SRA: Close involvement with Cobbetts for nine months before collapse
Six former leaders of defunct firm Cobbetts have been fined by the Solicitors Disciplinary Tribunal (SDT) for their actions as the firm was going under.
However, the Solicitors Regulation Authority (SRA) withdrew an allegation that they exhibited “manifest incompetence” in the way they ran the firm.
The decision – by way of an agreed outcome with the SRA and approved by the tribunal – comes some five years after Cobbetts was sold in a pre-pack deal to national firm DWF.
The outcome document recorded that the SRA became involved in close monitoring of the firm in June 2012, nine months before the firm went into administration.
This was the time when Cobbetts began experiencing cash flow problems as a legacy of the downturn in business during the financial crisis of 2008-09, “which had hit at a time when the firm had been expanding into new premises, combined with fee under-performance in the financial year ending April 2012”.
It added: “Those factors were then compounded in summer 2012 by the trend of reduced fee generation in the summer months and delay on the part of the firm’s major creditor, [Lloyds Bank], in agreeing a mid-term facility and the transfer of the firm to its business support unit, which led in turn to the deferral of a scheduled capital injection from new members.”
Despite efforts to improve cash flow, by January 2013 a forecast £2.9m fee shortfall for the financial year “undermined the proposed restructure and rendered the business no longer viable”.
The initial administrators’ report showed debts of £90m, but £74m of this was a notional amount based upon total future liability for rent. But the actual liabilities have turned out to be significantly less.
The six disciplined by the SDT were Nick Carr, who was managing partner, Stephen Benson, the chairman and senior partner, and board members Paul Brown, Mark Gibson, Jeremy Green and Richard Webb.
Mr Carr was fined £17,500, Mr Benson, Mr Brown and Mr Webb £15,001 each, and Mr Gibson and Mr Green £12,500 each. They were also ordered to pay costs of £35,000 each.
The only finding against all six was that they failed to take sufficient steps in respect of contingency planning, in breach of SRA principle 8 (you must run your business or carry out your role effectively and in accordance with proper governance and sound financial and risk management principles).
All but Mr Green were found to have failed to ensure that the partner responsible for renewing Cobbetts’ professional indemnity insurance with Libra disclosed to the insurer the dealings the firm was having with the SRA over its financial difficulties.
This was both a breach of SRA principle 6 (you must behave in a way that maintains the trust the public places in solicitors and the provision of legal services) and principle 8.
All but Mr Brown were found to have breached principles 6 and 8 for failing to adequately supervise James Boyd, who was Cobbetts’ finance director, in his dealings with a retiring partner who had agreed to defer his capital repayment to help with the firm’s cash flow but requested monthly financial information.
Mr Boyd – a non-solicitor who also faces the tribunal and was not part of the agreement – is accused of not providing the updates.
Mr Carr and Mr Brown were also found not to have dealt with the SRA “in an open, timely and co-operative manner”, in breach of principle 7. They failed to tell the SRA for three months about the existence of a report by KPMG on the firm’s short- and medium-term cash flow forecast
Finally, Mr Carr admitted two more breaches of principle 7 by “failing accurately to represent the position” on two possible sources of funding – in essence, he painted a more positive picture than was the case.
All other allegations made against the six were withdrawn, most notably that in all of these actions, the group exhibited manifest incompetence.
Also dropped were allegations that they breached principle 8 by causing or permitting the firm to be unable to meet its debts and members’ drawings to exceed profits.
The outcome details considerable mitigation put forward by all six, which included the outcome of the pre-pack: “There was no loss to any client and around 95% of the clients transferred their business to DWF. The firm had provided employment to in excess of 500 people (including members) and positions were found for almost everyone either at DWF or, in a few cases, elsewhere.
“The [six] were subsequently commended by board-level representatives of two clearing banks on a textbook resolution of its financial problems by using the ‘pre-pack’ for the purpose for which it was intended, rather than the purposes for which it has sometimes attracted bad publicity.
“[They] are not aware of any adverse publicity, or public interest, regarding their conduct, either at the time or since.”
They also highlighted the “immense stress” that each suffered at the time and how it “continues to take its toll”.
“It is now over five years since the SRA became involved in the firm, over five years since the administration, and three years since the Insolvency Service determined, following its investigation into the circumstances, to take no further action against the respondents, which have affected their mental well-being and their abilities to earn.”
At the time they were referred to the tribunal last year, the six issued a statement saying that the SRA allegations were “misconceived and are fully, and strenuously, denied. The evidence demonstrates that we acted appropriately and with propriety throughout”.
As well as Mr Boyd, non-lawyer Stephen Thornton was also charged. According to the SRA, they were also dealt with through an agreed outcome. Mr Boyd was fined £8,500 and ordered to pay costs of £10,000, while Mr Thornton was fined £2,500 with £3,000 costs. The ruling has not yet been published.
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