A Manchester firm posting £1m-plus annual turnover went out of business after the bank pulled the plug on increased lending, documents have revealed.
According to a statement to creditors filed last week with Companies House, EOS Law owed a total of £2.3m to creditors and members when it went into administration at the end of last year.
The boutique LLP, founded in 2010 by former DLA Piper partner Simon Woolley, made profits of almost £700,000 over its final two financial years on turnover of nearly £3m. Members were paid a total of £563,000 in those years.
The statement, prepared by administrator BDO, shows the firm was helped to start through £500,000 made available by NatWest bank. This was divided into a £250,000 loan repayable over four years and a £250,000 overdraft facility.
The statement notes that Woolley reported the first half-year performance of the business was ‘ahead of plan’ and that a request was made for additional working capital.
However, in December 2011, ‘NatWest confirmed that they were unwilling to provide additional working capital facilities due to a change in the RBS group credit policy for law firms’.
Woolley and Marchdale Limited, a company connected with his family, made available capital and loans to EOS of £230,000 to cover the shortfall.
But when attempts were made to refinance the NatWest debt with another bank, the statement to creditors noted this was impossible due to the early stage nature of the business, the lack of profitability and a ‘general move away by banks from lending to law firms’.
Following the collapse of merger talks with a national firm last summer, the business attempted to cut its costs in September by putting fee-earners on a four-day week and making redundancies.
But after discussions with BDO at the end of that month, Woolley took the decision to enter into a formal insolvency procedure.
The firm’s work in progress was divided up and sold to national firm Ward Hadaway and Kevin Philbin, a partner at Manchester firm Atticus Legal, for £83,202 and £10,000 respectively.
In all 17 people were made redundant, with some leaving in October and others working for the skeleton firm until December.
The creditors’ statement reports that at the date of administrators being appointed, NatWest was owed almost £280,000 before any outstanding interest and charges.
Almost £370,000 was owed to HMRC, £464,450 was owed to Marchdale and outstanding rent and service charges came to £118,261.
Administration fees for the two weeks it took to handle EOS Law's affairs were billed at £12,163.
A spokeswoman for RBS denied that the bank had changed policy about how decisions are made with regard to lending to law firms.
She said: 'Whilst the bank's lending policies are reviewed periodically to reflect economic and market conditions, our lending decisions are primarily based on the ability to service debt.
'We are holding firms accountable for the prudent financial management of their businesses. That involves requiring firms to be disciplined in their working capital management, regularly billing and collecting, having prudent levels of capital in the business, and not paying partners from debt whenincome has not been earned and converted to cash.'
She added that RBS is still keen to lend to law and is 'very much open for business'.