Douglas Mill: Let there be light…

I still can’t quite believe the response to my earlier article on the implications of the Pagan Osborne collapse. Literally dozens of solicitors have e-mailed or spoken to me. It seems most of them share my views that this latest case could cost the profession limited liability status, raise significant regulatory issues and kick start a call for solvency testing.

In particular, I would like to thank all those who have given me background and insights.

Now, I have to declare my credentials. I am just a wee guy from Paisley. I am not a Master of the Universe. I can understand Newtonian mechanics: forces, gravity and all that. I simply cannot grasp quantum physics. My brain is the wrong shape or not big enough or both. Schrodinger and Heisenberg could give me weeks of personal tuition and I would be no clearer on leptons, quarks and eigenvectors. Waste of time.

And I was given to believe 10/12 years ago that whilst financing small law firms was the economic equivalent of old physics, big firms were in the stratosphere of strangeness and charm and that I simply wouldn’t be able to grasp their financing. Fair enough.

Except it turned out to be bull. Total bull. Smoke and mirrors and the same crash as Icarus when flying too close to the sun.

The role of the banks bears analysis. One in particular, which applied a lot of rope to firms who eventually hung themselves.

The profession is looking for answers to a number of pertinent questions and many believe that an independent judicial factor should be appointed to get to the bottom of this sorry affair. Total transparency is required for creditors and for those who now find themselves in the unfortunate position of being guarantors for a firm that they believed they had severed all connections with.

The facts we need to know include:

1. What is the total amount of indebtedness? Everything over recent years- including bank write offs and lost capital accounts? One solicitor who was keeping a weather eye on PO for a number of years has been good enough to let me have five years’ accounts from 31/10/11 to 31/10/15 and it appears, among other interesting facts that HBOS wrote off £1,359,200 in 2014. Presumably to get shot of the account. These figures will not feature in the final demise. And the 2105 accounts show a partner with a Capital Account credit of £479,947 ( down from £523,603 the previous year). Again, correct me if I am wrong, but the first things to go in a situation such as this is the capital accounts. And these accounts are in the public domain. Pre-incorporation accounts are not.

2. Was the firm solvent when it extended loans to a director? Did it obtain full market value for the sale of property to a director?

3. And how many partners were there? The White Book said 4 the PR put out said 10. I recently heard 12. The accounts suggest five equity partners. Surely this matters in relation to creditors, clients, internal liabilities and Master Policy premiums? There is a fundamental difference here for a variety of reasons.

4. Are there regulatory implications here and is LSS too close to it to deal with them? It is obvious from the accounts that PO were, to put it very mildly, in extreme financial difficulty during Alistair Morris’s unique presidency. The impact on the profession if this firm had not refinanced and enjoyed the benefit of such a massive (and as far as I am aware, and indeed pray, unprecedented in the profession) write off, does not bear thinking about.

5. To quote Ace — ‘How Long Has This Been Going On?’ The implication given is it was a very recent and wholly unfortunate crash. Just bad luck. Could have happened to anyone. You know how these things are. Eh, no. Not close. The best of the lot is blaming subprime loans. And LBTT. Aye, right, as the profession is saying.

6. What about directors’ duties and obligations? What about solicitors’ ethical obligations? Is this acceptable? I really don’t know. Are we simply pretending this didn’t happen?