Thursday 23 April 2020 11:29 am

Law firms face 'bloodbath' in upcoming coronavirus recession

Advisers who worked on some of the largest UK law firm collapses predict a “bloodbath” for the legal industry as a result of the coronavirus economic crisis.

Andy Hosking of Quantuma, who acted as administrator to King & Wood Mallesons Europe (KWM) and Ince & Co, said: “You are going to see a bloodbath in this sector.”

Read more: Law and accountancy firm coronavirus partner promotions: a poisoned chalice?

Pinsent Masons restructuring partner Steven Cottee, who advised on the failure of KWM, predicted that the real crunch for firms would come towards the end of the year with the January tax bill looming.

“Where we see firms having problems is come next January when the tax bills are due and you are effectively having to pay twice,” he said.

The government has deferred VAT payments for businesses for the period from March to June which will gives firms a breathing space, but all liabilities must be paid by March 2021.

“You will to see law firms fully maxed-out on RCFs [revolving credit facilities] and borrowings that will have difficulties in October, November and December,” he added.

Read more: Deloitte UK cuts partner profits 20 per cent and freezes salaries in response to coronavirus slowdown

John Lord, a litigation partner at Knights who advised on the collapse of Halliwells, said: “I think it is inevitable [firms will go bust]. The model doesn’t really lead to the retention of cash so law firms are going to be struggling to generate cash as result of transactional and property work falling off a cliff.”

One corporate banking source said: “[Law firm failures] probably are inevitable. You’d like to think the top 75 have sufficiently professional finance functions and are of a size that means they are able to have credit discussions with a number of banks, but beyond that c.£40m revenue, it starts to become more of a challenge.”

Hosking said: “Those firms who had difficulties going into this I don’t believe will be able to ride it out. They will either have to recapitalise or merge or fail. Those who had solid foundations and were in a relatively good position will be left severely weakened but will be able to survive.”

Read more: Freshfields suspends partner profit distribution and freezes pay

Law firms are alive to the danger the economic slowdown poses and have moved quickly to reduce outgoings in anticipation of a tough few months.

Firms including Linklaters, Slaughter and May, Freshfields Bruckhaus Deringer, Clifford Chance and Allen & Overy have delayed partner profits to help retain cash in the firm.

Other firms such as Dentons and Norton Rose Fulbright have cut staff hours to help save money and avoid redundancies.

Firms such as Pinsent Masons, Watson Farley & Williams, Womble Bond Dickinson and Taylor Wessing have used the government’s coronavirus job retention scheme to furlough staff.

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