Creditors bear £300m cost of law firm collapses

Topics: Law firm & practice management,Alternative business structures

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Unsecured creditors of collapsed law firms have been left nursing losses of £300m since the sector was liberalised post-Legal Services Act, Gazette analysis shows.

The average return from realising assets is less than 2p in the pound.

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Creditors are poorly served by pre-pack administrations, the figures suggest, with returns in the legal sector well below the average when the controversial vehicle is deployed to sell on profitable parts of ailing businesses.

The debt pile grew significantly larger with the recent collapse of Parabis Group, new documents have revealed. A statement of administrator’s proposals shows that the business went into administration owing £47.6m to more than 2,500 unsecured creditors – including law firms, barristers’ chambers and medical experts.

They will lose over £46m after being told they can expect less than 2p in the pound. That contrasts with secured creditors, who are expected to recoup £32.5m of the £73.4m they are owed.

This 2p in the pound figure matches the return Manchester firm Cobbetts’ unsecured creditors were told to expect when Cobbetts was acquired by DWF in a pre-pack deal in early 2013. They were left tens of millions of pounds out of pocket.

Halliwells’ unsecured creditors fared even worse in 2010 when the Manchester firm was carved up through a pre-pack administration. The biggest law firm casualty of recent years left them with debts of £191m, from which they were told to expect a return of less than £1m.

Other collapsed firms have also left unsecured creditors with little or nothing. Midlands firm Challinors owed £7.1m to unsecured creditors, including the tax authorities and food suppliers, when it went down. They were left with nothing – as were the unsecured creditors of Atteys, owed £3m when the South Yorkshire firm was shut down owing £5m.

As recently as last month, London firm Jeffrey Green Russell was sold off as part of a pre-pack administration. Unsecured creditors owed a total of £7.1m were told they too will get nothing.

Pre-packs, through which a company enters and leaves an administration process almost instantly, remain a legitimate way to mitigate the detrimental effects of insolvent companies. They are now commonly used in the legal sector, but remain controversial over perceived unfairness to trade creditors.

Gazette analysis shows that in the case of law firms, the average return to unsecured creditors following a pre-pack administration is well below 2%, compared with an average of 5% across all industries.

Readers' comments (18)

  • What a disgrace!

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  • I agree David, it is a disgrace, and a true reflection of what the profession has become.

    Greater accountability, and a modicum of honesty would go some way to redress the balance, but a determination to line one's own pockets to the detriment of others seems to prevail in most circumstances.

    Small wonder that lenders view the sector with disdain.

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  • Yes, my first reaction was the same as David Crawford's.

    However, on reflection it is entirely wrong. Our rulers wanted law to be "commercial", and now it is. This type of situation is the inevitable corrollary to such commercialism.

    The mistake the profession made was in going along with commerciality without divesting ourselves of the professional obligations, as banks did.

    We should have dumped compulsory PII, the Compensation Fund, "officers of the court" (the courts certainly never give solicitors respect for that, just the responsibility...), and all the other stuff.

    Getting rid of the non representative Law Society and replacing it with a body like the BBA, which fiercely defends the banks, would also have been sensible.

    So, yes, a professional "disgrace" as some would have it, but the natural result of business, which is certainly not a disgrace at all, simply what happens in business, as Tesco, M and S, and others know.....

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  • Who is to blame? Investors? Lawyers? the market ? Politicians ?

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  • In response to Anon at 11.18 - this is simply what happens in a free market, liberalized environment - some businesses succeed, others fail, and unfortunately when the latter happens, creditors lose money. I agree with previous comments that the legal sector was not sufficiently prepared for this move to a more commercial footing, but some firms also didn't help themselves by not taking a proper long term, strategic approach to their businesses, preferring to simply think that business models that had worked in the past would continue to do so ad infinitum.

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  • Yet some of us manage firms sensibly, responsibly, pay our bills on time, aren't in hock, and manage to do so with burgeoning regulation, crippling PII, slashed costs, and ludicrous changes in competition that let all and sundry into the marketplace.

    My guess is that I'm representative of the vast number of solicitors out there. It's certainly getting harder to run a business in this climate, and it really is about time that those who regulate us take a peek into the real world and actually help, rather than creating more red tape.

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  • How can it be an utter for disgrace for solicitors to act in the same commercial manner as every other limited company does? I hear people moaning about solicitors not being allowed to compete on a level playing field with other professional yet as soon as they do so they are criticised.

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  • Because, Anon 12.45, we are professional men and women, not general traders, and we should act as such. The fact that others do not behave as they should and, inter alia, fail to pay their bills, is no excuse for our not doing so.

    I would tentatively suggest that those who are described generically as 'fiduciaries' and who therefore owe a duty of 'uberimae fidei' should behave themselves better than City slickers, although bankers and insurers have of late begun to let the side down. Seems as if we are going the same way and that some of the above comments consider this to be quite all right. Well, in my humble opinion, it's not.

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  • Paul is right .Despite post legal services act (Act) realities, his law firm continues to thrive, notwithstanding the contradictions, internal inconsistencies and collateral damage to solicitors flowing from the Act.

    The point is where do we go from here?

    Personally I would prefer to be part of a profession rather than a legal services association. Being ethical is the primary mark of quality, which differentiates us from the pretenders trying to confuse an already confused and cynical public.

    How do we, to use the language of J S Mill, shatter the compact mass of public prejudice?

    We take the lead in evolving the concept of "21st Century professionalism". By this I mean we promote to the domestic and business communities, the virtues of ethical behaviors being embedded in business practice, and the other numerous activities affected and regulated by law.

    Solicitors as a sectoral interest, need to take the front foot in defining their future role Susskind notwithstanding.

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  • A few years back I worked for a firm that went of business- took the pre-pack option and the 4 'directors' are still in IVAs. A previously well regarded firm of over 40 years standing until it decided to go 'commercial'- incorporated and all the usual BS marketing speak that went with it, daily income meetings, property/conveyancing became 'Real Estate' etc. Brought in a CEO with no legal background whatsoever (apparently he was good at 'networking' and as it turned out had lied about his academic qualifications which nobody checked) but I will always remember him saying 'It's a numbers game.' It is a people 'game'. Went bust a few months later but thankfully most of us had jumped ship by then- nearly £850k in debt including unpaid salaries to staff. A truly dreadful experience of what happens when a firm loses sight of its reason to exist and starts treating people like numbers.

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