Monday, May 08, 2023

High Court reporters

The Central Bank of Ireland has succeeded in its High Court application for provisional liquidators to be appointed to a Cork-based investment fund with some €180 million in client assets.

The regulator considered a petition for the winding up of Blackbee Investments Limited was necessary for protecting the interests of investors and for maintaining public confidence in the Irish financial market, the court heard.

Brian Kennedy, senior counsel for the bank, told the court on Monday afternoon the application was “not a matter that is being taken lightly” by the regulator and follows intensive supervisory engagement with Blackbee.

Over time the Central Bank developed “significant concerns” about the firm, particularly in relation to governance. It was also worried about the company’s inability to maintain senior roles, its lack of a clear business strategy and its regulatory capital and liquidity planning, he said.

The court heard the firm had about 1,700 retail clients (non-professional investors) and held client assets of some €180 million as of April 28th.

High Court President David Barniville was satisfied the bank put forward “good and sound” reasons for the provisional appointments to be made without the firm being notified of the application.

The judge noted Blackbee’s chief executive David O’Shea had “consistently” voiced his opposition to the appointment of provisional liquidators and wanted the firm to be notified of any petition brought.

However, the judge accepted the regulator’s contention there were “serious risks” associated with the petition becoming public knowledge prior to the appointments being made.

He made an order appointing Luke Charleton and Colin Farguharson of Ernst & Young as joint provisional liquidators and another suspending Mr O’Shea’s powers as the company’s sole director pending the full hearing of the petition.

The application for the winding up was made pursuant to the European Union (Markets in Financial Instruments) Regulations of 2017 and the Companies Act of 2014.

In seeking the orders, Mr Kennedy, with barrister Caren Geoghegan, told the court the investment firm has failed to comply with, and remains in breach of, its regulatory obligations. This is because Mr O’Shea, CEO and ultimate sole beneficial owner of Blackbee, is directing the business of the firm and it no longer has a non-executive director or chair of the board since the resignation of an officer last November.

This is concerning from a supervisory perspective as investment firms are required to have at least two people directing the business of the company and at least one non-executive director to ensure effective governance and oversight, the court heard.

Share capital

Blackbee attempted to engage external consultants to carry out these functions on a short-term basis, but these have not been secured, Mr Kennedy said. He added that there an executive is acting as the firm’s chief financial officer on a temporary basis.

There were also two failed attempts to sell the firm and its share capital, with the latest deal falling through late last month, he said. Following these aborted transactions, the bank no longer believes there is any reasonable prospect of a sale of the business or its shares, he said.

The bank also does not have any confidence that Blackbee is capable of hiring and retaining experienced staff or professional firms to fill the vacant roles.

In a sworn statement to the court, Claire McGrade, head of the Central Bank’s Resolution and Crisis Management Division, said the company was in the process of winding down its business since opting to cease taking new clients from October 2020.

Although it does not currently appear to be insolvent from a balance sheet or cash flow perspective, she said, it is in a financially distressed position due to continued operating losses.

She said the most recent capital and liquidity position, issued last month, indicates that, following the April 2023 termination of the proposed sale of the firm, Blackbee will likely be in breach of its regulatory capital requirements by August. The company has been unable to provide any credible evidence to the Central Bank that it has access to sufficient capital that will enable it to avoid such a breach, she added.

She said the bank believes it is necessary to seek the immediate appointment joint provisional liquidators as the company is likely to become “inundated” with urgent queries from clients seeking clarity leading to a “real and material risk” of an uncontrolled and disorderly collapse of the operations if the appointments are not made.

The company, she added, is currently failing to communicate appropriately with its clients and their brokers with respect to maturity defaults arising on certain alternative investments.

The provisional liquidators will be able to take steps to ensure client assets are properly safeguarded and to engage with the Central Bank, brokers and their clients, she said.

The bank acknowledges the serious implications for the investment firm of appointing the provisional liquidators, but it is of the view the move is “nonetheless essential to mitigate the risk of damage to the interests of the investors and clients”, she added.

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