The legal market could see another law firm fall in a Halliwells-style collapse in the next 12 months due to lack of capital and high property costs, experts have told the Gazette.

Accountants also warned that the demise of the north-west firm may make it more difficult for law firms to secure funding from banks, as lenders harden their attitude to the legal sector.

Nick Carter-Pegg, head of professional services at BDO, said another law firm could suffer a similar fate to Halliwells in the next year. He said: ‘I would not be surprised if there are not one or two other firms that are looking at what happened to Halliwells and are concerned over their own situation.

‘A lot of firms were loaned a lot of money. Banks were always ready to lend to the sector because they rarely lost money. Perhaps banks would have a different attitude now.’

Giles Murphy, head of assurance and business services at accountants Smith & Williamson, said that the recent sell-off of both Halliwells and accountancy firm Vantis due to debts could prove a warning sign for some thinly capitalised law firms.

He said the factors that lead to the demise of Halliwells were ‘not particularly unique’ but had ‘all come home to roost at once’.

Murphy said: ‘If you go back to when there was a lot of work around for lawyers, a lot of firms upgraded their premises. They did not need to do so, but did it because their competitors were doing it. They got bigger premises, and took on staff on higher salaries, because they expected to expand.

‘[Then as work became more scarce] firms still had these liabilities, but their clients were paying them less, and taking longer to pay.

‘The margins that firms were basing themselves on in terms of funding was pretty thin. They paid the rent, paid the salaries and paid out the partners. Not many firms built up large cash buffers for a rainy day situation.’

Murphy said there are now ‘a lot of firms’ that are now ‘thinly capitalised’ as a result.

Halliwells’ collapse has also impacted banks’ attitude to lending to the legal sector, according to Murphy.

He said: ‘We are aware of one firm that was due to have its overdraft extended on the Friday, as the Halliwells situation was unfolding. The firm really needed the money, and it was very tight. The bank said it wanted the weekend to think about whether or not to extend the loan, because of what was happening at Halliwells. Fortunately it did lend the money in the end, but if it hadn’t, it would have been another Halliwells situation.’

Murphy added: ‘Up to now, law firms have enjoyed special rates. They have had it far too good for too long. Banks are now being more careful in terms of lending, the rates they charge, and the level of security they want.’

Jeremy Black, associate partner in Deloitte’s professional practices group, said firms should look carefully at their cashflow forecasts to ensure they do not run into problems, and may need to ask partners for more capital investment.

He added: ‘Any number of things could trigger a real problem for firms. One of them might be a significant property move, but it could be just a big drop in profitability.’