Review of insolvency vehicle used in many distressed law firm sales favours voluntary scrutiny.

The proliferation of pre-pack buyout deals in the legal sector has helped preserve many jobs, but few would argue that it has done much for the profession’s image. Cobbetts’ above-board but below-the-radar takeover in February last year was perhaps the most controversial. 

Unsecured creditors were told to expect just 2p in the pound from debts totalling £41m, after DWF secured exclusivity for the transaction (‘several’ other suitors got nowhere). All this from a firm (Cobbetts) that was declaring itself a ‘steady ship’ just a few weeks earlier.

That deal prompted the solicitor representing Cobbetts’ pension scheme trustees to demand a review of how such deals are conducted. ‘The SRA’s perspective is to protect clients and clients’ money. But maybe [it] should have a responsibility to creditors as well as clients and partners,’ he told the Gazette.

Regulatory demands are such that it is impossible to run a law firm in administration for anything but the shortest of periods, making a pre-pack or liquidation the only options for a firm in trouble. Rules designed to support ‘stability’ thus have unintended consequences.

‘Recovery of 2p in every pound’ is not a phrase banks or landlords want to see near a large commercial law firm.

The SRA retorted at the time that protection of creditors was a ‘matter for mainstream insolvency law’. No matter. The government was already on the case, amid growing concern about lack of transparency in pre-packs and the fact that creditors are left out of the loop until a sale has taken place. A month later, it announced a review by a senior accountant, Teresa Graham.

Ms Graham reported this month, in terms that will have taken few by surprise given her experience as an adviser to the government on deregulation. There will not be legislation, but rather voluntary scrutiny by a ‘pool’ of experienced business people of those deals where a party involved is connected with the insolvent company.  

Connected parties will also be encouraged to complete a report saying how the company will survive for at least a year from the date of the statement; while valuations must carried out by a valuer who holds professional indemnity insurance. There should also be a proper marketing exercise undertaken before a sale (in the Cobbetts transaction, DWF warned that it would walk away if the business was marketed to others). 

Graham’s findings have met with two cheers from insolvency practitioners, who seem relieved that the report turns the spotlight on directors’ role in pre-packs and away from that of IPs. Speaking at an ICAEW conference last week, reports Accountancy Age, Graham said government should consider legislating if her measures aimed at cleaning up what she candidly described as the ‘scuzzy nature’ of pre-packs fall short.  

She did, however, strike one discordant note: stressing that the ‘dumping of debt will not be allowed’. To paraphrase one IP present, isn’t that the point?

Paul Rogerson is Gazette editor-in-chief