Law firms in distress

In recent years, we have seen high-profile failures in the legal sector for a variety of reasons.

Some of the most extreme cases involved fraud, while more common factors such as the pandemic, professional indemnity insurance costs, and competition have also contributed to these failures.

At Turpin Barker Armstrong, we have continued to expand our expertise and resources to help #law firm owners. We provide support on an advisory basis and can alternatively assist with implementing formal insolvency processes whether that be a Company Voluntary Arrangement ("CVA"), Liquidation or Administration.

Through our network, we can introduce law firm owners to other contacts to help drive efficiency within their businesses or explore merger and acquisition options.

So what have we learned from these assignments, and how could these lessons help other firms avoid insolvency entirely.

Succession

One of the factors that has consistently emerged in our assignments is the absence of succession planning. Running any business is challenging, but a lack of planning and future-proofing will eventually catch up with you.The best people leave out of frustration, and the outside world will notice. This makes recruitment more difficult because potential hires will see the succession issue.

Market gossip or a check of Companies House records will reveal the structure and performance of a practice.

Getting a suitable succession plan in place is important for the longevity for any practice.

Borrowing

If times are tough and funding is required, do your research on where to raise funds. Check the best deals and, importantly, prepare cash flows and projections while considering the deals available. Is the borrowing going into a black hole, or is it well planned so you know how it can be repaid?

Mergers

Would it make sense to merge with another practice sooner rather than later? There are some excellent mergers and acquisition specialists operating in the legal sector who can help target potential partners.

Professional Indemnity Insurance costs?

The cost of insurance was a key issue in the cases we dealt with. Unfortunately it led to additional borrowing at significant cost for the practices.

If insolvency is unavoidable then what are the key points to consider??

We look into these in the next section:

Facing Insolvency?

What Is an Orderly Wind Down?

Whether you are looking at a solvent or insolvent wind down of a law firm, it is imperative to consider the guidance from the SRA (SRA guidance).

When dealing with an assignment, the key elements we discuss with our clients are the client account and client files. Don’t be afraid to engage with the SRA. In our experience, they are supportive. Yes, they will ask tough and direct questions, but they are there to look after clients' interests.

Client Account

It goes without saying that you should ensure it reconciles and there are no shortfalls.

Ideally, upon cessation of trade, the client account balance should be zero. Often, our cases are not ideal, so we have client funds to deal with following appointment.

Firstly, we ensure we have a reconciled position on the date of appointment and then engage with clients to get their instructions on where to transfer their money. The business owner is typically considered the Trustee of these funds, so despite the practice being in the hands of an insolvency practitioner, the owner still has a responsibility to manage the client funds.

Client Files

There are two elements to this. Firstly, the files need to be secure. If the practice is ceasing to trade and shutting the doors without considering who will manage the files going forward, this is problematic.

In our cases, as we plan towards closure, we seek buyers for the business and assets, including the sale of goodwill and work in progress. The purchaser may take possession of those files to ensure they are secure before moving to step two, which is obtaining client consent for any transfer.

Client consent needs to be sought from each respective client, allowing them to decide who they want to manage their file going forward. They may be happy for the purchaser to take on their file, but they also have the option to have the file (and any funds) transferred elsewhere.

How can we help?

All of the above sounds relatively straightforward, but when combining these law firm-specific factors into an insolvency assignment, it adds to the complexities.

Getting early advice remains a priority, and if support is needed, please get in touch.