PII: exit plans

The number of law firms experiencing difficulty in obtaining insurance cover following the chaos surrounding Balva/Berliner has reportedly increased to in excess of 175.

It is quite possible that the actual number of firms with insurance issues is significantly higher than this as firms in difficulty attempt to find alternative cover within the 30-day period allowed by the Solicitors Regulation Authority for a complete continuation of trade (including the acceptance of new business).

Law firms without cover will naturally move heaven and earth to secure professional indemnity insurance. However, for many of them that is unfortunately not feasible, the quicker the firm acknowledges their position, the better their chances of securing an exit which is favourable to them and in the best interests of their clients and team.

To avoid the necessity of an SRA intervention and all the complications that go with that, law firms will have to demonstrate that their practice is being wound down in accordance with the SRA’s updated guidance on Closing Down your Practice.

In my conversations with firms, I have been somewhat taken aback at their (lack of) knowledge around winding down. It is most definitely not a simple case of closing up shop and walking off with whatever profits are left. Those facing wind-down must recognise that this process brings with it costs such as redundancy, lease liabilities and tax payments. It is therefore vital that an early and reasonable realisation of the firm’s asset value is made. This will go a long way towards ensuring an orderly exit.

Furthermore, it will not only provide comfort to the clients and SRA but will maximise the chances of the business owners moving on without being hamstrung by liabilities from their former business.

Notwithstanding a closure situation, law firms – particularly ones with significant assets that have not yet been realised (such as work in progress/debtors in personal injury matters) retain the opportunity to gain good value via a sale. However, for any realistic possibility of such good value being realised, firms must act quickly.

In terms of the personal injury acquisition market – which has been buoyant for the past year – we are on the cusp of a seller’s market evolving into one which will unquestionably favour credible buyers with the resources and experience to get deals away quickly. The importance therefore of a firm facing closure sourcing a credible buyer or buyers cannot be over-emphasised.

Realistically, in order to persuade such prospective buyers that the transaction is not a complete fire sale, negotiations will need to have been commenced and ideally concluded in the next month to allow ample time for the transaction to be completed prior to closure of the firm at the end of December.

Whilst a closing firm may view their circumstances as precarious, a proactive sales plan will allow them to capitalise upon the fact that – despite the much-reduced life expectancy of the firm – they nevertheless retain an asset with considerable potential value. The likelihood is that a sizeable proportion of work in progress will relate to cases incepted pre-August 2013 and thus attract hourly rates for cases upon which proceedings are issued.

For cases incepted pre-April 2013, recoverable success fees and higher fees from cases settled through the MoJ portal mean that buyers will see the upside in the acquisition not withstanding that the practice may have failed.

However, the longer the delay in accepting the necessity of closure and commencing a sales process, the higher the risk of a failure to attain good value either due to an SRA intervention or a more robust approach from prospective buyers who identify the fast approaching closure date as a means through which to play hard ball.

Firms need to be realistic about their position; first and foremost they need to exhaust the possibility of sourcing cover and if this is not possible, quickly acknowledge the situation and put in place an orderly plan to exit the business with the clients and the firm’s best interests as priority.

In reality, these interests should go hand in hand.

Simon Gibson is managing partner of SGI Legal