A failed group litigation and the Jackson civil litigation reforms sent an £8m national firm tumbling towards administration, documents have revealed.
First Stop Legal Services, trading as GT Law Solicitors from a base in Liverpool, entered administration in October after income plummeted in 2014/15.
At its peak in 2013 GT Law operated from 20 offices nationwide and employed more than 100 people, a statement of administrator’s proposals posted by Companies House reports. The firm posted turnover of £7.9m for the 2013/14 financial year.
But following restrictions on the personal injury sector imposed in April 2013 by the Legal Aid, Sentencing and Punishment of Offenders Act, turnover dropped to £6.7m.
In 2012 the firm became involved in a large group action following the Sonae chipboard-plant fire in Kirkby, Merseyside and secured 5,000 clients – the second-largest client base arising out of this action.
Court proceedings were issued against Sonae and test cases chosen by the defendants were heard in June 2015.
When the presiding judge dismissed the cases, the decision placed the firm under financial pressures owing to the ‘significant working capital’ invested in funding the action, the statement said. The firm was also referred to the Solicitors Regulation Authority over its alleged conduct during the litigation process.
The administrators added: ‘The company’s financial position was further adversely affected in 2015 as a direct consequences of the introduction of the Jackson reforms.
‘Given that the business was operated solely in the personal injury legal market, the reforms would have a direct and material impact on future profitability given the current structure of the business.
‘Historically, the company sourced its work through various marketing arrangements with referrers, however, following the Jackson reforms the company’s workflow fell dramatically.’
The decision was taken to either put the business up for sale as a going concern or break it up and sell it to various parties. The first option was not considered feasible as it would have created bad publicity that could have led to intervention by the SRA.
Instead three firms were found to buy different sections of the company’s files and a pre-pack administration was arranged through administrator Quantuma. The live files were transferred in October and the remaining 11 employees made redundant.
The administrator’s statement confirms that the firm had £1.7m of work in progress and trade debtors, which are likely to realise £950,000.
The biggest debt at the time of administration was to third-party funder HTG Ventures. It was owed almost £4m.
The estimated total deficiency for members is estimated at more than £3.5m. HM Revenue & Customs is owed around £190,000.
Pre-administration costs come to around £43,000, of which £18,000 are due to law firm Mishcon de Reya for legal costs.
Mishcon de Reya and Ashford Solicitors are also owed more than £73,000 in total for pre-administration expenses.