Joanne Wright of business rescue specialist Begbies Traynor looks at the options facing solicitors who want to wind up their practices
[1]Wright: law is an industry in distress
Recent figures from the Solicitors Regulation Authority (SRA) suggest that the number of law firms being abandoned is on the rise, with abandonment reports at their highest level since 2008.
In the first quarter of 2011, the SRA’s risk unit received 94 reports from legal complaints bodies and members of the public that a law firm had been abandoned. This represents a 45% increase on last year.
However, while concerning, these figures don’t really reflect my own experience of insolvencies in the legal sector. In fact I have seen solicitors go to great lengths to protect both clients and staff when the firm was faced with financial difficulties – helping to transfer ongoing files to other practices or ensuring an orderly wind-down of the business. The prospect of simply shutting up shop seems a distant one to most.
Having said that, our own figures show an industry in distress, with a growing number of law firms struggling to survive. Begbies Traynor’s Red Flag Alert report for Q1 2011 showed a 61% rise in the number of professional services firms showing signs of financial distress compared with the first quarter of 2010.
When financial concerns begin to mount and ultimately become unsustainable, the management can be left holding a cluster of liabilities and assets. The assets which are generally underpinned by a book of ongoing cases can be attractive to prospective buyers – but only if their value outweighs the potential risks and even then firms remain extremely nervous in relation to successor practice issues and TUPE.
There is sometimes the option of spreading the ongoing case work across a number of interested parties. As other practices acquire the files, a percentage of the final settlement for each case is put back in the pot for repayment to creditors of the failed firm.
If, however, a suitable buyer cannot be found, then the struggling firm may be forced to wind down the business. There will be certain cost considerations in relation to, for example, run-off cover and file storage.
In some circumstances a voluntary arrangement can be proposed, which allows these costs to be discharged and still produces a return for creditors.
Regardless of the situation, anyone thinking of closing down their law firm must do it responsibly to retain their practising certificates and avoid investigation by the SRA and the potential for disciplinary action. The partners should therefore consider doing the following:
- Read the SRA guidance on closing down a practice.
- Speak to an insolvency practitioner as soon as possible to assess all options. They will be able to advise on the practicalities of winding down a practice and the prospects of securing a voluntary arrangement with creditors.
- Establish which costs would be incurred.
- Consider whether establishing a new practice which accounts to the old one for the work in progress could be a solution.
Firms are more likely to find a solution that works for them and their clients if partners discuss the options with an insolvency practitioner.
In one recent case I handled, I became the supervisor of an IVA for a solicitor who transferred the practice to a new company managed by him that accounted to me for the value of the work in progress as at cessation. The money from this and personal assets meant that creditors received a reasonable return, the solicitor remains in practice and clients have the benefit of the continuity of legal advice.
SRA intervention should only ever be a last resort – voluntary closure with the support of the SRA is a better option than simply shutting up shop.
Joanne Wright is a partner at Begbies Traynor. E-mail: Joanne.wright@begbies-traynor.com [2]