These days, sole practitioners are often singled-out as an insurance risk. Indeed, most lenders will require panel firms to have two or more partners, in the expectation that this will reduce the likelihood of fraud. As a result, it is tempting for sole practitioners to get together and create arrangements that may appear from the outside to be a partnership, but in reality remain separate firms.

It is worth remembering that the formalities used (eg the wording of deeds of partnership; the extent of profit sharing) are not conclusive in deciding whether or not there is a partnership under the Partnership Act 1890; what matters is the ‘intention’ of the parties. So, if they intend to be partners then they will be, irrespective of the documentation; likewise, if they do not intend to be partners, then there will not be a partnership (even if the documentation tries to create one). Thus, there is a danger that sole practitioners who work together in ‘partnership’ will be regarded as operating sham partnerships. That can have important consequences:

insurance: if one of the partners is involved in fraud, the insurers will obviously decline cover for that partner (on the basis of dishonesty). On the other hand, cover should extend to the ‘innocent’ partner. However, if insurers decide that there is a sham partnership, then it may also be possible to decline cover for the innocent partner (even if there was no direct involvement with the fraud);

disciplinary proceedings: the operation of a sham partnership will almost certainly lead to disciplinary proceedings. Defence costs incurred in relation to such proceedings would normally be covered under a solicitor’s policy. But, with a sham partnership, the insurers could decline cover on the basis that proceedings have only been brought due to the dishonesty of the partners. Even if cover was provided, a finding by the Disciplinary Tribunal that there was a sham partnership would be strong evidence on which insurers could base any future refusal of cover.

See article in [2010] NLJ 210.