Focus: Orchard Solicitors, Til debt do us part

Law firms are going under. In the current economic climate those that expanded too quickly during the boom and placed big bets on practice areas such as real estate, are edging towards the cliff edge of insolvency.

With the market in such an awful state, it is a bit late for cautionary tales. But the story of how West End firm Orchard Solicitors found itself calling in the administrators makes for instructive reading.

“I’m happy where I am at the moment, but there’s no denying that it’s been an unhappy end for the practice,” comments one of the firm’s founding partners, who left before Orchards hit administration. “It’s a sign of the current times. Banks are getting a lot more nervous with ;law ;firm ;finance ;and are pulling loans more quickly.”

The firm followed the classic route to ruin, via overexpansion, debt, cash calls and partner bust-ups and ­departures, leaving one of its partners saddled with more than £250,000 of the firm’s £12m debt.

Payback time

The Lawyer has obtained details of the proposed individual voluntary arrangement (IVA) of this partner. Like all IVAs, it details just how a person intends to pay off a debt, and is an alternative to bankruptcy.

The document highlights the ­perils of law firms as business ventures in their own right. Extremely profitable in boom times, law firms can ­bankrupt their owners during sharp downswings. They require capital to run, with the debt often funded from the partners’ own pockets.

We will start at the beginning of Act I. The partner, let us call him John Doe, joined Orchards as an equity partner in 1997. The firm had seven partners, growing to eight by the year 2000, and boasting a turnover of £5m built on strong commercial ­litigation and property practices.

The firm’s total borrowings, including partnership loans, totalled no more than £1.8m. Everything was rosy. But the story begins to turn in 2000. In October of that year Chicago firm Altheimer & Gray took the entire corporate finance team to boost its London office. The group had brought in around half of the firm’s billings and represented 40 per cent of the 10-strong partnership.

Head of corporate finance Nick Davis left with fellow partners Jon Lovitt and Susan Breen, as well as property partner Nicky Stewart. They acted for big-name clients such as recruiter TMP Worldwide, ­monster.com, Unison, Tate & Lyle and ABN Amro.

Founding partner David Orchard told Barclays, the firm’s then bankers, what had happened. The bank ­reacted by effectively freezing the firm’s accounts and making formal demands ;for ;the ;immediate ­repayment of all loans.

“The remaining partners of Orchards were left with the problem of retaining the majority of the firm’s fee-earners and support staff and premises in the face of a rapidly and significantly eroded level of turnover in the medium term,” notes Doe in the IVA document.

Growing problems

So the curtain falls on Act I with Orchards starting the new century with fewer partners and revenue possibilities. The lights go up for Act II a year later, with the firm falling deeper into debt to fund an expansion push.

From the end of 2001 to the start of 2004 the firm grew steadily, reaching a peak of 16 partners, including salaried partners. There was talk of launching a New York office. Well-paid City big shots were brought in to boost the firm’s international clout.

During these years Orchards’ partnership swelled relentlessly. In 2002 the firm brought in four partners in one go. Orchards took MCI WorldCom’s international employment counsel Lynne Burns; Richards Butler media litigation partner Paul Sutton; Beveridge Milton partner Nicholas Mayles; and Shoosmiths property head Grania Thompson.

A year later the firm hired former London Stock Exchange chief ­executive Gavin Casey as special counsel to the partnership.

At the start of 2004 Orchards opened its partnership to technology, media and telecoms specialist Mark Cranwell and corporate lawyer David McLeod Smith, who joined from the now defunct Coudert Brothers and KLegal respectively.

But trouble was brewing behind all the bullish press statements and exciting headlines.

“The firm’s growth during this period was financed at the expense of the equity partners,” writes Doe in the document. “Drawings became very sporadic and substantial cash injections were made.”

The partners borrowed heavily. In 2001 Doe took a £166,000 line of credit from Arbuthnot Latham Bank. In 2003 he borrowed another £190,000 from Bank of ­Scotland (now HBOS).

And the interest on these loans was not the only cost.

“The increasing pressure on partners to offer continued cash support to the firm, while at the same time receiving irregular drawings, led to increasing friction within the firm,” comments Doe.

Split decisions

Partners began to leave the firm in droves. Equity partners resigned
and salaried partners were made redundant until the firm ceased to take on new business in December 2005. Equity partners Richard Beresford and Jack Czyzowski left Orchards, prompting the remaining four equity holders to join Brayton & Graham, forming Orchard Brayton & Graham (OBG).

The curtain for Act II goes down and Act III begins with OBG facing an uncertain future. The historic debts continued to haunt the firm. The partners hoped that the legacy debt facilities would be paid off with a concerted effort to track down unpaid bills.

“As is often the case when firms fragment,” writes Doe, “the debtor book did not produce the level of return expected and clients of ­former partners or employees of the firm found almost every excuse to avoid payment.”

Around this time OBG took out a £1.5m line of credit with Bank of Scotland, secured by personal notes from equity partners. Cashflow remained a problem at the firm and “personal drawings again became very sporadic”.

OBG was forced to move offices after the firm’s landlord decided it wanted the space for its own use. The firm’s new landlord insisted on a large rent deposit and the space needed renovating and refurnishing. A ­number of lenders financed the move with asset-backed loans, which again required more personal guarantees from partners.

The firm reached breaking point in 2007. Worried about the lack of improvement in OBG’s overdraft position, and the poor debtor ­colletion rate, HBOS held warning meetings with the firm. The bank cautioned the firm that it would exercise its rights under the ­partners’ letter of credit that secured OBG’s borrowings.

In March 2008 OBG went into administration and its business and assets were sold to another firm, Cameron Banfill, which became OBG Cameron Banfill this year.

The legacy OBG firm left more than £12m of outstanding debt, with former ­partner Doe attempting to at least pay off a chunk of it. Doe has a £250,000 bill to pay, with creditors ranging from ING and Investec to IBM Finance.
The history of Orchards and its dependence on easy credit has had very real consequences for its former equity partners.

The debt that funded the firm’s expansion, and the optimism that this credit could be turned into ­profit, now hangs like a millstone around the necks of the former partners.

Orchards was not the first, and it will not be the last.