Cobbetts partners face scrutiny from SRA and administrators
4 April 2013 | By Joshua Freedman
18 September 2013
6 February 2013
4 Feb 2013
25 April 2013
15 February 2013
Cobbetts’ administrators are set to work with the SRA to assist a potential investigation into the conduct of the failed firm’s partners, a report by KPMG reveals.
The filing, published on 21 March, states that the joint administrators’ actions will include liaising with the legal watchdog “to assist their investigation into the members’ conduct” and “conducting the statutory investigations into the conduct of the members and management of the LLP”.
The administrators at KPMG will then report to the Department of Business, Enterprise and Regulatory Reform pursuant to the Company Directors Disqualifications Act 1986.
The SRA confirmed it was looking to see if there were “any issues we need to investigate”, noting in a statement a number of points of focus, including serious financial instability identified by the SRA, the protection of clients’ interests and money, and “investigating events with regard to follow up of any conduct issues”. It also estimated the cost of intervention at £6m had this action been taken.
North West firm Cobbetts went into administration in February with the bulk of its business taken over by DWF in a pre-pack deal (6 February 2013).
The administration will automatically end on 5 February 2014, but can be extended by an application to the court or creditors. The joint administrators will seek an extension if they cannot complete their objectives by 5 February next year.
The KPMG team said it would also manage the payment of any distributions to creditors and would consider placing Cobbetts into creditors’ voluntary liquidation if appropriate.
It will also take the necessary steps to move the case from administration to dissolution when it considers that no further distributions to creditors will be made and the administrators have ended their duties.
The filing confirms the pre-pack deal’s consideration of £3.91m, comprising £3.88m related to net debtors and work in progress, £30,000 for unencumbered office furniture and equipment and £1 each for seven asset types including stock, goodwill and IP.
Of this amount, £570,194 had been received at the time the report was published. The £30,000 relating to the unencumbered office furniture and equipment is due to be received shortly, while the balance will be paid in three installments of £827,826 on 30 April, 31 May and 28 June this year and a further £827,825 on 31 July.
In addition, the report states that any future claims made against Cobbetts’ professional indemnity insurance will be the responsibility of DWF’s insurers as the latter has acquired the failed firm’s assets. The administrators have requested that the LLP’s insurance broker cancel Cobbetts’ professional indemnity insurance policy. It confirms that a claim has been received from a third party arguing that any refund received is due to them, with the administrators currently investigating the position and taking legal advice.
The KPMG administrators incurred fees of £267,840 to 15 March for 774 hours at an average rate of £346 per hour, in addition to expenses of £962. No fees have been drawn yet, with any payments set to be approved at a creditors’ meeting at the Freemasons’ Hall in Manchester at 11am next Wednesday (10 April).
The administrators’ charge-out rates are set out as £565 per hour for partners, £485 for associate partners and directors, £450 for senior managers, £365 for managers, £250 for senior administrators, £185 for administrators and £115 for support individuals.
On top of this, KPMG has been paid pre-administration costs of £153,107 and disbursements of £987. Pinsent Masons’ legal fees as adviser to the administrators stand at £169,367, but these had not been paid at the time the report was put out. Counsel fees were £71,289, giving total pre-administration fees of £154,094 (paid by Cobbetts) and £240,656 (unpaid). Unpaid fees are also up for approval at this month’s creditors’ meeting.
Creditors wishing to attend the meeting must apply with a statement of claim by the previous business day.
The report confirms that the firm of 73 partners and 439 staff across four offices suffered a signifcant downturn in trading performance in 2009 due to the economic climate and the drop in corporate and real estate deals. It says the LLP had entered into expensive new leases in 2006 and 2007, which combined with the trading downturn led to a decline in profitability, cash pressure and an over-reliance on short-term funders.
It had failed in its attempts to sub-let empty space in its Manchester office since 2009 and began to experience increased cash-flow pressure around June 2012, which may have led to a breach of its banking facilities in October 2012.
It reached deferral agreements with its landlords, HMRC and certain retiring members in September and October 2012 to provde a degree of financial and cash headroom, but the report says the firm remained dependent on short-term funding from various sources.
In December 2012 and January 2013 Cobbetts was unable to secure full VAT and partner tax funding from Wesleyan Building Society (WBS) as the amounts were above WBS’s usual lending limits. The firm partially funded he VAT liabitlity of £1.5m through £1.2m from WBS and another funder, Syscap. It also sought to fund the partner tax liability of around £2.4m due in February 2013 through other short-term funders.
It also chose to “generate headroom” by requesting £2.5m from partners through a cash call and selling off debt collection subsidiary Incasso.
On 26 June 2012, KPMG was initially appointed to review Cobbetts’ cash-flow forecasts. On 20 September the accountancy giant was engaged to prepare a contingency plan and on 28 November to prepare a detailed plan. The SRA also became heavily involved.
In January this year the firm’s board concluded it would be wrong to take any more short-term funding and also cancelled the £2.5m cash call, instead investigating a merger or sale. Short-term cash-flow forecasts suggested the firm could only trade until 1 February 2013.
On 17 January KPMG was instructed in relation to the sale prcoess. Seven parties were identified as potentially having the ability and desire to embark on a takeover. The firm’s management also contacted DWF about reviving talks over a solvent sale after calling off merger talks in 2012 (31 January 2012).
However, DWF made an offer demanding a period of exclusivity to complete the transaction and said it would withdraw its offer immediately if a marketing process was formally kicked off. This prompted Cobbetts’ leaders to put the marketing process off. Several law firm then contacted Cobbetts and KPMG about a potential deal following press reports of the impending administration, but most were related to a potential acquisition of elements of the business rather than a full takeover.
Cobbetts management and KPMG chose to sell the entire firm to DWF as the best option for creditors, the report claims. The SRA also supported this approach.
KPMG partners Mark Granville Firmin, Brian Green and Howard Smith were appointed joint administrators on 6 February.
Separately, the report confirms that as a result of the DWF acquisition approximately 439 employees, who would have been made redundant had Cobbetts been broken up, were transferred to new roles under TUPE regulations.
The report also lists Cobbetts’ 44 ‘assured equity members’, four ‘defined equity members’, 25 ‘variable equity members’ and one salaried partner.
DWF was unavailable for comment.