Financial problems - diagnosis and cure
Financial Problems - Warning Signs
The majority of firms and practitioners who have serious financial problems end up in that situation as the result of an aggregation of different (and perhaps wholly unrelated) causes or events; the result of this is that warning signs are difficult sometimes to notice, let alone interpret.
Each cause and event and the allied warning sign, taken on its own, can often be explained away very easily and many practitioners tend to do just that - entertaining is cut back a little, conferences and subscriptions are cancelled. As a last measure, drawings may be reduced or linked to monthly cash collection per partner/department.
These and similar cost-cutting measures are introduced; but they are often peripheral and fail to address the underlying issue(s). At best they may serve as a 'sticking plaster'; but they go no further towards arriving at a solution.
There are many variations on cost cutting-measures and their effectiveness differs according to various factors.
If a firm is in serious financial difficulties, it is not enough simply to cut back on expenditure here or there. It is of prime importance that the root cause or causes of the problem should be identified and treated.
The identification and treatment process is often painful and, understandably, one which most will seek to avoid. However, the inescapable fact is that, the longer the problem is avoided, the more painful - and probably more expensive - the exit route.
Check-List Questionnaire
Look at the following. Answer - honestly - the nine questions to yourself and consider the results:-
• Do you wake up at 4.00 a.m. and have difficulty going back to sleep, the rest of the night being spent tossing and turning and thinking about your problems?
• Does your stomach churn when the phone rings at about 11.00 a.m. and you hear that it is the bank who wish to speak to you?
• Do you dread looking at letters in the post which are addressed personally to you and marked "Private and Confidential"?
• Do you almost pray for each day to end?
• Have you noticed that your appetite is not as good as it was?
• Are you drinking or smoking more heavily than normal?
• Have you lost interest in things that you really used to enjoy as a leisure pastime?
• Have the bags under your eyes got bigger?
• Are personal relationships - both emotional and physical - suffering as a result of your present circumstances?
If you have answered "Yes" to more than four of these questions, it is most likely that the stress you are under is at, or is approaching, a level which is highly debilitating. If this has arisen as a result of financial problems or, for that matter, any other serious personal problem, it is of vital importance that you seek advice and assistance without delay.
Another way to deal with the questions is to look at the difference between the answers you give privately to yourself and the answers you would give if asked those questions by a close friend. If there is a noticeable gap between the two, there is a real danger that you know there is a problem but are avoiding facing up to it. That adds another dimension to the problem and the need to seek advice and assistance.
Talk to someone as soon as possible
It can be very difficult to find the courage to talk to someone. It is not clear whether we solicitors have put ourselves on a pedestal and therefore allow ourselves to show no human failing or whether clients have put us there and we feel the need to keep up the charade of being completely immune from the tolls and stresses of everyday life. Either way the result is a reluctance to show what may be perceived the weakness of seeking advice and assistance.
A starting point in overcoming a reticence to seek advice and assistance is the realisation that your problems are not unique. Some 25% of all practising solicitors in this country are close to severe financial difficulty.
A firm or a lawyer is not alone in having financial problems and there is no disgrace or shame in it.
Where is the Advice and Assistance?
Another problem is: "Who do I speak to?" This can be difficult. Although financial problems are a great leveller, the problems which a solicitor faces are often peculiar to the profession need specialist understanding which can best and, often, only come from another member of the profession.
You may fight shy of speaking to the Law Society (they being viewed perhaps as the 'Police' of the profession) and your bank are likely not to be helpful - the latter may be part of the genesis of the problem.
Your accountant will doubtless be sympathetic, but may well not understand what has caused the problems and how to cure them. And if he or she has been your accountant for some time, there may be a conflict of interest between you as a result of that relationship.
The specialist insolvency members of the Solicitors' Assistance Scheme are ideally placed to assist. They are neither judgmental nor condescending, will have experience of the issues and be well-placed to advise on containment and recovery issues.
Whoever you talk to, the most important thing must be that they help you through the difficulties so that you can carry on practising free of stress and can, together with their help, find a remedy which is effective and which works.
Remedies
It is a truism that the provision of legal services is and will always be required. So there is, in theory, no internal reason for a law firm to fail as the result of financial problems.
In some instances sale of the practice bringing with it a realisation for cash of the client base and work in progress may appear attractive, at least initially. However a solicitors' firm is a strange kind of commercial animal.
We often think of our work in progress as stock (i.e. an asset) and of our clients as being "our own".
Both ideas are fallacious.
First, work in progress is of commercial benefit only if it is completed and billed. Until then, rather than being an asset, it is a liability the cost of discharging which falls on the firm. The firm is, in effect, lending money to its client. If the solicitor or firm fails before a matter is completed, the works in progress becomes worthless, or so close to worthless, that the difference is negligible.
Second, we do not own, and therefore cannot sell, our clients. They have at all times a free choice to go elsewhere.
The prime objective for an advisor to a firm in trouble must be to channel the firm or solicitor into a structure or situation where they can carry practising and deal with the problems which have beset them.
Individual Voluntary Arrangement ("IVA") and Partnership Voluntary Arrangement ("PVA")
Often, the financial rehabilitation of a solicitor or a firm will involve a formal insolvency procedure such as an individual or partnership voluntary arrangement.
Briefly, both IVAs and PVAs are procedures under which the solicitor or firm in question seeks a moratorium from action by creditors in order to give it the breathing space to be able, along with specialist help, to put into effect a programme of rehabilitation. In such a situation, it is normal for a specialist member of the Solicitors' Assistance Scheme to act closely with the Licensed Insolvency Practitioner whom he or she considers most suitable for the chosen structure for recovery and who will become the Supervisor of the Arrangement. The Arrangement will normally last a period of years and its principal aim for the solicitor or firm is rehabilitation and, for the creditors, a better return than the bankruptcy of the Solicitor or the Winding-up of the partnership.
The scope of this paper is limited and only the outlines of such an Arrangement can be dealt with. However, apart from the (vital) element of the moratorium which normally lasts about three months, a feature of both IVAs and PVAs is that they can and must be tailor-made and fine-tuned to suit the set of circumstances presented by a particular situation.
It is of vital importance to realise that these are merely facultative structures; they are not an end in themselves. If someone says "I'm going into an Individual Voluntary Arrangement" , the question posed should be "What is going to be done in the Individual Voluntary Arrangement. What is going to be different? What are the radical changes?"
It is the actual proposals themselves that are important and great care must be taken to ensure that the particular problem is given specialist and appropriate attention so that the "cure" can be as effective as possible.
This advice was written for the SAS by Cormac Smith a Solicitor Advocate and a specialist in professional and insolvency law.