Struggling law firm Slater & Gordon Limited (ASX: SGH) this morning announced it plans to withhold up to £50 million in payments to the Watchstone Group (former Quindell Group) after it agreed to acquire part of the Quindell business for more than $1 billion in March 2015.

The law firm was subsequently forced to write off around $814 million of the value of its Quindell acquisition within a year of its purchase due to its poorer-than-expected financial performance and the potential impact of proposed UK government legislative changes on the treatment of personal injury claims.

Slater & Gordon controversially acquired the claims management business of Quindell despite it being in the deepest, darkest doghouse with UK investors over regulatory investigations into its accounting practices and other serious allegations of malpractice. A 30-second Google search in early 2015 would have revealed the serious allegations and problems to those conducting due diligence on the deal at Slater & Gordon, although blind to the red flags it pressed ahead with the circa $1.2 billion deal after its own due diligence.

Slater & Gordon’s announcement today that it intends to withhold some payment versus warranty claims over the Quindell business means Watchstone and Slater & Gordon will likely be heading for a bitter legal dispute in order resolve the claim.

For Slater & Gordon investors there’s some potential upside if it is able to save £50 million in payments over the Quindell deal, although it will need a strong case of misrepresentation over warranties given by Quindell or similar given Slater & Gordon itself was responsible for the due diligence.

The firm still carries a net debt of $682.3 million as at June 30 2016, which itself was reduced partly due to the post-Brexit tumble in the value of sterling versus the Australian dollar. The company also a delivered a net operating cash outflow of $104.2 million for FY 2016. This means turning cash flow positive and paying down its debt is a critical requirement if it is not to slide into a debt-induced oblivion.

Other emergency options include an equity raising, debt for equity swap, or going back to its lenders including Westpac Banking Corp (ASX: WBC) to ask for more credit. Unfortunately after the Quindell deal, Slater’s CEO Andrew Grech is not in a credible position and likely to get laughed out of the room if he ever returns to the banks asking for more credit, which means the firm and its investors remain in a perilous position.

Forget Slater & Gordon!

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.