Insolvent Law Firm Due to Falling Sales

The Challenge

A law firm faced a critical financial crisis with a number of compounding issues. The firm had acquired a smaller practice, but the bank never provided the promised funding for the purchase, which became a significant drain on cash. The bank then reduced the firm’s overdraft, and a bad debt coupled with falling fee income forced the company to borrow money from former clients to pay its VAT bills, creating expensive “VAT smoothing loans.” Cash flow problems were exacerbated by a rent increase on its main office. The situation reached a breaking point when the firm missed two consecutive PAYE payments, prompting HMRC to threaten to wind up the company. The Solicitors Regulation Authority (SRA) also warned the board to seek insolvency advice or risk intervention, an aggressive process that could effectively shut the firm down. With debtors of £500k and work in progress of £1m against borrowings and creditor debts of nearly £3m, the firm was insolvent.

The Solution

After an initial consultation, KSA Group was engaged to develop a comprehensive recovery strategy. The plan centered on a Company Voluntary Arrangement (CVA) but also included a contingency plan for a pre-pack administration. The key components of the strategy were to close non-performing offices and transfer clients to other firms or back to head office. The plan also involved making approximately **20% of the employees** and two partners redundant, with their claims met by the Redundancy Payments Office. KSA negotiated a 60-day debt standstill with creditors to allow for detailed financial modeling. The firm’s costs were also drastically reduced, with copiers and IT equipment leasing slashed from £200,000 per year to just **£30,000**. KSA met with the SRA and the bank to secure their approval for the overall plan, successfully avoiding an SRA intervention.

The Results

The CVA was successfully approved, which was a significant achievement that prevented SRA intervention and a pre-pack administration. The firm is now much leaner and fitter, with two properties vacated, costs cut, and employee expenses reduced. The bank loans are now being serviced after a 12-month capital payment holiday. Unsecured creditors will receive **25% of their debt** back over five years, with contributions in the first year set at a low £5,000 per month, a stark contrast to the original £25,000 per week that was being paid on the VAT loans. The firm’s salaries have been frozen for two years, and all future HMRC debts are being paid on time. KSA provided a senior director on-site for three days a week during the crisis, supported by a team of four experts who handled the company’s 45 creditors. This case demonstrates how a CVA can be a powerful tool for restructuring a professional firm, allowing it to survive a crisis and return to a viable financial position.