Recent years have been a particularly difficult time for law firms with a year on year increase in the number of law firm insolvencies increasing from zero recorded insolvencies in 2010 to 39 in 2018 with the trend set to continue.
One early issue surrounded PII renewals in 2013 where a lot of small firms could not obtain cover in time for the 1 October renewal date which was in place at the time, forcing them into mergers. Mergers also proved difficult with PII cover being provided on a successor practice basis which effectively resulted in the premium being calculated on a lowest common denominator basis. As a result, for example, a large firm acquiring a small unrated firm could have seen their premiums increase by a prohibitive level as a result of requiring cover for the whole practice based on the perceived risk of claims for business conducted by the acquired firm. This then led to a number of mergers or acquisitions being aborted and some small law firms having to cease trading or enter insolvency.
In addition, following the economic downturn, law firms conducting privately funded work have had to become increasingly competitive with regards to their charge-out rates and have seen their fees squeezed for private work whilst smaller Legal Aid funded practices have seen significant, well publicised, cuts to their funding. This has affected many areas of law including crime, family, employment and personal injury. This has led to many small firms reaching desperate situations which have also been exacerbated by an ageing board of equity partners looking to retire and have their capital loans repaid. As a result, many firms have been taking out multiple business loans in order to meet these requirements in addition to ongoing costs only for the repayment requirements to be unmanageable. Furthermore, many of these loans are often personally guaranteed by the remaining equity partners who have to take reduced drawings and cannot afford for the business to fail.
Once a law firm is in financial distress with little chance of avoiding an insolvency scenario, it is required to notify the SRA who will support the business through difficulties where possible but ultimately, if they do not believe the firm is capable of recovery, they have the power to intervene. Intervention results in the SRA taking control of the practice and passing all case files to another firm, called an Intervention Agent. In this scenario, the assets of the firm are utilised to meet the costs of the Intervention Agent. This often results in little or no return to creditors and the Equity Partners Personal Guarantees being called upon. In addition, if the SRA deems that the Partners have acted dishonestly or the business has been allowed to fail in a disorderly way, they have the power to seek recovery of the intervention costs from the partners individually.
However, with early intervention by the Partners, the SRA can be approached with a proposed strategy, either a solvent restructure or potentially a trading Administration, pre-pack Administration or CVA. A trading Administration is rarely the preferred option as it requires a Solicitor Insolvency Practitioner to be appointed and carries significant risk for the Insolvency Practitioner and an acquisition through a pre-pack Administration can have the same successor practice issues detailed above for the acquirer. This last point however does not necessarily prevent a pre-pack Administration from being proposed but is just one area for the acquirer to consider.
If a strategy for a pre-pack Administration or CVA contains a considered proposal with a clear business plan, the SRA will give this consideration and can offer their support to the strategy thereby avoiding Intervention. It must be stressed though that early intervention with the relevant professional advice is key to enable sufficient time to put a full strategy and business plan in place prior to any significant breaches of the SRA regulations.
It is also possible for a law firm to close through a liquidation process but this is typically avoided as the Partners are required to make arrangements for archiving of case files including wills and title deeds which must be retained indefinitely until required and can be expensive. Failure to make appropriate arrangements for archiving can result in the Partners being struck off through the Solicitors Disciplinary Tribunal.
A further complication and a significant breach of the regulations which has been apparent in a number of distressed Legal Aid funded firms has been the issue, through sheer desperation, of the utilisation of funds to meet ongoing costs of the firm which were received from the Legal Aid Agency in respect of “in case disbursements”, for such things as expert witnesses. It is a requirement of the SRA and the Legal Aid Agency that any funds received from the Legal Aid Agency in respect of in case disbursements must be passed on to the service provider within 14 days.
A breach such as this can result in Intervention, however if the practice in question, with the support of an industry experienced Insolvency Practitioner notifies the SRA of the regulatory breach and proposes a suitable solution to rectify the issue, the SRA and Legal Aid Agency will consider the proposal without appointing an Intervention Agent.
In summary, there have been and are many challenges facing law firms but these are not always insurmountable with early action and the relevant professional advice from an Insolvency Practitioner who is experienced in this very specifically regulated industry.
As a 4 partner firm, all of whom have a “Big 4” background, we have extensive knowledge and understanding of the issues surrounding the SRA’s regulatory requirements and experience in assisting law firms through periods of difficulty and garnering the support of both the SRA and Legal Aid Agency prior to formally acting in relevant Insolvency processes. In particular, we have first-hand experience of acting as both Nominee and Supervisor of CVA for a firm with the “in-case disbursement” issue detailed above. Following multiple discussions with both the SRA and Legal Aid Agency, they both agreed to provide their support to a CVA proposal which created a pseudo-preferential class of creditors, being the “in-case disbursement” creditors, who received 100p in the £ within 6 months and all other unsecured creditors receiving a reduced dividend over a period of 5 years.
If you, a client or a contact are experiencing any of the issues raised above please contact David Taylor in the first instance who heads up our legal corporate recovery business.
David Taylor 07855 231 103
Robert Keyes 07500 933 022
Gareth Roberts 07979 706 392
Paul Ellison 07967 471 211
For any further information on our services please do not hesitate to give one of us a call or visit our website: krecr.co.uk