Insolvency springs a trap on the spendthrift professionals: The miracle became a nightmare for many partners. Robin Tutty reports

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The Independent Online
UP AND DOWN the country, and perhaps mainly in the previously prosperous South, there is a new type of financial casualty: the insolvent professional partner.

Partners in a variety of professional firms are facing the fact that they and their firms are bust and only the forbearance of their bankers is shielding them from financial ruin.

The collapse last summer of Hook Harris, a South-Coast accountancy firm, sent a shudder through the professional community as it demonstrated what happens when banks withdraw that support.

Why is it happening? It is too simple to say recession, because clearly not all firms are in this predicament. Some, indeed, are thriving despite the financial climate.

Experience suggests a number of common problems among firms encountering the greatest difficulties. Perhaps the most significant is a high level of fixed overheads, taken on when there were no clouds on the economic horizon. Hindsight shows us that the 1980s was a period of ludicrous optimism. Encouraged by leaders who promised the economic miracle would go on and on, even cautious professionals began to believe and staked their futures on rapid expansion. Partnerships mushroomed in size and moved from the genteel untidiness of the red-brick Victorian office to the brave new world of chrome and glass.

Rents were high but the revenue flowed in. How many firms now wish that they had hung on in their old premises for just that little bit longer and had not been so keen to acquire such expensive trappings?

Many partnerships have also relied on the property market for income, which accounts for the demise of firms of surveyors and architects. Less obvious victims are solicitors with mainly conveyancing practices.

A problem sometimes not recognised is the burden of non-performing partners. Once, partners were appointed for their skills and their ability to generate income - and the clients that would keep a team of assistants and support staff busily employed. This notion seems to have been abandoned in the 1980s, and many expanding firms appointed partners who are now seen to be unable to justify their share of the cake.

Other firms just grew fat and complacent, and partners forgot the importance of continually honing their professional expertise. Ten years of indolence does a lot of damage to stamina, and many firms are suffering now because they lack professional and managerial strength.

The good news is that if these professionals stopped panicking, sought advice and took sensible stock of the situation, plans could be formulated that would - almost invariably - improve matters. Sometimes such plans have to be promoted under the shelter of insolvency legislation, by means of co-ordinated individual voluntary arrangements. Such formal procedures can often be avoided, although plans are usually agreed with creditors in conjunction with specialist insolvency advisers.

Unfortunately, the Insolvency Act does not give partnerships the range of options available to companies. As a result, organisation of a rescue plan is often complicated and requires detailed knowledge of insolvency law as well as juggling skills in handling the competing interests of creditors and partners. But changes in the law are expected.

Survival plans always begin with an assessment of the strengths and weaknesses of the firm and the partners. It is crucial that the assessments be frank and accurate, as they will form the foundation for whatever plans evolve.

Another vital part of the exercise is to see how bad the situation really is. Surprisingly, many partners have not sat down and worked out precisely what they owe and what they are worth. Many would be severely shocked to discover the extent of their personal indebtedness. But such a shock could well be the catalyst that concentrates the mind and makes serious consideration of the survival plan a real priority.

Robin Tutty is a partner in Fox Williams, a firm of solicitors in the City. He specialises in insolvency law and advising partnerships and companies facing financial problems.

(Photograph omitted)

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