Cobbetts calls in the Administrators

I have blogged before on the question of how quickly a professional services business can descend into a death spiral once the confidence of the partners is lost and they start to depart (most notably in the case of Dewey & LeBoeuf  (http://www.blogger.com/blogger.g?blogID=759712752327313714#editor/target=post;postID=4182441567666633396.)

The latest casualty of this phenomenon seems to be troubled northern law firm Cobbetts, which is set to enter administration in an attempt to secure a fire-sale of its business.

Cobbetts has almost 500 staff and 74 partners across 3 offices.  In 2007/8, before the financial crisis, the firm was performing strongly, turning in revenues of almost £60 million.  Corporate work was booming, and the firm expanded rapidly.  However, it was hit hard by the financial downturn and managed only £45.2 million of revenues for the 2011/12 financial year.  Given the significant fixed costs associated with the expansion during the boom years, this appears to have been a disastrous scenario. The management team attempted to address the problem through three separate redundancy rounds – a necessary step but something which saps the morale of a people-led business – but to no avail.  Four partners then defected to Gowlings, and another two to Gateley last year, which must have led to a greater crisis of confidence for those remaining, and so the spiral began.

In an attempt to reverse its decline, the firm considered a number of merger opportunities – most notably with DWF last year, but talks collapsed because of the market uncertainty.  It would, perhaps, not be entirely surprising if DWF emerges as an acquirer of the business through the administration process.

It is perhaps surprising that Cobbetts is the first major failure of a UK law firm since the fall of Halliwells in 2010, although the UK office of Dewey collapsed as part of the larger global group.  I suspect that, sadly, more may follow.

Capita enter the legal process outsourcing market

Capita has for many years been synonymous with business process outsourcing, but not in the legal services sector.  That is all set to change as it looks to enter the LPO market on the back of a successful pilot project with Pinsent Masons (“Pinsent”).  Given Capita’s size and capital resources, the existing incumbents in that market will doubtless be forced to sit up and take note.

Pinsent has recently been using a Capita office in Krakow to review documents in an e-disclosure exercise for a large legal dispute.  Capita assembled a team of 85 individuals, whose work was overseen by Pinsent lawyers shipped out to Poland for the purpose, in an attempt to drive down costs for the client (and presumably drive up margins for Pinsent at the same time).  This is not the first time that Pinsent has used a legal process outsourcer – it was one of the earlier pioneers of the practice - but it is the first time that Capita has entered that arena as a provider.

From the perspective of a law firm, outsourcing labour-intensive tasks such as e-discovery offers not only the ability to carry out work in a lower cost location, but also obviates the need to carry the fixed costs of large teams of people who may not be fully utilised all of the time.  In today’s tough market where many firms are scrabbling to reduce fixed costs, this is a significant consideration.

Although Capita will doubtless be hoping to receive more work from Pinsent, it appears that the pilot was not designed with this particularly in mind – according to an article in The Lawyer, Pinsent intends to decide which LPO provider to use on a case-by-case basis rather than electing to partner with any one provider for future projects.  Nevertheless, Capita are apparently sufficiently pleased with the way that the pilot went that they plan to move aggressively into this new niche, competing with the likes of CPA and Integreon.

More redundancy misery for UK lawyers

It seems there is a chill wind blowing through the legal services sector.  Well over 4 years into the financial crisis, law firms are still making further cutbacks to try to sustain profitability for those who are lucky enough to avoid the cull.

January has seen a raft of firms putting jobs "at risk" and starting redundancy consultations - 166 jobs are at risk in Eversheds (and this comes on the back of 4 previous rounds of redundancies, which have seen a total of 737 jobs being shed), 250 jobs are at risk in DLA Piper, 40 in CMS Cameron McKenna, 12 in Farrers, and 43 in Allen & Overy, which is moving more jobs to Belfast.

Take your tax advice from a lawyer rather than an accountant if you want to keep it confidential from HMRC

In recent years, there has been a blurring of responsibilities between the legal and accountancy professions, particularly when it comes to tax advice.  Lawyers frequently advise on tax matters which would previously have been within the remit of accountants, and accountants often given advice on the legal implications of tax schemes.  The blurring of the lines becomes even more marked with the introduction of multi-disciplinary practices.  However, a recent Supreme Court decision has confirmed that if you want to keep your tax planning discussions with your advisers confidential, then you will need to instruct a practising lawyer, rather than an accountant or a non-lawyer tax adviser.

The UK Supreme Court has ruled that legal professional privilege (LPP) should only apply to communications between lawyers and their clients and not between clients and accountants, even when the accountants are giving legal advice.   So in essence, the identical conversation between a client and his adviser regarding his tax affairs will be covered by LPP if he is talking to a lawyer, but not if he is talking to an accountant.

In the case of Prudential plc v Special Commissioner of Income Tax, HMRC had served Prudential with notices demanding the disclosure of documents related to a tax avoidance scheme promoted by PricewaterhouseCoopers (PwC).   Prudential resisted disclosure on the grounds that the documents contained legal advice on tax matters, from, amongst others, the accountants PwC.  The Supreme Court rejected this, saying that LPP could not be extended without legislation to do so, and that to extend the concept of privilege through court interpretation would lead to unwelcome uncertainty in an area where there is clarity on what the current law means.  Lord Neuberger said:

"The suggestion that it should apply in any case where legal advice is given by a person who is a member of a 'profession [which] ordinarily includes the giving of legal advice' suggests to me that this is an inappropriate formulation for us to adopt, as it would carry with it an unacceptable risk of uncertainty and loss of clarity in a sensitive area of law.”

As far back as 1983, the Revenue Commissioners recommended the extension of LPP to tax advice given by accountants and tax advisers belonging to certain professional bodies, but this did not get governmental backing was never acted on.

Not surprisingly, accountants are very unhappy at this situation. Michael Izza, Chief Executive of the Institute of Chartered Accountants in England and Wales, said:

"The current position on LPP is unprincipled and anti-competitive for individuals and businesses who we believe should be able to seek the best professional advice upon the same terms whether from lawyers, accountants or indeed other appropriately qualified professionals.  The way in which legal services are provided is changing as a result of the Legal Services Act with the creation of Multi-Disciplinary Practices.  As a matter of urgency, Parliament needs to find a way to resolve how issues such as LPP are addressed within these new structures."

In the meantime, tax lawyers will no doubt be making hay whilst the sun shines.

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Grant Thornton to be appointed Receiver of Axiom Legal Financing Fund

Faced with a storm of criticism from shareholders, the directors of the embattled Axiom Legal Financing Fund have reluctantly agreed to the appointment of Grant Thornton as receiver, rather than KPMG which had been the directors’ choice.

In a letter to shareholders on Tuesday, the directors confirmed that they will support the application to have a receiver appointed for the fund at a February court hearing.

KPMG had been appointed in October to conduct an audit of the fund’s assets following fraud allegations which had been made, principally by OffshoreAlert, and for this reason the directors thought that they would be best placed to act as receivers.  However, it became clear that a significant majority of investors opposed this view because of concerns over independence and fee levels, and so the directors have reluctantly bowed to investor pressure to support the appointment of Grant Thornton instead.

Quindell outperforms expectations following ABS conversion

Quindell Portfolio the AIM-listed company which received its alternative business structure (ABS) licences last month, has reported strong 2012 results, ahead of market expectations. 

In October Quindell Legal Services Limited acquired Pinto Potts Solicitors ("Pinto Potts") for an initial £1.5 million of cash plus 87,500,000 Quindell shares, with another £1.5 million in cash consideration being payable in the second half of 2013.  This was rapidly followed by the acquisition of The Compensation Lawyers ("TCL") in December, for a payment of £30,000 in cash and the issue today of 2,200,000 Quindell shares.

It seems that the acquisition strategy is proving to be a success. Quindell, which also offers outsourcing services in the insurance and telecoms sectors, expects revenue to be approximately £165m, with adjusted EBITDA of approximately £47m (including the figures of the acquired law firms for the period during which they were in partnership with Quindell prior to the issuance of the ABS licence).  Furthermore, Quindell is achieving an EBITDA margin of 28% - a figure that many firms would like to emulate.

Rob Terry, Chairman and Group Chief Executive said: 

“ Quindell Legal Services is now the UK's largest, claimant focused, personal injury law firm (based on forecast run rate volumes) having secured long-term relationships with some of the UK's most respected motor related brands during 2012. These long-term relationships are part of Quindell's wider claims outsourcing arrangements covering vehicle repair, hire, recovery, broader legal services, medical reporting and multi disciplinary rehabilitation services all helping to lower the total cost of claims for the insurance industry whilst protecting the quality of customer journey and the rights of the consumer.”

At the end of the day, the success of listed companies will be determined by their share price.  Qunidell’s shares are currently trading at around 14.75 – a very considerable improvement on the 52 week low of 4.70 which was seen last summer.  This will doubtless make the former Pinto Potts and TCL owners very glad that they took such a significant element of their sale consideration in Quindell stock.

A revolution in social mobility for lawyers?

Given the huge hikes in University fees in the last few years, it is not surprising that many students are becoming sceptical about the value of degrees, and opting for alternative ways of achieving their career ambitions.  As might be expected, many of the less academic degrees at dubious quality universities are being shunned as a consequence, but it seems that the full-time study even of such high-brow subjects as law are not immune to the winds of change and fewer students are willing to fork out £27,000 in fees and probably another £20,000 in living expenses to study a 3 year degree course which qualifies them....well, to do some more studying.

There has for a long time been a route into the legal profession as a paralegal or legal executive without going to university – through ILEx – and last year the Government provided £1m in funding for a new apprenticeship scheme for paralegals, which is expected to launch this year.  A number of more forward-thinking law firms have risen to the challenge themselves and begun to offer apprenticeships for school leavers for legal exec roles. However, until now, there has not in recent years been an alternative direct way into becoming a fully-fledged solicitor, without either doing a law degree, or another degree followed by the CPE.

That is all about to change.  The Minister for skills, Matthew Hancock, has announced government plans to introduce new higher-level apprenticeships, equivalent to bachelors degrees and masters degrees, in subjects including law, accountancy and engineering.  BPP Law School intends to launch an apprenticeship scheme for school leavers wanting to become lawyers, and is currently in talks with regulators on the issue.

Law is often a profession mired in intellectual snobbery, and I am sure there will be many who will decry the fact that these steps will lower standards.  I am not at all sure that this will be the case.  Much of what I studied during my 3 year law degree has been of very little, if any, value in my working life (never once have I been asked to opine on Roman Law or Jurisprudence, both of which were compulsory topics).  The study of law is essentially vocational and I think it is well suited to an apprenticeship style of learning which is routed firmly in the “real world” of day to day legal practice.

I am sure that many academic high-flyers who have the luxury of parents willing and able to fund them through university, or a relaxed attitude to the prospect of spending many years mired in debt, will continue to study law at our top class universities – and good luck to them, I would not want to knock that.  But it must be a good thing that for those of more modest means, or whose personal circumstances mean that a full time degree course is not a practical or desirable option, there will now be a sensible route which could potentially take them to the top of their profession. 

The proof of the pudding will be in the attitude of the big firms to those who have come through the apprenticeship route.  It is easy to see how the apprenticeships could be a great route in to smaller law firms doing relatively routine legal work – and that in itself would be a step in the right direction for social mobility.  But the real added value would be if the magic circle firms could embrace the concept and genuinely regard applicants with an apprenticeship background as on a par with those who have studied at university, provided they demonstrate the right aptitudes and attitudes.  Now that really would make a revolutionary change within the legal profession.  The question is, will any of the magic circle firms have the guts to give it a go?