With all the talk of recession, these are interesting times for the insolvency market.
All the major players have been affected by moves and retirement. As the potential for the sector hots up, other firms are gearing up to challenge the dominance of the status quo. Indeed, the Legal Week/Axxia survey, (Legal Week, 21 January), found that two-thirds of law firms intend to expand their insolvency practices in the coming year.
The sector continues to be dominated by the traditional insolvency big five – Allen & Overy, Lovell White Durrant, Wilde Sapte, Cameron McKenna and Clifford Chance – but for other firms it has been anything but a quiet year.
Some of the big firms were considered to have missed out on the 'big ticket' work last time around and seem determined not to do so again. The notable firm in this category is Freshfields, which recently attracted Chris Mallon from Biddle to join Sandy Shandro and Ken Baird.
In the past year, the firm has recruited another two partners and 10 assistants. But although many in the industry say they do not expect Freshfields to compete directly with the established players, concentrating on international work and syndicated bank lending, this is not necessarily the case, according to Shandro.
"We have a large team in the domestic department," he says, "and we will be pitching for domestic work as well."
Hard on the heels of the top five is another acquisitive firm – Herbert Smith – which is building its insolvency practice from scratch to capitalise on a strong existing international client base. Future chairman of the Society of Practitioners of Insolvency (SPI) Stephen Gale has been recruited from Hammond Suddards to head the insolvency team.
Other firms considered to be positioning themselves well for expected work are Linklaters and Denton Hall.
The competitive threat from accountants is generally regarded to have receded – at least for the time being. But the bean counters are still perceived as harbouring lucrative aspirations in the area and the potential for them to establish 'one-stop shops' for insolvency work is obvious.
While the Government scrutinises the issue of MDPs, the question that is being asked by the bigger firms, which would face the greatest competition in the short term, is not 'if' but 'when'.
The issue that the Government needs to look at before formulating its MDP legislation is the potential conflict of interest that arises if an accountancy firm works for a client across the board. This also runs contrary to Mr Justice Lightman's recommendation that practitioners should not blindly use their own firms, but put their work out to tender. "All we want from the Government is a level playing field," says Robin Tutty, head of insolvency at Fox Williams.
Whatever the machinations during the last 12 months with regard to personnel and players, if the Big Five are to retain their pre-eminent position, they will have to cope with significant changes in the market. Those firms that try to replicate their work of the last recession will find the landscape very different.
The watchwords this time around are corporate recovery, turnaround and workouts. Formal receivership is predicted to decline.
The banks, stung by the criticism they received during the last recession, are now taking a more sympathetic approach to struggling companies.
Businesses are more likely to go into administration than receivership and are more likely to look at alternative refinancing options, such as converting debt into shares.
This is is not a purely altruistic shift along the high street – there are sound commercial reasons for the change in perspective. The banks have become disenchanted with the poor returns from formal insolvency and are realising that they can recover and make more in the long term by supporting companies through difficult times.
The implication for the profession here is that insolvency lawyers will get involved far earlier in the process, rather than simply picking up the pieces after a company has gone bust. Indeed, the 'I' word is becoming downright unpopular.
This will mean that a greater range of skills will be required of insolvency lawyers and ultimately, their roles may be reduced. The firms that will benefit are those with strength in depth. Where the better work drifts away from insolvency departments, it will be picked up by the employment, corporate and tax divisions.
"Company rescue is the major trend," says Mark Andrews, head of insolvency at Wilde Sapte. "We will be looking to pick up the problems earlier. We always had that role to play, but it will become more developed."
But John Verrill, head of insolvency at Lawrence Graham, is not so sure that the game is up for formal insolvency. "Banks are less willing to appoint receivers at the moment because they have the management time available to look at the other options.
"But if the bubble bursts and we have another recession, they won't have time to evaluate each case on its merits and will revert to type – formal insolvency is quick and easy," he says.
Even where a company does end up in formal insolvency, the lawyers involved may find themselves engaged in 'shuttle diplomacy', not the fun (and fees) of litigation. The recent British & Commonwealth v Atlantic Computers case was reputed to be the largest such case settled by mediation in the UK (see page 6).
The impact on fees could become serious. If Atlantic had remained on the litigator route, it would have reached court in May 2000 and was predicted to remain there for 18 months.
"It [mediation] is a process that could be usefully imported here," Shandro says. "It is in the spirit of the Ferris report and will come to the fore in time."
Not that litigation specialists will be entirely redundant. The process is likely to embark on the litigation route, to establish a 'posture' for each side before going in to mediation. Where there is a point of law or principle involved, litigation will remain the only option.
In the longer term, litigation specialists may find a new role to play. The Government is currently considering a debt moratorium for smaller companies that find themselves in difficulties, with a view to extending the system to larger companies if it is successful. If, in its final form, this legislation is similar to the US Chapter 11 insolvency law, then the debtor company will have to apply to a bankruptcy court for protection.
The other major change in the market since the last recession is the growing international aspect to the better work. The past five years have seen huge growth of investment in emerging markets. The problems of Southeast Asia have been well documented and the region is likely to provide good work for insolvency lawyers well into 2000. Russia is proving another good, if problematic, source of clients.
The practices that will prosper are those with a presence in these markets. As the nature of cross-border insolvencies and deals become evermore complex, firms that do not understand the culture or language of the countries they are dealing with will lose out.
Much of this work will be bank-led and those who are strong in this area will prosper.
Of the top five, Allen & Overy looks set to benefit from both sides of this equation, with a strong banking practice and extensive presence overseas, particularly in the lucrative Far East.
For the rest of the market, the bread-and-butter work is expected to remain mostly domestic. Again, much of this is predicted to revolve around restructuring and mergers, rather than outright insolvency and those firms with strong corporate departments should benefit. Verrill, anyway, is doubtful as to the value of international work. "With the exception of places like Hong Kong, fees are better for UK work," he says.
The recommendations of the Ferris Report have been largely welcomed and many in the industry have praised the common sense applied by the professional members of the committee, Peter Totty of Allen & Overy and Murdoch McKillop of Arthur Andersen, chairman of the SPI.
Although the report accepted that the lowest fees do not necessarily represent the best value for money, fees are still considered a tricky issue.
In the shorter term, it is not expected to make much fundamental difference. "Fees will not be affected," comments Chris Hanson of Lovell White Durrant, "because the area is already competitive. But people will have to justify themselves in future – the better firms do that already."
The obvious form this will take is greater transparency. Firms will have to improve their record-keeping and, in time, introduce itemised billing. Cameron McKenna already has this in place. "We have an automated billing system so clients can see what they are paying for," says Rita Lowe, partner in the firm's insolvency arm.
In the longer term there could be changes ahead. "What direction the Government will go in after the Ferris report will be fascinating," Verrill says. "It can be seen as either a threat to insolvency practices or as an opportunity to adjust remuneration to a more sensible footing.
"Currently, fees are usually charged according to either time spent or assets recovered, but in future, I think that people will be paid more for complex work, less for the routine stuff."
Whatever 1999 brings, one thing is certain: those firms that stand still will be left behind.