Unsecured creditors are almost certain to recoup nothing from the UK’s biggest ever law firm collapse, the administrator’s initial report to creditors suggests.
KWM Europe’s assets ahead of its January demise totalled at least £37m, but were almost wholly comprised of work in progress and accounts receivable. Some of this has been sold at a heavy discount to departing partners and other firms, including Greenberg Traurig and DLA Piper, as part of what the report describes as a ‘pre-pack strategy’.
But the millions raised so far have been earmarked for secured creditor Barclays Bank, which is understood to be owed at least £25m.
KWM Europe had few other assets, Quantuma’s report discloses, since its Thames-side premises were leased and chattel assets consisting of furniture and equipment had little resale value.
The report directly addresses concerns about KWM Europe meeting its regulatory obligations with the Solicitors Regulation Authority.
Administrator Quantuma says one of the key reasons for the swift sale of assets was to minimise the risk of regulatory action, including intervention. Part of its remit has been to manage communications with the SRA, to ensure it was fully updated as to the intentions of KWM and to show evidence of contingency planning. This was carried out to provide regulatory reassurance that clients’ interests were being protected.
As at 30 April 2016 KWM Europe had more than 900 staff and 163 partners. The firm posted revenue of £177m in the year to 30 April 2016, but by the start of last year it had restructured to reduce overheads, with 20 partners leaving as part of this process. More partners then left of their own volition and a subsequent recapitalisation plan was vetoed after four senior partners resigned.
Once Barclays withdrew its support at the start of this year, administration was inevitable. Quantuma kept on around 45 staff to assist with the handling of what it called the firm’s ‘complicated’ affairs.
Quantuma says the pre-pack sale of most of the business has avoided the need for run-off insurance cover to be triggered and seen off a significant unsecured claim by indemnity insurers.
Sale contracts were issued to seven interested parties at the end of 2016, with two firms deciding to pursuing individual partner exit agreements.
The details of the fire sale included:
- Global firm Goodwin Procter bought WIP and accounts, and took on seven partners, for a total gross sales consideration of £2.2m.
- US-headquartered Greenberg Traurig received six partners agreed to pay 46% of WIP and accounts realised on work with a book value estimated at £3.6m.
- International firm DLA Piper transferred eight partners and took on WIP and accounts worth around £3m. Consideration is based on 40% of WIP and 50% of accounts received. The firm paid £457,000 upfront and deferred two further payments for later this year.
- Agreement with Sui & Lam LLP for KWM China, paying 50% of the book value estimated at £3.2m. On signature it paid £75,000 and four payments are deferred up to January 2019.
- Global firm Reed Smith transferred 12 partners and staggered consideration of WIP and accounts, paying 100% on the first 25% through to 10% of the final 25% realised. Value is between £1.7m and £2.2m.
- Shares in the Spanish business bought by existing partners, paying £51,000 initially and around £426,000 in future.
Talks continue over the disposal of KWM branch offices and agreements have also been made with around 40 individual partners for their departures. In return for their release from liabilities, they have agreed to buy WIP and accounts for a percentage of face value, realising around £5m.
Creditors are now invited to make their claims to the administrators, with proposals about their dividend likely to be made in mid-March.
Timeline – How KWM Europe came to grief
November 2013 – Merger with SJ Berwin
Early 2016 – Firm restructures to cut overheads – 20 partners leave and others follow voluntarily
September 2016 - Partners approve £14m recapitalisation, but plan is aborted after resignation of four senior partners resign (understood to be UK investments funds head Michael Halford, private equity partner Jonathan Pittal, corporate partner Andrew Wingfield and former European managing partner Rob Day)
November 2016 – KWM China proposes support package subject to Europe partners pumping in more cash and agreeing to a one-year lockin. Partners vote this down and more leave
December 2016 – KWM unable to meet January salary costs and partners’ tax liability
22 December – Firm files notice of intention to appoint AlixPartners as administrators to provide protection and enable asset sales
6 January 2017 – Primary funder Barclays Bank withdraws support
9 January 2017 – AlixPartners pulls out of administration due to lack of funding
17 January – Quantuma appointed as administrators, at which point the firm has around 5,000 clients and 12,000 live matters
Ongoing – Agreed sales of business and assets provide ‘best opportunity to preserving and realising maximum value for creditors’. Sales have also avoided need for PII run-off and thereby avoided a ‘significant unsecured claim by professional indemnity insurers’