Traditionally Chambers have operated as unincorporated associations, with the Head holding Chambers assets, employing staff and entering into contracts on behalf of Chambers. Leases of premises are commonly entered into by four senior members of Chambers, on behalf of all members.
Chambers assets are held on trust for the members and under the constitution members agree to indemnify the Head of Chambers and other members against any liabilities incurred on behalf of Chambers.
Whilst this structure has performed perfectly adequately in the past, many Chambers are now questioning whether this structure remains fit for purpose.
Difficulties with the traditional model
The model described above was developed when Chambers were generally smaller, as were the liabilities involved and the resulting personal risks to those incurring them.
As Chambers grow, both in terms of numbers and turnover, so does their expenditure. Rents continue to rise and premises costs, particularly in central London, are now eye wateringly expensive.
Added to this is the fact that the Head of Chambers will not necessarily have the same personal relationship with all members as has historically been the case. There is now greater fluidity at the Bar with barristers moving between Chambers more frequently. Many sets are now multi site, which exacerbates the issue.
Although Heads of Chambers will generally (although not universally) benefit from indemnities from Members under the constitution, it is an uncomfortable position for the Head to be primarily liable to creditors and potentially having to enforce indemnities against members (and in some cases former members).
Finally, there is the practical concern of what happens when the Head of Chambers changes and/or other members who have entered into contracts on behalf of Chambers leave. The departing Head or member will wish to be released from liability and to transfer the burden of the agreement to the new Head and/or other members. This however requires the agreement of the other contracting party and can be particularly problematic and costly in the case of leases, where landlord’s consent will be required and their costs of giving the consent will need to be met.
All of which means that Heads of Chambers and other senior members may be reluctant to enter into contracts or incur liabilities on behalf of Chambers. As a result many Chambers have, or are considering, putting in place a service company to address these concerns.
The service company model
One option is for Chambers to incorporate as a whole and operate as a BSB or SRA regulated entity. It will then be on a similar footing to traditional law firms with limited liability to both clients and creditors. However this is clearly a significant step and for a number of reasons, not least the risk of conflicts of interest arising between members of Chambers, is unlikely to be suitable for most Chambers.
The more common, and less radical, solution is to incorporate a service company to sit within the traditional structure.
Commonly the service company will be a company limited by guarantee, which avoids the need to transfer shares when members leave or join. Either all members of Chambers or the management committee will be the members of the company, and the benefits deriving from membership of the company will be held on trust for all members. The board of directors of the service company will usually comprise of the Head of Chambers and some or all members of the Management Committee.
The service company takes on the function of providing clerking and administrative services to Chambers. All Chambers assets are transferred to the service company, which assumes responsibility for Chambers liabilities. The service company will also become the employer of all Chambers staff.
There are a number of steps which need to be taken to set up the service company structure.
The company itself will need to be incorporated with appropriate articles of association and register for VAT and PAYE.
The constitution of Chambers will need to be amended to accommodate the use of a service company, for example by ensuring that the service company may benefit from the indemnities from Members.
The assets and liabilities of Chambers will need to be transferred to the service company by way of an asset transfer agreement between the Head of Chambers and the service company.
As the burden of a contract cannot be transferred without the consent of the other party to the contract, contracting parties to material or long term contracts will need to be approached with a request to novate the contract to the service company. Lower value or short terms contract may be left to expire and be renewed in the name of the service company.
The transfer is likely to constitute the transfer of an undertaking for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 2006. The Head of Chambers (as employer) will therefore have an obligation to inform and, if applicable, consult the affected employees (or their elected representatives) in relation to the proposed transfer and any measures to be taken in relation to their employment.
There will be a range of other issues for Chambers to consider as well, which will vary for different sets. The process is likely to be reasonably involved and as with any project it is important that there is a clear and workable timetable for implementation, taking into account the need to obtain the requisite approvals within Chambers, third party consents and register for VAT and PAYE.
Other issues to consider
Leases of Chambers premises can often prove problematic and it is necessary to consider the approach in relation to these at an early stage. The lease will almost certainly require the landlord’s consent to the assignment of the lease to the service company and the landlord will usually be entitled to impose reasonable conditions to any such consent.
As the service company will be newly formed with little in the way of assets, the landlord will commonly require personal guarantees from members of Chambers (or some of them) as a condition of giving its consent. As the rent payable under the lease is commonly the single largest expense of Chambers, the requirement for personal guarantees can limit the benefit of putting in place the service company.
An early approach to the landlord is therefore prudent. It may be that the liability under the personal guarantees can be capped. A rent deposit or bank guarantee are possible alternatives (although these have an impact on cash flow).
The other common problem area is Chambers overdraft facilities and bank loans. Once again, the bank will commonly have requested personal guarantees from members and, if not, will almost certainly do so if the loans are to be transferred to a service company.
One final point to consider, as ever, is tax. It will be necessary for the service company to register for VAT and therefore to charge VAT on members contributions to Chambers expenses. Not all Chambers are registered for VAT and in addition to the increased administration which will result, the VAT will represent an absolute cost to any members unable to recover it. There are other tax implications to be considered as well, in particular in relation to corporation tax and capital allowances. Tax advice is therefore essential.
So there are many issues to consider before taking the decision to use a service company. However, with careful planning, putting in place a service company can address many of the concerns arising from an unincorporated association structure and can form part of the solution for a modern, robust Chambers structure.
Scott Leonard is a Partner in the Corporate & Commercial Team at Russell-Cooke LLP.