Casualties of law in the PI fallout

Decisive action when facing closure will at worst avoid a chaotic wind-down and at best net a turnaround

By all accounts the recent deadline for law firms to renew professional indemnity (PI) insurance cover passed in a frantic scramble, with many unsuccessful smaller regional firms now on the brink of closure. This unwelcome situation comes as an unprecedented level of external competition and regulation piles pressure on the industry.


The effects of a disorderly wind-down in these circumstances are well known – bad publicity, angry unpaid creditors, disgruntled employees and very possibly bankruptcy proceedings against partners. The consequences of failure can be stark, yet too often firms fail to take decisive action that can stop this downwards spiral. 

Some firms will be operating in sectors where the fundamental business model is broken, where no amount of professional advice or innovation is going to alter the fact that the service provided is either no longer required or cannot be sold for the price previously obtained in the market. Recognising the problem and taking radical action – reducing a firm’s reliance on or even exiting a particular practice area, or recruiting to provide legal services for a different sector, for example – can make all the difference.

A firm without the critical mass to reform itself without support may be able to seek a merger partner. Yet mergers do not happen overnight, and it is important to enter the process with a degree of preparation and consultation to maximise the chances of success.

The emphasis for those firms on the brink should be on turnaround rather than closure. Time and again we see those that take early remedial action are those that avoid disaster. 

Similarly, those that manage a successful turnaround are those firms where all partners buy in to the process and that firm’s leadership remains focused on the task in hand. Egos and vested interests need to be put to one side for the common good.

For those firms that have found it is too late to adapt to the market changes, a clear strategy and a collegiate mentality between the partners can help guard against a meltdown. It is also crucial to ensure that the turnaround strategy meets with the approval of those outside parties whose co-operation is central to the strategy’s success – the banks, the SRA and the major creditors, for example.

Banks will want to know that the firm has taken appropriate advice regarding its cash position and that partners are aware of their obligations to ensure that losses to creditors are kept to a minimum. This may involve the firm and its partners being separately advised. Certainly it will involve consultation with professional advisers, and the bank will usually be prepared to sanction the expenditure on such advice. The bank will also want to see detailed cashflow forecasts and projections. They are more likely to be supportive if they believe that the firm’s partners are united and that leadership is strong.

It may now be too late to avoid casualties arising from the refusal of PI cover, but what is certain is that the longer the structural issues remain unaddressed, the less likely it will be that a solution can be found.