Claims Direct has come crashing down to earth. As with all good tragic characters, fatal and inescapable flaws have caused this one-time darling of the London Stock Exchange to self-destruct. Investors' rocky love affair with the personal injury (PI) revolutionary/ambulance-chasing scumbag (depending on your point of view) finally came to an acrimonious end earlier this month.
Claims Direct, whose shares had traded for as much as £3.60, called in the administrators when the price fell to a dismal 3.25p. First National Bank, which provided loans to customers to purchase their after-the-event (ATE) insurance premiums, put the final nail in the Claims Direct coffin. It called in the receivers. And while some commentators possessed of increasingly smug hindsight say they knew it would happen, the remarkable fact is that a number of law firms did not.
At one point, Claims Direct had as many as 350 firms on its panel, although earlier this year that was reduced to around 30. Either way, a significant number of firms have lost a client. If that were not cause enough for worry, consider the small matter of Claims Direct's 'investigation fee'. For every claim passed to a panel firm, Claims Direct is due a fee of £395.
This in itself is a dubious interpretation of Law Society rules concerned with paying to receive instructions. That point aside, Claims Direct is owed substantial sums in outstanding fees. As long ago as November, the company estimated that overdue debts from law firms amounted to at least £10m. Unfortunately for those firms, where Claims Direct may have delayed recovery to ensure smooth working relationships, the receivers will have no such civilised qualms. Law firms must stump up the cash sooner rather than later.
Claims Direct chief executive Ronnie Henderson laid the blame for the company's demise squarely at the door of liability insurers; but lawyers such as Andrew Parker, a partner at Beachcroft Wansbroughs, who acts for insurers, argues that this simply is not the case.
Liability insurers have a right to protect their interests when they see a company seemingly mandated to take money from them home into view. The Claims Direct model had one telling flaw – the case law on whether ATE premiums are recoverable from defendant insurers is far from clear. As a result, when the company started to drum up increased trade through aggressive advertising, liability insurers saw the writing on the wall and refused to pay what they deemed an excessive premium.
While the issue remained and still remains unclear, Claims Direct sought to take its cut directly from the damages awarded to claimants. Unsurprisingly, this led to a campaign in the national press and television to name and shame Claims Direct. Claimants sometimes found themselves out of pocket despite winning their case. The number of cases handled by the company dropped significantly and Claims Direct found itself staring trouble in the face.
Amid this catalogue of mismanagement, it is difficult to see who comes out with any credit. Essentially, the only people with anything to smile about are founders Tony Sullman and Colin Poole, for whom Claims Direct has been a nice little earner. Both made a fortune when the company floated, sharing around £60m.
As Claims Direct's fortunes waned and investors began deserting, Sullman and Poole, now in non-executive positions, offered 10p per share to buy the company back. They then sold those shares to incoming investor Simon Ware-Lane for prices ranging from 16p to £1.20. Sullman and Poole managed to sell the same company twice, making substantial sums twice over.
Poole, who has since returned to his former firm of solicitors Poole & Co, benefited further when Claims Direct severed its formal ties with the firm. The company had to pay £1.5m to buy Poole & Co out of exclusive rights to nominate solicitors and vet cases. Poole & Co subsequently remained on the Claims Direct panel and has submitted a claim against the company for unpaid bills amounting to more than £200,000.
But it's likely that Poole & Co will join the unsecured creditors list and it seems that for once Poole might be thwarted in his efforts to milk money out of his cash cow. Perhaps he could just dip into his pocket and hand over the cash.