A leading insolvency practitioner has said King & Wood Mallesons’ (KWM) financial situation in Europe has been “more mismanaged than BHS” after even its administrators walked away over concerns they would not be paid.
AlixPartners rejected being named KWM administrators on Tuesday (10 January) due to “concerns over funding”, according to an internal memo sent by managing partner Tim Bednall to all staff.
As the administrators rank highly in the pecking order of creditors to be paid in an administration, AlixPartners’ move could mean “there’s no money at all at KWM”, said the source.
“It’s extremely rare for an operating business of this size to get to this point without filing for administration. Normally businesses shut down long before now.
“It could easily end in litigation and likely an Insolvency Service investigation.”
AlixPartners’ decision to walk away from the administration is understood to have been prompted by the firm’s bankers Barclays refusing to sign off on a number of proposals from KWM management for cash to pay staff and suppliers this month.
But it is also thought AlixPartners’ parallel role advising Barclays for the last six months on KWM cash receipts has put it in a sticky situation regarding its involvement in the collapse.
The bank’s decision came as a major blow, particularly to staff who were told yesterday all salaries would be cancelled with immediate effect.
Bednall broke the news to staff, saying: “I appreciate that the position the bank has taken puts you all in a difficult position and I am really sorry that there is nothing further that I can do to cause the bank to change its mind.
“Although Barclays stands to lose a substantial amount of money, it will have benefited by around £5m in the last week in terms of business receipts and anticipated proceeds of the sale of part of the business.”
Barclays’ apparent £5m windfall will likely be supplemented by all of KWM’s accounts receivable, thanks to its debenture over KWM assets, which it ramped up the security on last month.
“There’s clearly no cash left so the only asset KWM has at the moment is bills that have been issued but not paid. AlixPartners were concerned the bank has security over all those funds and will keep it. Everything will go to the bank,” said a source close to KWM.
If that prediction is true – and at the moment it looks likely – creditors left sorely out of pocket will include HMRC, staff, current and former equity partners, and third party suppliers.
Staff waiting for unpaid holiday leave and redundancy payments will likely receive meagre statutory payments.
Meanwhile partners could find themselves personally liable for suppliers’ bills.
“Anyone who provided goods and services in the final period of KWM on credit could say the firm was wrongfully trading,” said an insolvency expert. “Once you’ve reached a point where there’s no hope of continuing a viable business your job is shutting down to reduce the risk to creditors.
“There will almost definitely be an investigation into the conduct of partners in this regard by the Insolvency Service.”
Some have also questioned the role of the wider firm – KWM in China, Hong Kong and Australia – in the collapse of KWM EUME LLP and the question of who is ultimately culpable.
“KWM China will have established the verein documents in a way that they won’t have responsibility,” said a source, “but if I was a creditor I’d be going up every drainpipe possible to make sure I got paid.
“You could say the UK business only continued to operate because the verein pushed it to, so in that case they would be part responsible for the Europe business going under owing all this money.”
Following AlixPartners’ departure, Bednall told staff it would be “seeking to accelerate” the appointment of a new administrator, Andrew Hosking from Quantuma.
This won’t be Hosking’s first rodeo – he has also worked on the liquidations of Challinors Solicitors and Davenport Lyons, though neither compare to KWM in size and scale or the complexity of its international relationships. Although of course KWM LLP is a vastly reduced firm compared to six months ago after the departures of around 90 partners.
Quantuma is also a smaller operation than AlixPartners, with different risk and due diligence procedures. A source close to the administration process said Quantuma’s comparatively smaller size would allow it to be more pragmatic in handling first KWM’s sale options, then the busy first month of its administration as it detangles client files, data and IT systems and insurance.
With the administration expected to take place in the next three or four days, what KWM management and Hosking accomplish this week will be crucial to defining the next year of fall-out.