Banks force debt collectives

Rowlands Field Cunningham and Linder Myers could be among the leaders of the pre-pack

In less straitened times Manchester’s Rowlands Field Cunningham might have been able to carry on. Although it had a lot of bank debt the firm was profitable as a day-to-day business and had a chance of trading its way out of trouble.

Unfortunately, these are tough times and lenders are short on ­patience. Following pressure from its bank, RBS, Rowlands went into ­administration on 22 December 2011 and was bought in a pre-packed deal by fellow Manchester firm Linder Myers.

The deal created a full-service practice with one of the largest personal injury and clinical negligence teams in the city and a projected turnover of £16m for the 2010-11 ­financial year. All of Rowlands’ staff were moved over to the new firm and client files transferred without work being interrupted.

Under the terms of the pre-pack deal the WIP was sold to Linder Myers and will be paid for over an extended term. The debtors and paid disbursements remain as an asset of the administration and will be collected on behalf of administrators Duff & Phelps (formerly MCR) by ­Linder Myers.

On the face of it, it looks like a good deal for both firms, but the pressure put on Rowlands by its lenders illustrates a pitfall that law firms face in
an ­already uncertain market, and few would be surprised if similar deals follow.

Under pressure

“We had a lot of bank debt that we were servicing,” says Rowlands’ ­former co-managing partner Jon ­Andrews, who joins Linder Myers as a board member and head of the firm’s national industrial disease team. “In a more benign age the bank would have let us continue servicing the debt, but they were saying they wanted us to pay it down. We could have restructured the practice, but the external challenges we were ­facing would still have been there. Frankly, this was the better way.”

The external challenges Andrews refers to are increased competition and a slowdown in work.

“Everyone knew the firm was in financial difficulties,” says one managing partner at a Manchester firm. “No one had been profligate, but Rowlands was a high street firm in the middle of Manchester specialising in personal injury and commercial property – precisely the sort of firm that would be affected by ­competition and the recession.”

Tough choices

Phoenix ritesUnfortunately, these are tough times and lenders are short on ­patience. Following pressure from its bank, RBS, Rowlands went into ­administration on 22 December 2011 and was bought in a pre-packed deal by fellow Manchester firm Linder Myers.

The deal created a full-service practice with one of the largest personal injury and clinical negligence teams in the city and a projected turnover of £16m for the 2010-11 ­financial year. All of Rowlands’ staff were moved over to the new firm and client files transferred without work being interrupted.

Under the terms of the pre-pack deal the WIP was sold to Linder Myers and will be paid for over an extended term. The debtors and paid disbursements remain as an asset of the administration and will be collected on behalf of administrators Duff & Phelps (formerly MCR) by ­Linder Myers.

On the face of it, it looks like a good deal for both firms, but the pressure put on Rowlands by its lenders illustrates a pitfall that law firms face in an ­already uncertain market, and few would be surprised if similar deals follow.

Phoenix rites

While there may be more law firm pre-packs on the horizon, future deals may not take place on the same terms as Rowlands’.

Regulations on pre-packs that would include giving creditors three days’ notice of a sale have been proposed following concerns expressed by creditors and worries about ’phoenixing’ – the process whereby businesses are taken over by old management under a new name.

Although Rowlands was clearly no phoenix deal, the administrator has confirmed that it has unsecured creditors, adding that “any potential dividend to unsecured creditors is dependent on the overall level of asset realisations”.

Speaking about the Rowlands pre-pack, Eversheds Manchester senior partner Michael Clavell-Bate says: “The proposed rules aren’t ­necessarily going to prevent a pre-pack sale like this going through, and nor should they. If a pre-pack saves a business that might otherwise fold, that option should be open to the business. However, they will require increased transparency to be given to the transaction by the insolvency practitioner, and this will at least give unsecured creditors an opportunity to understand what’s gone on.”

The rescuers

A law firm being bought out of administration is relatively rare, but far from unheard of. Insurance firm Hextalls was the first top 200 firm that took this route. Hextalls was pulled back from the brink after a group of partners from the firm bought it in a pre-pack deal in April 2009 (The Lawyer, 20 April 2009).

Then Tunbridge Wells firm Buss Murton adopted a company voluntary arrangement before going into pre-packed administration on 19 June 2009, emerging as Buss Murton Law.

Firms broken up and sold after entering administration since then include the Wirral’s Lee Lloyd Whitley (The Lawyer, 24 September 2009) and Halliwells, parts of which were bought by Hill Dickinson, Gateley and Barlow Lyde & Gilbert (now Clyde & Co).