Administrative issues

The Cobbetts administration highlights the importance of partners knowing their firm’s financial position, say Rita Lowe and Andrew Jackson

Rita Lowe
Rita Lowe

With Cobbetts yesterday (31 January) announcing that it is on the verge of entering administration and many UK-focused law firms predicting zero/low growth, there is little doubt that law firms remain vulnerable.

In this climate, members of law firms should pay even greater vigilance to financial information, and ask questions of management to properly understand the financial position of their firms. In any ultimate insolvency, members, when judged with the benefit of hindsight, will be expected to have exercised the highest degree of skill and care with regard to managing their business.

Our experience with insolvencies in this sector is that a number of the key issues which face law firms are unique. Aside from dealing with the SRA, which is important for members, there are issues with respect to client monies, confidential client information, dealing with any overseas branches or offices and relevant regulators, collecting debt or work in progess – particularly where it involves CFAs or other charging structures – and insurance.

In any run-up to invoking the protection of administration, management must tread carefully to preserve value, not to incur further debt, and to mitigate the risk of criticism or sanction for their actions during the “twilight zone”. When a law firm is in financial difficulties, the emotions run high – from management to members generally, associates, trainees and support-staff. However, an orderly sale process of all or parts of the business may help to alleviate the concerns of some of these stakeholders.

The benefit of filing a notice of intention to appoint administrators is to give the distressed firm a “window” to try to sell its business or departments to one purchaser, or more likely to a number of different purchasers. Given the regulated nature of law firms, an insolvency practitioner, even if he or she wanted to, could not trade a law firm in administration, so in practice any sale out of distress will be structured by way of a pre-packaged administration. However, the culture of the firm may dictate whether it is possible to keep business units together in view of effecting a sale, as it was with Halliwells, or whether the members will split off individually, as they did at Dewey & LeBoeuf.

Rita Lowe is head of banking and finance at CMS Cameron McKenna and acted for the administrators of Halliwells and Dewey & LeBoeuf’s UK LLP. She was named in The Lawyer’s Hot 100 for 2013. Andrew Jackson is a senior associate at CMS.