REPORT ON KSFIOM CREDITORS MEETING: MANX HERALD

Regardless of the legal position, it appears there would have been insufficient support to have made it happen anyway, even if a vote had been allowed; as there was an overwhelming vote, by value, in support of maintaining the status quo.

The attempt by members of the Kaupthing Singer & Friedlander Depositors Action Group (DAG) to have a ‘conflict’ liquidator appointed alongside deemed official receiver, and joint liquidators, Mike Simpson and Peter Spratt, both of PWC, failed to get off the ground at today’s creditors’ meeting (Tuesday 7th July).

The attempt was probably doomed from the beginning as Seth Caine, legal representative of the joint liquidators, pointed out, as a matter of law, the meeting could only vote to replace the liquidator and, if successful, to vote for a replacement.

Regardless of the legal position, it appears there would have been insufficient support to have made it happen anyway, even if a vote had been allowed; as there was an overwhelming vote, by value, in support of maintaining the status quo.

After quite a lengthy delay in producing a result, Mr Simpson announced - whilst 419 people had voted for the resolution, 237 voting against, with 4 abstentions - by value £329.5m had been cast opposing the resolution and only £86.4m was in favour.

Therefore, he said, the resolution “failed on the value test”.

Mr Simpson had commenced proceedings shortly after the 11.00am start time to allow the last few people, of a very small number of attendees, to register. There were about 60 or so people in the meeting - but quite a few of those were either legal representatives, or from the liquidator’s team, observers and the press – so in all probability less than 40 creditors put in an appearance. Many creditors/depositors no doubt decided it would serve little purpose in being there and would just run additional, un-recoverable costs.

Mr Simpson extended apologies on behalf of Mr Spratt, who he said was unable to attend for personal reasons, and introduced a colleague from PWC, two gentlemen from advisors Nabarro and Mr Caine.

Before he moved on to the core business of the meeting he pointed out a number of observers and members of the press were present and asked if any creditors had an objection to them being present; but none did.

He then gave a brief run down on the purpose of the meeting before giving an overview of the current situation. He explained a copy of his report, once finalized, would be distributed as soon as possible after the meeting; which was not particularly well received by a DAG representative, Robert Coates. He felt the liquidator had had plenty of time, since the winding up hearing, to circulate it before the meeting; but Mr Simpson countered this by saying he thought making sure the proxy votes were properly organized for this meeting was a higher priority.

In essence, as of the 27th May 2009, £155m was held in cash by the liquidator with an additional amount, in respect of share sales and loan interest, and repayments, pushing the total up to £263m. However, some of this additional money can only be released for distribution later this year when the indemnity given to JB Morgan Cazenove expires.

He explained all but £270k of the outstanding cash has been recovered, and £23m of loans has been repaid so far. This leaves 174 outstanding loans, owed by 157 customers, with a total amount outstanding of £418m. Of this amount £11.3m will be repaid through set-off claims. Most of these loans, which are interest only, are secured against high value properties, but where it has been assessed the loan to value ratio is insufficient some capital repayments are being sought. All are due to mature by 2017, but the vast majority are due for repayment by 2013. Some loans he said have already been refinanced, and he expects others will probably do the same. Only 28 are in arrears but he said he expected the situation to be regularized shortly.

Mr Simpson invited Jonathon Warne, a Partner at commercial law firm Nabarro, to explain the situation regarding Certificates of Deposit (CD).

Mr Warne stated it is a complex issue but, in summary, Kaupthing UK had acquired CDs on behalf of KSF (IOM) and some of the building societies involved had claimed they were unaware of this arrangement. They had tried to offset claims against KSF (UK) against the CDs and this had been challenged through the courts. In April the court had found in favour of KSF UK, and the company (KSF IOM), and £35m was released. However, owing to the action taken by the UK authorities, when KSF UK was put into administration, and the passing of a Special Banking Provisions Order, clearance is needed by the authorities to transfer the money to the IOM. This has been given, he said.

He moved on to the issue involving the special trust account established in the UK to accept payments received by KSF UK between 2nd & 8th October 2008. The court has heard the case and it had been anticipated a decision would be given today, but it is now expected on Friday. KSF (IOM) is hopeful of recovering money from this trust account if it is accepted it had qualifying deposits.

Mr Simpson up dated the situation regarding the collateral shares taken by the liquidator. As is already well known the JJB and Booker shares have been sold, realizing £99.8m, but dividends of £600k are still being held by a third party. This is being pursued, he said.

3 other shares are held, two of which are not expected to produce any return, and the third is subject to legal and beneficial ownership disputes.

He stated the UK administrators are still expecting to make a 10p in the £ dividend payment soon and an overall return in excess of 50p in due course.

He explained a date for the cancellation of the Repo agreement was still being negotiated as this will have a material effect on the valuation; and 41 derivative contracts, relating to currency swaps, are still un-finalized.

He said a winding up committee has been formed, in Iceland, to deal with the parent company but as of yet no call has been made for claims to be lodged. He also pointed out the moratorium on payments, runs until November 2009 and this may yet be extended. It is expected, when action commences, it will involve an insolvent liquidation or a Scheme of Arrangement (and we have all heard that some where before).

Remarking on the Habana case, he pointed out no trust fund had been established in the same way as the UK bank and inferred the company did not think the challenge would be successful. The decision of Deputy Deemster Andrew Corlett is waited, but no indication had been given as to when a judgment will be handed down. Whatever the result, he suggested an appeal may follow.

Mr Simpson explained there are a number of preferential creditors, including the Income Tax Division and members of staff, who will have to be paid out of the funds of the company but he does not expect this to delay payments to depositors.

The liabilities now total £907m with £863m being owed to in excess of 11,000 depositors. Costs so far of the liquidator PWC, which have not been paid as they need the approval of the court, amount to £3.1m and £1.7m has been spent on legal and professional fees (Cains, Nabarro, Lovells, and two other firms). This is perhaps not surprising when it was revealed, under questioning from Mr Coates, Mr Simpson’s charge out rate is £500/hr and Mr Spratt’s is an even more eye-watering amount of £670/hr.

The 64 members of staff at the bank have now been whittled down to 5, and Mr Simpson said it was important to retain certain key employees, and to incentivize them to stay. This cost has amounted to £900k so far.

Mr Simpson stated the current predicted ultimate dividend lies somewhere between 73% and 88%; although he said this doesn’t allow for a recovery through the parental guarantee or the other amounts being challenged through the courts in the UK.

Mr Simpson put it to the meeting he and his colleague were well aware of the concerns raised by many depositors, but he said they now have full investigatory powers and assured depositors they would use them.

Dan Schwarzmann, a Partner with PWC, who has been brought on board to assist with this aspect of the liquidation also sought to reassure depositors the seriousness that PWC attach to this element of the business. He also insisted conflicts, perceived or otherwise, are rigorously policed and will not arise.

He gave a brief résumé of some of his experience in this field and stated they will be looking at the reason the bank failed, transactions, the inter bank loans & repos, the decisions of the directors, the interaction with the regulators; and will see if any action against third parties is appropriate and could result in recovery of funds.

He also said they would also consider the findings of the judicial review of the collapse of KSF UK.

Having concluded his briefing Mr Simpson invited questions from the floor.

Mr Coates inquired if the directors had been invited to attend; to which Mr Simpson said they had but they had declined the invitation.

Mr Coates also asked why a statement of affairs had not yet been prepared and was informed it was taking time to finalize as it is covering a wider report than they are required to produce; but he did manage to extract the information that the costs of the failed SoA for the liquidator is £620k.

It was at this point Mr Coates tried to get Mr Cohen of BDO Soy Hayward appointed as a conflict liquidator, citing among other things the failure of the liquidator to get an indemnity from Treasury to cover their SoA costs; and the mistakes in the asset figures.

He said DAG had expected better of PWC and the appointment of Mr Cohen to deal with discrete areas of investigation would not add to the costs.

His arguments were rejected by Mr Caine and Mr Schwarzmann; with Mr Caine referring to D. Deemster Corlett’s judgment regarding the costs of the SoA. He put it to Mr Coates it would have been a pointless exercise for the liquidator to try to claim their costs from Treasury as his Honour had made it clear he would not make such an order in the absence of any misconduct.

At this point another depositor interjected they were not there to debate the rights and wrongs of the affair but to vote on the resolutions and having received support from other creditors Mr Simpson said he would move on to the voting.

As previously reported the main resolution was defeated but the setting up of a Committee of Inspection, and that it should consist of 7 members was almost unanimously supported. However, the four nominations for membership of the committee were defeated and a new poll was held to chose the 7 from 11 candidates; which apparently included the four names defeated in the first poll. The results, of the second poll, were not announced at the meeting and will be released in due course.

Whilst some of the votes were being counted Professor Davidson suggested the time could be used to answer some more questions as he wanted to know why the expected return from KSF UK is so low.

Mr Simpson explained the UK bank is much larger with greater exposure to derivatives and loans, some of which are secured against yachts and aircraft rather than real estate.

However, he wanted to make clear they re relying on the information and figures provided by the UK administrator and are not trying to “second guess” what they are being told.

In respect of question about the IOM loan book, he said the offers to buy it had included far too large a discount to make it worth while. However, when the majority of loans have matured in 2013 a further decision will probably be taken then whether to sell the remaining business.

Mr Schwarzmann pointed out this was exactly the same decision taken when they were dealing with the collapse of Lehmans.

The final results having been announced the meeting was called to a close at approximately 1.16pm.

The next date of interest to depositors is next Tuesday when Tynwald sits and they will debate a revised funding arrangement for the Depositors Compensation Scheme.

Treasury Minsiter Allan Bell - who is currently in the USA trying to convince the Obama administration the IOM is a first class offshore finance centre and should be considered to be among the good guys – will attempt to convince his Tynwald colleagues to allow him to now take £193m rather than £150m from reserves to fund the DCS.

This begs the question, if he is prepared to go to that amount now, why didn’t he improve the terms of the DCS before he wasted so much money on a failed SoA?