Re Halliwells Llp & Ors (Rev 1)

On 20 July 2010 I heard an application by Halliwells LLP (“Halliwells”) and Mr Shay Bannon and Mr Dermot Power (“the Administrators”), both Licensed Insolvency Practitioners and members of BDO LLP, for an administration order in respect of Halliwells; the appointment of the Administrators; and for the court’s approval of four pre-packaged sales of parts of the business of Halliwells. Mr David Chivers QC and Ms Martha Maher instructed by CMS CameronMcKenna LLP appeared on behalf of Halliwells and the Administrators and the application was supported by a witness statement of Mr Jonathan Brown, the managing partner of Halliwells, dated 19 July 2010 and a witness statement of Mr Bannon dated 20 July 2010. The matter being urgent, it came before me as an Interim Application. In the light of the submissions made to me by counsel and the evidence before me I concluded it was appropriate to make the orders and give the approval sought and duly did so. These are my reasons.

Halliwells made the application for an administration order under paragraph 13 of Schedule B1 of the Insolvency Act 1986 (“the Act”) on the basis that it was or was likely to become unable to pay its debts.

The purpose of the administration is to realise the assets of Halliwells by means of various proposed sales in order to make a distribution to one or more secured or preferential creditors pursuant to paragraph 3(1)(c) of Schedule B1 of the Act. In such a case paragraph 3(4) of Schedule B1 provides:

“The administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if –

(a)

he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph (1)(a) and (b), and

(b)

he does not unnecessarily harm the interests of the creditors of the company as a whole.”

Halliwells is a national law firm providing a range of legal services, with 116 partners and over 600 employees and offices in Manchester, Sheffield, Liverpool and London.

Halliwells has entered into a number of historic occupational leases which have left it with onerous payment obligations to landlords. The burden of these payments, a fall in revenue caused by the departure of several partners and a drop in turnover occasioned by the economic climate have left Halliwells unable to pay its debts as they fall due.

In light of these financial difficulties, Halliwells engaged the Administrators on 6 May 2010 in order to assist with the management of the sale of its business. They were also asked to plan for the possibility that Halliwells would enter into an insolvency process.

The Administrators have formed the view that Halliwells cannot be rescued as a going concern and that it is not reasonably practicable to achieve the objective of a better result for Halliwells’ creditors as a whole than would be likely if it were wound up without first being in administration. They have concluded the only way forward is to realise the assets of Halliwells by means of various sales in order to make a distribution to one or more secured or preferential creditors.

This marks the end of a marketing process of Halliwells’ business undertaken over the course of the last three months with the assistance of Dow Schofield Watts LLP, a corporate finance boutique. The Administrators quickly discovered that there are not very many potential purchasers for a business of Halliwells’ size. Negotiations were conducted with eight different firms and these generated four proposed sales which, in the opinion of the Administrators, represented the best return available for Halliwells’ creditors.

It was initially intended that the proposed administration would be an out of court appointment. Two notices of intention to appoint administrators were filed on a rolling basis to protect Halliwells’ assets while the negotiations were taking place. However the decision was taken to apply for an administration order because the proposed purchasers were not prepared to buy other than from an administrator and the Administrators required a court order to accept their appointment in light of the protracted nature of the negotiations, the imminent expiry of the second notice period and the need to seek the approval of the court for the proposed sales.

Halliwells’ largest single creditor is The Royal Bank of Scotland plc (“the Bank”) which is owed approximately £18 million, which is increasing each month. This debt is secured by way of a debenture. Since the projected return from the sales of the relevant parts of Halliwells’ business is less than £10 million it is clear that, on the basis of the Bank debt alone, Halliwells is insolvent on a balance sheet basis.

I must now say a little more about the relationship between the partners of Halliwells (“the Members”). The Members have nearly £13 million of capital invested in Halliwells, most of it funded through Partnership Practice Loans (“PPLs”). The Members have taken out these PPLs through various banks (“the PPL Providers”) and Halliwells has undertaken, through the Halliwells LLP deed (“the LLP Deed”), to repay each Member’s PPL when such Member ceases to be a member. In addition, Halliwells has given direct written undertakings to the PPL Providers regarding repayment of the Members’ PPLs. So, for example, in relation to the Bank, the relevant part of Halliwells’ undertaking reads:

“ We [Halliwells] irrevocably undertake:

(i)

that if the Customer [the Member] ceases to be a member of the LLP for whatever reason, sufficient of the monies standing to the credit of the Capital Account shall be remitted immediately to the Bank’s office… for repayment of the Loan…”

Since Halliwells is insolvent, it is unable to honour these undertakings, leaving the Members personally liable to repay their PPLs. This, as I shall explain, is a key issue for three of the purchasers in relation to those Members (“the Transferring Members”) who will be joining their businesses upon the transfer of assets pursuant to the asset sale agreements.

In the case of each of the four asset sale agreements the purchase price consists, wholly or partly, of the proceeds of Halliwells’ own debtors and work in progress, which the purchaser will endeavour to collect and pay over to the Administrators. In the case of two of the agreements, the proceeds are to be paid in part to the Administrators, and in part into a trust over which Halliwells will be the trustee for benefit of the PPL Providers, the Transferring members and the purchaser. In the case of a third, the Transferring Members will have the benefit of a covenant from the purchaser that the loans will be taken over. The reason for these arrangements is that in each of these three cases, the purchasers made it clear that if the deals were to proceed they wished to ensure that the Transferring Members did not become personally insolvent by reason of their obligations under the PPLs in circumstances where Halliwells was unable to honour its undertaking. As Mr Brown has elaborated, they were not prepared to risk the fact that some or all of the Transferring Members may no longer be able to practise as solicitors. Hence they stipulated that it be a condition of sale that the liability of Halliwells in respect of its undertaking to repay the PPLs of the relevant Transferring Members be discharged, at least in substantial part. I have been taken through the details of the asset sale agreements. In summary they comprise:

Mr Brown has explained that the remaining business of Halliwells in London is not included in any of the four sale agreements to which I have referred. However, five of the six remaining partners have finalised agreements to transfer to other law firms and it is hoped that a transfer in the case of the last partner may be agreed shortly.

The result of all of these arrangements is that substantially all of Halliwells’ legal business has now been or will shortly be sold or transferred. Nevertheless, there remains a possibility that client monies will still come into the administration and various files may be discovered that have not been transferred. Accordingly, the Administrators propose to appoint a solicitor to manage client monies and the control of client files for Halliwells in administration. Were such an appointment not to be made, the Solicitors Regulation Authority (“the SRA”) has indicated it would be likely to intervene. It is therefore proposed that a solicitor manager be appointed as an agent of the Administrators and that he be delegated all the powers that the administrators have in relation to the handling of client monies and client files. The SRA has indicated that it will not challenge such an arrangement and has agreed the scope of the appointment.

Mr Bannon has helpfully summarised the overall position. Halliwells was, prior to this application, loss making and those losses were projected to increase if it went into administration, significantly eroding asset value and having a knock-on effect on the funds available for distribution to all categories of creditors. The Administrators considered that the intended pre-packaged sales of the business represented the best deal available and would result in a higher level of recoveries for the secured, preferential and unsecured creditors than if Halliwells were allowed to proceed into a traded administration.

Importantly, the Bank, as a secured creditor owed approximately £18 million, stated by letter dated 19 July 2010 that it was content that part of the monies received from three of the four purchasers should be used for the purpose of repaying the PPLs of relevant Transferring Members:

“I have seen the draft sale agreements which are exhibited to your witness statement and acknowledge that it is intended that part of the monies to be received from three of the four purchasers of the business of Halliwells LLP are to be used for the purpose of repaying the PPLs of relevant transferring partners in the firm and this a key requirement of those three purchasers in entering into the proposed sale. On this basis and to enable the sale to proceed I confirm that the Bank is content for these monies to be treated and used in this way. The Bank acknowledges that the retention of sums and the establishment of the reserve trust to discharge the PPLs as described in the witness statements is driven out of necessity in order to maximise returns in the administration.”

Mr Bannon continues that the preferential creditors will be made up of employees of Halliwells who are not required by the purchasers. The estimated value of the preferential claims is between £68,000 and £100,000. The preferential creditors will be paid in full.

Further, the unsecured creditors will receive the maximum statutory “prescribed part” payment of £600,000. This sum will be available for distribution to all unsecured creditors and will result in a dividend of 2.63p in the £. On the other hand, if the four sales did not proceed and the business entered administration as a whole, the number of preferential and unsecured creditors would greatly increase, thereby lowering the dividend for unsecured creditors to 1.60p in the £.

Finally, Mr Bannon points out there will or may be Members (past or present) who are unsecured creditors of Halliwells, and who have not transferred as part of the four sales and who remain liable on their PPLs. However, he maintains, and I agree, that the payment of monies to satisfy the PPL liabilities of the Transferring Members under three of the four sales was a necessary evil to achieving those sales. The requirement was imposed by the purchasers and without it being complied with, the deals would have collapsed.

In Re Kayley Vending Limited [2009] BCC 578 HH Judge Cooke summarised the concerns about the use of pre-packs as being that they may too easily lead the directors and the insolvency practitioner to arrive at a solution which is convenient for both of them and their interests (perhaps also satisfying a secured creditor who might be in a position to appoint his own receiver or administrator) but which harms the interests of the general creditors. He also expressed the view that in exercising its discretion in pre-pack cases, the court must be alert to see, so far as it can, the procedure is at least not being obviously abused to the disadvantage of creditors and that for that purpose the court was likely to be assisted by the provision of (at least) the information required by SIP 16, in so far as known or ascertainable at the date of the application.

In support of this application, Mr Bannon has exhibited a draft note for the purposes of the SIP 16 letter to creditors. Importantly it contains a detailed exposition of why it is not appropriate to trade Halliwells and offer the business for sale as a going concern in the administration, full details of the marketing process and a complete explanation of the terms materially affecting the consideration paid. On the evidence before me, I am satisfied that the proposals are SIP 16 compliant and there is no evidence of any abuse of the process. To the contrary, the pre-packs are the only way forward.

The evidence before me establishes that the object of the administration is to realise property in order to make a distribution to one or more secured or preferential creditors. Further, the Administrators plainly think that it is not reasonably practicable to rescue Halliwells as a going concern or to achieve a better result for the creditors of Halliwells as a whole than would be likely if Halliwells were wound up. I recognise that my order permits the Administrators to enter into sale contracts which require them to apply a substantial amount of the consideration received for the purpose of paying down PPL obligations, and to that extent repaying the capital of the Transferring Members. These are undoubtedly preferences but they are, as the Bank has put it, driven out of necessity in order to maximise returns in the administration. In all the circumstances they do not, in my judgment, unnecessarily harm the interests of the creditors as a whole.