Storm warning: how to spot the tell-tale signs of a law firm in financial trouble
When a business enters a formal insolvency procedure, creditors and employees lose out, as well as the owners of the business who lose their equity investment. When a law firm enters an insolvency process, however, there is another class of stakeholder with plenty to lose: junior partners, who fall between the stones of employee and owner. New partners can be some of the most vulnerable stakeholders in law firms suffering financial difficulties. As a result, it is not surprising when new partners at insolvent law firms are the first to criticise their management, nor that they are the most frustrated when an insolvency practitioner approaches them for repayment of drawings. This may be broadly equivalent to salary without any sizeable participation in distributions before insolvency. New partners will have invested some of their hardest working years to be accepted into the partnership, and perhaps have also taken out a large loan to make a capital contribution. As they build their business, their reputations are always on the line, and their judgement is constantly scrutinised by clients and peers. All of this makes it even more difficult, and painful, for new partners to move on after insolvency.
Younger lawyers need to ask tough questions before taking partnership, warns CMS’s Rita Lowe
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