Law firm insolvency: Options for distressed firms

law firm insolvency

Law firm insolvency

The law firm insolvency process in England is incredibly complex. This is due to the heavy regulation of the legal profession and the need to protect clients.

The Solicitors Regulation Authority (SRA) plays a crucial role in the UK insolvency process for solicitors. They ensure compliance with their code of conduct and the protection of client funds. The process often requires the expertise of corporate restructuring and insolvency professionals with significant experience in dealing with law firm insolvency.

Insolvency processes for law firms involve various stages and legal considerations.

Insolvency lawyers are involved in negotiating insolvency processes. They may represent debtors or creditors, and the nature of their work depends on the type of firm they work for.

The insolvency process may include restructuring to reach agreements with creditors and, if necessary, the liquidation of assets and real estate to pay off debts.

When a law firm experiences financial distress, the Solicitors Regulation Authority (SRA) can intervene.

An Insolvency Practitioner oversees the process of law firm insolvency. This will happen once the most appropriate procedure has been agreed upon.

Recovery First provides a complementary service to professional advisers, such as insolvency practitioners, accountants and corporate recovery specialist to assist in situations of law firm insolvency.

We also deal with law firms directly to help them find the best solution to their financial issues and avoid director disqualification.

 

Understanding insolvency

Insolvency is a financial state in which an individual or entity is unable to pay their debts as they come due. This condition can apply to both businesses and individuals. There are two main tests to determine insolvency:

  • Cash-flow test: This looks at whether the individual or company can pay their debts when they fall due. If they cannot, they may be considered insolvent.
  • Balance sheet test: This assesses whether the total liabilities exceed the total assets. If the value of liabilities is greater than the value of assets, the individual or entity might be deemed insolvent under this criterion.

Corporate insolvency involves specific procedures tailored to businesses, including:

  • Administration: A process where an external administrator takes over the company’s management to try to save the business, sell it, or get a better result for creditors than an immediate liquidation would.
  • Liquidation: The process of winding up a company, asset recovery and selling off its assets to pay stakeholders, including creditors. Any leftover funds are then distributed to shareholders.
  • Company Voluntary Arrangement (CVA): An agreement between a company and its creditors to repay debts over time while continuing to operate. This is similar to an Individual Voluntary Arrangement which is used in individual insolvency cases.

 

Causes of law firm insolvency

 

The past few years have been difficult for all businesses due to the economic landscape and the current cost of living crisis. Commenting on the issue, Mark Turner from Lubbock Fine stated the following:

“Law firm insolvencies are accelerating as the cost of living crisis worsens. Late payments are stretching some firms’ cashflow to breaking point. With overheads likes salaries and energy increasing and inflation stuck at 10%, the cash flow situation for a lot of firms is getting very tight. Even some law firms not previously touched by financial challenges are having to tighten their belts.”

The legal industry has also been faced with a wide range of challenges. From the whiplash reforms, the reduction in the legal aid budget, the rising costs of professional indemnity insurance, and, the extension fixed costs.

As they grapple with the combined effects of market changes and financial burdens, the resilience of law firms is tested. These changes could potentially lead to insolvency when the balance of income and expenditures cannot be maintained.

Due to this, law firms need to adopt robust financial strategies and innovative solutions to withstand the turbulences of an evolving economic and regulatory landscape.

 

Options for firms facing financial difficulties

 

If your firm is facing financial difficulties, it may be possible to turn your situation around. It is vital that you recognise the signs and address any financial issues as promptly as possible. Your main priorities should be to avoid SRA intervention and address any underlying issues before they become too complex to manage.

Outlined below are some practical steps that may help to improve your law firm’s cash flow and alleviate financial pressures:

Expand your firm’s service offering:

You may wish to consider offering additional services to attract new clients and create alternative sources of income.

Exit unprofitable legal areas:

It might be beneficial to stop practicing in areas that are not financially viable. Recovery First can assist with the smooth transfer of your cases to one of our firms on our panel of solicitors, ensuring your work in progress retains its value. Should you decide to leave a particular market, transferring your files to another firm using the Recovery First process could unlock the maximum value of your work in progress.

Merge with another firm:

Merging with another legal practice could be a strategic option to consolidate resources, share costs, and expand your client base, leading to improved financial health and operational efficiencies. The need to exit specific areas of law before a merger can take place is quite common on these situations. Recovery First can assist in the process of exiting any legal market in a merger situation.

Restructure your firm:

If financial issues persist, restructuring your firm’s operations might be necessary to improve efficiency and financial health.

Consider closure:

In situations where other strategies may not be viable, closing your firm could be the most practical solution. Recovery First can assist in managing a compliant and orderly closure, ensuring that all legal and financial obligations are met. This can also help to minimise any negative impacts on clients and staff.

You aim should always be to avoid a distressed situation when closing your firm. This is why it is essential to seek assistance as soon as possible. 

The role of the SRA in law firm insolvency

 

The SRA monitors law firms and sole practitioners to ensure adherence to regulations and has the authority to enforce compliance. If a law firm becomes insolvent, the SRA’s involvement adds complexity to the situation​​.

The SRA is responsible for setting training and qualification standards for solicitors, monitoring compliance with the code of conduct, protecting client monies, and can close down practices or instigate disciplinary procedures if necessary​​.

The SRA has the power to intervene in a law firm’s operations during financial distress. It does so by freezing accounts, transferring client monies to safekeeping, and may result in job losses and office closure.

Interventions can occur under several circumstances. This may include a court-issued winding-up order or company administration. The cost of this can be substantial, potentially reclaimed from directors personally​​.

This process is designed to safeguard the interests of the public and maintain trust in the legal profession’s management of client funds during insolvency proceedings.

It is crucial for firms to take proactive measures to avoid SRA intervention and mitigate mounting debts against the firm.

Early action and addressing the root causes of financial distress can demonstrate to the SRA that such intervention is unnecessary. Should it become inevitable, a firm might have to choose voluntary restructuring or closure.

Recovery First offers support to law firms that are experiencing financial challenges, guiding them through restructuring or an orderly closure, thus helping to sidestep the need for SRA intervention.

 

How can Recovery First assist law firms facing insolvency?

 

Dealing with the complexities of law firm insolvency is a daunting challenge. It requires early intervention and highly experienced professionals, such as restructuring and insolvency lawyers to secure optimal solutions.

Recovery First understands the intricacies of insolvency and works with a range of clients to provide solutions to complex situations.

We work alongside restructuring and insolvency law specialists to ensure the best outcomes are achieved.

We offer a high quality client service, mitigating the likelihood of SRA intervention and steering towards the most favourable outcomes.

For firms in financial distress, strategically selling Work in Progress (WIP) assets can be a solution, allowing a refocus on more profitable sectors.

Even in dire circumstances necessitating closure, Recovery First provides compliant and structured services, ensuring key stakeholders are considered and the needs of clients are met.

Recovery First’s unique approach guarantees confidentiality and maximises recoverable WIP value, benefiting law firms and professional advisors alike.

If you would like to find out more about Recovery First’s process, feel free to get in touch with our team today using the details below and we will contact you to discuss the process.

 

It's never too late to speak to Recovery First. Contact us now in the strictest confidence

Sally Dunscombe:

sally.dunscombe@recoveryfirst.co.uk

David Johnstone:

david.johnstone@recoveryfirst.co.uk

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