London law firm Child & Child went insolvent because of “severe cash flow difficulties” caused by excess office space, Brexit hitting a key practice area, high salary costs, and clients taking longer to pay, it has emerged.
It also faced a winding-up petition from HM Revenue & Customs (HMRC), which was owed more than £2.3m, but unsecured creditors will only receive up to 5p in the pound following the pre-pack sale of the business.
We reported last week that five partners and a private investor acquired the firm in a management buyout, using an off-the-shelf alternative business structure (ABS), now called Allium Law, owned by Ince Gordon Dadds. It is still operating under the Child & Child name though.
The newly published report of the administrators at Begbies Traynor said the firm’s turnover in the year to 31 March 2019 was £12.2m – it had 94 staff, including 52 solicitors.
It said the firm had been trying to mitigate the “substantial overhead cost” of 6,200 sq m of excess office space – including rates of £750,000 – since it moved to its current premises in March 2017, but three “serious offers” for the space have since been aborted and it stands empty.
Child & Child has a “key specialism” in residential conveyancing in London, the report said, but “the Brexit referendum and a general decrease in property transactions over the last 18 months” resulted in a “material fall in revenues”.
Cash flow was also hit by “an increase in debtors and delay in cash collections, due to the company’s clients adopting longer payment processes”, leading to greater lock-up – more than £500,000 has been outstanding for over 150 days.
The report added: “The staff salary costs have grown to a level which is unsustainable through a mix of staff acquisition costs, high base salaries for new starters and generous commission structures.
“In the 12 months to March 2019, staff-related costs equated to c.70% of revenues. This is significantly ahead of market norm.”
A high-profile disciplinary case brought against Khalid Mohammed Sharif – who was a 50% owner of Child & Child but has not moved over to the new practice – also “attracted some negative publicity for the firm”, the report noted.
It said the firm had significant arrears of tax “for some time” and talks with HMRC about agreeing time to pay failed, leading to the winding-up petition being presented in May.
However, the firm persuaded the court twice to grant urgent validation orders – enabling business-critical payments to be made – and to restrain advertisement of the petition, so that it could keep on trading whilst a buyer was found.
The report said a rapid sale was required to preserve the business. Efforts to market the firm to private equity investors and competitor firms was hampered by the high fixed-cost base, while recoverable work in progress was not recorded and only subjected to provision adjustment at each year end.
“This caused some interested parties to view the recoverability of the firm’s WIP ledger with some scepticism,” it said.
Begbies Traynor said only one offer was received from an unnamed investment firm, which wanted the five partners to commit to stay on after the purchase.
The pre-pack “has achieved a significantly better result for creditors generally, than had the company been obliged to cease trading and enter liquidation, without first entering administration”. Only one member of staff was made redundant.
Allium Law paid £206,747, the report revealed, the price taking into account that it was taking on all the risk in relation to debts and WIP being realised, and then being reduced by £200,000 because of a higher quote for professional indemnity insurance than had been anticipated. Trade debtors were sold to Lambda Limited for £490,000.
The firm had no secured creditors, but £5.4m in unsecured creditors, including HMRC. It is currently anticipated that they will only receive 4-5p in the pound, the administrators said.
Meanwhile, City-based Cubism Law – a dispersed law firm that provided back-office support, including 20 supporting solicitors, to 45 partner-level consultant lawyers – has gone into administration. It was loosely based on a chambers structure.
There has been speculation about the future of the firm in recent weeks, with stories of lawyers jumping ship to other dispersed outfits.
It was set up in 2007 by Andrew Pena, formerly a partner at City firm Fieldfisher, and became an ABS in 2015. The following year, it launched a six-year academy for up to six students to qualify as solicitors through apprenticeships.
When we reported on a story with a Cubism angle last year, it was said to have a turnover of £12m.
Mr Pena named the firm after the art movement that breaks a subject down into its constituent parts in order to consider each part from different perspectives.