More law firms set to sell off PI work as financial pressures bite

An increasing number of law firms will be forced into selling their books of personal injury (PI) work over the next 12 months in order to meet working capital requirements and secure their financial future – says a leading insolvency and partnership specialist.

Chris Jones, a partner at national law firm, Irwin Mitchell, believes that the combination of tough economic conditions, new civil litigation rules and lenders tightening up their available credit facilities for legal firms, will trigger a considerable rise in the number of transactions of this type in the short term.

“The current economic climate is making it extremely tough for some law firms in the UK and this is being exacerbated by many lenders which are reviewing their exposure to the sector,” said Chris.

He added: “The issues are magnified for some firms involved in personal injury work due to wide-ranging legal reform which came into force from April 2013 which has meant that it is no longer possible to recover success fees or ATE insurance premiums from defendants. There has also been the ban on referral fees which was introduced as part of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO).

“There are a surprising number of firms which have not taken the appropriate steps to deal with this loss of income and credit tightening. This in turn has meant that in addition to many of these businesses now struggling to meet their working capital requirements, a significant proportion are finding it increasingly difficult to take on and fund new cases. For these firms, it has become a vicious cycle.

“As you would expect, many practices are assessing their strategic options in order to deal with the situation. Some of them are looking to raise working capital by selling part or all of their personal injury business. Others are looking to diversify out of the PI market, whilst others want to close down the whole of their business.

“As the financial position for many firms becomes increasingly unstable, I expect to see a considerable rise in the number of transactions within the PI sector driven by the larger firms. The demand certainly exists and I think further market consolidation is likely.”

Reiterating the need for law firms faced with these issues to act quickly, Chris said: “Clearly there are greater levels of distress amongst some firms and we are aware of a number which are currently exploring their turnaround options with insolvency practitioners. More often than not, many of these businesses have not taken the appropriate action at the appropriate time and as a result, their available options have become limited. Indeed as we have seen recently, many of these businesses often have no other option but to go down the route of administration.”

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    Readers Comments

  • A natural way of putting to bed firms grown on the back of claim farmers

  • Whilst agreeing with the sentiments of the article and in particular the need for firms to be proactive and recognise the need to act quickly, it is a buyers market and the heavy discounts applied to WIP values seriously erode the asset that is covering liabilities, working capital and partners’ own equity. That asset is inevitably being eroded anyway as each week goes by, in the new world it is now potentially necessary to settle in excess of 10 matters to achieve the same revenue as 3 pre 31/03/13 matters settling and whilst cash flows from the pre 31/03/13 work, the underlying asset reduces. If limited new work is being initiated, fee earner productivity will fall as they do not wish to come into an empty desk. Partners need to consider how they can maximise the net value achieved from the asset they will have locked up in personal injury files and in addition to the traditional methods of transferring files to a single purchaser at a heavy discount, they should consider outsourced run off services, spreading the work across multiple firms, ring-fencing the value they have created and minimising the loss in value previously built up in the case load being transferred. This can all be managed on their behalf and in addition to the potential for an initial cash injection, thereafter they can enjoy a cashflow that can underwrite establishing the practice in a different area of law or a change of personal direction without the significant distraction of trying to manage their own way out.

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