(Credit: Nils Versemann/Shutterstock.com)

Slater and Gordon moved more than 40 of its U.K. partners out of its partnership before agreeing on a recapitalization package with Anchorage Capital that will give lenders ultimate control of the U.K. business.

Filings with Companies House show 41 U.K. limited liability partnership (LLP) members were terminated from the partnership in the year ending June 30, with 29 of those terminations taking place between March 1 and the end of May. All of those affected remain with the business as employees.

In addition, 12 partners left the firm over the course of the year, and three more left after the close of the firm’s financial year at the end of June, when the initial refinancing package with Anchorage and other senior lenders was announced.

According to ex-partners, the move to transfer LLP members into employees was made in response to partners’ fears that their capital could be at risk in the event of the debt-laden business going into administration.

Many of those leaving the partnership have been repaid their capital, according to former partners.

One ex-partner said LLP members, which included partners from legacy firms Russell Jones & Walker, Pannone and Fentons, were repaid their capital around the same time that they transitioned from the partnership to employee status.

“If the firm had not survived, members would have been responsible for their capital loans and their tax and people had in mind a Halliwells scenario,” said one former partner referring to the Manchester law firm that collapsed in 2012.

Members of the business wanted employee status because they were worried about any personal liability they might have, another ex-partner said.

“The former salaried partners all made a financial investment in the firm and they were worried about losing that investment and so they thought they might be better going back to becoming employees,” the ex-partner said.

A spokesperson for Slater and Gordon said the firm stopped adding new members to the LLP in 2015, as it was no longer viewed as the optimal structure to support the business strategy. “The LLP continues to operate, and whilst many members have chosen to transfer to employee terms, not all capital has been returned,” the spokesperson said.

Ex-partners told Legal Week that management were initially reluctant to make the change but agreed in response to a steady trickle of exits. Some 30 partners left in the year ending June 30, 2016.

“The firm was initially resistant to the idea, I think because it could have upset their lenders and made it look like the people in charge were panicking,” an ex-partner said.

Another said that despite the initial reluctance, the decision to make the change was made in order to prevent key partners leaving. “I think the hedge funds [that now control the firm] took the view they needed to make the change to keep the senior management team in place and to prevent any more exits,” he said.

News of the move comes as Slater and Gordon continues to attempt to stabilize its business in the U.K. in the wake of its £637 million ($829.83 million) takeover of the professional services arm of Quindell in March 2015. Since that point, the firm has slashed its U.K. headcount by 20 percent and has closed at least 18 of its 48 U.K. offices.

It has seen a string of exits in recent months, including personal injury partner Tristan Hallam, who joined Pennington Manches last month; London clinical negligence head James Bell, who joined Hodge Jones & Allen in May; personal injury specialist Paul Kitson, who joined Hugh James in May; and real estate partner Stephen Chalcraft, who joined Shakespeare Martineau in April.

Last week, the firm announced in a statement to the Australian Stock Exchange that fee and service revenue for the U.K. arm had plummeted 31 percent from A$230 million ($183.70 million) to A$157.8 million ($126.03) for the 2016-17 financial year as a result of the rationalization program.

The same statement confirmed the plans to separate its struggling U.K. business from its listed Australian arm, with lenders taking control.

It also launched a strategic review of its U.K. business legal services division last month, with former partners now expecting a sale of some or all parts of the U.K. business.

U.K. insurance player BLM confirmed to ALM’s London-based publication Legal Week that it is in talks with the firm about the business legal services division.

A BLM spokesperson said that conversations with Slater and Gordon about working closely with its business legal services experts are in early stages.

“I would have thought that they are probably going to sell the profitable bits of the business off bit-by-bit to get something out of it,” one former partner said.

Shortly after the Quindell deal was announced, Quindell was placed under investigation by the Serious Fraud Office over its previous accounting practices. This June, Slaters served a £600 million ($781.63 million) claim against Watchstone Group – Quindell’s new identity – over the acquisition.

Former partners squarely blame the disastrous Quindell deal for the current financial challenges. In February, the firm significantly wrote down the value of the acquisition, announcing an A$350.3 million ($279.94 million) “impairment charge”.

“They over extended themselves by a huge margin, buying at A$1.3 billion, ($1.04 billion)” said one ex-partner. “If you make an error, there is no way back.”

Slater and Gordon moved more than 40 of its U.K. partners out of its partnership before agreeing on a recapitalization package with Anchorage Capital that will give lenders ultimate control of the U.K. business.

Filings with Companies House show 41 U.K. limited liability partnership (LLP) members were terminated from the partnership in the year ending June 30, with 29 of those terminations taking place between March 1 and the end of May. All of those affected remain with the business as employees.

In addition, 12 partners left the firm over the course of the year, and three more left after the close of the firm’s financial year at the end of June, when the initial refinancing package with Anchorage and other senior lenders was announced.

According to ex-partners, the move to transfer LLP members into employees was made in response to partners’ fears that their capital could be at risk in the event of the debt-laden business going into administration.

Many of those leaving the partnership have been repaid their capital, according to former partners.

One ex-partner said LLP members, which included partners from legacy firms Russell  Jones & Walker , Pannone and Fentons, were repaid their capital around the same time that they transitioned from the partnership to employee status.

“If the firm had not survived, members would have been responsible for their capital loans and their tax and people had in mind a Halliwells scenario,” said one former partner referring to the Manchester law firm that collapsed in 2012.

Members of the business wanted employee status because they were worried about any personal liability they might have, another ex-partner said.

“The former salaried partners all made a financial investment in the firm and they were worried about losing that investment and so they thought they might be better going back to becoming employees,” the ex-partner said.

A spokesperson for Slater and Gordon said the firm stopped adding new members to the LLP in 2015, as it was no longer viewed as the optimal structure to support the business strategy. “The LLP continues to operate, and whilst many members have chosen to transfer to employee terms, not all capital has been returned,” the spokesperson said.

Ex-partners told Legal Week that management were initially reluctant to make the change but agreed in response to a steady trickle of exits. Some 30 partners left in the year ending June 30, 2016.

“The firm was initially resistant to the idea, I think because it could have upset their lenders and made it look like the people in charge were panicking,” an ex-partner said.

Another said that despite the initial reluctance, the decision to make the change was made in order to prevent key partners leaving. “I think the hedge funds [that now control the firm] took the view they needed to make the change to keep the senior management team in place and to prevent any more exits,” he said.

News of the move comes as Slater and Gordon continues to attempt to stabilize its business in the U.K. in the wake of its £637 million ($829.83 million) takeover of the professional services arm of Quindell in March 2015. Since that point, the firm has slashed its U.K. headcount by 20 percent and has closed at least 18 of its 48 U.K. offices.

It has seen a string of exits in recent months, including personal injury partner Tristan Hallam, who joined Pennington Manches last month; London clinical negligence head James Bell, who joined Hodge Jones & Allen in May; personal injury specialist Paul Kitson, who joined Hugh James in May; and real estate partner Stephen Chalcraft, who joined Shakespeare Martineau in April.

Last week, the firm announced in a statement to the Australian Stock Exchange that fee and service revenue for the U.K. arm had plummeted 31 percent from A$230 million ($183.70 million) to A$157.8 million ($126.03) for the 2016-17 financial year as a result of the rationalization program.

The same statement confirmed the plans to separate its struggling U.K. business from its listed Australian arm, with lenders taking control.

It also launched a strategic review of its U.K. business legal services division last month, with former partners now expecting a sale of some or all parts of the U.K. business.

U.K. insurance player BLM confirmed to ALM’s London-based publication Legal Week that it is in talks with the firm about the business legal services division.

A BLM spokesperson said that conversations with Slater and Gordon about working closely with its business legal services experts are in early stages.

“I would have thought that they are probably going to sell the profitable bits of the business off bit-by-bit to get something out of it,” one former partner said.

Shortly after the Quindell deal was announced, Quindell was placed under investigation by the Serious Fraud Office over its previous accounting practices. This June, Slaters served a £600 million ($781.63 million) claim against Watchstone Group – Quindell’s new identity – over the acquisition.

Former partners squarely blame the disastrous Quindell deal for the current financial challenges. In February, the firm significantly wrote down the value of the acquisition, announcing an A$350.3 million ($279.94 million) “impairment charge”.

“They over extended themselves by a huge margin, buying at A$1.3 billion, ($1.04 billion)” said one ex-partner. “If you make an error, there is no way back.”