One of the self-styled new breed of law firms collapsed as income plummeted and consultants fled the stricken business, administrators have revealed.
A notice of proposals published at Companies House this week details how Cubism Law spiralled from relative success just a year ago to a company that could no longer absorb falling income and which owed £2m to creditors.
The company, founded in 2003, was one of a handful of challenger firms where virtually all fee-earners were treated as consultants and received around 60-70% of income from their own cases.
But Cubism began to experience cash flow issues early this year as the business model was not providing sufficient working capital to meet trading costs.
To support cash flow, the firm took the decision to withhold part of the payments due to consultants under their agreements, which resulted in several departures and further pressure on revenue.
Efforts to bring in new consultants failed and, with uncertainty about the futures of those that remained, no buyer could be found for the business.
The administrator's proposals show the accounts were relatively healthy prior to this year’s collapse. Turnover year on year increased by 37% to £3.7m in 2017/18, but over the same period profit margins halved.
For 2018/19, draft accounts show annual turnover plummeted by 57% to around £1.6m.
By the time of Quantuma’s appointment as administrator in July this year, most consultants had found other legal entities to join, and Cubism was already in the process of moving live and historic client data to consultants’ new firms. With no realisable physical assets remaining, it ceased to trade immediately upon the administrator's appointment.
The report confirmed Cubism has ‘significant’ balances of outstanding work in progress following the departure of the consultants. In general, the agreement is that these balances will be collected by the consultants, with 60% of the funds collected to be paid to Cubism and the rest retained by their new firms.
The firm owes more than £2m, mainly through its £1.67m in unsecured claims from trade and expense creditors – many from the legal sector – and consultants. Five-figure sums are also owed to employees, the banks, and HM Revenue & Customs. It is unclear at this stage what, if anything, these parties will receive.
In terms of legal costs, national firm Pinsent Masons was instructed by the company before the appointment of administrators to advise all parties. It was agreed their services would be provided on a time costs basis and £50,000 of costs were incurred in the pre-administration period. A further £132,840 was incurred post-administration with regard to the firm’s appointment as solicitor manager, of which £20,000 has already been paid.
Joint administrators’ fees are expected to reach £75,000.