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Debts and creditors major factor in legal insolvencies 17 February 2014

Failure to pay debts, as well as increased willingness of creditors to take action, has been pinpointed as a major factor behind the epidemic of financially distressed law firms.

New research from the Solicitors Regulation Authority (SRA) found that in 82% of 78 case studies, failure to pay debts was the most frequently identified indicator behind distress.

Failure to pay debts was also often accompanied by ‘poor financial and business management’, with both factors appearing in 29% of cases the SRA studied.

The research said: “In most cases, failure to pay debts has the most significant detrimental impact on creditors.

“However, this can occasionally spill over and create a negative impact on clients. For example, if the debts are owed to service providers such as legal file storage [providers] this could lead to clients’ data and information being put at risk.

“Sustaining high levels of debt from borrowing is becoming more difficult, despite the Bank of England setting historically low interest rates of 0.5%.

“We have observed a shift in the chasing of debt, with companies and organisations pursuing solicitor firms more vigorously for ever-decreasing sums of money.”

‘Adverse economic conditions’ was also a common factor, appearing in over 50% of the 76 cases, as well as in 53% of cases where a failure to pay debts was identified.

Other factors indicated where failure to pay debts were also cited included the ‘misuse and misappropriation of client money’ (21%) and the ‘failure to obtain Professional Indemnity Insurance/Practising Certificate’ (11%).

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