Insolvency specialists - high demand, short supply

The UK has nosedived into recession – but for some this financial cloud has a silver lining. After a relatively lean decade, the downturn is potentially lucrative for insolvency specialists.

The current skills shortage in this practice area, though, is a corollary of the perception by lawyers that insolvency work is dull.

Now, amid the economic turmoil, insolvency is a challenging practice area. The Association of Business Recovery Professionals, which represents professions engaged in insolvency work, predicts a rise from the official figure of 13,091 in 2007 to 15,693 for 2008 and 18,440 for 2009 – a 41% increase on 2007.

But there are few recruits to augment the small number of specialist insolvency solicitors. Peter Manning, a partner at City firm Simmons & Simmons, says: ‘I think a lot of firms are trying to train people but you cannot really learn insolvency by listening to someone talking about it – you have to have been through it and seen the whole process.

‘There will be something of a skills shortage because not many people have gone into insolvency over the past several years. And there are some people around who worked on insolvency in the last recession but their knowledge may not be up to date.’

When a business fails, the subsequent legal work involves specialists in a host of practice areas, such as property, employment, and commercial and contract, tailoring their usual work to the demands of an insolvency. Then it is the turn of the few solicitors steeped in the intricacies of insolvency law.

Vernon Dennis, a partner at London firm Howard Kennedy, outlined the challenge facing insolvency practitioners at a Law Society conference last summer. ‘Since September there has been a big increase in corporate distress and in the advice required from us as a result.

‘The focus was on advice to directors, but now increasingly it is creditors who need advice, in particular on matters such as property. I foresee a fairly significant amount of work coming to us from insolvency practitioners.’

This assessment is echoed by Steven Cottee, a partner at City firm Lawrence Graham. He reports ‘seeing increased activity, with more security reviews for banks and requests to advise directors who may be trading insolvently. I expect that will accelerate this year’.

But, he adds: ‘It has been quiet for 10 years or so and it’s been difficult to recruit. A lot of firms are trying to retrain people from other departments.’

Cottee took up insolvency when it was an unfashionable option because he started as a litigator and found that some of the most interesting cases involved insolvency. ‘I decided to specialise as there was the chance to experience very good quality work in this area’.

But the skills shortage does not mean firms’ fees have shot up as a simple matter of supply and demand. 'It is difficult in this climate to demand large fees, even if there is a shortage of legal expertise,' Cottee explains.

Manning expects to see solicitors from other practice areas seeking to retrain in insolvency. ‘There has been an increasing amount of work from clients, with the result that there is a demand for solicitors who may have worked in something else,’ he says. ‘You can expect to see solicitors in other fields move into this one if they have experience from some time back.’

His advice to any solicitor thinking of making this switch, or to someone at the outset of their career seeking a practice area, is ‘you have to be flexible and very pragmatic – those are the key skills in insolvency’.

Manning adds: ‘You’ve got to have broad experience because there can be questions in all kinds of areas of law that arise when you are sitting there doing an insolvency.’

Cottee emphasises the need to react quickly to events: ‘The main skills needed are to be a commercial, practical lawyer. You have to act with speed. For example, you can be called in to an insolvency on a Monday and find you have to find a way to get the wages paid on Friday. So it appeals to solicitors who like to be at the coalface.’

While insolvency work is complex, it can generate work for lawyers in other disciplines because of the breadth of issues involved. Dennis predicts that as the recession takes hold ‘every practice area will be affected, because people who become insolvent have customers, tenants and suppliers who are all drawn in, and people are suffering’.

He expects a boom in insolvency work that will last at least two years as well as a need for firms to train or retain lawyers. ‘It is probably fair to say that this is an area of law that has not attracted many new people over the past decade,’ he concedes. ‘Since the 1990s recession there has only been one upturn in insolvency, at the end of the dotcom boom, and that was more ideas failing than actual businesses, so there was not much value in it.’

Almost any kind of business can be at risk now, Cottee says: ‘The strange thing about this recession is that it seems to affect every sector: retail, construction, professional services, manufacturing, media and others at the same time, while earlier ones tended to have only certain sectors affected.’

Property and construction ‘are having a torrid time and more failures will arise there’, says Dennis, with suppliers, estate agents and solicitors dependent on these markets all affected.

‘We are going through a different curve now,’ he adds. ‘First, we saw the failure of vulnerable businesses that were weak anyway and cannot survive in the present conditions.

‘That then spread to the middle market, and next you will see good businesses fail, not necessarily through any fault of theirs but because of economic conditions, and there will be instructions to try to sell them as going concerns.’

One day the recession will end and insolvency specialists will return to their legal niche, which ticks over well enough even in good times. Until then, theirs will be one of few sectors of the profession facing more work than they can handle.

Upside of the downturn

• Corporate insolvencies set to increase
• Insolvency specialists in demand for legal advice
• Shortage of skilled solicitors means training tops agenda

Insolvency practitioner Chris Garwood (pictured) is a partner at Hull firm Carrick Read. While the firm handles mainly commercial and property work, it has a separate insolvency arm.

Garwood became an insolvency practitioner after being involved in the Law Society’s work in formalising the status of solicitors in this field. ‘Before 1986, anyone could be an insolvency practitioner and there were some pretty "iffy" people involved, so the government was persuaded to create licensed insolvency practitioners – and one route to that status was through a professional body.

‘I sat on the committee that led to the Law Society becoming accredited as such a body. Few solicitors had been insolvency practitioners before, but we thought "why not?", and then I felt I should get myself accredited as one.’

The number of solicitors accredited as insolvency practitioners was 200 in the early days but in a sign of insolvency’s recent doldrums only some 145 remain.

Garwood explains how Carrick Read handles insolvency work. ‘We take work of every kind all over the country, and act for practitioners, suppliers, customers, partners, employees, anyone affected in fact,’ Garwood says. ‘Work tends to come by word of mouth because insolvency is a difficult service to advertise. You can’t say: "Thinking of going bust tomorrow? Give us a call".’

He adds that, unlike any previous recession, this one is ‘a very, very, weird market because it is working top down. It used to be that people had less to spend so businesses went broke, then their suppliers did, and it worked up the chain, but this one has started with the banks and is working downwards’.

Like other solicitors, he says anything connected with the construction and retail sectors has been badly hit. One example was a firm in the kitchen and bathroom installation market on whose administration he worked. ‘In July its turnover was £300,000, and in August it was £100,000, since most of its work was on new homes,’ Mr Garwood recalls. ‘One way they could have saved the money they needed to was to let a lot of employees go, but as a long-established company the redundancy bill would have been about £180,000, and it could not find that, so the only way was to go into administration.

‘Recession affects anything associated with construction, which is why you have seen a fall in residential conveyancing, and it will have hit estate agents and solicitors for whom that work is a large part of their business.’

In normal times, an insolvency practitioner would work with solicitors to sell a failed business, or at least its assets. Not now. ‘A year ago, if a business got into difficulty you could find a buyer, but now there is no finance for that,’ Garwood says. ‘I heard of one solicitor who asked a valuer to give a valuation for some assets and he agreed, "so long as you don’t ask me to try to sell it, since the value would be pretty notional".’

Garwood expects a notable leap in insolvency work in the early months of 2009 because of a bank practice that appears benign, but is not. ‘In retail, restaurants, bars, anything like that, banks let them trade through the Christmas season because it is their busiest time and it brings in cash, and then they pull the plug in the new year,’ he explains.

‘Businesses think the banks gave them the chance to benefit from the Christmas trade, but in fact would have already taken the decision to close them and they simply want more money in the business when it closes.’

One of his clients, for example, is a supplier to what Garwood ominously describes as ‘a well-known chain of shops that is expected to go bust very soon’. Like other solicitors involved, Garwood fears the effects of insolvency’s skills shortage.

‘Insolvency is highly specialised work and they teach you nothing about it at law school or university,’ he says.

‘Lots of lawyers in other fields can be taught easily enough to give an insolvency emphasis to their work, but the really technical stuff cannot be learned quickly.’

Mark Smulian is a freelance journalist