’s work in progress? You dressed it up as annuities— some firms do it as goodwill. The thing is that when the latest changes in accounting principles came in (Urgent Issues Task Force (UITF) 40 etc if you want to get technical), for most firms that difference disappeared. Now, your accounts do have to reflect the full value of the work in progress and all the revenue which should be recognised. The capital account figures have been increased accordingly, so if you still had the old annuity provisions people would, in effect, be getting paid twice for the same thing.
Does that apply to all firms?
More or less. There are still some who do succeed—if that’s the right term—in keeping their figures down, especially if they have high levels of conditional fee work, or contingency work such as conveyancing where no charges are made on abortive work, and so only files with exchanged contracts are counted. Some of them may still have formulae to recognise the gap between theory and reality in payments to outgoing partners.
That wasn’t the only reason you disliked annuities though, was it?
No indeed. The other reason goes back to the idea of converting to an LLP. If you do that, the accounting requirements which go with the Companies Act-style accounts you will have to produce require that you have to provide in your balance sheet against the contingent debt which the annuities represent. In other words, you have to go through a complex (and potentially costly) annual exercise of valuing the annuities, and then showing them as a debt in your books. Some firms have had to abandon the idea of conversion solely for this reason—the added debt would make them appear insolvent.
Glad we got rid of those, then. You talked about some other issues which were relevant on LLP conversion, as far as outgoing partners were concerned. What was that all about?
The position isn’t really that much different from that which applies within a partnership, but you do have to keep your eyes open for some differences. In your case, the one that worried me the most was your life insurances. First of all, you hadn’t thought through who the policies were intended to benefit, and how much was appropriate; and then there were technical difficulties on an LLP conversion, simply because they hadn’t been thought of when the trusts were set up which you’d applied to the policies.
I remember this got quite messy. What were the basic issues?
To start with, you had to think of what the policy was for. Was it for the benefit of those remaining within the firm, so that they had some money coming in to compensate them for the loss of their deceased partner’s fee earning etc; or was it to enable them to pay off the deceased partner’s capital? Of course, if you’re willing to pay for it, one policy can cover both purposes. You decided you just wanted the latter, but there were troubles with some of the trusts. You remember there was quite a mix of policies, from different companies.
I remember. Something about double benefit, wasn’t it?
That’s right. Some of the policies simply said “the firm” was to benefit. That would have meant that the deceased’s estate got his share of the benefit as well. So, if there had been four of you, one quarter would have gone to the estate, and only three quarters would have been available to pay off the capital account. What you meant to do was done in some of the other policies, which were written in trust for the surviving partners in the partnership, other than the life assured. In other words, all the proceeds would go to those who were left, and be available to pay the unaugmented capital account of the deceased to his estate. The snag was that most of these simply said the beneficiaries were the partners in your named firm “or any successor partnership”. They didn’t cover the situation where the successor was an LLP or indeed a company, rather than a partnership. We agreed that, if you do convert, we’ll have to get you new policies organised which are written on a broader basis.
Well, I sincerely hope my policy doesn’t pay out for a while yet. I want to enjoy my retirement. I might even bring it forward, but if I don’t they’ll want to get rid of me anyway, won’t they?
Well, they’ll have to be careful. I’m not going to go into the law on age discrimination, but what they will have to do is be sure that, if they are seeking to rely on a retirement age, they can objectively justify it. What many firms are turning to (and again some are doing this in conjunction with their transfer to an LLP environment) is to introduce some objective performance management standards, or at least the means by which they can be set in the future. Therefore they will have an objective set of criteria by which they can say to any partner who is failing to meet the agreed or determined goals that, if it continues he’ll have to go, whatever his age. It sounds harsh, but firms feel they are being pushed down that track by the discrimination legislation.
They won’t have to worry about that with me. I’ll be out of there and down to the golf course like a shot. Naturally, I’d like to keep my hand in as a part-time consultant. I could do with a bit of spare cash, and some of my old clients will still want to use me. That’s OK, isn’t it?
Provided you are careful, yes. There are two aspects. First, you’ve got to think of the tax position. Talk to the accountants about whether or not the particular arrangements you envisage will allow you to keep self-employed status.
Second, however, there’s been quite a tightening on the compliance front, which might affect you. Obviously there are compliance costs attached (practising certificate fee etc) and I’m sure you’d want the firm to pick those up.
Under r 5 of the Solicitors Code of Conduct 2007, the partners will have to make sure that all their arrangements include you. So, even if perhaps you’re working from home, you’ll still have to follow the systems and procedures the same as everyone else. Also, you’ll still be subject to the training requirement, to the effect that everyone has to be trained to the level required for the competent performance of their job. You’ll have to keep up in your fields of law just like anyone else, and obviously there are costs attached to that.
Right, the golf course it is then! But what about any claims that crawl out of the woodwork after I’ve gone. How am I protected there?
The retirement documentation—whether built into the original partnership agreement or done at the time of departure—should include an obligation from the others to continue cover, at not less than an agreed level. The only exception should be if the business is sold, in which case there should be an obligation to get the buyer to enter into a similar commitment, in a direct covenant with you.
If there is no successor practice for any reason, for instance because the business has become an LLP and then goes bust, the insurer has to provide run-off cover. The bad news is that, as you are among those protected by such cover, you might have to cough up towards the run-off premiums.
