Two creditors who claimed they lent cash to Midland law firm Challinors Solicitors have started legal proceedings in a bid to retrieve £650,000 they are allegedly owed.
Dharmendar Khag, who said he lent the firm £400,000 over a two-year period, and games designer Cosmic Concepts, which said it lent the firm £250,000, have both served statutory demands on partners of Challinors.
Cosmic Concepts has also issued a High Court claim against all 14 of the firm’s partners while Mr Khag said he was planning to file a petition for bankruptcy relating to the firm’s partners.
The details emerged after it was revealed the law firm, which has offices in Birmingham city centre, West Bromwich, Halesowen, Nottingham, Leicester, Loughborough and Wolverhampton, had appointed a corporate recovery specialist regarding its financial situation in May.
But Challinors maintained it was business as usual and said it was gearing up for an imminent sale of the business.
Although the firm’s partners this week unanimously agreed a notice of intention to appoint administrators, it was understood the move was designed to protect the interests of the firm for a 30-day period with a view to allowing its sale to go ahead.
The firm has notified the High Court in Newcastle of its intention to appoint Eric Walls and Wayne Harrison of KSA Group as administrators.
In letters to Cosmic Concepts and Mr Khag, Berwick-on-Tweed-based KSA Group revealed it had been appointed to assist Challinors with the firm’s “current financial position” and was holding detailed discussions which included “the partnership’s future restructuring”.
Both Mr Khag and Bally Shanker, a director of Cosmic Concepts, contacted the Post.
Mr Shanker claimed he was approached by a partner of Challinors last December and asked if he would lend the firm £250,000 to pay a VAT bill, with a promise the money would be repaid within 12 months.
“I thought, lending the money to the partners of a leading law firm, I would be safe and would be repaid,” he said.
Mr Shanker said he was surprised to receive a letter towards the end of June from KSA.
“It now appears that Challinors Solicitors are in financial difficulty and it is unlikely I would be repaid the loan in full,” he added.
Mr Shanker said he had now served statutory demands on 13 of Challinors’ 14 partners and was attempting to serve a notice on the remaining one.
And speaking about his dealings with the law firm, Mr Khag said: “I have issued demands on the partners and am in the process of putting in a winding-up petition. Every partner has been issued with a statutory demand.
“I lent the firm £200,000 in July 2011 and another £200,000 in 2012.
“They missed a loan repayment in June and in July I contacted them about payments being due but no-one rang back.
“Three days later I got a letter from KSA.”
In the letter from KSA to Mr Shanker, corporate advice administrator Eirlys Lloyd confirmed Challinors’ partners acknowledged the late payment of monies owed to him. She said discussions with Challinors related not only to a proposed restructuring of the firm but also “possible forward investment in the partnership’s business from new external investors”.
Ms Lloyd added that discussions were taking place with the Solicitors Regulation Authority, which would need to ratify any investment in the firm.
She said: “The clients’ interests, monies and files must at all times be considered of paramount importance, or the SRA can intervene, remove the files and clients’ instructions.
“Subsequently all value will be lost for the creditors and the partners.
“Our plan is to avoid that drastic outcome for the partnership and therefore you as a creditor and restructure the debts and the business and comply with the SRA’s requirements.
“We also plan to avoid any formal insolvency process if possible.”
Speaking to the Post, Challinors’ senior partner Paul Griffiths said: “This is a good news story not a bad news story.
“Challinors is positioning itself for an eventual sale of the business.
“In the interim I am pleased to confirm the interests of our staff and clients are fully safeguarded.”
And a statement issued by the firm said: “Challinors are currently in commercial talks with some of our creditors. These discussions are confidential and it will not assist to comment on them publicly.”
It added that the company was continuing to “operate normally”.
The SRA confirmed it spoke regularly to Challinors as a matter of course.
An SRA spokesman said that, as one of the 200 largest law firms, Challinors had a regulatory manager, a named person, whose job it was to liaise with the Authority on a weekly basis.