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The legal sector is in trouble. The introduction of the Legal Services Act has led to the option of forming alternative business structures (ABSes), meaning a number of distressed firms with failing businesses may be snapped up by larger players.
But as is customary in any marketplace, whenever you see consolidation, you also see failure. Businesses close down, other companies purchase distressed assets and a consensus between stakeholders is rarely reached. If the Solicitors Regulation Authority (SRA) thinks a firm is a risk to the clients, then it may instantly intervene. “Effectively the business dies there and then,” says Keith Steven, managing director of KSA Group.
“To put a company into liquidation takes three weeks, but the SRA can intervene in a flash – if they’re ready to go, they can be there “today”. In most cases, the SRA will give prior warning by writing to distressed firms requiring the management to seek external insolvency advice. But often if it gets to this stage, it’s already too late.
“Smart lawyers should be thinking about turnaround options that are available before it’s imposed upon them by the SRA,” explains Steven. “The aim should be, even before the SRA gets them on its watch list, to get advice before insolvency options are required.”
Common warning signs such as poor cashflow, falling sales or not being able to meet payments to HMRC should be taken seriously by partners and directors. Struggling with PAYE and VAT payments are indicators that management must act. “A new pair of eyes coming in can spot the issues,” explains Steven.
“The reason management doesn’t address structural business problems is fear of change. But change has been forced upon them by the market and smart directors must act to turnaround the business.” The KSA Group offers a variety of solutions including plans “A”, “B” and “C” to the distressed firm, and works with it and the SRA to prevent regulatory intervention.
Plan “A“ can be used while it’s still possible to defer creditor payments, restructure bank debts, chase debtors, cut costs and turn the business around.
If creditors choose to reject this informal deal, then Plan “B”, may be used, this is often a formal Voluntary Arrangement (CVA or PVA) to pay creditors over a fixed period while continuing to trade. Debts are substantially discounted on the way through. If it gets to the stage where it is impossible to turn the business around, that may mean plan “C”, when a break-up sale to buyers or a prepack administration becomes necessary. “That’s not desirable for all parties, but it can sometimes be the only outcome” said Steven.
The KSA Group also offers a free online guide at www.companyrescue.co.uk which has served as a crucial aid for companies feeling the pressure of a tough economic climate, with thousands still trading with its help.
020 7877 0050