Key Business Finance (KBF), the legal lender currently in administration, has been threatened with legal action by 10 law firms over advance payments made to the company.

The 10 firms feature in a list, compiled by administrators Ernst & Young last week, of 125 firms that paid a total of £850,000 in advance payments to KBF just before it entered administration. The list, part of the administrator’s statements of proposals to creditors, says that the 10 have threatened to ‘claim for damages arising from alleged breach of agreement’.

Publication of the report comes six weeks after KBF, part of Icelandic bank Landsbanki, went into administration [see [2008] Gazette, 16 October, 1]. According to the report, 1,600 law firms took loans from KBF. Many made advance payments to secure KBF loans that were never received. The largest such advance payment was £78,000, from Bristol firm TLT.

Ernst & Young declined to comment on whether advance payments would be returned, but a spokeswoman said: ‘The funds owed to KBF rank equally among unsecured creditors.’

Uncertainty also remains over the status of £57m in outstanding loans made to legal firms. Ernst & Young declined to comment on whether firms could be forced to repay loans earlier than stated in their original agreements.

KBF’s loan book will not be sold because offers for it were ‘below expectations’ the Ernst & Young report states. Instead, the administrators will collect repayments and distribute funds to creditors.

Problems with collecting loan repayments have also stalled the wind-down. KBF used HSBC bank accounts to collect repayments via direct debit, but HSBC froze these accounts when KBF entered administration.

The report says that £9.4m in repayments remained uncollected by 18 November, with HSBC holding a further £1.1m in frozen funds collected before the administrator’s appointment.

Some firms have asked to set off the value of advance payments against outstanding loans, but Ernst & Young said it has ‘not accepted that a right of set-off exists’.