The economic crisis has claimed its first significant victims in the legal sector, with a 10-partner London firm among the recent casualties.
Saunders Solicitors was wound up in October by administrators BDO Stoy Hayward, which drafted in a team of restructuring lawyers from DLA Piper.
Meanwhile, Tunbridge Wells-based Buss Murton has been saved from administration by entering into a company voluntary arrangement (CVA) with its creditors – writing off around £1m of debt in the process.
It is a sign that larger and larger firms are now being overwhelmed by the credit crunch, whereas insolvencies had previously been limited to the high street.
DLA Piper global head of restructuring Stephen Halladay said: “We’ve got a number under review and we’d anticipate that there’ll be considerably more law firm insolvencies during the course of 2008.”
Saunders was put into administration in October after being unable to meet a large lease commitment. It is also understood that a large bill for a Middle Eastern client was not paid.
Four of the firm’s partners have bought part of the business and relaunched as The ;Saunders ;Law Partnership, specialising in criminal defence litigation, regulatory work and civil fraud.
The remainder have taken clients and existing work ;with ;them ;and pursued jobs at other firms.
Buss Murton senior partner Alan Williams told The Lawyer the firm’s problems stemmed from “bad decisions” in the 1990s that had created a high level of debt.
The firm’s accounts from 2007 show that it had total fees of £2.6m and an operating profit of just £140,000, with debts of around £3m. This meant that the profit pool for partner drawings was in deficit by more than £200,000.
Williams said: “The hope had been within the firm that it would be able to trade out of the situation. What we realised in the last year was that was unlikely to be the case.”
The eight-partner firm invested heavily in personal injury in the 1990s, including no win, no fee work, which requires careful financial management. Much of its debt dates from this period. The firm also acquired the operations of BM Law, a Dartford firm in administration, in 2007.
The current financial crisis has added to its woes, forcing the firm to cut its residential conveyancing practice by making up to 10 redundancies. The practice had provided around 30 per cent of total revenue, which is now down to 10 per cent.
A CVA, like the one employed by Buss Murton, is an arrangement between an insolvent company and its creditors over the payment of debts. It enables an organisation to keep trading with a timetable for repayment, as well as possibly writing off a portion of the debt.
Williams said: “We’d be quite happy to talk to other firms who feel that it would be useful to go down the same route, because it’s worked extremely well for us. We’ve ended up financially stronger.”
Halladay said law firms on the verge of insolvency face several outcomes.
One is going into administration in the same way as a traditional company. Being an LLP is no barrier to this process, but client confidentiality can make it difficult for administrative accountants to assess the business.
Another is that the Law Society, through the Solicitors Regulation Authority (SRA), takes over the running of a failing practice. Concerns about the viability of a firm can be raised by clients, lawyers or members of the public, said an SRA spokesperson.
Halladay added: “There’s always a risk that the Law Society will intervene. They can appoint an independent lawyer to go in and run the practice.”
A CVA with creditors is another option and is usually used by companies as a stay of execution to raise money for creditors before being wound up.
However, Buss Murton employed what is known as a ‘drop dead’ CVA, which should allow the firm to continue trading.