Eleventh hour rescue deal failed to save Cobbetts
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PARTNERS at law firm Cobbetts agreed to fund a £2.5m rescue deal in January, but it collapsed when they were asked for personal guarantees.
Details of the last ditch effort to save the firm were disclosed at a creditors’ meeting in Manchester yesterday, where former partners and a representative of lender Wesleyan Bank also grilled managing partner Nick Carr, chairman Stephen Benson and finance director James Boyd.
The firm, which had an office in Leeds, filed for administration in January and was bought by rival DWF in a pre-pack deal. It left total liabilities of £90.1m, of which £74.4m related to property leases.
KPMG’s restructuring team started working with Cobbetts in September and the firm was eventually appointed as administrator. Referring to the rescue deal joint administrator Brian Green said: “We came back after Christmas expecting members to put money in and for the business to be saved. That was our understanding.”
Around 90% of members agreed to the plan but it came unstuck when lenders wanted security over each of the members’ homes, and more detail about the firm’s financial affairs was required.
Earlier, former partner Andrew Wright, who said he was the largest individual creditor, tackled Mr Carr on the firm’s corporate governance, while another former partner, Charles Bond, questioned partner payouts in the weeks leading up to the administration. Former managing partner Michael Shaw quizzed the management team on the sale of the firm.
Mr Wright said: “I’m still the largest individual creditor by a long way which has had a detrimental effect on my family and future… I had heard rumours and I was concerned so I wrote to Cobbetts and I was told that things were certainly difficult, but I didn’t know the Solicitors Regulation Authority (SRA) was in there and that KPMG was drawing up contingency plans.
“I may have said ‘keep the money’ but as one solicitor to another I think you should have been open with me. We would like to be treated in the same way as existing partners… Why didn’t you tell me in December what was going on? Why weren’t you forthright and absolutely honest?”
Mr Carr (pictured left) replied: “I would rather not discuss personal details in this room, we can have discussions outside of this meeting. You know from earlier discussions how I feel about it.”
Mr Wright continued, pressing the three partners on what was known about the firm’s financial problems beyond the management team. “When the SRA and KPMG came in what was in the board minutes? Did ordinary members know what was going on? Were they aware KPMG had drawn up contingency plans? If I was a member there I would have been furious. Did they know? Did the board minutes set this out from July?”
Mr Benson (pictured right) replied: “The board minutes are very comprehensive. To what extent those minutes were circulated I can’t tell you.”
Mr Bond asked about money taken out of the business in member payouts. “I would like to understand why a drawings freeze was not put in place in the last month. And why drawings took place right up to the administration.”
Mr Carr said this was considered “long and hard”, but ultimately the payouts were in the “best interests of the business” as they kept members at the firm.
Mr Bond and Mr Wright left in February 2012 and now work at London firm Gowlings. They are owed around three quarters of the £630,000 owed to former partners.
Former managing partner Michael Shaw asked if any attempt was made to sell the Cobbetts business between June and September when cashflow problems first became apparent. When Mr Boyd said there had not been, he asked about press reports mooting a tie-up with Pannone. Mr Carr would not discuss that, citing confidentiality agreements.
Steve Billot, a partner at RSM Tenon, questioned the former management team on their view of the firm’s solvency in the months leading up to the administration given his client, the Wesleyan Bank, had agreed a £1m loan on December 1. He also raised the prospect of liquidators using section 214 of the Insolvency Act to claw back member drawings.
He said: “I’m absolutely flabbergasted that on December 1 you can draw down £1m from the Wesleyan given the position you’ve found yourselves in.”