Law firms have historically been viewed by banks as relatively immune to a downturn in the economy. However, following Halliwells’ collapse, banks no longer take a view that lending to law firms is low risk. Many banks will now not provide partner capital loans where they are also the primary lender to the firm and now look to take debentures as security, which was very rare pre-Halliwells. Banks are also increasing their margins on funding to law firms to reflect their concerns that lending to law firms carries a higher risk post-Halliwells. The only alternative for many firms is to ask partners for increased capital contributions.
With banks toughening their attitudes, many firms are now considering whether the traditional model of full distribution of the profits of the firm each year is a prudent model to follow and some are looking to convert to limited company status. The recent Halliwells creditors report shows that the amount Halliwells owes to unsecured creditors is £190m, which will not have eased the concerns of the banks, particularly regarding firms with high building costs and vacant offices.
