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David Johnstone

As of the end of October there are some 153 law firms on the brink of insolvency as the professional indemnity insurance (PII) deadline looms.  Here David Johnstone, managing director of Recovery First, tells IPs how to advise such firms to ensure net value is retained, as well as ensure those businesses devastated by the debacle do not enter 2014 with nothing to show for years of hard work.

David Johnstone

David Johnstone

A staggering 153 law firms are now entering what is termed the 60 day cessation period having failed to secure professional indemnity insurance.

In essence these firms have five days to advise the SRA that they have ceased practicing and 60 days to wind up their businesses. Most insolvency practitioners are aware of the significant increase in firms of solicitors going through a formal process.  It is a relatively new phenomenon and while the current spike in activity is driven by PII issues, the underlying issue has been dramatic change for the sector driven by recent legislation.

The likelihood is that many firms will seek advice from IPs in the foreseeable future so it would be astute to be prepared.
A number of restructuring and insolvency businesses have experience of law firms.  However, with the sharp rise in numbers, many are dealing with legal practices for the first time or with limited market knowledge. If restructuring is not possible and closure inevitable, the situation is particularly challenging, as there can be very limited time to secure value through a sale given the regulatory complexities around the legal market. This is exacerbated by the fact that the significant asset will often be locked in WIP on personal injury caseloads, which are based on speculative agreements and can take years to reach a conclusion.  Such an asset has a very narrow purchasing audience.

While some within the restructuring and insolvency sector may have limited experience, the narrow band of purchasing law firms are highly aware of the situation, resulting in sales taking place off the back foot. Traditionally WIP value is very heavily discounted in order to generate any value in advance of news breaking and claimants uplifting their own files and walking elsewhere.

David Thornhill at FRP Advisory has been quoted as saying ‘The sale value achievable through a straight cash sale of personal injury WIP is often negligible, if it can be achieved at all. We have experience of this sector and have in the past sought to improve the value realised by selling on an earn-out basis. That however brings its own challenges, not least identifying a credible purchasing firm prepared to enter into such a purchase but also from a monitoring and cash collections perspective throughout the administration and run off. The timescales involved can be extensive and absorb huge amounts of professional time. Being able to use other agencies to assist in the process improves the efficiency of the monitoring process.’

If value is to be preserved for stakeholders and creditors, care must be taken to understand the wider issues facing the legal sector currently and all the options available.

Complimentary services aimed at insolvency practitioners dealing with this niche sector, such as those of Recovery First, are emerging whereby the challenges of identifying purchasing firms, monitoring and collecting the proceeds can be outsourced.

It is possible to realise the full value of WIP incumbent in any given caseload, distribution channels are currently available accompanied with full accounting and monitoring services.

Many of the 153 firms now facing closure as a result of PII issues will be solvent on a going concern basis. The challenge for those involved in advising such firms will be to ensure there is net value retained on closure to underwrite a period of change for those whose lives have been devastated by this years’ events, ensuring that they do not enter 2014 with nothing to show for years of hard work building up their businesses.

This debacle is just the tip of the iceberg for personal injury law firms, so IPs should be prepared for dealing with the legal sector more in the future.

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