Creditors bear £300m cost of law firm collapses
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.
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.