Law firm insolvency rates accelerate due economic conditions

law firm insolvency

Research has found that law firm insolvency rates are increasing as the UK cost of living crisis worsens. A recent article published in the Law Society Gazette has stated that 61 law firms went into a form of insolvency between January to March this year, increasing from 46 in the previous year. According to the article, this rise can be attributed to the rising costs of professional indemnity insurance, energy costs and staffing, as well as a slowdown in demand for legal services.

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.”

Other factors leading to law firm insolvency

Although the cost of living crisis plays a massive role in contributing to the rise in law firm insolvency rates, other factors, such as changes to the legal market have added to the crisis.

In recent years, the legal services market has experienced rapid changes. The decrease in the legal aid budget has led to the closure of many law firms on the high street.

The RTA (Road Traffic Accident) market has significantly contracted due to the recent whiplash reforms, resulting in the closure of numerous firms or their shift towards other areas, such as data breach cases. Nevertheless, court decisions in this domain have led to low settlements, making it financially unviable for firms to generate substantial revenue from this sector.

Most recently, the announcement of the MOJ’s plan to implement the fixed recoverable costs extension in October 2023 has led to many firms fearing for their financial future.

Advice for firms facing financial issues

If your firm is facing financial difficulties, you may be able 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.

Listed below are some options you may wish to explore to help your firm increase cashflow and reduce financial strains.

  • Broaden service offerings: Explore the possibility of expanding the range of services provided by your firm to create a diversified revenue stream and seize new business prospects.
  • Exit less profitable legal areas: You may wish to consider a strategic exit from specific practice areas to focus on more profitable markets, potentially enhancing your financial position. With the guidance of Recovery First, you can ensure a seamless and compliant exit from these markets by transferring files to suitable solicitors from our panel, safeguarding the value of your work in progress.
  • Unlock the value of your work in progress: If you opt to withdraw from an unprofitable or less profitable market, you can opt to transfer your existing files to another solicitor firm. By employing the Recovery First approach, you can recover the maximum value of your work in progress, thereby enhancing cash flow during crucial times.
  • Consider restructuring your firm: In certain instances, law firms facing financial challenges may need to restructure their operations. This could involve making changes to the firm’s organisational structure, processes, or business model to optimise efficiency and regain financial stability. 

How Recovery First can assist your firm

The prospect of law firm insolvency can be extremely daunting and a complex issue for firms to navigate. Facing these issues as early as possible, and seeking the right help is key to ensuring the best solution is achieved.

Whichever route you choose to take for your firm, Recovery First will ensure the most positive and profitable outcome is achieved, ensuring SRA intervention is avoided.

Selling Work in Progress files to exit a specific market can be a positive solution for distressed law firms. It can help them focus on more profitable areas of law.

In the worst-case scenario, you may be required to close your firm due to insolvency. Recovery First can assist you in this situation to ensure a compliant closure of your firm.

Our clients receive 100% of their recoverable WIP, plus their allocated entitlement to deductions from damages, anecdotally returning significantly higher value than a traditional WIP sale.

The unique scheme offered by Recovery First is suitable for both law firms and professional advisors. Our team manage the transfer of files from start to finish; placing case files with an approved law firm  to protect the integrity of the client’s case, while at the same time maximising the value of the work in progress.

We guarantee 100% confidentiality for all clients. If you would like to find out more about Recovery First’s process, feel free to get in touch today.

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

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