Creditor Update: Resolution of Unsecured Creditor Claims - 16/06/2010

The purpose of this update is to share the Joint Administrators' current thoughts in relation to the creation of an expedient process to facilitate both the determination of unsecured creditors' claims and the payment of an interim distribution.

Background

In December 2009, the Joint Administrators obtained an order from the High Court of England and Wales granting them permission to make a distribution to unsecured creditors. The effect of this was to convert the administration of LBIE into a distributing administration akin to a liquidation. The Joint Administrators have since that time been engaged in the process of determining the validity of unsecured creditors' claims. This has involved the implementation of comprehensive processes for the reconciliation and valuation of claims.

According to LBIE's records there are up to 6,300 counterparties who could have unsecured claims against LBIE.  The overwhelming majority of these claims arise from a wide variety of complex financial trading arrangements. It is apparent from the work undertaken to date that the manner in which many unsecured creditors have calculated and submitted claims varies widely and that, in many instances, claims asserted by unsecured creditors are higher than LBIE's assessment. Drawing upon their experience in other major insolvencies and following a careful evaluation of the claims profile in this estate, the Joint Administrators have concluded that a conventional procedure for determining claims, whether using their existing powers under a distributing administration alone or in conjunction with a scheme of arrangement or a company voluntary arrangement, will involve a time consuming and expensive adjudication process that is likely to involve extensive disputes and potential litigation. This in turn means that it is likely to be many years before a material interim dividend can be paid to unsecured creditors.

A Consensual Approach

In the Joint Administrators' 3^rd Progress Report dated 14 April 2010, the Joint Administrators identified that they were exploring various options to progress the determination of unsecured creditors' claims.  The Joint Administrators have subsequently, in conjunction with the Unsecured Creditors' Resolution Working Group (the "UCRWG"), a working group which includes members of the creditors' committee, agreed to explore the feasibility of an alternative, consensual procedure (the "Consensual Approach") for determining claims, as the Joint Administrators believe that this could materially accelerate the resolution of the LBIE estate. 

The exact scope of the Consensual Approach is still being explored. At present, it is anticipated that the focus of the Consensual Approach will be upon the financial trading creditors ("FTCs").

• Under the Consensual Approach, LBIE will offer to agree each participating FTC's claim by substituting the FTC's claim value with a value determined by LBIE using its own methodology (the "LBIE Determination").
• The LBIE Determination will be established using a comprehensive set of processes, data sources and valuation models, all subject to comprehensive review and universally applied to the unsecured creditors falling within the scope of the Consensual Approach.
• The offer by LBIE will be conditional upon the acceptance of the LBIE Determination by an overwhelming majority of the FTCs.  The Joint Administrators will continue to work with the UCRWG to define the pre-requisite threshold level of support required to implement this Consensual Approach.
• If the required level of acceptance is met, the claims of participating FTCs will be admitted for dividend in the administration of LBIE at the LBIE Determination.
• The Joint Administrators are also exploring whether it might be possible to provide participating FTCs and other unsecured creditors with admitted claims with an option of receiving a one-off cash payment in full and final settlement of their claim.

Next Steps

The Joint Administrators are committed to implementing a procedure for the determination of the claims of FTCs that is both pragmatic and broadly acceptable to the market. The feasibility of the Consensual Approach is entirely dependent on the willingness of an overwhelming majority to support the process. The Joint Administrators will therefore be engaging with a number of FTCs with regard to their claims and seeking their support for the Consensual Approach.

FTCs who are contacted are encouraged to engage in a constructive dialogue with the Joint Administrators as a matter of priority, as the Joint Administrators wish to provide feedback to the UCRWG over the coming weeks.

In the event that the engagement with FTCs leads the Joint Administrators and the UCRWG to conclude that the Consensual Approach could be viable, it is anticipated that meetings will be hosted in London and New York to outline the Consensual Approach in more detail. The Joint Administrators would envisage launching the Consensual Approach and issuing LBIE Determination notices prior to the end of the current year, and would aspire to make a first cash distribution to unsecured creditors as early as possible in 2011.

If you have an unsecured claim against LBIE and have not yet provided the Joint Administrators with details, it is imperative that you do so, failing which your claim may not be admitted and FTCs may not be invited to participate in the Consensual Approach. For more information on submitting a claim please click here.

Conclusion

The Joint Administrators are confident that if the Consensual Approach is implemented there will be very considerable benefits to unsecured creditors.  These include:

• The rapid determination of an agreed and formally admitted claim against LBIE
• A significant reduction in the administrative burden for unsecured creditors
• A material reduction in the costs of determining unsecured creditors' claims
• An acceleration to the timing of a cash dividend from LBIE
• The potential option of receiving a full and final payment in settlement of an admitted claim
• The potential for enhanced overall realisations in the LBIE estate as resources are focused on asset realisation

The Joint Administrators recognise that creditors may have questions regarding this update and the Consensual Approach. If you do have any questions, please contact us by emailing unsecuredcreditors@lbia-eu.com.  Please continue to check this PwC website for information on matters relating to the administration of LBIE and your potential unsecured claim. In the meantime, unsecured creditors are encouraged to embrace this initiative, to provide LBIE with their claims as a matter of priority and to respond to LBIE requests and enquiries.