A raft of legislative changes and a revived economy are testing the mettle of insolvency specialists.

Mark Smulian examines the shift from traditional work to restructuring

To those on the wrong end of insolvency cases, the results can be a disaster, with them losing their business, investments or both.

But someone has to clear the mess, and specialist solicitors have been the beneficiaries for the past few years of what economists would call a counter-cyclical market.

Put simply, they do well when others do badly, and it is only when good times come and fewer businesses crash that insolvency specialists suffer lean years.

Times may be about to get leaner through a combination of three factors - economic recovery, which spells the end of the insolvency sector's mini boom; the Enterprise Act 2002, which came into force in mid-September; and the national spread of the Forensic Insolvency Recovery Scheme (FIRS).

There are many facets to the Enterprise Act but the two which stand out in this context are the simplification of the procedures needed for a business to enter administration and the removal of Crown preference among creditors.

The former may simply mean a lesser demand for lawyers, while the latter, by treating the Crown as any other unsecured creditor, changes the odds for creditors in general and may be helpful to them.

Piloted by the Official Receiver in 2000, FIRS was supported by the Inland Revenue and Customs & Excise.

Although the initial idea was to pursue 'no win, no fee' personal actions against negligent directors, there are fears that lawyers and other professionals involved in a business may also find themselves in the frame as the pilot scheme ends and FIRS goes national (see [2003] Gazette, 11 September, 3).

London firms Moon Beever and Davies Arnold Cooper, together with Northampton-based Howes Percival, piloted FIRS for three years with other professionals, such as accountants Kingston Smith & Partners, barristers, insolvency practitioners and enquiry agents.

Southern firm Blake Lapthorn Linnell has replaced Davies Arnold in the roll-out.

Cases are identified by the regional offices of the Insolvency Service, part of the Department of Trade and Industry.

Other firms may join the scheme.

However, being pursued by FIRS is not the peril uppermost in the minds of practitioners - it is the economy.

Mark Hyde, head of insolvency at global giant Clifford Chance, says: 'It is fair to say that in common with other large City firms for the past two years or so, insolvency has been one of the busiest areas in the firm, if not the busiest.

'Two large sectors of work have been telecoms and energy.

In recent weeks, things have been a little quieter in terms of new work, but the existing work has a long tail.'

Cultural change has overtaken the sector in recent years with a shift from traditional insolvency work to restructuring of businesses, with fewer formal insolvency appointments than in the past, Mr Hyde says.

Peter Manning, insolvency partner at City firm Simmons & Simmons, also thinks 'it is quietening down now and there is generally a reduction in work'.

He explains: 'At the middle market and below, the business economy has been fairly steady, and we have not been in recession as such, so volumes have been patchy and there has not been a strong flow of business for lawyers or accountants.

'At the top end of the market in the last two years, there has been a lot of work but my impression is that it is becoming quieter.'

Regional firms rarely saw the spoils of the sort of high-profile insolvency cases that flowed into City firms in the past few years.

David Pomeroy, a corporate recovery and insolvency partner in the Exeter office of Bevan Ashford, says: 'If other areas do well, we do less well and vice versa.

In the regions, there is usually a gap between an initial downturn and when work comes in.

'I don't think we are seeing recruitment on the scale we did 12 months ago when the big City firms were gearing up for what they obviously thought was going to be a major recession.

That has not happened and things are not at that level.'

In Birmingham, Ian Baker, an insolvency partner at Martineau Johnson, has had largely the same experience.

'This economic downturn has been very different from the early 1980s and 1990s because there has not been the volume of middle-market insolvencies we saw then,' he says.

He too has noticed the cultural change with both lawyers and insolvency practitioners getting involved in failing companies at an earlier stage than they might have done before.

Like most other practitioners, he is cautious about trying to predict the impact of the Enterprise Act, although he thinks the loss of the Inland Revenue's and Customs & Excise's preferred creditor status may mean they will be less prepared to agree delays on payments of tax and duty, which may precipitate more insolvencies.

But he maintains that the turnaround culture is now well established, with banks preferring to preserve both income and customers by pursuing this route.

Mr Manning predicts a flow of administration cases in the Enterprise Act's first few months, but a reduction after that and less work for lawyers as simpler processes encourage insolvency practitioners to dispense with solicitors.

Administrative receivership is likely to fade.

Mr Hyde says the Act has removed this concept as a right that secured creditors can exercise at the drop of a hat, a state of affairs criticised by some because it might leave unsecured creditors with nothing.

'There can still be administrative receivership for floating charges dating from before the implementation of the Act, but I suspect there will be great political pressure on banks not to use the procedure,' he says.

'As someone with a qualified floating charge has to swear that they are entitled to do so when they want to appoint an administrator out of court, that will likely involve more work for lawyers.'

Steven Cottee, an assistant solicitor working in insolvency at City firm Richards Butler, predicts there will be a flurry of cases as banks have waited for the end of Crown preference to pounce on some companies in the expectation that the Crown's lowlier place in the queue will increase what is available to lenders.

He expects several cases will get to court to clarify the Act, as some specialist commentators have pointed to areas of potential doubt in its drafting.

The spread of FIRS is seen as something for a watching brief.

Mr Pomeroy does not anticipate a rash of cases against lawyers, other than 'a few rogues' who have acted in questionable insolvency cases.

He doubts there will be a return to the 'lawyer bashing' of the early 1990s property crash, when lenders looked in vain for someone with sufficient money to sue, and often chose to pursue solicitors with negligence claims.

'I don't think we will see that because of the lack of clarity in these cases about who owed a duty to whom,' he says.

One other contentious current issue in insolvency is the call by John Verrill, head of insolvency at Lawrence Graham and the recently appointed head of R3 Group - which represents insolvency and other business recovery practitioners - for a single regulator for the insolvency and business recovery professions.

Mr Pomeroy is sympathetic to this as at present various licensing organisations, of which the Law Society is one, 'all have different approaches to different problems', he says.

Although this mainly affects accountants rather than lawyers, Mr Pomeroy maintains the system needs the uniformity that would be provided by a single regulator.

'People view self-regulation with suspicion and think it is an old pals' act,' he says.

Does the present uncertain outlook mean that insolvency is still an area that would attract ambitious new solicitors?

Mr Hyde says: 'A lot of young people want to join this area as it is seen as busy and attractive, and young lawyers like to work in topical areas.

It attracts a wide range of people and it is academically challenging, which people tend to like.'

Mr Manning agrees, but says that applicants are no longer 'flooding in'.

But Mr Baker expects the skill set needed will change as the emphasis on the ability to restructure a business increases.

It looks as if there may be fewer cases in the insolvency sector in the future, but solicitors involved may have some new tricks to learn.

Mark Smulian is a freelance journalist