Volcanic ructions

The latest report into the Icelandic banks saga could fuel a busy year for law firms’ litigation teams. Tom Phillips investigates

 Published two days after the eruption of a volcano, Iceland’s official report into the country’s banking collapse was largely lost under a cloud of ash. While travel disruption may have pushed it off the news pages, its contents were no less explosive than the volcano itself, presenting the most damning post-banking collapse indictment of government ministers, officials and directors anywhere in the world.

For the people of Iceland it heralds the start of a long healing process. For the lawyers, both inside and outside the country, it is likely to provoke litigation from claimants who are filing claims hot on the heels of criminal investigations.

“It spares no one,” says Gunnar Thor ­Thorarinsson, a former in-house counsel at collapsed investment company Baugur Group and now an associate at Logos Legal Services. “Many regard this as the first step towards Iceland’s society getting back on its feet.”

SIC headache

The Special Investigation Commission (SIC) report, written by a Supreme Court Justice, a parliamentary ombudsman and a ­professor at Yale University, runs to 2,000 pages and is scathing in its criticism for those at fault from the top down.

Government ministers and regulators are accused of “extreme negligence”, CEOs of some of the banks are criticised and accountancy firms are named for their part in ­bringing the country’s economy to its knees.

On 6 May Hreidar Mar Sigurdsson, the former CEO of Kaupthing Bank, was arrested in Reykjavik. It is probable that more arrests will have been made by the time this article is published, as prosecutors investigating the reasons behind the country’s devastating banking collapse in October 2008 piece together how three banks -Kaupthing Bank, Glitnir Bank and Landsbanki – managed to amass around e14bn (£12.12bn) in foreign debt, a figure higher than ­Iceland’s GDP, before falling like dominos.

For law firms, and those in the UK ­especially, the collapse has meant a ­plethora of work. UK firms have accumulated a ­variety of instructions derived from the UK’s heavy exposure to Iceland’s debt.

“It will be interesting to see the affect ­Iceland has on UK law firms this year,” says one partner at a law firm on the island.

Allen & Overy, Ashurst, Mishcon de Reya, SJ Berwin and Slaughter and May are some of the firms working on the issues.

The SIC report will act as a backdrop to the legal work performed by all these firms over the coming years and is likely to ­influence the next wave of legal action, this time in the form of litigation.

Slow going

A deluge of claims is expected from non-depositor creditors, who question the ­validity of the priority granted to the repayment of some claims over others.

According to a law firm partner close to the Financial Services Compensation Scheme (FSCS) claim, law firms are champing at the bit to take legal action, but are being held up by Iceland’s due process, which is better suited to dealing with fishing trawler disputes than multibillion-euro litigation.

“The non-depositor creditors have ­wanted to litigate since 2008, but it’s only now that they’ve had a concrete claim,” says the source.

The issues started in October 2009, when the banks’ creditors were asked to file their claims. Iceland’s Winding-up Board was given the task of deciding on the validity and the priority of the claims. This included the granting of ’priority’ status in accordance with the country’s Emergency Act, which was introduced in 2008.

In November last year the Winding-up Board decided which creditors should have priority status. Non-depositor creditors who fall outside the priority list argue that the Emergency Act is invalid and unfair insofar as it grants priority to depositor claims.

But before they can proceed with legal action they have to go through an official complaints procedure that includes mediation. The procedure is believed to be largely academic and the first actions are expected to be seen towards the end of this summer.

“It’s necessary for the country to sort itself out,” maintains the source.

The UK Treasury and The Netherlands’, which as the two most exposed countries had £4bn deposited between them in Landsbanki’s failed Icesave scheme, have had their claims accepted, but both are ­currently subject to ongoing objections.

The progress of these politically charged claims have also been delayed by elections in the UK and Iceland. Iceland held early ­elections in April, with a new centre-left party led by Johanna Sigurdardottir ­winning the majority of seats.

Slaughter and May has been instructed by the UK Treasury on its FSCS-led claim.

SJ Berwin, meanwhile, has picked up mandates from the banks. The City firm has been instructed by various Icelandic banks, including Landsbanki on its administrative takeover of the assets of ­Baugur, which include UK retailers House of Fraser, French Connection and Debenhams.

SJ Berwin corporate partner Mike ­Wollard says parallels can be drawn with the infamous collapse of BCCI, which he also worked on. “It’s impossible to say how long it will take,” Wollard states. “The different aspects of the situation will take varying degrees of time to work through and we expect some aspects to have a very long tail.”

Those who live on the small island may wish it would take considerably less time for the issues to be resolved. But while the SIC report has breathed clean air into the process, litigation on the horizon could mean it will take years before the cloud lifts.