One of the UK’s biggest regional law firms is expected to disappear from the market shortly, after the economic downturn claimed its biggest victim so far in the legal sector.

As the Gazette went to press, Manchester-headquartered Halliwells and its staff were in limbo as talks continued with Liverpool-based Hill Dickinson over the acquisition of the bulk of Halliwells’ business.

Halliwells employs some 700 fee-earners, including about 114 partners, at offices in Manchester, Liverpool, Sheffield and London.

Other firms are interested in cherry-picking Halliwells’ more profitable operations, including Barlow Lyde & Gilbert, which is said to be looking at the Manchester-based insurance practice. DWF and Hammonds are also said to be looking at acquisitions.

Halliwells applied last week for court approval to appoint an administrator, triggering a moratorium on its liabilities and providing a window for talks on the future of the business. The firm is expected to be dissolved when these talks have concluded. Hefty job losses appear inevitable, with junior lawyers and support staff most at risk.

The Solicitors Regulation Authority told the Gazette it is preparing for what may be a costly intervention in Halliwells, depending on the outcome of the negotiations.

Halliwells’ plight was blamed on high property costs exacerbated by the economic climate. The firm spent millions of pounds relocating in 2007 to the Spinningfields business district, dubbed ‘Manchester’s Canary Wharf’.

Shay Bannon, head of business restructuring at BDO, which is advising Halliwells, said: ‘It is well known that the firm assumed substantial property obligations in recent years which have significantly increased operating costs. This, together with the slowdown in transactional activity in the current economic climate, has put pressure on cashflow. Halliwells has a great reputation and a highly skilled and committed workforce. We are in discussions with several other law firms regarding a sale of the Halliwells business. The moratorium is in place while we work with Halliwells to conclude the sale of the business.’

Industry observers have pointed to the legacy of a multi-million-pound reverse premium paid to Halliwells when it agreed to move into Spinningfields. A spokeswoman confirmed that three-quarters of that premium, understood to exceed £20m, was distributed to equity partners, most of whom she said are no longer with the firm. The firm was subsequently run on borrowed money, with major creditor Royal Bank of Scotland taking a security over its assets.

Halliwells' latest accounts show that the firm ended the 2009 financial year with an £18m bank loan due to be repaid to RBS in 2011. The firm later renegotiated its banking facilities with RBS to include a £2m overdraft renewable in January 2011, a £5m term loan repayable by April 2013, and a revolving credit facility repayable in April 2013.

In 2009, Halliwells LLP posted a profit before members’ remuneration and profit shares of £17.9m, down from £24.6m the previous year, on turnover which fell 3.5% to £77.8m.

William Arthur, a partner at consultants Kerma Partners, said: ‘It’s not unheard of for a law firm [to have] difficulties but something like this is pretty exceptional. It’s a reasonable assumption to make that banks are now going to look at firms that have a high level of debt, and the individual bank has a high exposure to that firm. It brings to the fore a question that’s been asked for the last two years: are firms adequately capitalised? Is there enough partner capital in the business, compared with the debt the firm has taken on from banks?’