Legal disputes delay MF Global creditor payments

by Rachael Singh

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04 Jul 2012

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Richard Heis

KPMG ADMINISTRATORS are being delayed from repaying creditors at collapsed investment business MF Global UK due to litigation actions.

Richard Fleming, Richard Heis (pictured) and Mike Pink, partners at KPMG, were appointed joint special administrators of MF Global UK in November.

One of the key elements of a special administration is to recover and repay debts to creditors quicker than in a normal administration.

The special administration regime (SAR) was created in February 2011 after Lehman Brothers collapsed at the end of 2008. The company is still embroiled in legal battles, with some creditors still awaiting full payment.

The administrators of MF Global UK have published a likely outcome of returns to creditors. They estimate that between $3.2bn (£2.05bn) and $2.8bn will be made available to creditors and clients, but it is unclear if this return will include secured creditors (such as lenders) and unsecured creditors (such as the taxman), as well as clients with segregated accounts.

However, there will be delays to the return of money as the administrators have two legal hurdles to overcome.

Firstly, the administrators must get to grips with the judgment at a Supreme Court hearing involving the collapse of Lehman Brothers. The decision means all clients whose monies were either segregated or should have been segregated can claim against the client money pot, irrespective of whether or not the company segregated the funds.

Secondly, the administrators are also appealing a claim of about $418m against them from the company's US arm, MF Global Finance USA Inc.

Heis, restructuring partner at KPMG, said: "If the high end of the funds range is returned to the combined estates and the lowest end of the range of claims succeed against the combined estate, the claimants – both clients and ordinary unsecured creditors – would be repaid in full.

"While we have paid 26 cents in the dollar to clients of MF Global UK by way of an interim distribution, we will not be able to make a dividend to unsecured creditors until two key issues are resolved. The first hurdle is establishing the extent to which the recent ruling of the Supreme Court on Lehman Brothers will mean that funds currently in the unsecured (or house) pool could be subject to tracing for the benefit of the segregated client money pool.

"The second hurdle in making an unsecured dividend payment is the appeal by the Chapter 11 Trustee of MF Global Finance USA Inc, against our rejection of its net $418m claim. Both issues are likely to require court guidance before we have certainty about the available unsecured funds and are therefore able to make a payment."

Heis also said that the administration team was working to ensure there were no duplicate or spurious claims.

The purpose of a special administration entails the administrators focusing on three tasks: making a swift return of client assets; ensuring timely engagement with authorities; and rescuing the business as a going concern, or winding it up in the best interests of the creditors. A regular administration involves the latter, but not the first two objectives.

With those tasks in mind, special administrators would try to ascertain the funds held in segregated accounts – which are clients' funds for investment – and then return the funds to them. In regular administrations, assets are pooled together and then divided between creditors.

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