Landsbanki Guernsey Limited in Compulsory Liquidation update 14 April 2011
Update in respect of Icelandic position and litigation
This Emergency Law changed the standing of creditors in LIHF such that
- all domestic depositors were fully compensated through the transfer of their accounts to New Landsbanki;
- certain valuable assets were transferred to New Landsbanki;
- direct depositors of LIHF were granted preferential status in the external administration of LIHF; and
- all other creditors including intercompany depositors (such as LGL) and any claims of creditors and depositors of LGL and Heritable under guarantee are left as ordinary creditors and hence in a position where their potential distributions will effectively be used to compensate other creditors.
As a result of this law a significant number of legal cases have been heard in Iceland regarding the priority status of various creditors. There have been several “first instance” decisions of the District Court of Reykjavik that are relevant to the claims of LGL. Whilst these decisions are subject to appeal, the general of effect of them is that the validity of the Emergency Law has been upheld and claims of certain 'wholesale' creditors are considered to be “deposits”.
The following paragraphs refer to cases where the Joint Liquidators are opposing the priority given to certain LIHF creditors:
Wholesale deposit claims
Trials of the British and Dutch wholesale deposit priority claim cases took place in February 2011. These claims are made by British and Dutch wholesale depositors, such as local authorities, universities and other community institutions. The winding up board of LIHF ("WUB") had determined to award priority to these claims. LGL, amongst a group of other ordinary unsecured creditors, challenged the decision of the WUB to award these wholesale depositors priority on the basis that (1) the Emergency Law was invalid; (2) wholesale 'deposits' did not fall within the scope of the enhanced protection provided for deposits by the Emergency Law; and (3) notwithstanding, any priority should in any event be limited to the maximum payable pursuant to the Icelandic Depositor Protection Scheme (i.e. €20,867).
On 1 April 2011, the judgments in those cases were delivered. The District Court of Reykjavik found in favour of the wholesale depositors on all three issues. Currently, these findings are being appealed by LGL to the Supreme Court of Iceland (it is anticipated that others within the Plaintiff group will also appeal). The arguments run for the initial proceedings will be re-run on appeal. Whilst the Joint Liquidators have been advised that there is sufficient merit in LGL's arguments in respect of each of the issues to justify an appeal, in taking the decision to appeal the District Court's decision the Joint Liquidators have had particular regard to the low costs of doing so (including the likelihood and there being costs awarded against LGL), as against the benefit accruing to LGL should the appeal be successful.
Trial of the so-called “Icesave-cases” took place at the end of March 2011 and judgment in respect of these cases is still awaited. These cases relate to claims by the UK Financial Services Compensation Scheme and the Dutch National Bank, in respect of amounts paid out to UK and Dutch depositors pursuant to the respective depositor protection schemes in those jurisdictions. The governmental agencies have “stepped into the shoes” of their depositors and have made a priority claim against the estate of LIHF, which was accepted by the WUB. Again, LGL amongst a group of other ordinary unsecured creditors of LIHF, have disputed the priority treatment accorded to this claim.
Update on the Alternative claim
Further to the Joint Administrators’ fourth report to creditors, the “Alternative Claim” is also still being investigated and considered by the Joint Liquidators’ Icelandic legal representatives. This claim, if successful, could result in LGL achieving a 100% return on its claims as all deposits transferred to New Landsbanki were guaranteed by the Icelandic government.
The Joint Liquidators‘ Icelandic Counsel have suggested that the Joint Liquidators should wait for a decision of the Supreme Court (on appeal from a decision of the District Court of Reykjavik) in respect of a similar claim brought in the administration of another of the failed Icelandic banks and LGL's appeal in relation the whole-sale cases referred to above. Each of these decisions, which are anticipated to be handed down later this year, will provide further guidance in relation to the criteria that will be used by the Icelandic courts in relation to the definition of “deposit” under the relevant Icelandic laws.
Icelandic Counsel advise that there is a four year statute of limitation period applicable to these types of claims in Iceland (running from October 2008), and that there is nothing that the Joint Liquidators can or should do to protect LGL’s position pending the hearing of these appeals.
Market in LIHF debt
Based on current estimates, it is expected that those with a priority will recovery approximately 90% of their claims. Ordinary creditors, which include LGL and other financial institutions, will receive nothing.
Following the verdicts in the cases above, the market price for LIHF debt is currently at approximately 7% which is down on the 10-11% quoted prior to the decision on the wholesale deposit cases. Whilst there is a possibility that the Joint Liquidators could sell the debt at approximately 7% (a 0.9p/£ return to LGL creditors), should the “Alternative Claim” or appeals of the cases above be successful, there is a possibility of a greater return to creditors. It is therefore the Joint Liquidators’ view that the debt should not be sold at this stage.
Update on the Icesave deal
A referendum on the so-called ‘Icesave Agreement' was held in Iceland on Saturday, 9 April. The referendum concerned the validity of Act No. 13/2011, which authorised the Minister of Finance to sign the agreements on "the guarantee of (a) reimbursement from, the Depositors' and Investors' Guarantee Fund to the United Kingdom and the Netherlands of costs resulting from the payment of minimum guarantees to depositors in branches of Landsbanki Íslands hf in the United Kingdom and the Netherlands, and (b) payment of the remaining balance and interest on these commitments”.
Although the Act was adopted by 44 of 63 members of the Icelandic parliament, Althingi, on 16 February 2011, the President of Iceland refused to sign the bill into law on 20 February 2011, referring its validity to a referendum.
The result of the referendum is now clear; the Act has been rejected by the majority of the voters and is therefore repealed. The turnout of the referendum was high and close to 40% voted for and 60% voted against the law.
As all legal proceedings in Iceland are operated strictly on the rule of law, it is expected that the result of the Icesave agreement referendum should not have any impact on LGL‘s cases directly.
Whilst there has been significant information in the press recently with regard to the referendum and the agreement between the Icelandic, UK and Dutch governments, it should be noted that, as a result of the Emergency Law, the UK and Dutch Governments (having fully compensated all depositors in the UK and Netherlands branches of Icesave) are still expected to recover the majority of the amounts owing to them at the expense of other ordinary creditors of LIHF (including LGL) who are likely to recover nothing. This is because the Icesave depositors were granted priority for the whole of their deposits under the Emergency Law (and not just the first €20,867 covered by the Icelandic Depositor Protection Scheme) and, as these governments are now “standing in the shoes” of the Icesave depositors, they are now themselves priority creditors of LIHF and are expected to recover approximately 90% of their claims.
The Joint Liquidators note that this preferential recovery would be at the cost of all monies deposited by ordinary creditors, including LGL’s deposit of approximately £15m.
Costs incurred in litigation in Iceland
The costs of the Icelandic legal action to date (excluding the costs of the Joint Liquidators and LGL’s Guernsey Advocates) are £140,000 and are therefore still within the estimated budget of £160,000 proposed to the Guernsey Court in 2009.
No further litigation has been brought by the Joint Liquidators at this time.
The Joint Liquidators draw creditors’ attention to the conclusions previously drawn in relation to other potential litigation which is included in their second interim report as Joint Administrators. The Joint Liquidators note that any litigation to be brought in respect of potential failures of LGL would need to be instigated prior to any applicable period of limitation or prescription (in general six years from the date that the cause of action accrues which, in certain matters, could be before August 2012). Creditors should obtain their own legal advice in respect of any claims they might wish to bring, including in relation to any applicable time limits that might apply to any such claims. These matters will be further addressed in an update to creditors in Autumn 2011 following the Court decisions in respect of the above cases.