18 JANUARY 2013

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%.

Contacts

The best way to make contact is to write to the bank at PO Box 197, Third Floor, Sixty Circular Road, Douglas, Isle of Man, IM99 1SN, or emailmailto:ksf@iom.pwc.com. If you need to telephone the bank, please use the number +44 1624 699222. All other numbers in previous use are now switched off or auto-forward to +44 1624 699222. Please be aware that all telephone calls are recorded for security purposes.

Mike Simpson

Joint Liquidator