Colt insolvency case result due Friday

Can a hedge fund push the pan-European carrier into administration? A court ruling is imminent

On Friday, a High court judge will decide the future for pan-European carrier Colt Telecom. Three days of hearings have closed, in which a US-based hedge fund, Highberry, has claimed Colt should be declared bankrupt because it will be unable to meet its debts after 2005.

The judge, Justice Jacob, has set up a nail-biting conclusion, showing contempt for both sides during the hearing. However IT managers should not fear a meltdown similar to KPNQwest, whose network was shut down earlier in 2002. Whichever way the case goes, the operation of Colt's network is not in question.

Highberry, part of the Elliot Group, bought part of Colt's debt at a discount on the market, and is attempting to force Colt into bankruptcy. Highberry claims it is certain to lose the value of its stake, because Colt is certain to become insolvent and fail to repay between 2006 and 2009. Highberry owns £75m Colt notes, out of a total debt of £1.1bn.

In its defence, Colt has stated that the company is "stongly solvent", with assets of £977m, and expects to be cash flow positive in 2005. Colt claims that Highberry is "seeking to achieve profit by an unjustified transfer of value from shareholders to noteholders". If Colt is forced into administration and a debt-for-equity swap, Highberry could own a substantial part of the company.

"All of these numbers are complete speculation," said Justice Jacob during the trial, according to Computer Business Review. "I may come to the conclusion I have no idea who is right."

The role of accountancy firm KPMG in the case has come in for criticism. KPMG produced a report for Highberry and has put itself forward as a potential administrator. KPMG has also done tax work for Colt in the past. These possible conflicts of interest were noted by the judge and by Colt's lawyer, Richard Sheldon QC.

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