Law firms braced for a new round of failures

By May 2, 2014Finance, News

With almost one in three legal businesses in the North West already at risk, the sector is now facing a new round of failures as law firms start to feel the impact of the Jackson reforms, according to the insolvency trade body R3.

A seminar organised by pro-manchester and R3 heard that many firms were set to lose a third of their income as a result of the reforms, which restricted fees in personal injury and other civil litigation cases.

Figures from R3 show that 31 per cent of legal businesses in the region – 366 out of 1,190 – are classed as at risk of failure within the next 12 months, and the figures do not take account of any further cuts in revenue.

Richard Wolff, North West chair of R3 and Head of Corporate Recovery and Insolvency at JMW Solicitors, told the seminar at JMW’s Manchester office that law firms had faced an onslaught in recent years. “Regulatory changes, the impact of recession, competition from non-law firms and the difficulty in sourcing professional indemnity insurance have combined to create the perfect storm for law firms,” he said. “The short-term outlook remains challenging.”

Patrick Lannagan, Business Restructuring Partner with BDO which handled the Halliwells’ insolvency, said failures were often due to a combination of factors, such as a decline in revenue, overleverage as a result of previous acquisitions or repayments to retiring partners and weak financial controls. An increase in workload could also put pressure on cashflow.

He said profitability was not a good guide to resilience. “A hallmark of professional practices is that profitability can be readily manipulated via work-in-progress accounting,” he said. He added that many firms ‘lacked a culture of cash management’ and in half of all cases he saw there was a lack of partner unity.

David Johnstone of Recovery First, which helps firms move out of the personal injury sector, spoke of the difficulty for firms in assessing the value of their work in progress, and in funding it. Typically it takes two years from the start of a claim until receiving payment.

For this reason the Jackson reforms, introduced in April 2013, were only just beginning to have an impact. He predicted a major consolidation in the market.

“For the next two years we are going to see many firms crash,” he said. “We have already seen a few but most of them have yet to feel the full impact.

Once the Armageddon is over there will be a more consistent standard of service. Up to now many law firms have been run as lifestyle businesses but they will be forced to become more corporate or go out of business.”

Gavin Jones, Head of Corporate Recovery at DWF and who handled DWF’s takeover of the failed law firm Cobbetts, said the Legal Services Act said the introduction of alternative business structures, which allowed non-lawyers to own law firms, would eventually result in a stronger legal sector.

“Manchester is leading the way in terms of the number of firms adopting alternative business structures,” said Gavin. “These will introduce new money into the business. Law firms will increasingly be run by businessmen and women and not by lawyers. A number of pioneers in the sector are going through growing pains at the moment.”

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