One in three North West law firms ‘at risk’

RESEARCH by the insolvency trade body R3 suggests nearly one in three North West solicitors and legal services firms are at risk of failure within the next 12 months.

It said 31%, or 366 out of 1,190 legal businesses, were under pressure due to the Jackson reforms which were introduced last year and have radically changed the way in which civil litigation is funded.

A central part of the reforms is the removal of legal firms’ ability to claim a success fee in cases taken under conditional fee agreements. Experts believe this will lead to a significant reduction in litigation, especially in areas such as personal injury.

A seminar organised by professionals membersuip organisation Pro Manchester and R3 last week heard that many firms were set to lose a third of their income as a result of the reforms.

Richard Wolff, North West chair of R3 and head of corporate recovery and insolvency at JMW Solicitors, said: “Regulatory changes, the impact of recession, competition from non-law firms and the difficulty in sourcing professional indemnity insurance have combined to create the perfect storm for law firms. The short-term outlook remains challenging.”
 
Patrick Lannagan, business restructuring partner with BDO which handled the Halliwells’ insolvency, said failures were often due to a combination of factors, such as a decline in revenue, big debts and weak financial controls.
 
He said profitability was not a good guide to resilience. “A hallmark of professional practices is that profitability can be readily manipulated via work-in-progress accounting,” he said. He added that many firms “lacked a culture of cash management” and in half of all cases he saw there was a lack of partner unity.

But Gavin Jones, head of corporate recovery at DWF and who handled DWF’s takeover of the failed law firm Cobbetts, said the Legal Services Act said the introduction of alternative business structures, which allowed non-lawyers to own law firms, would eventually result in a stronger legal sector.
 
“Manchester is leading the way in terms of the number of firms adopting alternative business structures,” he said. “These will introduce new money into the business. Law firms will increasingly be run by businessmen and women and not by lawyers. A number of pioneers in the sector are going through growing pains at the moment.”