Friends or foes?

Ravinder Chahal reports on the likelihood of multidisciplinary practices taking insolvency work from law firms. Ravinder Chahal is a freelance journalist.

The threat posed by accountants to the legal profession in the tax battlefield has been well documented, but when you consider that Arthur Andersen now holds the strongest corporate recovery legal team in Scotland, is it time for insolvency lawyers to review their traditionally cosy relationship with the bean-counters?

The insolvency profession is relatively small with just over 1,800 licensed practitioners in the UK, of which only around 200 are lawyers.

Licensed practitioners can receive appointments, usually from creditors, but lawyers who are licensed as insolvency practitioners rarely take this up in practice. Holding a licence, which requires passing a rigorous examination, is more a sign of specialism for lawyers.

Traditionally, accountants have handled the insolvency appointments directly from the banks, and take care of the valuation and disposal of a business, while lawyers deal with a host of legal issues that crop up, from producing the documentation to dealing with third-party claims on assets and sorting out intellectual property matters.

The president of the Society of Practitioners of Insolvency (SPI), Brendan Guilfoyle, an accountant working from specialist insolvency practice Geoffrey Martin & Co, points out that that none of the law firms associated with accountancy practices offer insolvency advice – at least not in England and Wales.

Although he recognises that the number of lawyers working for accountancy firms will increase over time, he does not think that law firms will be totally pushed out of insolvency work. Guilfoyle says that the “increased complexity of financial work means that lawyers do not sit back while accountants take the lead” and that many law firms are increasing their insolvency capabilities, even if they do not take appointments directly.

About two-thirds of the 200 insolvency lawyers holding insolvency qualifications are members of the SPI and many hold prominent positions. Gordon Stewart of Allen & Overy was president of the SPI prior to Guilfoyle. Stewart had a broad-church approach to membership and encouraged both lawyers and accountants to take an active role.

He now heads the Vision Group, which is looking at broadening the base further to include bankers and other regulated professionals connected with insolvency.

Another prominent lawyer at the SPI is Stephen Gale, who chairs the technical committee. Gale is currently on gardening leave from Hammond Suddards and is set to join Herbert Smith in the New Year, where he will head a new corporate recovery group. He says that any “legal practice would be foolish to ignore the threat from accountancy firms” and that he “suspects much of the more mundane insolvency work in accountancy firms already goes to in-house legal teams”.

Gale says accountancy firms, which have traditionally been clients of law firms, are now acting more like competitors. He thinks the way firms meet this challenge will vary.

“A certain element will compete head-on, but there will be those which work for mid-size clients and don't rely on accountants for the bulk of their work,” says Gale. However, at the “heavier end” he does not believe accountants will “risk their in-house teams” and will continue to work closely with the larger law firms.

Nick Pearson, partner and head of Baker & McKenzie's insolvency group in London, says the move by accountancy firms to have their own associated legal practices has certainly given his practice something to think about.

Pearson says that, to date, Baker & McKenzie has taken the view that relations with accountancy practices are good, with the roles well-defined. “They take care of the business end, and we do the law.”

Competition from multidisciplinary shops in the areas of tax and business advice will increase and, according to Pearson, “it will get tougher in insolvency, too”.

In-house legal teams have already bitten into one area of work that belonged to lawyers – the monitoring of cases relevant to the Insolvency Act. Like Gale, Pearson feels that firms will respond differently, with some aggressively targeting the banks for appointments while others will steer clear of the accountants' bailiwick for fear of reprisals.

Baker & McKenzie has considered what it would have to do if it had to compete head-on. He says that any law firm would face huge infrastructure and manpower problems if it embarked on such a course.

“Ernst & Young or Arthur Andersen can send a team of four or five people who are not senior to act as support staff – lawyers are highly paid, so it makes less sense,” says Pearson. “Perhaps the role of paralegal could be increased, especially if they were employed on an ad hoc basis.”

He also says that problems of conflict of interest could arise both for law firms and accountants. At present, when accountants have complex insolvency issues they seek independent advice as a safety mechanism, but with their own firms operating independently this could change. News recently came from sources at Garrett & Co – the law firm associated with Arthur Andersen – that there is an “intention” to establish a corporate recovery team at the firm's Birmingham office, confirming Pearson's fears.