A&O, Cadwalader in conflict storm over collapse of TXU

Row builds as City law firms play controversial dual role for TXU administrators and creditors

It has emerged that both Allen & Overy (A&O) and Cadwalader Wickersham & Taft are acting for the creditors of power group TXU Europe as well as KPMG, one of the joint administrators on the lucrative insolvency.

The appointment has become so controversial in the insolvency sector that Herbert Smith, the law firm acting for Ernst & Young, the other joint administrator, is considering whether to bring legal action over the issue.

A&O is understood to have cleared £2m for six weeks work alongside KPMG, while Herbert Smith has billed £7m so far on the administration.

A&O is advising both the syndicate, which consists of around 50 banks owed money by TXU, and KPMG. Cadwalader is advising a large group of bondholders as well as KPMG. In both cases the firms were acting for the creditors before being appointed by KPMG.

The Lawyer understands that, although KPMG's use of A&O and Cadwalader has been approved by TXU's creditors committee, some of the parties owed money are beginning to bristle at what they perceive as a conflict.

“It's certainly still an issue for some of the creditors,” an accountant close to some major creditors commented.

As well as Herbert Smith, other lawyers involved in the administration are becoming concerned.

“You can't act for banks or bondholders and the administrator without a huge inherent conflict,” one lawyer close to TXU said. “The banks and bondholders want, and will probably get, their money first, while the administrator is there to look out for everyone, including the small shareholders.”

When The Lawyer contacted KPMG, it emerged that the accountancy firm is about to instruct Denton Wilde Sapte on further aspects of the administration. Dentons is already acting for a group of TXU pensioners.

KPMG partner Phil Wallace said he was relying on A&O and Cadwalader's effective use of Chinese walls to deal with any conflict, whether perceived or otherwise.

In Cadwalader's case, London managing partner Andrew Wilkinson is representing the bondholders, while partner James Douglas is acting for the administrator.

When approached by The Lawyer, Douglas originally said the firm was not using separate secretarial and administrative teams on TXU, something crucial to stop information leakage in a Chinese wall situation; but he then clarified that the firm was in fact using separate administration teams.

A&O managing partner John Rink would not reveal whether KPMG and the banks were being advised by separate partners. London banking partner Nick Segal is known to be involved, but Rink would not volunteer the names of anyone else on the deal.

“When we get involved in anything for more than one client, we only do so with a Chinese wall in place,” said Rink.