Partners “worryingly” unaware of consequences of insolvency
Law firm partners are “worryingly” unaware of the significant personal costs they could face if their firm ceases to trade without a successor practice in place.
Even though the current climate for law firms is tough, one out of two law firm partners do not know what financial losses they might incur in the event of insolvency, according to a new report by accountants Baker Tilly, The importance of being financially stable.
The report offers advice to partners on different ways to assess stability within their firm, and how to cope with an unplanned failure. Under law firm regulation, the firm itself is required to be financially stable yet the report uncovered a lack of understanding of how to gauge stability and what it really means, and the implications of regulatory intervention by the Solicitors Regulation Authority (SRA).
The report suggests that law firms may in future want to retain more of their profits in the business, even though this is not tax-efficient.
George Bull, chair of Baker Tilly’s professional practices group, says: “There is a worrying lack of knowledge and understanding about the implications of a law firm falling into insolvency.
“All possible steps should be taken to avoid an unplanned cessation of business which can be very costly for individual partners. However, all too often, partners don’t take action in time, either because they fail to pay sufficient attention to their cashflow, or because they wilfully bury their heads in the sand.”
In the last year, several well-known law firms have gone under, including Midlands firm Blakemores, which closed in March after an SRA intervention. National firm Cobbetts collapsed in January, and was later sold to DWF. Yorkshire firm Atteys was shut down by the SRA in March. In October, financially struggling Manches was bought in a “pre-pack administration” deal by Penningtons.
