Case No: 007084 of 2003
Strand, London, WC2A 2LL
B e f o r e :
| SISU CAPITAL FUND LTD
SISU CAPITAL FUND LTD II LTD
SISUCAPITAL FUND LIMITED PARTNERSHIP
AVRO MASTER FUND LIMITED PARTNERSHIP
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY
THE PAUL REVERE LIFE INSURANCE COMPANY
UNUM LIFE INSURANCE COMPANY
|- and -
JEREMY SPRATT (the joint liquidators of Energy Holdings (No3) Ltd (in liquidation))
FINBARR O'CONNELL (the joint administrators of Energy Group Overseas BV(in administration)
Mr M Briggs QC Mr J Machell & Mr D Drake (instructed by Fladgate Fielder) for Mr Spratt & Mr O'Connell (the Respondents)
Hearing dates: Hearing dates: 8th ,9th ,10th, 11th, 12th,15th, 16th, 17th, 18th & 19th August 2005
Crown Copyright ©
Mr Justice Warren
A. This application has come on in the Long Vacation as a matter of urgency. I have needed to digest a mass of written material, including case summaries and written opening and closing cases running to several hundred pages, as well as witness statements (excluding exhibits running to some 30 ring-binders) of over 1000 pages. It is impossible for me, in the time available to write this judgment, to review the evidence in the detail which I would ordinarily wish to do in arriving at, and expressing, my conclusions. The fact that I do not do so does not mean that I have ignored it – although it would be a pretence at perfection to say that I had not overlooked anything. I should say that, in order to speed production, I have taken large parts of the narrative virtually verbatim variously from an agreed statements of facts and from the witness statements of Mr Wallace and Mr Roome where I am able to accept what they say as correct.
B. Accordingly, except in relation to a very few events, I state my conclusions of fact without setting out the detail of the competing stories. Statements of fact are to be taken, except where otherwise expressly qualified, as my findings. My findings necessarily entail acceptance or rejection of one or other of the inconsistent evidence from different witnesses.
C. Similarly, it has been impossible to deal with a substantial number of submissions made. I have read, and re-read, opening and closing written submissions from all parties. The fact that I have not expressly dealt with a point, and I am afraid there are very many of them which I have not dealt with, does not, again, mean that I have ignored it although it would, again, be a pretence at perfection to say that I had not overlooked any. I hope, however, that I have covered all the major submissions.
D. I shall start with a very brief review of the nature of the application and of the background and the major events so that the reader coming afresh to the case can see in broad terms what it is about. I shall then address the areas of law which have been debated before me, then set out in detail the facts and my findings, before expressing my conclusions.
a. Pursuant to section 6 IA 1986, the revocation or suspension on such terms as the court thinks fit of the approval given by creditors' meetings held on 31 March 2005 of the CVAs in respect of EGO BV and EH3 on the grounds that those CVAs are unfairly prejudicial to the interests of the Applicants and that there were material irregularities at or in relation to the meetings approving the CVAs.
b. Pursuant to paragraphs 74 and/or 88 of Schedule B1 to IA 1986, the removal of Mr Wallace and Mr O'Connell as the joint administrators of EGO BV and, under paragraphs 90 and 91 of Schedule B1 to IA 1986, the appointment of new administrators of EGO BV.
c. Pursuant to sections 108 and 171 of IA 1986, the removal of Mr Tucker and Mr Spratt as the joint liquidators of EH3 and, under section 108 of IA 1986, the appointment of new liquidators of EH3.
a. The bank lenders:
i. a £900 million Revolving Credit Facility for TXUEL arranged by Barclays, JPMorgan plc, Salomon Brothers International Limited and RBS dated 19 November 2001 (the "RCF Facility" giving rise to the "RCF Debt" owed to "the RCF Banks");
ii. a £126 million Credit Facility for TXUEG arranged by RBS and Bayerische Landesbank Girozentrale, London Branch dated 20 June 2001;
iii. a US$174.4 million Credit Facility for Eastern Group Finance Limited arranged by Bayerische Hypo-und Vereinsbank Aktiengesellschaft, London Branch, and Bayerische Landesbank Girozentrale, London Branch dated 13 March 2002. This facility was guaranteed by TXUEL; and
iv. a US$220 million Letter of Credit and Reimbursement Agreement between Eastern Group Finance Limited (as accounts party), TXUEG (as guarantor) and Bayerische Landesbank Girozentrale, New York Branch as issuing bank, Bayerische Landesbank Girozentrale, London Branch and KBC Bank NV, London Branch as arrangers and KBC Bank NV as agent dated 16 June 2002 (together with (c), the "Lilo Banks ").
the lenders together being called the "Lending Bank Syndicates".
b. Bondholders ("EFC Bondholders") of approximately £1.3 billion of bonds ("EFC Bonds") issued by EFC (about £1.377 billion outstanding at 19 November 2002). The EFC Bonds were guaranteed by TXUEL. Further, the proceeds of the EFC Bonds were lent to TXUEL. Accordingly, the EFC Bonds give rise to several rights – the EFC Bondholders having direct claims against EFC (primary liability) and TXUEL (guarantee liability) with EFC itself having a debt owing by TXUEL equal to the proceeds of the bonds on-lent to TXUEL.
c. Bondholders ("EGO BV Bondholders") of US$500 million of bonds ("EGO BV Bonds") issued by EGO BV (about £330 million outstanding at 19 November 2002). The EGO BV bonds too were guaranteed by TXUEL. They were also guaranteed by EH3. TXUEL also gave an indemnity to EH3 in respect of EH3's own guarantee. The Applicants held between them about 17.4% of the EGO Bonds, the majority being held by holders of RCF Debts and EFC Bonds.
a. TXUEL: Unum, SISU, Appaloosa, JPMorgan and Barclays as members, with AEGON and Citigroup as observers.
b. TXUAC (whose creditors were largely other group companies in respect of inter-company balances): John Pattisson (a retired executive director of Hanson plc and a TXUAC loan note holder) ("Mr Pattisson"), Finco No. 2 (represented by Unum), Global Energy Finance LLC (represented by SISU) and EH4 (represented by Appaloosa) as members, with no observers. It may be that JPMorgan was an observer to this committee but nothing turns on that.
c. TEG (whose creditors were also largely other group companies in respect of inter-company balances): EH5 (represented by Unum), Energy Resources Limited (represented by SISU) and EGO BV (represented by Appaloosa) as members. It may also be that AEGON and Citigroup were observers to this committee but again nothing turns on that.
The creditors on these committees (and subsequently the liquidation committee of EH3) have been referred to by the Respondents as Committee Creditors and I will adopt the same phrase.
Outline of relevant major events
The £67 million payments
a. Net v Gross was to be settled at 75:25 in favour of net.
b. The £67 million held by Herbert Smith was to be paid to TXUEL.
c. Investigation proceeds (ie the proceeds of the claims against TXU Corp and directors) were to be split 5% to creditors of EET, 5% to creditors of TXUEG who were not creditors of the ATL companies and 90% to the creditors of the ATL companies.
d. TXU UK was to receive for no consideration the benefit of the tax losses used to set off against its gain on the sale of its operating business.
Powers of liquidator
Powers of administrator
"However, it is right to say that the court does, in appropriate circumstances, have power to authorise the administrator to take a course, despite the fact that the creditors' committee have voted by a majority against it, but that is a course which the court would only take in very exceptional circumstances."
"Section 6 provides that a creditor may apply to the court for an order to revoke or suspend a decision approving a voluntary arrangement on the ground that the 'voluntary arrangement unfairly prejudices the interest of [the] creditor'. The authorities establish that: (1) to constitute a good ground of challenge the unfair prejudice complained of must be caused by the terms of the arrangement itself; (2) the existence of unequal or differential treatment of creditors of the same class will not of itself constitute unfairness, but may give cause to inquire and require an explanation; (3) in determining whether or not there is unfairness, it is necessary to consider all the circumstances including, as alternatives to the arrangement proposed, not only liquidation but the possibility of a different fairer scheme; (4) depending on the circumstances, differential treatment may be necessary to ensure fairness (see Cazaly Irving Holdings Ltd v Cancol Ltd  BPIR 252 at 269–270 and Sea Voyager Maritime Inc v Bielecki  1 BCLC 133 at 148 - 154, and (I would add) (5) differential treatment may be necessary to secure the continuation of the company's business which underlies the arrangement: (consider Re Business City Express Ltd  2 BCLC 510).
"The question of fairness of the arrangement requires consideration of all the circumstances and in particular the alternatives available and the practical consequences of a decision to confirm or reject the arrangement. In my judgment the only practicable course available to the administrators was to enter into the agreement and proceed with the scheme. The alternative advocated by the Revenue, in their single minded pursuit of their principled objection to the payment in full of the priority debts, can only bring down the whole edifice and secure a nil return for all concerned."
"In deciding whether or not to sanction a proposed compromise the court must consider whether the interests of those, whether creditors or contributories, who have a real interest in the assets of a company in liquidation are likely to be best served (i) by permitting the company to enter into that compromise with all the terms that it contains; or (ii) by not permitting the company to enter into that compromise. It is not for the court to speculate whether the terms of the proposed compromise were the best that could have been obtained; or whether the proposed compromise would have been better if it did not contain all the terms that it does contain. Unless it is satisfied that, if the company is not permitted to enter into the compromise on the terms which the liquidator has negotiated, there will then be better terms or some other compromise on offer, the decision is between the proposed compromise and no compromise at all."
"There is no statutory guidance on the criteria for judging fairness either for a scheme of arrangement under section 425 of the Companies Act 1985 or for a CVA under section 6 of the 1986 Act. There is a difference in the onus. Under section 425, it is for the proponents to satisfy the court that it should be sanctioned, whereas under section 6 it is the objector who must establish unfair prejudice. I do not, however, consider that there is any difference in the substance of the underlying test of fairness which must be applied. It is deliberately a broad test to be applied on a case by case basis, and courts have struggled to do better than the approach adopted by the Court of Appeal in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co  Ch 213 and summarised in the often-cited passage from a leading textbook, Buckley on the Companies Acts:
'In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme.'
That paragraph is directed to schemes of arrangement. The crucial difference with a CVA is that there is just one meeting of creditors, so that necessarily means that there may be sub-groups who would constitute separate classes for a scheme. In considering unfair prejudice, the court will have regard to the different position of different groups of creditor. This, too, will be the case with a scheme of arrangement where groups of creditors with different interests or even rights nonetheless have been included in the same class for the purpose of considering and voting on the scheme."
"Thus stated, the test is not whether the opposing creditors have reasonable objections to the scheme. A creditor may be equally reasonable in voting for or against the scheme. In such a case Mr Moss submitted that creditor democracy should prevail. Where, as here, those who voted in favour of the scheme are large and sophisticated corporations, the rigid application of this test as the sole criterion would rarely, I think, enable the court to refuse to sanction a scheme. It is also not entirely clear to me how the rigid application of this test sits with statements that the court has an unfettered discretion"
"I do not consider that is the same as asking: would the meeting have been adjourned? It seems to me the real question is: would the revelation of the truth have made a material difference to the way in which the creditors would have considered the terms of the CVA itself? The word "likely" is used in a variety of different ways. It does not necessarily mean that there is more than a 50% chance. It seems to mean, therefore, that the right test is whether there was a substantial chance that the creditors would not have approved the CVA in the form in which it was presented."
Removal of officeholders
"The due cause is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed."
most recently followed by Etherton J in Re Buildlead Ltd (In Liq) (No.2)  BCC 138 at paragraphs 168-9 following citation from a number of authorities at paragraphs 154-168.
" In an application such as this, the court may have to carry out a difficult balancing exercise. On the one hand the court expects any liquidator, whether in a compulsory winding up or a voluntary winding up, to be efficient and vigorous and unbiased in his conduct of the liquidation, and it should have no hesitation in removing a liquidator if satisfied that he has failed to live up to those standards at least unless it can be reasonably confident that he will live up to those requirements in the future.
 Support for this approach is not only to be found in Keypack, but also in some cases where the court has compulsorily wound up the company and appointed a new liquidator in circumstances where there is already a voluntary liquidator in place – see for instance, Re Zirceram Ltd  1 BCLC 751, especially at para 25(5). Also where the liquidator could not be seen as independent – see, for instance, Re Lowerstoft Traffic Services Ltd  BCLC 81 (where the liquidator concerned seems to have been the same liquidator as in Keypack).
 It may also be right to remove a liquidator where the circumstances are such that, through no fault of his own, he is perceived to be – even though he may not be – biased in favour of, say, one or more of the creditors – see per Robert Walker J in Re Gordon & Breach Science Publishers Ltd  2 BCLC 189, another case concerned with a compulsory winding-up order in circumstances where there was already a voluntary liquidator in place.
 While the removal of the liquidator is not necessarily based on any fault on his part, most such cases will involve a degree of criticism. Although in Keypack Millett J emphasised there was no criticism of the general ability, experience and professionalism of the liquidator, and that, even in relation to the particular case, there was no evidence of his being biased or dishonest, it is nonetheless clear that he was removed because the judge took a dim view of the way in which he had conducted the particular liquidation. As the judge said, the fact that this may to some extent resound to the discredit of the liquidator, does not mean that the court should shy away from making the order. On the contrary, in an appropriate case it is the duty of the court to make such an order, not merely on the merits of the particular case, but also because it sends out a clear message to liquidators that they have an important function which they should conduct in a vigorous, effective and independent manner.
 On the other hand, if a liquidator has been generally effective and honest, the court must think carefully before deciding to remove him and replace him. It should not be seen to be easy to remove a liquidator merely because it can be shown that in one, or possibly more than one, respect his conduct has fallen short of ideal. Otherwise, it would encourage applications under s 108(2) by creditors who have not had their preferred liquidator appointed, or who are for some other reason disgruntled. Once a liquidation has been conducted for a time, no doubt there can almost always be criticism of the conduct, in the sense that one can identify things that could have been done better, or things that could have been done earlier. It is all too easy for an insolvency practitioner, who has not been involved in a particular liquidation, to say, with the benefit of the wisdom of hindsight, how he could have done better. It would plainly be undesirable to encourage an application to remove a liquidator on such grounds. It would mean that any liquidator who was appointed, in circumstances where there was support for another possible liquidator, would spend much of his time looking over his shoulder, and there would be a risk of the court being flooded with applications of this sort. Further, the court has to bear in mind that in almost any case where it orders a liquidator to stand down, and replaces him with another liquidator, there will be undesirable consequences in terms of costs and in terms of delay."
Perhaps one can say that this is another area of the law where one's flexible friend, proportionality, is to be found at work and the matter should simply be approached on a proportionate basis.
"….The fact is that these documents alone indicate a case for removal. After all, all that one has to find is some good cause why a person should not continue as liquidator. You do not have to prove everything in sight; you do not have to prove, for example, misfeasance as such; you do not have to show more than there may well be a case for misfeasance or, indeed, incompetence."
"..a new liquidator would be able to exercise an independent professional judgment about the liquidator's conduct, having investigated all the circumstances, and to decide not only whether [certain allegations are made out] due to culpable conduct on the part of the liquidators".
Conflicts of duty and interest
"The fact that the present liquidators may face conflicts of interest comparable to those which would face the partners of KPMG if appointed liquidators in their place is no consolation to those such as the perpetual trustee or the FSA claimants who have not been informed of the reasons why the 1986 trustee requisitioned a meeting at the time it did. Indeed the time may be approaching when, to deal with the conflicts faced by all the major firms of insolvency practitioners in liquidations such as this, serious consideration will have to be given to leaving the Official Receiver as a liquidator and authorising him to employ his agents and insolvency practitioners of his choice and to requiring him to monitor their costs and expenses."
"would never have appointed the same person as liquidator of both [companies which had an antagonistic interest] for no man should ever be placed in a position in which his duty and his interest conflicted."
This was a case of actual conflict. The refrain "a position where his duty and interest conflict" is, I note, one which runs consistently through the many cases in the field of trusts relating to conflicts: see for example the cases cited by Mr EG Nugee QC in Re Wallace Smith & Co Ltd  BCLC 970 at page 987.
"It appeared that the liquidator could not from the books of the two companies say whose debts they were; he was thus going to exercise a quasi-judicial position but, as he represented each of the two companies, he would be appearing for conflicting interests. If there was an apparent conflict then the liquidator could not act for both conflicting interests."
"These can relate to a myriad of matters including, for example, inter-company balances, competing claims to assets, allocation of liabilities, guarantee and indemnity claims, issues of set-off or double proof, the validity of security, tax and avoidance or recovery actions. Often, at the stage at which office-holders are appointed and for some considerable time afterwards, it may not be clear what conflicts exist or how they should be managed."
a. Licensed insolvency practitioners are professional men who are well accustomed to dealing with conflicts.
b. In general it is in the interests of creditors, at least in the first instance, to appoint a single officeholder and any conflicts are usually best left to be managed if and when that becomes necessary.
c. If and when it becomes clear that any conflict is sufficiently material to require to be managed, one of a variety of different approaches may be appropriate depending on all the circumstances.
d. Such different approaches may include, for example, obtaining legal advice, the appointment of an additional partner from the same firm or the appointment of an independent partner from a different firm.
|"…..Of course there are possible conflicts of interest. It is unnecessary to go into them in detail, but one of the more obvious is that in an insolvency situation the subsidiary will have its own creditors whose claims will have to be met. Sometimes the creditors will include the parent company or the subsidiary next up the line. Sometimes the interest of the parent company or subsidiary next up the line will merely be an interest as shareholder which ranks behind the creditors of the subsidiary. But these sort of potential conflicts do not in practice give rise to any serious difficulty because they are well known to the experienced insolvency practitioners."|
"... the course taken by Knox J in appointing the same firm to be both provisional liquidators and receivers of the property holding companies was, if I may say so with respect, eminently sensible. In fact, it is very difficult to see how the necessary process of investigation would have been efficiently conducted if there were separate firms representing all, or worse still some of the receivership companies, and another firm representing the provisional liquidators. It is by no means uncommon in the case of the insolvency of a substantial group of companies for cross-claims and conflicts of interest to arise between companies within the group. That does not usually deflect the court from appointing a single firm of insolvency practitioners in the first instance to deal with the whole insolvency of the group, leaving the question of potential conflict of interests to be dealt with if and when it arises."
"would be subject to an acute conflict of duties, and the conflict would be hardly less acute for anyone else who was a member of KPMG…. or any firm associated with it."
"The present case is very different from those two cases. Here there is not merely a potential conflict of interest but substantial litigation on foot between WSTC and WS & Co, and it would in my judgment be quite wrong to make a winding-up order in this jurisdiction which would be very likely to have the consequence that the liquidators of WSTC, or persons closely associated with them, would be appointed liquidators of WS & Co….."
"The disadvantage of appointing an additional administrator is as Morritt J. observed in the Polly Peck case, the further expense and delay which is caused by having to have co-operation between two different firms of accountants and in this case by having to introduce a new firm which has no previous knowledge of the circumstances of this company to join Price Waterhouse, who have a head start in the matter.
There are other ways of dealing with a potential conflict of interest. One of them is to leave the matter to be dealt with if and when it arises. It seems to me that any provision which I make to deal with it today could equally be made at some future date either here or in the US. If such a conflict should surface there should be no difficulty for the administrators, if they find themselves faced with any difficulty in the matter, in securing the appointment of the necessary independent persons by the court in New York or by the court here to relieve them of any embarrassment which they might feel."
"Hitherto in virtually all jurisdictions where court proceedings have been taken the court officers appointed to preserve on an interim basis the assets of the BCCI group have either been members of Touche Ross or associates of Touche Ross. Thereby the accountancy profession has managed to achieve, at least in part, a worldwide system for regulating international insolvency which the civilised countries of the world have failed to achieve so far as the law is concerned. For this court to contemplate on the existing state of affairs that there could be imported into that machinery somebody who was not part of the otherwise co-ordinated system of administration would be to send out an entirely erroneous message about what were the intentions and likely intentions of this court."
Now, there is nothing said about conflicts in this judgment. But it can be seen from further proceedings in the BCCI saga - Re Bank of Credit and Commerce International SA (No.3)  BCLC 106 per Nicholls VC and 1490 (CA) – that Touche Ross (subsequently Deloitte & Touche) became and remained liquidators of such companies. During the course of those liquidations, amongst other things, they negotiated and agreed a pooling agreement between the relevant BCCI companies (which had claims against each other) and a settlement agreement with the Government of Abu Dhabi, on behalf of, amongst others, both BCCI SA and BCCI Overseas, the two main companies in the group. Touche Ross continued to act at all times as liquidators in spite of the obvious potential conflicts amongst the various companies in the group.
"There is in my mind nothing to choose so far as competence, integrity and independence are concerned between these two eminent firms. I have no doubt that each of them would act independently as office holders appointed by the court and that Price Waterhouse would in no way act in a way which favoured the banks at the expense of other creditors or…..that Messrs Touche Ross would cast themselves in the role of the management's nominees and favour them."
"In the light of these facts I cannot see any conflict of interest between the creditors of Agency and the creditors of Holdings, nor anything improper in the same office holders acting in respect of the liquidations of each company."
So that is a case where the court perceived there to be no conflict and, accordingly, had no problem with the appointment of the same liquidators to each company. It is not authority for the converse proposition that, in all cases, it is inappropriate to appoint individuals as officeholders to two or more companies even where there are existing conflicts but where conflicts can be satisfactorily managed, for instance, in cases where this is adequate, by the appointment of an additional independent officeholder.
Relevance of conflicts and ICAEW Guidance and its status
"Mr Jordan and Mr Stone have made full and detailed disclosure to the Institute, which is still considering the matter. The Institute is, of course, concerned with the integrity and objectivity of its members and has laid down guidelines for the conduct of their professional duties. I am concerned with the interests of the administration. It is, of course, of paramount concern that administrators who are officers of the court, possess integrity and objectivity. No possible criticism can be made of the applicants in the present case."
"To displace the administrators, a year into office, without a very strong reason for doing so would be very damaging. I can see no reason for doing so and, indeed I would have no hesitation, as Morritt J. in appointing the three administrators even if the question arose at the very outset of the administration, instead of a year into it".
In fact, Mr Crystal tells me, the two administrators subsequently remained in office, notwithstanding that they were later fined as a result of disciplinary proceedings actually brought against them by the ICAEW.
"2.100 Although the matter was canvassed at considerable length with [the claimants' expert], it seemed to me at the end of his evidence, as indeed it does now, that as an allegation it did not found a cause of action on its own. If as a result of the conflict of interest the defendants were negligent in the advice they gave to the plaintiffs then the plaintiffs have a cause of action as a result of the negligence. The conflict of interest would historically be the reason for the negligent advice ...
2.104... I approach this case not in any semantic way but by looking to see whether as a matter of fact Stoy Hayward acted properly or not in relation to the plaintiffs. If in fact there was a conflict of interest which resulted in their giving improper advice I shall say so; but it is the quality of the advice and not the reason behind it which is the question I have to resolve"
Scheme of arrangement
Bias and deliberate bias
A more detailed statement of the relevant events and issues
a. a work out over the next 6-9 months based on short term cash preservation, a renegotiation of the PPAs and a rescheduling of the group's long term debt. This was referred to as "Plan A"; and
b. an immediate sale of the core UK business (ie the retail business located in TXU UK), followed by administration of the remainder of the business. This was known as "Plan B".
49. The directors [of TXUEL] and their advisers became aware of at least the first of these transfers (albeit after it had taken place) before 18 October 2002 (and in all likelihood, some time prior to that). ……. We were told that the group's total cash balance would be down to £47 million by the following Monday morning (21 October 2002), but that £45 million of this was somehow restricted. I had no knowledge at the time where this £45 million had come from or why it was restricted.
50. Two days later, at noon on 20 October 2002, I participated in a conference call in which a further update was given by, I believe, Mr. Gale [of Herbert Smith, TXUEL's then advisers]. …….I note that Mr. Florent's [of A&O, acting for the Bank Steering Committee] note states that "We have worked out a way to introduce £45 million into our cash-flow. It is not now blocked". At this point, I still had no knowledge where this £45 million had come from, why it had been restricted or what way had been found to release it.
51. It was not until the following week, on Tuesday 22 or Wednesday 23 October 2002………that I (or indeed to my knowledge any of the Financial Creditors or their advisers) was told of the genesis of the "restricted" £45 million.
52. Mr. Gale told me that the £45 million was the proceeds of various in the money swap transactions with TXUEL which had been encashed. These proceeds had then been transferred to TXUEG. He further informed me that he had deliberately decided not to tell the Financial Creditors during the various calls and meetings over the previous weekend why the £45 million had been restricted (or "ring-fenced" as I believe he put it) or that the £45 million of the swap proceeds had been assets of TXUEL. He told me that the reason for withholding this information from the Financial Creditors was that he feared that they would have used this information to seek to freeze the money in the hands of TXUEG, on the basis that those funds belonged to TXUEL. If the Financial Creditors had been successful, these monies would not have been available to support the business until the sale of the retail business had been effected.
53. Mr. Gale apologised for not explaining the position fully at the weekend but explained that the £45 million had been released into cash flow on the basis that it would be repaid to TXUEL from the proceeds of the sale of the retail business. He told me that the release had benefited the creditors since it had removed the danger that the regulator might exercise his powers to appoint a supplier of last resort and left the way open for the business to be sold and value released for the benefit of all creditors.
54. Mr. Gale went on to tell me that he had previously understood there to be approximately £45 million of swap proceeds but that he now thought that there may be more. Herbert Smith and the TXU Europe group companies were in the process of clarifying the position. I subsequently learned that the amount of the swap proceeds was approximately £67 million.
55. Accordingly, it was only at this stage that I, the Financial Creditors and their advisers (including Mr. Segal and Mr. Florent) became aware of the existence of swap transactions with TXUEL, their encashment, and the subsequent transfer of the proceeds to TXUEG and their ultimate release into general cash-flow to facilitate the sale of the retail business to Powergen.
56. I duly reported these matters to the Financial Creditors and their advisers. This information caused considerable consternation on the part of the Financial Creditors. They blamed the directors of TXUEL for allowing substantial assets to be removed at a time when TXUEL was, on any view, hopelessly insolvent and, rightly or wrongly, also blamed the company's advisers, Ernst & Young and Herbert Smith, whom they perceived to be inextricably tied up with the events in question. These events came to light within days of the sale of the retail business to Powergen which the Financial Creditors had opposed on the basis that it removed their last chance of maximising their recoveries on their very substantial investments.
57. Once the information concerning the Swap Proceeds had come to light, the Financial Creditors of TXUEL and their advisers pressed for the Swap Proceeds to be returned to TXUEL. By 4 November 2002, the directors of TXU UK had agreed to make the repayment from the proceeds of the sale to Powergen but, just before the payment instructions could be given, White & Case LLP, who then acted for the Lilo Banks which had lent funds to TXUEG, objected to the transfer taking place. Accordingly, it was agreed that £67 million of the proceeds received by TXU UK from the sale of its retail business (a sum equivalent to the Swap Proceeds) would be placed in escrow pending agreement of its rightful ownership.
58. As a result of these events, a key inter-company dispute emerged. The Swap Proceeds were originally an asset of TXUEL but each of TXUEL, TXUEG and TXU UK had a possible claim to the equivalent amount which had been taken from the proceeds of the sale of the retail business and placed in escrow."
a. The Bank Steering Committee considered it inappropriate for administrators from the same firm to be appointed both at TXUEG and EET in view of the Net v Gross issue.
b. Both E&Y and KPMG had acquired considerable knowledge of the affairs of the group during the "orderly wind down" period and it would be an undesirable expense to bring in yet another firm and that a degree of pragmatism was required in resolving the problems to which conflicts gave rise.
c. Partners of KPMG should be appointed as administrators of TXUEG.
d. Partners from E&Y should be appointed at EET.
e. Joint officeholders should be appointed at TXU UK. The rationale for this was that this was where the group's principal asset resided and this would ensure that these assets were not distributed without the agreement of both sets of administrators.
i) "1.1.6 'E&Y Reserved Matters' means, in relation to the Administration:…
a) (B) (1) the long term Power Purchase Agreements entered into between [TXUEG] and various counter-parties;
(ii) (7) any litigation on behalf of [TXUEG] against [TXUEL] arising in connection with the encashment of certain swaps by [TXUEL] and the subsequent utilisation of the proceeds of encashment (totalling approximately £67,000,000);
b) (C) the initiation, continuance, settlement or compromise of any legal or other proceedings against any company or persons whatsoever or wheresoever situate (sic) arising from the investigations carried out under paragraph […] (B); and
c) (D) all KPMG Conflict Matters...
1.1.9 'KPMG Conflict Matters' means any matter on which KPMG have a conflict either as a result of work undertaken for any person by KPMG or as a result of a conflict between the interests of [TXUEG] and its creditors and the interests of any other company within the TXU Group for whom KPMG act as administrators or liquidators."
Clause 2 gave exclusive conduct of the E&Y Reserved Matters to the E&Y Administrators.
Events leading up to liquidation of EH3:
"We think it is incumbent on you as administrators to give the holders of BV Notes (and especially our clients) sufficient information to make an informed decision, particularly given the potential conflicts of interest arising from this unusual group structure. These potential conflicts of interest arise from: first, your role as administrators not only of TXU Acquisitions Ltd, but also of other companies within the TXU Group; second, from the de facto control that you have over other key TXU companies and, third, by virtue of the fact that you, and your legal advisers Allen & Overy, acted as advisors to certain creditors within the TXU Group prior to commencement of the various TXU administrations. These potential conflicts make it critical that there be transparent and comprehensible explanations of the impact of any steps you might take to maximise recoveries for the TXU Group as a whole, on the recoveries for the creditors of individual TXU entities."
Bingham claimed that their clients needed to be given funds and the opportunity to obtain urgent independent advice in relation to the tax proposals and that KPMG should provide them with full access to all the information they had, including KPMG's working papers.
He thought that Bingham were overstating the issue. Nevertheless, it was KPMG's objective to achieve a consensual resolution of the numerous complex issues if that were possible, and considered that it was important in that regard to ensure that the various creditor constituencies, including the Applicants, had confidence in the transparency and fairness of the insolvency process. He took the view that a consensual resolution would be reached only if everyone had the resources they felt were necessary in order to deal with the issues. In this context, KPMG were working with a large number of US-based organisations, including Unum, who are used to consulting their own legal advisers, and without consulting whom they would be reluctant to agree to any proposals.
a. They could have the relevant work done by Bingham, funded by the estates, with Bingham arguing the Applicants' position on an inter-creditor basis.
b. They could, at least in relation to the £67 million issue, join with the teams fighting the corners respectively of TXUEG and TXUUK (which was indeed one suggestion which KPMG made later, in May 2004).
c. They could turn to Mr Spratt and Mr O'Connell, insisting that they involve themselves; they would undertake the necessary work at the expense of their estates.
"Since we sent our first letter of today, our clients (and we) have learned from you that that (sic) the proposal for offsetting the capital gain realised by TXU UK Limited at this stage now simply involves placing No. 3 into creditors' voluntary liquidation".
"In principle, our clients do not object to a straightforward liquidation of [EH3] at this stage. However, our clients maintain their concerns regarding your potential conflicts (as set out in our first letter of today) in relation to your proposal that you now also act as liquidators of [EH3]. As it stands, our clients believe that [EH3]'s liquidators should be entirely independent office-holders, who are neither partners in KPMG nor Ernst & Young."
They also said that the proposed "briefing" meeting would provide an opportunity to discuss the issue of who should act as liquidators of EH3 prior to the section 98 meeting. I am not clear whether such a briefing meeting took place prior to the section 98 meeting which took place on 8 January 2003.
"At that meeting, Mr Wallace was evidently keen to overcome the Applicants' objections to the appointment of KPMG partners as liquidators of EH3. He questioned why the Applicants would want independent liquidators at EH3. He accepted that the Applicants would want the liquidators to fight their corner but said that, in reality, independent liquidators would have limited access to information from the KPMG office-holders and would therefore have less say in the process. Mr Wallace offered to procure that the liquidation committees of EH3 and TEG (which was a large debtor of EGO BV and EH5) would be controlled by the Applicants. Mr Wallace also agreed that the Applicants should have independent accountants to undertake due diligence on their behalf in relation to the accounting work undertaken by KPMG; whilst he did not think this last measure was necessary, he said that he wished the Applicants to have confidence in the Insolvency Proceedings, the outcome of which for the various creditor groups would, to some extent, be determined by the settlement of the ATL inter-company balances."
a. That, prior to Mr Wallace's appointment as an officeholder at TXUEG and TXUEL, he and Mr Florent of A&O, on behalf of creditors of TXUEL, had been involved in a contest over the destination of £67 million held in TXU UK and had adopted a position which was contrary to the interests of the Applicants as creditors of EH3 and EGO BV.
b. That, prior to his appointment as an officeholder at TXUEG and TXUEL, Mr Wallace and Mr Florent had been informed by various creditors of TXUEL that the £67 million had to be returned to TXUEL at all costs and should not under any circumstances be allowed to remain in TXU UK or go to TXUEG (and thence to the Conduit Companies) and that they remained immovable in respect of this conviction.
c. As a result of differences between E&Y and KPMG leading up to their respective appointments, they had agreed that KPMG could not deal with any matter where there was a conflict between the interests of TXUEG and TXUEL respectively and that a Memorandum of Understanding had been agreed and approved by the court to that effect (although Unum and SISU had become aware of the existence of such a document, no details had been released and none were volunteered or disclosed by KPMG).
d. That Mr Wallace and Mr Tucker were acting for TXUEL alone in respect of the dispute between TXUEG and TXUEL over the £67m.
e. That they could not therefore act for EH3 or EGO BV on that issue.
"Following the sale to Powergen, the creditors of TXUEL, together with their advisers, made repeated requests for the reimbursement of TXUEL/Eastern Funding. The directors ultimately received legal advice that it would be inappropriate to do so. "
and goes on:
"We have instructed solicitors to obtain witness statements from the directors, their legal advisers, and appropriate TXUEL senior management, in order that the facts leading up to the transfer of the £67 million can be properly established. This process is ongoing".
a. TXUEL: Unum, SISU, Appaloosa, JPMorgan and Barclays as members, with AEGON and Citigroup as observers.
b. TXUAC (whose creditors were largely other group companies in respect of inter-company balances): John Pattisson (a retired executive director of Hanson plc and a TXUAC loan note holder), Finco2 (represented by Unum), Global Energy Finance LLC (represented by SISU) and EH4 (represented by Appaloosa) as members.
c. TEG (whose creditors were also largely other group companies in respect of inter-company balances): EH5 (represented by Unum), Energy Resources Limited (represented by SISU) and EGO BV (represented by Appaloosa) as members.
Administration of EGO BV:
Events leading to the BTL CVAs and the CVAs themselves
a. Compromise of PPAs.
b. The Net v Gross Issue.
c. The estates' claims against TXU Corp.
d. The inter-company balances owed by TXUEG to the Conduit Companies.
e. £67m held in escrow.
f. The valuation date for BTL creditor claims and the entitlement to interest.
a. Creditors who would receive 100% in any event, would be paid in full but without any payment of interest.
b. All creditors who would not receive 100% would compromise the Net v. Gross issue at 50:50 initially.
c. All creditors, excluding the Conduit Companies and the two largest PPA Creditors (namely, Drax Holdings Limited and Drax Power Limited ("Drax"), and Scottish and Southern Energy plc ("SSE")), would receive a dividend based on the Net v Gross dispute being settled at 70:30 in their favour (ie 70:30 net for those preferring net and 70:30 gross for those preferring gross); a shortfall would arise under these proposals which would initially be borne mostly by the Holding Companies but also in part by Drax and SSE.
d. The £67 million would be split 50:50 above the line and below the line.
e. Any proceeds of investigations would first be distributed to any creditors who had suffered the initial shortfall under the Net v. Gross compromise, in order to top up their distribution to revert to 50:50.
f. Any further proceeds would then be used to top up those creditors still receiving 50:50 to their preferred outcome (i.e. 70:30) on Net v. Gross.
g. Any surplus proceeds of investigations would then be allocated to all creditors who had not received a 100% dividend, in a compromise formula to be agreed.
a. There had been no disclosure to either the Operating Companies' creditors' committees or the Committee Creditors of the work performed by the E&Y and the KPMG officeholders and their advisers (including National Economics Research Association Inc. ("NERA") and Ilex Energy Consulting Limited ("ILEX") on PPA valuation and the associated valuation methodology. By 2004 the PPA negotiations had come to a standstill. On the one hand, the Holding Company creditors were demanding full disclosure of all PPA related documents and wanted to be engaged in the negotiations of the claims. On the other hand, the PPA Creditors saw no reason why the Committee Creditors should have any involvement in the PPA valuation process or have sight of any PPA related documents.
b. The assumed value of the PPA Creditors' claims was towards the top end of Mr Wallace's expectations and significantly in excess of the expectations of the Committee Creditors.
c. The costs of funding the proposed Net v. Gross settlement and of buying out "smaller" creditors would have been borne disproportionately by the Holding Companies.
d. The Net v Gross settlement proposal did not reflect the merits of the arguments made through the Net v Gross position papers which had been exchanged between the parties as part of the negotiation process.
e. The proposed allocation of investigation proceeds did not take into account the merits of the different claims.
a. Net v Gross was to be settled at 75:25 in favour of net.
b. The £67 million was to be returned to TXUEL.
c. Investigation proceeds were to be split 5% to the creditors of EET, 5% to the creditors of TXUEG who were not Holding Company creditors, and 90% to the Holding Company creditors.
d. TXU UK was to receive tax losses for no consideration.
"This is accepted by Unum Provident and SISU Capital for the purposes only of negotiation with the below-the-line creditors, on the condition that the position of EGO BV bondholders is reserved with regard to the allocation of the £67m Swap Proceeds as between the above the line finance creditors, and on the basis that a process for addressing the above-the-line inter-creditor issues is put in place in short order. This footnote is addressed to the above-the-line finance creditors only and may therefore be removed from this term sheet when it is sent to EY."
a. Net v Gross: Mr. Florent (of A & O) presented TXUEG's case and Mr. Lloyd and Mr. Milner-Moore (both of Herbert Smith) presented EET's case;
b. £67 million: Mr. Florent presented TXUEL's case, while Mr. Lloyd opposed it, arguing that the £67 million should either remain at TXU UK or be paid to TXUEG; and
c. Litigation: Mr. Douglas (of Cadwalader) presented on the merits of the potential claims available to the Holding Companies and TXUEG against third parties including TXU Corp, while Mr. Milner-Moore presented on comparable claims available to the Operating Companies (excluding TXUEG).
Negotiations concerning the £67 million
"This disclosure was a shocking revelation to the Applicants and my firm. It appeared that the KPMG office-holders, Allen & Overy, Mr Crystal QC and Mr Oditah QC had from the outset been representing just TXUEL on this issue but had never seen fit to disclose this fact to us or our clients, although it must have been obvious to them that we understood them to be acting for all of the ATL Companies - as they had in relation to the Double Dip, the Multiple Dip and, indeed, all of the other ATL issues. This disclosure also put in a very different light the prior statements of the office-holders and their advisers at Allen & Overy concerning the availability of Mr Crystal QC's original opinion. It also explained why the position paper and Counsel's opinion we had been given in early May 2004 were one-sided and lacking in any depth of reasoning. We then understood that the position paper and new opinion were anything but advice to the Creditors' Committees. This disclosure very substantially raised the level of the Applicants' concerns about the conflicts of interest faced by the KPMG office-holders and their advisers."
|7 May 2004||TXUEL position paper|
|25 May 2004||TXUEG position paper|
|26 May 2004||Without prejudice meeting between the officeholders of TXUEL, TXUEG and TXU UK and their respective legal advisers|
|29 June 2004||TXUEL supplementary position paper|
|1 July 2004||Without prejudice meeting between the officeholders of TXUEL and TXU UK and their respective legal advisers|
|2 July 2004||TXUEG supplementary position paper|
|5 July 2004||Without prejudice meeting between the officeholders of TXUEL and TXUEG and their respective legal advisers|
The Joint Proposal
a. Interlocking CVAs would be proposed for the five most important BTL companies (namely TXUEG, TXU UK, EET, TXU Europe Power Limited and EGFL) but would not take effect unless at least 75% by value of the PPA Creditors agreed the value of their claims for both voting and dividend purposes at the values set out in the Joint Proposal.
b. The PPA Creditors' claims were to be compromised at £1.2 billion (compared with claims in excess of £2 billion).
c. The Net v Gross issue was to be compromised on a 50:50 basis.
d. All existing and future claims of the BTL companies against TXU Corp, the directors, auditors and certain other third parties were to be pursued by the KPMG officeholders for the exclusive benefit of the ATL companies,
e. The inter-company balances owed by TXUEG to TEG, EH3, TXUAC and TEG Head Office (a minor creditor of TXUEG) were to be fixed at a total of £429 million.
f. The "non-compete" claims of two PPA Creditors against TXUEG would be settled for approximately £29 million instead of being litigated.
g. The £67m was to be repaid from the escrow account to TXUEL, together with interest.
h. All unsecured claims were to be valued as at 19 November 2002 and no interest was to be paid by BTL companies to their creditors, even in the event that it transpired that they were solvent, unless all BTL companies became solvent.
i. TXU UK was to acquire tax losses to shelter its 2002 tax year gain by paying £70 million to EET and £35 million to certain ATL companies. However, an adjusting payment would be made (either by the ATL companies or by the BTL companies) such that the effect of the tax loss payments would be neutral for the ATL companies.
j. The ATL companies would pay an aggregate amount of £7.5 million to various BTL company creditors.
The Decision to Implement the Joint Proposal
"if we cannot reach agreement on these [ie the Holding Company] issues the Creditors Committees will need to consider de-linking the Holding Company and Operating Company CVAs."
The decision to de-couple
a. It was originally intended to synchronise an ATL settlement with the BTL settlement.
b. In their report to creditors on 8 August 2004, the Respondents had indicated that de-coupling might be necessary in the absence of progress on the resolution of issues between the ATL companies.
c. On 16 November 2004 Mr Tucker emailed the members of the Creditors' Committees and advisers. Mr Tucker proposed that the BTL and ATL CVAs be de-coupled. The e-mail contained a revised timetable for finalising the BTL and ATL settlements, and proposed that lock-up agreements be entered into by the material BTL company creditors by 25 November 2004.
d. During a conference call on 24 November 2004 Mr Wallace stated that the KPMG officeholders intended to enter into lock-up agreements to the BTL company settlement at TXUAC, TEG and EH3 if they had majority creditor support.
a. The timetable for implementing the Joint Proposal was extremely aggressive. The PPA Creditors felt that the process had already taken far too long and were adamant that unless the process was confined to a tight timetable, their interests would be better served by causing EET to go into liquidation. Threats were made to liquidate EET at various times throughout the process. A final deadline was set on 16 November 2004 when Mr Bloom sent an email to Mr Wallace and Mr Tucker setting out a timetable which included:
i. Lock-up and compromise agreements to be signed and delivered to Herbert Smith in escrow by 25 November 2004.
ii. Lock-up agreements to be released from escrow and to become unconditional on 29 November 2004.
iii. A formal Operating Company CVA Proposal to be posted to creditors on 7 January, 2005.
iv. CVA meetings to be held on 28 January 2005.
"It was an absolute requirement of EET creditors that the creditors' meetings to consider the Operating Company CVA Proposals be held before the end of January 2005. Mr. Bloom stated in the e-mail that the timetable had no room for slippage. In view of the time that had elapsed since the first proposal, with the support of the Operating Company Creditors, Mr. Bloom indicated that if the lock up agreements were not lodged by 25 November in escrow and released from escrow on 29 November, the CVA process would be terminated. The likely effect of this termination would be the commencement of liquidation at EET and litigation in respect of all those matters which were sought to be dealt with through the CVAs.
Although Allen & Overy were able to find one or two extra days in the timetable, thus extending this lock up period, which still allowed for creditors' meetings to be held before the end of January 2005, I believed that the written threat of termination of the CVA process if the timetable was not adhered to was genuine and serious. This was reinforced in my discussions with key Operating Company creditors and in an e-mail dated 26 November 2004 in which the EET only creditors, represented by David Buchler……., also threatened to take steps which were likely to result in EET being put into liquidation.
By the end of October at the latest it was clear to me that it would not be possible to resolve Holding Company inter-creditor issues with a view to putting forward proposals for Holding Company CVAs within the same timetable as that contemplated in relation to the Operating Company CVAs. The response from some Committee Creditors was that they were unwilling even to begin to discuss the means by which inter-creditor issues could be resolved amongst themselves until they had completed their due diligence on the PPAs, or separately from a deal with TXU Corp.
On 16 November 2004, therefore, Mr. Smith circulated on behalf of Mr. Tucker a detailed e-mail to the Committee Creditors (including the Applicants) explaining our concerns and recommending that the Holding Company CVAs and the Operating Company CVAs be de-coupled. We also recommended that the Committee Creditors should sign off on the Operating Company deal by 25 November 2004."
Lock-up Agreements and reservation of rights
"Up until late November 2004 we had received unanimous approval from all of the Committee Creditors for all key decisions put to them. Given the close involvement of all the Committee Creditors in the negotiation of the Operating Company CVA Proposal and the progress of those negotiations in the preceding months, particularly as the PPA information became available in the dataroom, in mid to late November I expected that we would receive unanimous approval from all of the Committee Creditors for us to sign lock up agreements with respect to the Operating Company CVAs on behalf of the Conduit Companies. This situation changed on 24 November 2004, when the Applicants indicated that they would not support the course we proposed."
a. They considered the Joint Proposal (as amended) to be the best settlement reasonably obtainable for each of the Conduit Companies and their creditors as well as in the best interests of each of the other ATL companies of which they were officeholders and their creditors.
b. If the BTL company lock-up agreements had not been deposited into escrow on 25 November 2004, or become unconditional on 2 December 2004, then the entire BTL CVA process would have been likely to collapse. The Operating Company CVAs gave the Conduit Companies and all the other ATL companies the prospect of certainty. If the process had collapsed it was likely that the main Operating Companies would have been placed into liquidation. All ATL creditors would have faced massive uncertainties and the prospect of having to wait 18 months to 2 years to receive any distributions. They also considered it likely that each of the Conduit Companies would face substantially reduced recoveries in a liquidation, compared to the recoveries which they could expect through the Operating Company CVAs.
c. In contrast, they estimated that if the £67 million were treated as the Applicants wanted, that would result in an increase of approximately 2p in the £ in the dividend payable on the EGO BV Bonds.
d. They believed that a large majority of the Committee Creditors wanted the BTL CVAs to proceed.
e. The Applicants held approximately 17% of EGO BV Bonds. The other Committee Creditors held approximately 57% of the EGO BV Bonds.
f. The sole reason given by the Applicants for not endorsing the Operating Company CVAs was that they wanted the terms of a "reservation of rights" letter to be agreed for the purpose of preserving their rights for the allocation discussion between the ATL creditors (as to which see below).
242. My colleague, Mr Terry, therefore contacted the conflicts office-holders on 26 November 2004 ………requesting that they become involved with the issues raised in our letter to Messrs Wallace and Tucker of 25 November 2004.
243. Mr Wallace and Mr Tucker had aligned themselves with the interests of TXUEL in relation to the £67 million ring-fenced at TXU UK and, despite the conflicts they faced as joint office-holders of TXUEL, TXUEG, TEG, EH3 and EGO BV, they were not ensuring that the conflicting interests in these monies were being resolved or even effectively managed.
244. The disclosures relating to the PPA counter-party payments and the move to "majority voting" increasingly caused the Applicants to believe during early December 2004 that Mr Wallace was willing simply to ignore the difficulties caused by the conflicting interests in favour of the wishes of his majority creditors at TXUEL.
245. It was unclear to us what involvement or knowledge the conflicts office-holders had until this point. As the Applicants had now largely lost confidence in Mr Wallace and Mr Tucker's willingness to treat them fairly, I felt it was incumbent on us at least to try and engage with the conflicts office-holders. Unfortunately, the Applicants' subsequent experience only confirmed their initial views that the conflicts office-holders would be incapable of taking an independent view.
246. At a meeting with Messrs Spratt and O'Connell on 1 December 2004, I explained the background to the £67 million ring-fenced at TXU UK, the £11.5 million PPA cash-backs and the assignment of the BTL litigation proceeds, and the reasons why it was essential to preserve the rights and interests of those office-holders' estates by a reservation of rights letter. I urged Mr Spratt, as joint liquidator of EH3, to withdraw EH3's executed BTL lock-up agreement (which had been placed in escrow until the following day), at least until a proper mechanism had been put in place to preserve the rights of TXUEG's creditors. I also urged that, as a creditor of TXUEG, EH3 should approach the joint administrators of TXUEG to assert that EH3 was being materially prejudiced by the BTL settlement. Mr Spratt refused to agree to withdraw the BTL lock-up agreement, but he did say he would seek to agree suitable wording with Mr Wallace to preserve these rights.
247. Despite the concerns expressed by my firm on behalf of the Applicants, and their refusal to support the BTL settlement, Mr Tucker agreed to the release of the EH3 BTL lock-up agreement from escrow on 2 December 2004. Mr Spratt's lawyers have since asserted in their letter dated 3 February 2005 that Mr Tucker signed the BTL lock-up agreements after consulting Mr Spratt…….".
a. His detailed involvement in the BTL and ATL settlements commenced on Monday 29 November 2004.
b. In relation to Mr Terry's contact with him he refers to the email exhibited by Mr Roome dated 26 November 2004. He says, and I accept this, that he in fact never saw this email and it was sent to an incorrect address for Mr O'Connell.
c. He makes observations on Mr Roome's comments on his and Mr O'Connell's involvement, noting, I think correctly, that Bingham knew that they were not actively involved in the BTL settlement negotiations and (as Mr Roome would have seen) they had not been copied in on any of the voluminous emails.
a. The £67 million which, it will be remembered, belonged either to TXUEL or to TXU UK (with a somewhat spectral alternative claim by TXUEG) but with no direct claim by any Conduit Company.
b. The proceeds of any claims that the BTL companies, including TXUEG, might have against TXU Corp and TXU Europe group company directors.
c. Payments agreed to be made by the PPA Creditors to certain of the ATL companies.
a. Other major creditors were making clear that they would not be willing to agree an ATL settlement unless it involved the resolution of all ATL issues. It was also Mr Wallace's own view that it was more desirable, and more practicable, to try and resolve all outstanding issues at once through a "package deal".
b. There was a limited window of opportunity to seek to agree the terms of an ATL settlement if the prospect of a valuable settlement with TXU Corp was to be preserved. Resolution of the £67 million issue could not realistically have been achieved in that time-scale.
c. To have resolved the £67 million would have meant adducing evidence from partners in Herbert Smith and from TXUEL directors. The inability to compel them to give evidence in an out-of-court process would have impeded TXUEL in asserting its claim since there must be doubt whether the individuals concerned would be willing to expose themselves to criticism and possible liability.
The Approval of the BTL CVAs
Material change of position
Above the Line issues and the ATL settlement
a. The Double Dip.
b. The allocation of any settlement payment made by TXU Corp.
c. The GFA Claim.
d. The inter-company balances.
e. £67m swaps proceeds held in escrow.
f. The allocation of £11.5m of payments to be made by certain PPA creditors upon the implementation of the BTL CVAs.
g. The valuation date for the ATL creditor claims for the purpose of any CVA and their entitlement to interest.
a. The officeholders' goal was to make distributions of assets to Holding Company creditors. In this context, it plainly made sense to seek a consensual compromise of those matters that might impede or delay such distributions, rather than to litigate them.
b. Timing in this respect was critical. There was a real prospect of agreeing a valuable early settlement with TXU Corp, but the officeholders believed that they needed to do so by 15 January 2005 at the latest as a result of a deadline imposed by TXU Corp which they considered to be genuine. However, major creditors such as the RCF Banks had made clear that they would not be willing to endorse a settlement with TXU Corp unless they knew how other Holding Company issues would be resolved. I would add here that TXU Corp had also informed Mr Wallace and Mr Tucker that unless direct claims by creditors, as well as claims by TXUEL group companies, were resolved as part of one package, there could be no substantial settlement of the claims of the estates alone. Further, TXU Corp's original date for settlement had been the year end ie 31 December 2004, and that, failing agreement, the matter would be turned over to their D&O insurers.
c. The majority of the principal Holding Companies were in pre-Enterprise Act administration proceedings. Putting those companies into liquidation (the alternative to CVAs or schemes of arrangement) in order to make distributions would have entailed material disadvantages in terms of adverse tax consequences and the need to maintain higher reserves.
a. On 5 January 2005, KPMG distributed update reports on their analyses of the Double Dip Claim and the GFA Claim.
b. On 6 January 2005, a number of papers and opinions were distributed with respect to the Valuation Date issue (and a related issue that had arisen with respect to currency indemnity provisions). These included papers and opinions prepared on the respective instructions of the officeholders, the RCF Banks and the EFC Bondholders.
c. On the morning of 11 January 2005, the creditors were provided with the papers on the direct claims of the RCF Banks and the EFC Bondholders against TXU Corp and certain directors of TXU Europe group companies.
a. There was disagreement both between and within the EFC Bondholder and RCF Bank groups on the resolution of the Valuation Date issue. This issue affected different members of the EFC Bondholder group in different ways, as there were EFC Bonds denominated in dollars, sterling and euros, and the EGO BV Bonds were denominated in dollars. The RCF Debt was largely denominated in Euros, but the position of Barclays differed from the other RCF Banks, because it also had a claim denominated in sterling at EH3. The Applicants were contending that a 19 November 2002 date should be used.
b. The EFC Bondholder group appeared less willing than the RCF Banks to support the allocation of some of the proceeds of the PPA Payments to the Conduit Companies. The Applicants considered that all of the proceeds of the PPA Payments should go to the Conduit Companies.
c. The EFC Bondholder and RCF Bank groups each appeared to accept that no value should be attributed to EFC's Double Dip Claim or EGO BV's GFA Claim. The Applicants agreed with the former proposal, but not the latter.
d. The EFC Bondholder and RCF Bank groups each took the position that TXUEL should retain all of the £67 million Swap Proceeds. The Applicants' position remained that the proceeds should be allocated to the Conduit Companies unless TXUEL could establish a proprietary claim. I note here that Mr Wallace was, as he said he would, be perfectly prepared to consider the allocation issues held over, as it were, from the BTL settlement, including the £67 million issue. He did not say to the Applicants that there was no point in their making suggestions because the issue had been finally resolved by the BTL settlement.
e. Mr Wallace believes that the EFC Bondholder group eventually agreed certain proposals among themselves and put them to the RCF Bank group, but that they were rejected. No agreements were reached with the Applicants.
f. Accordingly, the New York meetings appear not to have moved matters forward and there remained material disagreements.
"The approach adopted by the Applicants to the restructuring proposals appeared to us to amount to a pursuit of every argument available, regardless of the legal and economic merits, in order to provide them with a lever in the negotiations in the restructuring. This was apparent during the negotiations; the position taken by the Applicants on these issues was always an extreme one. AEGON were not and are not prepared to conduct business in that way. We were not prepared to pursue claims to a point that exceeded a fair reflection of their legal merits in an attempt to increase recoveries by threatening to block or impede the restructuring. Nor do I consider that such a strategy would have yielded a more favourable outcome for EGO BV holders, for the reasons I have given. AEGON have been involved in numerous restructurings and take the view that while parties with different interests are to be expected to push their position in respect of their claims, achieving a restructuring ultimately involves the various competing interests taking a realistic approach resulting inevitably in compromise."
The ATL heads of terms and lock-up agreements
Termination of Bingham's retainer
a. The BTL CVAs had been approved by overwhelming majorities at the creditors meetings.
b. The heads of terms for the ATL CVAs had been approved by a majority in value of the creditors of each of the relevant companies.
c. The Applicants were refusing to support either the BTL CVAs or the ATL heads of terms.
d. Mr. O'Connell and Mr. Spratt had retained independent legal advisers.
The ATL CVAs and CVA Meetings
a. The proposal (including the notices of meetings).
b. A letter from the officeholders dated 11 March 2005.
c. The letter from Bingham to A&O dated 8 March 2005.
d. The letter from A&O to Bingham dated 11 March 2005.
a. EFC's claim against TXUEL would be treated as subordinated (ie there would be no Double Dip).
b. The US$175m litigation recoveries from TXU Corp settlement would be split 60:40 between estate and direct claims. The US$105m (ie 60% of the TXU Corp Settlement) going to the estates would be split (after certain specified deductions) 50:50 between TXUEL and TXUEG. The remaining US$70 million (ie 40% of the TXU Corp settlement) would be split between the RCF Banks and the EFC Holders in respect of their direct claims against TXU Corp, with US$1.5 million of this sum going to the EGO BV Bondholders as a whole.
c. EGO BV's claim against EH3 under the GFA would be released.
d. In relation to the inter-company balances (i) the claim of TEG against TXUEG was recognised; (ii) the triangle of liabilities were not treated as having been netted-off; (iii) EH3 was treated as having back-to-back recourse to TXUAC with respect to EH3's liability to Barclays under the currency swaps; and (iv) EH3's indemnity claim against TXUEL was allowed.
e. The £67 million plus interest previously ring-fenced at TXU UK would be paid to TXUEL to form part of TXUEL's assets.
f. The £11.5 million PPA Payments would be split 50:50 between TXUEL and the Conduit Companies.
a. The liquidators of EH3 required (but did not have) the sanction of the liquidation committee or the Court for various matters involving the CVAs of the BTL and ATL Companies.
b. There were various claims relating to conflicts of interest.
c. The CVA proposals were unfairly prejudicial to their clients.
d. The proposal contained insufficient information to enable creditors to make an informed decision on the CVAs, that their clients had been denied access to other EGO BV Bondholders and that, accordingly, there had been material irregularities in the CVA process.
e. Certain members of the creditors' committees had indicated to the officeholders their dissatisfaction with certain aspects of the conduct of the administration and liquidation proceedings for the ATL companies.
|Unconnected creditors||Connected creditors||Total % of claims voting in favour||Total % of claims voted against||Total % of claims voted against||Total % of claims voted against|
|Value of Claims voting for,
|Value of Claims voting against,
|% value of unconnected claims voting in favour||Value of Claims for, £ (no votes against)||Value of Claims for, £ (no votes against)||Value of Claims for, £ (no votes against)|
The allegations of unfairness
"I disagree both with this assertion and with Mr Roome's and Mr Olin's assessment of me. As regards the assertion I note that Mr Roome does not provide any information as to what he believes AEGON would have recovered under a liquidation scenario. His assertion is unsupported by any facts, documents, or underlying assumptions. Further, his suggestion is inconsistent with the liquidation analysis I had received from KPMG which……estimated the expected recovery for the EGO BV holders in a liquidation scenario would be 62.4p on the pound, some 5p on the pound less than the distributions expected under the CVAs at the time of voting….."
The allocation of the £67m
|10 August 2004||Opinion of Mr Girolami QC|
|18 August 2004||Meeting between KPMG, A&O and Bingham|
|1 September 2004||Response to Mr Girolami QC's opinion sent to Bingham by A&O|
|24 September 2004||Applicants' position paper|
|21 October 2004||TXUEL position paper|
a. TXUEL has no proprietary claim to the £67 million.
b. TXU UK and TXUEG agreed, by the BTL settlement and BTL CVAs, to give up their claims to the £67 million.
c. Accordingly, as Bingham put it in their position paper, "as among the above the line creditors, the £67 million represents funds advanced by and repayable to TXUEG, and it can only therefore be allocated to TXUEG from whence it came, so as to augment the assets of TXUEG available for distribution to TXUEG's above-the-line inter-company creditors". Or, as Mr Roome later put it "unless some person has some greater right to the assets being released by the below-the-line administrators, TXUEG's above-the-line creditors should receive the benefit of all amounts that the below-the-line administrators are prepared to release above the line in order to achieve this package deal – including the GBP 67 million".
"[Mr Roome's comments] led me to believe that he was in fact alleging that the Ernst & Young administrators of TXUEG had conceded the Swap Proceeds issue in exchange for some other equivalent benefit under the Joint Proposal and that such benefit would inure only to the Operating Company creditors of TXUEG and that, consequently, the Holding Company creditors of TXUEG should receive equivalent compensation. Although not directly in response to Mr. Roome's e-mail, I did address this argument in an e-mail which I sent to Mr. Olin on 21 January 2005. In this e-mail, I stated: "I acknowledge that it is possible to argue that Chris Hughes and the [Ernst & Young] Administrators gave up part or all of the £67 million in return for an equivalent value transfer from the Holding Companies on some other part of the Operating Companies' Settlement. However, no one has suggested to me areas or issues on which the Holding Companies have given up value that they ought not to have done." I am certainly not aware of any benefit obtained by the Operating Company creditors as a quid pro quo for giving up the Swap Proceeds, nor has anyone (including the Applicants) ever identified any such benefit."
"believed that there was a significant risk that the BTL deal would collapse if EH3 had withdrawn its lock-up agreement. That was a risk which I was not prepared to take on behalf of EH3. In other words, I had formed the view that the BTL deal was fair and reasonable from EH3's perspective even without a reservation of rights letter".
The GFA Claim
"[EH3] hereby undertakes to guarantee any receivable (including interest) on [EH3] Group Companies, immediately upon receipt of EGO BV's first written demand, in relation to its indebtedness arising from Group Financing."
"…to [EH3] group companies, of which [EH3] holds, whether directly or indirectly, at least 50% of the issued and outstanding shares, or on which [EH3] exercises ultimate control to a substantial extent."
a. Whether Clause 2 of the GFA was an immediate guarantee, or rather a contingent executory obligation to give a guarantee if and when a demand was made by EGO BV (no such demand having been made prior to the commencement of EH3's liquidation).
b. Whether the provisions of the GFA were capable in any event of constituting a guarantee in respect of TEG's borrowing from EGO BV. This comes down to whether the indebtedness of TEG to EGO BV falls within the definition of "Group Financing" and is therefore covered by the provisions of the GFA.
a. Clause 2 gave rise to an executory obligation only and that, no demand having been made by the directors of EGO BV prior to the commencement of EH3's liquidation, it would be contrary to public policy to attempt to enforce EH3's obligation to give EGO BV a guarantee now, being in fraud of insolvency laws and the pari passu treatment of all creditors.
b. As a matter of construction, the terms of the GFA were not capable of constituting a guarantee in respect of TEG's borrowing from EGO BV as, given that EH3 did not either hold at least 50% of the shares in TEG or exercise ultimate control over it, that borrowing did not fall within the definition of "Group Financing" under the GFA.
a. First, that clause 2 of the GFA constituted an immediate guarantee rather than an executory obligation to provide a guarantee on demand.
b. Secondly, that even if clause 2 only created an executory obligation, there is no rule of policy of insolvency law which would prevent EH3 from giving the guarantee now, pursuant to the executory obligation.
c. Thirdly, that although it was accepted that TEG's borrowing from EGO BV did not come within the definition of Group Financing, EH3 was or might be estopped from denying that the liabilities of TEG to EGO BV constituted "Group Financing" within the meaning of the GFA.
To succeed in its claim EGO BV would have needed to succeed on the third of these three points as well as on either the first or second points.
"440 Bingham McCutchen also instructed Mr. Girolami QC….He then concluded, as we had done, that the terms of the GFA did not on their face extend to EGO BV's lending to TEG. However, on the basis of an assertion that it seemed "quite plain that the group [had] dealt with EGO BV's tax affairs on the basis that the liabilities of TEG to EGO BV were within the scope of the GFA" (paragraph 18), he opined that further steps needed to be taken by us to satisfy themselves that they had fully investigated the factual matrix relevant to the creation of the GFA.
441. The matter apparently relied upon by Mr. Girolami QC in support of his assertion was EGO BV's successful extension of its tax ruling in 2001 (see paragraph 10 of his opinion). This was a matter that Boekel had already addressed in their advice of 25 May 2004. They concluded that Loyens had apparently failed to assess whether EGO BV remained compliant with the terms on which it originally obtained its tax ruling. They did not conclude that EH3 should therefore be deemed to have guaranteed the liabilities of TEG to EGO BV. To the contrary, their view was that, following the 1998 restructuring, it was EGO BV's new parent TXUEL, rather than EH3, that should have provided any necessary guarantees.
442. In any event, neither we nor our solicitors had located any evidence of action or conduct on EH3's part to support a conclusion that it had agreed to guarantee TEG's liability. Nevertheless, given the Applicants' continuing challenge of our conclusions, our solicitors were instructed to address additional questions directly with the directors of the EH3 and TXUEL companies and TXU Corp in respect of both the GFA and the 1998 TXU Europe group reorganisation. …. Questions were sent to former directors on 27 September 2004………
443. At the same time, Bingham McCutchen produced a position paper on behalf of the Applicants with respect to the GFA Claim. No new issues were raised in the position paper. It was again accepted that the TEG receivable fell outside the definition of Group Financing under the GFA.
444. The former EH3 and TXUEL directors took many weeks to respond to the questions posed of them. Berwin Leighton Paisner responded on 10 November 2004 on behalf of Mr. Marsh, offering scant information concerning the 1998 group reorganisation, no information on the GFA, and providing no relevant documentation.
445. Pending receipt of answers from the other directors, we arranged for our solicitors to interview Mr. Buchanan on 29 November 2004. ….
446. Mr. Buchanan recalled that no-one had had any involvement with the GFA except himself, Mr. Murray, a former in-house legal counsel to the TXU Europe group, Loyens and The Equity Trust Company. He confirmed again that the GFA had not been considered in the context of the group reorganisation in 1998.
447. Our solicitors then sought to speak to Mr. Murray. However, I understand from Ms. Croucher of Cadwalader that Mr. Murray either declined to be interviewed or was uncontactable despite several requests through his advisers, Berwin Leighton Paisner."
Mr Wallace then goes on to explain, in an explanation I find wholly convincing, why nothing of assistance was found in the files of Norton Rose (who had at one time acted for EH3 and/or TXU Corp at the time of the reorganisation in 1998). He then says:
450. Given the further investigations that we had undertaken since counsel first opined in July 2003, including the advice that we and Bingham McCutchen had obtained from respective Dutch counsel and the opinion that Bingham McCutchen had obtained from Mr. Girolami QC, our solicitors instructed Dr. Oditah QC to reconsider his original joint advice. His further opinion dated 18 December 2004 confirmed the conclusions in his original advice, and dismissed any claim that EH3 might be estopped from denying liability in respect of the TEG receivable as "hopeless".
452. Lovells responded to us on 10 January 2005 on behalf of other directors of EH3 and TXUEL who were in office at the relevant time. The directors could not recollect the GFA, and could provide no relevant documentation. On 18 January 2005, the Applicants' advisers were informed that these answers were available for inspection at Cadwalader's offices.
The allocation of £11.5m of payments made by certain PPA creditors
a. Their agreed valuations would be included in the Joint Proposal, intending that these valuations would stand as their proposal unless they could be persuaded that any of them had been reached on the basis of some manifest error.
b. A data room would be set up in which the PPA documentation would be made available to restricted Operating Company committees and Committee Creditors. This would provide Committee Creditors with the opportunity they required to test the officeholders' valuations (and PPA Creditors the opportunity to assess each other's claims).
a. The officeholders were guaranteed access to the final report.
b. The officeholders would not re-visit the valuations contained in the Joint Proposal unless it could be shown that the work conducted by the officeholders' experts, NERA and ILEX, contained some manifest error. Neither Mr Wallace nor Mr. Bloom were prepared to re-open negotiations with the PPA Creditors simply on the basis of differing expert opinions on matters of a subjective nature. Both Mr Wallace and Mr Bloom were absolutely clear in their evidence that the figures in the Joint Proposal were, subject to that possible variation, sacrosanct.
a. Not all of the Committee Creditors agreed with the officeholders' approach. Appaloosa and Davidson Kempner, in particular, remained intent on convincing them that their valuations should be reduced. To this end, they asked them both to attend a meeting with them in New York on 3 November 2004.
b. At the meeting, Mr. Bloom spent some time explaining why the officeholders were confident that they had arrived at fair valuations. He accepted that PA Consulting's views were defensible, and did not discourage the Committee Creditors from trying to persuade major PPA Creditors to reduce their claim, but expressed doubt that any would agree to do so.
c. The Committee Creditors agreed that, initially, they would approach Drax and SSE which they did. Rugeley Power was later added.
d. Although there was no scope for a dispute with Drax as to the expert valuation of their claim, there were three legal issues:
i. Whether a particular clause in their contract prevented TXUEG from making a claim against the estate of EET unless and until Drax had been paid out in full (the so-called "non-compete" clause).
ii. Whether Drax had acted prematurely in terminating its contract giving rise to repudiatory breach.
iii. A minor issue as to the proper interpretation of a financial cap on TXUEG's liability as guarantor.
e. These issues had already been the subject of extensive consideration by the KPMG and E&Y officeholders. The Joint Proposal proposed that Drax be paid an additional £25 million in settlement of the first and third of these issues.
The allocation of any settlement payment made by TXU Corp
a. The continuation by TXUEL and TXUEG of trading from the first quarter of 2002 until October 2002, when it was arguable that the directors were obliged to have regard to the interests of the creditors of the companies, and had failed to do so sufficiently or at all (the "Trading Claim"). These included "loss of chance" claims one theory of loss was that TXUEL had lost an opportunity to restructure the business of its subsidiaries without break-up and outside formal insolvency proceedings; another theory of loss was that the continuation of trading had caused diminutions in net assets over the relevant period.
b. Inter-company dividends paid by TXUEG in 1999 and 2000 and by TXU (UK) Holdings, TXUEG, TEG and TXUAC in 2001, when those dividends were or were arguably unlawful under Part VIII of the Companies Act (the "Dividend Claims"). It is to be noted that it was not only TXUEG which had Dividend Claims.
c. TXUEG's need to compromise the Net v Gross issue, when it was arguable that the compromise was necessitated by the absence of proper books and records (the "Books and Records Claim").
d. TXU Corp's withdrawal of promised financial support for TXUEL in late 2002, in circumstances which arguably constituted a breach of contract or breach of promise sufficient to give rise to estoppel under the laws of Texas (the "Texas Claims").
a. Waiver of a £62.2 million claim by TXU Corp against TXUAC (its only claim against any of the Holding Companies).
b. Reimbursement of certain insurance premiums to TXUEG (estimated to be $1.3 million but which subsequently became $2.9 million).
c. Reimbursement of £680,553 in pre-administration legal costs to TXUAC.
a. $13 million would be paid under the Tax Cooperation Agreement.
b. $205 million (as well as the reimbursement sums in respect of legal costs and insurance premiums) would be paid under the settlement agreement.
a. $43 million is allocated between TXUEL, EFC and Finco 2 in respect of tax matters.
b. $105 million (less certain deductions) is allocated equally between (i) TXUEL and (ii) the Conduit Companies pro rata to their claims as creditors of TXUEG. The deductions are designed to reimburse TXUAC in respect of certain costs and much of the benefit will flow to EH3 and EGO BV as indirect creditors of TXUAC.
c. US$70 million is allocated to Direct Claims
a. That the allocation of $43 million to TXUEL, EFC and Finco 2 of a portion of the settlement proceeds prejudices the interests of the Conduit Companies.
b. That the allocation of as much as $70 million to Direct Claims prejudices the interests of the Conduit Companies.
c. That the 50:50 split of the $105 million allocated to estate claims prejudices the Conduit Companies.
In each case the alleged prejudice to the Conduit Companies entails prejudice to the Applicants.
"(a) Pursuant to the terms of the Tax Cooperation Agreement we had originally entered into……, TXUEL, Finco 2 and EFC had the right to compel a payment of $50 million from TXU Corp in respect of the use of (or agreement not to use) tax losses. Such right would have been retained and enforced if the overall settlement with TXU Corp was not consummated. At TXU Corp's request, we agreed to amend the Tax Cooperation Agreement in conjunction with the settlement to provide that only $13 million would be paid under its terms on the basis that, in exchange, TXU Corp would pay a further $30 million under the Settlement Agreement.
(b) In these circumstances, and as described at Part C, paragraphs 7.5, 7.17 and 7.18 of the Holding Company CVA Proposal, we believed that the allocation of $43 million of the proceeds of the settlement to TXUEL, Finco 2 and EFC was fair……"
a. The Applicants, at one stage, complained that Mr Wallace had stated to Ms Seppala that the RCF Banks had strong claims; that was used to suggest that Mr Wallace was weak in conceding claims which he should not have done, to the detriment of the estates. In fact, what he had said was that the RCF Banks themselves were saying that they had strong claims so that there was no foundation for the suggestion of weakness.
b. It was suggested that position papers had been deliberately withheld, but that was not maintained.
c. It was suggested by the Applicants that TXU Corp offered to settle the claims of the estates alone at $125 million but there never was such an offer.
d. It was suggested that the Applicants were not represented in negotiations with TXU Corp. They were not unrepresented and agreed how those negotiations should progress.
"We considered the following matters:
(a) The Books and Records Claim belonged solely to TXUEG.
(b) The strongest of the Dividend Claims was likely to be the claim in respect of the £99 million dividend paid by TXUEG in 2001. Because TXUEG was a public company with significant external creditors, it was plain that the relevant dividend was illegal and there was an arguable basis for resisting relief under section 727 of the Companies Act.
(c) The other Dividend Claims of TXUEG, TXU (UK) Holdings Limited, TEG and TXUAC were weaker, because they were paid by private companies without significant external creditors and/or because it was difficult to identify a factual basis for resisting relief under section 727 of the Companies Act.
(d) The Trading Claim might be pleaded on behalf of both TXUEL and TXUEG, as the two most important companies in the TXU Europe group (both with significant bodies of external creditors). However, the claim appeared stronger at TXUEL, because the directors of TXUEL had a significantly greater opportunity to preserve the chance of avoiding the substantial losses that would result from the break-up of the business, whether through securing equity, restructuring TXUEL's balance sheet and/or effecting a sale of its subsidiaries or their businesses as a going concern. There was comparatively little that the directors of TXUEG could have done to avoid such loss, given TXUEG's inability to raise equity and its dependence on TXUEL's investment grade rating. In addition, the relative size of the shortfall to creditors at TXUEL enabled that company to formulate a significantly greater claim, running to many hundreds of millions (or even billions) of pounds.
(e) TXUEL had potential Texas Claims against TXU Corp arising out of TXU Corp's withdrawal of financial support for TXUEL in October 2002.
The Double Dip
The valuation date for ATL creditor claims for the purpose of any CVA and the entitlement to interest
The inter-company balances
a. Whether TEG had a claim against TXUEG, or whether the liability giving rise to that claim was instead owed by TXUEG to TXUAC. The Respondents concluded that TEG's claim should be recognised. If it had not been, the EGO BV Bondholders' receipts would have been reduced by £13 million.
b. Whether a triangle of liabilities shown in the accounting records as owed (i) by EH3 to TXUAC; (ii) by TXUAC to TXUEG; and (iii) by TXUEG to EH3 had in fact been netted off and no longer existed. The Respondents concluded that such liabilities had not been netted off. Had they been netted off, the EGO BV Bondholders' receipts would have been reduced by £56 million.
c. Whether EH3 had back to back recourse to TXUAC with respect to EH3's liability to Barclays under certain currency swaps. The Respondents concluded that it did. Had the claim not been recognised, the EGO BV Bondholders' receipts would have been reduced by £4.5 million.
d. Whether EH3's indemnity claim against TXUEL would be rejected in a liquidation of TXUEL as a consequence of the rule against double proof. The Respondents concluded that it would not. Had they concluded otherwise, the EGO BV Bondholders' receipts would have been reduced by £14 million.
a. GFA Claim on the basis of admitting the claim at 20% of value (the percentage adopted by the Applicants, as they now say, for illustrative purposes): £620,000 (or 2.08p/£) for SISU and £570,000 (or 1.88p/£) for Unum.
b. PPA payments on basis of 100% rather than 50% going to the Conduit Companies: £160,000 (or 0.53p/£) for SISU and £150,000 (or 0.48p/£) for Unum.
c. £67 million issue with 100% going to the Conduit Companies: £540,000 (or 1.81p/£) for SISU and £500,000 (or 1.64p/£) for Unum.
d. TXU Corp settlement with TXUEL and the Conduit Companies sharing $140 million, instead of $105 million, as the Applicants propose: £490,000 (or 1.66p/£) for SISU and £460,000 (or 1.53p/£) for Unum.
Removal of officeholders
|A&O||Allen & Overy LLP|
|AEGON||Aegon USA Investment Management|
|Appaloosa||Appaloosa Management L.P.|
|Bank Steering Committee||The informal steering committee of lending banks formed in October 2002|
|Barclays||Barclays Bank plc|
|Bingham||Bingham McCutchen LLP|
|Bondholder Committee||The ad hoc committee of bondholders formed in October 2002, including the Applicants|
|Citigroup||Citigroup Investments Inc|
|Committee Creditors||Members and observers of creditors' and liquidation committees of TXUEL, TXUEG, TXUAC, TEG, EGO BV and EH3|
|Conduit Companies||EH3, TEG and TXUAC|
|CVAs||Company Voluntary Arrangements under Part I of the Insolvency Act 1986|
|E&Y||Ernst & Young LLP|
|EET||TXU Europe Energy Trading Limited (in administration)|
|EFC||TXU Eastern Funding Company (in administration)|
|EGFL||Eastern Group Finance Limited (in liquidation)|
|EGO BV||Energy Group Overseas BV (in administration)|
|EH3||Energy Holdings (No.3) Limited (in liquidation)|
|EH5||Energy Holdings (No.5) Limited (in administration)|
|Financial Creditors||Banks, bondholders and loan noteholders with debt claims against the Holding Companies or TXUEG|
|Finco No 2||TXU Finance (No. 2) Limited (in administration)|
|Holding Companies||TXUEL and its subsidiaries, excluding TXUEG and its subsidiaries|
|IA 1986||Insolvency Act 1986|
|JP Morgan||JPMorgan Chase Bank|
|Lending Bank Syndicates||Four lending syndicates with claims at different companies in the TXU Europe group|
|M&G||M&G Investment Management Limited|
|Operating Companies||TXUEG and its subsidiaries|
|PPA Creditors||Creditors under the PPAs|
|PPAs||Power purchase agreements. Long term power supply contracts.|
|SISU||Collectively, SISU Capital Fund Limited, SISU Capital Fund II Limited, SISU Capital Fund Limited Partnership and ARVO Master Fund Limited, acting by their investment manager SISU Capital Limited.|
|TEG||The Energy Group Limited|
|THM||Talbot Hughes McKillop LLP|
|TXU Europe group||TXU Europe Limited and its subsidiaries|
|TXU UK||TXU UK Limited|
|TXUAC or TXUAL||TXU Acquisitions Limited|
|TXUEG||TXU Europe Group plc|
|TXUEL||TXU Europe Limited|
|Unum||Collectively, Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company and Unum Life Insurance Company of America, acting by their investment manager Provident Investment Management, LLC|