Investec, the FTSE 250 banking and asset management group, is preparing to walk away from a debt of about £150m owed by one of its offshore businesses, according to those chasing the money on behalf of creditors to the
failed Icelandic bank Kaupthing.
The debt, equivalent to almost 40% of the Anglo-South African group's profits for 2013, is an unintended legacy of Investec's administration of a hugely complex offshore trust on behalf of
Robert Tchenguiz, one of London's most active corporate raiders before the 2008 banking crisis.
At its peak, the Investec-administered trust sat on top of a business empire that had heavily debt-financed interests in Sainsbury's, Mitchells & Butlers, Somerfield, Welcome Break and an extensive property portfolio – as well as homes, offices and yachts used by Tchenguiz. It had borrowings of £4bn.
The banking crisis saw many of Tchenguiz's investments come crashing down as the banks seized trust assets. Although it was not until last December that receivers were officially appointed over the trust, it has long been accepted that the
Kaupthing claim, if successful, left Tchenguiz's empire horribly insolvent.
In January a court in the Channel Islands found that an Investec subsidiary, Investec Trust Guernsey (ITG), must be held liable for some of the borrowings Tchenguiz had taken on, through his trust, to finance investments. Investec is appealing against the judgment.
With remaining assets in the trust – Tchenguiz's home, his office in Mayfair and several other properties – estimated by creditors to be worth about £30m, the shortfall on the £180m owing to Kaupthing is likely to be enormous.
Tchenguiz is not personally liable for the shortfall. He is appealing against the Guernsey court's decision affirming Kaupthing's claim over trust assets.
ITG had been at the heart of Investec's offshore trust business for many years, targeting
Europe's super-rich. But in 2010, Investec effectively wound down ITG to a shell company, with trust administrating functions shifting to offices in Jersey. Last November, the group's entire offshore trust operations, with offices in Switzerland, South Africa, Mauritius and Jersey, was sold.
Those acting for Kaupthing fear that, should ITG's appeal fail, then Investec will not honour the debt owed to Kaupthing creditors. ITG will be allowed to go bust.
Last December, this possibility was raised in court by the judge, lieutenant bailiff Sir John Chadwick. Addressing lawyers acting for Kaupthing creditors' interests, he said: "Your problem at the moment is that if the parent company … of ITG says: 'We are going to walk away from this. We are not going to support our subsidiary', you are left with a very personal judgment against somebody who is virtually worthless."
Lawyers for Kaupthing pointed to evidence submitted by Investec, insisting it showed: "That is exactly what the parent is saying, of course."
The Guardian put the allegation to Investec that it is planning to walk away from the ITG liability. In response, it would only stress that it is appealing against the Guernsey court's decision. It did, however, reiterate a statement from its annual report: "Investec does not expect the ultimate resolution of the proceedings to have a material adverse effect on the financial position of the group."
It is not the first time Investec has clashed with receivers acting for Kaupthing. In late 2008, shortly after the Icelandic bank began rapidly calling in loans to Tchenguiz trust companies and liquidating assets, Investec trustees wrote to Reykjavik revealing that they had removed some of the remaining collateral assets – interests in Somerfield and Welcome Break – from Kaupthing's grasp.
These interests, trustees said, would be frozen, and courts in the British Virgin Islands invited to determine who had a rightful claim over them.
Receivers were furious, and accused Investec of fraud. Investec trustees, meanwhile, insisted such allegations were "scandalous and vexatious", and that the assets rightfully belonged with the trust.
Some 18 months later, Investec trustees decided to settle with Kaupthing. Frozen assets were released and Kaupthing's allegation of fraud dropped. Less than two weeks later, Tchenguiz – who at the time was pursuing a claim, since dropped, for "fraudulent misrepresentation" against Kaupthing – removed Investec as trustees.
Anatomy of a non-dom's £4bn offshore trust
Legal rows over what little remains of fallen investment tycoon Robert Tchenguiz's trust empire – which at its peak had about £4bn of borrowings – offer a rare glimpse into the secret world of offshore wealth.
The trust finally fell into the hands of receivers last December, having already surrendered most of its assets to a handful of banks, including Royal Bank of Scotland and Lloyds Banking Group.
Refusing to accept defeat, however, Tchenguiz, a UK "non-dom" for tax purposes, continues to fight for the remaining assets, battling against the trust's last – and largest – creditor Kaupthing, the Icelandic bank that had pumped more than £1.6bn of loans into his empire before itself crashing into insolvency in the 2008 banking crisis.
While almost all of the trust's underlying investments were in UK assets, diagrams mapping out the full corporate structure reveal a bewildering labyrinth of offshore companies, many based in the British Virgin Islands in the Caribbean.
At the top of the structure was Investec Trust Guernsey (ITG), operating out of offices up a back street in St Peter Port, the island's harbour town capital. Court papers show that two trusts associated respectively with Tchenguiz and his brother – each containing billions of pounds of assets – were administered by a team of just 20 Investec staff.
Although ultimate responsibility for trust affairs lay with this team, it is clear significant power was exercised by Robert Tchenguiz and a handful of his chief lieutenants, leaving Investec trustees often feeling they were struggling to keep up.
Relations between trustees and the Tchenguiz inner circle, were described to the court by one Investec manager as "good in general … [but] far from perfect".
Not only was the investment tycoon, together with his family, a trust beneficiary; he was also the director of R20, a business that advised the trustees on investments and financing. Furthermore, as trust protector, Tchenguiz was also responsible for directing and monitoring the role of his trustees – and sacking them if need be.
Of concern to Investec was the extent to which Tchenguiz and his lieutenants were too busy brokering deals and not always keeping the trust in the loop. "Most of all, R20 were not forthcoming in providing information," one manager told the Guernsey court. She herself had stepped up to lead interactions in the second half of 2007 after a colleague went on maternity leave.
"Although … [there was never] any particular concern, I nevertheless took the view that I should go to R20 to try to obtain the information myself, because it was very much the case with R20 that you would not receive anything if you did not persistently ask for it," she explained. "As time passed, R20 would get a bit better at giving us information, but I still felt they were holding information back, even after the consultancy agreement was in place.
"R20 also did not always seem to appreciate the need to keep [Investec] informed about their activities. I got the feeling that sometimes things could happen which we did not know about and would not know about unless R20 needed us to do something which they could not."
At the height of Tchenguiz's powers in 2007, his trust had taken major stakes in Sainsbury's and Britain's largest pub operator Mitchells & Butlers and was threatening to force a takeover at both businesses.
The trust had also taken an interest Somerfield (now part of the Co-op), Phase Eight, House of Fraser, Welcome Break, video games group Eidos, Slug & Lettuce, Yates, La Tasca, Menzies Hotels, Finnish insurer Sampo and Icelandic investment group Exista.
Extensive property assets include the Farnborough head office of BAE Systems, 15 LA Fitness gyms and hundreds of tenanted pubs.
Then there is Tchenguiz's Mayfair office, Leconfield House, the former headquarters of MI5, from which R20 operated. It too was owned by the trust, as was the tycoon's yacht My Little Violet and its unfinished successor, the 75-metre M25.
Tchenguiz's home, the former Royal College of Organists, next to the Albert Hall in London, also belongs to the trust, and is one of a shrinking number of remaining assets. It too will be sold off to help repay debts owing to Kaupthing if an appeal against the Guernsey judgment fails later this year.
