There are many challenges facing the legal profession and access to working capital is becoming even more of a major issue.
This will be increasingly so as up to £300m is removed from the legal aid budget from March 2013 and as the effects of Jackson ripple their way through the profession. If firms face an uncontrolled failure then the Solicitors Regulation Authority will have to intervene to protect the clients whose affairs would otherwise be at real risk.
The recent event at Blakemores where the SRA intervened raises many practical issues for the sector. Stephensons, for whom we have the greatest respect, are more than capable of handling such an intervention and will do their utmost to ensure the principles of intervention are maintained. The real question will be the dilemma between intervention itself and the overall interests of the creditors.
There are a number of fundamental differences between an intervention by the SRA, where the intervention agent is seeking to protect the clients’ interests, and that of an insolvency process which protects the interest of creditors and employees. Whilst the circumstances of the demise of Blakemores have been well documented, what happens next will be paramount in the future lending policies particularly when a charge is placed over the assets of the practice, including debtors and work in progress to secure the working-capital needs of the firm.
In a formal insolvency, an insolvency practitioner is appointed and a process is followed, often over several years, establishing the true and realisable value of the debtors and work in progress resulting in a percentage pay-out to the creditors in due course. It depends on the extent of the insolvency as to how much that percentage in the pound is recovered and distributed.
In the case of a firm such as Blakemores there are literally thousands of files that all need urgent attention to protect the clients’ best interests: Stephensons can only do so much under its brief and the normal process of events would be to distribute these files to willing practices who could effectively continue each file to its logical conclusion. In an insolvency it is normal practice for these files to be heavily discounted to encourage firms to take on the work – why would they if there wasn’t an incentive to do so? Often the WIP on personal injury cases is only realised when the file is concluded at a percentage of the value recovered.
The immediate challenge in Blakemores is that there is no formal insolvency, at this time, of the practice which operated as a legal disciplinary practice (effectively a partnership with non-solicitor members). Therefore we know employees cannot claim on the government redundancy fund and firms interested in taking over files will have no party to negotiate with in order to agree a discount or earn-out basis for the files. They will have to give the usual solicitor undertakings on conduct of the files but how will an eventual liquidator react to their transfer?
Any lenders having security over the WIP and book debts will expect to realise the value for these specific cases yet if these are discounted to, for example, 30p in the pound to protect the clients’ interests then who will be expected to make up the difference? In addition to whom are the realisations allocated. Do they go to the intervention agent to cover costs or to the secured lenders? This is, as yet, untested territory.
The result could end up in litigation and the banks and specialist lenders will question the value of their security in such cases. If the SRA wins the profession may have fewer costs on these cases but the dilemma will them move to firms facing the need for funding, particularly on personal injury and clinical negligence work, where the banks and specialist lenders will surely question their policy regarding such cases.
This further exacerbates the challenges law firms are facing with the referral fee ban and the reduced fees through the portal.
It is more essential than ever that law firms are operated and run as businesses – the traditional access to working capital particularly for firms in the personal injury sector is about to change. The banks and specialist lenders will watch very carefully the outcome of this intervention and the future attitude of lenders could well be significantly changed by the outcome.
The impact of failures at Cobbetts, Atteys and now Blakemores is huge in their respective specialist and geographical areas: these are the early casualties in a fundamental shift in law firm survival and we suspect just the beginning of a very turbulent year ahead.
Viv Williams, (pictured) is chief executive of 360 Legal Group and Steve Billot is a director at RSM Tenon