Business recovery: routes out of trouble

A significant number of professional partnerships are currently facing
financial pressures, including a significant number of small to medium sized

Professional partnerships such as independent accountancy practices face a
difficult future in the current climate.

The level of transactional and advisory work has dropped significantly and a
competitive market means that many accountancy practices are struggling to
attract new clients.

It’s not just accounting practices facing financial pressures. The
conveyancing practices of many have been severely affected by the downturn in
the property market. Some of the personal injury practices that have expanded
rapidly over the last ten years have suffered with the failure of two of the
largest claims providers (Claims Direct and The Accident Group) leading to a
significant tail off in new instructions.

Criminal and family practices continue to have cash flow problems owing to
the Legal Services Commission’s payment system.

Professional partnerships are increasingly likely to turn to insolvency
specialists for advice on their financial position as they struggle to deal with
their liabilities. Advising an insolvent professional partnership gives rise to
numerous challenges. Here are just a few of the issues to consider.

The Partners and the Partnership

It is clearly important to establish the status of each of the partners
within the partnership at an early stage.
Are they salaried, fixed equity or full equity partners? Do the salaried
partners have indemnities in place from the other partners and, if so, are the
indemnities worth anything?

The form of the partnership will also be a significant point to consider. Is
it a traditional partnership formed under the Partnership Act 1890 (in which
case the partners will be liable for the firm’s debts) or a limited liability

These issues are all likely to impact upon the extent to which the key
individual partners are prepared to stay with the firm and seek a restructuring
or rescue. It is usually the case that certain partners will have more to lose
than others if the partnership enters into an insolvency process, so each
partner will often have his, or her, own agenda. It may be difficult to retain
loyalty from all the partners in an LLP, since individual exposures may well be

Managing the partners and ensuring that they all pull together in the same
direction is therefore crucial to ensuring the best outcome for the firm’s
creditors and the partnership as whole. ‘Lock ins’ whereby each of the key
partners agree not to leave the partnership may be desirable, although the mere
act of asking for one may precipitate a crisis in itself.

Assets and Liabilities

As with any service provider, the major assets of a partnership will be its
debts and work in progress. Many partnerships, particularly small law firms,
often do not have effective systems in place to manage their debts and work in
progress, however. When advising such a firm, it is therefore crucial to
establish the actual value of these assets.

The major liabilities of a partnership will usually be to the bank, the
landlord, its staff and HM Revenue & Customs.

Insolvency processes

The insolvency processes available to a partnership formed under the
Partnership Act 1890 will include: a partnership voluntary arrangement (with or
without interlocking individual voluntary arrangements for the partners);
administration; and compulsory liquidation and bankruptcy of the partners.

For an LLP, the insolvency processes will include a company voluntary
arrangement, administration, compulsory liquidation and voluntary liquidation.

The commencement of an insolvency process in relation to a professional
partnership can potentially lead to a significant destruction of its value.

Most, if not all of the debts and work in progress in relation to incomplete
matters and transactions will be irrecoverable if clients are required to engage
another firm to complete the work as they will usually counterclaim against the
professional partnership for their additional costs and expenses.

Where possible, it is important to ensure continuity in the provision of
services to the professional partnership’s clients. A voluntary arrangement or a
pre-pack administration will both be attractive options. A liquidation of the
professional partnership is usually unlikely to realise any significant value
from debts or work in progress. Generally, a formal insolvency process spells
disaster for stakeholders.

Restructuring and Rescue

Given the potential financial implications for the professional partnership,
a restructuring or rescue will often be the preferred route. A restructuring may
include additional capital injections from the partners. Depending on their
individual resources, some partners may have to contribute more than others.
These partners may have no option but to accept this situation given the
alternative options.

A restructuring may also include reaching compromises with creditors, for
example, by negotiating with the landlord on a reduction in rent or floor space.
The restructuring could also include the use of one of the formal insolvency
processes outlined above. The support of the firm’s bank will, of course, be
crucial to the success of any restructuring.

A number of partnerships have been rescued by way of merger. The merger firm
may be a local competitor or may simply be looking for a presence in the local
area. The insolvent partnership’s bank will often play an important role here as
it may be able to introduce the insolvent professional partnership to one of its
other customers.

It is obviously essential that the merger firms complement each other’s
practices and are a good fit. A merger of two poorly performing firms may simply
create one larger poorly performing firm.

The current economic climate is likely to test a number of partnerships. An
increased need for restructuring advice therefore seems inevitable.

Bhaljinder Mander is a solicitor in corporate recovery
and restructuring at
Lawrence Graham LLP

Related reading