Bankruptcy Those who have faced financial hardship know how difficult it is to deal with debt. Fortunately for many debtors, bankruptcy can provide a way out. Bankruptcy is designed to give debtors a financial fresh start by eliminating most debts in . Symbat Tursyngali, Anar Kubeyeva. Lawyers, Synergy Partners Law Firm. A company, for example LLC, has decided to close its karacto.xyz this case there are several options: (1) The shareholders liquidate the LLC themselves. This option is possible if the LLC has enough property and money to . The Bankruptcy Abuse Prevention and Consumer Protection Act, which came into force in the US in , tried not only to simplify the procedure but also limit its length to 18 months.
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Explore the topic Court claims, debt and bankruptcy. Is this page useful? Partners who get out early enough may even be protected by the statute of limitations. The lesson, once again, is to get out quickly. Unfinished business liability. Boxer, a California Court of Appeals opinion involving the breakup of a small law firm. The Jewel doctrine says that partners who remain with a firm up through the time of its dissolution must share with the firm the proceeds of any work they perform after dissolution on matters that belonged to the firm at the time of dissolution.
The rule has been applied widely to all types of dissolved law firms. It reaches not only firms organized as general partnerships but also firms organized as limited liability partnerships, professional corporations, and limited liability companies. The logic of the Jewel rule is to protect the partners from one another.
In the absence of the rule, the argument goes, partners could back out of their partnership agreements and take partnership profits for themselves by absconding with valuable business. Forcing partners to return fees to their old firms is supposed to ensure that all the partners share the fruits of partnership business on the terms dictated by the partnership agreement.
It stops the partners from stealing opportunities from the firm. This makes a good deal of sense, but in practice it encourages a race to the exits. This is because Jewel has been interpreted to flip on like a switch at the moment of dissolution: it applies to partners who stay until dissolution, but not to partners who leave just prior.
This creates terrible incentives. Partners who stay until dissolution face millions of dollars in liability, while partners who leave one day prior to dissolution walk away completely free. Although Jewel was designed to punish partners for leaving early, it actually punishes them for leaving late. The lesson of Jewel is to get out before the firm dissolves.
The reason law firms are so fragile is that their structural makeup encourages partners to leave in spiraling cycles. Ownership exposes partners to the risks of declining profits and serious personal liability, and the best way to avoid those risks is to get out early in the cycle of decline. The result is a race to the exits. Ideally, we would be able to test this ownership-based theory experimentally or statistically, by comparing firms that are owned by partners to firms that are owned by others, and asking which were most likely to collapse.
The best way to validate this theory about the connection between ownership and collapse is thus to look a little more widely for comparisons.
We may not be able to compare partner-owned law firms to investor-owned law firms, but we can look around for other comparisons. Associates and staff. One comparison is the associates and staff of a law firm. Although associates and staff seem to leave at higher rates in times of decline, they primarily leave on the heels of the partners they work for.
They do not appear to go in search of other jobs as quickly as partners do. One explanation is that associates and staff have fewer options in the labor market than partners do. This may be true, and if so, it would tilt the associates and staff in favor of staying.
But, of course, there is another explanation as well: the associates and staff are not owners. They might lose their jobs, just as partners might if the firm dissolves. This makes staying until they get laid off much more attractive.
Accounting firms. Accounting firms are also owned by their partners. Arthur Andersen, the partner-owned accounting firm that audited Enron, collapsed and went into liquidation with astonishing speed after it was charged with a crime in connection with the Enron scandal. And Andersen was not the only accounting firm to blow up like a law firm. But later that year, the firm collapsed and filed for bankruptcy in a pattern virtually identical to that of many law firms: the firm dissolved after about a quarter of its partners fled in a six-month period in response to a decline in profits.
Shareholders in investor-owned companies. Law firm partners also stand in interesting contrast to investors who own ordinary industrial companies. Like law firm partners, investors in an ordinary company also have an incentive to run, since they, too, will suffer when profits decline. Unlike law firm partners, however, investors in an ordinary company cannot run because the corporate charter prohibits them from withdrawing unilaterally. Shareholders in an ordinary company like General Electric can sell their shares, but they cannot actually take back their money from the firm.
They cannot unilaterally ask GE to give them back the portion of its factories, brand names, and cash that corresponds to their shares.
Dividends in ordinary companies have to go to every shareholder at the same time and on the same terms. No shareholder can individually get out on his or her own.
There is thus no reason for investors to race to leave because everyone has to leave simultaneously. The terrible inertia of individual decision making disappears. Partner ownership seems to be one of the key factors in explaining why law firms collapse with such unusual force and speed. But does it really change anything about how we understand law firm blowups? Usually, we explain the bankruptcy of a business such as Chrysler or Delta Air Lines as a simple combination of declining revenues and increasing costs.
Do partner ownership and the notion of a partner run add anything to our understanding that mere financial distress does not? How else, one might ask, could such an old, prestigious, and profitable firm have fallen apart so swiftly? A focus on partner runs actually provides an answer. Partner ownership creates a set of incentives that might have pushed Dewey to a swift and deadly end even if its managers had been completely honest. Partner ownership also gives us a new perspective on the role of debt and fixed salaries.
Dewey was, on this telling, no different from Chrysler or Delta Air Lines or any number of other bankrupt businesses that took on too many costs without enough revenues.
This story makes intuitive sense, but a focus on partner ownership would tell the story rather differently. Guaranteed partner salaries alone could not have driven the firm to be incapable of paying its debts because, as we have already seen, partner ownership gives law firms freakishly robust capital structures. Even at the time of its death, Dewey, like every other law firm in America, had many partners who were still being paid in profit shares rather than fixed salaries, so it had huge free cash flows over which its managers had total discretion.
Far from being insolvent, Dewey remained profoundly profitable—at least as an accounting matter—almost up through the day of its dissolution. The focus on fixed partner salaries is also a bit naive because it ignores the extent of other salaries in the firm.
Every law firm—including healthy ones—has many people who usually get paid in salaries. These people are called associates and staff. The addition of a handful of salaries for the partners thus could not, by itself, have bankrupted the firm.
Something else must have been at play: the tendency of partners to run in the face of declining profits. Also, a focus on partner ownership gives a clearer picture of why exactly Dewey started paying all these fixed salaries. News reports have told us that all the fixed partner salaries were given out as recruitment incentives to partners coming laterally from outside the firm. But in fact, most of the salaries went to partners who had already been at the firm for years.
And we can now see why these partners wanted the fixed salaries so badly. By demanding to be paid in salaries rather than profit shares, some of the partners were trying to transform themselves from owners into creditors. They were hoping to avoid the slide profits that inevitably hurt the owners of a firm in decline. If partners were paid in profits, they would leave, making the firm even less profitable and even more precarious for everyone who remained.
It shows us how precarious ownership can be in a time of decline. A salary is a kind of debt because it represents a contractual obligation that has to be paid in a fixed amount at a fixed moment in time. Debt, like partner salaries, is often said to be the main cause of law firm collapses, for the same reasons it is said to make businesses like Chrysler and Delta Air Lines insolvent. And so debt plays a different role in law firms than in other businesses. In a law firm, debt tends to be a lagging, rather than a leading, indicator of decline.
Firms often take on large amounts of debt only after profits have begun to decline, mostly as a way of desensitizing their partners to profit declines. Debt surely made things worse at Finley Kumble. Debt is so unimportant in a law firm that we can imagine a law firm collapsing even without any financial debts at all.
If profits declined enough, partners could start to leave the firm in a self-reinforcing spiral even if the firm never took out a loan and never fell behind on its debt payments. Perhaps the most important lesson a theory of partner runs can teach us about the Dewey collapse is to show why financial distress was so much more destructive at Dewey than at other kinds of businesses.
Dewey was, as we have seen, technically profitable almost until the end. To understand why Dewey collapsed, we have to go beyond mere financial stress and understand how that financial stress became magnified and distorted by the force of a partner run. Other businesses are made of rubber, but Dewey was made of glass. The forces pulling law firms apart are not irresistible. Most firms manage to survive them because most of the time, they enjoy a kind of equilibrium in which partners are inclined to stay at their current firms.
A firm begins to collapse only when partners fall out of this equilibrium. The key to figuring which firms will collapse is to identify the forces that tilt a firm out of equilibrium and start the snowball of partner departures rolling. Although elite law firms have almost all become much larger, most of the collapsed firms expanded with a speed and aggressiveness that was unusual even among their peers.
Financial s tress. Although financial stress is not the only cause of law firm collapse—one of the lessons we learned from Dewey—financial stress does matter, albeit in a surprising and unconventional way. Firms collapse not because their profits decline in absolute terms, but because their profits decline in relative terms.
Since they pay their partners in discretionary profit distributions rather than fixed wages or bonuses, they have enormous free cash flows that they can use for almost any purpose, including the repayment of debts.
The relative nature of profits is so important that a firm could theoretically collapse even at a time when its profits were increasing if the profits were not increasing fast enough to keep pace with competitors.
To be a bit more precise, what truly matters is the change in relative profits. Some law firms will always be more profitable than others. This is just a fact of life. But most firms nevertheless remain stable because the market for partners usually sits in an equilibrium in which each lawyer settles at the firm that offers him or her the best deal.
Partner runs commence when the market falls out of this equilibrium because a firm has changed its profitability relative to competitors. Knowing the importance of relative profits is useful because it tells us that law firm collapses should actually be surprisingly unrelated to large, industrywide shocks like financial crises and recessions.
A truly widespread event may diminish the profits at every firm, but partners will start to move around only if profits diminish more at one firm than another. Slowdowns in demand for legal services will drive firms to collapse only when they damage those firms relative to their competitors, perhaps because one firm is more exposed to a particularly slow practice area than other firms.
For this reason, a truly industry wide decline like the ones now afflicting newspapers and recorded music would not necessarily cause individual law firms to collapse. If crises and recessions cause firms to collapse, it is only because some firms are more heavily damaged by the declines than others. But the firm could easily have remained solvent in the face of this liability if it could have kept its partners.
Although it is difficult to pinpoint a single event that causes the most partner runs, the most important event seems to be expansion. Although elite law firms have almost all become much larger in the past 40 years, most of the collapsed firms expanded with a speed and aggressiveness that was unusual even among their peers.
One risk is the cost of investing in new office space and partners. But the beautiful office brought some very ugly costs. Brobeck earned about the same amount of revenue in as it did in , but its real estate costs had ballooned from 6. Although the firm could easily have paid these costs if it had suspended profit distributions, the decline in profit distributions was not sustainable because it pushed the partners to run in early Client l oyalty.
The placement of client loyalties is also important. If clients are loyal to firms rather than to individual partners, partners will be less likely to leave and the firms will suffer less damage when they do.
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