BDO Stoy Hayward response to issues of liquidation cost and tax.

BDO Stoy Hayward response to issues of liquidation cost and tax.

I attach our response to the issues being raised in relation to the potential "increase in costs" argument and the tax consequences of the appointment of a conflict liquidator.


As we have mentioned, the appointment of a conflict liquidator should not lead to an increase or duplication of costs. This is because there will be a distinct split of duties and responsibilities between the liquidators (which we would look to agree with the creditors' committee). The incumbent liquidators will continue to deal with the day to day running of the Bank - collecting in the loan book and disposing of other assets, dealing with creditor queries, dealing with statutory matters etc (and this will help with the tax "issue" - see below). The conflict liquidator will deal with matters such as the investigations into the conduct of the company and its directors, the conduct of the various institutions, and other such matters as the committee may direct. This could lead to the instigation of legal proceedings in an attempt to recover further funds for the bank's creditors. It would be usual for any appointed liquidator to undertake such investigations - there will be no additional cost as, by removing this responsibility from PwC, their costs should be proportionately lower.

A final point, as we have mentioned before, is that our chargeout rates are likely to be significantly lower than PwC (although, as we have not seen any analysis of their fees or chargeout rates, we cannot provide a direct comparison).

Tax consequences

I set out below the analysis from our tax team, based on the information that we have been provided with to date. We are aware that PwC and certain investors have stated that tax will be an issue in the event of the appointment of an offshore conflict liquidator, but we do not agree with this analysis and we set out our position below. In the event that creditors wanted to appoint us as conflict liquidator, we could of course ask our tax specialists to speak with those of PwC to ensure that this issue is properly dealt with.

We understand that the Bank is not currently UK tax resident, and that it is therefore necessary to ensure that it remains non-UK tax resident in order to ensure that recoveries cannot be taxed in the UK. A company is generally determined as being UK tax resident if it is "centrally managed and controlled" in the UK. This is generally where the strategic decisions are made i.e. board control rather than day-to-day operational control. In an insolvency, there is always a concern that the appointment of a UK insolvency practitioner to an offshore company could bring it within the scope of UK tax for the first time.

As a practical matter, if the liquidators reasonably take the view that the offshore company is not centrally managed and controlled in the UK, then they will not file UK tax returns for the company and it is difficult to envisage why the company would come to the attention of HMRC. However, the liquidators must of course be able to satisfy themselves that the company is indeed managed offshore and, to be able to do so, the following important risk factors should be carefully managed:
• Where a majority (by number) of the board are UK residents, then HMRC consider this is a factor indicative of UK tax residence. By analogy, 2 UK-based liquidators and 1 IoM based liquidator is indicative of UK tax residence. However, this can be rebutted by demonstrating that they exercise their strategic control of the company when outside the UK (i.e. all strategic decisions are made on-island).
• Upon the appointment of a third liquidator, we would suggest that the 3 liquidators should enter into an MoU to set out their specific spheres of responsibility (having liaised with the committee). This document should make clear that the conflict liquidator's "management" rights are limited to the specific conflict matters and that he has no other involvement in the management of the Bank (eg, debt workouts).
• As a belt and braces approach, the conflict liquidator could undertake to fly out to the IoM for any key decisions within his sphere of responsibility which might be relevant to the strategic management of the Bank.
• A further step that could also be undertaken, to "even-up" the number of on-island/off-island liquidators, is to appoint a further on-island PwC liquidator. This person would have no daily role and therefore not add to costs in any way.

In addition to the residence risk, it is also important that the Bank cannot be said to be trading in the UK. On the basis that the Bank is not continuing to write new business (but is merely running off its loan portfolio) and given that the conflict liquidator's involvement will be limited to the specific conflict matters, we do not consider that the conflict liquidator's involvement could give rise to a UK trade or business presence, particularly when there is none to start with.

I hope this helps, but please let me know if you would like to discuss these matters in further detail.

Kind regards

_______________________________________________ Shane Crooks
Business Restructuring

For and on behalf of BDO Stoy Hayward LLP
55 Baker Street
London W1U 7EU


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