Major legal aid practice sold for just £200,000 upfront in pre-pack

Hussain: Continuity of service

A large legal aid practice with a turnover of nearly £10m was sold to a consolidator in a pre-pack just before Christmas for only £200,000 upfront, it has emerged.

The jobs of all 80 staff at Nottingham-headquartered Cartwright King, which has 10 offices around the country, were saved by AWH, an acquisitive Manchester-based law firm backed by private equity investor Sandton Capital Partners.

Half of the £200,000 was attributed to work in progress, debtors and receivables. AWH will also pay 50% of any realisations above £2.5m in respect of these.

According to the directors’ statement of affairs – it had two owners, Steven Gelsthorpe and Michael Thurston – work in progress and debtors totalled around £6.5m, of which £4.1m related to legal aid work, although they only expected to realise £190,000.

A newly published report from the administrators at BDO said Cartwright King’s problems began with Covid, which caused “significant delays” in progressing cases and had a “detrimental impact of the company’s financial performance and cash flow”.

Despite furloughing staff and other cost-cutting measures, the firm recorded a loss of £700,000 in the year to 30 September 2020, on a turnover of £9.7m.

Cartwright King made a net profit of £44,000 in the following year on a similar turnover but still experienced “ongoing trading difficulties as a result of court backlogs and delays to hearings impacting case progression, billing, turnover and file completion rates”.

It secured £3m in loans under the coronavirus business interruption loan scheme and recovery loan scheme as the directors “sought to implement operational improvements to increase profitability and improve cash flow”.

The directors felt this was working until last September, BDO recorded, when the firm “identified an issue with LAA [Legal Aid Agency] invoicing which resulted in LAA receipts in October 2022 being less than anticipated. The reduced receipts results in a forecast funding shortfall in the week commencing 24 October.”

The directors could not inject additional funds and the bank, Clydesdale, would not, prompting the directors asking BDO to undertake an accelerated merger or acquisition.

This led to three offers – from an initial 36 interested parties – but all were on the basis of a sale completed through an insolvency process.

AWH’s was chosen for several reasons, including that all staff would be transferred, its agreement to be the successor firm, and it assuming liability for unpaid disbursement creditors, estimated at £135,000.

However, AWH reduced its initial offer following further due diligence and “the increasing levels of financial challenge within the company”. The deal completed on 23 December.

Some staff had already left before then, taking £459,000 of work in progress with them. “It is currently unknown what level of WIP will be recoverable,” BDO said.

Clydesdale is owed £5.1m and HM Revenue & Customs £1.3m. The administrators said it was “uncertain” whether they would recover anything; unsecured creditors, also owed £1.3m, will not receive anything as things stand.

BDO’s pre-administration costs were £109,000, with a further £122,000 spent on legal advice from Pinsent Masons.

Abdul Hussain, chief executive of AWH, said: “We are delighted to have completed this deal before Christmas on a very tight timetable at a busy time of year.

“We have managed to take on all the employees of Cartwright King, protecting all 80 roles and we will provide continuity of service to all the firm’s clients.”

AWH came to prominence in 2018 after buying industrial disease specialist Roberts Jackson and has completed several acquisitions of firms or WIP books since.

In 2021, AWH announced a collaboration with Sheffield-based Credit Style – which acquires debtor books to provide certainty on returns to company creditors – and specialist insolvency litigation funder Tresartis, set up by Sandton, to offer ‘IP Unlock’.

This aims to provide a “turnkey” solution for insolvency practitioners looking to sell distressed consumer law firms.

AWH was advised on the acquisition by Adrian Biles, the former Ince Group PLC chief executive who is now managing partner of London firm Child & Child.

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