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What law firms need to do to survive the pandemic induced recession

Written by Keith Steven Managing Director 5 May 2020

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What law firms need to do to survive the pandemic induced recession

Keith Steven writes with regards to the shock survey published in the Law Society Gazette on the 30th of April 2020.

The findings from a survey of nearly 8000 small law practices conducted in March and April, found that 1 in 5 practices said they were already feeling the squeeze on cash flow or income and this would only worsen as lockdown progresses.

 Around 63% of one person practices and 71% of firms with four partners or less, said such pressure could well and truly put them out of business by Autumn 2020. Extrapolating this as a worst case, this would equate to over 5000 UK law firms ceasing to trade.

The Law Society president Simon Davis commented on the unprecedented shock to the legal system of lockdown, saying it was sudden and severe, whilst firms may be open for business, there was little business happening.

KSA Group would urge directors, partners, designated members of law firms to consider the use of rescue options which are too often overlooked when a crisis hits.

Keith Steven managing director of KSA said “Directors, partners, and designated members should be planning for a serious trading recession. As well as taking advantage of government support schemes which are well described on LinkedIn and other social media (take the money!) you should be planning for a slow recovery from this massive shock. Does that mean companies, LLPs and sole practitioners should simply give up and close? Absolutely not”

He went on “We believe that the likelihood of mergers and acquisition-driven by aggregators will be severely reduced, given the recessionary environment, so firms should consider their objectives as well as those of the individuals driving the firms.

Do YOU WANT TO SURVIVE THIS? and be trading in 2021 and beyond? If so you should consider the UK’s available rescue options” Please see a very brief description below. Do download our free Worried Directors Guide too.

Partnership voluntary arrangement, used for partnership firms of 2, 3 or more partners, these schemes can affect a rescue reasonably quickly, preserve tax losses, preserve ownership of the practice and allow a deep restructuring of costs, people costs, overheads, and debt.

Obviously this IS an insolvency mechanism but it is the only option leaving the partners in charge. Supplemented by turnaround experts like KSA, a PVA can be a powerful tool for change. Whilst it’s not easy to restructure law firms quickly, choosing experienced advisors can alleviate your worries and stresses quickly. We can give a free consultation today by call, video, or when permitted, face to face meetings with senior KSA executives.

Likewise company voluntary arrangements can be used for corporate vehicles or limited liability partnerships (LLPs). Again the CVA scheme can be written to deeply restructure your firm’s debts, its cost base and overheads. We have experience built up over 25 years of arranging voluntary arrangements for doctors, lawyers, accountancy practices, engineers, manufacturers, travel firms and all other types of business areas. The law for LLPs and corporates is almost identical and we were the first insolvency advisors to build, and successfully agree, a CVA for a law firm trading through an LLP structure over 15 years ago.

For smaller firms of 1 or two principals, individual voluntary arrangements are powerful tools to restructure debts, personal taxes, credit card debts, loans, PAYE, VAT and help the business to survive the current crisis and following recession.

Whilst unpalatable and unpleasant, voluntary arrangements are, when there is a viable business (however much reduced in size), much better than the alternative of liquidation or administration. 

The Solicitors Regulation Authority and the Law Society are fully aware of these recovery and rescue options and we have extensive experience in dealing with the regulators. A good proposition will usually be allowed to proceed and lawyers can continue to practice.

Are voluntary arrangements a panacea? Quite clearly not. If the company or business is not viable and there is no determination to fight to survive, then liquidation is probably the better option for small businesses. We have just re-launched our expert's guide to creditors voluntary liquidation see link here. Please download this for free.

What can be included in a voluntary arrangement? (PVAs, CVAs, IVAs or linked IVAs)?

All unsecured debt, contingent or actual, including tax liabilities such as PAYE & VAT, employment costs such as redundancy and lieu of notice, rent, future lease obligations for property or assets, non-domestic rates, leasing arrangements and so on can be bound in, they can be varied, reduced or deferred. VAs are hugely flexible and experts like us can provide bespoke solutions for your firm’s problems. Secured debts are often informally restructured alongside the VA or may even be bound into the voluntary arrangement scheme.

It is essential to obtain advice from experienced turnaround and insolvency practitioners to act as architects of the scheme. You will need to build sensible forecasts to support the voluntary arrangement proposal. Many lawyers and solicitors' practices have little experience in such forecasting disciplines. We have used our bespoke forecasting tools for this purpose for 20 years and can help you plan. By producing a recovery plan and a recovery forecast this will support the necessary proposals to achieve two aims.

1) The firm, practice or company is galvanised behind a recovery plan and

2) That plan would be acceptable to a licensed insolvency practitioner who will take it to the Court and call a decision making process (formerly known as a creditors meeting).

In the current crisis a voluntary arrangement is much more likely to be an appropriate solution for viable business than pre-pack administrations, but how do you/we forecast, when it is difficult to know when business will recover and to what levels?

Uniquely, KSA Group has developed a process of “holding voluntary arrangements”. Essentially the debtor will request a 12 month arrangement which can be extended with new forecasts and up-to-date management and accounting information, provided to the CVA supervisor at the end of the first year. At that point, the practice can decide to extend the scheme of arrangement, bring it to a close and liquidate or perhaps seek refinancing which may allow an exit from the scheme early.

Finally, voluntary arrangements can allow the preservation of tax losses which can be brought forward to offset against future profitable periods. As many firms have been running at a loss recently and were not taking steps to restructure and downsize their cost base, this legally binding process can facilitate recovery and future growth tax efficiently.

Summary

If you have a viable business we can help you reduce practice costs, overheads, debts and facilitate a rescue and recovery from this dreadful crisis. KSA can help you plan and navigate through the likely recession of 20-21 and beyond.

  1. KSA arranged the first CVA for a law firm in the UK in 2003. This was, in fact, an LLP with trade, tax, and bank debts of £2m.
  2. We have extensive knowledge of the legal sector with multiple IVA, CVA, pre-pack administration, and liquidation clients across all types of law firms.
  3. KSA has extensive knowledge of the SRA’s processes, client protection objectives, and intervention scenarios.
  4. KSA has its own solicitor IP.
Keith Steven

The Author

Author of this page is Keith Steven who is the Managing Director of KSA Group Insolvency Practitioners

"KSA Group which owns this site, will help you fix problems in your business. We won't charge for any initial advice or face to face meetings. We speak in English. We will save you money and your precious time.  You can come to any of our offices

"We also follow up any meeting with a full "solutions report" which runs on average to 30 pages valuable free advice!!  No other practitioner offers this service.  In this report we advise on ALL the options and explain them clearly.  We advise on a course of action given the information you have given us ( the more information we have the better we can advise!)"

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