While DAG was successful in obtaining a costs award in its favour, it is disappointed that the court has allowed the IoM Treasury to escape the financial consequences of creating and promoting a Scheme that was manifestly not in the interests of depositors

The Depositors Action Group of collapsed bank Kaupthing Singer & Friedlander (IOM) Ltd has expressed their disappointment, in a press release (see below), at the decision of Deputy Deemster Corlett not to make the Treasury pay the price of promoting the failed Scheme of Arrangement (SoA).

His Honour rejected DAG’s calls for the Treasury to pay both DAG’s costs, and those of the joint provisional liquidators (JPL), and decided they should instead be paid as a pre-preferential debt on the assets of the company. In other words the depositors/creditors of KSF (IOM) will pick up the tab, estimated to be far in excess of £1m.

He also ruled that as the winding-up was a mirror image of the SoA then DAG’s costs, which are thought to be minimal, should also be paid out of the assets of the company.

His Honour identifies in his judgment that the claim didn’t revolve around whether DAG should have their costs paid but by whom and from what date.

In dismissing DAG’s counsel’s interpretation of the judgment in the ‘Esal case’ - the only authority relied on by the competing parties – that Treasury, as the ‘loser’, should pay, his Honour did side with DAG on the date their costs should first be paid. He agreed the November 2008 date, when the SoA was effectively first mooted, should be used rather than the date of the April 2009, when the court decided the SoA would be put to the vote.

Clearly his Honour was persuaded by Mr Gough’s interpretation of Esal, on behalf of the Treasury, misconduct had to be shown, by the promoter, before it could be held liable for the cost of the other party. Mr Chambers had essentially argued it was not necessary for misconduct to have taken place it was simply a matter of - he who loses, pays.

His Honour also accepted Mr Gough’s point that if he went with DAG it would mean, with the current state of the IOM’s inadequate insolvency laws, it would provide a disincentive, in the future, for anybody to promote any thing other than liquidation.

His Honour did turn to this point in a postscript to his judgment, in which he said he hoped priority would be given by Treasury to reviewing the law. He also added “The Island’s reputation as an international finance centre will only suffer if it is not.”

The Manx Herald would suggest he missed out the word ‘more’ after ‘suffer’.

He also mentioned, in passing, the “prudence” of Treasury in pursuing the SoA as opposed to following the well trodden path of liquidation, and the Depositors Compensation Scheme; but said it would be for others to consider not the court.

Certainly this should form a central part of any investigation into the collapse of the bank and the resulting farce that has followed it.

His Honour also chose to make a point of Mr Caine’s submission that DAG “did not speak with one voice” when it came to the voting on the SoA. However, his perceived ‘dig’ at DAG is probably balanced by his observation on the JPL’s failure to pursue a costs order against the Treasury; even if he said it may be for the JPL and the creditors to take view on whether they “have acted in dereliction of their duty in failing to pursue such an Order”.

His Honour also chucked out the suggestion of DAG a ‘Bathampton Order’ should be issued - which would have had the effect of stopping the bank’s legal costs being paid until all the creditors have been paid out – as he found no evidence of misconduct by the Company or the JPL.

As an aside to the handing down of his judgment, Deputy Deemster Corlett was critical of comments made by DAG in a press release, issued since the hearing on the 23^rd June, some of which he felt were injudicious. With a wry smile he suggested if they were dissatisfied with his decision it was open to them to try their luck in the appeal court; but he clearly gave the impression he doubted their case would find any more favour with the Staff of Government.

The full text of DAG’s press release is reprinted below.

DAG read the Deputy Deemster's costs judgment with interest. While DAG was successful in obtaining a costs award in its favour, it is disappointed that the court has allowed the IoM Treasury to escape the financial consequences of creating and promoting a Scheme that was manifestly not in the interests of depositors and has ordered that the costs of the Treasury’s failed Scheme should fall to the reluctant and long-suffering depositors and other creditors. 

Contrary to what counsel for the IoM Treasury argued before the Court, DAG does not believe that the IoM Treasury was motivated by an altruistic concern for the interest of the bank’s depositors. DAG believes the Scheme was first and last pursued for the benefit of the Treasury and the Isle of Man. It was a fig leaf to hide deficiencies in the Island's financial regulation, and was intended to save the government from the perceived stigma of a liquidation. Even with that purpose, the Scheme could have been made attractive to depositors had there been a will to do so. There was not.

DAG believes the clear duty of the joint provisional liquidators was to ask for their and the company's costs of and occasioned by the Scheme. It should be remembered that Mr Simpson was equivocal about the Scheme until April, when his support for it increased to luke warm. They did not ask. DAG is also clear that the joint provisional liquidators ought as a condition of their support for the Scheme to have obtained a contractual undertaking at the outset from the Treasury to underwrite their and the company's considerable costs of the Scheme. 

DAG notes the comments made by the court about it voicing the opinions of its members. It was not the intention of DAG to offend the Court. DAG is an action group that speaks for ordinary people whose access to their life savings has been cut off for the best part of a year while the IoM government played politics, introducing unnecessary delays in the compensation and liquidation process, rather than allowing matters to follow the well trodden course of liquidation or, better, offering proper compensation to depositors as other jurisdictions have done. Inevitably this has engendered feelings of great frustration, desperation and hostility.

DAG  notes  the invitation of the court to appeal against its judgment, but is understandably reticent because such an appeal would have to be brought at very considerable further cost in the same legal jurisdiction in which there has already been much disappointment for depositors.