Lawyers Taking on Responsibility as Partners or Sole Proprietors of Existing Firms

There are significant legal and ethical implications in assuming responsibility for an existing law firm, whether by way of partnership, sole proprietorship, or through a merger or acquisition.  Lawyers undertaking such responsibilities must recognise the gravity of the role.  Stepping into control means inheriting not just the firm’s name but also its potential liabilities, including those arising from prior acts or omissions.  With the number of professional indemnity insurance (“PII”) claims on the rise, due diligence is no longer optional — it is essential.
 
The Bar Council Risk Management Committee is deeply concerned about recent notifications about mismanagement of client accounts that highlight recurring issues regarding partnership responsibilities and inadequate internal governance.  These incidents point to broader issues: inadequate system processes, lack of defined accountability, and insufficient engagement with the support team.
 
When issues escalate, stakeholders can provide support, but their effectiveness depends on whether the insured practice is proactive, cooperative, and responsive.  Managing a law firm is not a passive responsibility; it requires active oversight and timely communication to prevent problems from compounding.
 
High-Risk Areas Demand Rigorous Due Diligence
Due diligence is not merely a box-ticking exercise.  It is your first line of defence against liabilities that may threaten your professional standing.  Remember to scrutinise these items: 

 

Mismanagement of client accounts and embezzlement remain the most common sources of complaints against lawyers and claims against insured practices.  The consequences are often severe, with lawyers being revoked of their practising certificates or imprisoned. 

 Before assuming control, conduct a detailed review of the client accounts, including monthly bank statements, transaction records, and audit trails.  Questionable payments, uncleared cheques, and inconsistent balances must be viewed with suspicion.  If the account is currently not in order, the liability may soon become yours. 

Verify that the client accounts are managed in accordance with regulatory standards, including the segregation of funds, use of authorised signatories, and timely reporting.  Ensure that the firm’s bookkeeper or administrator is trained and supervised.  Any gaps in the control mechanisms today can lead to serious regulatory action tomorrow. 

Do not rely solely on the work of the accountants; proper supervision, checks, and balances must be in place.  Assign a clearly defined responsibility for regular monitoring of the accounts and ensure that there is a clear audit trail for all supervisory actions.  For example, if a single signatory is permitted to authorise large sums (eg RM5,000 or more), it is crucial to assess and question the risks associated with such a practice.

If you are denied access to financial records, it is not just a red flag — it is a deal-breaker.  Saying “No” may be the decision that protects your career.  Where transparency is lacking or access is restricted, you must seriously reassess your position.  Entering a partnership or proprietorship without full access to financial information is a risk no lawyer should take.  Saying “No” at this stage may save your career.
 

Incoming partners or proprietors often underestimate the extent to which they may be held accountable for the firm’s past conduct.  Liabilities do not vanish with changes in control; they remain embedded in the firm’s legal identity.

Start by reviewing all statutory obligations, including overdue income tax, Goods and Services Tax (“GST”), Employees Provident Fund (“EPF”) contributions, and any regulatory non-compliance.These obligations remain enforceable and may expose you to penalties, legal action, or reputational damage, particularly if you are taking over as a sole proprietor or new partner.
 
In addition, assess other outstanding debts such as unpaid loans, rent arrears, staff salaries, claims, and other internal liabilities.These financial obligations can significantly impact cash flow and create operational and legal risks if not properly addressed from the outset.

Obtain a complete record of the firm’s previous and ongoing litigation, disciplinary proceedings, and PII claims.  Check whether any matters remain unresolved.  Even if you were not involved at the time, liability may be imputed to you as the firm’s partner or proprietor.

Where the firm’s internal documentation is incomplete, inconsistent, or unclear, you must consult external professionals — whether accountants, auditors, or lawyers — to verify the firm’s standing.  Do not rely solely on verbal assurances or past relationships.  Your duty of care is crucial.

3. Monitoring Unusual External Activities Within the Scope of Legal Practice 

Some firms may be involved in non-legal activities such as acting as property agents, holding assets in nominee arrangements, or offering ancillary services.  These activities may fall outside the scope of the legal profession, and more importantly, outside the coverage of the PII. 

It is essential to clearly identify all activities that fall outside the scope of legal services, even if they are carried out alongside or within the firm.  PII only covers legal services as defined under the Legal Profession Act 1967 (“LPA”).  If a claim arises from activities beyond this defined scope, even if a client is involved, the firm and its partners may not be covered, and any resulting loss could become a personal liability.
 
Certain activities are expressly prohibited under the LPA, including money lending and acting as a property agent.  You should request full disclosure of any external business ventures or engagements undertaken by the firm or its partners.  These may include side businesses, real estate dealings, nominee arrangements, investment advisory roles, or collaborations with third-party service providers.  Notably, even if such activities are not conducted under the firm’s name, they can still create significant risk exposure. 

Ensure that the firm’s activities, whether legal or ancillary, are conducted in full compliance with rules governing legal practice and do not create conflicts of interest or compromise your professional obligations to clients.  All activities should be properly structured, appropriately licensed (where required), and financially separated from the firm’s core legal operations.
 
In addition, implement clear governance processes for staff, including providing proper training and supervision to ensure they understand and uphold the firm’s standards and legal responsibilities in all aspects of their work.
 
Taking on or taking over a role in an existing law firm brings with it substantial legal, financial, and ethical responsibilities.  The three areas above, ie client accounts, existing liabilities, and external engagements, represent some of the most significant risks for incoming lawyers assuming control of a firm.  These are not theoretical or distant possibilities, but they are real and recurring problems faced by firms across the profession.


Insurance Is Not a Shield for Everything: Know Your Liability
 
PII strictly applies to legal services as defined under the LPA.  If a claim arises from activities outside this scope, even if it involves a client, you will not be covered.  Any losses may be borne personally by the firm and its partners.
 
If you identify major issues and the firm is unwilling to take corrective steps, the best course of action is to walk away.  Entering a firm without full clarity and assurance of the responsibilities you are taking on may cost you more than your reputation; it may cost you your practising certificate. 
 
While PII may provide coverage for certain risks, it does not guarantee protection in cases involving misconduct or embezzlement.  Claiming to be an “innocent partner” is not a sufficient defence.  In some cases, it does not constitute a defence at all.  Legal liability is joint and several, and your exposure is 100%, regardless of your level of involvement.  Claiming no knowledge or relying on the structure of the partnership is not an escape route.  Ignorance of the law is no excuse (ignorantia juris non excusat) and silence may be taken as consent (qui tacet consentire videtur).

Should you have any enquiries, kindly contact the Malaysian Bar Secretariat’s Professional Indemnity and Risk Management Department by telephone at 03-2050 2001 or by email at pirm@malaysianbar.org.my.