another interesting read

Here is another article by Tony Boyd of Business Spectator:

Chasing Babcock

When a handful of Babcock & Brown noteholders met at a fairly sombre creditors meeting in Sydney today they were introduced to the person who is most likely to deliver them a return.

That man is James Marshall, a leading insolvency lawyer whose advisory credits include Enron, Parmalat, Pasminco, Sons of Gwalia and Basis Capital.

Babcock & Brown's administrators David Lombe and Simon Cathro of Deloitte Touche Tohmatsu have an important role to play in investigating Babcock & Brown's demise. Their 439A report into Babcock & Brown will look for breaches of directors duties, trading while insolvent, related party transactions and deals that were not commercial.

But if noteholders are realistic they will realise that prospects of any decent return on their $594 million investment will hinge on Marshall's legal skills.

It will be his analysis and considered legal advice that will shape the recommendations put to creditors at their next meeting in July.

Marshall is known for his creativity in squeezing a few extra dollars out of insolvent rump such as selling the listed corporate shells of Gowings and WC Penfolds for about $1 million each.

Someone might want to buy the Babcock & Brown shell but it will only be worth money if the creditors do not vote for liquidation. That line of action would close off the opportunity for pursuit of the directors and other statutory legal actions.

The most obvious legal action would be for Babcock & Brown's administrators to challenge the subordinated guarantee between Babcock & Brown and Babcock & Brown International Pty Ltd (BBIPL), which is the operating company that holds all the assets.

The subordinated guarantee prevents assets in BBIPL being made available to Babcock & Brown until all senior debt is paid to the senior secured creditors.

BBIPL says its subordinated debt agreement is watertight and it will defend it in court.

A far more exciting prospect would be if Marshall recommended that the Babcock & Brown administrators mount the first legal challenge to the way in which Australian banks manage distressed companies.

This would involve taking action to prove that BBIPL is actually trading while insolvent and not in the control of its directors.

Marshall would have to put on his litigators hat on and prove in court that the syndicate of 25 banks that are owed $3.4 billion by BBIPL are actually calling all the shots and postponing BBIPL's death. It is common knowledge that the banks have a right of veto over every asset sale made by BBIPL.

BBIPL's directors would say that they control the company and not the bankers, who are being advised by insolvency firm McGrathNicol.

The Bell Group court decision showed that a company did not have to be in administration to be regarded as being insolvent.

If the Babcock & Brown administrators can prove that BBIPL is losing money and is insolvent then the losses will have to be made up to unsecured creditors such as Babcock & Brown by the banks.

Only a bold administrator would take on such a momentous legal action. Deep pockets will be required as you can safely assume the case will go to the High Court.

No one has attempted this sort of court case before and one reason is that it would involve taking on powerful vested interests. Lombe and Cathro from Deloittes and Marshall from Blakes would be shaking the foundations of Australia's tight knit insolvency world.

Funding may not be an issue if the Babcock & Brown report to creditors sets out a compelling case for legal action. Litigation funders have jumped at the chance to pursue anyone with money and this would be no exception. They will be happy for creditors to fund the legal due diligence.

At today's meeting Marshall told the assembled noteholders in Sydney, and those on the line from New Zealand, that there was no point doing anything rash. He said there was no point blowing the whole thing up.

The noteholders were told that it would cost about $800,000 to prepare a report to creditors. For once, creditors will probably be happy to know that a lot of that will be going to their lawyer.