Personal injury firms will struggle to convince banks that they are viable when fees are slashed next month, an insolvency expert has warned.

Practices across the country have begun making redundancies ahead of fixed recoverable costs being cut by 60% at the end of April, the Gazette understands.

Paul Monaghan, head of corporate recovery and insolvency at Newcastle firm Sintons, said PI firms had already been in touch about winding down their business.

‘Everyone in the PI sector is pre-empting what is going to happen in April. If it’s a big firm then it can rely on other areas it specialises in, but for two-to-three partner firms relying on PI it’s devastating,’ he said.

‘Many moons ago people were able to refinance their debt with a bank, but banks won’t do that now. The reality is the creditors need the money as much as anyone else and there is no stay of execution.

‘Big law firms will gobble up the smaller firms – not in terms of a merger, but by waiting for them to go bust, writing to the liquidator and bringing in files for 25 pence in the pound.’

One firm contacted by the Gazette said it is to go into ‘hibernation’ – not taking any cases after this month and keeping enough staff to deal with the existing caseload.

‘In 18 months, when firms have closed and business models have been tested and scrutinised, we would be in position to grow again,’ the managing partner, speaking on condition of anonymity, said.

‘But I’m not going to be a guinea pig to find out the models that are not viable. We will lose a lot of firms because they owe banks a lot of money. There will be a serious knock-on effect for firms that have other practice areas but rely on RTA work.’

Meanwhile, doubts have emerged about what effect the changes will have on car insurance premiums – the government’s key reason for forcing a cut in recoverable costs.

Last week, John O’Roarke, managing director of insurer LV=, told an industry conference that premiums would come down by no more than 3%.

At the same event, it was announced that the House of Commons transport select committee would open a new inquiry into whiplash.

The purpose of the inquiry is unclear, given that a consultation on raising the small claims court limit to £5,000 – a policy largely driven by whiplash claim figures – closed only last Friday.