Manx Herald Isle of Man: KSF (IOM) liquidation granted another 21 day reprieve

KSF (IOM) liquidation granted another 21 day reprieve
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Herald Editor on 29 January, 2009 03:54:00
 
Deputy Deemster Corlett has granted, this afternoon (Thursday, 29th January),
the Treasury’s wish for a further adjournment to the joint Petition, by KSF
(IOM) and the Financial Supervision Commission (FSC), to ‘wind-up’ the bank.
However, it was John Wright’s submission, appearing on part of a large number
of ‘smaller’ creditors (but who jointly are owed circa £100m), that the
adjournment should not be 60 days, but a shorter period, that was acceded to by
his Honour.
In granting a further 21 day adjournment, his Honour made it clear that he is
unlikely to be persuaded to grant a further adjournment, unless all the matters
raised at this court, with regards to the proposed ‘Scheme of Arrangement’
(SOA), are appropriately addressed. He ordered that affidavits be submitted
within 14 days; and suggested that the requests by Mr Wright’s clients - for
more information, a comprehensive statement of affairs and how creditors’
rights, to take action against third parties (such as regulators or directors),
could be protected - are dealt with.
Having listened to a full morning of submissions - mostly from the Treasury and
creditors supporting the SOA option - Deputy Deemster Corlett had put it to the
Treasury - represented by the Learned Attorney General, John Corlett and Alan
Gough - that the only apparent advantage of the Treasury’s proposal, if it
worked, would be that ‘smaller’ depositors would get all their money back a
few months sooner than under a traditional liquidation.
His Honour seemed less than convinced that the timescales being proposed by the
Treasury, for their SOA, even with a fair wind, are workable; which is partly
why he granted the shorter period of adjournment. His view was that in 21 days
time he will be able to better judge the likelihood of the Treasury proposal
having any chance of success.
It was announced during the hearing, by the A G, that part of the Treasury’s
proposal, - worked up with consultants Alix Partners - involves ‘scheduled
assured payments’. Effectively, using taxpayers’ money - and as of yet
unapproved by Tynwald - payments would be paid to depositors within 3 months
(estimated to be July/August 09) of a SOA being approved, such that 54% of
depositors would have received all their money back. A further payment would be
made in 12 months by which time 65% in number, and 35% by value, would be
repaid. A third payment would be made in 2 years resulting in 71% in number, and
49% by value, having been repaid. Thereafter, payments would be paid out,
equally, to the remaining creditors as assets are recovered. The Government
(taxpayer) would not start being repaid until 65p in the pound had been received
by creditors.
The A G added that Treasury is acutely aware of the financial plight of some
creditors and so Tynwald is to be asked, at the next sitting, to agree to an
increase to £10,000 the ‘Early Payment Scheme’; and if approved 40% of
depositors will get all their money back.
He pointed out that Mr Lovett, of Alix Partners, in his affidavit, had
identified four advantages of the SOA option, including a smoother and more
efficient payout to creditors.
However, one of the ‘benefits’ identified is the mitigation to the damage
the IOM’s reputation, as a finance centre, could suffer if KSF (IOM) collapses
into liquidation; and it is this, in the view of the Manx Herald, that is
probably seen as the most attractive benefit of a SOA to the Government.
It was also put to the Court that if the bank goes into liquidation, and the
Depositor Compensation Scheme (DCS) kicks in, then the FSC, who operate the
Scheme, have given evidence that payments to depositors were unlikely before
November 2009.
When Mr Gough took over, and expanded on some of the Alix Partner’s proposals,
he agreed with his Honour that it could be possible to have a liquidation and a
SOA, but he suggested it would be very laborious; and in any case, under the
proposed SOA, the banks would be making contributions in a way similar to the
DCS.
Mr Gough clarified that the SOA would not guarantee any more being paid out than
in liquidation, but it would be quicker, and it would favour the smaller
depositors.
He also suggested that in the event of another bank failure, under the terms of
the SOA, depositors in KSF (IOM) would not be affected as they would be if they
were under the DCS. (Heaven help the tax payer then if another bank goes bust -
Ed.) Mr Gough pointed out that ultimately if the creditors didn’t like what
was being put to them they could reject it, but at least they are being given
the choice; and all that would be lost was 60 days.
He thought Treasury would move “heaven and earth” to try to keep to any
payout time table.
Mr Cain, appearing for the joint liquidators provisionally, gave an up date on
the amount of assets recovered so far.
He said that £140 million (in Sterling equivalent) is being held in a number of
banks to spread the risk (and it is unfortunate that this simple and sensible
process had not been employed by the bank previously, and a point not lost on Mr
Roper, one of the creditors at the hearing - Ed.).
He explained they are experiencing some difficulty with realising some assets
and gave as an example the JJB Sport shares which had been lodged as security
for borrowings. He also pointed out that winding-up order for the UK arm of KSF
had as its main objective the moving of Edge deposits to ING. As for the
‘parental guarantee’, he gave the impression it is worthless and is unlikely
to produce any funds.
With regard to legal action, advice had been taken and it had been decided not
to take an action against the UK authorities, although he acknowledged that the
Icelanders are; and as for the directors, the Company Act limits the action that
can be taken - albeit an individual creditor could take an action if they so
wished.
Mr Cain suggested that any SOA would best be approved by the UK High Court,
given the number of UK based creditors, and that it may be appropriate to widen
the scope of the original Order, made in October 2008, to allow the liquidator
to work more closely with the Treasury and Alix Partners.
Mr Wild, appearing for the FSC informed his Honour that his client took the view
that the SOA may be better for the creditors, but they had to acknowledge that
the reasons for the original petition, KSF IOM’s insolvency, still
appertained. He also pointed the DCS sunset clause came in to effect in October
2009 and, if the liquidation didn’t take place before that date, the level of
compensation would drop back to £20,000.
Furthermore, he drew attention to the fact that the DCS levy is raised on an
annual basis, and if the liquidation issue was not settled before 31st March
2009, the opportunity for a levy for this financial year would be lost.
Mr Clucas, for KSF (IOM) said he didn’t have much to say other than the bank
still couldn’t meet its liabilities. He reminded his Honour of the Demiglass
Holdings case (which is a leading authority in respect of liquidations) but
added that it was not really for him to comment on the petition.
Mr Morris, representing probably the largest block of creditors, the insurance
companies, including Axa and Norwich Union, said they would go along with the 60
day adjournment but with reservations. His clients want a better deal for bond
holders than is currently on offer; and said they would be “challenging”
Treasury to see they “shaped” any SOA, among other things, to give a better
timetable for payments to bond holders.
His Honour allowed individual creditors present to have a say if they so wished
on the proposals before the court.
Mr Roper thought the proposals amounted to a case of “smoke and mirrors” and
what was being proposed is “liquidation by another name” and about “saving
face for the financial services in the Isle of Man”.
He pointed out that the bank is insolvent and therefore should be liquidated. He
added that he couldn’t see much difference in what was being proposed; and the
end result would be much the same but it may take a little longer through the
DCS route. He urged for a decision to wind up being taken then and there.
Other creditors made various comments but none so as to sway Deputy Deemster
Corlett’s decision to grant the further adjournment.
The next hearing is scheduled for 10.00am on Thursday, 19th February 2009.
Footnote:
At yesterday’s (Wednesday 28th Jan) Compliance Institute conference, held at
the Mount Murray, the KSF ‘affair’ was touched upon in some of the
presentations.
John Apsden, Chief Executive of the FSC, commented that the ‘upstreaming’ of
50% of the bank’s funds was not unusual and is not as much as some other banks
operating on the Island. He said he didn’t think it unreasonable to rely on
some form of assurance from the parent company and supervisory bodies; albeit he
admitted this is an area that needs looking at.
He pointed out that there is no evidence that the bank was mismanaged, or of any
fraud or seriously toxic assets. However, he perhaps wisely added the caveat
“as I stand here at the moment.” The Manx Herald has yet to be convinced
and, in the same vein, as to the reasons why the directors have not yet
resigned.