The curious case of Manches’ suicidal cashflow management and its eleventh-hour rescue by Penningtons
Manches’ 46 partners must have known something was up when HM Revenue & Customs (HMRC) contacted them over the summer.
The firm, already behind on its £715,000 VAT bill, failed to hand over partners’ personal tax liabilities by the July 31 deadline despite being given the cash by the individual lawyers. Its £6.4m overdraft was at its limit, its professional indemnity insurance (PII) was due for renewal and the intervention by the SRA’s solicitors was estimated to cost £2.5m.
When HMRC issued a notice of action two weeks before the firm went into administration, partners knew Manches had reached a dead end.
“By that point partners wanted out, whole teams were looking for the nearest exit,” recalls one source. “But the mood changed when [what were originally] merger talks reached a more advanced stage with Penningtons.”
According to sources, that shift came soon after Penningtons chief executive David Raine sat the firm’s partners down individually. Initially unaware of the firm’s financial situation or the speed at which it had to move – Manches got an extension on its PII cover by one month, to 31 October, while the firm explored a potential sale – Raine nevertheless provided the hands-on approach that was needed. For a firm basically starved of direction, he came across as just the medicine.
“Manches’ management had a very hands-off approach, with fixed-share equity partners left completely in the dark,” claims one insider. “As a fixed-share partner you would attend a meeting maybe once a quarter, and that’s it. There was also a feeling among equity partners that they didn’t know what was going on, that they were presented decisions by the executive committee for rubber-stamping.”
At precisely 5.28pm on 14 October Penningtons bought Manches for £500,000 and Raine became chief executive of new entity Penningtons Manches. It put an end to a “confusing and miserable” few months for the legacy firm but there was no party that night and senior partners on the Manches side have since refused to comment.
Having witnessed a slow-motion train crash in cashflow management, it is hardly surprising they didn’t fancy popping a cork and calling the press.
But one question still hangs in the air – can Raine and his team turn things around?
Raine takes the reins
The Manches/Penningtons story is hardly a romantic one. Penningtons was not Manches’ first or only choice – insolvency adviser Baker Tilly approached four firms, including Penningtons, about a possible sale, while a fifth was contacted directly by one of Manches’ two managing partners (London-based Melvin Pedro and Richard Smith in Oxford).
Nearly all those contacted were interested in a deal, but Penningtons was the only firm willing to take on all three of Manches’ offices – the third is in Reading – and move quickly enough.
According to a 13-page creditors’ notice filed by administrators PriceWaterhouseCoopers (PwC), one of the firms only wanted to take on Manches’ London practice, another offered to acquire the secured lending at a level that was not acceptable to Lloyds Bank, the firm’s largest creditor, and two others could not move fast enough to complete the deal in the given time frame.
The latter point was crucial. Flirting for too long could have led to the end of Manches, which was facing possible enforcement action by HMRC or intervention by the SRA. It desperately needed to buddy-up, and now was not the time to get picky.
The Lawyer revealed that talks had reached an advanced stage in mid-September, just weeks after they had begun and weeks before they would end.
“There were two outcomes available to the LLP [after mid-October],” reads the PwC filing. “To allow an SRA intervention, which would involve a transfer of client cases from the LLP to other solicitor firms and ultimately, the closure of the LLP, or a sale of the business and assets.”
Insiders on the Manches side initially insisted this was not a pre-pack administration (see boxout, below). That showed some loyalty, at least. But it is not how the administrators chose to word things.
“While Penningtons had explored a solvent merger with Manches, the extent of its financial difficulties meant a sale of the business ‘outside formal insolvency’ could not be achieved,” the creditors’ notice confirms.
If that is the case, what was Penningtons thinking? The day after the acquisition was announced Raine spoke to The Lawyer between visits to Manches’ offices – a two-day “roadshow-style” welcoming, he said. During that call he made clear the acquisition was less about financial stability and more the quality of Manches’ clients and lawyers – family partner James Stewart, who has worked on a number of high-profile divorce matters since joining Manches in 2006, no doubt among them.
“We thought of it in a longer term way,” Raine added. “We wanted to double in size in London and improve specific sectors such as corporate client, private wealth and technology.”
What’s the plan?
So if this is not the “toxic merger” one source claimed it was, how exactly is Penningtons going to turn things around? When The Lawyer contacted various sources to get more insight into the firm, few went into detail about its practices, clients or lawyers. Penningtons was instead praised for its management style and focus on operational matters – half of those on its six-strong management committee are non-lawyers: finance director Tim Wright, marketing director Rolland Keane and head of business services Franco Bosi.
“Penningtons wouldn’t have made this decision on the whim of one or two individuals,” notes one recruiter. “The firm is well-run – it has a clear sense of direction.”
Internal dialogue is already shaping up at Penningtons Manches, with one source going so far as to say there have been “thousands and thousands” of meetings as well as a detailed “organisational map” – whatever that might be, the firm didn’t elaborate – in the first month.
For most of legacy Manches’ 46 partners, particularly those who weren’t on equity, it looks like a step in the right direction.
But bad communication alone does not a £6.4m overdraft make. The crucial question in all of this is why Manches let its financial situation become so abysmal. Penningtons’ upfront payment, which excluded a debtors’ ledger (money owed to the business) of £6.2m, was lowered after administrators established that £2.3m of Manches’ £4.7m work-in-progress (WIP) was more than 120 days old and therefore difficult to recover.
“Economic conditions remain tough, meaning law firms’ clients are looking for ways to help their cashflow and therefore could be taking longer to pay,” Barclays head of professional services Tom Wood told The Lawyer during research for this year’s UK 200 report (see boxout, below). “Finding the right balance of client relationships and cash collection is paramount for firms.”
The strain on cash was, according to administrators, evident at the start of this year. In the 20-month period ending 30 August the firm had seen its average monthly turnover decline by £2.1m. In the four months before August administrators found that the firm’s “high cost base” had resulted in a net loss of £976,000. Manches finance director Richard Naylor left for immigration specialist Gherson that month, after two years with the firm.
The tension builds
But the financial stink bombs don’t end there. In addition to the insolvency issues, the SRA established that Manches had failed to properly account for accrued interest – estimated at around £165,000 – on its client accounts.
So what was done? Sources say the firm called in consultants and recruiters years ago to discuss the idea of getting rid of underperforming departments. Tensions are understood to have built over a number of years as the family and private wealth groups felt they had been carrying other areas, but the frustrations started and ended as just that.
Manches had a short-lived fling with former chief executive Judit Petho, installing the management specialist in 2010 in a bid to boost profits, only for her to leave the firm two years later.
“Manches hasn’t lived up to its potential for a long time,” Petho told The Lawyer in 2011. “If you don’t have strong leadership and don’t push people you lose track of where you’re going.”
Following Petho’s departure, Naylor’s role was expanded “to include operational and other aspects of the day-to-day running of the business”, along with HR director Marcia Mardner. London managing partner Melvin Pedro and Thames Valley managing partner Richard Smith also expanded their roles to implement the firm’s strategy.
And then there were the merger talks, most famously with now-extinct Halliwells but also with Shoosmiths and Mills & Reeve. (Penningtons, meanwhile, knows a thing or two about merger execution; it swallowed up Wedlake Saint and the rump of Lincoln’s Inn firm Dawsons in 2011. And in one peculiar twist, CMS Cameron McKenna’s head of banking and finance Rita Lowe acted for the administrators of both Halliwells – shortly after its merger talks with Manches in 2010 – and Manches.)
In hindsight, what the firm needed were some less dramatic steps such as cutting partners’ drawings. A spot of genuine belt-tightening all round could have had a positive impact on cashflow.
“The distinct factor between a successful and a non-successful firm is management,” stresses one legal consultant. “When firms fall on tough times you need someone to make the decision to cut drawings. But many of these senior partners have grown up in an era where the only way is up. There are lots of firms sleepwalking to extinction for this reason.”
If that’s the case, then let Manches be a lesson to the other zombie firms out there. And make no mistake, there are several.
Former partners find it irritating that the firm’s demise is often blamed on the exit of family partner Helen Ward, one of the UK’s leading divorce lawyers, who left for Stewarts Law last September. The real warning sign, they say, should have been the gradual build-up of partner resignations in recent years.
“It’s wrong to say [Ward] left and the firm fell apart,” says one source, pointing to the fact that she was the fifth partner to make the journey to Stewarts in three years (see The Departed, below). “Her exit followed a trickle of departures over a number of years.”
More recent exits include Ward’s former junior partner Nicola Wager, who joined Stewarts on 4 November, litigation partner Margaret Tofalides, who left for Clyde & Co in January, and head of real estate finance Rajan Shori, who quit for HowardKennedyFsi in March.
That is likely to be the end of the departures for some time, given that most had to sign lock-in agreements of varying lengths at the time of the acquisition, some of up to two years.
“We wouldn’t call it a lock-in, but conditions were agreed,” a Penningtons partner close to the deal said last month. “These were agreed individually – there was no sweeping decision.”
In the end, this is not a horror story with lessons to learn about lack of work, unhappy partners or failed merger talks. It is a story about the calamitous impact of being abysmally bad at cashflow management. Thrift is in.
- Head of trusts and real estate Alan Poulter ‘retires’ in December 2006, only to come out of retirement to join Henmans in January 2007.
- Technology and IP head Alexander Carter-Silk leaves in January 2007 for Speechly Bircham.
- Head of employment Jonathan Maude leaves in July 2008 for Lovells and, in 2010, moves again, to McGuireWoods.
- Head of technology and IP Richard Dickinson, appointed to succeed Carter-Silk, quits in July 2008 for Arnold & Porter.
- Property and construction head Robin Grove quits in April 2009 for Speechly Bircham.
- Head of litigation Clive Zietman and litigation partner Andrew Shaw quit in April that year too, bound for Stewarts.
- Family partner Debbie Chism joins Stewarts Law, also in 2009.
- In 2010 commercial litigator Keith Thomas quits for Stewarts.
- Star family partner Helen Ward leaves for Stewarts in 2012, a move that sends shockwaves through the family sector.
- Manches chief executive Judit Petho also departs in September 2012, after two years
- in the role.
- Litigation partner Margaret Tofalides leaves for Clyde & Co in January this year.
- Head of real estate finance Rajan Shori quits for HowardKennedyFsi in March.
- Finance director Richard Naylor leaves for immigration firm Gherson in August.
- This month, family partner Nicola Wager hightails it to Stewarts.
Why a pre-pack?
Chris Williams, partner, McTear Williams & Wood
The term ‘pre-pack administration’ is literally that – the pre-packaging of a business before it goes into administration and is sold on. A buyer is found and terms agreed before the wider world is aware the company is going into administration.
From the insolvency practitioner’s point of view this is often the way to maximise the sale price, minimise the cost of trading the business while finding a buyer and getting a better return to creditors. This is possibly because the value of a business lies in its people, contracts and brand – the value of which can fall quickly if a company goes into administration.
However, creditors see a pre-pack as a way for unscrupulous directors to ditch the debt and restart debt-free, putting them at an unfair trading advantage. In an attempt to satisfy creditors’ hostility, the insolvency profession has to comply with a new rule that is issued to creditors as soon as the transaction completes.
This includes demonstrating that it was the best deal for creditors, details of the valuations and marketing exercise that went on and the alternatives that were considered.
WIP cashflow into shape
Manches was one of the few firms not to reveal its year-end work-in-progress (WIP) and debtor day levels for this year’s UK 200 report, despite providing the information the previous year. In 2011/12 it recorded average WIP of 42 days, debtor days of 117 and a lockup target of 120.
A report by the firm’s administrators might explain
why it chose not to divulge this data. In a creditors’ notice PricewaterhouseCoopers
(PwC) established that £2.3m of Manches’ £4.7m WIP was more than 120 days old and therefore hard to recover.
This highlights the extent to which firms have to clamp down on their housekeeping to stay afloat, but what exactly is WIP? The term is used to describe a matter that is underway, but for which the client has not been billed. Meanwhile, debtor days reflect the length of time it takes a firm to collect money from the client once the bill has gone out, while ‘lockup’ describes the total time involved in the process.
Experts say it is this data that really shines a light on how financially robust a firm is and how well it is managed.
“More than ever, firms and their fee-earners need to be aware of the importance of focused lockup management,” Barclays’ head of professional services Tom Wood told The Lawyer last month. “Cash collections have to be a priority for everyone as lenders and regulators look more closely at the borrowing levels of firms. A simple improvement of a few debtor
days can result in considerable reductions to working capital line dependency.
“The ability to convert WIP into cash is made a key performance metric for individuals in those firms, with financial reward dependent upon it. Lockup management is an end-to end process, starting at first contact with a potential client.”
For a fuller list of WIP among the UK’s top 200 firms visit www.thelawyer.com/UK200
A tax of the zombies
When it came to the last days of Cornish firm Follett Stock the writing was on the Twitter newsfeed. Sometimes 40 characters is worth 1,000 words and @OwlLocksmith’s tweet on Monday 4 November said it all: “so much for the end of the recession. Just got back from Truro after lock change on the Follett Stock building for the receivers. Ouch!”
The firm had been struggling with hefty bills for a long time and was hit with a winding-up petition by HM Revenue & Customs (HMRC) in the summer. This demanded that the firm pay its six-figure tax bill by 30 September, but Follett Stock managed to adjourn payment until a
21 October court hearing.
During that time rumours swirled around the firm and questions were asked about the switch in directors from Chris Lingard and Martin Pearse to Lingard’s wife Fiona Higgins and Pearse in the summer.
The firm spent September and October seeking a suitor to buy it and take on its live cases, preventing the need for SRA or court intervention, but to no avail.
By mid-October it was still without a willing partner for a pre-pack administration, half its offices were shut and a High Court date was looming. The SRA continued to hold off intervening in the firm, hoping it could dispose of its case or makes a sale. But when 21 October arrived the firm was out of time.
Without another firm to take it over in a pre-pack administration and unable to pass on its cases, the High Court wound up Follett Stock LLP and Follett Stock Holdings Ltd, and appointed KPMG as the liquidator. The 30 remaining staff were immediately dismissed and all assets handed over to KPMG to begin paying back its multiple creditors.
The SRA intervened two days later, appointing Southampton firm Lester Aldridge to take on the firm’s live cases and client cash.
Depending on the number of creditors involved, the end of Follett Stock could spell a bleak midwinter for more people than its lawyers.