Insolvencies in professional partnerships

With the number of professional services insolvencies on the rise Mark Sands, partner at Baker Tilly, looks at some of the factors affecting insolvencies, key issues for partnership insolvencies and some of the most common insolvency procedures.

There have been a number of professional services insolvencies recently, particularly solicitors and accountancy firms—why do you think this is?

The legal profession has seen changes which have simply become too much for an increasing number of firms—conveyancing volumes have halved, and have only recently shown signs of recovery. Private clients faced with tightened belts look at low cost answers to problems such as will writing, divorce and other family related issues, demanding low fixed fees or sidestepping the profession and using the internet and blogs as sources of self-help. Legally aided work has been significantly cut in the overall budget, and corporate and commercial clients have reduced spending both as a result of reduced activity and seeking lower or fixed fees for routine employment, property and commercial work.

These issues have driven many firms to consolidate and streamline their businesses while new entrants have sought to commoditise an increasing number of products at low and/or fixed costs. Faced with the combination of the above and competition driving down margins, many practices can simply no longer compete.

Partnerships are ‘unique’ in that partners should only take drawings from profits whereas corporate entities pay senior staff, deducting those costs to arrive at a figure for profits. However, partners may become used to a level of drawings and continue to draw funds from the partnership at their traditional rate for some time after profits have fallen below the combined level of partners’ drawings—so even when making a notional profit, a partnership can find itself with a material outflow of cash which has to be funded by increased debt levels. The situation may be worsened by the build-up of work in progress in the lead up to insolvency, meaning that cash generation is even lower than calculated profit.