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There May Be Trouble Ahead

One of our predictions at the end of last year was that there would be more law firm mergers in the UK (http://www.3volutionllp.com/blog/move-over-mystic-meg/) .  We cited a number of reasons for this including oversupply and the search for economies of scale.

So, the recent collapse of Cobbetts and its swift buyout by DWF, wasn't entirely surprising. Cobbetts may have left it a little too late to be able to pass off a merger as a strategic move, but the sorts of problems and circumstances that led to its administration are affecting many law firms and further mergers (and insolvencies) are, sadly, inevitable. While the SRA has denied the rumours, the Law Society Gazette recently reported that it had "serious concerns" about the financial stability of 2,000 firms. Although precise figures aren't available, that figure is something like 1 in 5 firms.  Given the state of the economy general, it seems reasonable to assume that "serious" means something more than a concern that firms are generally feeling the pinch; there can be few, if any, firms out there that haven't noticed that there is a recession on and have had to tighten their belts.

Should clients and suppliers of these firms be worried?  We are a highly regulated profession, so even if a firm goes into some form of insolvency arrangement, client money should be safe (or recoverable) and the successor practice rules are designed to ensure that, as far as possible, a client will have someone (with an insurance policy) to sue even if the firm that originally acted no longer exists and hasn't bought run-off cover.

Suppliers (and other unsecured creditors) of solicitors firms are probably in no better position than they are with other insolvent businesses. While the regulatory framework means that a quick pre-pack may not be quite as attractive an option for solicitors as it might be for other businesses, the SRA is generally concerned with the protection of clients rather than other creditors.   Because of on-going relationships some creditors may find themselves getting special treatment, but many without any hold over future business will end up with irrecoverable debt. Cobbetts (allegedly) is a good example of this – reports suggest that part of the deal with DWF involved some of the debt and WIP sold to DWF being used to cover shortfalls on partners' personal professional practice loans (with the tax man picking up the rest) and yet unsecured creditors can expect 2p in the pound.  To say the least, that seems a little unfair.

So where does this leave unhappy creditors? Probably as part of a growing number of businesses who are having to look at more creative solutions to recover otherwise bad debt.  We're certainly noticing an increased reluctance to accept that insolvency means the end of a matter and while there are no easy wins, companies and individuals with sufficiently close connections to insolvent businesses can expect closer scrutiny now. Cattles' supervisor, Zolfo Cooper, has just started proceedings seeking £1.6 billion from Cattles' auditors, PwC, but creditors are likely to cast the net wider than accountants.

Sometimes you have to accept that there's no point in throwing good money after bad, but that should only be a decision reached after some thought and advice and never an  unchallenged assumption.

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