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Does the management team of a professional services firm have the power to deal with an extended lockdown?

17 April 2020

Like all other businesses, professional services firms are feeling the effect of the coronavirus outbreak and are having to take steps to ensure survival in a world of mass remote working, empty offices, a decline in clients seeking services and increasing financial pressures.

Management teams are grappling with these issues on a day to day basis and juggling the between maintaining the culture of their people driven businesses and addressing the harsh financial reality that revenue is in decline and costs savings must be made. This is never easy with so many fixed overheads, but most firms were quick to adopt a number of measures to manage cashflow and reduce employment costs including furloughing staff and reducing hours, deferring bonus payments and suspending planned recruitment.

The Government’s announcement last month that firms can defer the payment of VAT and partners’ income tax due on 31 July was also welcome assistance with short-term cashflow requirements. Many firms entered into discussions with their banks to increase facilities and are considering taking advantage of the Government’s new business interruption loan schemes.

But what about financial measures regarding the significant cashflow impact of the remuneration of partners in LLPs and partnerships? We know that, not surprisingly, firms have been quick to address the issue by extending measures to partners themselves.  For many, such measures were a simple financial and ethical decision taken to protect and preserve the workforce and the future of the business in the long term.

The most common short-term measures have been reductions in partners monthly drawings, suspension of profit distributions and bonuses and, for some firms, capital calls to provide extra working capital for the business (particularly where the firm has an existing capital financing facility that can be drawn relatively quickly).

The introduction of what were perhaps regarded as short-term measures saw firms bring partners together to preserve the ethos of collegiality and demonstrate partner commitment to the firm’s values and culture. In many cases, measures were introduced by consensus and by voluntary decisions made by the partner group.

But circumstances have changed again and we now know that the lockdown has been extended for at least a further three weeks.  For many firms this may mean that further and potentially tougher measures will need to be taken in relation to the partner community and where those measures begin to have a more significant financial impact on individual partners, it may be become increasingly difficult to make changes by voluntary action or by consensus. 

So management teams should now be carefully reviewing their partnership agreements and identifying  what powers they have to compel changes required to preserve and protect the business and how they must exercise their powers. It must be anticipated that where the personal impact of potential changes results in partners declining to consent to what is contemplated, management teams must look at what powers they have in relation to:

  • further reductions in the level of monthly drawings paid to partners;
  • continuing the suspension or deferral of profit distributions;
  • making capital calls on partners;
  • adjusting profit shares;
  • reducing the working hours of partners and the commensurate effect on remuneration; and
  • de-equitisation of partners (temporarily or permanently).

It is vitally important that power is exercised lawfully and in accordance with the procedures set out in the partnership agreement. Having a full appreciation of the law and  the agreed procedures is sometimes overlooked with the result that decisions are subject to challenge by disgruntled partners.

Even if the management team has the power to introduce measures considered necessary to preserve the business, it would be prudent to assume that some partners will be very hostile to measures which they do not believe should be imposed upon them.  In such circumstances, management must also be prepared to deal robustly with individuals who do not accept the necessity of measures designed to achieve the long-term objective of the survival of the business.

In these difficult times, the true meaning of partnership ethos will be tested to the limit - and management must be prepared to make tough decisions in relation to the partner group.

If you have any queries regarding this article, please contact either of the authors or your regular contact at Lewis Silkin.

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