Integration and cash flow problems brought down law firm consolidator

Administration: Some of the business sold

The administrators’ report into the collapse in June of the Law Direct group has highlighted the difficulty of building a law firm consolidator.

Problems with integration led to cash flow difficulties and ultimately the group’s insolvency, according to Begbies Traynor partners Stephen Katz and Paul Cooper.

Law Direct was the umbrella business for 13 law firms around the country. North London practice Alexander & Partners (A&P) bought parts of the group in a pre-pack following its administration, with the Solicitors Regulation Authority (SRA) intervening into those parts of the businesses not covered by the deal.

The report said that A&P bought the conveyancing, personal injury and probate files, the Law Direct office in Birmingham – with staff transferring across – the goodwill in the trading names, and the shares in Windsor firm Geoffrey Bryant & Co.

It paid £10,000 for the Birmingham office and a payment on account of £7,500 for the conveyancing files – it is paying £300 for every one that completes. A&P will also pay 31% of work in progress on other client files successfully transferred and billed.

The report revealed that A&P was working alongside Tony Sullman and Ian Powell of The Legal Partnership – Mr Sullman is best known as a co-founder of Claims Direct, where his actions eventually led to him being disqualified as a director for seven years, and more recently claims business CallBrian.

The administrators said Law Direct made several acquisitions in the two years leading up to their appointment, mostly on the basis of a nominal payment with a split of future revenues between Law Direct and the acquired practice or its owners.

“However… it seems a number of the firms acquired did not fully comply with the directors and declined/refused to account for turnover and funds, contrary to what had been agreed.

“This resulted in various integration issues and difficulties when trying to manage the variety of systems used by each of the firms within the network. This all resulted in the company experiencing cash flow difficulties.”

The report said many of the partners of the acquired firms were dissatisfied with the overall structure of the group and the cash flow problems, which meant it was unlikely that professional indemnity insurance (PII) premiums, many of which were coming due, would be paid.

Begbies Traynor was then called in to advise. It found that Law Direct was “clearly insolvent” but there was a “significant lack of accurate information and disclosure from a number of practices operating within the network”, which made a review of the business’s affairs “difficult”.

“For example, the initial information we received inferred that here were over 2,900 live conveyancing cases but subsequent details [sic] analysis from seven of the firms indicated that the true number was between 200 and 400.

“Four firms did not provide any information, including details of their client accounts (despite later requests from the SRA to provide that information to them).”

The administrators said they have also identified that shares in Sussex Law – a law firm in Brighton that was part of the group – were transferred to its directors before the insolvency but at a time when Law Direct was insolvent. The SRA initially included Sussex Law in the list of interventions but then removed it.

Investigations into this were at an early stage but in the statement explaining the pre-pack, the administrators said the issue with Sussex Law was one of the reasons for it.

They said: “Sussex Law, one of the firms that had previously been acquired, had since claimed to have separated from the company in circumstances that were not very clear and where the directors of the company remained the directors and shareholder of Sussex Law, which itself was paying [PII] premiums for three or four of the other practices, and had taken over some of the files of some of the smaller practices that appeared to no longer be operating as individual trading entities.

“However, despite significant correspondence, we were unable to obtain a clear understanding of the files/WIP that had been transferred to Sussex Law, nor the day-to-day involvement of the directors in that firm.”

Law Direct owes staff £31,000 – at least some of which is likely to be paid – HM Revenue & Customs £390,000 (“it is currently uncertain” whether any will be paid) and has an estimated £1.6m in unsecured creditors, who as things stand will not be paid, according to the administrators.

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