City firm Ince & Co owed creditors £34m when it was sold in a pre-pack and went into administration, after partners refused to bail it out, it has emerged.
The details of what went wrong at the firm, contained in a report by joint administrators Quantuma, also revealed that salaried partners at the firm refused to join the equity given the state of its finances.
The venerable City law firm, best known for its shipping work, was bought by listed practice Gordon Dadds on 31 December 2018 for £27m – although at the time it was not made clear that this was a pre-pack sale.
The alternative was a disorderly break-up and likely intervention by the Solicitors Regulation Authority (SRA).
The main Ince & Co LLP owes creditors £19.8m, who are now likely to recoup 21.8p in the pound. Creditors of its international LLP are owed £7.2m but will barely recoup anything, while the creditors of the Ince services company, owed £7.1m, should receive 3.5p per pound.
Merger talks with Gordon Dadds began in June 2018 and it was the listed firm’s due diligence that led it to the conclusion that Ince & Co was insolvent.
There were several elements to this, including “material miscalculations in respect of transfer pricing charges” to foreign entities that formed part of the firm’s international network, as well as a mistaken belief that the firm owned a 20% interest in each of those foreign firms.
Most significantly, cash-flow forecasts indicated that Ince would be unable to meet liabilities as and when they fell due in January 2019, and Gordon Dadds believed that the firm’s liabilities exceeded its assets.
The administrators’ initial investigations have shown that Ince experienced a “significant level of partner departures” in the 12 months prior to administration, with the number of equity partners down from 37 to 22, and non-partner fee earners from 104 to 75.
“It is also understood that a number of the remaining partners would tender their resignations if the Gordon Dadds transaction did not complete by 31 December 2018 and were in discussions and/or had offers with competitor firms.”
As well as the significant loss in turnover caused by the partner exit, the firm faced a £4m capital repayment to the former partners within two years of their departures, with caused immediate profitability and cash flow problems.
In early August 2018, the global partners were told that declining turnover, working capital constraints and WIP lock-up was “expected to generate further working capital pressures in the coming months”.
A global management board meeting in October heard that £1m of additional profit was required in order to meet the requirements of Ince’s lenders; failing to meet them would meant notification to the SRA, ‘going concern’ issues for the annual accounts, the prospect of an independent business review by a third party, and all loans with the bank becoming payable on demand.
Further, if a sale was not concluded in short order, all partners would need to agree to a three-year lock-in and they would need to provide additional capital of £8.5m by April 2019.
There was, however, “no appetite” among partners to do this, while some salaried partners had declined to move to equity and inject capital.
The firm had been financed via partners’ capital of £12.5m and unsecured facilities from Royal Bank of Scotland of £10m.
With cash flow set to become “unmanageable” by the end of 2018, this left a sale of the business as the only option – other firms were approached but only Gordon Dadds was interested in buying the whole of the firm, rather than breaking it up.
The administrators felt that a break-up would be difficult, especially with around 60,000 files in storage, some of which acquiring firms would not take on due to their age, and that an intervention by the SRA would be likely as a result. Staff would also be made redundant at a cost £5.5m.
It was also decided that retired partners would not receive outstanding capital repayments due at the end of 2018.
The sale to Gordon Dadds represented “the best value for creditors”; the only way to do it was for Gordon Dads to acquire the partners’ interests and then immediately put three business that made up the firm into administration.
Gordon Dadds is paying 40% of the value of the collected WIP and account receivables, 75% of the value of collected unbilled paid disbursements, £400,000 for fixtures, fittings and IT hardware, £700,000 for the inter-company position (plus 25% of any monies recovered above £5m) and £50,000 for the intellectual property rights.
In a statement, Jan Hungar, managing partner of Ince & Co in Germany, said: “This demonstrates what we said at the time of the acquisition, that the deal with Gordon Dadds was essential to ensure that Ince continued to operate and to enable us to grow.
“Since the merger, the combined firm has already demonstrated that we are able to service existing clients better and offer new clients a greater range of products.”
The administrators said they were reviewing Ince & Co’s books to ascertain the point at which it became insolvent, and if and when the partner group as a whole should have been told of the financial position, rather than just the partners on the board.
They are also looking at when the level of partner departures reached the point that the firm’s insolvency could not have been avoided.