Cobbetts filings reveal debt deal with Lloyds ahead of fire sale plan

Cobbetts created a debenture earlier this month securing all of its debt and future debt to its major creditor Lloyds TSB, filings with Companies House have revealed.

Documents filed on 25 January state that the firm create a debenture “securing all monies due or to become due from the Limited Liability Partnership to Lloyds TSB” on 16 January. The debenture also entitles Lloyds to “the power to appoint an administrator and/or a receiver”.

Details of the debenture agreement, filed by Walker Morris, come after Legal Week reported last year that Cobbetts had agreed to refinance £10m in existing loan and overdraft facilities with Lloyds, after switching from previous lender Royal Bank of Scotland at the end of the 2010-11 financial year.

It is not known at this stage whether the debenture resulted from refinancing discussions or whether Lloyds decided against future lending to the stricken firm, which today (29 January) announced its intention to find a buyer for its business ahead of appointing administrators.

One banker with knowledge of the firm said: “There could have been a refinancing event with Lloyds taking the view that financial performance at the firm was not strong enough, or that they just couldn’t get to an agreement. It is also possible there was a breach of covenant which could have led to the debenture.

“It is a drastic step. Normal banking practice would make this the last resort as it is in the bank’s best interests to hang on because if the borrower is still alive you are more likely to get their money back,” he added.

“But if I wanted to shore up my position and I had serious concerns about the financial standing of the borrower, I would look to take a debenture as it would give me security and preference over any other unsecured creditors.”

At this stage it is not guaranteed that the firm will go into administration, as this could be avoided through a fire-sale of the business. If a single firm were to try to take on the entire firm it is likely that they would take on much of the debt, according to accountants, though some creditors would accept writing off some of the value.

In contrast, if different parts of the business are bought by different firms, they would likely not take on the debt.

One accountant commented: “A landlord with a 10-year lease at £100,000 a year may accept a new lease from the acquirer for the full term but at £75,000, or a bank may accept a reduction in the debt such that it receives £75 per every £100 of debt. It is hard to say what may or not be possible, but at least they are facing up to it.”

The banker added: “There is no guarantee firms looking to acquire part of the business will take on debt. A smart way to go about things for a predatory acquirer at the moment with good negotiation skills, would be to pick up the key fee earners without wanting to get too involved in the liabilities. If you are not in the equity, you have no obligation, with the equity partners liable to lose their capital at most.

“Just look at Dewey. Other firms just cherry-picked the fee earners they wanted, and took the clients with them, and nobody took the legal entity in which Dewey carried on the practice of law, so that provide a pretty good recent illustration as to how things unravel.”

The debenture echoes a similar arrangement agreed by Halliwells and the Royal Bank of Scotland (RBS) in 2009, in which the law firm agreed a loan arrangement which effectively gave RBS security on its assets.

The firm, which subsequently collapsed the following year, agreed a debenture with RBS which gave the bank a “fixed and floating charge over the undertaking and all property and assets present and future, including goodwill, uncalled capital, buildings, fixtures, fixed plant and machinery”.

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