The huge increase in the number of empty retail premises in central Southampton dominated the regional television news on the South Coast on Monday. The next morning a headline in The Times business pages cautioned: “Disastrous reports now pour in from every sector.”

In other words, the parlous state of the economy is now top of everyone's agenda. So that is the bad news but, by the same token, are the good times starting to roll once again for the insolvency and corporate recovery lawyers around the City?

Strangely enough the answer is “no”. A straw poll of a cross-section of City law firms with strong insolvency practices produced a remarkably consistent result. “It's extraordinarily quiet - it's actually rather spooky. We seem to be in a strange twilight zone,” Stephen Gale, head of corporate recovery at Herbert Smith, said.

Paul Gordon-Saker, head of restructuring and insolvency at Stephenson Harwood, agreed: “We had been expecting something of a boom but it has not actually started - or at least the banks are not passing much on.”

Meanwhile, south of the river, Nick Pike, a corporate recovery partner at LG, had the same story. “To be honest, I can't say that we are particularly busy right now.”

So what is going on? The business news suggests that thousands of badly wounded businesses should be limping to their legal advisers for assistance and that the banks would be asking the insolvency practitioners to put the mortally wounded out of their misery. But it is not happening.

The only law firm to report more work than at this time last year is Lovells and all its extra cases have come from the financial services sector. “Even so, the volume of work is much lower than we had expected,” said Robin Spencer, of Lovells's business restructuring and insolvency team. Probe a bit deeper and the consensus this week is that we are in the calm before the storm. But that may be a very bad thing. Older lawyers - with experience of the early Nineties' crash - observed that many banks and business alike are still in denial.

“So long as they can defer facing up to reality they can hope that something will turn up to bail them out,” Gale said. “For those who have only lived through the good times, the expression that ‘values can go down as well as up' was purely theoretical. They didn't really believe it might actually happen.”

Other factors have helped to prolong the illusion. For example, it has been suggested that because many of the deals were done two years ago without any covenants in place, the result is that, strictly speaking, there have been no defaults. But while this disguises the depth of the problem it does not alter it. Nonetheless, it may give comfort to the Government, which, it is alleged in some quarters, is applying pressure behind the scenes to discourage the banks from pulling the plugs. It has even been argued - not without plausibility - that the bankers are putting off the evil hour until next year in order to collect one final whopping bonus before it all goes belly-up.

By common agreement, however, the lawyers think that the trick cannot be kept going longer than the fourth quarter of this year. Some think the “dam will start to burst” in early September, after weak summer sales.

As Ernst & Young noted recently: “Insolvencies are set to increase at a much faster pace in the later part of this year and in 2009. The driving force behind the increases will be the tighter credit conditions ... The full impact of this tightening is just feeding through as credit providers deliver sharp doses of reality to credit-addled individuals and businesses, which are just finding out that they can't live in 'never-never' land forever.” Gale believes that it would have been better for the never-never land bubble to have burst much earlier. “The longer you put it off the worse it will get,” he said.

Corporate recovery is only going to be possible for businesses that still have some funds and credit left to give them room for manoeuvre.

“If the money has run out then there will be no alternative to insolvency,” he says. “I think that we are really storing up big problems for 2009.”

The expectation remains that, by the winter, insolvency and corporate recovery departments will be run off their feet. Spencer said only the biggest cases are likely to be given time by the banks to enter into negotiations. “Because of the complexity of their positions it is going to be fiendishly difficult to sort it all out,” he said. “There won't be the time or the people available to deal with the smaller organisations, so many will probably be put straight into administration.”

Among other things this may give rise once again to a demand for the UK to adopt a version of the United States' Chapter 11 protection.

With the benefit of time to get their financial breath back some businesses might survive. That luxury is now likely to be denied them.



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