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ECM bankruptcy battle pits creditors and administrator

  15:00

ECM’s bondholders call for restructuring of the property developer with the firm likely to be declared bankrupt if their rights aren’t recognized.

foto: © ČESKÁ POZICEČeská pozice

The fate of the insolvent property developer ECM will be determined on August 20. The company’s creditors are calling for the restructuring of the firm but the appointed insolvency administrator, Ivo Hala, is rejecting their demands. What’s at stake is not “just” the debts, but the very existence of ECM with some observers saying the company will be declared bankrupt if the rights of creditors are not recognized.

ECM Real Estate Investments’ creditors last week lodged claims totaling Kč 9.44 billion in the Municipal Court in Prague, but the insolvency administrator only recognized claims amounting to under Kč 2 billion. For the most part, the creditors who lodged complaints were the holders of the ISIN XS0319645981 Eurobonds issued in 2007 and which mature on October 7, 2011. The creditors include large multinational banks and other large institutional investors. Since May 2010, Astin Capital Management Limited has been representing a group of creditors holding bonds with a face value of €125 million.

You're not creditors

Administrator Hala opposes the creditors’ demands on the grounds that since the collective bond managed by Astin Capital Management Limited was formed, the collective bond holder is the creditor of accounting systems, which are in turn the creditor of the depositor who is the actual creditor of ECM. As such, Hala argues, the direct creditor, i.e. the depositor, must file any claim.

Astin Capital CEO, Charles Bray, has responded to Hala’s stance in an open letter filed in the insolvency register, suggesting administrator Hala is acting in a biased manner. Hala has refuted this claim in an official response.

“The fundamental documents have been received from ECM… and according to the position of Loyens  & Loeff, Senior Associate, Stéphane Braun, the holders of the Eurobonds are not the direct creditors of ECM. In my opinion the reasons stated in the assessment are of such principal importance that a legal review is required on which I will be able to rely on and which will be prepared by an impartial and independent Luxembourg law firm for me as the client. I have already submitted a request for the approval for [a legal review by] the Luxembourg firm to the interim insolvency commission,” Hala says in his statement contained in the insolvency register.

We object!

ECM’s legal representative Kinstellar rejects the arguments presented by Hala. “Both of the reports mentioned by the administrator concern only and exclusively the existence of the mutually creditable claim of the debtor and the company PSJ New and in no way question the right of the company Astin Capital, which is entitled as the joint representative of the holders of the EUR bonds to represent the holders in their demand for the implementation of their rights,” the law firm Kinstellar states.Since ECM went into administration, the only creditor to support filing for bankruptcy is Glancus Investments, which is part of the PPF Group

What’s more, Kinstellar says that a Response to Set-Off Notice confirms that only Astin Capital as the legitimate joint representative of the EUR bond holders has the right to defend their rights, and furthermore ECM has recognized Astin Capital’s representation as legitimate: “The debtor confirmed to the administrator on July 11, 2011, that Astin Capital’s registration as the elected representative of the holders of the EUR bonds is provided for and legal as stipulated in the conditions of emission of EUR bonds and by Law 1915,” Kinstellar states.       

Czech Position asked administrator Hala in an email whether he had received a legal opinion on the bondholders’ demands from the unnamed independent Luxembourg law firm and what conclusions can be drawn from it.  In the event he had not received such an analysis, we also asked whether he intends to wait for an assessment from Luxembourg before deciding whether or not to recognize the creditors’ demands. Hala did not respond to our enquiries.

Juraj Alexander of the law firm Salans, which is representing Astin Capital, says his firm has not received any notification of a legal opinion from Luxembourg. “We don’t even know which law firm the administrator has hired,” Alexander added.

A procedural review of the creditors’ demands is to be held on Wednesday, July 20, by the insolvency commission. It is probable that the same day there will be a vote on whether to declare ECM bankrupt, or allow the firm to restructure. If the creditors’ demands are recognized, they will be able to vote within the commission; the holders of the Eurobonds are according to the value of the titles ECM’s largest creditor. The predominant opinion on the property market is that if the bondholder-creditors are not allowed to vote, ECM will be declared bankrupt.

Since ECM went into insolvency administration, the only creditor to support filing for bankruptcy is Glancus Investments, which is part of the PPF Group owned by the richest Czech, Petr Kellner. The other major creditors— Česká spořitelna, Astin Capital and Volksbank—all want the firm to be allowed to restructure. Over the past two months, however, PPF’s position has been strengthened by the recognition of claims lodged by Generali Pojišťovna and other firms in which the group has stakes.

Although representatives of Česká spořitelna, Volksbank and UniCredit Bank are on the interim insolvency commission, it remains to be seen how active a role the banks will play. According to Czech Position’s sources, judging from the banks stance in the insolvency commission so far, it doesn’t appear they want to take a dominant role in the process.

Conflict of interests

Another circumstance indicates the strong position of PPF in proceedings: at the first session of the interim insolvency commission on June 1, the law firm BBH was appointed as the commission’s legal advisor. And BBH also provides legal advice to one member of the commission, PPF’s Glancus.

On June 22, BBH relinquished its role as legal advisor to the commission: “BBH has decided not to continue in negotiations on the offer of legal services for the interim insolvency commission due to the majority opinion of the members of the commission that it is impossible to rule out potential conflict of interests in providing legal advice to a member of the commission and to the commission as a whole,” state the notes from the session of the interim insolvency commission on June 22.              

Czech Position asked BBH why it changed its stance towards the commission after almost three weeks. “In accordance with company regulations we do not provide information on on-going cases or cases in which there is potential [for us] to act as a legal representative or issues relating thereto. I believe that you will understand the explanation provided, and on behalf of BBH I hereby notify that we do not consent to the name of our law firm or its lawyers being mentioned in any article without the prior consent of BBH,” a lawyer with the firm, Josef David, said.

ECM management, lead by the company’s founder and majority owner Milan Janků, is calling for the company to be allowed to restructure with limitations on development activities. According to the company’s calculations, this option would provide the greatest return for creditors. But now the decision lies to a great extent with Ivo Hala’s insolvency administration. It’s probable that if Hala rejects the creditors’ demands, the latter will challenge the decision in the courts which would cost the creditors dear.

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