A new administrators’ report covering the closing weeks of a claims firm has lifted the lid on missed payments, creditor wrath and allegations of misleading financial statements.
Manchester-based Sandstone Legal entered administration in February when specialists from Smith & Barnes Insolvency Practitioners were appointed. They have now published the first statement of proposals and outlined details of the last days of the firm.
Sandstone Legal was incorporated in 2017 and specialised in flight compensation, PPI, housing disrepair and debt recovery. All claims were handled on a no win, no fee basis and the company sought funding from third parties to cover the costs of buying and progressing cases.
Director Andrew Settle explained to administrators that financial difficulties arose when Sandstone transferred a significant caseload from St Helens firm Hattons Legal Services. This also involved the transfer of £5.25m in liabilities, including a £350,000 debt owed to Medico-Legal Services which issued a winding-up petition against Sandstone in December.
Last July, the firm failed to pay interest due under a funding agreement with a creditor, who had provided £3m in funding. Sandstone did manage to repay £768,325 but was unable to fulfil assurances that there would be no further repayment breaches. The funder secured an injunction last November freezing the firm’s bank accounts and a court order was made to provide disclosures of housing disrepair claims.
The proceeds of the housing disrepair claims were supposed to be paid into a designated account and to the funder before the firm could use them. In accordance with the injunction, disclosure was given by Sandstone which showed that the proceeds of the housing disrepair claims were mixed up with other monies received by the firm and used to pay day-to-day expenses.
Litigation funder Truehaven SPV registered a charge in January relating to cash provided for PPI Plevin cases, but this has since been disputed. Settle then applied to the court to appoint FTS Recovery as administrators of the firm to facilitate a sale of the assets. But on review, a major creditor contacted another insolvency firm, Smith & Barnes, as it was unsure about the proposal to sell the business and assets to a connected company through a pre-pack administration. This creditor had immediate concerns including that Settle was trying to transfer the business to a company called Precision Limited, for which he is also a director.
A marketing campaign had been started to sell the business but lasted just a week before Precision made an offer to buy the Plevin claims only, leaving thousands of other cases unaccounted for. The proposal deal was for an initial £60,000 and four instalments of £10,000 each. The administrators note: ‘It was the view of a major creditor that this marketing campaign strongly favoured Precision as opposed to the overall benefit of creditors.’
The court rejected the pre-pack proposal from Settle and instead appointed interim administrators from Smith & Barnes. They were given access to the firm’s books and records and the power to protect and preserve all assets until a further order. The administrators’ report states that ‘several matters’ were identified during the subsequent weeks which warranted further investigation.
In February, administrators and their staff attended the firm’s offices to meet with Settle and the nominated solicitor manager. It became apparent then that the firm’s trading position was ‘somewhat different’ to what was expected. Settle and two senior members of Sandstone’s legal team informed the visitors that all staff members had either been transferred to Precision or made redundant. Sandstone had also exercised a break clause on the lease at the end of January and no longer had active trading premises.
The firm’s Proclaim system had been suspended due to ‘significant’ arrears under the licence agreements, limiting access to any details of cases or clients. The administrators said they were able to obtain some information from Settle but that ‘it became clear that not all information was forthcoming, and that key information had not all been provided at our initial meeting’.
The firm was placed into administration on 21 February. The sale of the business’ assets has not yet been finalised but a preferred buyer has been found. A different offer was rejected as it was largely based on proceeds from ongoing disrepair claims, which the administrators have established ‘could potentially be far lower than previously anticipated’.
Asset realisations are nevertheless estimated at almost £6m based on potential recoveries from work in progress. Unsecured non-preferential claims are valued at £12.8m, and administrators say that creditors can expect a dividend of 41p in the pound.
Administrators’ costs to date are estimated at £106,000, with incurred legal fees of £69,000 and solicitor manager costs of almost £34,000.
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