No simple answer to collapse of Semple Fraser

OF COURSE it’s not fair to quote it but the website of Semple Fraser, now in administration, advises visitors that what makes it stand out is: “We focus on the bigger picture.

Our experience is that clients want to concentrate on their business issues rather than managing the legal process.”

The seismic shock of the abrupt collapse of one of Scotland’s bigger legal firms, with 20 partners and 70 qualified legal staff on its 120-strong payroll, is still working its way through a sector that has become used to takeovers and mergers in the shake-out that has followed the recession since 2008.

The bigger picture within which Semple Fraser operated was well known and has affected the whole sector. The speed of its demise seemed so unbusinesslike. On 5 March the company issued a statement indicating it was looking for prospective merger partners.

Managing partner Simon Etchells said: “It’s well known that the market for commercial legal services has contracted, and we’ve been weathering these challenges. We’ve reduced our costs but are still reviewing the business and our alternatives. This process is under way and we will not be making any further comment until it is complete, and the partners have decided on the best way forward for the business, our clients, and our staff.”

By the next morning staff were informed by e-mail that the company was going into administration. Other companies – and their clients – want to know what happened.

“In addition to the general recession since 2008,” says Alistair Morris, chief executive of Pagan Osborne, “there are also particular aspects that led to the volume of activity in terms of legal services in Scotland falling off a cliff. Domestic housing activity is down, commercial development is down, business mergers and acquisitions are down. What’s different about this recession is that the whole legal sector has been affected.

“As well as that, the Royal Bank of Scotland and Bank of Scotland were driving a lot of activity on their own account in the last decade, as well as funding activity in the wider economy. Their difficulties and the subsequent departure of much decision-making to the south has created something of a Catch-22 for the firms who did very well on the banks’ coat tails. Whatever your gearing is, if you are in a sector that has lost 30-40 per cent of its business you are in choppy waters.”

It was well known that Semple Fraser were likely to be exposed, but no reason to think that would be more than many others were likely to be. Their website specifies the most affected areas – construction, finance and real estate – among their specialisms.

It had been noted that they were late in filing their 2011-12 annual accounts to Companies House. Their 2010-11 accounts posted revenues of £12.2m, an increase of ten per cent on the previous year, but the figure was still lower than before the 2008 crash. The firm’s turnover was £15.4m in 2006/07.

While wages and associated costs had been cut by more than £1m between 2009 and 2010 (from £5.17m to £4.12m) they had risen again to £4.84m in 2011.

Commitment to forward leases had risen from £804,000 in 2009 to £1.236m in 2011. Nevertheless they reported an operating profit of £3.648m in 2011 with plenty of cash in the bank. If something dramatic happened during 2012 there was no obvious hint of it in the 2010-11 accounts.

Grapevine speculation has been on the role of Lloyds TSB, which held a floating charge, but that had been pared down from £592,000 in 2009 to £261,000 in 2011. To pull the plugs this month the bank would either have to have had a severe panic attack or seen something extremely worrying within Semple Fraser during 2012. Similarly, the rumour mill has ground out a suggestion that Tesco, a key client during Semple Fraser’s expansion in the last decade, had cut its commitment to the firm.

A spokeswoman for Tesco would only confirm that her company was still doing business with Semple Fraser up to the moment it went into administration.

The administrators, RSM Tenon in Scotland, have not released any detail on the basis of commercial confidentiality beyond their statement on 9 March in which they set out that, remarkably quickly, they had “agreed a sale of the Manchester office operations to Weightmans, including the transfer of all 14 local office staff, including two partners, who will transfer to Weightmans office in the city; agreed a sale of certain clients and the formation of a new Scottish construction practice for Weightmans in Glasgow, following their hiring of one partner and two staff members from Semple Fraser; agreed a sale of work in progress to Maclay Murray & Spens following their hiring of seven partners from Semple Fraser, based in both Glasgow and Edinburgh; agreed a sale of work in progress to Dundas & Wilson following their hiring of six partners from Semple Fraser to be based in Edinburgh; three partners have joined other practices [Anderson Strathern] in Edinburgh; and agreed arrangements in principle, including with the 
firms mentioned above, that will allow all 12 Semple Fraser legal trainees to complete their traineeships.”

With the exception of seven staff to be retained by the joint administrators to assist with the affairs of the business, all remaining 62 staff in Glasgow and Edinburgh were made redundant. Some of those without jobs or severance pay are asking how it could be the partners found new positions quite so quickly after administration if the decision was as sudden as depicted.

While the trainees are being taken on by new hosts to complete their traineeship there is no guarantee that any of them will be retained afterwards.

Lorna Jack, chief executive of the Law Society of Scotland, is also constrained by confidentiality but in terms of the timeline of events she says the society was only advised at the very last stages prior to the appointment of administrators.

“Our chief concern is always for the clients – protecting their money and their current business with the firm in any winding-up, whatever the circumstances. But we engaged with the Semple Fraser partners to ensure they were aware of their obligations; we took calls from other firms representing clients dealing with Semple Fraser wanting to know where they stood; and we took calls from solicitors and trainees within Semple Fraser for clarification of their situation.”

The sudden, apparently unmanaged collapse of Semple Fraser is on the same scale in the commercial legal sector as the abrupt closure in the criminal defence business of Ross Harper in May.

The tax regime is a factor with partnerships. There is no incentive to leave money in the firm in the good times. With a limited company the tax regime is substantially different.

Alistair Morris says the firms waiting and watching for more information should be looking at structures that allow adaptability in response to changing market conditions. “The partnership structure has problems in flexibility. The tax regime in partnerships gives an incentive to short-term profit taking rather than leaving money in the firm.”

Drawings and distributions to Fraser Semple’s 24 members in 2010-11 totalled £3.24m from the operating profit of £3.648m . The highest earning partner was awarded £218,000.

Mr Morris says banks used to fall over themselves to lend to prospective partners at advantageous rates. Now they’re not really interested. That means in smaller firms partners can sometimes be trapped with an unsellable share.

“There are bound to be more in the pipeline. I don’t know any of the details of the Semple Fraser situation but I doubt if there will be a single ‘golden bullet’ that you could argue inflicted the fatal injury.”