Solicitors’ Solvency: Covid-19 and the Risk of Insolvency

avoiding sra intervention

Since the beginning of the covid-19 pandemic, there have been major concerns within the legal services industry regarding the risk of formal insolvency for some law firms, including those in the personal injury and commercial property sectors. In an article written by Weightmans Solicitors in July 2020, it was stated that there were growing concerns that the pandemic posed a major threat to a number of firms, especially those which were already facing financial difficulties due to a drop off in work and a potential increase in the cost of professional indemnity insurance.

It was stated in Weighman’s article, almost a year ago, that, “of 774 small firms, including sole practitioners, almost three quarters of high street practitioners commented that they believe that they may have to close their doors within the next six months.”

 

It was further stated that, “Andrew Hosking, a partner of financial advisors Quantuma…has estimated that 250 firms nationally may be restructured or forced to merge as a result of the crisis.”

 

Current threat of covid-19 on solicitors’ solvency

Ten months on from the Weightmans article, there may not be quite so many insolvent companies within the legal industry as were initially expected as a result of the virus. A number of measures were put in place by the UK Government at the start of the pandemic to minimise the impacts of covid-19 on the economy.

The furlough scheme was introduced to ensure staff retention for businesses impacted by the pandemic, this scheme has now been extended and will run until the end of September 2021. Several grants were also allocated to businesses to keep them afloat throughout the restrictions.

These schemes, as well as the Corporate Solvency and Governance Act 2020, have greatly assisted many law firms and may have allowed some to remain solvent over the past year.

 

The Corporate Solvency and Governance Act 2020

The Corporate Solvency and Governance Act 2020, was introduced as a temporary measure to ” continue to provide a breathing space to companies whilst coronavirus related restrictions remain in place (including social distancing and regional lockdowns).” A number of permanent and temporary insolvency measures have been introduced within the Act.

The new permanent measures have potential to completely alter law firm insolvencies because of the Restructuring Moratorium, which is outlined below(information obtained from the Parliament website):

  • “A new restructuring plan to help viable companies struggling with debt obligations. The court can only sanction a restructuring plan (that binds creditors) if it is “fair and equitable”. In other words, creditors vote on the plan, but the court can impose it on dissenting creditors (known as “cross-class cram down”).
  • A free-standing moratorium for UK companies to give companies a formal “breathing space” in which to pursue a rescue or restructuring plan. During this moratorium no creditor action can be taken against the company without leave (i.e. permission) of the court. The moratorium is overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company remains with the directors (in effect, it is a “debtor-in-possession” procedure).
  • Temporary modifications to the new (and otherwise permanent) moratorium procedure, which relax the entry requirements, have been extended until 30 September 2021. Temporarily, a company may enter a moratorium if they have been subject to an insolvency procedure in the previous 12 months; measures also ease access for companies subject to a winding up petition. The temporary moratorium rules have also been extended to 30 September 2021.
  • A prohibition on termination (or so called “ipso facto”) clauses that engage when a company enters an insolvency procedure, a moratorium or begins a restructuring plan. In effect, the Act prevents suppliers from stopping their supply while a company is going through a rescue process. The Act includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business. In addition, small suppliers are exempt from the obligation to supply until 30 June 2021 so that they can protect their business if necessary.”

Temporary measures which have been introduced include:

  • A suspension of serving statutory demands and restrictions on winding-up petitions where unpaid debt is due to Covid-19
  • Suspension of the wrongful trading rules. This may temporarily remove the threat of director disqualification or personal liability due to wrongful trading.
  • Temporarily providing companies (and other bodies) with greater flexibility to hold Annual General Meetings
  • A Temporary extension to filing deadlines at Companies House. 

Although the Restructuring Moratorium could potentially allow insolvency practitioners to secure practice monies before intervention, there are concerns that this will lead to increased tensions between the Solicitors Regulation Authority (SRA) and insolvency practitioners.

 

The future threat of covid-19 on solicitors’ solvency

As restrictions ease and we make our way out of lockdown, the future looks bright for many businesses, including law firms. For some firms, however, the short-term measures which were put in place to prevent insolvency may have been acting as a temporary band-aid to cover a deep wound.

Although the furlough scheme has been successful in helping many firms remain solvent, the scheme is due to end in September 2021. Many firms may have been able to remain in operation throughout the pandemic; however, many will have seen a drop in business as a result of the covid-19 restrictions. The government’s “stay at home” message led to a reduction of people in public places, on the roads, and at work over the past year, leading to less accidents and potential claims for personal injury.

As more and more people have been working from home, the demand for office space will have reduced, leading to a reduction in workloads for commercial property solicitors.

The legal industry has faced many challenges over the past decade, with more on the horizon following the whiplash reforms after 31st May 2021.

 

How Can Recovery First Assist?

 

Recovery First understands the challenges facing the legal sector as a result of covid-19. We offer a positive solution to any law firm by helping them exit any legal market whilst remaining solvent, maintaining cash flow, and ensuring they get the most out of their files.

As well as assisting firms who are going through restructuring, we also assist many firms who are going through the formal insolvency process. We work alongside the insolvency team to come up with the right plan tailored to meet the needs of each specific firm.

Whatever the reason, Recovery First will ensure the most positive and profitable outcome is achieved. An additional benefit being that the firm’s clients not only get a seamless transfer, but they are also married up with a firm specialised in their particular needs. The unique scheme offered by Recovery First is suitable for law firms and professional advisors, including restructuring and insolvency solicitors, insolvency practitioners and accountants. Our team manage the transfer of files from start to finish, placing case files with an approved law firm so as to protect the integrity of the client’s case.

We will provide you with all the advice and support you need, and 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 via email (david.johnstone@recoveryfirst.co.uk), telephone (0845 056 1258) or contact Sally Dunscombe at sally.dunscombe@recoveryfirst.co.uk or 01357 440140.

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

Sally Dunscombe:

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David Johnstone:

david.johnstone@recoveryfirst.co.uk

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