Partners to be hit with bill for profit shortfalls

Partners could be left paying for the financial crisis long after they have
walked away from their firm.

A recent court decision has offered an insight into what might be in store
for those among the mass partner purge which took place during the downturn.

London-based law firm Hammonds LLP was challenged by its ex-partner David
Jones who objected to paying back funds resulting from overdrawn profits.

Shortly before he retired, Jones was told he would owe a substantial sum due
to lower-than-expected profits during 2004/2005. Later, he was told he would
also need to pay further sums for overdrawings in the year before.
Jones challenged the matter, his objection based on the correctness of the
accounts. Hammonds went to court.

Jones lost the case, appealed and, last week, lost again, with Lord Justice
Lloyd ruling: “The people who needed to be bound by the accounts were those
whose rights and liabilities were affected by them, namely, the people who were
members of the partnership during the relevant accounting period.”

In short, when a partner marries themselves to a firm, it’s in sickness and
in health. When profits fall short of expectations, partners can be called up to
repay their share.

“It’s unattractive asking any partners for money back… but firms are entitled
to do it,” said Jane Howard, an accounting and audit expert with lawyers
Reynolds Porter Chamberlain.

“It is a situation which arises when firms have paid out, by way of drawings,
a very high proportion of the budgeted profit share.”

Following a painful twelve months, which saw partners shed from close to all
the major accounting firms, Howard expects more businesses to approach former or
current partners, asking for some money back. And if the partners resist, the
firms can brave embarrassment and take the matter to court.

Accounting partnerships were among those hit hard during the crisis. In July,
mid-tier firm BDO said goodbye to one in ten partners, a decision managing
partner Simon Michaels then described as “not one we have made lightly”.

“All the partners are well respected and have made a valuable contribution to
the firm during their time as partners,” Michaels said.

Tim Edward, head of commercial dispute resolution at lawyers Maclay Murray
& Spens LLP, spends his time advising departing partners.
He said many now sign a formal agreement with their former employers, but across
the board there is limited knowledge of what action can be taken to safeguard
the funds.
“The Hammonds case shows there is not universal awareness and there still may be
a belief that because a partnership is limited liability,
that that limits the liability to pay back into the partnership,” he said.
“If there simply isn’t enough cash there, firms have to recoup from whatever
source they have.”

Further reading:

Business Link’s advice ‘Legal structures: the basics’

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