Thomas Alan finds reality setting in for creditors and former partners more than two years on
‘My immediate thought was: “Can’t we just move on?” I can’t be bothered with it,’ says one former King & Wood Mallesons (KWM) Europe and Middle East partner when asked for their thoughts on the firm’s latest administration report. Indeed, it is hard not to share some of the sentiment. Two years after the collapse of KWM EUME, the saga continues to limp forward in a fashion considered onerous even by law firm insolvency standards.
Unfortunately there is little sign of the administration coming to a satisfactory end any time soon. Having first moved into administration in January 2017, the firm’s defunct European arm has since seen a change to its proposed administrators, partners arguing over tax relief and creditors pursuing money that is not there. As yet, those conflicts have not been settled, with the latest reports making difficult reading.
An interim report published in March by the firm’s administrators, Quantuma, shows a meagre £600,000 has been set aside for unsecured creditors, a complete mismatch with the 159 claims amounting to £18.9m. ‘Fundamentally, what they’re hoping to recover is significantly higher than what they have recovered,’ says RSM UK partner Mark Waddilove, whose practice focuses on the structuring of UK businesses. ‘It seems they have collected about all they can. The funds just aren’t there for the unsecured creditors.’
The firm’s only secured creditor, Barclays, has so far received £6.5m and is likely to receive approximately £3m more. However, this will still be a far cry from what the bank would have been hoping for, having had valid security over approximately £16.5m in September 2017.
Meanwhile, there is a sense expectations have been managed poorly by the administrators and this could see many parties set for disappointment. ‘Something spooked the old administrators,’ says one business structuring partner at an accountancy firm. ‘Quantuma probably came in and promised the earth but found the money isn’t there.’
Originally, AlixPartners was the proposed administrator, before it pulled out, citing funding concerns. Restructuring boutique Quantuma then took over and found its role as administrator extended in January 2018. As it stands, the legal fees incurred measure at over £1.7m according to the latest report from Quantuma – a great deal more than the £450,000 initially estimated. Meanwhile, in January of this year, the administration was extended once more as KWM’s dispute with Standard Chartered over unpaid fees delayed the process.
‘What creditors are hoping to recover is significantly higher than what they have recovered.’
Mark Waddilove, RSM
Disagreement is likely to characterise the rest of the administration, with tax relief an invidious issue. Currently, it is hard to know what sort of deal partners have done, with any arrangements likely subject to non-disclosure agreements. However, partners can claim a share of the debt at the highest rate of tax going back three years, though the disagreements over who is eligible for this relief rumble on. Fixed-share partners who left the firm before it went under will be pursuing some loss relief, but equity partners are expected to pull in the other direction with the tax-related wrestling match yet to be concluded. However, the big question is where the money from the tax relief will go.
‘It’ll be interesting to see how much of those funds from tax relief will be sent across to the administrators to cover overdrawing,’ says Waddilove. ‘The administrator will ask for it if they were drawing while the business was insolvent and partners won’t want to be paying back on their drawings.’
Undoubtedly, former partners of the insolvent operation have not come this far unscathed. ‘Partners will have lost capital,’ says one employment and partnership specialist. ‘Partners will have lost tax reserves while still being liable to the tax man and there will have been a loss of undivided profits. People will have lost real capital out of this.’
And some have certainly lost capital. One former KWM partner says they lost approximately £1m from their own pocket as a result of the insolvency. For 288 former employees the story is somewhat better, having been awarded £1m by an employment tribunal in 2017, which has been paid out, while the administrator is currently calculating and distributing further payments owed to other employees.
However, for many, the episode is likely to run on for longer, with divisions over tax repayments, payments to unsecured creditors and potential payments to the administrator to cover overdrawing all issues in need of resolution. Another former KWM partner provides a frustrated yet concise assessment of the insolvency so far: ‘The simple fact is that there seems to be not much money there and an awful lot of unsecured creditors. Honestly, I am waiting for the point where it’s all over and there’s no more stories.’ The wait continues.