Hammonds – Payback Time?

When Hammonds rev-ealed last June that it was suing 14 of its former partners for £3m of overdrawings, one of the firm’s insiders predicted that “there’s going to be an almighty spat”. His forecast has come true.

Hammonds - Payback Time? When Hammonds rev-ealed last June that it was suing 14 of its former partners for £3m of overdrawings, one of the firm’s insiders predicted that “there’s going to be an almighty spat”. His forecast has come true.

A war of words broke out last week, as reported by The Lawyer (6 October), when former partners spoke publicly for the first time, accusing Hammonds of allowing the case to drag on longer than was ­necessary.

Seven of the eight former partners, who are being represented by ­Addleshaw Goddard, took the ­decision to break their silence, as they felt information had leaked out painting them in a negative light.

Former Hammonds partner Stephen Tupper, now at Watson Farley & Williams, says they felt the need to speak out after being portrayed as unreasonable because 15 of the 23 ­former partners had already settled.

“We need to deal with this ­suggestion that, because several partners have settled, we’re the evil-doers, the penny pinchers, and we’re the few that are unreasonable,” says Tupper, who speaks on behalf of the whole rebel group. “We aren’t ­maverick troublemakers looking to forestall the inevitable. We have a proper case and we’re going to fight it properly.”

Even before the former partners decided to speak out there were rumours that Hammonds had been leaning on partners to pay up. ­Tupper accuses the firm of “bullyboy tactics”. “It’s total war as far as they’re ­concerned,” he claims. “Not a single one of the ­partners that have settled with ­Hammonds have ­settled on the basis that Hammonds was right.”

The money at stake, says Tupper, “affects how we can educate our ­children, whether we can still afford to stay in the houses that we stay in and so on. For Hammonds it’s simply taking something out of the ­marketing spend.

“So when faced with the litigation and the tactics that Hammonds has deployed, some just haven’t wanted to put their families through that.”

However, Hammonds Leeds chief Simon Miller, who is representing the firm, says Hammonds has approached the repayment of ­overdrawings on “the basis of ­fairness and equality of treatment between affected partners.
“The agreements reached with all former partners have been amicable, notwithstanding that the process with them, as with all affected parties, has been difficult.”

No surrender

Tupper says that in his case it is not about the money, as the claim against him is the smallest, at £92,642. He will not surrender because he believes the former partners have a strong case.

“Given that I was one of the voices of reason in Hammonds, those who still know me at the firm should be worried I’m still in this litigation,” he argues. “They’ll know that if I’m still in this litigation it’s because we’ve got a sensible reason for being in it.”

The former partners believe their arguments will see the court side
with them and will highlight that ­Hammonds is looking into what ­Tupper terms an “abyss” as a result of this litigation.

Hammonds see this as “a simple debt collection matter”, stress the ­former partners.

The ex-partners’ claim that ­Hammonds had misrepresented the financial situation while they were at the firm, and they are therefore not liable.
The firm called for summary judgment “on the basis that [the ex-partners] have no defence in law to a large part of the claim against them”, according to Miller.

The ex-partners disagree. “It’s not just a simple matter of collecting money from us,” Tupper insists.

The rebel group questions why Hammonds would choose to go for a summary judgment when it could have made it a preliminary issue.
“If you’ve got confidence in your point, you make it a preliminary issue,” argues Tupper. “But with the summary judgment you can fight it another day.”

Hammonds says it has full ­confidence in its position. “These applications [against the former ­partners] seek summary disposal of a large number of claims made against Hammonds, which we believe are made upon fundamental errors of law and in relation to which it is ­inappropriate to comment further,” says Miller.

Partnership deed

At November’s forthcoming three-day case ­management conference the two sides have agreed that a preliminary issue, as to the meaning of the partnership deed, needs to be resolved.

As part of this, Blackstone ­Chambers silk Charles Flint QC for the rebel group will argue that “an accounting” should be ordered, which will see the court pick through Hammonds’ accounts with a fine-tooth comb to trace all transactions and to pinpoint where the money has gone.

To support their argument the ex-partners will rely on the Hammonds partnership deed – but so will ­Hammonds to reject the claim.

It is going to come down to which rival interpretation sways the court, says Tupper.

“You have to remember that, when they [Hammonds] were crafting the deed, they weren’t thinking about the business going south, they were expecting the business to go north,” he says. “They didn’t want to be ­sending us a letter saying, ‘oh, by the way, we owe you money’. That’s the reason why they crafted the deed in the way they did – to ensure they didn’t have to cough up. They didn’t think that they’d have to grab back.”

The former partners’ argument is simple. If former partners are not entitled to income after leaving the firm, why should the partners pay for debts accounted for after they have left?

If the rebel group win this point they say it will see Hammonds’ ­financial structure out in the public domain and will show the state of the firm’s accounting system at the time.

If the court comes to a different conclusion from Hammonds’ accountants PricewaterhouseCoopers, the ­former partners say it will have a ­massive impact on the position of the current partners and could lead to ­former partners who have settled ­looking to renegotiate, if allowed by the terms of the settlement.

“This will then ripple through the accounts going both forward and back,” says Tupper. “It means, in regards to current partners, if we win, we’ll win, then everything that they earn and have earned will feel a little fake.”

Full disclosure

Meanwhile, the court has ordered Hammonds to disclose ­documents to back up the firm’s claim to the repayment of overdrawings for the 2003-04 and 2004-05 financial years.

It was back in 2005, when the ­former partners first asked for disclosure after receiving what Tupper calls a “relatively bare letter” explaining that the accounts were being revised and they would have to pay back any money the firm felt it was due.

Hammonds says that, until now, it was not able to provide the documentation due to confidential information being released to the legal press.

“Copies of all documents have been provided, but their [the rebel group’s] position as set out in their defence remains that they owe ­nothing to their former firm,” says Miller. “In so doing they seek to put themselves in a more advantageous position than all their former partners. We believe that to be an unreasonable and untenable position.”

The ex-partners contend that Hammonds was stalling, giving them another reason to stay in the litigation.

“Hammonds ;declined ;the ­invitation to explain why, and as ­anybody would be, you become a ­little suspicious that perhaps they’re not being totally free and frank with us,” says Tupper.

In ;addition ;to ;getting ;the ­requested documentation, the ­former partners were awarded costs. “They’ve been forced to pay £50,000 on account pending the cost ­assessment in relation to the ­disclosure actions,” reveals Tupper.

The silk road

Hammonds sees the disclosure hearing as a regular part of litigation and so does not feel put out by the court’s order. The firm can also be confident in its position, with almost two-thirds of its former partners settling.

Back at February’s hearing, ­Hammonds’ silk, Alan Steinfeld QC of XXIV Old Buildings, argued that the former partners’ claim against the firm, that it misrepresented the financial situation, could not be heard, as they were then part of the partnership and so could not sue themselves.

Steinfeld, however, told the court that any misrepresentation should be against particular individuals.

This led to the ex-partners adding Hammonds managing partner Peter Crossley and the estate of former ­senior partner Richard Burns, who has since died, to their claim.

In relation to suing the Burns estate, Tupper says that when they filed Burns was ill, which was unfortunate. “We knew that he was unwell, but no more than that,” he says. “It was just normal litigation rhythm. There was nothing else behind it other than we’d been invited to take this alternative route by their QC.”

No way out

At the time of writing, Hammonds has not had any luck so far in throwing out the former partners’ claim and is still pursuing the settlement avenue.
“It remains the hope of all the ­partners in Hammonds that its former partners will come forward with fair and reasonable proposals, which can form the basis for a resolution of the claim before these applications come before the court, and that an amicable resolution can finally be reached,” is Miller’s simple statement.

Amicable? ;That ;does ;not look likely.

The story so far

February 2005: Hammonds forced to dump its auditors Fletcher Greenwood & Co, a two-partner firm in Bradford, in favour of PricewaterhouseCoopers. In ­addition, the firm orders its partners to repay £3m of ­overdrawings for the 2003-04 and 2004-05 financial years.

July 2005: Former Hammonds partners prepares to sue the firm as it emerged that the auditors discovered a revenue shortfall of £8m for the
2004-05 financial year. ­Proposed changes in ­accounting policies, such as averaging out cost over time, were abandoned.

August 2005: Senior partner Richard Burns confirms that he was stepping down from his role at the end of the financial year after only one year into his second three-year term of office. Former managing partner Chris Jones negotiates his ­departure from the firm.

April 2007: Hammonds managing partner Peter Crossley, through the pages of The Lawyer, threatens legal action against a group of former partners who had failed to agree to repay overdrawings.

June 2007: Hammonds sues 14 former partners who it alleged owe the firm money, while the former partners also starts litigation for ­disclosure of documents. Hammonds partner Simon Miller takes on the litigation for the firm and instructs Alan Steinfeld QC of XXIV Old Buildings, while most of the ex-partners instruct ­Addleshaw Goddard.

February 2008: The court orders Hammonds to disclose documents to the former partners after a case management conference hearing.

June 2008: Hammonds applies for summary ­judgment against seven ­former partners who are ­battling the firm over a £3m profit dispute, claiming that there is no defence in law to a large part of the claim.

October 2008: Former ­partners speak out against Hammonds for the first time, as the firm reveals that 15 out of 23 former partners have settled.