Crash of the Icebergs

The sudden demise of the Icelandic banking system in the autumn of 2008 left 145 local authorities in the UK exposed to huge financial losses. The authorities had ploughed money into Icelandic banks such as Landsbanki, Glitnir, Kaupthing Singer & Friedlander (KSF) and Heritable because of the attractive deposit rates they had on offer.

The collapse of the country’s banking system left the councils wondering how much money they would get back – if any.

At the time of the crisis the authorities had a combined £1.1bn held in deposits at the banks. Such was the enormity of the exposure that former Prime Minister Gordon Brown became embroiled in the matter after Iceland refused to guarantee the return of the money.

“The responsibility for this lies fairly and squarely with the Icelandic authorities, and they cannot simply default,” he said.

And, as it happened, there have been significant repayments by the UK subsidiaries of two banks – KSF and Heritable. Between them the pair held 41 per cent of the local authority deposits and so far KSF has returned 53 per cent of its deposits while Heritable has returned 56.3 per cent.

The amount that could be recovered from Landsbanki and Glitnir, however, was in doubt after they challenged an earlier ruling that creditors of the two banks were considered to have priority status, meaning they would take priority when it came to splitting the assets. According to the Audit Commission Glitnir accounted for around 22 per cent of the deposits, or £220m, and Landsbanki 38 per cent, or £363m.

The local authorities combined and formed a collective action co-ordinated and led by the Local Government Association (LGA), which instructed Bevan Brittan partner Virginia Cooper to respond to the challenge. The firm worked alongside Reykjavik firm Logos Legal Services.

In the Landsbanki action the Financial Services Compensation Scheme (FSCS) instructed Slaughter and May partner Andrew McClean to support the challenge. In Iceland the FSCS was represented by BBA Legal (RVK) partner Baldvin Bjorn Haraldsson.

There were also challenges from the Dutch Central Bank, which had deposits tied up in Landsbanki, and the bondholders of both banks.

If the banks’ appeal was successful it would have meant that the authorities would be ranked alongside other creditors and the likelihood of being compensated for the full amount would have reduced dramatically.  

However, last week the Icelandic Supreme Court ruled that the authorities should maintain their priority status meaning that Glitnir will repay the entire sum it had on deposit while Landsbanki will hand over around 95 per cent of the deposits.

Current estimates mean this could make a difference in excess of £470m to

their global recoveries.

Cooper at Bevan Brittan said “This decision has vindicated the local authorities and other wholesale creditors who always believed they had deposits with the Icelandic banks.

“The prospect of recovering almost all of the money they had with the Icelandic banks will be a huge boost to our clients at a time when many are facing significant budget cuts.”

THE LAWYERS:

Landsbanki Islands:

Bevan Brittan partner Virginia Cooper and Logos Legal Services partner Olafur Eriksson for the UK local authorities, universities and other wholesale depositors.

Slaughter and May partner Andrew McClean and BBA Legal partner Baldvin Bjorn Haraldsson for the Financial Services Compensation Scheme.

Boekel de Neree partner Jacques Knol for the Dutch Central Bank.

Stibbe partners Duco de Boer and Job van Hoff for the Dutch local authorities.

Bingham McCutchen partners Chip Fischer, Barry Russel and Natasha Hamilton and Rettur Law Firm for the bank bondholders.

The Landsbanki winding up board represented itself.

Glitnir Banki:

Bevan Brittan partner Virginia Cooper and Logos Legal Services partner Olafur Eriksson for the UK local authorities, universities and other wholesale depositors.

Bingham McCutchen partners Chip Fischer and Barry Russel and Natasha Hamilton and Rettur Law Firm for the bondholders.

The Glitnir winding up board represented itself.