Sanjeev Gupta’s winding-up petition
Alex Jay, Head of Insolvency and Asset Recovery at UK law firm Stewarts debates the position of audit firms from the collapse of Greensill Capital
he recent collapse of Greensill Capital has had widespread repercussions for struggling businesses. Most notably, a major entity (Liberty Commodities) within Sanjeev Gupta’s “GFG Alliance”, which Greensill was the main lender to, was reportedly issued a winding up petition from Citibank on behalf of Credit Suisse. This is an aggressive step which could threaten to end the business. If this action spreads to the wider GFG Alliance companies – which includes Liberty Steel – it could put thousands of jobs in Britain’s steel industry at risk.
What does this mean from a legal point of view?
Sanjeev Gupta has indicated that the GFG Alliance will “vigorously” contest the winding up petitions if necessary. He will need grounds to do so – and whether he has them or not is not yet clear. In the meantime, the GFG Alliance creditors are pushing for urgent action, which they must think is needed to preserve their position. As a result, they are allowing little breathing room, and this could ultimately lead to a major battle in the Courts.
This seems even more likely now as the Financial Times has revealed that loans made to the GFG Alliance by Greensill were allegedly advanced on the basis of suspect invoices, raising suspicions of fraud. Greensill bundled together these loans into “notes” that were then placed into funds and sold to investors via Credit Suisse. The risk of default on these notes was supposed to be small, because the loans underpinning them were advanced to large corporate customers (ie such as the GFG Alliance) with little default risk. This allowed investors to put cash in the funds as if it were almost risk free.
However, Greensill’s administrators are now questioning the supporting invoices from GFG Alliance, in relation to these “low risk” loans included in the notes. Certain commodities trading houses have also reportedly investigated alleged impersonation by Liberty entities within the GFG Alliance of their web domains. Any manipulation of material that supported the Greensill loans, or a misrepresentation of their risk profile, would be a very serious matter and will need to be investigated very carefully.
In the short term, Liberty Commodities – and possibly other entities within the GFG Alliance - are facing serious challenges to their business. The failure of GFG Alliance’s biggest lender may well cause cashflow issues for the group, including Liberty Steel and Liberty Commodities, and could disrupt the groups’ rescue plans. This combined with reports of fraud within the Greensill and GFG relationship may also put off other backers, while the winding up petition will put significant time pressure on the group to resolve this situation one way or another, and avoid insolvency.
What does this mean for auditors and the accounting industry in general?
In addition to GFG Alliance and Greensill, there are several institutions which may be caught up in this issue, making impartial investigations particularly important. Anyone that was involved in auditing any of the affecting parties, or who undertook financial due diligence on these arrangements, or were involved in selling the “notes” to investors, may too face scrutiny. Some of that scrutiny will be entirely fair and proper, but other parties may simply be caught in the cross-fire, rightly or wrongly.
It is also worth observing that the bundling of loans into “low risk” notes which were then be sold by investment funds has shades of the “collateralised debt obligations” which traumatised the economy in 2007/2008. Back then, bundled up sub-prime mortgage loans were sold as “low risk” investments” on the basis that there were too many loans within the investment packages for default to be likely. That proved wrong – on a massive scale – and it was a trigger for the 2008 financial crash. While it seems unlikely that the Greensil fallout will be on the same scale, it raises similar questions in relation to who was really doing the due diligence on these products, and have we learnt anything from the credit crunch?
Ultimately, the collapse of Greensill is a timely reminder for audit firms to take a closer look at their clients business model, and the lenders their clients are using and other key stakeholders involved. This is particularly the case where either the client, or its lender, is operating under aggressive models of financing like Greensill.