Steps to take when a law firm cannot avoid insolvency

Several issues can lead to a law firm’s financial instability, and in some cases, actions can be taken to improve performance. However, sometimes a firm’s debt is just too large to make survival possible. What are the next steps? 

Internal financial audit 

Hopefully, a firm’s Compliance Officer for Finance and Administration (COFA) will have carried out an internal financial audit. This in-depth examination will ensure that all aspects of the firm’s financial performance have been checked to confirm whether the business’s continuation, in its present form, is sustainable. 

Seek professional advice 

It is vital that all key issues are identified as soon as possible. You may have never encountered these problems before so it is useful to speak to an adviser who is experienced in these matters. It may be that you can pursue options such as merging with another firm or seeking a buyer for your business. The right adviser will have a database of firms looking to expand and can ensure a quick sale. It is important that matters are considered, such as property leases where personal guarantees have been given, overdrawn capital accounts, or professional indemnity insurance obligations. 

Contact the Solicitors Regulation Authority (SRA)

You must notify the SRA promptly of any indicators of serious financial difficulty relating to your firm, if you intend to cease operating as a legal business, or if a relevant insolvency event, such as a winding up, or an administration order is about to be made against your firm. The SRA’s duty is to protect the public so its priority will be to ensure the safety of client monies and records. Prompt actions and continued updates are appreciated by the SRA, which will also help to avoid interventions. 

Ensure proper closure 

If a buyer can be found then client monies and files will likely be transferred to the new firm as part of the transaction. If a sale cannot be concluded then it is very important that the business owners work with the SRA to ensure that all relevant matters such as returning client records, and returning monies held on behalf of clients, are dealt with correctly. Effective communication with clients is vital so that they understand what is happening and how their assets will be protected. 

Act promptly to avoid intervention 

It is important to address the issues arising from a firm’s financial distress as soon as possible. It may be possible to extend the firm’s line of credit temporarily to buy sufficient time to sell the business. Business owners can be proactive in speeding up the conversion of work in progress to debtors and then cash. 

Intervention by the SRA should be avoided at all costs for the following reasons: 

• Operational disruption - If an intervention occurs, the firm’s operations will cease. The SRA will appoint a specialist intervention agent to protect and then pass on client files and monies to other firms that will continue to act for the clients. This can happen at very short notice, meaning that income that may have been expected in the coming days/weeks may not accrue. 
• Financial consequences - The SRA has the authority to recover costs from the intervened party to cover the expenses incurred during the period of intervention. This can include the costs of appointing an agent to carry out the intervention and managing the practice’s documents. These costs can be crippling. 
• Personal reputation - Intervention by the SRA can destroy the professional reputation of a practice and its partners, making it very difficult to continue as a solicitor. At the very least, there are likely to be restrictions placed on the practising certificates of those involved. 

Early awareness of financial difficulties is essential. Obtaining the correct professional advice can ensure that the best outcomes are achieved, without incurring the financial and reputational cost of intervention.