Reproduced Manx Herald article on 9th April Hearing.

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  • 11/10/08 31/05/09
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Posted: Fri, 10/04/2009 - 16:06

Critical Information:

http://www.manxherald.com/index.php/business/485.html

********** article minus photo of demonstrators, headline and comments.

After a near all day session - of listening to evidence as to why he should, or shouldn’t, accede to the Treasury’s wish for a Scheme of Arrangement (SoA), rather than put Kaupthing Singer & Friedlander (IOM) Ltd into liquidation - Deputy Deemster Corlett finally decided he couldn’t give a definitive answer today. Therefore, it will be for the creditors to decide, in a vote to be put to them, at three meetings, held in Douglas, on the 19th May 2009.

This decision means that creditors are unlikely to receive any payment (other than to those eligible for the £10,000 ‘Early Payment Scheme’ payment) until late September 2009 at the earliest.

Many of the depositors, who had sat listening attentively to the proceedings all day, looked stunned by the decision; having been convinced that the Q C, Dominic Chambers, representing their interests, had made a strong enough case that the SoA offered no advantages, at all, over liquidation. They had hoped his Honour would dismiss the Treasury’s petition and grant a winding-up order today; thereby setting in motion a triggering of the much vaunted, by now apparently questionable, Depositor Compensation Scheme (DCS). It had been argued by Mr Chambers, under a liquidation and DCS scenario, creditors would receive their first payment by early July 2009; nearly three months sooner than under the SoA.

It is probably worth considering that the creditors in Landsbanki, the other failed Icelandic bank, which had a branch in Guernsey, and was not covered by a DCS, have already recovered 30% of their deposits. And of course in the UK, creditors of KSF (UK) have already, in some cases, under their compensation scheme, recovered millions of pounds of their deposits.

Senior Manx politicians have told the public, in the IOM, the ‘Manx DCS’ is a scheme for which they should be proud. The Manx Herald would suggest they got their words mixed up and the truth is: it is a scheme that causes us shame and embarrassment.

Yet again arguments were made, by the Treasury and Financial Supervision Commission (FSC) representatives, Mr Hacker Q C and Mr Wild, that the DCS could not be relied upon; and that the SoA was the only thing that guaranteed ‘protected depositors’ certainty in repayments. However, it still means, if a creditor has £50k or more tied up in the bank, they will have to wait until June 2011 to get the £50k back.

Moreover, Mr Hacker pointedly told the court, and the assembled depositors, this is the best offer you are going to get from the Treasury. Essentially it is a take or leave it deal from Mr Bell; and he emphatically made it clear there is no more money on offer.

This seems extraordinary given the measures other European countries have adopted to protect their depositors, and this point was not lost on at least one depositor.

Peter Wakeman left his Honour in no doubt that he considered what is being offered, by Treasury, is a “second class response” compared to the “best practice and world class response” offered elsewhere; which is guaranteeing 100% return of depositors’ money.

Mr Hacker had kicked off proceedings by having to apologise for the short time depositors had been given to consider the latest version of the SoA. However, he added he didn’t think they had insufficient time to get an appreciation of what was being proposed; and in any case he didn’t think, strictly speaking, they had a right to it any way.

He tried to suggest to his Honour that any attempt to discuss the benefits of the scheme should be ignored as they were not relevant; and today they only real issue was whether the SoA should be put to the vote.

His Honour agreed a lot of the arguments regarding the SoA had been rehearsed before.

Mr Hacker continued to make his case that the matter before the court was a very narrow one; essentially the issue of whether the SoA should go to the vote, and whether the mechanics dealing with the convening of meetings, and the holding of the vote, were appropriate. He obviously argued they were.

Therefore, he stated arguments whether the SoA was deficient or could be improved, whether it was fair or unfair to one interest group or another, were not relevant. Only, he said, if, as in the ‘Savoy case’, the SoA was “incontrovertibly doomed to fail” should the court not proceed to allow a vote. In this case though, he argued, “on its face” the SoA appears to satisfy the statute, the Company and the creditors; and so the meetings should be convened.

Mr Hacker went on to say if applying the English practice, whilst seeking an understanding of the SoA, one would not embark on a contested analysis of the SoA or what it may achieve; but the court, in coming to its decision, would be guided by the evidence before it. In this case, he explained, there were two affidavits, one from Mr Moss Q C, which showed the SoA was a normal reasonable scheme and another from Mr Simpson, the provisional liquidator. Mr Simpson, he said, who is an officer of the court, also supported the SoA; and so the court should give “close regard to his views”.

His Honour remarked that Mr Simpson’s affidavit did appear to set out a number of perceived benefits of the scheme.

Mr Hacker took the opportunity to set out what he thought these benefits were: the SoA would give certainty of lump sum payments on a set timetable; they would provide a quicker recovery for creditors; and the Treasury would subordinate the £2.8m it is owed. Therefore, on balance, creditors should support the scheme.

Mr Hacker also wished to make clear a provision would be made in the SoA to retain the power to pursue claims against third parties; and that the joint provisional liquidators will assert any claims they have, and all realisations will go in to the pot for paying out to creditors.

The Treasury, he said, will also make “top-up payments” to the SoA; and payouts to creditors will be in three instalments. These are 90-100 days after court approval of the scheme, on the first anniversary of the scheme and the second anniversary. This would ensure all ‘protected’ creditors will get exactly the same as they would under the terms of the DCS.

His Honour sought clarification that if the scheme vote is not in favour it will go directly to liquidation; which was confirmed.

Mr Hacker added he was not there to “sell the scheme to the court or the creditors, just describe the benefits”.

At this point a set of ‘worked examples’ were distributed around the court room showing how it is estimated, in certain circumstances, creditors will get their money back.

Using a low, medium and high asset realisation estimate, Mr Hacker explained what could be seen, from the graphs, is that in all scenarios the payments to creditors are larger and quicker under the SoA compared to liquidation; even if the benefit did decrease for depositors with larger balances.

Mr Hacker and his Honour then engaged in a discussion on the issue of classes of creditor and when this should be fixed, before or after the vote.

Mr Hacker said in the English practice it was a settled at the third stage, when the court decides whether to sanction the scheme, but his Honour wondered if it should be settled sooner.

Mr Hacker maintained what had being postulated by the Treasury team was good enough, and his Honour shouldn’t concern himself too much. As far as he was concerned creditors would receive ample notification of the meetings and ample provision to cast their vote; even if they couldn’t attend in person.

Mr Hacker went on to say that the meeting could be held on the 19th May, the results known within 5 days, and everybody could be back in court by the 28th May to get the nod from his Honour.

Other than offering to show his Honour a copy of the proxy form, which was declined, Mr Hacker said that was all he had to say.

Mr Chambers commenced his ‘demolition’ of the SoA by stating there is no material benefit or advantage derived from it to creditors as a whole; and any there may have been have evaporated with the passing of time. In fact, he said, there are some disadvantages compared to the DCS; not least for 71% of creditors who would be disadvantaged by the SoA.

He pointed out that in his opinion the figures in Mr Hackers’ graph misrepresented the figures for the DCS payout; and there should be three classes of voter and not just two.

Therefore, the petition should be dismissed and a winding-up order granted.

Mr Chambers disagreed with Mr Hackers’ assertion that the matter was very narrow one; and the petition was not about a SoA but a winding-up. Therefore, the question before the court was whether a further adjournment should be granted, or to wind-up today.

In his opinion his Honour had to consider the SoA “qualitatively” and there would have to be “sufficiently tangible advantage not to make the winding-up order today.” The court would have to consider, he said, on the evidence presented, as to whether the SoA did give a tangible benefit. He would show there were none, and in fact, compared to liquidation, disadvantages to people owed less than £50k.

His Honour tried to say these were matters argued previously, but Mr Chambers said an issue of timing had arisen.

He went on to explain that the SoA introduced no more money than the DCS. He also put it to his Honour that the 60% recovery of deposits was a figure set by Treasury and was too low. This he based on the fact that the low asset realisation figure, used in the Treasury’s graphs, was based on 60% recovery; and he believed it is possible to reach a higher figure. He also pointed out that with the likely timing needed for the approval of the SoA, a payment under the DCS could be made three months earlier.

Mr Chamber ran through his own figures - which he had acquired from correspondence between Mr Simpson and the FSC - for the SoA and DCS, and came to the conclusion, under the DCS, creditors would get their ‘protected’ amounts returned in full by 31st December 2010; whereas under the SoA it will be 6 months later.

He pointed out that the figures had not been challenged.

Mr Chambers carried on to say that the advantage of the DCS was not just with the timing of the first payment but goes on throughout the scheme.

His Honour confirmed that Mr Simpson had previously said the issue of timing, between the two schemes, was marginal (and during this exchange with Mr Chambers, Mr Simpson could seen to be conferring a lot with colleagues sat beside him in the public gallery).

The Deputy Deemster sought clarification that Mr Chambers thought one of the lines on the Treasury graph should be higher; to which Mr Chambers said he thought the lower line should be equal or higher.

Mr Chamber suggested an error had been made in the graphs and the payment shown in ‘Div 2’ should have been put in ‘Div 1’; and therefore the graphs should be the “inverse” of what was shown.

He went even further and suggested the only place for them was “in the bin”.

Mr Chambers then pointed out that Tynwald had approved up to £150m to fund the DCS, yet only £70m is being earmarked for the KSF (IOM) depositors. He believed the other £80m is being held back in case another bank fails. He suggested if no other bank failed before mid October 2009, then the £80m could be used; and if it was it would more than cover the required amount to meet all the ‘protected’ payments by October 2009.

Mr Chambers suggested to his Honour that the FSC was also concerned about the £80m and planned to go to court to get a ruling on it; and if the SoA was approved, creditors would lose the opportunity to make use of that £80m.

Furthermore, Mr Chambers was concerned if the SoA goes to a vote the ‘little’ creditors will be out voted.

Returning to the issue of the £80m, Mr Chambers suggested the talk of further bank failures is scaremongering as, of the 30 odd licensed deposit takers on the Island, he pointed out they are nearly all owned by UK, Spanish or other large banking groups with national government backing, so they are all very safe. But even if one did fail, there still is the £80m “cushion” and, he said, it would need to be totally exhausted before it had any impact on the KSF (IOM) situation.

He then emphasized that he could not see a situation where politically or economically it would acceptable for the government to allow the DCS to default. He reminded the court Mr Bell had said it was necessary, in order to increase the confidence of local and international depositors, to revise the DCS as it is a very big draw to the IOM, with the banks trading on it. Therefore, it would a catastrophe if it was allowed to default, and although, from the comfort of their offices in London, Mr Lovett and Alix Partners may suggest it could happen, Mr Bell hadn’t made the suggestion in his evidence.

Mr Chambers put it to His Honour that under a liquidation situation the proper course of action was to claim under the DCS, which was he said what it was designed for - to which his Honour agreed – and the Treasury appeared to be attempting to get out of their DCS obligations.

It was noted the A G looked quite uncomfortable during this exchange.

Moving on again, Mr Chambers pointed out that at the previous hearing the Treasury had made out they would subordinate a £10m claim, which equated to 1.2p dividend to creditors. However, it now appeared they had got the figure wrong and it is only £2.8m, thus making any dividend 0.3p, and even more trivial; rendering any advantage almost non-existent.

As for the class issue, Mr Hacker pointed out ‘protected’ creditors owed more than £50k had a foot in both classes - the totally unprotected creditor class, and the protected creditor class, therefore they should have their own class.

He suggested if the issue wasn’t determined today it could lead to appeals by disgruntled parties; and therefore further delay payments under the SoA if it was to go ahead.

The point appeared to be taken by his Honour, and following a few more technical arguments, Mr Chambers wrapped up his submission by saying the whole proposal was so dreadful it shouldn’t proceed to a vote.

Before breaking for lunch, his Honour allowed a regular attendee, Mr Hughes, who had a plane to catch, to speak.

Mr Hughes was brief and sought clarification that dates in connection with ‘set-off’ would be corrected in the final SoA, if it got the go ahead, as they were ‘inadvertently’ wrong in the version before the court today. Mr Hacker confirmed they would be corrected.

After lunch His Honour allowed another depositor to speak before having a quick whip round the various advocates representing a number of parties.

She stated she thought depositors were in worse situation than 6 months ago and liquidation today was the only course of action to follow. She pointed out FSA Chief Executive, Hector Sants had given evidence in the UK that KSF IOM didn’t need to stand in line with other creditors; and they could get their money back sooner than the court was being made to believe they would. Being 70 she wanted to get on with the remaining years of her life, while she still had some life left, and urged his Honour to get on with it as well.

Mr Wild, representing the FSC, reiterated the bank is still insolvent and can’t meet its debts; but as it is not a creditor is was not for them to say whether the court should grant a further adjournment.

However, he wished to address a couple of issues in the submission made by Mr Chambers. He pointed out that Mr Chambers had misunderstood a few points in the letter between Mr Simpson on the FSC.

The new DCS only allows for a sum equivalent to the amount needed to make up the money from £20k to £50k compensation to be paid out by Treasury. Based on the creditor profile for KSF (IOM) that amounted to £70m, and so the £80m has nothing to do with another default. He also explained the reason why they may go to court is because there is some ambiguity in who is entitled to a share of the £70m; and they want to make sure it goes to the intended recipients.

Although these explanations may not have suited Mr Chambers they appeared to satisfy his Honour.

Moving on to Mr Morris, representing the big insurance companies, he said they backed proceeding to scheme meetings; and thus supported a further adjournment of the winding up petition. However, they were keen for the proposed timetable to be strictly adhered to.

Mr Carter supported the issue of classes being resolved that day, but otherwise his clients had not changed their views and supported the SoA.

None of the other advocates dissented either.

His Honour then invited submissions from other creditors.

To a ripple of laughter a creditor stood up and announced his name as Alan Bell – no not that one – and backed Mr Wakeman’s call for 100% return of his life savings and the money in his business account. He was of the opinion a third option should be being explored, which is a return of 100% through negotiations with the UK authorities. He was conscious that the TSC in the UK had suggested it several days ago and wondered why nothing seemed to have happened.

Stu Roberts explained he had taken an active role in the DAG, and had held meetings with John Spellman and Alix Partners; and having done the maths, he didn’t believe they had been completely honest in conveying all the information to creditors.

Mr Hacker responding to all the submissions, agreed to call for three classes; as he didn’t want to be seen to be “steamrolling” the smaller creditors.

He disagreed with Mr Chambers there was no more money being introduced and referred to the subordinated £2.8m.

His Honour reminded him it only amounted to .3p; but Mr Hacker was adamant it was a benefit; particularly to those creditors owed larger amounts.

As for the calculation that £210m would be sufficient to fund the DCS, Mr Hacker stated it had now been recalculated at £250m; upon which Mr Chambers interjected, have you any evidence?

Mr Hacker said there is no evidence as he had no advance warning of what Mr Chambers was going to say in his submission.

He went on to say it was Mr Chambers who had made errors, and his percentages are the misleading ones. He also made out Mr Chambers was trying to compare apples with pears and had got it wrong about the advantages of the SoA.

He also felt it inappropriate to speculate on what may happen in the event of other unforeseen events, and how that may impact on the DCS. By comparison, he said, the SoA offers a “bird in the hand and the DCS does not”.

He said there was a misconception on the behalf of the depositors; especially Mr Roberts, who had it wrong; and once the creditors and the government had recovered 60% they would rank equally in any further payouts; and the government is not backing out of a previous agreement. “They will take no more than a fair share”, he said, “when they are entitled to take a share.”

Under questioning from his Honour, Mr Hacker did concede his graphs need a slight adjustment and perhaps the addition of a 1a div would address the concern. However, he still maintained the DCS would not match the SoA.

He said he sympathized with smaller creditors but they were not entitled to special treatment, and had to be treated the same whether you had £10m at stake or £500.

This stance appears to contradict previous evidence, that the scheme was designed with smaller creditors in mind, and also the way certain politicians sold the SoA to colleagues.

Mr Hacker in conclusion put it to His Honour Mr Chambers may represent some depositors but by no means the majority of the 10,000, and he would leave it at that.

Mr Chambers, asked for the indulgence of his Honour as, although he didn’t have a right to speak again, Mr Hacker had said he didn’t understand his figures he would try to explain them to him – which he did. However, Mr Hacker responded by saying he was now trying to compare apples with cheese.

Mr Hacker went on to say the SoA is not designed to replicate the DCS, and rightly or wrongly, it was just designed to give protected creditors their money back sooner.

He acknowledged it is difficult to understand what they are trying to do with the SoA; to which his Honour interjected, “it’s not a model of clarity”.

Mr Hacker agreed it was “not easy to explain precisely, simply”; but assured his Honour they are doing their best to communicate with creditors.

His Honour announced he would need to rise in order to consider the evidence he had heard. He didn’t want to rush his consideration in case it lacked coherence; but he was also conscious some people had flights to catch. He adjourned to 4.00pm.

On his return he made his announcement he would allow the scheme to proceed to a vote on the 19th May. He thanked the public for their good behaviour and although he noted their desire for a 100% return, he said, it was not within his power to grant their wish; and appreciated their frustration at the delay.

The Court hearing for sanctioning the result of the vote is set for 10.00am 27th may 2009.

After the hearing a number of creditors remarked to the Manx Herald that they think this decision today marks the beginning of the end for offshore banking in the IOM.

************************** end of article********************************

Go to link given above, and reproduced again here, to see a photo of our demonstrators, and the comments.
Of course if you go to the site you can post your comment too. I'm starting to think of the Manx Herald as a 'sister' site. Express your anger but try to think of a solution, the comments section is an appropriate place for stimulating a debate.

http://www.manxherald.com/index.php/business/485.html

One personal comment: If anybody had any doubts at all about the integrity of the IoMG then this final Court hearing should have destroyed it and buried it forever.
Lots of people will notice that I am going to repeat myself here -

Now can we finally agree, those that aren't intimidated by the IoMG's PR tricks, that we need to

VOTE AGAINST THE SoA.

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