Client throws a spanner in the works for A&O on TXU

Hearing rescheduled as Barking and AES Drax reject Chinese walls protocol.

It is an irony Alanis Morissette would have wished she’d dreamt up herself. Last week, Allen & Overy (A&O) went to the Commercial Court to seek approval for representing nearly everyone on the £4bn TXU Europe administration, but the attempt was scuppered by one of its own clients.

On TXU, A&O has accepted instructions from TXU joint administrator KPMG, TXU’s banks, one of the power companies that depended on contracts with TXU for its livelihood Barking Power, and the bankers for another dependant AES Drax.

A&O and KPMG’s other law firm Cadwalader Wickersham & Taft, which also acts for TXU’s bondholder, have drawn up a unique “lawyers’ protocol” outlining the sturdiness of their information barriers.

They were hoping the Commercial Court would rubber-stamp the protocol last Tuesday (18 March), but the hearing was adjourned after A&O’s client Barking, along with Drax and another of TXU’s energy creditors International Power, rejected the protocol.

The questions raised by Barking’s revolt are considerable. So, is this a case of A&O’s client acting against its law firm’s interests? Probably not. A&O never wanted to beg the Commercial Court to be allowed to keep its clients. Who knows, the firm may secretly be quite pleased that Barking has thrown a spanner in the works.

A&O and Cadwalader were shoehorned into drawing up the lawyers’ protocol by Ernst & Young (E&Y), TXU’s other joint administrator, which is known to be deeply unhappy about the conflicts within the two law firms. It is highly probable that Alan Bloom, TXU’s administrator at E&Y, would have wanted the Commercial Court to rule against the validity of A&O’s and Cadwalader’s Chinese walls. It is also probable that Bloom would have liked to slap an injunction on A&O and Cadwalader to force them to give up some of their roles. However, because he has to present a united front with client KPMG on the administration, this just would not have been cricket.

If the Commercial Court hearing proceeds as planned this Friday (28 March), and it is ruled that A&O and Cadwalader cannot work their Chinese walls, then they could be removed from one or more of their roles. Presumably, Bloom would then be a happy man.

The question on many creditors’ minds is why Bloom is devoting so much energy to scrutinising KPMG’s law firms.

Standoffs between E&Y and KPMG are common and well documented on almost every major administration they are jointly involved in, but Bloom, according to many of his friends, is scrupulously decent and never petty.

The E&Y position is that until the conflicts at A&O and Cadwalader are resolved, much of the work that needs to be done on the administration cannot start.

KPMG is administrator to the three companies above plc level within the TXU group, while E&Y is looking after the three below plc level. They are joint administrators of the plc company.

While they are working together on the plc company, they have to agree to a way of sharing the thousands of documents relating to the companies they are acting for separately. Until E&Y is convinced that information it gives to KPMG and its law firms will not flow into the hands of the wrong parties, the information-sharing process cannot start. This is a massive inconvenience for KPMG. While its law firm A&O has made at least £2m so far working for various parties on the administration, the issues surrounding A&O’s multiplicity of roles mean an important part of its work has been held up.

According to one lawyer involved in the TXU administration, the whole situation is unprecedented and has turned TXU into the most confusing insolvency ever seen.

With A&O reportedly pushing for this week’s Commercial Court hearing to take place in private, we may never know how it intends to resolve its conflicts, or why Barking rejected the protocol. What is certain is that A&O’s client KPMG has been inconvenienced, its other client Barking is acting up and what started as a recession-happy chow-down is turning into a Mad Hatter’s tea party.

Responsible libels

Last week saw the Court of Appeal commiserate with a solicitor who’d been libelled by the Bar Council. Had the same libel been committed by a newspaper and not the Bar Council, he probably would have won at least five figures in damages, but Swansea solicitor Robert Kearns, the victim of a letter sent by the Bar Council to more than 10,000 of its members in 2001, falsely claiming he wasn’t a lawyer, walked away empty handed.

Luckily for the Bar Council, the communication was held by the Court of Appeal to be protected by qualified privilege – the defence accorded to organisations which have defamed someone, but acted responsibly.

Newspapers and broadcasters have their own version of qualified privilege, known as the Reynolds defence. This defence is a 10-point plan for proving they have acted responsibly, but no national newspaper has ever used it in a libel case and won.

As Kearns suffered such a serious libel, the Court of Appeal had a chance to apply Reynolds outside of the media sphere, but rejected it as too stringent a test for a professional body. The appeal judges said that this case was never intended to make new law and the Bar Council had acted responsibly – it was only trying to protect its members from a solicitor it thought was a fake.

This would have been cold comfort for Kearns. Consider the weight of being defamed in a mailshot sent directly to 10,000 of your peers by their professional body, compared with being libelled in a newspaper article likely to be missed by most. You can see why he might have preferred to suffer at the grubby hands of a hack.