Calculation of interest payments to creditors in the
event that payments exceed 100%
Our current expectation for the final outcome for creditors is
that it will be in the range of 97.2% to 99%. However, as the
potential exists for the outcome to exceed 100%, the Committee of
Inspection asked us to outline how interest would be calculated and
prioritised should 100% be exceeded.
The rules for calculating interest in an Isle of Man insolvent
liquidation are not straightforward and rely on the application of
the 1892 Bankruptcy Code and the 1934 Winding Up Rules. Creditors
who were due contractual interest up to 8 October 2008 have had it
applied to their claims (as it was applied to their bank accounts),
capped at 5%. The sequence from then on would be as follows:
1. Creditors who were entitled to contractual interest
in excess of 5% per annum would receive the amount due in excess of
5% per annum up to 8 October 2008 (Bankruptcy Code Sec 23(3)). This
amounts to around £3.5m.
2. Creditors who were not entitled to contractual
interest would receive 4% per annum on amounts owed to 8 October
2008 (Winding Up Rules, Rule 78). This amount would be small as the
relevant creditors are typically trade creditors, the total value
of such claims is low and trade creditors were not generally
outstanding for long before 8 October 2008.
3. Once the above two steps have been completed, all
creditors will have received all their interest entitlements up to
8 October 2008.
There are some issues which would need to be addressed if we were
to reach step 3, which would be at approximately 100.4%. The
position is not totally clear and we would need to seek directions
from the Court.
The financial implications of step 3 are pretty straightforward:
all creditors would receive interest at 4% per annum on amounts
proved (Bankruptcy Code Dec 23(4)). The advice we have received
indicates that this is calculated based on the amount accepted in
the proofs of debt and is not adjusted for the timing of payment of
distributions to individual creditors. Paying this interest to
creditors could amount to up to £36.2m per annum, but would of
course be limited by the extent to which cash was available.
The implementation process of step 3 is uncertain and potentially
costly. It will need Court guidance:
- It would need to be clarified whether the interest would be
applied based purely on the amount accepted for proof, or whether
it should be adjusted to take account of the timing of dividend
payments. This could make a significant difference to some
creditors and also to the amount of work which would need to be
performed to calculate the payments.
- It would need to be determined whether interest in respect of
the EPS and DCS would have to be paid to the EPS and DCS or
directly to creditors. Our current understanding is that interest
in respect of EPS claims should be made directly to the creditors,
whilst interest in respect of DCS claims should be paid to the DCS
for onward payment. This is because, in the case of the DCS claims,
it is the DCS which has submitted a proof of debt in the
liquidation, therefore the DCS is the creditor and is entitled to
interest, whereas in the case of the EPS, it is the depositors
themselves who are the creditors and have submitted proofs of debt
in the liquidation and are therefore entitled to interest. It is
our understanding that any interest paid to the DCS would be passed
on to DCS claimants. The position is further complicated where
depositors claimed in both the DCS and EPS.
- If it was determined that interest payments in respect of the
DCS claim had to be paid by us directly to DCS claimants, that
would create a significant administrative burden and cost for the
creditors, as we would have to calculate and process several
thousand individual payments to individuals whose payment details
we do not currently possess.
We do not propose to go to Court until such time as it becomes
clear that dividends will exceed 100%.
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