Thursday 19 January 2017 5:45 pm

Warning signs for legal eagles: One in three law firms in serious financial danger

One in three law firms is currently in financial hot water, according to figures seen by City A.M.

A search by Opus Restructuring of a database from Company Watch identified just over 6,000 UK law firms with enough numbers to crunch. Of those, 2,056, or 34 per cent, were performing so poorly financially that they could be at serious risk of failing in the next three years.

By comparison, just 25 per cent of firms across the economy as a whole meet the same criteria. 

Just days ago, City-based law firm King & Wood Mallesons (KWM) put its UK division into administration. 

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"Of course, they won't all collapse like KWM because they will be rescued by other firms or their owners will raise new capital to support them," said Nick Hood, business risk advisor at Opus Restructuring. "But my best estimate is that around a quarter of [those at risk] – 500 – will actually fail and with all the turmoil in the legal sector, it might well be higher."

The legal sector is currently battling its way through a slew of reform, with cuts to legal aid and rising court and tribunal fees causing many would-be clients not to seek out help.

Meanwhile, the introduction of Alternative Business Structures, which allow non-lawyers to own and invest in law firms, has lead to legal eagles competing with companies they probably wouldn't have envisioned fighting for clients with a decade ago. 

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However, Begbies Traynor's red flag distress monitor, which is not tied to the same figures as Company Watch, found the financial health of law firms had actually improved as of late, with businesses at risk falling by 8.3 per cent year-on-year and 2.1 per cent quarter-on-quarter for the fourth quarter of last year.

"Claims that law firms face higher risk of financial danger than other companies are in stark contrast to what we know, which is that the legal sector is an active and vibrant contributor to the UK economy," said president of the Law Society of England and Wales, Robert Bourns.

"Our own figures show law firms have a comparatively low failure rate – in a usual year we would expect to see two to three per cent of law firms fail."