Warning for law firm partners about the risks of insolvency

With law firms across the North West currently facing unprecedented challenges to their financial stability, Baker Tilly has warned partners that they could face significant personal costs if their firm ceases to trade without a successor practice in place.

A new Baker Tilly report, which highlights the practical steps that law firms and their partners can take to reduce the risk of financial disaster, suggests that around half of partners are unaware of the effect that their firm’s insolvency would have on them personally.

In the event of an unplanned failure and cessation of business by a law firm without a successor practice, the Solicitors Regulation Authority (SRA) can take steps to protect the firm’s clients by way of an intervention, with the costs being borne by the firm’s partners. This will include the costs of collecting and protecting both live and closed client files, as well as returning them to the client. Any appointed insolvency practitioner would also review drawings taken by partners and request repayment of overdrawn current accounts. Other liabilities could include any personal guarantees given to creditors, or the repayments on equity loans.

Baker Tilly’s report, The importance of being financially stable is a response to the challenges facing law firms arising as a result of changes in the regulatory and commercial environment. New entity-based regulation now gives the SRA a more active role in monitoring firms’ financial stability, which is now under pressure more than ever before.

In the last few years, a number of big names in the North West have exited the market including Halliwells and Cobbetts, and the pressure on firms remains. In July this year, R3, the Association of Business Recovery Professionals, predicted that around 2,000 firms nationally would be forced out of business within a year.

Andrew Baker, a partner at Baker Tilly in the North West region said: ‘There is a worrying lack of knowledge and understanding among partners about the implications of a law firm falling into insolvency. An unplanned cessation of business can be very disruptive for clients and costly for individual partners and should be avoided if at all possible.’

The full report is available on the Baker Tilly website.