Special report: Trade creditors pay £800 million price of law firm failures

High-profile law firm failures have saddled unsecured creditors with losses totalling over £800m since the legal services market was liberalised more than a decade ago. That is according to the Gazette’s analysis of law firms which have collapsed into insolvency since the profession’s very own ‘Big Bang’.

In the past five years alone (see table), the sector’s most prominent casualties have left behind a debt mountain of around £400m. Only a tiny fraction of that sum has been repaid, or is ever likely to be repaid. A few pennies in the pound is the best unsecured creditors can typically hope for. Usually, they get nothing.

New Labour implemented the Legal Services Act 2007 to boost competition and benefit consumers by reforming how law firms were allowed to operate. External ownership in the form of alternative business structures (ABSs) followed in 2012.

Some of the standard-bearers for what was then called ‘Tesco Law’ have since faded away or reined in their ambitions. They included big brands such as the Co-op, BT, the AA and Saga. A handful of law firms also took up the opportunity to list on the stock market, with distinctly mixed results.

But what is also notable about the post-liberalisation era is the scale of the carnage that can now ensue when law firms get into financial trouble. This is partly a consequence of pre-pack administrations, which enable the quick sale of a distressed business but disadvantage creditors. In the case of law firms, the average return to unsecured creditors following a pre-pack administration is well below 2%, compared with an average of 5% across all industries.

In an insolvency, unsecured creditors rank below secured and preferential creditors. They typically include suppliers (including barristers chambers, experts and other law firms), HMRC and contractors. In the Plexus insolvency, to take one example, trade creditors ranged from law firms including Macfarlanes and Lewis Silkin, to taxi firms, cleaning companies, florists and a supplier of water coolers.

The Gazette’s analysis is limited to prominent law firms which have gone under owing unsecured creditors more than £1m.

SSB’s demise is the most spectacular of recent years, leaving unsecured creditors nursing losses of £142m, as the Gazette disclosed this week. But in the past two years alone, it has come to light that at least six law firms have become insolvent owing £10m or more to this category of stakeholder.

The six do not include Axiom Ince, where £64m went missing from the client account but the amount owed to unsecured creditors is not yet known. Also excluded is the defunct consolidator Metamorph, where unrecoverable group losses across the network are known to top £20m.

When those two firms are properly accounted for by corporate undertakers, the headline figure of unsecured creditor losses across the sector in the past eight years is likely to exceed £600m.

Big-ticket law firm failures and pre-packs were less frequent before 2016, but two in particular stood out. In 2013 Manchester firm Cobbetts’ unsecured creditors were left tens of millions out of pocket when Cobbetts was acquired by DWF in a pre-pack deal.

Halliwells’ unsecured creditors had fared even worse in 2010, when the Manchester firm was also carved up through a pre-pack. The biggest law firm casualty of its time left them with debts of £191m, from which they were told to expect a return of less than £1m.

In 2013 Midlands firm Challinors owed £7.1m to unsecured creditors, including the tax authorities and food suppliers, when it went down. They were left with nothing – as were the unsecured creditors of Atteys, owed £3m when the South Yorkshire firm was shut down in the same year owing £5m.

In 2015, London firm Jeffrey Green Russell was sold off as part of a pre-pack, leaving unsecured creditors owed £7.1m with nothing.

Businesses fail and suppliers can suffer; that is an immutable law of commerce. But in the legal profession, so many failures on such a large scale are both reputationally and structurally problematic.

The Legal Services Board commissioned as yet unpublished reviews of the SRA’s role in the runup to the demise of both SSB and Axiom Ince. Solicitors, meanwhile, are footing the cost of failure in the form of steep rises to the Compensation Fund levies partly arising from expensive law firm interventions.

Many of the biggest law firm casualties of recent years have been alternative business structures which exploited the newly liberalised marketplace to expand rapidly. ABSs have gone under owing millions include SSB Law, Pure Legal and Kingly – as well as Metamorph.  Speaking of SSB, one Gazette reader commented this week: ‘Who can recall the fanfare surrounding the Legal Services Act 2007? According to the government, the act heralded a new dawn of “liberalised” legal services. However, small and medium-sized law firms are now being asked to top up a Compensation Fund conceived in very different times. It is sobering to reflect, that before the act was passed, we did not have these law firm failures on quite the same scale. The Law Society should sound out with the government the idea of a regulatory reset.’

Clarification: An earlier version of this article incorrectly stated that AWH Legal and not Roberts Jackson had entered administration. AWH Legal was in fact the acquiring firm and has never gone into administration. 

¹ Amount owed to unsecured creditors (as reported, or confirmed by administrators)

² Year when the amount owed was disclosed, not (necessarily) when the firm ceased trading

³ Where confirmed, or as estimated/reported

⁴ Asons’ debt figure includes secured creditors, as the two categories could not be disaggregated