DWF acquired Cobbetts’ work in progress (WIP) from KPMG in February for £3.8m as details emerge of the Manchester firm’s fire sale.
KPMG was instructed on 17 January to start administration proceedings, although Cobbetts’ lender, Lloyds TSB, had engaged KPMG in September to formulate contingency plans as the firm was beginning to falter. Continued trading was dependent on the support of Lloyds TSB, which was only prepared to provide monies to pay January wages and other outgoings if Cobbetts granted security.
According to the Statement of Insolvency Practice (SIP) document drawn up by KPMG, DWF is also making £1.8m in payments from book debts and WIP available to the Cobbetts partners to help partners pay off their capital loans that amounted to £8.3m.
KPMG says the losses incurred by Cobbetts in its last period of trading will remove any further liability for tax payable on profits previously earned. This will amount to around £6.4m to be recouped in terminal loss relief and allows partners to carry back any trading losses that occur in the final accounting period to be set off against profits made in any or all of the previous three years.
The pre-pack deal means that DWF is not liable for the potential liabilities of Cobbetts, thought to be worth around £41m, half of which is owed to landlords.
The SIP document also describes the fall of Cobbetts in detail. It says that the firm entered into expensive new leases in 2006 and 2007 which, combined with the downturn in trade, led to a decline in profitability, some cash pressure and an over reliance on short-term funders. The firm had been trying to address the problem of real estate costs since 2009, by trying to sub-let empty office space in the firm’s Manchester office but this failed.
If DWF recovers more than £9.4m from collected fees it then has to pay 25% of any further recoveries to the administrators.
Cobbetts had turned to Deloitte and Pinsent Masons to find a way out of financial difficulties last year. But despite drastic measures such as reaching deferral agreements with both its landlords, retiring partners and HMRC, Cobbetts’ board approached former merger contender DWF with an offer of a solvent sale of the business in mid-January. Given the level of unsecured debt, DWF did not accept that offer and acquired the firm in a pre-pack deal instead.
Up to 70 partners are joining DWF from Cobbetts but won’t be part of the equity for at least 12 months. This includes managing partner Nick Carr and senior partner Stephen Benson, who will also not be joining DWF’s executive or management team.