Heenan Blaikie, a 40-year-old national law firm with offices in nine Canadian cities and in Paris, decided this week to dissolve its partnership. Here's how law partnerships work, and how a dissolution could unfold.
How law firms are capitalized
Partners put up capital, either all at once or over a period of time. "That money is the partnership's money to use for working capital," said Bryce Tingle, who holds the Murray Edwards Chair of Business Law at the University of Calgary. "It's how it manages its cash flow. The law firm may also have debt from a bank. It will also have trade creditors – people who supply services."
What happens when partners leave?
In most law firms, partners who leave do not receive their capital back all at once. At Heenan, dozens of partners left over a short period of time. Norman Bacal, who has been overseeing the dissolution, said the wave of departures became a "run on the bank." He acknowledged that partners will lose a significant portion of their capital.
Who gets paid first?
Whether assets exceed liabilities or a firm is insolvent, the government is the "super-priority," and is first to be paid taxes owing, including HST. Then come secured creditors, usually banks, and then the unsecured – employees and those who supply services. Partners are personally liable for the unpaid wages of employees. Then the partners are paid, typically (depending on the partnership agreement) splitting the remaining money into equal shares, Prof. Tingle says.
The firm will keep working
To maximize money for creditors and partners, the firm will continue on projects, winding the business down while still generating revenue. "You never just want to shut something down if you're trying to extract money from it," Prof. Tingle says.
Ensuring clients' files are transferred to other firms and confidentiality is protected is crucial. Clients will be the first priority, Mr. Bacal said.