Recovery First model proving highly successful in Delta Legal run off

Achieves £890,000 in 21 months – potentially seven times more than a fire sale with more to follow – and, in addition, over £700,000 in disbursements

Updated: 30th June 2016

When claimant personal injury (PI) law firm, Delta Legal, realised it was facing insolvency issues following the huge changes to the legal landscape in 2013, its managing partner knew he must act quickly to improve the situation for creditors and clients.

It was in January 2014 when Delta Legal recognised there was trouble ahead and immediately contacted Recovery First managing director, David Johnstone. After being told about the situation, David directed Delta Legal to other experts, including independent accountants and insolvency practitioners, who advised on an independent voluntary arrangement (IVA).

Delta Legal then made the decision to appoint Recovery First to oversee the managed and compliant run off of 800 PI files, which will achieve the Manchester based firm almost 100% of the value of its work in progress (WIP) over three years.

If Delta Legal had opted for a fire sale, it could have made approximately £150,000 to £200,000. Instead, 27 months in, Recovery First has liquidated 84% of the value anticipated to be locked up in the WIP at the point of being instructed and has outperformed the target set for the period.

Over the last 27 months, its panel firms have realised some £950,000 for Delta Legal, net of fees, from the firm’s existing WIP, which had a balance sheet value slightly in excess of £1m. In addition to this, Recovery First has also realised an additional £752,000 in disbursements for service providers in a situation where it is often difficult for them to follow the claimant.

By entering into an IVA, Delta Legal not only avoided a distressed sale but also achieved an orderly wind down in an SRA compliant manner; a process showing partners/owners can avoid bankruptcy and retain their practicing certificates.

Insolvency practitioner at FRP Advisory LLP, which advised Delta Legal and supervised the voluntary arrangement, David Thornhill said: “The Recovery First model is working well and maximising returns for creditors.

“The service it provides is fairly unique and was perfect for Delta Legal at this time. From an IP perspective, Recovery First makes life easier for us in that it offers a very streamlined process, which allows the early repatriation of funds recovered from successful legal cases back to the proper parties. There’s at least monthly reporting, taking a great deal of the administrative burden away from the IP; this helps to reduce the costs and ultimately enhances returns to creditors.

“Further to this, we’ve found the Recovery First team to be extremely proactive in providing us with information, which is always detailed and professionally produced. It makes a huge difference from the IP’s point of view who does not have to be continually chasing work in progress.

“Sadly we’re seeing more and more PI firms in this situation but it was refreshing to have the issues faced by Delta Legal brought to our attention early since the options available for restructuring were greater. In this case, the proactive involvement of Recovery First avoided the problems that can be encountered in disposing of books of WIP, often at a significant discount to their real value. By utilising the efficiencies of the Recovery First panel and its proactive management we believe recoveries for unsecured creditors will be greater than would otherwise have been achieved. In addition, the benefit of avoiding bankruptcy to the sole trader in this case has allowed him to retain his practicing certificate.”

The documentation governing the arrangement with Recovery First was prepared by JMW Solicitors and sees Recovery First facilitate five panel firms and project-manage the transfer process. It continues to monitor the liquidated value flowing to Delta Legal on case conclusion and, in the meantime, Delta Legal is supervising and managing its own orderly wind down.

Managing director at Recovery First, David Johnstone said: “We’re delighted to be making such headway with Delta Legal’s voluntary arrangement as it proves our model works extremely well. In the case of Delta Legal, we’re significantly ahead of target. We thought we would see 80% of anticipated recovery value within 21 months, but we’re actually nearer 85% of the value on the balance sheet at the point of our involvement. This is likely to culminate in a situation where the sums realised for WIP exceed the expectation at the point of appointment. The whole process for Delta Legal will last for three years, therefore with a significant volume of matters still to conclude over the next 9 months and a residual to then be capitalised, we’re hopeful we’ll exceed the balance sheet value on behalf of the firm.

“Entering a voluntary arrangement buys a law firm time. There will be many firms where, on a balance sheet basis, they are solvent but cash isn’t flowing quickly enough to address their liabilities as and when they fall due. In such situations it may be possible to manage the situation on a completely informal basis, but the use of a voluntary arrangement provides certainty and they should be able to pay off all their liabilities as the asset is liquidated, retaining the balance of the realised value for themselves.”

Speaking of his decision to hand the files over to Recovery First, managing partner at Delta Legal, Daren Ismay said: “The Jackson Reforms resulted in such a draconian reduction in revenues and recognising the firm wasn’t going to be financially viable going forward, I decided to take immediate action and contact Recovery First. By seeking professional advice early, I’ve been able to manage the process, which will improve the situation for creditors and clients alike.”