SBC’s Icelandic misadventure takes a turn for the better

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SCOTTISH Borders Council has welcomed a court decision which will see the cash-strapped local authority cut its losses following its ill-fated 2008 deposits of £10million in two Icelandic banks – Heritable and Landsbanki – which collapsed in the autumn of that year, writes Andrew Keddie.

Having already borrowed £1.02million – at repayments of more than £4,000 a week for the next five years – to cover the true cash loss from the investments in 2010/11, the council was facing a further £2.9million black hole in its accounts if a legal challenge heard by Iceland’s Supreme Court last week had been successful.

The bid had been mounted by a group representing around 70 bondholders, including major financial institutions such as Deutschbank, which had lent Landsbanki nearly £5billion.

The group wanted its members to be given the same priority creditor status afforded to despositors – including Scottish Borders Council, which had £5million invested in Landsbanki, and around 100 other public bodies in the UK – by emergency Icelandic legislation enacted in October, 2008.

As a prefential creditor, SBC would have expected to recoup nearly 95 per cent of its claim against Landsbanki. But if the pot was to be shared on an equitable basis with the bondholders, that dividend would have been cut to around 33 per cent, leaving the council forced to borrow a further £2.9million.

In April this year, Reykjavik’s district court rejected the bondholders’ appeal for an equal share of the Landsbanki assets.

And on Friday, the country’s Supreme Court upheld the district court determination, confirming SBC as a priority creditor.

“The ruling enables us to commence payments of accepted claims,” said Kristinn Bjarnason, head of the Landsbanki winding up committee. “We expect to be able to present a time schedule to a meeting of claims holders [at which SBC will be represented] on November 17.”

And Iceland’s Prime Minister Johanna Siguroardottir confirmed that Friday’s ruling was undisputed as the Supreme Court was a “court of last instance”.

“The ruling eliminates uncertainty regarding distributions from the [Landsbanki] estate,” she added.

That would appear to remove any further obstruction to SBC receiving 95 per cent of its claim, despite the bondholders threatening at the weekend to take the Icelandic government to the European Court of Human Rights over the emergency legislation.

“Our lawyers are in no doubt that any such action by the bondholders will not impact on Friday’s ruling,” said Paddy Fagan, SBC’s corporate finance manager. “We also understand that the dividend we will receive as priority creditors of Landsbanki is more likely to be between 98 and 100 per cent with payments phased between now and 2017/18.

“Had the decision gone against us, we would be facing a loss of £2.9million.”

Councillor Neil Calvert, SBC’s depute leader (finance) told us: “The way in which our legal advisers and the Local Government Association have co-ordinated the legal action with other UK public bodies has minimised legal costs to less that one per cent of the amount we expect to recover.

“The news that local authority deposits are being regarded as preferential represents a major victory for UK public body depositors and is very welcome.

“It will minimise the impact on the Borders taxpayer to the level already provided for in the 2010/11 accounts.”

In respect of the UK-registered Heritable Bank, the council has already received dividends of £2.56million, representing more than 50 per cent of the deposit. It is anticipated the council will receive 85 per cent of its original investment by October, 2012.