The interim manager handling the wind-down of Yorkshire firm Atteys has alleged that the successor practice rules (SPR) allowed ‘the professional indemnity insurance (PII) tail to wag the profession’s dog’.

The SPR ensure insurance is in place to cover claims against firms that no longer exist, but whose business has been taken over by other firms. This liability can be a serious risk to successor firms, especially if the insurance cover carries a large excess.

The risk was considered too great by the firms that expressed an interest in buying parts of Atteys, with deals often vetoed by PII insurers, according to restructuring specialist Mark Feeney of Consergo.

In February, said Feeney, Atteys received 60 expressions of interest and many overlapping offers for parts of the business. ‘The bubble burst on 26 February,’ he said. ‘One by one the bidders pulled out, citing SPR, often with PII insurers vetoing the deals.’

Feeney added that 120 principals and staff were only paid until 28 February, so Atteys was left with days to find a home for its clients.

On 8 March, when ‘the vast majority of fee-earners and 99% of client files had been accepted by other firms’, the partners asked the Solicitors Regulation Authority to intervene in the firm.

Feeney said: ‘The SPR need to change. A situation has arisen allowing the PII tail to wag the profession’s dog. Unless a firm has an exemplary PII and disciplinary record, or the commercial advantages are so significant to an acquiring firm, it is almost impossible to save a stressed practice by the traditional method of merger, acquisition or sale.

‘Aside from a pre-pack sale back to principals or a partnership voluntary arrangement, which enables a partnership to make a proposal to creditors regarding payment of debts (neither usually a great option for creditors), the only remaining option is a messy and stressful splintering process.

‘This creates huge stress for clients, staff, regulators and the Legal Services Commission, and gives the lowest return to creditors. This is so difficult to achieve in practice that it will in my view lead to a large increase in interventions.’

Last Wednesday, Law Society chief executive Desmond Hudson wrote to Council and local law societies updating them on Atteys.

He said: ‘The SRA estimates that there are some 450,000 old files within the various branch offices that have not been appropriately archived and managed, more than 20,000 files containing wills and/or documents of title but that the vast majority of live client files have been transferred to other firms.’