Edwin Coe correspondence with Cains (IOMT Legals)

Edwin Coe correspondence with Cains (IOMT Legals)

Edwin Coe to Cains 4th May 2009

Dear Mr Caine

Further to my previous emails, I have now had an opportunity to study the graphs included in the Explanatory Statement for the amended Scheme of Arrangement ("SoA"). These differ from the graphs included in Explanatory Statement for the original SoA but appear to have the same or similar fallacies. Clearly they form an important part of the description of the SoA and its explanation. Depositors refer to them for the purpose of determining whether or not the SoA has advantage over the possibility of liquidation and distribution from the Depositors Compensation Scheme ("liquidation/DCS"). In short, as with the originals, the graphs are misleading.

The first matter to note is that the SoA appears to present the worst possible position for the DCS. The claims upon it being at their maximum but the contributions into it being at their minimum. With respect, this has the look of a manipulation of the figures in order to show the SoA in the best possible light in that comparison.

The graphs, however, have more fundamental errors which make them simply wrong and misleading. I am hesitant to suggest that this is purposeful but the problems were discussed at the last hearing and they appear to have been repeated despite an assurance to the contrary.

The errors arise from the way in which the graphs have been constructed to make a comparison between the two alternatives, using what is portrayed as a timeline for the dividend payments.
First, all payments are shown as equally spaced on the graphs, whereas they are not equally spaced in time.
Second, payments under liquidation/DCS are shown as if they occur at the same time as the corresponding distributions under the SoA. As was pointed out to the court, this is simply not correct. A substantive part of our submission to the court, which was accepted by you and the court, was that the timing of the first payment under the SoA is 90 days after it comes into effect, whereas payment of a first dividend by the Liquidator can take place considerably before that date. However, due to the manner in which the graphs have been presented, the effect is concealed altogether.
A further example of the misleading impression created by presenting the graphs in this way, is that they hide the effect of the payment to the Treasury under the SoA at the point at which the threshold dividend of 70p is reached. At that time the other creditors receive nothing further until the Treasury has itself been reimbursed up to that dividend level. Accordingly, a long period of time elapses before the next dividend is paid under the SoA, whereas the corresponding latter distributions under liquidation would not be similarly delayed. However, this consequence is not apparent from the graphs. It is not apparent from the SoA curves that later payments are delayed relative to the liquidation payments, nor do the liquidation curves cross over nor even more closely approach the corresponding SoA curves during the relevant time. Both of these effects would be apparent if the horizontal axis was really a timeline. In general, the graphs have been presented in such a way that, any crossing over of the two curves which would be immediately apparent if the two alternatives were properly compared showing the points in time when payments actually occur, will be hidden and instead the liquidation curve will always fall below or at best overlap the corresponding SoA curve.
Appropriate graphs should be available to depositors. Although it was said at court that these would be made available, those within the Explanatory Statement are highly misleading. This is a matter which must receive immediate attention. Initially proper graphs should be made available on the Company web site and then distributed to ensure depositors are not mislead.

We had understood that we were to see the draft changes before they were distributed. If that had been the case we would have been able to comment upon them. As it is, we have requested from you a marked copy of the changes, a transcript of the hearing in front of Deputy Deemster Corlett, and the Order that he made. We have had no response to that request. Could you please do so by return.


Cains Reply to above 5th may 2009

Dear Mr Greene

Thank you for your email of yesterday's date.

I have discussed with my clients the points that you raise about the graphs
included in the Explanatory Statement for the proposed Scheme of
Arrangement, and they have suggested that rather than engage in detailed
correspondence about these points, it would be quicker and simpler to
arrange a meeting tomorrow, at which a representative of our client can
discuss these issues with you.

Representatives from PwC are happy to meet with Richard Halsall, your
clients' Manx Advocate, together with any representatives of your client
who wish to attend, at any time tomorrow that is convenient to Mr Halsall
or your clients.

Further, representatives of PwC are available to meet with you and/or
Dominic Chambers QC and any representatives of your clients who wish to
attend at a meeting in London following the Scheme presentation that is due
to be held in London commencing at 11 am on 11th May 2009.

With regard to the changes made to the Explanatory Statement and the
proposed Scheme of Arrangement, you will appreciate that because the
Treasury's revised offer was made in the light of the First Report of Ernst
& Young as Administrators of KSFUK, which was only received on 20th April
2009, it was simply not possible to circulate the proposed changes for
comment in the time available. The Scheme documents had to be sent out by
27th April 2009 at the latest, pursuant to the Order of Court dated 9th
April 2009. In addition, further information has been provided by the DCS,
which is reflected in the assumptions used in the graphs. Unfortunately,
the DCS has elected not to put this information into the public domain, and
that is a position that our clients have to respect.

With regard to the hearing before Deputy Deemster Corlett on 23rd April
2009, we enclose herewith copies of the following documents that were
placed before the learned Deemster:-

The Affidavit of Kenneth Clive McGreal, Financial Controller of the
Treasury of the Isle of Man Government, sworn on 23rd April 2009, which
sets out details of the Treasury's revised offer in relation to the
proposed Scheme of Arrangement;
A Summary of the material changes to the draft proposed Scheme of
Arrangement and the Explanatory Statement.

There is, at present, no transcript of the hearing in front of the Deputy
Deemster, although a CD recording of the hearing can be obtained from the
Court Registry.

The Deputy Deemster did not make a formal Order in relation to the proposed
changes to the Explanatory Statement and proposed Scheme of Arrangement,
but simply directed that a copy of the Affidavit of Mr McGreal should be
enclosed with the Scheme documents to be sent out on 27th April 2009, and
that a paragraph should be inserted into the covering letter enclosed with
the Scheme Documentation, in the following terms:-

"The Provisional Liquidators draw to your attention that there have been
some changes to the drafts of the Explanatory Statement and the Scheme that
were considered by the High Court of Justice of the Isle of Man at the
hearing on 9th April 2009. These changes principally reflect the matters
set out in the Affidavit of Kenneth Clive McGreal, sworn on behalf of the
Treasury on 23rd April 2009, and were considered by the Court on the 23rd
April 2009. A copy of Mr McGreal's Affidavit is enclosed (without

For the sake of completeness, I can inform you that at the hearing on 23rd
April 2009 the Deputy Deemster also dealt with the Petition of Michael
Simpson and Peter Spratt in their capacity as Chairmen of the Scheme
Meetings, and in this regard I enclose herewith:-

Petition of Michael Simpson and Peter Spratt dated 22nd April 2009
Order of Court dated 23rd April 2009 regarding voting at the Scheme
Meetings. A copy of the Order has been served upon Richard Halsall.

I look forward to hearing from you as a matter of urgency with regard to
the suggested meeting. My clients would urge you to take up their offer of
a meeting, as they believe that there may be some misunderstanding on your
part as to how the Scheme will operate.

Yours sincerely

Seth Caine

Edwin Coe Reply to above 6th May 2009

Dear Mr Caine

Thank you for your note and the documents. We would indeed be pleased to have a meeting today but it would have to be by telephone with DAG committee members [--redacted--] and myself. I can provide conference call facilities. On this notice the three of us can only do at or after 4.30 p.m. today and I hope that fits.

As to a further meeting I am not sure I see the point of having a meeting after the road show since our concerns are for matters that should be dealt with before public presentation of the Scheme but perhaps we would leave that arrangement until after the instant discussions and see where we get today.

I am disturbed by the revelation in your message that a public body, the Depositors Compensation Scheme, is distributing information to a private third party, the Liquidator Provisional, concerning, presumably, payments under that Scheme, which is then being maintained as a secret between them. With respect your note suggests a conspiratorial cabal to which the authority and the Liquidator are party and on which the Liquidator is placing reliance in his presentation to the creditors. This is wholly improper and fails to meet any appropriate standards of transparency. How can creditors make a decision based on a stance of "accept the Scheme because we know things about the alternative that you do not"? There must be openness between the Company and its creditors in the presentation of the Scheme. Information available to the Company and on which it bases its offer must be made available to creditors.

Please let me know by return what information you and the Liquidator have in relation to the DCS that leads to the assumptions made in drawing the graphs so that we can discuss this issue with the Liquidator at the proposed meeting today.

Yours sincerely

David Greene


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