Despite stigma, pre-packs are a viable option for troubled law firms

2 Aug 2013

Pre-pack administrations for law firms have come under fire from various angles over the course of the last 12 months, but I essentially agree with Lee Manning’s article in The Law Society Gazette, defending the option for troubled firms.

Whilst there has been, and potentially will continue to be, stigma attached to a firm opting to take a pre-pack administration, the process is all about selecting the right option for the company in question.

Administration is a difficult period for any firm to undergo, but it is also a period where everyone involved is focused on obtaining the best outcome from a difficult situation. In that environment, it has always seemed counter-intuitive to me that an option which could viably be the best available is often taken off the table at the very start of proceedings.

As Lee details in his article, a pre-pack administration involves an agreement of sale for a firm prior to the business entering administration. The sale is effected by the administrator often on the day of their appointment, or very shortly afterwards.

Criticisms of the system often focus on the fact that the lack of open-marketing of the company due to enter administration can limit the amount returned to creditors.

Some may argue that this was indeed the outcome in the most recent case study of a pre-pack sale in the legal market, when Cobbetts were sold to DWF.

This view though, fails to take account of two very important factors:

  1. Management buyout. If a firm is failing but some of the partners wish to take it over, a pre-pack is an acceptable and positive way to do this, with a minimum of disruption to staff and any clients who will continue to be serviced. The administrators and the directors have a duty to prove that a pre-pack sale will provide the best possible outcome for creditors, so it is impossible for firms to take this option in order to essentially phoenix the company, when better options were available.

  2. When a short term solution is the only answer. If a firm faces the possibility of being liquidated within days, then a pre-pack solution may actually be the only viable answer. When compared to the alternative, pre-pack in this case will almost certainly meet the above objective of providing the best possible outcome for creditors and the short-term completion can work in a number of cases.

In the case of the Cobbetts deal, the only suitable buyer for the vast majority of the company had stipulated that they were only interested if they had the right to exclusivity. Ignoring this request would have left Cobbetts’ administrators with a very small window to effect a sale, risking either the company disappearing entirely or having to accept a deal that provided even less return for creditors than the DWF purchase.

In essence, a pre-pack was the only option here as it may be for others, with a decision not to proceed down the DWF route amounting to a spin on a roulette wheel. At least by proactively choosing this deal, all at Cobbetts gained some time to plan futures and the firm remained almost completely whole. Where this is again the best option in the future, firms should be willing to investigate pre-pack as a viable alternative in otherwise uncertain times.

Jepson Holt are Merger and Acquisition Consultants, with a long history of securing the best possible outcomes for firms who may feel as though they have limited options. Talk to us today about our expertise and what we can offer your business.

[Sources: http://www.lawgazette.co.uk/news/cobbetts-demise-and-resurrection-full-story]

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By Philip Jepson. Phil is the Chairman of Jepson Holt Ltd., which he established in 2004. His main focus in the business is helping law firms grow their businesses and lawyers develop their careers. You can find him on , Twitter & LinkedIn.